<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 14, 1998
REGISTRATION NO. 333-57211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Floating Rate Senior Notes due 2007......... $30,000,000 100% $30,000,000 $8,850.00
Guarantees of the Floating Rate Senior Notes
due 2007.................................. $30,000,000 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.
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- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
PRIMARY STANDARD ADDRESS, INCLUDING ZIP CODE AND
JURISDICTION INDUSTRIAL IRS EMPLOYER TELEPHONE NUMBER INCLUDING AREA
OF CLASSIFICATION CODE IDENTIFICATION CODE, OF PRINCIPAL EXECUTIVE
NAME OF CORPORATION INCORPORATION NUMBER NUMBER 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
Mercer Products Company, Inc........... New Jersey 3089 22-3061500 37235 State Road 19 N Umatilla,
FL 32784 (352) 357-4119
</TABLE>
<PAGE>
PROSPECTUS
- -------------
BURKE INDUSTRIES, INC.
OFFER TO EXCHANGE ALL OUTSTANDING
FLOATING INTEREST RATE SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
(GUARANTEED BY SUBSTANTIALLY ALL OF ITS SUBSIDIARIES)
($30,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR FLOATING INTEREST RATE SENIOR NOTES DUE 2007
(GUARANTEED BY SUBSTANTIALLY ALL OF ITS SUBSIDIARIES)
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON SEPTEMBER 3, 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 herein) (the "Letter of Transmittal," which together
constitute the "Exchange Offer"), to exchange $1,000 principal amount of its
Floating Interest Rate Senior Notes due 2007 (the "New Notes") for each $1,000
in principal amount of its outstanding Floating Interest Rate 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 $30,000,000
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 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 April 21, 1998 (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 23 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 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 JULY 14, 1998
<PAGE>
The Old Notes were issued in a transaction (the "Prior Offering") pursuant
to which the Company issued an aggregate of $30,000,000 principal amount of the
Old Notes to the Initial Purchaser on April 21, 1998 (the "Closing Date")
pursuant to a Purchase Agreement, dated April 17, 1998 (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 April 21, 1998, 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 Old Notes were, and the New Notes will be, issued under the Indenture,
dated as of April 21, 1998 (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 mature on August 15, 2007, unless previously redeemed.
Interest on the New Notes is payable semiannually on February 15 and August 15,
commencing August 15, 1998. The New Notes will bear interest at a rate per annum
equal to LIBOR plus 400 basis points. Interest on the New Notes will be reset
semi-annually. The New Notes will be redeemable at the option of the Company at
any time at the redemption prices set forth herein in "Description of
Notes--Redemption--Optional Redemption," plus accrued and unpaid interest
thereon, to the redemption date. Upon a Change of Control (as defined herein),
the Company will be required to make an offer to repurchase all outstanding New
Notes at 101% of the aggregate principal amount thereof plus Liquidated Damages
(as defined herein), if any, and accrued and unpaid interest thereon to the date
of repurchase. See "Description of Notes-- Redemption--Purchase of Senior Notes
Upon Change of Control or Asset Sale" and "--Certain Covenants--Purchase of
Senior Notes Upon a Change of Control." Under certain circumstances, the Company
will be required to make an offer to purchase all or a portion of the Notes with
the proceeds received from an Asset Sale (as defined herein). See "Description
of Notes--Certain Covenants--on on Certain Asset Sales."
The New Notes will be general unsecured obligations of the Company and will
rank senior to all existing and future subordinated indebtedness of the Company
and PARI PASSU in right of payment to all unsubordinated indebtedness of the
Company, including indebtedness under the Credit Facility and the Existing
Notes. The Existing Notes are the $110,000,000 aggregate principal amount of 10%
Senior Notes
2
<PAGE>
due 2007 previously issued by the Company and currently outstanding. The
obligations of the Company under the Credit Facility are secured by
substantially all of the assets of the Company and, accordingly, such
indebtedness will effectively rank senior to the Notes and the Existing Notes to
the extent of such assets.
The New Notes will be unconditionally guaranteed (the "Note Guarantees") on
a joint and several basis by four subsidiaries of the Company: Burke Flooring
Products, Inc., a California corporation, Burke Rubber Company, Inc., a
California corporation, Burke Custom Processing, Inc., a California corporation
and Mercer Products Company, Inc., a New Jersey corporation ("Mercer")
(collectively, the "Subsidiary Guarantors"). None of the Subsidiary Guarantors,
other than Mercer, has any substantial assets or properties. 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; provided, however, that the guarantees of
indebtedness under the Credit Facility are secured by substantially all of the
assets of the Subsidiary Guarantors and will effectively rank senior to the Note
Guarantees to the extent of such assets. The Indenture restricts, but does not
prohibit, the Subsidiary Guarantors from incurring additional secured
indebtedness.
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
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 supplemented, available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
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 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
3
<PAGE>
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 Offer--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 July 20, 1998.
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>
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PAGE
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<S> <C>
Available Information...................................................................................... 6
Prospectus Summary......................................................................................... 7
Risk Factors............................................................................................... 23
The Transactions........................................................................................... 31
Use of Proceeds............................................................................................ 32
The Exchange Offer......................................................................................... 33
Capitalization............................................................................................. 42
Unaudited Pro Forma Combined Financial Statements.......................................................... 43
Selected Historical Consolidated Financial Data............................................................ 52
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 56
Business................................................................................................... 64
Acquisition of Mercer...................................................................................... 80
Consent Solicitation....................................................................................... 81
Management................................................................................................. 82
Security Ownership of Certain Beneficial Owners and Management............................................. 87
Certain Relationships and Related Transactions............................................................. 88
Description of Notes....................................................................................... 91
Description of New Credit Facility......................................................................... 121
Description of Capital Stock............................................................................... 124
Plan of Distribution....................................................................................... 129
Legal Matters.............................................................................................. 130
Experts.................................................................................................... 130
Index to 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.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports and other information with the Commission. In addition,
upon registration of the guarantees of the Existing Notes in connection with the
Prior Offering, each Subsidiary Guarantor also became subject to the reporting
requirements of the Exchange Act, subject to obtaining exemptive relief from the
Commission on 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, UNLESS THE CONTEXT
OTHERWISE REQUIRES. THE COMPANY'S FISCAL YEAR ENDS ON THE FRIDAY CLOSEST TO
DECEMBER 31. THE FINANCIAL INFORMATION OF THE COMPANY 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) AND THE PRIOR RECAPITALIZATION
(AS DEFINED HEREIN), INCLUDING THE PRIOR OFFERING OF THE EXISTING NOTES, AS IF
EACH HAD OCCURRED ON JANUARY 4, 1997 WITH RESPECT TO THE PRO FORMA COMBINED
STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 2, 1998 FOR THE COMPANY AND THE
YEAR ENDED DECEMBER 31, 1997 FOR MERCER AND, FOR THE PRO FORMA COMBINED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED APRIL 3, 1998 AND APRIL 4, 1997
FOR THE COMPANY AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 FOR MERCER.
ALL REFERENCES HEREIN TO "FISCAL YEAR 1997" REFER TO THE YEAR ENDED JANUARY 2,
1998 FOR THE COMPANY AND THE YEAR ENDED DECEMBER 31, 1997 FOR MERCER.
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) a leading nationwide producer of
both rubber and vinyl cove base and floor covering accessories for commercial
and industrial applications ("Flooring Products") and (iii) a value-added
producer of high-performance silicone hose, roofing and membrane products for
the heavy-duty truck, commercial building and fluid containment industries,
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 $36.4 million in 1993 to $90.2 million in 1997.
On April 21, 1998, the Company acquired all of the capital stock of Mercer
from Sovereign Specialty Chemicals, Inc. ("Sovereign") pursuant to a Stock
Purchase Agreement, dated March 5, 1998, among the Company, Sovereign and Mercer
(the "Mercer Acquisition"). Mercer is a leading manufacturer of extruded plastic
and vinyl flooring products such as vinyl cove base, transitional and finish
mouldings, corners, stair treads and other accessories. On a pro forma basis,
after giving effect to the Mercer Acquisition as if it had occurred on January
4, 1997, Burke would have generated $115.1 million and $22.4 million in revenues
and EBITDA, respectively, in 1997. See "Acquisition of Mercer" and "Unaudited
Pro Forma Combined Financial Statements."
Mercer represents the fifth acquisition completed by Burke's current
management team over the last five years. Burke's integration of these
acquisitions has led to a dominant position in the aerospace seals market,
opened new markets for its Flooring Products, improved operating efficiencies,
consolidated overhead and strengthened technical capabilities. Management
intends to continue to evaluate potential acquisitions as a way to augment
Burke's internal growth, expand and strengthen existing product lines and
enhance the Company's distribution and technological capabilities.
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's seals are specified on virtually all major domestically produced
commercial aircraft, including every aircraft series manufactured by The Boeing
7
<PAGE>
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 aircraft in the world,
including the Boeing 717, 737, 747, 757, 767 and 777, the McDonnell Douglas DC
and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Burke
bases its belief that it is the largest domestic producer of certain components
used in commercial and military aircraft upon internal analysis and informal
feedback from customers and competitors.
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 one-third of the Company's 1997 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.
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 $31.2 million in 1997, accounting for approximately 34.6%
of the Company's total net sales in 1997. Management believes the Aerospace
Products business is well positioned to benefit from the commercial aircraft
build rates which increased in 1997 and are continuing to increase in 1998,
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 a leading nationwide
producer of floor covering accessories for commercial and industrial
applications. Burke has historically been the dominant supplier of rubber cove
base (floor border that joins flooring or carpet to a wall), manufactured under
the name BurkeBase-Registered Trademark-, and other rubber-based flooring
accessories for commercial and industrial applications in the western United
States. The acquisition of Mercer significantly expands Burke's product
offerings and distribution capabilities given Mercer's historically strong
presence as a manufacturer of vinyl cove base and other vinyl-based flooring
accessories in the eastern United States.
Both Burke's and Mercer's principal product offerings include vinyl cove
base and rubber cove base, tile, stair treads, corners, shapes and other
flooring accessories. Demand for 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. The Company's Flooring Products sales were $23.5 million in 1997,
comprising 26.0% of the Company's total net sales in 1997. Mercer's sales were
$24.9 million in 1997.
Management believes that the acquisition of Mercer, which is already well
established as a leading supplier of vinyl cove base and mouldings in the
eastern United States, 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 traditionally more popular than rubber cove base, such
as the midwestern and eastern United States. The Mercer Acquisition also
presents the opportunity for cost savings through economies of scale and shared
resources.
8
<PAGE>
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 $14.8
million in 1993 to $35.5 million in 1997, and represented 39.4% of the Company's
total net sales in 1997. 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, one of the nation's
largest producers of floor covering accessories and maintains strong positions
in its 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
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.
Pursuant to the Mercer Acquisition, the Company will also be acquiring Mercer's
strong relationships with distributors in the eastern United States and Mercer's
trade name Uni-Color-Registered Trademark- color matching system, which is a
widely recognized brand name in the flooring business.
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. 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
9
<PAGE>
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 managed the Company's continuing vertical integration efforts and
acquired five independent operations since 1993.
BUSINESS STRATEGY
Burke intends to capitalize on its aforementioned competitive strengths in a
variety of ways in each of its major market segments. 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 largest domestic aerospace seal manufacturer and
has 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 expand this product line into
other geographic regions by offering the full complement of its rubber and
newly acquired vinyl flooring products and by capitalizing on the strong
East Coast presence in vinyl flooring products that Mercer has already
established.
- LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS. The
Company intends to continue to capitalize on the BurkeBase trademark by
expanding and upgrading its existing product line. In addition, the
Company intends to capitalize on the strong brand name established by
Mercer in the flooring business with Mercer's unique
Uni-Color-Registered Trademark- color matching system. The Company also
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 it
has yet to fully capitalize on the growth opportunities for its Purosil
silicone hoses, particularly in the heavy-duty truck and bus aftermarket.
New initiatives include increasing customer share at a major private-label
customer, initiating production of silicone hoses for a major new OEM
customer and expanding into new product areas.
10
<PAGE>
- 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, such as the Mercer Acquisition, where it can expand and
strengthen existing product lines and enhance 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
ACQUISITION OF MERCER
On April 21, 1998, the Company acquired all of the outstanding capital stock
of Mercer from Sovereign pursuant to a Stock Purchase Agreement among the
Company, Sovereign and Mercer, dated March 5, 1998, for an aggregate
consideration of $35,750,000, subject to working capital and other adjustments.
Founded in 1958, and headquartered in Eustis, Florida, Mercer is a leading
manufacturer of extruded plastic and vinyl products such as vinyl and rubber
cove base, transitional and finish mouldings, corners, stair treads and other
accessories. Mercer also sells a range of related adhesive products. Mercer's
product and distribution lines strongly complement the Company's Flooring
Products business. While the Company is the dominant producer of rubber cove
base and floor covering accessories in the western United States, Mercer is a
leading supplier to the vinyl cove base and moulding products markets and has a
particularly strong presence in the eastern United States.
Management believes the acquisition of Mercer significantly enhances the
Company's already strong flooring product offerings, distribution channels and
product development capabilities. The Mercer Acquisition also presents the
opportunity for cost savings through economies of scale and shared resources.
Mercer has experienced consistently profitable historical financial results,
with steady growth in sales since 1995. Net sales increased 7.2% and 1.4%,
respectively, in 1996 and 1997.
The Stock Purchase Agreement contains customary representations and
warranties from Sovereign to the Company. Certain of these representations and
warranties, and related indemnification rights, will
11
<PAGE>
terminate after a limited time following the effectiveness of the Mercer
Acquisition. The following table sets forth the sources and uses of funds in
connection with the Mercer Acquisition:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C>
Sources of Funds:
Issuance of Senior Notes.............................................. $ 30,000
Issuance of Convertible Preferred Stock(1)............................ 3,000
Cash on Hand.......................................................... 6,500
-------
$ 39,500
-------
-------
Uses of Funds:
Aggregate Mercer Acquisition Consideration(2)......................... $ 35,750
Transaction Expenses(3)............................................... 3,750
-------
$ 39,500
-------
-------
</TABLE>
- ------------------------
(1) Purchased by JFLEI (as defined herein), together with the other shareholders
and warrantholders of the Company who elected to participate in the
subscription offering.
(2) Subject to adjustment based on Mercer's working capital on the closing date
of the Mercer Acquisition pursuant to the Stock Purchase Agreement.
(3) Includes discounts and commissions and estimated expenses to be incurred in
connection with the Prior Offering, and fees and expenses payable in
connection with the Mercer Acquisition and the related financing thereof,
including the Consent Solicitation. See "The Transactions" and "Certain
Relationships and Related Transactions."
For a more detailed discussion of the business and operations of Mercer, see
"Acquisition of Mercer."
CONSENT SOLICITATION
In connection with the Prior Offering, pursuant to a consent solicitation
(the "Consent Solicitation"), the Company obtained the consents (the "Consent")
of holders of its Existing Notes to certain amendments (the "Amendments") to the
indenture pursuant to which the Existing Notes were issued between the Company
and United States Trust Company of New York (the "Existing Indenture") which,
among other things, (i) permitted the issuance of the Notes and permit the
incurrence of indebtedness represented by the Notes, (ii) increased certain of
the permitted indebtedness and permitted investment baskets contained in the
indebtedness and restricted payment covenants in the Existing Indenture, (iii)
modified the lien covenant to enhance the Company's ability to use existing
assets as collateral for new financings and (iv) made certain other amendments
of a non-substantive nature to the Existing Indenture. Pursuant to the Consent
Solicitation, the Company made certain payments to holders thereof who properly
furnished their Consents to the Amendments.
The Prior Offering, the related financing transactions and the Consent
Solicitation are collectively referred to herein as the "Transactions."
THE PRIOR OFFERING
The outstanding $30.0 million principal amount of Old Notes were sold by the
Company to the Initial Purchaser on the Closing Date (as defined herein)
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
12
<PAGE>
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 Floating
Interest Rate 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,
$30.0 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 September 3, 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 per annum
equal to LIBOR plus 400 basis points. Interest shall
accrue from April 21, 1998 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........................... 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
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
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
herein) 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 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
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
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 for its own
account 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 "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
Notes;" and "Description of Notes."
15
<PAGE>
<TABLE>
<S> <C>
Securities Offered................ $30,000,000 aggregate principal amount of Floating
Interest Rate Senior Subordinated Notes Due 2007.
Maturity Date..................... August 15, 2007.
Interest Rate and Payment Dates... Interest on the Notes will accrue from the date of
issuance and will be payable semi-annually on each
February 15 and August 15, commencing August 15, 1998.
The Senior Notes will bear interest at a rate per annum
equal to LIBOR plus 400 basis points. Interest on the
Senior Notes will be reset semi-annually.
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 Credit Facility and the Existing
Notes. However, the obligations of the Company under the
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") and the indenture for the
Existing Notes (the "Existing Indenture") restrict, but
do not prohibit, the Company from incurring additional
indebtedness. See "Description of Senior
Notes--Ranking."
Optional Redemption............... The Company may redeem the Notes at any time, in whole
or in part, at the redemption prices set forth herein,
plus accrued and unpaid interest, if any, to the date of
redemption. See "Description of Senior
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"). None of the
Subsidiary Guarantors, other than Mercer, has any
substantial assets or properties. 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 Credit Facility. Any Subsidiary
Guarantor's obligations under the Credit Facility,
however, will be secured by substantially all of the
assets of such Subsidiary Guarantor. Accordingly, such
secured indebtedness will effectively rank senior to the
Note Guarantees to the extent of such assets. The
Indenture and the Existing Indenture restrict but do not
prohibit, the Subsidiary Guarantors from incurring
additional secured indebtedness. See "Description of
Senior Notes--Note Guarantees."
Mandatory Redemption.............. None, except as set forth under "Description of Senior
Notes-- Change of Control."
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Change of Control................. Upon a Change of Control (as defined herein), the
Company 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. See "Description of Senior Notes--
Redemption--Purchase of Senior Notes Upon Change of
Control or Asset Sale" and "--Certain
Covenants--Purchase of Senior Notes Upon a 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 restricts, 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 Senior Notes--Certain
Covenants."
Use of Proceeds................... The Company used the net proceeds received from the
Prior Offering and the other financing transactions
described herein to finance the Mercer Acquisition and
to pay fees and expenses related to the Mercer
Acquisition and the Consent Solicitation. 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>
17
<PAGE>
RISK FACTORS
For a discussion of certain matters that should be considered by prospective
investors in connection with the Exchange Offer, see "Risk Factors."
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following sets forth summary unaudited pro forma financial data derived
from the unaudited pro forma financial data contained elsewhere herein (the "Pro
Formas"). The following unaudited pro forma statement of income data for the
year ended January 2, 1998 and the three months ended April 4, 1997 give effect
to the Prior Recapitalization as if it had occurred on January 4, 1997. The
unaudited pro forma combined statement of income data for Burke and Mercer
together for the year ended January 2, 1998 for Burke and December 31, 1997 for
Mercer have been further adjusted to give effect to the Transactions, including
the Prior Offering, the application of funds therefrom and the Mercer
Acquisition as if they had occurred on January 4, 1997. The unaudited pro forma
combined statement of income data for Burke and Mercer together for the three
months ended April 3, 1998 and April 4, 1997 for Burke and March 31, 1998 and
1997 for Mercer have been adjusted to give effect to the Transactions, including
the Prior Offering, the application of funds therefrom and the Mercer
Acquisition as if they had occurred on January 4, 1997. The unaudited pro forma
combined balance sheet data for Burke and Mercer together as of April 3, 1998
for Burke and March 31, 1998 for Mercer give effect to the Transactions,
including the Prior Offering, and to the Mercer Acquisition, as if they had
occurred on April 3, 1998. Certain management assumptions and adjustments
relating to the Prior Recapitalization and 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 and the
Prior Recapitalization been completed on the date indicated or Burke's or
Mercer's actual or future results or financial position. The summary unaudited
pro forma financial data should be read in conjunction with the information
contained in the financial statements of Burke and Mercer and the notes thereto,
"Unaudited Pro Forma Combined Financial Statements," "Selected Historical
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
18
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA COMBINED
---------------------------------------------
THREE MONTHS THREE MONTHS
FISCAL YEAR ENDED APRIL 4, ENDED APRIL 3,
1997 1997 1998
----------- --------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING DATA:
Net sales.......................... $ 115,127 $ 29,122 $ 29,147
Cost of sales...................... 78,995 20,337 20,120
----------- --------------- ---------------
Gross profit....................... 36,132 8,785 9,027
Selling, general and administrative
expenses......................... 17,665 4,598 4,789
----------- --------------- ---------------
Income from operations............. 18,467 4,187 4,238
Interest expense, net.............. 14,166 3,541 3,578
----------- --------------- ---------------
Income before income tax
provision........................ 4,301 646 660
Income tax provision............... 1,763 265 270
----------- --------------- ---------------
Net income......................... $ 2,538 $ 381 $ 390
----------- --------------- ---------------
----------- --------------- ---------------
OTHER DATA:
EBITDA(1).......................... $ 22,366 $ 5,106 $ 5,185
EBITDA margin(1)................... 19.4% 17.5% 17.8%
Depreciation and amortization...... $ 3,899 $ 919 $ 947
Capital expenditures............... 1,551 437 431
Cash interest expense.............. 13,350 3,337 3,351
Ratio of EBITDA to cash interest
expense.......................... 1.7x 1.5x 1.5x
Ratio of earnings to fixed
charges(2)....................... 1.3x 1.2x 1.2x
Ratio of earnings to combined fixed
charges(3)....................... 1.0x -- --
Net cash used in operating
activities....................... $ (11,432) $ (3,815) $ (4,340)
Net cash used in investing
activities....................... (36,745) (35,631) (431)
Net cash provided by (used in)
financing activities............. 50,254 43,675 (2,985)
BALANCE SHEET DATA AT APRIL 3,
1998:
Working capital.................... $ 19,595
Total assets....................... 93,678
Long-term obligations, less current
portion.......................... 140,000
Redeemable Preferred Stock(4)...... 16,652
Convertible Preferred Stock(5)..... 3,000
Shareholders' deficit.............. (83,562)
</TABLE>
- ------------------------
(1) EBITDA is the sum of income before 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.
19
<PAGE>
(2) 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.
(3) 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, accretion of the carrying value of the
Redeemable Preferred Stock and dividends on the Convertible Preferred Stock.
Earnings were insufficient to cover combined fixed charges by $403 for the
three months ended April 3, 1998 and $412 for the three months ended April
4, 1997.
(4) Net of $2,350 attributable to the Warrants (as defined herein) and issuance
of costs of $106 and including $1,108 of accrued dividends-in-kind.
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. See "Description of Capital
Stock-Preferred Stock-Redeemable Preferred Stock."
(5) See "Description of Capital Stock-Preferred Stock-Convertible Preferred
Stock."
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data below for Burke for the
three years ended January 2, 1998 and as of January 3, 1997 and January 2, 1998
have been derived from the Consolidated Financial Statements of Burke which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The summary consolidated financial data below for
Burke for the years ended December 31, 1993 and December 30, 1994 and as of
December 31, 1993, December 30, 1994 and December 29, 1995, have been derived
from the Consolidated Financial Statements of Burke which have also been audited
by Ernst & Young LLP, but which are not included elsewhere herein. The summary
financial data for the three months ended April 4, 1997 and April 3, 1998 and as
of April 3, 1998 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 April 4, 1997 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 three months ended April 3, 1998 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 Burke of certain assets of Purosil in March 1993; of Silicone
Fabrication
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Specialists, Inc. ("SFS") in February 1995; of Haskon Corporation ("Haskon") in
June 1995; of Kentile Corporation ("Kentile") in April 1996; and the effect of
the Prior Recapitalization in August 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR -------------------------
------------------------------------------- APRIL 4, APRIL 3,
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales......................................... $36,431 $44,370 $68,411 $72,466 $90,228 $23,124 $22,943
Cost of sales..................................... 25,355 29,998 49,226 49,689 62,917 16,419 16,180
------- ------- ------- ------- ------- ----------- -----------
Gross profit...................................... 11,076 14,372 19,185 22,777 27,311 6,705 6,763
Selling, general and administrative expenses(1)... 9,215 8,152 10,212 11,610 12,238 3,182 3,256
Transaction expenses(2)........................... -- -- -- -- 1,321 -- --
Stock option purchase(3).......................... -- -- -- -- 14,105 -- --
------- ------- ------- ------- ------- ----------- -----------
Income (loss) from operations..................... 1,861 6,220 8,973 11,167 (353) 3,523 3,507
Interest expense, net............................. 2,897 2,812 3,007 2,668 5,408 498 2,787
------- ------- ------- ------- ------- ----------- -----------
Income (loss) from continuing operations before
income tax provision (benefit), cumulative
effect of accounting change, extraordinary loss
and discontinued operation(4)................... (1,036) 3,408 5,966 8,499 (5,761) 3,025 720
Income tax provision (benefit).................... 146 1,395 3,393 3,466 (1,818) 1,209 288
------- ------- ------- ------- ------- ----------- -----------
Income (loss) from continuing operations before
cumulative effect of accounting change,
extraordinary loss and discontinued
operation(4).................................... $(1,182) $ 2,013 $ 2,573 $ 5,033 $(3,943) $ 1,816 $ 432
------- ------- ------- ------- ------- ----------- -----------
------- ------- ------- ------- ------- ----------- -----------
Net income (loss)(4).............................. $ (657) $ 1,502 $ 1,094 $ 4,101 $(3,943) $ 1,816 $ 432
------- ------- ------- ------- ------- ----------- -----------
------- ------- ------- ------- ------- ----------- -----------
OTHER DATA:
EBITDA(5)......................................... $16,851(6) $ 3,872 $ 3,873
EBITDA margin(5).................................. 18.7%(6) 16.7% 16.9%
Depreciation and amortization..................... $ 1,499 $ 349 $ 366
Capital expenditures.............................. 1,454 419 419
Cash interest expense............................. 2,059 498 2,639
Ratio of EBITDA to cash interest expenses......... 8.2x 7.8x 1.5x
Net cash used in operating activities............. $(8,543) $ (928) $(4,275)
Net cash provided by (used in) investing
activities...................................... 2,852 (419) (419)
Net cash provided by (used in) financing
activities...................................... 17,254 1,347 (2,985)
Ratio of earnings to fixed charges(7)............. -- 1.2x
Ratio of earnings to combined fixed charges(8).... -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF FISCAL YEAR -------------------
------------------------------------------- APRIL 4, APRIL 3,
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT PERIOD END):
Working capital......................... $ 4,932 $ 4,766 $ 5,402 $ 5,328 $21,678 $ 8,425 $ 22,084
Total assets............................ 30,535 28,551 39,729 40,673 62,837 44,599 55,915
Long-term obligations, less current
portion............................... 20,011 16,937 21,803 18,126 110,000 19,579 110,000
Redeemable Preferred Stock.............. -- -- -- -- 16,148 -- 16,652
Shareholders' (deficit) equity.......... (654) 849 340 4,283 (86,490) 6,099 (86,562)
</TABLE>
- ------------------------
(1) Selling, general and administrative expenses include amortization of
acquisition costs of $850 in 1993.
(2) Reflects $1,321 of expenses associated with the Prior Recapitalization in
August 1997.
(3) Reflects the Company's cost to purchase options issued and outstanding under
the Company's stock option plan in connection with the Prior
Recapitalization in August 1997.
(4) 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 $26, $511, $664 and $308 in 1993, 1994, 1995 and
through June 28, 1996, respectively, incurred by the Company's custom-molded
21
<PAGE>
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.
(5) EBITDA is the sum of income (loss) before income tax provision (benefit) and
interest, depreciation and amortization expense. EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
(6) Reflects EBITDA excluding costs of stock option purchase, transaction
expenses related to the Prior Recapitalization and management fees paid to a
former controlling shareholder.
(7) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income tax provision (benefit), cumulative effect of
accounting change, extraordinary loss and discontinued operation plus fixed
charges (excluding capitalized interest). Fixed charges consist of interest
incurred (which includes amortization of deferred financing costs) whether
expensed or capitalized and a portion of rental expense estimated to be
attributable to interest. Earnings were insufficient to cover fixed charges
by $5,790 for fiscal year 1997. The ratio of earnings to fixed charges has
not been presented for periods prior to the Transactions as the Company
believes the ratio is not material to investors.
(8) 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 combined
fixed charges by $6,968 for fiscal year 1997 and $129 for three months ended
April 3, 1998.
22
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, HOLDERS
OF NOTES SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH BELOW, AS WELL AS
THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
Upon consummation of the Transactions, the Company and its subsidiaries
incurred significant outstanding indebtedness and became highly leveraged. As of
April 3, 1998, after giving effect to the Transactions, the Company had
outstanding consolidated indebtedness of approximately $140.0 million. See
"Capitalization." In addition, subject to the limitations set forth in the
Indenture, the Existing Indenture and the Credit Agreement, the Company and its
subsidiaries may incur additional indebtedness, including borrowings under the
Credit Facility. See "Description of 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, including
higher than anticipated interest rates on the Notes (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 Credit Facility or successor facilities and
the interest rate on the Notes not increasing materially. 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 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 Senior 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 SENIOR 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,
including the Existing Notes. Loans under the Credit Facility will be secured by
substantially all of the Company's assets and will be guaranteed by four of the
Company's domestic subsidiaries (including Mercer), 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
23
<PAGE>
assurance that the assets of the Company or the relevant subsidiary would be
sufficient to repay in full any such secured indebtedness.
RESTRICTIVE COVENANTS
The Existing Indenture and the Credit Agreement and Indenture contain
numerous restrictive covenants that limit the discretion of the management of
the Company with respect to certain business matters. These covenants 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 Credit Agreement also
contains a number of financial covenants that require the Company to meet
certain financial ratios and tests and provides that a "change of control" will
constitute an event of default. See "Description of Senior Notes--Certain
Covenants" and "Description of Credit Facility." A failure to comply with the
obligations contained in the Credit Agreement, the Existing Indenture 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 Credit Agreement, the lenders under the 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 Credit Facility, the Existing Notes 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 $11.4 million, or 12.6%, of the Company's total
net sales and 36.5% of the Aerospace Products division's net sales in 1997, and
for $7.9 million, or 11.0% of the Company's total net sales and 32.1% of the
Aerospace Products business' net sales in 1996. In 1997, the top five customers
of the Aerospace Products division accounted for $22.1 million in net sales,
representing 24.5% and 70.8%, respectively, of the Company's total and the
Aerospace Products division's 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.
Boeing has recently announced certain production problems relating to its 737
aircraft, and there is no assurance that such production problems would not have
a material adverse effect on the Company. 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 "Business--Products and
Markets--Aerospace Products--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
24
<PAGE>
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 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. However, the markets in which
the Company's Aerospace Products compete have recently experienced
consolidation, and any future consolidation may result in loss of customers of
the Company and lower profit margins on the Company's Aerospace Products. 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," "--Products and Markets--
Flooring Products--Competition" and "--Products and Markets--Commercial
Products--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's operations are largely dependent on the efforts of its senior
management. While the Company has entered into employment agreements with its
key personnel, 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
The Company is controlled by J.F. Lehman Equity Investors I, L.P. ("JFLEI"),
which beneficially owns shares representing 65% of the voting interest in the
Company 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. JFLEI's ownership
percentages are calculated without giving effect to the shares issuable upon
conversion of Convertible Preferred Stock (as defined herein) and shares
issuable upon exercise of certain options granted to management of the Company.
Pursuant to the terms of the Shareholders Agreement (as defined herein), for so
long as JFLEI, together with its related transferees, owns 75% of the Warrants
initially issued to it, one of the holders of the Warrants will have the right
to designate the ninth director. In addition, pursuant to the terms in the
Shareholders Agreement, for so long as JFLEI, 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
25
<PAGE>
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 current 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."
GOVERNMENT PROCUREMENT POLICIES
Approximately 27% of the Company's Aerospace Products division's net sales
in 1997 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 "Risk Factors--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.
Certain of the military programs for which the Company is producing or
developing products are subject to continuous budgetary scrutiny by the United
States Congress and by the Pentagon. In particular, the expense budgets of both
the B-2 bomber and the F-22 fighter aircraft are highly controversial and
proposals to limit or eliminate these programs are periodically made in both the
United States House of Representatives and the Senate. The B-2 bomber has been
subject to particularly high levels of scrutiny recently based on reports
calling into doubt the efficacy of its stealth capabilities. Although the
Company does not currently derive a high percentage of its revenues from sales
relating to either of these programs, the Company's ability to expand its
Aerospace Products business may be limited if either of these programs were to
be curtailed or eliminated.
RISKS RELATING TO MERCER ACQUISITION
The Company acquired all of the capital stock of Mercer from Sovereign
concurrent with the closing of the Prior Offering. Under the Stock Purchase
Agreement pursuant to which the Company acquired Mercer, certain of the
representations and warranties and related indemnity obligations of Sovereign
will survive the effectiveness of the Mercer Acquisition for a limited time.
There can be no assurance that the Company will not encounter unanticipated
problems or liabilities with respect to the operations of Mercer or with the
integration of Mercer's operations with those of the Company. See "Acquisition
of Mercer."
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.
26
<PAGE>
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 Senior 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. See "Description of Senior Notes--Certain Covenants--Purchase of
Senior 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 Senior Notes tendered. Moreover,
restrictions in the Credit Agreement prohibit the Company from making such
required repurchases; therefore, any such repurchases would constitute an event
of default under the Credit Agreement absent a waiver. In addition, the holders
of the Existing Notes and holders of the Redeemable Preferred Stock may also
require the Company to repurchase their respective notes and shares upon a
Change of Control, which would also constitute a default under the Credit
Agreement, 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.
ENVIRONMENTAL MATTERS
The Company and Mercer are 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
Prior 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 entered into in connection with
the Prior Recapitalization, the former shareholders of the Company have agreed,
subject to certain limitations as to survival and amount, to indemnify the
Company against certain environmental liabilities incurred prior to the
consummation of the Prior Recapitalization. See "The Prior Recapitalization."
Based
27
<PAGE>
in part on the investigations conducted and the indemnification provisions of
the merger agreement entered into in connection with the Prior Recapitalization
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.
In connection with the Mercer Acquisition, the Company conducted an
environmental review of Mercer's operations and its compliance with applicable
environmental laws. The review included a site visit to Mercer's manufacturing
facility in Eustis, Florida and interviews with facility personnel regarding
environmental matters. In addition, the Company reviewed existing environmental
reports that included Phase I assessments, audits and limited soil and ground
water sampling data. The environmental review revealed that Mercer's facilities
have had, or may have had, releases of hazardous substances that may require
remediation. Pursuant to the Stock Purchase Agreement, the former shareholders
of Mercer have agreed to indemnify the Company against certain environmental
liabilities incurred prior to the purchase provided the Company makes a written
claim for indemnification against the former shareholders of Mercer prior to the
90th day after receipt by the Company of audited financial statements of Mercer
for the fiscal year ending December 31, 1999, but in no event later than June
30, 2000, and subject to a maximum cap on liability of $5,000,000 or the
adjusted purchase price for Mercer. Based, in part, on the environmental review
conducted by the Company and the indemnification provisions of the Stock
Purchase Agreement with respect to environmental matters, the Company believes,
although there can be no assurance, that its 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
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.
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<PAGE>
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. Upon
consummation of the Prior Offering, the Company would not have any significant
subsidiary other than Mercer.
On the basis of its historical financial information and recent operating
history, as discussed in "Offering Memorandum Summary," "Unaudited Pro Forma
Combined 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; TRANSFER RESTRICTIONS
There is no existing trading market for the Notes. Although the Initial
Purchaser has advised the Company that it currently intends to make a market in
the Notes, it is not obligated to do so and may discontinue such market-making
at any time without notice. In addition, such market activity may be limited
during the Exchange Offer. See "Plan of Distribution." Accordingly, there can be
no assurance that an active market will develop upon completion of this Offering
or, if developed, that such market will be sustained. The initial offering price
of the Notes was determined through negotiations between the Company and the
Initial Purchaser, and may bear no relationship to the market price of the Notes
after the Offering. Although the Notes are expected to be eligible for trading
in the PORTAL market, there can be no assurance as to the development of any
market or the liquidity of any market that may develop for the Notes or the
Exchange Notes (as defined herein). The Company does not intend to apply to list
the Notes or the Exchange Notes on any securities exchange or for quotation
through the National Association of Securities Dealers Automated Quotation
Systems. The liquidity of, and trading market for, the Notes or the Exchange
Notes also may be adversely affected by general declines in the market for
similar securities, regardless of the Company's financial performance or
prospects.
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
29
<PAGE>
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 or other
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. 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 market-making activities or other trading activities. The Company has
agreed that, for a period of 180 days after the effective date of this
Prospectus, 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.
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<PAGE>
THE TRANSACTIONS
THE SPONSOR
J.F. Lehman & Company ("Lehman") was established in 1992 by John F. Lehman,
Donald Glickman and George Sawyer (the "Managing Principals") to acquire niche
manufacturing and service companies operating in the electronics, engineering,
aerospace and defense industries. The Managing Principals have significant
operating and investing experience in these industries and have a proven track
record in producing strong equity returns by employing this focused investment
strategy. The Managing Principals are the managing members of JFL Investors LLC,
the general partner of JFLEI.
In 1993, Lehman purchased Sperry Marine Inc., a recognized world leader in
the design and manufacture of advanced electronic maritime instruments and
sensors, from Tenneco Inc. After working closely for over two years with
Sperry's management to reposition the company and improve its profitability,
Lehman sold Sperry to Litton Industries, realizing a substantial gain on its
original equity investment. Similarly, in 1992, Lehman sponsored the acquisition
of Astra Holdings Corporation, a leading manufacturer of electronic and
electromechanical devices and subsystems for military and commercial uses, which
it later sold to Alliant Techsystems in 1993, producing an annualized rate of
return on its invested equity in excess of 100%.
In each of its investments, Lehman has taken an active, hands-on approach
toward portfolio company oversight. Lehman provides the Company with additional
strategic opportunities utilizing the strong operating experience in the
aerospace and electronics industries that its general and limited partners
possess. In addition to the Managing Principals, Lehman's other partners
include: Mr. Oliver C. Boileau, Jr., former President of Boeing Aerospace,
General Dynamics and Northrop; Mr. Thomas G. Pownall, former Chairman and Chief
Executive Officer of Martin Marietta; Sir Christopher Lewinton, Chairman of TI
Group plc and Dowty Aerospace; Mr. William Paul, former Executive Vice President
of United Technologies Corporation and President of Sikorsky Aircraft and Space
Systems; and General P.X. Kelley, former Commandant of the United States Marine
Corps. See "Management."
THE PRIOR RECAPITALIZATION
On August 20, 1997, JFLEI acquired a controlling interest in Burke through a
recapitalization of the outstanding securities of Burke (the "Prior
Recapitalization"). The Prior Recapitalization was financed through (i) a $20
million capital contribution by JFLEI to the Company, (ii) the sale of $18
million in Redeemable Preferred Stock and Warrants by the Company and (iii) the
issuance of the Existing Notes in an aggregate principal amount of $110 million.
Upon the completion of the Prior Recapitalization, on a fully diluted basis, (i)
JFLEI and its affiliates owned approximately 65% of the common equity of the
Company, (ii) the holders of the Warrants had the right to purchase
approximately 20% of the common equity of the Company and (iii) certain members
of management and certain other shareholders of the Company owned 15% of the
common equity of the Company. These ownership percentages are calculated, in
each case, without giving effect to shares issuable upon conversion of
Convertible Preferred Stock and shares issuable upon exercise of certain options
granted to management of the Company.
In connection with the Prior Recapitalization, the former shareholders of
the Company made certain customary representations, warranties and covenants and
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, expired on March 31, 1998.
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<PAGE>
THE MERCER ACQUISITION
Concurrent with the consummation of the Prior Offering on April 21, 1998,
the Company acquired all of the outstanding capital stock of Mercer from
Sovereign for an aggregate consideration of $35,750,000, subject to working
capital and other adjustments, pursuant to a Stock Purchase Agreement, dated
March 5, 1998, among Burke, Sovereign and Mercer. The consummation of the Mercer
Acquisition was subject to customary conditions. The Stock Purchase Agreement
contains customary representations and warranties from Sovereign to the Company.
Certain of these representations and warranties, and related indemnification
rights, will terminate after a limited time following the effectiveness of the
Mercer Acquisition.
CONSENT SOLICITATION
In connection with the Prior Offering, pursuant to a consent solicitation
(the "Consent Solicitation"), the Company obtained the consents (the "Consent")
of holders of its Existing Notes to certain amendments (the "Amendments") to the
indenture pursuant to which the Existing Notes were issued between the Company
and United States Trust Company of New York (the "Existing Indenture") which,
among other things, (i) permitted the issuance of the Notes and permit the
incurrence of indebtedness represented by the Notes, (ii) increased certain of
the permitted indebtedness and permitted investment baskets contained in the
indebtedness and restricted payment covenants in the Existing Indenture, (iii)
modified the lien covenant to enhance the Company's ability to use existing
assets as collateral for new financings and (iv) made certain other amendments
of a non-substantive nature to the Existing Indenture. Pursuant to the Consent
Solicitation, the Company made certain payments to holders thereof who properly
furnished their Consents to the Amendments.
USE OF PROCEEDS
The gross proceeds to the Company from the Prior Offering were $30.0 million
before deducting commissions and estimated expenses of the Prior Offering. The
Company used the proceeds from the issuance of the Old Notes, the related
financings and existing cash to finance the Mercer Acquisition and to pay
certain expenses of the Transactions.
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.................................................................. $ 30,000
Issuance of Convertible Preferred Stock(1)................................................ 3,000
Cash on Hand.............................................................................. 6,500
-------
$ 39,500
-------
-------
Uses of Funds:
Aggregate Mercer Acquisition Consideration(2)............................................. $ 35,750
Transaction Expenses(3)................................................................... 3,750
-------
$ 39,500
-------
-------
</TABLE>
- ------------------------
(1) Purchased by JFLEI and the other shareholders and warrantholders of the
Company who elected to participate in a subscription offering.
(2) Subject to adjustment based on Mercer's working capital on the closing date
of the Mercer Acquisition pursuant to the Stock Purchase Agreement.
(3) Includes discounts and commissions and estimated expenses incurred in
connection with the Prior Offering, and fees and expenses payable in
connection with the Mercer Acquisition and the related financing thereof,
including the Consent Solicitation. See "Certain Relationships and Related
Transactions."
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchaser on April 21,
1998 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 their
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 their 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, $30.0 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 July 16, 1998, 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.
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<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 September 3, 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,
34
<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, in 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 (iii) 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 floating rate equal to LIBOR plus 400
basis points per annum, which interest shall accrue from August 15, 1998 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
35
<PAGE>
HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY.
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. LETTERS OF TRANSMITTAL AND OLD NOTES SHOULD NOT BE
SENT TO THE COMPANY. WE ARE NOT ASKING FOR A PROXY AND YOU ARE REQUESTED NOT TO
SEND US A PROXY.
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
36
<PAGE>
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.
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.
37
<PAGE>
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.
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.
38
<PAGE>
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
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
39
<PAGE>
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 the federal income tax consequences of
the Exchange Offer reflects the opinion of Gibson, Dunn & Crutcher LLP, counsel
to the Company, as to the 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 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
New 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 New Note is
treated as a continuation of the corresponding Old Note. An exchanging Holder's
holding period for a New 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 New 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.,
40
<PAGE>
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 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.
41
<PAGE>
CAPITALIZATION
The following table sets forth, as of April 3, 1998 (i) the consolidated
capitalization of the Company and (ii) the pro forma combined capitalization of
the Company after giving effect to the Transactions, including the Prior
Offering, and the application of the proceeds therefrom. This table should be
read in conjunction with "Description of Senior Notes," the Unaudited Pro Forma
Combined Financial Statements and the notes thereto and the Consolidated
Financial Statements of the Company and the notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
APRIL 3, 1998
--------------------
HISTORICAL PRO FORMA
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term obligations (including current maturities of long-term
obligations)........................................................ $ -- $ --
LONG-TERM OBLIGATIONS (NET OF CURRENT MATURITIES):
Credit Facility(1).................................................. -- --
10% Senior Notes due 2007........................................... 110,000 110,000
Floating Interest Rate Senior Notes due 2007........................ -- 30,000
--------- ---------
Total long-term obligations......................................... 110,000 140,000
--------- ---------
Redeemable Preferred Stock, no par value; 30,000 Series A shares
designated; 16,000 Series A shares issued and outstanding; 5,000
Series B shares designated; 2,000 Series B shares issued and
outstanding(2)(3)................................................... 16,652 16,652
SHAREHOLDERS' EQUITY:
Convertible Preferred Stock, no par value; 3,000 shares authorized; no
shares issued and outstanding; 3,000 shares issued, on a pro forma
basis(3)............................................................ -- 3,000
Common stock, no par value; 20,000,000 shares authorized; 3,857,000
issued and outstanding(4)........................................... 25,464 25,464
Accumulated deficit................................................... (112,026) (112,026)
--------- ---------
Total shareholders' equity (deficit)................................ (86,562) (83,562)
--------- ---------
Total capitalization................................................ $ 40,090 $ 73,090
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) The Company increased the amount available under the Credit Facility from
$15.0 million to $25.0 million contemporaneously with the Prior Offering.
See "Description of Credit Facility."
(2) Net of $2,350 attributable to the Warrants and issuance costs of $106 and
including $1,108 of accrued dividends-in-kind. 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. See "Description of Capital Stock--Preferred Stock--Redeemable
Preferred Stock."
(3) The Company has an aggregate of 50,000 authorized shares of Preferred Stock,
inclusive of the shares which have been designated as Redeemable Preferred
Stock and Convertible Preferred Stock.
(4) Excludes (i) 964,000 shares of Common Stock reserved for issuance pursuant
to the Warrants, (ii) 300,000 shares of Common Stock reserved for issuance
upon conversion of the Convertible Preferred Stock and (iii) 500,000 shares
of Common Stock reserved for issuance under the Company's stock option plan.
See "Prior Recapitalization," "Description of Capital Stock--Warrants" and
"Management--Compensation Summary."
42
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Combined Financial Statements (as defined
below) of the Company are based on the audited and unaudited financial
statements of the Company and Mercer appearing elsewhere in this Prospectus, as
adjusted to illustrate the estimated effects of the Transactions and the Prior
Recapitalization. The unaudited pro forma adjustments are based upon available
information and certain assumptions that the Company believes are reasonable.
The Unaudited Pro Forma Combined Financial Statements and accompanying notes
should be read in conjunction with the historical financial statements of the
Company and Mercer and other financial information pertaining to the Company and
Mercer appearing elsewhere in this Prospectus including "The Transactions,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The following Unaudited Pro Forma Combined Statement of Income for Burke for
the year ended January 2, 1998 and the three months ended April 4, 1997 give
effect to the Prior Recapitalization as if it had occurred on January 4, 1997.
The Unaudited Pro Forma Combined Financial Statements have been prepared to give
effect to the Transactions, including the Prior Offering, and the application of
the net proceeds therefrom as if such transactions had occurred on January 4,
1997 for the statement of income for the year ended January 2, 1998 and for the
three months ended April 3, 1998 and the three months ended April 4, 1997 (the
"Unaudited Pro Forma Combined Income Statements") and on April 3, 1998 for the
balance sheet (the "Unaudited Pro Forma Combined Balance Sheet," which together
with the Unaudited Pro Forma Combined Income Statements comprise the "Unaudited
Pro Forma Combined Financial Statements"). The pro forma adjustments relating to
the allocation of the purchase price of Mercer represent the Company's
preliminary determinations of the purchase accounting and other adjustments and
are based upon available information and certain assumptions the Company
considers reasonable under the circumstances. Final amounts could differ from
those set forth therein. The Mercer Acquisition will be treated as a purchase
for financial accounting purposes.
The Unaudited Pro Forma Combined Financial Statements do not purport to be
indicative of what the Company's financial position or results of operation
would actually have been had the Transactions and the Prior Recapitalization
been completed on such date or at the beginning of the periods indicated or to
project the Company's results of operations for any future date.
43
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF APRIL 3, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------ PRO FORMA PRO FORMA
BURKE MERCER ADJUSTMENTS(1) COMBINED
--------- ------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 3,884 $ 436 $ (4,320)(2) $ --
Trade accounts receivable................................................ 12,561 2,952 15,513
Due from affiliated companies............................................ -- 813 (813)(3) --
Inventories.............................................................. 12,747 3,179 -- 15,926
Prepaid expenses and other current assets................................ 1,213 124 (97)(3) 1,240
Deferred income tax assets............................................... 2,845 9 (9)(3) 2,845
Refundable income taxes.................................................. 348 -- -- 348
--------- ------- -------------- ----------
Total current assets................................................... 33,598 7,513 (5,239) 35,872
Property, plant and equipment.............................................. 15,082 4,862 (197)(3) 19,747
Prepaid pension costs...................................................... 501 -- -- 501
Deferred financing costs, net.............................................. 5,183 1,772 1,228(2) 8,183
Goodwill, net.............................................................. 1,456 24,749 3,075(4) 29,280
Other assets............................................................... 95 -- -- 95
--------- ------- -------------- ----------
Total assets........................................................... $ 55,915 $38,896 $ (1,133) $ 93,678
--------- ------- -------------- ----------
--------- ------- -------------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses.............................. $ 5,054 $ 1,534 $ 2,616(2) $ 9,204
Accrued compensation and related liabilities............................. 1,982 613 -- 2,595
Accrued interest......................................................... 1,527 -- -- 1,527
Payable to shareholders.................................................. 1,948 -- -- 1,948
Income taxes payable..................................................... 1,003 126 (126)(3) 1,003
--------- ------- -------------- ----------
Total current liabilities.............................................. 11,514 2,273 2,490 16,277
Existing Notes............................................................. 110,000 -- -- 110,000
Long-term debt due to Sovereign............................................ -- 30,000 (30,000)(3) --
Senior Notes............................................................... -- -- 30,000(2) 30,000
Other noncurrent liabilities............................................... 420 169 (169)(3) 420
Deferred income tax liabilities............................................ 3,891 175 (175)(3) 3,891
Redeemable Preferred Stock, no par value; 30,000 Redeemable Series A shares
designated; 16,000 Series A shares issued and outstanding; 5,000 Series B
shares designated; 2,000 Redeemable Series B shares issued and
outstanding.............................................................. 16,652 -- -- 16,652
Shareholders' equity (deficit):
Convertible Preferred Stock; 3,000 shares authorized; no shares issued
and outstanding; 3,000 shares issued on a pro forma basis.............. -- -- 3,000(2) 3,000
Class A common stock, no par value; 20,000,000 shares authorized;
3,857,000 issued and outstanding....................................... 25,464 -- -- 25,464
Additional paid-in capital............................................... -- 6,105 (6,105)(3) --
Accumulated deficit...................................................... (112,026) 174 (174)(3) (112,026)
--------- ------- -------------- ----------
Total shareholders' equity (deficit)................................... (86,562) 6,279 (3,279) (83,562)
--------- ------- -------------- ----------
Total liabilities and shareholders' equity (deficit)................... $ 55,915 $38,896 $ (1,133) $ 93,678
--------- ------- -------------- ----------
--------- ------- -------------- ----------
</TABLE>
The accompanying notes to the unaudited pro forma combined balance sheet
are an integral part of this statement.
44
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(1) For purposes of preparing the Unaudited Pro Forma Combined Balance Sheet,
Mercer's assets and liabilities acquired or assumed have been recorded at
their estimated fair values. A final determination of the required purchase
price accounting adjustments and of the fair value of the assets acquired or
assumed has not yet been made. Accordingly, the purchase accounting
adjustments made in connection with the development of the unaudited pro
forma financial information reflect the Company's best estimate based upon
currently available information. Based upon Mercer's March 31, 1998 balance
sheet, the purchase price allocation would be:
<TABLE>
<S> <C>
Current Assets..................................................... $ 6,158
Plant and Equipment................................................ 4,665
Excess purchase price over net assets acquired..................... 27,824
Accounts payable and accrued expenses.............................. (2,147)
---------
Total purchase price............................................... 36,500
Mercer Acquisition expenses........................................ (750)
---------
Mercer Acquisition consideration................................... $ 35,750
---------
---------
</TABLE>
(2) Reflects the issuance of $30,000 of Senior Notes, the issuance of 3,000
shares of Convertible Preferred Stock, the use of $6,500 of Burke's cash to
pay a portion of the Mercer Acquisition consideration and the capitalization
of $3,000 of deferred financing costs; also reflects the elimination of
$1,772 in deferred financing costs previously capitalized by Mercer and $436
in cash not contractually acquired in the Mercer Acquisition.
(3) Reflects assets and liabilities, including certain property, plant and
equipment not contractually acquired or assumed from Sovereign in the Mercer
Acquisition.
(4) Reflects the recording of goodwill under the purchase accounting method.
Under the Stock Purchase Agreement, Burke and Sovereign have agreed to make
elections under Section 338(g) and Section 338(h)(10) of the Internal
Revenue Code and any state, local and foreign counterparts with respect to
Mercer.
45
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FISCAL YEAR 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO PRIOR PRO FORMA TRANSACTIONS PRO FORMA
BURKE RECAPITALIZATION BURKE MERCER ADJUSTMENTS COMBINED
------- ---------------- --------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales......................................... $90,228 $-- $90,228 $24,899 $-- $115,127
Cost of sales..................................... 62,917 -- 62,917 16,499 (600)(4) 78,995
179(5)
------- ------- --------- ------- ------------ ---------
Gross profit...................................... 27,311 -- 27,311 8,400 421 36,132
Selling, general and administrative expenses...... 12,238 (279)(1) 11,959 4,803 1,070(5) 17,665
(167)(6)
Transaction expenses.............................. 1,321 (1,321)(2) -- -- -- --
Stock option purchase............................. 14,105 (14,105)(2) -- -- -- --
------- ------- --------- ------- ------------ ---------
Income (loss) from operations..................... (353) 15,705 15,352 3,597 (482) 18,467
Interest expense.................................. 5,408 5,592(3) 11,000 1,661 1,505(7) 14,166
------- ------- --------- ------- ------------ ---------
Income (loss) before income taxes................. (5,761) 10,113 4,352 1,936 (1,987) 4,301
Income taxes...................................... (1,818) 3,602(8) 1,784 777 (798)(8) 1,763
------- ------- --------- ------- ------------ ---------
Net (loss) income................................. $(3,943) $ 6,511 $ 2,568 $ 1,159 $(1,189) $ 2,538
------- ------- --------- ------- ------------ ---------
------- ------- --------- ------- ------------ ---------
</TABLE>
The accompanying notes to the unaudited pro forma combined statement of income
are an integral part of this statement.
46
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
PRIOR RECAPITALIZATION ADJUSTMENTS--FISCAL YEAR 1997
The pro forma financial data for Burke (excluding the Mercer Acquisition)
have been derived from the Company's historical financial statements for the
year ended January 2, 1998 as if the Prior Recapitalization occurred on January
4, 1997. The Prior Recapitalization has been accounted for as a recapitalization
that has no impact on the historical basis of assets and liabilities.
(1) Reflects the elimination of management fees paid to a director and to an
affiliate of the prior principal shareholders of the Company prior to August
1997.
(2) Includes the elimination of $14,105 representing the Company's cost to
purchase options issued and outstanding under the Company's stock option
plan in connection with the Prior Recapitalization. Also reflects the
elimination of expenses of $1,321 incurred in connection with the Prior
Recapitalization.
(3) Reflects a full year of interest on the Existing Notes net of interest on
prior debt repaid as follows:
<TABLE>
<S> <C>
Interest expense on the Existing Notes............................. $ 11,000
Amortization of debt issuance costs (10 years)..................... 500
Less interest income............................................... (500)
Less historical net interest of existing debt refinanced........... (5,408)
---------
Incremental interest expense....................................... $ 5,592
---------
---------
</TABLE>
TRANSACTIONS ADJUSTMENTS--FISCAL YEAR 1997
The following adjustments reflect the Transactions, including the Prior
Offering, as applied to the Company's pro forma results and Mercer's actual
results as if the Transactions took place on January 4, 1997.
(4) Reflects raw material cost savings of $600 primarily due to the shifting of
raw material purchases away from Mercer's former affiliate and to lower
cost, non-affiliated suppliers.
(5) Adjustment to cost of sales reflects additional depreciation expense of $179
while adjustment to selling, general and administrative expenses reflects
additional amortization expense of $1,070 calculated on a straight line
basis over 15 years of the excess of purchase price over net assets acquired
in the Mercer Acquisition, net of Mercer's prior amortization expense.
(6) Reflects the elimination of management fees paid to a former controlling
shareholder of Mercer.
(7) Reflects interest on the Notes, net of interest on Mercer's debt not
assumed:
<TABLE>
<S> <C>
Interest on the Senior Notes....................................... $ 2,850
Amortization of debt issuance costs (9 1/2 years).................. 316
Less historical interest expense on Mercer's debt not assumed...... (1,661)
---------
Incremental interest expense....................................... $ 1,505
---------
---------
</TABLE>
Each incremental 25 basis point increase or decrease in the assumed interest
rate of the Senior Notes would increase or decrease annual interest expense
on the Senior Notes by $75.
(8) Reflects the income tax (benefit) provision arising from the pro forma
adjustments discussed above based on the Company's pro forma estimated
effective tax rate of 41% for the twelve months ended January 2, 1998.
47
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED APRIL 3, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TRANSACTIONS PRO FORMA
BURKE MERCER ADJUSTMENTS COMBINED
------- ------ ------------ ---------
<S> <C> <C> <C> <C>
Net sales................................................... $22,943 $6,204 $-- $29,147
Cost of sales............................................... 16,180 3,923 17(1) 20,120
------- ------ ----- ---------
Gross profit................................................ 6,763 2,281 (17) 9,027
Selling, general and administrative expenses................ 3,256 1,294 239(1) 4,789
------- ------ ----- ---------
Income from operations...................................... 3,507 987 (256) 4,238
Interest expense............................................ 2,787 701 90(2) 3,578
------- ------ ----- ---------
Income before income taxes.................................. 720 286 (346) 660
Income taxes................................................ 288 114 (132)(3) 270
------- ------ ----- ---------
Net income.................................................. $ 432 $ 172 $(214) $ 390
------- ------ ----- ---------
------- ------ ----- ---------
</TABLE>
The accompanying notes to the unaudited pro forma combined statement of income
are an integral part of this statement.
48
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
TRANSACTIONS ADJUSTMENTS--THREE MONTHS ENDED APRIL 3, 1998
The following adjustments reflect the Transactions, including the Prior
Offering, as applied to the Company's and Mercer's actual results as if the
Transactions took place on January 4, 1997.
(1) Adjustment to cost of sales reflects additional depreciation expense of $17
while adjustment to selling, general and administrative expenses reflects
additional amortization expense of $239 calculated on a straight line basis
over 15 years of the excess of purchase price over net assets acquired in
the Mercer Acquisition, net of Mercer's prior amortization expense.
(2) Reflects interest on the Notes, net of interest on Mercer's debt not
assumed:
<TABLE>
<S> <C>
Interest on the Senior Notes......................................... $ 712
Amortization of debt issuance costs (9 1/2 years).................... 79
Less historical interest expense on Mercer's debt not assumed........ (701)
---------
Incremental interest expense......................................... $ 90
---------
---------
</TABLE>
Each incremental 25 basis point increase or decrease in the assumed interest
rate of the Senior Notes would increase or decrease annual interest expense
on the Senior Notes by $75.
(3) Reflects the income tax (benefit) arising from the pro forma adjustments
discussed above based on the Company's pro forma estimated effective tax
rate of 41% for the three months ended April 3, 1998.
49
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED APRIL 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO PRO
PRIOR FORMA TRANSACTIONS PRO FORMA
BURKE RECAPITALIZATION BURKE MERCER ADJUSTMENTS COMBINED
------- ---------- ------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................................... $23,124 $-- $23,124 $5,998 $-- $29,122
Cost of sales............................................... 16,419 -- 16,419 4,042 (150)(3) 20,337
26(4)
------- ---------- ------- ------ ----- ---------
Gross profit................................................ 6,705 -- 6,705 1,956 124 8,785
Selling, general and administrative expenses................ 3,182 (105 (1) 3,077 1,293 300(4) 4,598
(72)(5)
------- ---------- ------- ------ ----- ---------
Income from operations...................................... 3,523 105 3,628 663 (104) 4,187
Interest expense............................................ 498 2,252 (2) 2,750 228 563(6) 3,541
------- ---------- ------- ------ ----- ---------
Income before income taxes.................................. 3,025 (2,147 ) 878 435 (667) 646
Income taxes................................................ 1,209 (849 (7) 360 174 (269)(7) 265
------- ---------- ------- ------ ----- ---------
Net income.................................................. $ 1,816 ($1,298 ) $ 518 $ 261 $(398) $ 381
------- ---------- ------- ------ ----- ---------
------- ---------- ------- ------ ----- ---------
</TABLE>
The accompanying notes to the unaudited pro forma combined statement of income
are an integral part of this statement.
50
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
PRIOR RECAPITALIZATION ADJUSTMENTS--THREE MONTHS ENDED APRIL 4, 1997
The pro forma financial data for Burke (excluding the Mercer Acquisition)
have been derived from the Company's historical financial statements for the
three months ended April 4, 1997 as if the Prior Recapitalization occurred on
January 4, 1997. The Prior Recapitalization has been accounted for as a
recapitalization that has no impact on the historical basis of assets and
liabilities.
(1) Reflects the elimination of management fees paid to a director and to an
affiliate of the prior principal shareholders of the Company during the
three months ended April 4, 1997.
(2) Reflects three months of interest on the Existing Notes net of interest on
prior debt repaid as follows:
<TABLE>
<S> <C>
Interest expense on the Existing Notes.............................. $ 2,750
Amortization of debt issuance costs (10 years)...................... 125
Less interest income................................................ (125)
Less historical net interest of existing debt refinanced............ (498)
---------
Incremental interest expense........................................ $ 2,252
---------
---------
</TABLE>
TRANSACTIONS ADJUSTMENTS--THREE MONTHS ENDED APRIL 4, 1997
The following adjustments reflect the Transactions, including the Prior
Offering, as applied to the Company's pro forma results and Mercer's actual
results as if the Transactions took place on January 4, 1997.
(3) Reflects raw material cost savings of $150 primarily due to the shifting of
raw material purchases away from Mercer's former affiliate and to lower
cost, non-affiliated suppliers.
(4) Adjustment to cost of sales reflects additional depreciation expense of $26
while adjustment to selling, general and administrative expenses reflects
additional amortization expense of $300 calculated on a straight line basis
over 15 years of the excess of purchase price over net assets acquired in
the Mercer Acquisition, net of Mercer's prior amortization expense.
(5) Reflects the elimination of management fees paid to a former controlling
shareholder of Mercer.
(6) Reflects interest on the Senior Notes, net of interest on Mercer's debt not
assumed:
<TABLE>
<S> <C>
Interest on the Senior Notes......................................... $ 712
Amortization of debt issuance costs (9 1/2 years).................... 79
Less historical interest expense on Mercer's debt not assumed........ (228)
---------
Incremental interest expense......................................... $ 563
---------
---------
</TABLE>
Each incremental 25 basis point increase or decrease in the assumed interest
rate of the Senior Notes would increase or decrease annual interest expense
on the Senior Notes by $75.
(7) Reflects the income tax (benefit) provision arising from the pro forma
adjustments discussed above based on the Company's pro forma estimated
effective tax rate of 41% for the three months ended April 4, 1997.
51
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
BURKE:
The selected consolidated financial data below for the Company for each of
the three years in the period ended January 2, 1998 and as of January 3, 1997
and January 2, 1998 have been derived from the Consolidated Financial Statements
of the Company which have been audited by Ernst & Young LLP, independent
auditors, and are included elsewhere in this Prospectus. The selected
consolidated financial data below for the Company for the year ended December
31, 1993 and December 30, 1994 and as of December 31, 1993, December 30, 1994
and December 29, 1995, 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
three months ended April 4, 1997 and April 3, 1998 and as of April 3, 1998 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 April 4, 1997 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
three months ended April 3, 1998 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," the Consolidated Financial Statements of the Company and the
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,
52
<PAGE>
Inc. ("SFS") in February 1995; of Haskon Corporation ("Haskon") in June 1995; of
Kentile Corporation ("Kentile") in April 1996; and the effect of the Prior
Recapitalization in August 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ----------------------
------------------------------------------- APRIL 4, APRIL 3,
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OPERATING DATA:
Net sales.............................................. $36,431 $44,370 $68,411 $72,466 $90,228 $23,124 $22,943
Cost of sales.......................................... 25,355 29,998 49,226 49,689 62,917 16,419 16,180
------- ------- ------- ------- ------- ----------- --------
Gross profit........................................... 11,076 14,372 19,185 22,777 27,311 6,705 6,763
Selling, general and administrative expenses(1)........ 9,215 8,152 10,212 11,610 12,238 3,182 3,256
Transaction expenses(2)................................ -- -- -- -- 1,321 -- --
Stock option purchase(3)............................... -- -- -- -- 14,105 -- --
------- ------- ------- ------- ------- ----------- --------
Income (loss) from operations.......................... 1,861 6,220 8,973 11,167 (353) 3,523 3,507
Interest expense, net.................................. 2,897 2,812 3,007 2,668 5,408 498 2,787
------- ------- ------- ------- ------- ----------- --------
Income (loss) from continuing operations before income
tax provision (benefit), cumulative effect of
accounting change and extraordinary loss and
discontinued operation(4)............................ (1,036) 3,408 5,966 8,499 (5,761) 3,025 720
Income tax provision (benefit)......................... 146 1,395 3,393 3,466 (1,818) 1,209 288
------- ------- ------- ------- ------- ----------- --------
Income (loss) from continuing operations before
cumulative effect of accounting change and
extraordinary loss and discontinued operation(4)..... $(1,182) $ 2,013 $ 2,573 $ 5,033 $(3,943) $ 1,816 $ 432
------- ------- ------- ------- ------- ----------- --------
------- ------- ------- ------- ------- ----------- --------
Net income (loss)(4)................................... $ (657) $ 1,502 $ 1,094 $ 4,101 $(3,943) $ 1,816 $ 432
------- ------- ------- ------- ------- ----------- --------
------- ------- ------- ------- ------- ----------- --------
OTHER DATA:
EBITDA(5).............................................. $16,851(6) $ 3,872 $ 3,873
EBITDA margin(5)....................................... 18.7%(6) 16.7% 16.9%
Depreciation and amortization.......................... $ 1,499 $ 349 $ 366
Capital expenditures................................... 1,454 419 419
Cash interest expense.................................. 2,059 498 2,639
Ratio of EBITDA to cash interest expenses.............. 8.2x 7.8x 1.5x
Net cash used in operating activities.................. $(8,543) $ (928) $(4,275)
Net cash provided by (used in) investing activities.... 2,852 (419) (419)
Net cash provided by (used in) financing activities.... 17,254 1,347 (2,985)
Ratio of earnings to fixed charges(7).................. -- 1.2x
Ratio of earnings to combined fixed charges(8)......... -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF FISCAL YEAR END -------------------
-------------------------------------------- APRIL 4, APRIL 3,
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 4,932 $ 4,766 $ 5,402 $ 5,328 $ 21,678 $ 8,425 $ 22,084
Total assets............................ 30,535 28,551 39,729 40,673 62,837 44,599 55,915
Long-term obligations, less current
portion............................... 20,011 16,937 21,803 18,126 110,000 19,579 110,000
Redeemable Preferred Stock.............. -- -- -- -- 16,148 -- 16,652
Shareholders' equity (deficit).......... (654) 849 340 4,283 (86,490) 6,099 (86,562)
</TABLE>
- ------------------------
(1) Selling, general and administrative expenses include amortization of
acquisition costs of $850 in 1993.
(2) Reflects $1,321 of expenses associated with the Prior Recapitalization in
August 1997.
(3) Reflects the Company's cost to purchase options issued and outstanding under
the Company's stock option plan in connection with the Prior
Recapitalization in August 1997.
(4) 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 $26, $511, $664 and $308 in 1993, 1994, 1995 and
through June 28, 1996, respectively, incurred by the Company's custom-molded
organic rubber products manufacturing operations, the assets of which were
disposed of in June 1996, and loss, net of income tax benefit, of $624 in
1996 on disposal of those assets.
53
<PAGE>
(5) EBITDA is the sum of income (loss) before income tax provision (benefit) and
interest, depreciation and amortization expense. EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to
service indebtedness. However, EBITDA should not be considered as an
alternative to income from operations or to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) and should not be construed as an indication of a company's
operating performance or as a measure of liquidity.
(6) Reflects EBITDA excluding costs of stock option purchase, transaction
expenses related to the Prior Recapitalization and management fees paid to a
former controlling shareholder.
(7) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income tax provision (benefit), cumulative effect of
accounting change, extraordinary loss and discontinued operation plus fixed
charges (excluding capitalized interest). Fixed charges consist of interest
incurred (which includes amortization of deferred financing costs) whether
expensed or capitalized and a portion of rental expense estimated to be
attributable to interest. Earnings were insufficient to cover fixed charges
by $5,790 for fiscal year ended 1997. The ratio of earnings to fixed charges
has not been presented for periods prior to the Transactions as the Company
believes the ratio is not material to investors.
(8) 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 combined
fixed charges and preferred stock dividends by $6,968 for fiscal year 1997
and $129 for three months ended April 3, 1998.
MERCER:
The selected operating and balance sheet data below for Mercer for the year
ended, and as of, December 31, 1996 have been derived from the Financial
Statements of Mercer which have been audited by KPMG Peat Marwick LLP,
independent auditors, and are included elsewhere in this Prospectus. The
selected financial data below for Mercer for the year ended December 31, 1997
and for the periods from January 1, 1997 to August 4, 1997 and from August 5,
1997 to December 31, 1997, and as of August 4, 1997 and December 31, 1997, have
been derived from the Financial Statements of Mercer which have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere in this
Prospectus. The selected operating and balance sheet data for the three months
ended March 31, 1997 and 1998 and as of March 31, 1998 have been derived from
the Company's Unaudited Financial Statements for those periods included
elsewhere in the Prospectus and the balance sheet data as of March 31, 1997 have
been derived from the Company's Unaudited 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 three months ended March 31, 1998 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
54
<PAGE>
Operations--Mercer" and the Financial Statements of Mercer and the related notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD(1) THREE MONTHS ENDED
-------------------- ------------------------
FISCAL
FISCAL YEAR 1/1/97 TO 8/5/97 TO YEAR(1) MARCH 31, MARCH 31,
1996 8/4/97 12/31/97 1997 1997 1998
----------- --------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................ $ 24,558 $ 14,954 $ 9,945 $ 24,899 $ 5,998 $ 6,204
Cost of sales........................ 17,668 9,578 6,921 16,499 4,042 3,923
----------- --------- --------- ----------- ----------- -----------
Gross profit......................... 6,890 5,376 3,024 8,400 1,956 2,281
Selling, general and administrative
expenses........................... 4,668 2,904 1,899 4,803 1,293 1,294
----------- --------- --------- ----------- ----------- -----------
Income from operations............... 2,222 2,472 1,125 3,597 663 987
Interest expense..................... 964 544 1,117 1,661 228 701
----------- --------- --------- ----------- ----------- -----------
Income before income taxes........... 1,258 1,928 8 1,936 435 286
Income taxes......................... 675 771 6 777 174 114
----------- --------- --------- ----------- ----------- -----------
Net income........................... $ 583 $ 1,157 $ 2 $ 1,159 $ 261 $ 172
----------- --------- --------- ----------- ----------- -----------
----------- --------- --------- ----------- ----------- -----------
OTHER DATA:
EBITDA(2)............................ $ 4,748 $ 907 $ 1,384
EBITDA margin(2)..................... 19.1% 15.1% 22.3%
Depreciation and amortization........ $ 1,151 $ 244 $ 397
Capital expenditures................. 97 18 12
Cash interest expense................ 1,548 228 631
Ratio of EBITDA to cash interest
expense............................ 3.1x 4.0x 2.2x
Net cash (used in) provided by
operating activities............... $ 3,125 $ (373) $ (53)
Net cash used in investing
activities......................... (97) (18) (12)
Net cash (used in) provided by
financing activities............... (2,919) 341 --
BALANCE SHEET DATA (AT PERIOD END):
Working capital...................... $ 2,649 $ 3,793 $ 4,679 $ 4,679 $ 3,901 $ 5,240
Total assets......................... 17,218 16,968 38,364 38,364 17,237 38,896
Long-term obligations, less current
portion............................ 4,655 4,777 30,000 30,000 4,996 30,000
Shareholders' equity................. 9,238 9,170 6,107 6,107 9,499 6,279
</TABLE>
- ------------------------
(1) Mercer's selected financial data for 1997 have been presented in two periods
because Mercer was purchased by Sovereign from Laporte plc on August 5, 1997
and Mercer's financial data was reported by Laporte plc prior to August 5,
1997 and by Sovereign for the remainder of the year. The total fiscal year
1997 data reflect the effects of the acquisition of Mercer by Sovereign
since August 5, 1997 and accordingly, does not purport to be indicative of
what Mercer's results of operations for fiscal 1997 would actually have been
had the acquisition by Sovereign been completed as of January 1, 1997.
(2) EBITDA is the sum of income before 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.
55
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BURKE
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's 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, Burke is now positioned as the leading seals supplier for the domestic
commercial aircraft industry and is OEM-specified on virtually every existing
commercial and military aircraft platform in production.
Aircraft seal revenues for 1997 were comprised of approximately two-thirds
sales to OEM manufacturers and one-third sales to the aftermarket. In addition,
commercial aircraft manufacturing has resulted in 73% of 1997 seal revenues
being derived from the commercial market, compared with approximately 27% from
the U.S. military. Aerospace Products 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 92.6% of 1997
revenues for the Aerospace Products business. The remaining 7.4% 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
moulding. The Company has developed a well-known brand name (BurkeBase) in the
western United States by targeting the architectural community and installers of
commercial flooring. Growth in Flooring Products revenues was significant in
1997 due to improvement in the commercial construction market in the western
United States.
56
<PAGE>
The Commercial Products business is comprised of: (i) Purosil brand
high-performance silicone truck and bus engine hoses; (ii) roofing and other
fluid barrier membrane products; and (iii) various intermediate and end use
products based upon Burke's extensive elastomer manufacturing capabilities.
Revenues generated by silicone hose sales are driven by both new truck and bus
manufacturing as well as the replacement market. OEM and aftermarket customers
specify and prefer silicone hoses due to their high performance and relatively
minor absolute cost. In addition, silicone hoses are increasingly being
specified on trucks and buses due to the higher performance requirements of new
engine design. Burke roofing and fluid containment system sales have tended to
be relatively steady over time. Roofing and fluid barrier membranes are used in
numerous applications including new and replacement commercial roofs and
reservoirs. The Hypalon product provides significant wear and durability
advantages compared with less expensive products. Revenues from these products
can be materially affected on a quarter-to-quarter basis by the size and timing
of certain reservoir projects.
RESULTS OF OPERATIONS
The following table sets forth certain income statement information for the
Company for the fiscal years ended December 29, 1995, January 3, 1997 and
January 2, 1998; and the three months ended April 4, 1997 and April 3, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
---------------------------------------------------------- ------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF NET OF NET OF NET APRIL 4, OF NET APRIL 3, OF NET
1995 SALES 1996 SALES 1997 SALES 1997 SALES 1998 SALES
------- ---------- ------- ---------- ------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Aerospace
Products... $23,254 34.0% $24,622 34.0% $31,225 34.6% $ 7,911 34.2% $ 9,551 41.6%
Flooring
Products... 19,693 28.8 20,546 28.4 23,475 26.0 5,893 25.5 5,842 25.5
Commercial
Products... 25,464 37.2 27,298 37.6 35,528 39.4 9,320 40.3 7,550 32.9
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Total net
sales.... 68,411 100.0 72,466 100.0 90,228 100.0 23,124 100.0 22,943 100.0
Cost of
sales........ 49,226 72.0 49,689 68.6 62,917 69.7 16,419 71.0 16,180 70.5
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Gross profit... 19,185 28.0 22,777 31.4 27,311 30.3 6,705 29.0 6,763 29.5
Selling,
general and
administrative
expenses..... 10,212 14.9 11,610 16.0 12,238 13.6 3,182 13.8 3,256 14.2
Transaction
costs........ -- -- -- -- 1,321 1.5 -- -- -- --
Stock option
purchase..... -- -- -- -- 14,105 15.6 -- -- -- --
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Income (loss)
from
operations... 8,973 13.1 11,167 15.4 (353) (0.4) 3,523 15.2 3,507 15.3
Interest
expense,
net.......... 3,007 4.4 2,668 3.7 5,408 6.0 498 2.1 2,787 12.1
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Income (loss)
before income
tax provision
(benefit),
extraordinary
loss and
discontinued
operation.... 5,966 8.7 8,499 11.7 (5,761) (6.4) 3,025 13.1 720 3.2
Income tax
(benefit)
provision.... 3,393 5.0 3,466 4.8 (1,818) (2.0) 1,209 5.2 288 1.3
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Income (loss)
from
continuing
operations
before
extraordinary
loss and
discontinued
operation.... $ 2,573 3.7% $ 5,033 6.9% $(3,943) (4.4)% 1,816 7.9 432 1.9
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
Net (loss)
income....... $ 1,094 1.6% $ 4,101 5.7% $(3,943) (4.4)% $ 1,816 7.9 $ 432 1.9
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
------- ----- ------- ----- ------- ----- -------- ----- -------- -----
</TABLE>
THREE MONTHS ENDED APRIL 3, 1998 VERSUS THREE MONTHS ENDED APRIL 4, 1997
NET SALES. Total net sales decreased 0.8% from $23.1 million for the three
month period ended April 4, 1997 to $22.9 million for the same period in 1998.
Aerospace product sales grew 20.7% from $7.9 million for the three month period
ended April 4, 1997 to $9.6 million for the same period in 1998, due to
57
<PAGE>
increased commercial aircraft build rates. Flooring products sales decreased
0.9% from $5.9 million for the three month period ended April 4, 1997 to $5.8
million for the same period on 1998, due to the impact of weather-related delays
in general construction activity in the western part of the United States.
Commercial products sales decreased 19.0%, from $9.3 million for the three month
period ended April 4, 1997 to $7.5 million for the same period in 1998,
primarily because the first quarter of 1997 included a liner project order that
favorably affected results for that period.
COST OF SALES. Cost of sales decreased 1.5%, from $16.4 million for the
three month period ended April 4, 1997 to $16.2 million for the same period in
1998. As a percentage of net sales, gross profit increased from 29.0% for the
three month period ended April 4, 1997 to 29.5% for the same period in 1998. The
increase in profit percentage was primarily due to the fact that membrane
products, which have a lower gross profit margin than the Company's other
product lines, constituted a smaller portion of total net sales for the three
month period ended April 3, 1998 compared to the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 2.3%, from $3.2 million for the three month
period ended April 4, 1997 to $3.3 million for the same period in 1998. The
increase was due to general cost increases.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations was unchanged, at $3.5 million for the three month periods ended
April 3, 1998 and April 4, 1997. As a percentage of net sales, income from
operations increased from 15.2% for the three month period ended April 4, 1997
to 15.3% for the same period in 1998.
INTEREST EXPENSE. Interest expense increased from $0.5 million for the
three month period ended April 4, 1997 to $2.8 million for the same period in
1998. The increase was due to the issuance of an aggregate principle amount of
$110.0 million Senior Notes due 2007 on August 20. 1997.
NET INCOME. As a result of the above factors, net income decreased from
$1.8 million for the three month periods ended April 4, 1997 to $0.4 million for
the same period in 1998.
YEAR ENDED JANUARY 2, 1998 VERSUS YEAR ENDED JANUARY 3, 1997
NET SALES. Total net sales increased 24.5%, from $72.5 million in 1996 to
$90.2 million in 1997. Aerospace Products sales grew 26.8%, due to strong
expansion of commercial aircraft build rates. Despite this overall performance,
revenue for low-observable materials decreased in the second half of the year
due to material product design changes by major customers, which delayed
shipments of these materials. Flooring Products sales grew 14.3% due to price
increases and generally stronger demand for construction products in California
and the introduction of vinyl cove base products. Commercial Products sales grew
30.1% due to a major sale of membrane products for a liner application and due
to orders from a new customer.
COST OF SALES. Cost of sales increased 26.6% from $49.7 million in 1996 to
$62.9 million in 1997. The increase was primarily due to the increase in net
sales over the same period. As a percentage of net sales, gross profit decreased
from 31.4% in 1996 to 30.3% in 1997. The decrease was due primarily to the fact
that membrane products, which have a lower gross profit margin than the
Company's other product lines, constituted a larger portion of total net sales
in 1997 compared with 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 5.4%, from $11.6 million in 1996 to $12.2
million in 1997. The increase included the addition of Flooring and Commercial
sales personnel. However, as a percentage of net sales, these costs declined
from 16.0% to 13.6% over the same period.
TRANSACTION EXPENSES. Transaction expenses were incurred in connection with
the Prior Recapitalization.
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STOCK OPTION PURCHASE. The stock option purchase charge in 1997 represents
the compensation component of payments made for the cancellation of stock
options in connection with the Prior Recapitalization.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations decreased 103.2%, from $11.2 million in 1996 to a loss of $(0.4)
million in 1997.
INTEREST EXPENSE. Interest expense increased 102.7%, from $2.7 million in
1996 to $5.4 million in 1997. The increase was due to the issuance of the
Existing Notes on August 20, 1997.
INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income
from continuing operations decreased 178.3%, from $5.0 million in 1996 to a loss
of $(3.9) million in 1997.
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 sales 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 sales grew 4.3% as the
result of the introduction of new products, price increases of 2.6% and volume
increases of 1.0%. Commercial Products sales grew 7.2% due to orders from a new
customer and to increased 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
integration of assets acquired from SFS and Haskon of 1.6%, decreases in the
cost of raw materials used in the Company's Flooring Products of 0.9% and
general pricing, operational, and overhead absorption improvements of 0.9%.
Flooring Products' 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.
INCOME TAX PROVISION
For the three months ended April 3, 1998, the Company recorded an income tax
provision of 40.0% which represents the effective tax rate projected for the
full fiscal year 1998. This effective tax rate differs from the federal
statutory rate primarily due to state income tax (net of federal benefit) and is
consistent with the effective tax rate for the three months ended April 4, 1997.
For 1996 and 1997, the Company recorded an income tax provision (benefit) of
40.8% and (31.6)%, respectively, which differs from the federal statutory rate
primarily due to state income taxes (net of
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federal benefit) and in 1997 due to an additional provision for federal and
state audits. In 1996, the Company settled with the Internal Revenue Service
("IRS") certain issues relating to the Company's income tax returns for 1988
through 1990. As of January 3, 1997, the Company had fully provided for the
taxes and interest which are payable as a result of the settlement.
In addition to the above settlement, in 1997, the Company settled with the
IRS certain issues related to the Company's income tax returns for 1992 and
1993. The Company fully provided for the taxes and interest which are payable as
a result of the settlement.
For 1995, the Company recorded an income tax provision of 56.9%, which
differed from the federal statutory rate primarily due to state income taxes
(net of federal benefit) and due to an additional provision for potential IRS
audit adjustments.
IMPACT OF THE YEAR 2000
Based on a recent assessment, the Company determined that it will be
required to modify or replace significant portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. The Company presently believes that with modifications to
existing software and conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems. The Company
anticipates completing the Year 2000 project within one year which is prior to
any anticipated impact on its operating systems.
Although the Company is not aware of any material operational issues
associated with preparing its internal systems for the Year 2000, there can be
no assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which include third party software and
hardware technology.
MERCER
INTRODUCTION
The following discussion and analysis should be read in conjunction with the
"Selected Historical Consolidated Financial Data" and the audited Financial
Statements of Mercer and the notes thereto included elsewhere in this
Prospectus.
Founded in 1958, and headquartered in Eustis, Florida, Mercer is a leading
manufacturer of extruded plastic and vinyl products such as vinyl and rubber
cove base, transitional and finish mouldings, corners, stair treads and other
accessories. Mercer also sells a range of related adhesive products and is a
leading supplier to the vinyl cove base and moulding products markets, with a
particularly strong sales presence in the eastern United States.
Historically, revenues in Mercer's business have been driven by both new
commercial construction and the continuous repair and remodeling of existing
commercial space. Operations have been concentrated in the eastern United States
and Mercer has sold primarily extruded plastic and vinyl products. Mercer's
Uni-color system offers a complete selection of vinyl flooring accessories to
ensure product and color compatibility throughout all flooring projects.
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RESULTS OF OPERATIONS
The following table sets forth certain income statement information for
Mercer for the years ended December 31, 1996 and 1997, and the three months
ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
---------------------------------------------- --------------------------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF NET OF NET MARCH 31, OF NET MARCH 31, OF NET
1996 SALES 1997(1) SALES 1997 SALES 1998 SALES
--------- ----------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $ 24,558 100.0% $ 24,899 100.0% $ 5,998 100.0% $ 6,204 100.0%
Cost of sales............ 17,668 71.9 16,499 66.3 4,042 67.4 3,923 63.2
--------- ----- --------- ----- ----------- ----- ----------- -----
Gross profit............. 6,890 28.1 8,400 33.7 1,956 32.6 2,281 36.8
Selling, general and
administrative
expenses............... 4,668 19.1 4,803 19.3 1,293 21.6 1,294 20.9
--------- ----- --------- ----- ----------- ----- ----------- -----
Income from operations... 2,222 9.0 3,597 14.4 663 11.0 987 15.9
Interest expense......... 964 3.9 1,661 6.6 228 3.8 701 11.3
--------- ----- --------- ----- ----------- ----- ----------- -----
Income before income
taxes.................. 1,258 5.1 1,936 7.8 435 7.2 286 4.6
Income taxes............. 675 2.7 777 3.1 174 2.9 114 1.8
--------- ----- --------- ----- ----------- ----- ----------- -----
Net income............... $ 583 2.4% $ 1,159 4.7% $ 261 4.3% $ 172 2.8%
--------- ----- --------- ----- ----------- ----- ----------- -----
--------- ----- --------- ----- ----------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Mercer's selected financial data for 1997 have been presented in two periods
because Mercer was purchased by Sovereign from Laporte plc on August 5, 1997
and Mercer's financial data was reported by Laporte plc prior to August 5,
1997 and by Sovereign for the remainder of the year. The total fiscal year
1997 data reflect the effects of the acquisition of Mercer by Sovereign
since August 5, 1997 and accordingly, does not purport to be indicative of
what Mercer's results of operations for fiscal 1997 would actually have been
had the acquisition by Sovereign been completed as of January 1, 1997.
THREE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997
NET SALES. Net sales increased 3.4% from $6.0 million for the three month
period ended March 31, 1997 to $6.2 million for the same period in 1998. The
increase was primarily due to increased prices.
COST OF SALES. Cost of sales decreased 3.0% from $4.0 million for the three
month period ended March 31, 1997 to $3.9 million for the same period in 1998.
As a percentage of net sales, gross profit increased from 32.6% to 36.8%. The
increase in profit percentage was primarily due to the shifting of raw material
purchases away from a manufacturing process.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were unchanged, at $1.3 million for the three month
periods ended March 31, 1997 and 1998.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations increased 48.9% from $0.7 million for the three month period ended
March 31, 1997 to $1.0 million for the same period in 1998.
INTEREST EXPENSE. Interest expense increased 207.5% from $0.2 million for
the three month period ended March 31, 1997 to $0.7 million for the same period
in 1998. The increase was due to the interest charged on long-term debt to the
parent company recorded in the August, 1997 acquisition of Mercer by Sovereign.
NET INCOME. As a result of the above factors, net income decreased 34.1%
from $0.3 million for the three month period ended March 31, 1997 to $0.2
million for the same period in 1998.
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YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
NET SALES. Total net sales increased 1.4%, from $24.6 million in 1996 to
$24.9 million in 1997. The increase was primarily due to increased prices.
COST OF SALES. Cost of sales decreased 6.6%, from $17.7 million in 1996 to
$16.5 million in 1997. As a percentage of net sales, gross profit increased from
28.1% to 33.7%. The increase in profit percentage was primarily due to the
shifting of raw material purchases away from a former affiliate, and secondarily
to the vertical integration of a portion of the manufacturing process.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 2.9%, from $4.7 million in 1996 to $4.8
million in 1997. The increase is primarily due to advertising and promotion
costs, net of reduced bad debt expense and administrative headcount.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations increased 61.9%, from $2.2 million in 1996 to $3.6 million in 1997.
INTEREST EXPENSE. Interest expense increased 72.3%, from $1.0 million in
1996 to $1.7 million in 1997. The increase was due to the interest charged on
long-term debt to Mercer's parent company recorded in the August 1997
acquisition of Mercer by Sovereign.
NET INCOME. As a result of the above factors, net income increased 98.8%,
from $0.6 million in 1996 to $1.2 million in 1997.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. The Company's principal uses of cash are to finance working
capital and capital expenditures related to asset acquisitions and internal
growth. Burke's net cash used in operating activities was $8.5 million in 1997.
Excluding the charge related to the stock option purchase, Burke's net cash
provided by operating activities would have been $5.6 million in 1997.
CAPITAL REQUIREMENTS. The Company, including Mercer post-acquisition,
expects to spend approximately $2.0 million during 1998 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 Credit
Facility described below.
SOURCES OF CAPITAL. Contemporaneously with the consummation of the Prior
Offering, the Company amended the Credit Facility to increase the allowable
revolving credit borrowings from $15.0 million to $25.0 million. The Credit
Facility will mature in August 2002. Interest on loans under the 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. Loans under the
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 are secured by
substantially all of the assets of the subsidiaries. The Credit Agreement
contains customary covenants restricting the Company's ability to, among other
things, incur additional indebtedness, create liens or other encumbrances, pay
dividends or make other restricted payments, make investments, loans and
guarantees or sell or otherwise dispose of a substantial portion of assets to,
or merge or consolidate with, another entity. The Credit Agreement also contains
a number of financial covenants that 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 Credit
Facility, see "Risk Factors--Significant Leverage and Debt Service," "--Ranking
of Senior Notes; Asset Encumbrance," "--Restrictive Covenants" and "Description
of Credit Facility."
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The Company anticipates that its principal use of cash following the Mercer
Acquisition 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 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. 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 companies to report
selected segment information in financial statements and 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 application of the new rules on the Company's
consolidated financial statements.
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BUSINESS
OVERVIEW
SUMMARY
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) a leading nationwide producer of
both rubber and vinyl cove base and floor covering accessories for commercial
and industrial applications ("Flooring Products") and (iii) a value-added
producer of high-performance silicone hose, roofing and membrane products for
the heavy-duty truck, commercial building and fluid containment industries,
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 $36.4 million in 1993 to $90.2 million in 1997.
On April 21, 1998, the Company acquired all of the outstanding capital stock
of Mercer from Sovereign pursuant to a Stock Purchase Agreement among the
Company, Sovereign and Mercer, dated March 5, 1998. Mercer is a leading
manufacturer of extruded plastic and vinyl flooring products such as vinyl cove
base, transitional and finish mouldings, corners, stair treads and other
accessories. On a pro forma basis, after giving effect to the Mercer Acquisition
as if it had occurred on January 4, 1997, Burke would have generated $115.1
million and $22.4 million in revenues and EBITDA, respectively, in 1997. See
"Acquisition of Mercer" and "Unaudited Pro Forma Combined Financial Statements."
Mercer represents the fifth acquisition completed by Burke's current
management team over the last five years. 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. Management
intends to continue to evaluate potential acquisitions as a way to augment
Burke's internal growth and expand and strengthen existing product lines and its
distribution and technological capabilities.
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's 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 aircraft in the world, including the Boeing 717, 737, 747, 757, 767 and
777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the
Lockheed Martin L1011. Burke bases its belief that it is the largest domestic
producer of certain components used in commercial and military aircraft upon
internal analysis and informal feedback from customers and competitors.
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 one-third of the Company's 1997 Aerospace Products sales.
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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 $31.2 million in 1997, accounting for approximately 34.6% of the Company's
total net sales in 1997. 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. See "Risk Factors-- Importance
of Key Customers to the Aerospace Products Business."
FLOORING PRODUCTS
Through its Flooring Products business, Burke is a leading nationwide
producer of floor covering accessories for commercial and industrial
applications. Burke has historically been 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. The acquisition of
Mercer significantly expands Burke's product offerings and distribution
capabilities given Mercer's historically strong presence as a manufacturer of
vinyl cove base and other vinyl-based flooring accessories in the eastern United
States.
Both Burke's and Mercer's 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 $23.5 million in 1997,
comprising 26.0% of the Company's total net sales in 1997.
Management believes that the Company's acquisition of Mercer, which is
already well established as a leading supplier of vinyl wall base and moulding
products lines in the eastern United States, 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 $14.8
million in 1993 to $35.5 million in 1997, and represented 39.4% of the Company's
total net sales in 1997. 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.
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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. Pursuant to the Mercer Acquisition, the Company will also be acquiring
Mercer's strong relationships with distributors in the eastern United States and
Mercer's trade name Uni-Color-Registered Trademark- color matching system, which
is a strong brand name in the flooring business.
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. 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 managed the Company's continuing vertical integration efforts and
acquired five independent operations since 1993.
BUSINESS STRATEGY
Burke intends to capitalize on its aforementioned competitive strengths in a
variety of ways in each of its major market segments. 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 largest domestic aerospace seal manufacturer and
has the production capacity to market beyond the United States. With the
Company's recent acquisitions dramatically increased production capacity
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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 and by capitalizing on the strong
presence in vinyl flooring products that Mercer has already established in
the eastern United States.
- LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS. The
Company intends to continue to capitalize on the BurkeBase trade name by
expanding and upgrading its existing product line. In addition, the
Company intends to capitalize on the strong brand name established by
Mercer in the flooring business with Mercer's unique
Uni-Color-Registered Trademark- color matching system. The Company also
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 developed, particularly in the heavy-duty truck and bus aftermarket.
New initiative includes increasing customer share at a major new
private-label customer, initiating production of silicone hoses for a
major new OEM customer, and expanding into new product lines.
- 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, such as the Mercer Acquisition, 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 the demand for
elastomeric products will continue to grow as the performance requirements of
various products are increased.
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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 effort of companies in these and other
industries provides ongoing and new opportunities for elastomeric product
applications. The Company believes that its technical resources, experience, and
reputation provide it with a competitive advantage in seeking to provide
products to these industries.
HISTORY
The Burke Rubber Company was founded in 1942 as a family-owned manufacturer
of custom industrial rubber products. By the early 1950s, Burke manufactured a
proprietary line of rubber floor tile and cove base as well as custom-molded
rubber products. The Burke product line subsequently grew to include flexible
membrane products for industrial uses, as well as engineered elastomer-based
products for defense-related applications. In 1970, Burke developed an improved
roofing and fluid barrier technology based upon DuPont's patented Hypalon
elastomer polymer. The Company was renamed Burke Industries, Inc. in 1972 to
reflect its broadened base of business. In August 1997, the Company entered into
the Prior Recapitalization pursuant to which the Company was recapitalized by
means of a merger and JFLEI and its affiliates became the owners of
approximately 65% of the common equity of the Company, without giving effect to
shares issuable upon conversion of Convertible Preferred Stock and the exercise
of certain options issued to management of the Company. See "The Prior
Recapitalization."
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 Industries and Massachusetts-based Haskon Corporation.
Purosil, SFS and Haskon had each been an independent producer of precision
silicone aerospace components, and together had over 100 years of service to the
commercial and military aerospace industry.
In the Flooring Products division, the Company expanded its product lines
through the purchase of Kentile's vinyl cove base production assets in April
1996. In addition, on March 5, 1998, the Company entered into a Stock Purchase
Agreement with Sovereign pursuant to which the Company agreed to acquire from
Sovereign all of the outstanding capital stock of Mercer for an aggregate of
$35,750,000, subject to working capital and other adjustments. Through the
Mercer acquisition, the Company will add significant depth to its already strong
product and distribution lines and product development capabilities. In
particular, management believes that Mercer's highly successful vinyl wall base
and moulding product lines and strong presence in the eastern United States will
complement the Company's position as the dominant producer of rubber cove base
and floor covering accessories in the western United States.
Burke's integration of these acquisitions has led to a dominant position in
the aerospace seals market, opened new markets for its Flooring Products
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.
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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 1997, the top five customers of the Aerospace Products division accounted for
$22.1 million in net sales, representing 24.5% and 70.8%, respectively, of the
Company's total and the Aerospace Product division's net sales in that year.
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
manufacturers 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 aircraft
in the world, including the Boeing 717, 737, 747, 757, 767 and 777, the
McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the Lockheed
Martin L1011.
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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 presents a potential
opportunity for expansion of Burke's aerospace business. Burke's revenues from
this program 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 Air Force fighter aircraft and is designed to replace
the F-15 as the premier fighter in the United States military arsenal in
approximately four to five years. However, both the B-2 bomber and the F-22
fighter are subject to continuous budgetary scrutiny and Burke's ability to
expand its aerospace business could be limited if either of these programs were
to be curtailed or eliminated. See "Risk Factors--Government Procurement
Policies."
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 mid 1998. The Company has also bid on a
contract to develop 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. The program is scheduled for production after the year 2005.
COMPETITION
Burke is the largest domestic supplier of highly-engineered silicone seals
for the aerospace OEM market and aftermarket. Burke's domestic competitors are
primarily small, privately-held companies which generally lack Burke's track
record, long-term OEM relationships and capabilities. These competitors include
Kirkhill Rubber Company, Chase-Walton Elastomers, Inc. and Elastomeric Silicone
Products, which was purchased by Bestobell Aviation in August 1997. Management
believes that each of Burke's competitors had silicone aerospace seals revenues
that were significantly less than the Company's revenues from those products in
1997. Additionally, the Company has two principal European competitors, Dunlop
France S.A. and Bestobell Aviation, of the United Kingdom, which enjoy
significant market share among European aircraft manufacturers, including Airbus
Industries.
Management believes that Burke's long-standing customer relationships,
unique design capabilities and superior product quality will continue to support
its position as the leading supplier of engineered silicone seals within this
fragmented market.
Burke is one of only a few companies with the combination of knowledge and
manufacturing capabilities required to develop, test and manufacture engineered
elastomer-based products to military specifications. Many of Burke's Advanced
Aerospace Products are classified in nature, and in many cases project leaders
return to previous classified product suppliers for a preliminary assessment of
future development opportunity.
GROWTH AND OPPORTUNITIES
The strong expansion in 1997 commercial aircraft build rates is expected to
continue and to drive long-term growth within Burke's Aerospace Products
business. Boeing and other aircraft producers continue to experience strong
demand for new aircraft. According to recent publications, Boeing expects to
deliver over 500 new aircraft in 1998, compared with 374 in 1997. This increase
in deliveries is the
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continuation of what many industry analysts believe is a prolonged industry
upturn. See "Risk Factors-- Importance of Key Customers to the Aerospace
Products Business."
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 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.
Burke is continuing the trend of extending its Flooring Products lines
beyond rubber products through the Mercer Acquisition. Founded in 1958, and
headquartered in Eustis, Florida, Mercer is a leading manufacturer of extruded
plastic and vinyl products such as vinyl and rubber wall base, transitional and
finish mouldings, stair treads and other accessories. Mercer also sells a range
of related adhesive products. Mercer's product and distribution lines strongly
complement the Company's Flooring Products business. While the Company is the
dominant producer of rubber cove base and floor covering accessories in the
western United States, Mercer is a leading supplier to the vinyl wall base and
moulding products markets and has a particularly strong sales presence in the
eastern United States. The Mercer Acquisition will result in many synergies
including strengthening the Company's presence in the eastern United States in
both the rubber and vinyl flooring products markets, as well as providing for
economies of scale and shared resources. The integration of Burke's newly
acquired vinyl cove base products from Kentile and Mercer significantly enhances
Burke's national market position in flooring accessories given vinyl's broad
appeal in
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geographic regions where rubber products have traditionally been less popular.
See "Acquisition of Mercer."
PRODUCTS
Burke's Flooring Product line consists of a variety of commercial rubber and
vinyl flooring products and accessories including rubber and vinyl cove base,
flooring tiles, stair treads, corners, shapes, special application adhesives and
newly developed luminescent emergency lighting accessories sold under the
BurkeEmerge trademark. 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 was an important complement to Burke's
product offerings, and the Mercer Acquisition further complements Burke's
Flooring Products line and geographic distribution. Rubber flooring products are
generally more expensive than vinyl products due to their material and
manufacturing cost but yield a longer-lasting product. However, vinyl flooring
products are extremely popular for less demanding applications and are the
predominant commercial flooring construction material in geographic regions
outside of the western United States. The addition of a vinyl cove base product
line creates a lower-cost, complementary offering targeted at less demanding,
more cost-sensitive applications.
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.
The Mercer Acquisition adds significant depth to Burke's already strong
product lines. With over thirty years of extrusion experience, Mercer has
developed a strong brand name in the flooring business. Among other things,
Mercer has been a pioneer in the market for flooring profiles with its unique
Uni-Color color matching system. In addition, Mercer possesses a unique
coextrusion process which lowers manufacturing costs while maintaining a high
level of quality in its products. In total, Mercer manufactures and sells
approximately 116 products including:
- STANDARD VINYL: Standard wall bases and corners extruded in vinyl.
- MOULDINGS: Used on floors for transition between carpets, wood and cement.
- RUBBER BASE: Low gloss and rubber-like base products which are similar to
vinyl and rubber base products.
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- STAIR TREADS AND NOSINGS: Stair treads, various edgings and non-slip
surfaces.
- MIRROR FINISH: High-gloss finish products which are sold principally to
large retail outlets.
- MARINE/OTHER: Marine bumpers, waterstop products, complementary adhesive
products.
MARKETS AND CUSTOMERS
Prior to the Mercer Acquisition, Burke's Flooring Products have been 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.
In 1997, the top five customers of the Flooring Products division accounted for
$7.7 million in net sales, representing 8.5% and 32.8%, respectively, of Burke's
total and the Flooring Product division's net sales in that year. Sales in the
western United States accounted for over 80% of Burke's Flooring Products sales
in 1997.
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 combined with Burke's
acquisition of Mercer, with its already established vinyl base products lines
and significant market share in the eastern United States, are expected to
create significant opportunities beyond Burke's traditional product line and
geographic territories. Mercer's customers are wholesale, full-line, and supply
flooring distributors and select national and export accounts. Mercer's customer
base includes 255 distributors nationwide, the top ten of which enjoy
long-standing relationships with Mercer. Geographically, Mercer's sales are
distributed throughout the United States with approximately 67% in the eastern
and central United States and approximately 15% internationally in 1997.
Mercer's sales were $24.9 million in 1997.
COMPETITION
While there are a number of companies, both large and small, servicing the
floor covering market, Burke is the largest producer of rubber cove base in the
western United States. Burke's focus over many years on this specialized niche
has created significant brand awareness and customer loyalty. The Mercer
Acquisition increases Burke's competitive advantage by adding several new
vinyl-based product lines that have significant brand awareness and customer
loyalty in the eastern United States. Both Burke's and Mercer's primary
competitors in flooring accessory 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 by capitalizing on Mercer's already strong presence in the eastern United
States in the vinyl wall base and moulding products markets. The continued
development of the Company's own vinyl product line, in combination with the
Mercer Acquisition, will allow the Company to penetrate the eastern United
States markets where vinyl has historically been preferred. Burke's distributor
organization is being strengthened as Burke adds new distributors who have
established long-standing relationships with Mercer in the eastern United States
and as new distributors in the western United States 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.
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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, and its acquisition of Mercer, 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
PUROSIL PRODUCTS. Burke manufactures and markets a wide range of private
label and Purosil-branded engineered silicone hose products for high-pressure,
heat-sensitive applications. These high-performance products are sold primarily
to OEMs and the aftermarket for heavy-duty trucks and buses. Burke was the first
silicone hose producer in the industry to become ISO 9002 certified and is
preparing for QS 9000 certification. The Company guarantees the performance of
certain higher quality silicone truck hoses for 1,000,000 miles and experiences
negligible product returns and warranty claims each year. The Company also
manufactures silicone hose products for applications in the powerboat, potable
water and food service industries.
New product development is an important focus within this group. Purosil has
responded to recent market demand with newly designed charged-activated-coupling
and knitted hose products for specific applications within the Class 8 truck
market. These additions are expected to strengthen the silicone hose product
line and increase Burke's penetration of the OEM market.
Burke plans to lease an additional facility of approximately 45,000 square
feet beginning in mid 1998. This facility will be devoted to the manufacture and
distribution of Purosil products and should help to increase efficiency and
customer service levels for all of the Company's silicone-based products.
MEMBRANE PRODUCTS. Burke's membrane products business utilizes the
Company's elastomer-based manufacturing expertise to produce high-end,
single-ply commercial roof-covering systems and flexible liner membranes.
Commercial roofing systems are sold into the new roofing and re-roofing markets
under the Burkeline trade name and have been installed in large and small
commercial and institutional facilities around the world. The Company's membrane
products are also used as reservoir liners and floating potable and waste water
covers.
Burke's roofing and liner membrane systems are designed with DuPont's
patented Hypalon polymer material, which is an extremely durable and flexible
material, widely regarded as the highest-quality single-ply product available in
the commercial roofing and membrane market. Burke's membrane products typically
incorporate structural fabric laminated between thin layers of Hypalon.
Burkeline roofing systems are installed by Burke-approved contractors and
technical assistants and are fully warranted 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.
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CUSTOM PRODUCTS. The custom products group within Burke's Commercial
Products division has capitalized on the Company's sophisticated formulation and
production capabilities to become a value-added partner that collaborates
closely with its customers in designing application-specific advanced products
in both the silicone and organic rubber products markets. The group focuses on
identifying high-margin products that complement its existing product lines and
utilize excess production capacity. These custom products are typically complex
blending and compounding formulations serving as intermediate or finished
products for manufacturers of specialty rubber products and include oil drilling
equipment components, road tape, rocket motor insulation and surface ship bow
domes.
MARKETS AND CUSTOMERS
Management believes that the Company is the only approved supplier of
silicone hoses to Mack Trucks. Burke's automotive hose products are also
designed and specified into model builds of other major Class 8 truck OEMs
including Peterbilt and Freightliner.
Burke's membrane roofing products are sold both to distributors and directly
to end-users who favor higher-quality roofing systems and who select Burke based
on its reputation for quality. These roofing systems are typically employed in
high value-added applications where quality, as measured by durability and ease
of maintenance, is critical.
Burke's liner membrane products are used in applications which are typically
outsourced by municipalities on a bid basis and take several months to complete.
Burke's covers and liners are sold to distributors and fabricators who heat weld
the Hypalon-constructed sheets together to create a final product. It is not
unusual for Burke to work with multiple distributors who are bidding for the
same municipal project.
Most of Burke's customers of the custom products unit are repeat users and
range from large industrial companies to niche manufacturers producing
specialized elastomeric products. Burke has developed long-standing
relationships with a broad base of customers as a supplier of both intermediate
and finished products whose technical complexities are suited to its unique
capabilities. Burke markets these products using direct and independent sales
representatives in both the United States and Europe. In 1997, the top five
customers of the Commercial Products division accounted for $11.7 million in net
sales, representing 12.9% and 32.9%, respectively, of the Company's total and
the Custom Product division's net sales in that year.
COMPETITION
The marketplace for engineered silicone hose applications is supplied by
three principal companies: Flexfab Horizons International, Thermopol
Incorporated and the Company.
In both roofing and liner systems, Burke competes with other Hypalon-based
product manufacturers and with lower-cost alternatives. Leading manufacturers of
these alternative systems include JPS Elastomerics Corp. and Carlisle Companies,
Inc. Each has significant single-ply membrane roofing businesses and emphasize
their membrane products manufactured from alternative materials as lower-cost,
higher-volume products. Their Hypalon offerings represent a small portion of
their aggregate sales.
There are a number of manufacturers that compete in 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.
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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. New initiatives
include increasing customer share at a major private-label customer, initiating
the production of silicone hoses for a major new OEM customer and expanding into
new product areas.
Management also foresees 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. Burke's acquisition of Mercer's already
established vinyl-based product line will enable Burke to (i) increase its
number of first-tier distributors, specifically in the midwest and east, who, in
the past, have not carried Burke products due to Burke's lack of a vinyl product
offering and (ii) displace other vinyl suppliers with distributors that already
carry Burke's rubber flooring products line. The Flooring Products business
currently utilizes 14 direct sales representatives who manage direct sales and
orchestrate the Company's national marketing efforts through approximately 90
commercial flooring products distributor locations. Mercer has 16 direct sales
representatives and its customer base includes 255 distributors nationwide.
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.
MANUFACTURING
RAW MATERIALS
Principal raw materials purchased by the Company for use in its products
include various custom and standard grades of rubber, silicone gum and vinyl as
well as the Hypalon polymer material. The Company has historically not
experienced any significant supply restrictions and has generally been able to
pass 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
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Company in the near future, there can be no assurance that such price increases
will not occur and that the Company's results of operations will not be
adversely affected thereby.
VERTICAL INTEGRATION
Burke's operations are vertically integrated for the production of both
silicone and organic rubber-based products. The Company's production process
commences with the receipt of raw materials, followed by a variety of production
steps which generally include mixing, milling, calendering (or extrusion or
stripping), forming and molding and, in the case of silicone, roto-curing.
Management believes Burke's vertical integration provides a key competitive
advantage within the markets it serves.
FACILITIES
San Jose, California serves as the corporate headquarters for Burke 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 February 28, 1998, Burke maintained operations at the following
locations:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE OWNERSHIP FUNCTION
- ------------------------------ --------- ----------- --------------------------------------
<S> <C> <C> <C>
San Jose, CA.................. 123,000 Owned Manufacturing, Engineering,
Distribution, Offices
San Jose, CA.................. 82,000 Leased Manufacturing, Warehouse
Santa Fe Springs, CA.......... 80,000 Leased Manufacturing, Engineering,
Distribution, Offices
Santa Fe Springs, CA.......... 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.
Complementing Burke's manufacturing and distribution facilities in the
western United States are Mercer's counterparts in the eastern United States.
Eustis, Florida serves as the corporate headquarters and manufacturing facility
for Mercer's business. In addition, Mercer leases and operates large
distribution centers in Rancho Cucamonga, California and South Kearny, New
Jersey.
77
<PAGE>
As of February 28, 1998, Mercer's manufacturing and distribution facilities
were as follows:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE OWNERSHIP FUNCTION
- ------------------------------ --------- ----------- --------------------------------------
<S> <C> <C> <C>
Eustis, FL.................... 96,500 Owned Manufacturing, Engineering,
Distribution, Headquarter Offices
Rancho Cucamonga, CA.......... 22,000 Leased Warehouse, Distribution
South Kearny, NJ.............. 25,000 Leased Warehouse, Distribution
</TABLE>
The Company believes that Burke's and Mercer's facilities are in good
condition and that the facilities, together with anticipated capital
improvements and additions, are adequate for the Company's operating needs for
the foreseeable future.
OTHER INFORMATION
BACKLOG AND WARRANTY
The Company's backlog consists of cancelable orders and is dependent upon
trends in consumer demand throughout the year. Customer order patterns vary from
year to year, largely because of annual differences in consumer end-product
demand, marketing strategies, overall economic and weather conditions. Orders
for the Company's products are generally subject to cancellation until shipment.
As a result, comparison of backlog as of any date in a given year with backlog
at the same date in a prior year is not necessarily indicative of sales trends.
Moreover, the Company does not believe that backlog is necessarily indicative of
the Company's future results of operations or prospects.
The Company's warranty policy is to accept returns of products with defects
in materials or workmanship. The Company will also accept returns of incorrectly
shipped goods where the Company has been notified on a timely basis and, in
certain cases, to maintain customer goodwill. In accordance with normal industry
practice, the Company ordinarily accepts returns only from its customers and
does not ordinarily accept returns directly from consumers. Certain of the
products returned to the Company by its customers, however, may have been
returned to those customers by consumers. The Company generally warrants its
roofing products for two years, for which the related costs are not significant.
In addition, the Company sells extended warranties on roofing products for ten
to twenty years. During the three-year period ended January 2, 1998, the Company
incurred insignificant warranty costs with respect to its roofing products.
EMPLOYEES
BURKE. The Company employed at January 2, 1998, 887 employees at its four
locations, including 780 involved in manufacturing and manufacturing support and
85 involved in product sales. Employees at the Company's four 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 was renegotiated in October 1997 for a
three-year term. The Company has not experienced a work stoppage due to a labor
dispute since 1975 and management believes that the Company's relationships with
its employees and unions are good.
MERCER. Mercer employed at December 31, 1997, 125 employees at its three
locations, including 103 involved in manufacturing and manufacturing support and
16 involved in product sales. Employees at Mercer's three locations receive
comparable insurance and benefit programs.
78
<PAGE>
PATENTS, TRADEMARKS, TRADE NAMES AND TRADE SECRETS
The success of the Company's various businesses depends in part on the
Company's ability to exploit certain proprietary patents, trademarks, trade
names and trade secrets on an exclusive basis in reliance upon the protections
afforded by applicable copyright, patent and trademark laws and regulations. The
loss of certain of the Company's rights to such patents, trademarks, trade names
and trade secrets or the inability of the Company effectively to protect or
enforce such rights could adversely affect the Company. The duration of the
Company's and Mercer's intellectual property rights is as follows:
BURKE
PATENTS
<TABLE>
<CAPTION>
PATENT NO. TITLE GATT EXPIRY
- ---------- ------------------------------------------------------------------- ------------
<S> <C> <C>
4,608,792 Roof membrane holdown system....................................... 11/12/08
4,603,790 Tensioned reservoir cover, rainwater run-off enhancement system.... 3/11/05
</TABLE>
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>
MERCER
TRADEMARKS
<TABLE>
<CAPTION>
MARK EXPIRATION
- ---------------------------------------------------------------------------------- -----------
<S> <C>
DOCKSIDERS & DESIGN............................................................... 11/26/05
MAXXI-TREAD....................................................................... 8/20/05
MERCER FRICTION GRIP.............................................................. 12/03/08
MERCER & DESIGN................................................................... 12/14/03
MERCER............................................................................ 8/30/04
MIRROR-FINISH..................................................................... 7/20/03
RUBBERLYTE........................................................................ 2/14/09
RUBBERMYTE........................................................................ 7/23/01
UNICOLOR.......................................................................... 4/05/04
</TABLE>
ENVIRONMENTAL LIABILITY
The Company and Mercer are 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
Prior Recapitalization, JFLEI conducted certain investigations (including, in
some cases, reviewing environmental reports prepared by others) of the Company's
operations and its compliance with
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<PAGE>
applicable environmental laws. The investigations, which included Phase I
assessments (consisting generally of a site visit, records review and
non-intrusive investigation of conditions at the subject facility) by
independent consultants, found that certain facilities have had or may have had
releases of hazardous materials that may require remediation. Pursuant to the
Merger Agreement (as defined below), the former shareholders of the Company have
agreed, subject to certain limitations as to survival and amount, to indemnify
the Company against certain environmental liabilities incurred prior to the
consummation of the Prior Recapitalization. See "The Prior Recapitalization."
Based in part on the investigations conducted and the indemnification provisions
of the Agreement and Plan of Merger, dated as of August 13, 1997 (the "Merger
Agreement") among JFLEI, JFL Merger Co. ("MergerCo") and certain former
shareholders of the Company (pursuant to which the Company was recapitalized by
means of a merger of MergerCo into the Company (the "Merger") with the Company
surviving the Merger) with respect to environmental matters, the Company
believes, although there can be no assurance, that its liabilities relating to
these environmental matters will not have a material adverse effect on its
future financial position or results of operations.
In connection with the Mercer Acquisition, the Company conducted an
environmental review of Mercer's operations and its compliance with applicable
environmental laws. The review included a site visit to Mercer's manufacturing
facility in Eustis, Florida and interviews with facility personnel regarding
environmental matters. In addition, the Company reviewed existing environmental
reports that included Phase I assessments, audits and limited soil and ground
water sampling data. The environmental review revealed that Mercer's facilities
have had, or may have had, releases of hazardous substances that may require
remediation. Pursuant to the Stock Purchase Agreement, the former shareholders
of Mercer have agreed to indemnify the Company against certain environmental
liabilities incurred prior to the purchase provided the Company makes a written
claim for indemnification against the former shareholders of Mercer prior to the
90th day after receipt by the Company of audited financial statements of Mercer
for the fiscal year ending December 31, 1999, but in no event later than June
30, 2000, and subject to a maximum cap on liability of $5,000,000 or the
adjusted purchase price for Mercer. Based, in part, on the environmental review
conducted by the Company and the indemnification provisions of the Stock
Purchase Agreement with respect to environmental matters, the Company believes,
although there can be no assurance, that its 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.
A lawsuit has been filed by a former shareholder against the Company and
certain of its current and former officers and directors. The former shareholder
is asserting various claims in connection with the Company's repurchase of such
shareholder's shares prior to the Prior Recapitalization. The Company believes
that such claims are without merit and intends to vigorously defend such action.
ACQUISITION OF MERCER
On April 21, 1998, the Company acquired all of the outstanding capital stock
of Mercer from Sovereign pursuant to a Stock Purchase Agreement among the
Company, Sovereign and Mercer, dated March 5, 1998, for an aggregate
consideration of $35,750,000, subject to working capital and other adjustments.
Through the Mercer Acquisition, the Company will significantly enhance its
already strong product and distribution lines and product development
capabilities. In particular, management believes that Mercer's highly successful
vinyl cove base and moulding product lines, and strong presence in the
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<PAGE>
eastern United States, will complement the Company's position as the dominant
producer of rubber cove base and floor covering accessories in the western
United States. Management also believes that the Mercer Acquisition will serve
as an excellent platform from which to pursue complementary acquisitions in the
highly fragmented market niches in which the Company currently competes.
Mercer manufactures its products in a 96,500 square foot manufacturing
facility located in Eustis, Florida. With over thirty years of extrusion
experience, Mercer has developed a strong brand name in the flooring business.
Among other things, Mercer has been a pioneer in the market for flooring
profiles with its unique Uni-Color-Registered Trademark- color matching system.
In addition, Mercer possesses a unique coextrusion process which lowers
manufacturing costs while maintaining a high level of quality in its products.
In total, Mercer manufactures and sells approximately 116 products including:
- STANDARD VINYL: Standard wall bases and corners extruded in vinyl.
- MOULDINGS: Used on floors for transition between carpets, wood and cement.
- RUBBER BASE: Low gloss and rubber-like base products which are similar to
vinyl and rubber base products.
- STAIR TREADS AND NOSINGS: Stair treads, various edgings and non-slip
surfaces.
- MIRROR FINISH: High-gloss finish products which are sold principally to
large retail outlets.
- MARINE/OTHER: Marine bumpers, waterstop products, complementary adhesive
products.
Mercer leases and operates a 22,000 square foot distribution center in
Rancho Cucamonga, California, and a 25,000 square foot distribution center in
South Kearny, New Jersey. Mercer's customers are wholesale, full-line, and
supply flooring distributors and select national and export accounts. Mercer's
customer base includes 255 distributors nationwide, the top ten of which enjoy
long-standing relationships with Mercer. Geographically, sales are distributed
throughout the United States with approximately 67% in the eastern and central
United States and approximately 15% internationally in 1997.
The Stock Purchase Agreement contains customary representations and
warranties from Sovereign to the Company. Certain of these representations and
warranties, and related indemnification rights, will terminate after a limited
time following the effectiveness of the Mercer Acquisition.
CONSENT SOLICITATION
In connection with the Prior Offering, pursuant to the Consent Solicitation,
the Company solicited the Consents of holders of its Existing Notes to the
Amendments to the Existing Indenture which, among other things, (i) permitted
the issuance of the Senior Notes and permit the incurrence of indebtedness
represented by the Senior Notes, (ii) increased certain of the permitted
indebtedness and permitted investment baskets contained in the indebtedness and
restricted payment covenants in the Existing Indenture, (iii) modified the lien
covenant to enhance the Company's ability to use assets as collateral for new
financings and (iv) made certain other amendments of a non-substantive nature to
the Existing Indenture. Pursuant to the Consent Solicitation, the Company made
certain payments to holders thereof who properly furnished their Consents to the
Amendments.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and position of each person who
is a director or executive officer of the Company. 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............. 61 Vice Chairman of the Board, President and Chief Executive Officer
Reed C. Wolthausen............ 50 Director, Senior Vice President and General Manager--Silicone Products
David E. Worthington.......... 44 Treasurer, Vice President--Finance
Robert F. Pitman.............. 43 Vice President and Technical Director--San Jose
Craig A. Carnes............... 38 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
George Sawyer................. 67 Chairman of the Board
Oliver C. Boileau, Jr......... 71 Director
Donald Glickman............... 65 Director
Bruce D. Gorchow.............. 40 Director
John F. Lehman................ 55 Director
Keith Oster................... 36 Director, Secretary
Thomas G. Pownall............. 76 Director
Joseph A. Stroud.............. 42 Director
</TABLE>
ROCCO C. GENOVESE, Vice Chairman, President and Chief Executive Officer, has
been with the Company for 42 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, Senior Vice President and General Manager--Silicone
Products, has been with the Company for nine years. Initially serving as the
Company's Chief Financial Officer, Mr. Wolthausen now 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, Treasurer and Vice President--Finance, has been with
the Company for seven years. Mr. Worthington joined Burke as Corporate
Controller in 1990 and served in that capacity until 1997 when he was promoted
to his current position. Prior to joining the Company, he served as Chief
Financial Officer for Electro-Technology Corporation.
ROBERT F. PITMAN, Vice President and Technical Director--San Jose, has been
with the Company since 1979 and currently oversees all technical and product
development for the San Jose-based businesses as well as sales and marketing for
the San Jose portion of the Commercial Products business. During his tenure with
Burke, Mr. Pitman has held a number of positions including Director of Technical
Services and Material/Process Development Engineer. He has served in his current
position since 1994.
CRAIG A. CARNES, Vice President--Sales and Marketing--Flooring Products,
joined the Company in 1996. Prior to joining the Company, Mr. Carnes was Vice
President of Sales and Marketing for Color Spot, Inc., a subsidiary of
Pacificorp and a consumer perishable product company that is the nation's
largest producer of garden bedding flowers. For five years prior to joining
Color Spot, Inc., Mr. Carnes held senior
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<PAGE>
sales and marketing positions with Levelor 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 six 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.
GEORGE SAWYER, Chairman of the Board of Directors of the Company and a
Managing Principal of Lehman, has been affiliated with Lehman for the past 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. Mr. Sawyer is also a director of
Elgar Holdings, Inc. and Blacklight Power Inc.
OLIVER C. BOILEAU, JR. became a director of the Company upon consummation of
the Prior Recapitalization. He joined The Boeing Company in 1953 as a research
engineer and progressed through several technical and management positions and
was named Vice President in 1968 and then President of Boeing Aerospace in 1973.
In 1980, he joined General Dynamics Corporation as President and a member of the
Board of Directors. In January 1988, Mr. Boileau was promoted to Vice Chairman
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.
DONALD GLICKMAN, who became a director of the Company upon consummation of
the Prior 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 aerospace, marine and defense industries. Prior to forming 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 cavalry 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. Mr.
Glickman is also chairman of the board of directors of Elgar Holdings, Inc.
BRUCE D. GORCHOW, who became a director of the Company upon consummation of
the Prior Recapitalization, is a member of the investment advisory board of
Lehman. Since 1991, Mr. Gorchow has
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<PAGE>
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., Elgar Holdings, Inc. and is
an investment director of several investment limited partnerships. Mr. Gorchow
also represents PPM America, Inc. on the boards of ten of its portfolio
companies. Prior to his position at PPM America, Mr. Gorchow was a Vice
President at Equitable Capital Management, Inc.
JOHN F. LEHMAN, who became a director of the Company upon consummation of
the Prior 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, Elgar Holdings, Inc. and ISO Inc., and is currently Vice
Chairman of the Princess Grace Foundation, a director of OpiSail Foundation and
a trustee of Spence School.
KEITH OSTER, Secretary of the Company, also became a director of the Company
upon consummation of the Prior Recapitalization, is a Principal of Lehman and
has been affiliated with Lehman for the past five years. Mr. Oster joined Lehman
in 1992 and is principally responsible for financial structuring and analysis.
Prior to joining Lehman, Mr. Oster was with the Carlyle Group, where he was
responsible for analyzing acquisition opportunities and arranging debt
financing, and was a Senior Financial Analyst with Prudential-Bache Capital
Funding, working in the Mergers, Acquisitions and Leveraged Buyout Department.
Mr. Oster is also a director of Elgar Holdings, Inc.
THOMAS G. POWNALL, who became a director of the Company upon consummation of
the Prior 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.
JOSEPH STROUD, who became a director of the Company in February 1998, is a
Principal of Lehman. Mr. Stroud joined Lehman in 1996 and is responsible for
managing the financial and operational aspects of portfolio company
value-enhancement. Prior to joining Lehman, Mr. Stroud was the Chief Financial
Officer of Sperry Marine, Inc. from 1993 until the company was purchased by
Litton Industries, Inc. in 1996. From 1989 to 1993, Mr. Stroud was Chief
Financial Officer of the Accudyne and Kilgore Corporations. Mr. Stroud is also a
director of Elgar Holdings, 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 Capital Stock--Preferred Stock-- Redeemable Preferred
Stock--Voting Rights."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee, consisting
of Messrs. Glickman, Oster and Pownall. The Compensation Committee makes
recommendations concerning the salaries and incentive compensation of employees
of, and consultants to, the Company, and oversees and administers the Company's
stock option plans.
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<PAGE>
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 2, 1998.
COMPENSATION SUMMARY
The following summary compensation table sets forth for the fiscal years
ended January 2, 1998, January 3, 1997 and December 29, 1995, 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 2, 1998:
<TABLE>
<CAPTION>
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING
-------------------------------------- OPTIONS
OTHER LONG-TERM
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($)(2) ($)(3) COMPENSATION
- ----------------------------------------------- ------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Rocco C. Genovese ............................. 1997 196,925 317,500 5,579,314 150,000
President and Chief Executive Officer 1996 180,050 150,000 -- 336,000
1995 189,614 120,000 -- 0
Reed C. Wolthausen ............................ 1997 148,800 237,000 3,201,004 100,000
Senior Vice President and General 1996 141,378 100,000 -- 224,000
Manager--Silicone Products 1995 133,664 60,000 -- 0
Robert F. Pitman .............................. 1997 103,808 77,500 584,815 7,500
Vice President and Technical Director--San 1996 90,750 27,500 -- 0
Jose 1995 84,273 22,500 -- 0
David E. Worthington .......................... 1997 95,166 100,000 393,766 10,000
Vice President--Finance 1996 90,794 25,000 -- 0
1995 87,791 20,000 -- 0
Robert Engle .................................. 1997 94,231 67,500 373,834 7,500
Vice President--Operations--Silicone Products 1996 89,342 25,000 -- 0
1995 91,020 17,500 -- 0
</TABLE>
- ------------------------
(1) Perquisites and other personal benefits paid in 1997 for the Named Executive
Officers aggregated less than the lesser of $50,000 and 10% of the total
annual salary and bonus set forth in the columns entitled "Salary" and
"Bonus" for each named executive officer and, accordingly, are omitted from
the table.
(2) Annual bonuses are indicated for the year in which they were earned and
accrued. Annual bonuses for any year are generally paid in the following
fiscal year.
(3) Represents the compensation component of the consideration paid to the
executives for their stock options in the Company in connection with the
Prior Recapitalization.
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<PAGE>
The following table summarizes options granted in 1997 to the Named
Executive Officers.
OPTIONS GRANTED IN 1997
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES TOTAL OPTIONS EXERCISE
UNDERLYING GRANTED TO PRICE PER
NAME OPTIONS EMPLOYEES SHARE EXPIRATION DATE
- ----------------------------------------------------------- ----------- --------------- ----------- ---------------
INDIVIDUAL GRANTS(1)
<S> <C> <C> <C> <C>
Rocco C. Genovese.......................................... 150,000 40.5% $ 6.50 12/19/2007
Reed C. Wolthausen......................................... 100,000 27.0% $ 6.50 12/19/2007
David E. Worthington....................................... 10,000 2.7% $ 6.50 12/19/2007
Robert F. Pitman........................................... 7,500 2.0% $ 6.50 12/19/2007
Robert G. Engle............................................ 7,500 2.0% $ 6.50 12/19/2007
</TABLE>
- ------------------------
(1) All vested options outstanding immediately prior to the Prior
Recapitalization were canceled and converted into the right to receive
approximately $9.33 per share (the "Recapitalization Consideration") less
the applicable exercise price.
COMPENSATION OF DIRECTORS
None of the directors who are officers of the Company receives any
compensation directly for their service on the Company's Board of Directors. All
other directors receive customary directors' fees for their services. In
addition, the Company pays Lehman certain fees for various management,
consulting and financial planning services, including assistance in strategic
planning, providing market and financial analyses, negotiating and structuring
financing and exploring expansion opportunities. See "Certain Relationships and
Related Transactions."
EMPLOYMENT AGREEMENTS
In connection with the Prior Recapitalization, the Company entered into
employment agreements (each, an "Employment Agreement") with two key executives.
Generally, each Employment Agreement provides for the executive's continued
employment with the Company in his position prior to the execution of the
Employment Agreement for a period of two years from the date of the Employment
Agreement renewable by mutual agreement for successive one-year terms, at an
annual salary, bonus and with such other employment-related benefits comparable
to those received by such executive immediately before the execution of the
Employment Agreement.
If the executive is terminated for Cause (as defined in the Employment
Agreement) or voluntarily terminates his employment prior to the expiration of
the then-current term, the executive will be entitled to receive unpaid
compensation through the date of his termination. If the executive's employment
is terminated by the Company for any reason other than for Cause or the
executive dies or is unable to perform his duties due to disability for a period
of 90 consecutive days, the executive will be entitled to receive all
compensation that would be due through the end of the then-current term, to the
extent unpaid on the date of termination.
Each Employment Agreement contains provisions prohibiting the executive,
during the period of his employment with the Company and, for two years
thereafter, from owning, managing, operating, financing, joining or controlling,
directly or indirectly, any business entity that is, at the time of the
executive's initial involvement, in competition with the Company in any business
then or thereafter conducted by the Company. Each Employment Agreement also
contains provisions requiring the executive to maintain the confidentiality of
certain information related to the Company during the period of his employment
with the Company and, under certain circumstances, for two years thereafter.
Each Employment Agreement further provides that any proposals or ideas developed
by the executive or that are submitted by the
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executive to the Company during the term of the Employment Agreement, whether or
not exploited or accepted by the Company, are the property of the Company and
may not be exploited by the executive except in compliance with the Company's
policy on conflicts of interest.
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 February 28, 1998 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 who is the beneficial owner of more
than 5% of the outstanding Common Stock of the Company.
<TABLE>
<CAPTION>
NUMBER
OF PERCENTAGE OF
NAME OF INDIVIDUAL OR ENTITY(1) SHARES(2) SHARES OUTSTANDING(3)
- ---------------------------------------------------------- ----------- -----------------------
<S> <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
Joseph A. Stroud(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
(16 persons)............................................ 3,608,000 74.9%
</TABLE>
- ------------------------
* Less than 1%
(1) The address of JFLEI and Messrs. Lehman, Sawyer, Glickman, Oster and Stroud
is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The
address of Jackson National and Mr. Gorchow is 225 West Wacker Drive,
Chicago, Illinois 60606. The address of MassMutual is 1295 State Street,
Springfield, Massachusetts 01111. The address of Paribas is 787 Seventh
Avenue, New York, New York 10019.
(2) As used in this table, beneficial ownership means the sole or shared power
to vote, or to direct the voting of a security, or the sole or shared power
to dispose, or direct the disposition of, a security.
(3) Based on 3,857,000 shares of the Company's Common Stock outstanding and
964,000 shares of the Company's Common Stock underlying warrants. The
calculations do not include shares issuable upon conversion of Convertible
Preferred Stock or upon exercise of certain options granted to management of
the Company that are not exercisable within 60 days after consummation of
the Transactions.
(4) JFLEI is a Delaware limited partnership managed by Lehman, which is an
affiliate of the general partner of JFLEI. Each of Messrs. Lehman, Glickman,
Sawyer, Oster and Stroud, either directly
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(whether through ownership interest or position) or through one or more
intermediaries, may be deemed to control Lehman and such general partner.
Lehman and such general partner may be deemed to control the voting and
disposition of the shares of the Company Common Stock owned by JFLEI.
Accordingly, for certain purposes, Messrs. Lehman, Glickman, Sawyer, Oster
and Stroud may be deemed to be beneficial owners of the shares of the
Company's Common Stock owned by JFLEI.
(5) Includes the shares beneficially owned by JFLEI, of which Messrs. Lehman,
Glickman, Sawyer, Oster and Stroud are affiliates.
(6) 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 Prior
Recapitalization" and "Description of Capital Stock--Warrants."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to the terms of the Management Agreement (the "Management
Agreement") entered into between Lehman and the Company, (i) upon consummation
of the Prior Recapitalization, the Company paid Lehman fees in the amount of
$1.5 million, (ii) the Company agreed to pay Lehman an annual management fee
equal to $500,000, as may be adjusted from time to time subject to necessary
board approval, that will commence on October 1, 1998 and be payable in arrears
on a quarterly basis commencing on January 1, 1999 and (iii) upon consummation
of the Prior Offering, the Company paid Lehman a transaction fee in the amount
of $500,000.
SHAREHOLDERS AGREEMENT
In connection with the Prior Recapitalization, the Company, JFLEI, the
Continuing Shareholders and, in their capacity as holders of the Warrants,
Jackson National Life Insurance Company ("Jackson National"), Paribas North
America, Inc. ("Paribas"), MassMutual Corporate Value Partners Limited,
Massachusetts Mutual Life Insurance Company, MassMutual High Yield Partners LLC
(collectively, "MassMutual") (collectively, the "Shareholders") entered into a
Shareholders Agreement (the "Shareholders Agreement"), the principal terms of
which are summarized below:
CERTAIN VOTING RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK. If at any
time after October 15, 2000, any amount of cash dividends payable on the
Redeemable Preferred Stock shall have been in arrears and unpaid for four or
more successive Dividend Payment Dates, then the number of directors
constituting the Board of Directors shall, without further action, be increased
by the Dividend Arrears Number (as defined below) and, in addition to any other
rights to elect directors which the holders of Redeemable Preferred Stock may
have, the holders of all outstanding shares of Redeemable Preferred Stock,
voting separately as a class and to the exclusion of the holders of all other
classes and series of stock of the Company, shall be entitled to elect the
directors of the Company to fill such newly created directorships.
If the Company shall fail to redeem shares of Redeemable Preferred Stock in
accordance with the mandatory redemption provisions described above, then the
number of directors constituting the Board of Directors shall, without further
action, be increased by the Control Number (as defined below) and, in addition
to any other rights to elect directors which the holders of Redeemable Preferred
Stock may have, the holders of all outstanding shares of Redeemable Preferred
Stock, voting separately as a class and to the exclusion of the holders of all
other classes and series of stock of the Company, shall be entitled to elect the
directors of the Company to fill such newly created directorships.
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<PAGE>
"Dividend Arrears Number" shall mean such number of additional directors of
the Company which, when added to the number of directors otherwise nominated by
the holders of Redeemable Preferred Stock, shall result in the number of
directors elected by or at the direction of the holders of Redeemable Preferred
Stock constituting one-third of the members of the Board of Directors of the
Company.
"Control Number" shall mean such number of additional directors of the
Company which, when added to the number of directors otherwise nominated and
elected by the holders of Redeemable Preferred Stock, shall result in the number
of directors nominated and elected by or at the direction of the holders of
Redeemable Preferred Stock constituting a majority of the members of the Board
of Directors of the Company.
Any additional directors elected by the Redeemable Preferred Stock pursuant
to the provisions described above shall remain in office until such time as (i)
all such dividends in arrears are paid in full or (ii) all shares of Redeemable
Preferred Stock shall have been redeemed pursuant to the mandatory redemption
provisions described above, as the case may be.
RESTRICTIONS ON TRANSFER. The shares of the Company's Common Stock held by
each of the parties to the Shareholders Agreement, and certain of their
transferees, are subject to restrictions on transfer. The shares of Common Stock
may be transferred only to certain related transferees, including, (i) in the
case of individual Shareholders, family members or their legal representatives
or guardians, heirs and legatees and trusts, partnerships and corporations the
sole beneficiaries, partners or shareholders, as the case may be, of which are
family members, (ii) in the case of partnership Shareholders, the partners of
such partnership, (iii) in the case of corporate Shareholders, affiliates of
such corporation and (iv) transferees of shares sold in transactions complying
with the applicable provisions of the Shareholder or Company Right of First
Refusal or the Tag-along or Drag-Along Rights (as each term is defined below.)
RIGHTS OF FIRST OFFER. If any Shareholder desires to transfer any shares of
the Company's Common Stock or Warrants (other than pursuant to certain permitted
transfers) and if such Shareholder has not received a bona fide offer from an
unrelated third-party that such shareholder wishes to accept (a "Third-Party
Offer"), all other Shareholders have a right of first offer (the "Right of First
Offer") to purchase the shares or warrants (the "Subject Shares") upon such
terms and subject to such conditions as are set forth in a notice (a "First
Offer Notice") sent by the selling Shareholder to such other Shareholders. If
the Shareholders elect to exercise their Rights of First Offer with respect to
less than all of the Subject Shares, the Company has a right to purchase all of
the Subject Shares that the Shareholders have not elected to purchase. If the
Shareholders receiving the First Offer Notice and the Company will exercise
their respective rights of first offer with respect to less than all of the
Subject Shares, the selling Shareholder may solicit Third-Party Offers to
purchase all (but not less than all) of the Subject Shares upon such terms and
subject to such conditions as are, in the aggregate, no less favorable to the
selling Shareholder than those set forth in the First Offer Notice.
SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Company will not
be permitted to issue equity securities, or securities convertible into equity
securities to JFLEI or to any of its affiliates unless the Company has offered
to issue to each of the other Shareholders, on a pro rata basis, an opportunity
to purchase such securities on the same terms, including price, and subject to
the same conditions as those applicable to JFLEI and/or its affiliate.
TAG-ALONG RIGHTS. The Shareholders Agreement provides that, if the
Shareholders and the Company fail to exercise their respective rights of first
refusal with respect to all of the Subject Shares, the Shareholders have the
right to "tag along" (the "Tag-Along Right") upon the sale of the Company's
Common Stock by JFLEI pursuant to a Third-Party Offer.
DRAG-ALONG RIGHTS. The Shareholders Agreement provides that if one or more
Shareholders holding a majority of the Company's Common Stock (the "Majority
Shareholders") propose to sell all of the Common Stock owned by the Majority
Shareholders, the Majority Shareholders have the right (the "Drag-
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<PAGE>
Along Right") to compel the other Shareholders to sell all of the shares of
Common Stock held by such other Shareholders upon the same terms and subject to
the same conditions as the terms and conditions applicable to the sale by the
Majority Shareholders.
MERGER. The Shareholders Agreement provides that the Company may not enter
into any merger, consolidation or similar business combination unless the terms
of such merger provide for all Shareholders to receive the same consideration
for their shares of Common Stock.
REGISTERED OFFERINGS. The shares of Common Stock may be transferred in a
bona fide public offering for cash pursuant to an effective registration
statement (a "Registered Offering") without compliance with the provisions of
the Shareholders Agreement related to the Right of First Refusal or the
Tag-Along or Drag-Along Rights.
LEGENDS. The shares of Common Stock subject to the Shareholders Agreement
bear a legend related to the Right of First Refusal and the Tag-Along and
Drag-Along Rights, which legends will be removed when the shares of Common Stock
are, pursuant to the terms of the Shareholders Agreement, no longer subject to
the restrictions on transfer imposed by the Shareholders Agreement.
REGISTRATION RIGHTS. JFLEI and certain other shareholders are entitled to
one "demand" and unlimited piggyback registration rights, subject to additional
customary rights and limitations.
The term of the Shareholders Agreement is the earlier of (i) August 20,
2007, (ii) the date on which none of the Shareholders nor any of their permitted
transferees are subject to the terms of the Shareholders Agreement, (iii) the
date on which none of the shares of Common Stock are subject to the restrictions
on transfer imposed by the Shareholders Agreement or (iv) the consummation of a
Registered Offering for an aggregate offering price of $25.0 million or more.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Articles of Incorporation of the Company contain provisions eliminating
the personal liability of directors for monetary damages for breaches of their
duty of care, except in certain prescribed circumstances. The Bylaws of the
Company also provide that directors and officers will be indemnified to the
fullest extent authorized by California law, as it now stands or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The Bylaws of the
Company provide that the rights of directors and officers to indemnification is
not exclusive of any other right now possessed or hereinafter acquired under any
statute, agreement or otherwise.
MANAGEMENT PARTICIPATION IN THE PRIOR RECAPITALIZATION
The executive officers and directors of the Company received a total of
approximately $12.8 million, representing the Recapitalization Consideration.
Certain executive officers and directors of the Company also retained shares of
the Company's common stock and did not convert such shares into the right to
receive the Recapitalization Consideration. 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. See "Management--Executive Compensation" and "Security Ownership of
Certain Beneficial Owners and Management."
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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, $30.0 million aggregate principal amount of Old Notes is
outstanding. See "The Exchange Offer."
GENERAL
The Old Notes were issued and the New Notes offered hereby will be issued
under an indenture dated as of April 21, 1998 (the "Indenture") among the
Company, as issuer, the Subsidiary Guarantors referred to below and United
States Trust Company of New York, trustee (the "Trustee"), a copy of which will
be made available to prospective purchasers of the Notes upon request. The terms
of the Notes include those stated in the Indenture and those made a 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 the material provisions of the Indenture is
materially complete but is qualified in its entirety by, reference to the
provisions of the Indenture, including the definitions of certain terms
contained therein and those terms made part of the Indenture by reference to the
Trust Indenture Act. As used in this Section, the term "Fixed Rate Notes" refers
to the Company's Existing Notes. For definitions of certain other capitalized
terms used in the following summary, see "--Certain Definitions" below.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on August 15, 2007, will initially be limited to $30
million aggregate principal amount and will be senior unsecured obligations of
the Company. The Indenture provides for the issuance of up to $20 million
aggregate principal amount of additional Notes having identical terms and
conditions to the Senior 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 Notes," reference to the Notes does not include Additional
Notes.
The Notes will bear interest at a rate per annum, reset semi-annually, equal
to LIBOR (as defined) plus 400 basis points, as determined by the Calculation
Agent (the "Calculation Agent"), which shall initially be the Trustee. Interest
will be payable semi-annually in arrears on February 15 and August 15 of each
year, or if any such day is not a Business Day, on the next succeeding Business
Day, commencing on August 15, 1998 (each, an "Interest Payment Date") to holders
of record on the immediately preceding February 1 and August 1.
"LIBOR," with respect to an Interest Period, will be the rate (expressed as
a percentage per annum) for deposits in United States dollars for a six-month
period beginning on the second London Banking Day (as defined) after the
Interest Determination Date (as defined) that appears on Telerate Page 3750 (as
defined) as of 11:00 a.m., London time, on the Interest Rate Determination Date.
If Telerate Page 3750 does not include such a rate or is unavailable on an
Interest Rate Determination Date, LIBOR for the Interest Period shall be the
arithmetic mean of the rates (expressed as a percentage per annum) for deposits
in a Representative Amount (as defined) in United States dollars for a six-month
period beginning on the second London Banking Day after the Interest Rate
Determination Date that appears on Reuters Screen LIBO Page (as defined) as of
11:00 a.m., London time, on the Interest Rate Determination
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Date. If Reuters Screen LIBO Page does not include two or more rates or is
unavailable on an Interest Rate Determination Date, the Calculation Agent will
request the principal London office of each of four major banks in the London
interbank market, as selected by the Calculation Agent, to provide such bank's
offered quotation (expressed as a percentage per annum), as of approximately
11:00 a.m., London time, on such Interest Rate Determination Date, to prime
banks in the London interbank market for deposits in a Representative Amount in
United States dollars for a six-month period beginning on the second London
Banking Day after the Interest Rate Determination Date. If at least two such
offered quotations are so provided, LIBOR for the Interest Period will be the
arithmetic mean of such quotations. If fewer than two such quotations are so
provided, the Calculation Agent will request each of three major banks in New
York City, as selected by the Calculation Agent, to provide such bank's rate
(expressed as a percentage per annum), as of approximately 11:00 a.m., New York
City time, on such Interest Rate Determination Date, for loans in a
Representative Amount in United States dollars to leading European banks for a
six-month period beginning on the second London Banking Day after the Interest
Rate Determination Date. If at least two such rates are so provided, LIBOR for
the Interest Period will be the arithmetic mean of such rates. If fewer than two
such rates are so provided, then LIBOR for the Interest Period will be LIBOR in
effect with respect to the immediately preceding Interest Period.
"Interest Period" means the period from and including a scheduled Interest
Payment Date through the day next preceding the following scheduled Interest
Payment Date, with the exception that the first Interest Period shall commence
on and include April 21, 1998 and end on and include August 14, 1998.
"Interest Rate Determination Date" means, with respect to each Interest
Period, the second London Banking Day prior to the first day of such Interest
Period.
"London Banking Day" is any day in which dealings in United States dollars
are transacted or, with respect to any future date, are expected to be
transacted in the London interbank market.
"Representative Amount" means a principal amount of not less than U.S.
$1,000,000 for a single transaction in the relevant market at the relevant time.
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on
the Reuter Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service for the purpose of displaying London Interbank Offered
Rates of leading banks).
"Telerate Page 3750" means the display designated as "Page 3750" on the Dow
Jones Telerate Service (or such other page as may replace Page 3750 on that
service for the purpose of displaying London Interbank Offered Rates of leading
banks) or any successor service.
The amount of interest for each day that the Notes are outstanding (the
"Daily Interest Amount") will be calculated by dividing the interest rate in
effect for such day by 360 and multiplying the result by the principal amount of
the Notes outstanding. The amount of interest to be paid on the Notes for each
Interest Period will be calculated by adding the Daily Interest Amounts for each
day in the Interest Period.
All percentages resulting from the above calculations will be rounded, if
necessary, to the nearest one-hundred-thousandth of a percentage point, with
five one-millionths of a percentage point being rounded upwards (e.g., 9.876545%
(or 0.09876545) being rounded to 9.87655% (or 0.0987655)) and all dollar amounts
used in or resulting from the calculations will be rounded to the nearest cent
(with one-half cent being rounded upwards).
The interest rate on the Notes will in no event be higher than the maximum
rate permitted by New York law as the same may be modified by United States law
of general application. Under current New York law, the maximum rate of interest
is 25% per annum on a simple interest basis. This limit may not apply to Notes
in which $2,500,000 or more has been invested.
The Calculation Agent will, upon request of the holder of any Note, provide
the interest rate then in effect with respect to the Notes. All calculations
made by the Calculation Agent in the absence of manifest
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error will be conclusive for all purposes and binding on the Company, the
Subsidiary Guarantors and the holders of the Notes.
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 114 W. 47th
Street, New York, N.Y., 10036-1532) 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 multiple 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 Exchange 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., Burke
Custom Processing, Inc. and Mercer. 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 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, including the Fixed Rate Notes and indebtedness
under the Bank Credit Agreement. 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.
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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 are guaranteed by the Subsidiary Guarantors, which guarantees
are secured by substantially all of the assets of the Subsidiary Guarantors.
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 any time, at the
option of the Company, in whole or in part, on not less than 30 nor more than 60
days' prior notice at 105.00% of the principal amount thereof, plus accrued and
unpaid interest thereon to, but excluding the date of redemption, if redeemed
prior to February 15, 1999 and at the redemption prices (expressed as
percentages of principal amount) set forth below if redeemed during the
twelve-month period beginning on February 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>
1999............................................................................. 104.00%
2000............................................................................. 103.00
2001............................................................................. 102.00
2002............................................................................. 101.00
2003............................................................................. 100.00
</TABLE>
and thereafter at 100% of the principal amount, together with accrued interest,
if any, to the redemption date.
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.
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 Senior 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 contains, 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 Mercer
Transactions and Prior Recapitalization, as if such transactions had
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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 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) $25 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 (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 Senior 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 Fixed Rate Notes (other than
additional Fixed Rate Notes issued under the Fixed Rate Notes Indenture
after August 20, 1998 ("Additional Fixed Rate Notes"))
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and the Fixed Rate Note Guarantees (including any Fixed Rate Note Guarantees
issued pursuant to Section 1021 of the Fixed Rate Note Indenture);
(v) 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");
(vi) Indebtedness of the Company or any Restricted Subsidiary under
Hedging Obligations incurred in the ordinary course of business;
(vii) 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;
(viii) 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 (whether through
the direct acquisition of such property or assets or indirectly through the
acquisition of the Capital Stock of any Person owning such property or
assets), 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 $10.0 million at any one time
outstanding;
(ix) 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 $15.0 million at any one time outstanding;
(x) 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
(xi) 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), (vi), (vii), (viii), (ix) or (x) 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.
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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 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 October
1, 1997 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 August 20, 1997 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.
For purposes of this "--Limitation on Restricted Payments" covenant, the
accrual of dividends on the Series C Preferred Stock shall not be treated as a
Restricted Payment. Notwithstanding the foregoing, the Company and its
Restricted Subsidiaries may take the following actions, so long as (other than
with respect
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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;
(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 (xi) 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;
(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 August 20, 1997;
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 August 20, 1997),
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
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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 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, 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
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Notes or Additional Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance.
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 may 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 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 Bank Credit Agreement contains 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, PRO RATA in proportion to the respective
amounts outstanding of the Notes and Fixed Rate Notes, 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 out
of 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
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(a) transactions among the Company and/or its Restricted Subsidiaries;
(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 Prior
Recapitalization and the Mercer Transactions; 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
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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.
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 Senior Notes for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the Indenture
or the Senior Notes unless such consideration is offered to be paid or is paid
to all Holders of the Senior 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 Senior 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 Senior Notes at least
to the same extent as such Subordinated Indebtedness is subordinated to the
Senior 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).
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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 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 Senior 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
Senior 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
aggregate principal amount of the outstanding Indebtedness permitted by
clauses (i) and (ix) 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 (a) Notes, any Additional Notes or any Note
Guarantee or (b) any Fixed Rate Notes, any Additional Fixed Rate Notes or
any Fixed Rate Note Guarantees, provided the Notes or any related Note
Guarantee and the Fixed Rate Notes and any Fixed Rate Note Guarantees are
secured equally and ratably with the obligation or liability secured by such
Lien;
(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;
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(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 (vi) of the definition of "Permitted Indebtedness";
(viii) Liens securing Indebtedness permitted to be incurred under
paragraph (viii) 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 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;
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(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 an Exchange Offer or the effectiveness of the Shelf Registration
Statement (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 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 Senior
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;
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(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 Senior 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;
(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 dispose of its properties and assets substantially as an entity 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.
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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, 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
have become due otherwise than by such declaration of acceleration and
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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 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 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.
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
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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 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.
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 Senior 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 Senior 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 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 incorporated by
reference therein, contain limitations on the rights of the Trustee thereunder,
should it become a creditor 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
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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 by
writing to Burke Industries, Inc., 2250 South Tenth Street, San Jose, CA 95112,
Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next succeeding paragraph, the Notes to be resold
as set forth herein 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").
Notes that were (i) originally issued to, or transferred to, institutional
"accredited investors" who are not "Qualified Institutional Buyers" (as such
terms are defined under "Notices to Investors" elsewhere herein (the "Non-Global
Purchasers"), or (ii) issued as described below under "Certificated Notes" will
be issued in registered, definitive, certificated form (the "Certificated
Notes"). Upon the transfer to a Qualified Institutional Buyer of Certificated
Notes initially issued to a Non-Global Purchaser, such Certificated Notes may,
unless the Global Note has previously been exchanged in whole for Certificated
Notes, be exchanged for an interest in the Global Note representing the
principal amount of the Senior Notes being transferred.
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 (including the Initial
Purchasers), 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 designated by the Initial Purchasers 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. For certain other
restrictions on the transferability of the Notes, see "Notice to Investors."
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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
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.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Note for any reason, including to
sell Notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Global Note in accordance with the normal procedures of DTC and in
accordance with the procedures set forth in the Indenture.
CERTIFICATED NOTES
Any beneficial owner of Notes evidenced by the Global Note may obtain Notes
in the form of registered definitive Notes ("Certified New Notes"). If (i) 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 or (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Notes in the form of
Certificated Securities under the Indenture then, upon surrender by the Global
Note Holder of its Global Note, Certificated Notes 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
Senior 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.
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SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires 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.
"Additional Fixed Rate Notes" means up to $75.0 million aggregate principal
amount of additional Fixed Rate Notes issued under the Fixed Rate Notes
Indenture after August 10, 1997.
"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 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 Code 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
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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
on August 20, 1997 among the Company, the Banks and NationsBank, N.A., as agent,
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 purposes 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.
"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);
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(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".
"Closing Date" means the date on which the Old Notes were originally issued
under the Indenture.
"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 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
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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 FASB 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 Senior 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 or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Senior 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.
"Dollar Equivalent" means, with respect to any monetary amount in a currency
other than the US dollar, at any time for the determination thereof, the amount
of US Dollars obtained by converting such foreign currency involved in such
computation into US Dollars at the spot rate for the purchase of US Dollars with
the applicable foreign currency as quoted by Reuters at approximately 11:00 a.m.
(New York time) on the date not more than two Business Days prior to the
determination.
"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
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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.
"Fixed Rate Note Guarantee" means any guarantee of the Fixed Rate Notes
issued by a Restricted Subsidiary of the Company pursuant to the Fixed Rate
Notes Indenture.
"Fixed Rate Note Indenture" means the Indenture dated as of August 20, 1997
between the Company and United States Trust Company of New York, as Trustee, as
it may from time to time be supplemented or amended.
"Fixed Rate Notes" means the Company's existing 10% Senior Notes due 2007.
"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 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
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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.
"Mercer Acquisition" means the acquisition by the Company of all of the
outstanding capital stock of Mercer Products Company, Inc. pursuant to a Stock
Purchase Agreement dated March 5, 1998 among the Company, Mercer and Sovereign
Specialty Chemicals, Inc.
"Mercer Transactions" means (i) the Prior Offering and (ii) the Mercer
Acquisition and the related financing transactions in connection therewith.
"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;
(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;
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(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 in any Person, a majority of the equity ownership and
voting stock of which is owned, directly or indirectly, by the Company and/or
one or more of the Subsidiaries of the Company, that do not exceed $7.5 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, collectively, the Series A Cumulative
Redeemable Preferred Stock of the Company, no par value, and the Series B
Cumulative Redeemable Preferred Stock of the Company, no par value, in each
case, issued on August 20, 1997.
"Series C Preferred Stock" means the Convertible Preferred Stock of the
Company issued on the Closing Date.
"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
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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
Upon the consummation of the Prior Recapitalization, the Company entered
into a Loan and Security Agreement, as amended from time to time (the "Credit
Agreement"), with NationsBank, N.A., as administrative agent (the "Agent"), and
other lending institutions party thereto (the "Banks"), which agreement provided
the Company with a $15.0 million revolving credit facility, guaranteed by Burke
Rubber Company, Inc., Burke Flooring Products, Inc. and Burke Custom Processing,
Inc. (in this context, the "Credit Agreement Guarantors"). See "Use of
Proceeds." Upon consummation of the Prior Offering, the Company and the lenders
under the Credit Agreement amended the Credit Agreement to, among other things,
(i) increase the Company's revolving credit facility from $15.0 million to $25.0
million (as amended, the "Credit Facility") (ii) add Mercer as a Borrowing
Subsidiary (as defined in the Credit Agreement), (iii) increase certain of the
baskets contained in the restrictive covenants to reflect the increased size of
the Company after the closing of the Mercer Acquisition and (iv) waive any
default or event of default that may otherwise result from the consummation of
the Prior Offering and the Mercer Acquisition. This information relating to the
Credit Facility is qualified in its entirety by reference to the complete text
of the documents entered into in connection therewith. The following is a
description of the general terms of the Credit Facility.
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SECURITY
Indebtedness of the Company under the Credit Agreement is secured by (i) a
first priority security interest in substantially all of the personal property
(including, without limitation, accounts receivable, 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
(iii) a mortgage lien on the presently owned real property of the Company and
its domestic subsidiaries.
INTEREST
Indebtedness under the Credit Facility bears interest at a floating rate of
interest equal to, at the Company's option, the Eurodollar Rate (as defined in
the 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 rate of interest announced publicly by the Agent as its prime rate.
Interest based on the Prime 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 Credit Agreement, advances under the Credit
Facility are to be limited to the lesser of (a) $15 million, or $25 million if
the Credit Agreement is amended, 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 Credit Facility plus the aggregate
amount of any unreimbursed drawings under any outstanding letters of credit.
MATURITY
Loans made pursuant to the Credit Agreement 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 quarterly basis, on the
committed undrawn amount of the Credit Facility. The Agent and the Banks 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 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 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 obligation of the Banks to make loans or extend letters of credit under
the Credit Facility is subject to the satisfaction of certain customary
conditions including, but not limited to, the absence of a default or event of
default under the Credit Agreement, all representations and warranties under the
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Credit Agreement being true and correct in all material respects and the absence
of a material adverse change.
COVENANTS
The 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 Credit Agreement),
(vi) investments, (vii) liens and (viii) guarantees, as well as prohibitions on
the payment of dividends to, or the repurchase or redemption of stock from,
shareholders. In addition, the Credit Agreement contains various financial
covenants, including covenants requiring the maintenance of fixed charge
coverage and maximum funded debt to EBITDA ratios.
EVENTS OF DEFAULT; REMEDIES
The Credit Agreement contains customary events of default under the Credit
Facility, including the non-payment of principal or interest when due under the
notes issued in connection with the 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 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 Credit Facility and may require all such amounts outstanding
thereunder to be immediately paid in full.
INDEMNIFICATION
Under the Credit Agreement, the Company agrees 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 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 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.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, without par value, and 50,000 shares of Preferred Stock, without
par value. The following statements are summaries of certain provisions
applicable to the Company's capital stock.
COMMON STOCK
As of January 2, 1998, there were 3,857,000 shares of Common Stock issued
and outstanding, held of record by 13 shareholders. The holders of Common Stock
are entitled to one vote per share on all matters submitted to a vote of
shareholders. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
the Company, holders of Common Stock would be entitled to share ratably in the
Company's assets remaining after payment of liabilities, and after provision is
made for each class of stock, if any, having preference over the Common Stock
(including, as of the date of this Offering Memorandum, the Company's 6%
Convertible Preferred Stock to be issued in connection with the Transactions
(the "Convertible Preferred Stock") and the Series A and Series B 11 1/2%
Cumulative Redeemable Stock that was issued on the closing date of the Prior
Recapitalization (collectively, the "Redeemable Preferred Stock") described
below). Except as provided in the Shareholders' Agreement, holders of Common
Stock have no preemptive, subscription, redemption or conversion rights. All of
the outstanding shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 50,000 shares of Preferred Stock (which includes
the 35,000 shares which have already been designated as Redeemable Preferred
Stock and the 3,000 shares which has been designated as Convertible Preferred
Stock) in one or more series and to fix the powers, designations, rights,
preferences, privileges, qualifications and restrictions thereof, including
dividend rights, conversion rights, voting rights, rights and terms of
redemption, liquidation preferences and sinking fund terms, any or all of which
may be greater than the rights of the Common Stock. The Board of Directors,
without shareholder approval, can issue Preferred Stock with voting, conversion
and other rights which could adversely affect the voting power and other rights
of the holders of Common Stock.
CONVERTIBLE PREFERRED STOCK.
In connection with the Mercer Acquisition, JFLEI, together with the other
shareholders and warrantholders of the Company who elected to participate,
purchased 3,000 shares of Series C Convertible Preferred Stock issued by the
Company.
RANKING. The Convertible Preferred Stock shall, with respect to rights on
bankruptcy, liquidation, winding up and dissolution, rank (i) junior to the
Redeemable Preferred Stock and (ii) senior to the Company's Common Stock, and to
all other classes and series of stock of the Company now or hereafter
authorized, issued or outstanding, other than any class or series of stock of
the Company expressly designated as being on a parity with ("Parity Securities")
or senior to the Convertible Preferred Stock. Such other classes or series of
stock of the Company not expressly designated as being on a parity with or
senior to the Convertible Preferred Stock are referred to hereafter as "Junior
Securities." The rights of holders of shares of the Convertible Preferred Stock
are subordinate to the rights of the Company's general creditors, including the
holders of the Existing Notes and the Senior Notes.
DIVIDEND RIGHTS. Dividends on the Convertible Preferred Stock, will accrue
at the annual rate per share of 6% times the sum of (i) $1,000 and (ii) accrued
but unpaid dividends as of the immediately preceding Convertible Preferred
Dividend Payment Date (as defined below). The holders of shares of the
Convertible Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors,
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out of funds legally available therefor, dividends payable semi-annually in
arrears on April 15 and October 15 of each year (each such date, a "Convertible
Preferred Dividend Payment Date"). Notwithstanding the foregoing, no dividends
on shares of Convertible Preferred Stock will be authorized, declared, paid or
set apart for payment at such time as and to the extent that the terms and
provisions of any agreement of the Company, including any agreement relating to
its indebtedness, prohibits such authorization, declaration, payment or setting
apart for payment. The declaration or payment of dividends on the Convertible
Preferred Stock would be restricted under the Indenture and the Existing
Indenture. See "Description of Senior Notes--Limitation on Restricted Payments".
In the event that the Company elects to redeem all or any portion of the
shares of the Convertible Preferred Stock or upon a redemption of the
Convertible Preferred Stock upon a Change of Control, the Company shall pay, out
of funds legally available therefor, all accrued but unpaid dividends to the
holders thereof. See "--Optional Redemption" and "--Redemption Upon Change of
Control." Dividends are also payable to holders of the Convertible Preferred
Stock, out of funds legally available therefor, if declared by the Board of
Directors of the Company.
So long as any shares of the Convertible Preferred Stock are outstanding,
the Company shall not, without the prior consent of the holders of at least
fifty-one percent (51%) of the shares of outstanding Convertible 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
Corporation to purchase or redeem any Junior Securities; (iii) declare, pay or
set apart for payment, or permit any corporation or other entity directly or
indirectly controlled by the Corporation to declare, pay or set apart for
payment, any dividend or make any distribution or payment on any Junior
Securities or Parity Securities, whether directly or indirectly and whether in
cash, obligations or shares of the Company or other property (other than
dividends or distributions payable in additional shares of Junior Securities to
holders of Junior Securities); or (iv) make any payment on account of, or set
apart for payment money for a sinking or other similar fund for, the purchase,
redemption or retirement of, any Parity Securities whether directly or
indirectly, and whether in cash, obligations, shares of the 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 the Convertible 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 Convertible Preferred Stock
are entitled to receive the stated liquidation value of $1,000 per share ($3.0
million in the aggregate based on 3,000 shares of Convertible Preferred Stock to
be issued on the date of issuance), plus an amount per share equal to any
dividends accrued but unpaid (whether or not declared by the Board of Directors
of the Company), 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 Convertible
Preferred Stock will not be entitled to any further participation in any
distribution of assets of the Company.
CONVERSION. Each holder of shares of Convertible Preferred Stock will have
the right, at such holder's option at any time following a Triggering Event (as
defined below) to convert all of such shares into Common Stock at the conversion
price of $10.00 per share of Convertible Preferred Stock, subject to adjustments
pursuant to certain anti-dilution provisions from time to time. A Triggering
Event shall include (i) a Change of Control (as defined in the Certificate of
Determination for the Convertible
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Preferred Stock), (ii) an initial public offering of any class of equity
securities of the Company pursuant to the Securities Act of 1933, as amended,
(iii) the delivery of a notice from the Company to each holder of the
Convertible Preferred Stock that the Company intends to redeem the Convertible
Preferred Stock or (iv) the fifth anniversary of the date of issuance. For
purposes of such conversion, each share of Convertible Preferred Stock will be
valued at $1,000. Upon conversion of the Convertible Preferred Stock, holders of
shares of Convertible Preferred Stock shall not be entitled to receive any
accrued but unpaid dividends.
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 Convertible 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, including dividends accrued through the Convertible
Preferred Dividend Payment Date immediately preceding the redemption date, but
not including any dividends for any period after such Convertible Preferred
Dividend Payment Date.
REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of
Control, the Convertible 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, including
dividends accrued through the Convertible Preferred Dividend Payment Date
immediately preceding the redemption date, but not including any dividends for
any period after such Convertible Preferred Dividend Payment Date; provided,
however, that the Company will not be obligated to redeem any Convertible
Preferred Stock upon a Change of Control prior to repurchase or redemption of
such Existing Notes, Notes and Redeemable Preferred Stock then outstanding as
the Company is required to repurchase or has called for redemption in connection
with Change of Control pursuant to the terms of the indentures for the Existing
Notes and the Notes or the Company's Amended and Restated Articles of
Incorporation, as the case may be.
VOTING RIGHTS. The holders of shares of Convertible Preferred Stock are not
entitled to any voting rights, except as required by applicable law and except
as set forth in the next sentence. Without the consent of the holders of at
least 51% of the outstanding shares of Convertible Preferred Stock, the Company
may not amend its Amended and Restated Articles of Incorporation in any way that
would adversely alter or change the powers, preferences or special rights of the
Convertible Preferred Stock.
PIGGYBACK REGISTRATION RIGHTS. The holders of the Convertible Preferred
Stock are not entitled to any "demand" registration rights. However, the holders
of the Convertible Preferred Stock are entitled to unlimited "piggyback"
registration rights with respect to the shares of common stock of the Company
issuable upon conversion of the Convertible Preferred Stock after the date of
the Company's initial public offering of its common stock, subject to customary
rights and limitations.
TRANSFER RESTRICTIONS. There are no restrictions on the transferability of
the Convertible Preferred Stock, except as required by applicable securities
laws.
REDEEMABLE PREFERRED STOCK.
In connection with the consummation of the Prior Recapitalization, 18,000
shares of Redeemable Preferred Stock (also referred to herein as the "Series A"
or "Series B" Preferred Stock), and warrants to purchase approximately 964,000
shares of common stock of MergerCo at an initial exercise price of $4.67 per
share were issued by MergerCo to MassMutual, Paribas and Jackson National. Upon
consummation of the Prior Recapitalization, the Redeemable Preferred Stock
became the Redeemable Preferred Stock of the Company and the Warrants became
Warrants to purchase Common Stock of the Company.
RANKING. The Redeemable Preferred Stock ranks (i) senior to the Convertible
Preferred Stock and (ii) prior to the Company's Common Stock with respect to
dividend rights and rights on liquidation,
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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 or senior to the Redeemable Preferred Stock. The rights
of holders of shares of the Redeemable Preferred Stock are subordinate to the
rights of the Company's general creditors, including the holders of the Existing
Notes and the Senior Notes. 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 are 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
are 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
are payable quarterly on each January 15, April 15, July 15 and October 15 of
each year (each a "Dividend Payment Date") and commenced on October 15, 1997.
If at any time after July 15, 2000, the cash dividends payable on the
Redeemable Preferred Stock are 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.
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 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 are
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
127
<PAGE>
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.
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 the Existing Notes then outstanding as the Company is required to
repurchase or has called for redemption in connection with Change of Control
pursuant to the terms of the Existing Indenture.
VOTING RIGHTS. The holders of shares of Redeemable Preferred Stock are not
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 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. In addition,
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 (a)
the sale of all or substantially all of the assets of the Company, (b) the
voluntary liquidation, dissolution or winding up of the Company or (c) 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.
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 Prior 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. The Warrants
are currently exercisable until February 20, 2008 at an exercise price per share
equal to $4.67, payable in cash or by tendering shares of Redeemable Preferred
Stock. The exercise price and number of
128
<PAGE>
Warrant Shares are both subject to adjustment in certain events. The Warrants
are 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.
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. 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 October 12, 1998,
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 for their own account
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
129
<PAGE>
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.
LEGAL MATTERS
The legality of the New Notes will be passed on for the Company by Gibson,
Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of Burke Industries, Inc. as of
January 2, 1998 and January 3, 1997, and for each of the three fiscal years in
the period ended January 2, 1998, 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.
The financial statements of Mercer Products Company, Inc. as of August 4,
1997 and December 31, 1997, and for the periods from January 1, 1997 to August
4, 1997 and from August 5, 1997 (date of acquisition by Sovereign Specialty
Chemicals, Inc.) to December 31, 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.
The financial statements of Mercer as of December 31, 1996, and for the year
then ended, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditng.
130
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2
Consolidated Statements of Operations for the three fiscal years ended January 2, 1998..................... F-3
Consolidated Balance Sheets at January 3, 1997 and January 2, 1998......................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the three fiscal years ended January 2,
1998..................................................................................................... F-5
Consolidated Statements of Cash Flows for the three fiscal years ended January 2, 1998..................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
Condensed Consolidated Statements of Income for the three months ended April 4, 1997 and April 3, 1998
(unaudited).............................................................................................. F-19
Condensed Consolidated Balance Sheets at January 2, 1998 and April 3, 1998 (unaudited)..................... F-20
Condensed Consolidated Statements of Cash Flows for the three months ended April 4, 1997 and April 3, 1998
(unaudited).............................................................................................. F-21
Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-22
MERCER PRODUCTS COMPANY, INC.
Report of KPMG Peat Marwick LLP, Independent Auditors...................................................... F-24
Statement of Earnings and Retained Earnings for the year ended December 31, 1996........................... F-25
Balance Sheet at December 31, 1996......................................................................... F-26
Statement of Cash Flows for the year ended December 31, 1996............................................... F-27
Notes to Financial Statements.............................................................................. F-28
Report of Ernst & Young LLP, Independent Auditors--January 1, 1997 to August 4, 1997....................... F-33
Balance Sheet at August 4, 1997............................................................................ F-34
Statement of Operations and Retained Earnings for the period from January 1, 1997 to August 4, 1997........ F-35
Statement of Cash Flows for the period from January 1, 1997 to August 4, 1997.............................. F-36
Notes to Financial Statements.............................................................................. F-37
Report of Ernst & Young LLP, Independent Auditors--August 5, 1997 to December 31, 1997..................... F-42
Balance Sheet at December 31, 1997......................................................................... F-43
Statement of Income for the period from August 5, 1997 to December 31, 1997................................ F-44
Statement of Stockholder's Equity for the period from August 5, 1997 to December 31, 1997.................. F-45
Statement of Cash Flows for the period from August 5, 1997 to December 31, 1997............................ F-46
Notes to Financial Statements.............................................................................. F-47
Condensed Statements of Operations for the three months ended March 31, 1997 and 1998 (unaudited).......... F-52
Condensed Balance Sheets at December 31, 1997 and March 31, 1998 (unaudited)............................... F-53
Condensed Statements of Cash Flows for the three months ended March 31, 1997 and 1998 (unaudited).......... F-54
Notes to Condensed Financial Statements (unaudited)........................................................ F-55
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Burke Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Burke
Industries, Inc. and subsidiaries as of January 2, 1998 and January 3, 1997, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the three fiscal years in the period ended
January 2, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Burke
Industries, Inc. and subsidiaries at January 2, 1998 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 2, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
February 26, 1998
F-2
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................................ $ 90,228 $ 72,466 $ 68,411
Costs and expenses:
Cost of sales.................................................. 62,917 49,689 49,226
Selling, general and administrative............................ 12,238 11,610 10,212
Transaction expenses........................................... 1,321 -- --
Stock option purchase.......................................... 14,105 -- --
--------- --------- ---------
(Loss) income from operations.................................... (353) 11,167 8,973
Interest expense, net............................................ 5,408 2,668 3,007
--------- --------- ---------
(Loss) income before income tax (benefit) provision, discontinued
operation, and extraordinary loss.............................. (5,761) 8,499 5,966
Income tax (benefit) provision................................... (1,818) 3,466 3,393
--------- --------- ---------
(Loss) income from continuing operations before discontinued
operation and extraordinary loss............................... (3,943) 5,033 2,573
Loss from discontinued operation, net of income tax benefit of
$205 in 1996, and $443 in 1995................................. -- (308) (664)
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 (loss) income................................................ $ (3,943) $ 4,101 $ 1,094
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................................... $ 11,563 $ --
Restricted cash.............................................................................. 1,070 --
Trade accounts receivable, less allowance of $334 in 1997 and $189 in 1996................... 11,186 9,155
Inventories.................................................................................. 11,187 8,616
Prepaid expenses and other current assets.................................................... 1,056 630
Deferred income tax assets................................................................... 2,845 1,014
Refundable income taxes...................................................................... 1,639 --
--------- ---------
Total current assets....................................................................... 40,546 19,415
Property, plant, and equipment:
Land and improvements........................................................................ 1,884 1,884
Buildings and improvements................................................................... 9,151 9,151
Equipment.................................................................................... 13,007 12,329
Leasehold improvements....................................................................... 606 555
--------- ---------
24,648 23,919
Accumulated depreciation and amortization.................................................... 10,536 9,101
--------- ---------
14,112 14,818
Construction-in-process...................................................................... 908 183
--------- ---------
15,020 15,001
Other assets:
Prepaid pension cost......................................................................... 501 542
Goodwill, net................................................................................ 1,465 1,529
Note receivable from an affiliate of the principal shareholders.............................. -- 4,066
Deferred financing costs, net................................................................ 5,210 --
Other assets................................................................................. 95 120
--------- ---------
7,271 6,257
--------- ---------
Total assets............................................................................... $ 62,837 $ 40,673
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Checks outstanding in excess of funds deposited.............................................. $ -- $ 828
Trade accounts payable and accrued expenses.................................................. 5,489 5,656
Accrued compensation and related liabilities................................................. 2,086 1,937
Accrued interest............................................................................. 4,347 798
Payable to shareholders...................................................................... 5,882 --
Income taxes payable......................................................................... 1,064 2,468
Current portion of long-term obligations..................................................... -- 2,400
--------- ---------
Total current liabilities.................................................................. 18,868 14,087
Senior notes................................................................................... 110,000 --
Long-term obligations, less current portion.................................................... -- 16,469
Other noncurrent liabilities................................................................... 420 720
Deferred income tax liabilities................................................................ 3,891 3,457
Subordinated debt.............................................................................. -- 1,657
Preferred stock, no par value; 50,000 shares authorized; 30,000 Series A Redeemable shares
designated; 16,000 Series A shares issued and outstanding; 5,000 Series B Redeemable shares
designated; 2,000 Series B shares issued and outstanding..................................... 16,148 --
Shareholders' equity (deficit):
Class A common stock, no par value:
Authorized shares--20,000,000
Issued and outstanding shares--3,857,000 in 1997 and 9,377,000 in 1996................... 25,464 6,716
Accumulated deficit.......................................................................... (111,954) (2,433)
--------- ---------
Total shareholders' equity (deficit)....................................................... (86,490) 4,283
--------- ---------
Total liabilities and shareholders' equity (deficit)........................................... $ 62,837 $ 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 (DEFICIT)
<TABLE>
<CAPTION>
CLASS A TOTAL
COMMON STOCK SHAREHOLDERS'
-------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
--------- --------- ------------ --------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at fiscal year end 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 end 1995................................ 9,431 5,633 (5,293) 340
Net income................................................... -- -- 4,101 4,101
Proceeds from sales of shares through employee stock plans... 181 77 -- 77
Increase in value of shareholder warrants.................... -- 1,241 (1,241) --
Repurchase of stock.......................................... (235) (235) -- (235)
--------- --------- ------------ --------------
Balance at fiscal year end 1996................................ 9,377 6,716 (2,433) 4,283
Net loss..................................................... -- -- (3,943) (3,943)
Proceeds from sales of shares through employee stock plans... 22 10 -- 10
Increase in value of shareholder warrants.................... -- 5,100 (5,100) --
Accretion of preferred stock discount........................ -- -- (89) (89)
Preferred stock dividend in kind............................. -- -- (665) (665)
Common stock warrant issued on sale of preferred stock....... -- -- 2,500 2,500
Proceeds from sale of common stock, net of issuance costs.... 3,134 18,724 -- 18,724
Recapitalization of company.................................. (8,676) (5,086) (102,224) (107,310)
--------- --------- ------------ --------------
Balance at fiscal year end 1997................................ 3,857 $ 25,464 $ (111,954) $ (86,490)
--------- --------- ------------ --------------
--------- --------- ------------ --------------
</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
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
OPERATING ACTIVITIES
Net (loss) income................................................................. $ (3,943) $ 4,101 $ 1,094
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization:
Property, plant, and equipment................................................ 1,435 1,378 1,354
Goodwill...................................................................... 64 41 134
Debt discounts arising from warrants.......................................... 93 37 259
Interest on shareholder note.................................................. (240) -- --
Deferred financing costs...................................................... 229 -- --
Loss on disposal of discontinued operation...................................... -- 624 --
Extraordinary loss on debt settlement, noncash portion.......................... -- -- 1,362
Changes in net assets of discontinued operation................................. -- 1,401 (680)
Changes in operating assets and liabilities:
Trade accounts receivable..................................................... (2,031) 701 (4,326)
Inventories................................................................... (2,571) (1,398) (2,539)
Prepaid expenses and other current assets..................................... (436) (78) (68)
Prepaid pension cost.......................................................... 41 83 66
Other assets.................................................................. 25 12 (31)
Trade accounts payable and accrued expenses................................... 3,382 1,940 1,853
Accrued compensation and related liabilities.................................. 149 124 536
Deferred income taxes......................................................... (1,397) 241 (462)
Income taxes payable.......................................................... (3,043) (103) 1,798
Other noncurrent liabilities.................................................. (300) 36 (142)
--------- --------- ---------
Net cash (used in) provided by operating activities............................... (8,543) 9,140 208
INVESTING ACTIVITIES
Purchases of property, plant, and equipment....................................... (1,454) (1,684) (3,647)
Proceeds from disposal of discontinued operation.................................. -- 1,818 --
Note receivable from affiliate of the principal shareholders...................... -- (4,066) --
Repayment of note receivable from affiliate of the principal shareholders......... 4,306 -- --
Proceeds from sale of equipment................................................... -- -- 123
--------- --------- ---------
Net cash provided by (used in) investing activities............................... 2,852 (3,932) (3,524)
FINANCING ACTIVITIES
Restricted cash................................................................... (1,070) -- --
Checks outstanding in excess of funds deposited................................... (828) (888) 1,228
Borrowings of long-term debt...................................................... -- 79,516 101,393
Repayments and settlement of long-term debt and capital lease obligations......... (18,869) (83,678) (97,702)
Payable to shareholders........................................................... 5,882 -- --
Repurchase of common stock and warrants........................................... -- (235) (1,603)
Proceeds from sales of shares through employee stock plans........................ 10 77 --
Deferred financing costs.......................................................... (5,430) -- --
Repayment of subordinated debt.................................................... (1,750) -- --
Net recapitalization consideration................................................ (107,310) -- --
Issuance of senior notes.......................................................... 110,000 -- --
Issuance of preferred stock, net of issuance costs................................ 17,895 -- --
Issuance of common stock, net of issuance costs................................... 18,724 -- --
--------- --------- ---------
Net cash provided by (used in) financing activities............................... 17,254 (5,208) 3,316
--------- --------- ---------
Change in cash.................................................................... 11,563 -- --
Cash at beginning of year......................................................... -- -- --
--------- --------- ---------
Cash at end of year............................................................... $ 11,563 $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Burke Industries, Inc. and subsidiaries (the Company) develop, manufacture,
and market various elastomer products for use in commercial and military
applications.
The Company 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 construction, defense,
and aerospace industries and other commercial markets, primarily in North
America. The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral.
One customer accounted for approximately 13% of net sales in fiscal year
1997 and 11% of net sales in fiscal year 1996. No other customers constituted
10% or more of net sales in any of the three fiscal years ended in 1997.
Substantially all of the Company's hourly workers in San Jose, California
are represented by the International Association of Machinists and Aerospace
Workers through a collective bargaining agreement that expires October 2, 2000.
The Company has renewed its collective bargaining agreement with United
Electrical Radio and Machine Workers of America, who represent the Company's
hourly workers in Tanton, Massachusetts through June 5, 2000.
RECAPITALIZATION
In August 1997, the Company entered into an Agreement and Plan of Merger
(the Merger Agreement) pursuant to which the Company was recapitalized (the
Recapitalization). Pursuant to the Merger Agreement, all shares of the Company's
common stock, other than those retained by certain members of management and
certain other shareholders (Continuing Shareholders), were converted into the
right to receive cash based upon a formula. The Continuing Shareholders agreed
to retain approximately 15% of the common equity of the Company. In order to
finance the transactions contemplated by the Recapitalization, the Company (i)
issued $110 million of senior notes in a debt offering (NOTE 4); (ii) received
$20 million in cash from an investor group for common stock, and (iii) received
$18 million in cash for the issuance of redeemable preferred stock (the
Transactions). Pursuant to the terms of a ten-year Management Agreement entered
into between the Company and its principal shareholder after completion of the
Recapitalization transaction, the Company paid the shareholder a transaction fee
of $1.0 million and the Company agreed to pay an annual management fee equal to
$500,000 commencing October 1, 1997.
The Company has four wholly owned subsidiaries, consisting of Burke Flooring
Products, Inc., Burke Rubber Company, Inc., Burke Custom Processing, Inc., (the
Guarantor Subsidiaries) and Burkeline Construction Company, Inc. (the
Non-Guarantor Subsidiary). Each of the Guarantor Subsidiaries' guarantees of the
Company's $110 million senior notes, is full, unconditional and joint and
several. The Company's subsidiaries have no operations or assets and liabilities
and therefore no separate financial statements of the Company's subsidiaries are
presented.
In connection with the above August 1997 transactions, the tax benefit the
Company will receive associated with the cost to purchase options issued and
outstanding under the Company's stock option plan, in addition to other tax
savings associated with the transaction, will be distributed to the Company's
continuing and former shareholders when realized by the Company. Accordingly, as
part of the recapitalization the Company recognized a liability of $5,882,000
for the total estimated benefit to be realized.
F-7
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A lawsuit has been filed by a former shareholder against the Company and
certain of its current and former officers and directors. The former shareholder
is asserting various claims in connection with the Company's repurchase of such
shareholder's shares prior to the Prior Recapitalization. The Company believes
that such claims are without merit and intends to vigorously defend such action.
Management believes the resolution of this matter will not have a material
adverse effect on the financial position of the Company.
ACCOUNTING PERIODS
The Company's fiscal year ends on the Friday closest to December 31. The
Company maintains a fifty-two/fifty-three week fiscal year cycle, which resulted
in a fifty-two week year in fiscal 1995, a fifty-three week year in fiscal 1996,
and a fifty-two week year in fiscal 1997. For convenience, the accompanying
financial statements have been referred to as fiscal years ended 1995, 1996, and
1997 for the periods ended December 29, 1995 and January 3, 1997 and January 2,
1998, respectively.
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Burke Industries, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposit accounts with five
banks. Restricted cash consists of a three month U.S. treasury bill held as
security for an outstanding letter of credit.
REVENUE RECOGNITION
Revenue from sales of products is generally recognized upon shipment to
customers. For contracts relating to certain products, a portion of the revenue
is recognized upon completion of a part of the manufacturing process and upon
customer acceptance. The remaining revenue is recognized upon completion of the
manufacturing process and shipment.
WARRANTY
The Company generally warrants its roofing products for two years, for which
the related costs are not significant. In addition, the Company sells extended
warranties for ten to twenty years. Revenues received for extended warranties
are deferred and amortized over the period in which warranty costs are expected
to be incurred. Warranty reserves and deferred warranty revenues are included in
accrued expenses and other noncurrent liabilities on the accompanying
consolidated balance sheets.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-8
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform with the 1997 statement presentation.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) released
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997.
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.
2. INVENTORIES
Inventories consist of the following at the fiscal year ended:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................. $ 4,626 $ 3,260
Work-in-process............................................ 1,593 1,433
Finished goods............................................. 4,968 3,923
--------- ---------
$ 11,187 $ 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 Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for the Long-Lived Assets to Be Disposed Of" (FAS 121), the carrying value
of long- lived assets and related goodwill is reviewed if the facts and
circumstances suggest that they may be impaired. If this review indicates that
the carrying value of these assets will not be recoverable, as determined based
on
F-9
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. GOODWILL AND LONG-LIVED ASSETS (CONTINUED)
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 $367,000 and $303,000 at fiscal years ended
1997 and 1996, respectively.
4. LONG-TERM DEBT AND LEASE OBLIGATIONS
In connection with the Recapitalization of the Company (NOTE 1), all
outstanding borrowings under the existing bank line of credit agreement, term
loans payable to bank, and subordinated notes were repaid and the Company issued
$110 million of Senior Notes and entered into a new credit facility with a bank.
SENIOR NOTES DUE 2007
The Senior Notes bear interest at a rate of 10% per annum. Interest on the
Senior Notes is payable semiannually, commencing February 15, 1998. The Senior
Notes mature on August 15, 2007.
At any time on or before August 15, 2000, the Company may redeem up to 35%
in aggregate principal amount of (i) the initial aggregate principal amount of
the Senior Notes and (ii) the initial principal amount of any additional notes,
on one or more occasions, with the net cash proceeds of one or more public
equity offerings at a redemption price of 110% of the principal amount thereof,
plus accrued and unpaid interest thereon to the redemption date, provided that
at least 65% of the sum of (i) the initial aggregate principal amount of the
Senior Notes and (ii) the initial aggregate principal amount of additional notes
remain outstanding immediately after redemption. The Senior Notes are redeemable
by the Company at stated redemption prices beginning in August 2002.
The Senior Notes are general unsecured obligations of the Company and senior
to all existing and future subordinated indebtedness of the Company. The
obligations of the Company under the bank credit facility are secured by
substantially all of the assets of the Company. Accordingly, such secured
indebtedness will effectively rank senior to the Senior Notes to the extent of
such assets.
The Senior Notes restrict, among other things, the Company's ability to
incur additional indebtedness, pay dividends or make certain other restricted
payments, incur liens, sell preferred stock of subsidiaries, apply net proceeds
from certain asset sales, merge or consolidate with any other person, sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of the
assets of the Company or enter into certain transactions with affiliates.
Since the Senior Notes were issued in August 1997, the Company believes the
fair value of the Senior Notes at fiscal year ended 1997 approximates the
carrying value of such debt at fiscal year ended 1997.
BANK CREDIT FACILITY
In connection with recapitalization, the Company entered into a Loan and
Security Agreement with a bank to provide the Company with a $15.0 million
revolving credit facility expiring August 20, 2002. No amounts are outstanding
at fiscal year end 1997.
Indebtedness of the Company under the agreement is secured by a first
priority security interest in substantially all of the Company's assets.
Indebtedness under the agreement bears interest at a floating rate of
interest equal to, at the Company's option, the eurodollar rate for one, two,
three or six months, plus 2.50% or the bank's prime rate.
F-10
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
Advances under the agreement are 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 plus the aggregate amount of any unreimbursed drawings under any
outstanding letters of credit. Letters of credit up to a maximum of $1.0 million
may be issued under the bank credit facility.
The credit agreement contains restrictions on the incurrence of debt, the
sale of assets, mergers, acquisitions and other business combinations, voluntary
prepayment of other debt of the Company, transactions with affiliates,
investments, as well as prohibitions on the payment of dividends to, or the
repurchase or redemption of stock from, shareholders, and various financial
covenants, including covenants requiring the maintenance of fixed charge
coverage.
INTEREST EXPENSE
Interest expense consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest incurred................................... $ 5,900 $ 2,771 $ 3,039
Capitalized......................................... (29) (19) (30)
Interest income..................................... (463) (84) (2)
--------- --------- ---------
Interest expense, net............................... $ 5,408 $ 2,668 $ 3,007
--------- --------- ---------
--------- --------- ---------
</TABLE>
Included in interest expense is $142,000, $212,000, and $1,108,000 of
interest incurred on subordinated shareholder notes in fiscal years 1997, 1996,
and 1995, respectively. There was no interest payable to these shareholders at
fiscal years ended 1997 and 1996, respectively, and such subordinated notes were
repaid in connection with the Recapitalization of the Company.
DEFERRED FINANCING COSTS
In connection with the issuance of the Senior Notes and bank credit facility
agreement, the Company incurred debt issuance costs of $5,429,000 that are being
amortized to interest expense over the term of the related debt. Accumulated
amortization at fiscal year end 1997 is $219,000.
LEASE OBLIGATIONS
The Company also leases certain manufacturing, warehousing, and
administrative space under noncancelable operating leases. At fiscal year ended
1997, future minimum payments under noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
1998................................................................ $ 1,040
1999................................................................ 937
2000................................................................ 847
2001................................................................ 387
2002................................................................ 295
Beyond 2002......................................................... 1,771
---------
$ 5,277
---------
---------
</TABLE>
F-11
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
Rental expense approximated $1,404,000, $1,143,000, and $1,006,000 in fiscal
years 1997, 1996, and 1995, respectively. Rental expense is before sublease
income of $316,000 in 1997 and $206,000 in 1996. Future sublease rental income
commitments aggregated $1,301,000 at fiscal year ended 1997.
PURCHASE OBLIGATIONS
As of year end 1997, the Company had an agreement with a vendor to purchase
inventory for approximately $900,000. The Company set up a letter of credit as
collateral for the purchase.
5. REDEEMABLE PREFERRED STOCK
In connection with the Recapitalization transaction, the Company issued
16,000 shares of redeemable preferred stock designated as Series A 11.5%
Cumulative Redeemable Preferred Stock and 2,000 shares of redeemable preferred
stock designated as Series B 11.5% Cumulative Redeemable Preferred Stock for
cash proceeds of $18 million, less issuance costs of $106,000, less the $2.5
million value assigned to warrants to purchase common shares issued to holders
of preferred stock. The excess of redemption value over the carrying value is
being accreted by periodic charges to retained earnings (accumulated deficit)
through February 2008.
Dividends will be payable to holders of the redeemable preferred stock, at
the annual rate per share of 11.5% times the sum of $1,000 and accrued but
unpaid dividends. Dividends shall be payable at the annual rate per share of
0.115 shares of redeemable preferred stock through July 15, 2000, and in cash
after July 15, 2000.
Dividends will be payable quarterly on January 15, April 15, July 15, and
October 15 of each year, commencing October 15, 1997. Dividends shall be fully
cumulative and shall accrue on a quarterly basis.
If at any time after July 15, 2000, the cash dividends payable on the
redeemable preferred stock shall have been in arrears and unpaid for four or
more successive dividend payment dates, then until the date on which all such
dividends in arrears are paid in full, dividends shall accrue and be payable to
the holders at the annual rate of 13.5% times the sum of $1,000 per share and
accrued but unpaid dividends thereon. Upon payment in full of all dividends in
arrears, cash dividends will thereafter be payable at the 11.5% annual rate set
forth above. There were no dividends in arrears as of fiscal year ended 1997.
Holders of shares of redeemable preferred stock shall be entitled to receive
the stated liquidation value of $1,000 per share, plus an amount per share equal
to any dividends accrued but unpaid, in the event of any liquidation,
dissolution or winding up of the Company. After payment of the full amount of
the liquidation preference, holders of shares of redeemable preferred stock will
not be entitled to any further participation in any distribution of assets of
the Company.
The Company may, at its option, redeem at any time, all or any portion of
the shares of the redeemable preferred stock, at a redemption price per share
equal to 100% of the liquidation preference on the date of redemption.
On February 20, 2008, the Company shall redeem any and all outstanding
shares of redeemable preferred stock, at a redemption price per share equal to
100% of the liquidation preference.
Upon the occurrence of a change of control (as defined), the redeemable
preferred stock shall be redeemable at the option of the holders, at a
redemption price per share equal to 100% of the liquidation preference.
The holders of shares of redeemable preferred stock shall not be entitled to
any voting rights. However, without the consent of the holders of at least two-
thirds of the outstanding shares of redeemable preferred stock, the Company may
not change the powers or preferences of the redeemable preferred
F-12
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE PREFERRED STOCK (CONTINUED)
stock, create, authorize or issue any shares of capital stock ranking senior or
on a parity with the redeemable preferred stock or create, authorize or issue
any shares of capital stock constituting junior securities, unless such junior
securities are subordinate in right of payment to the redeemable preferred
stock.
If at any time after October 15, 2000, any amount of cash dividends payable
on the Series A Redeemable Preferred Stock shall have been in arrears and unpaid
for four or more successive dividend payment dates, then the holders of the
Series A Redeemable Preferred Stock, shall have the right to elect the smallest
number of directors constituting one-third of the authorized number of
directors, and the holders of the common stock shall have the right to elect the
remaining directors.
If the Company fails to redeem shares of Series A Redeemable Preferred Stock
in accordance with the mandatory redemption provisions described above, then the
holders of the Series A Redeemable Preferred Stock shall have the right to elect
the smallest number of directors constituting a majority of the authorized
number of directors, and the holders of the common stock shall have the right to
elect the remaining directors.
The right of the holders of Series A Redeemable Preferred Stock to elect
directors pursuant to the provisions described above shall continue until such
time as all such dividends in arrears are paid in full or all shares of Series A
Redeemable Preferred Stock shall have been redeemed pursuant to the mandatory
redemption provisions.
6. SHAREHOLDERS' EQUITY
COMMON STOCK
At fiscal year ended 1997 a total of 964,000 shares of Class A common stock
are reserved for the exercise of warrants and 500,000 shares are reserved under
the 1997 Stock Option Plan.
On October 10, 1995, the Company and a 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.
For shareholder warrants issued in connection with debt, the aggregate
increase in the difference between the fair value of the Class A common stock
and the exercise price of the shareholder warrants ($587,000 in 1995 and
$1,241,000 in 1996) has been charged to accumulated deficit. In connection with
the Recapitalization transaction, these shareholder warrants were repurchased
and the resulting $5,100,000 increase in value was charged to accumulated
deficit.
On October 25, 1996, the Company loaned $4,000,000 to an affiliate of a then
principal shareholder and such amount was repaid in connection with the
Recapitalization transaction. The Company was charged an annual management fee
by an affiliate of the then principal shareholders of $250,000 in fiscal years
1995 and 1996.
STOCK OPTIONS
Prior to the Recapitalization, the Company maintained the 1989 Stock Option
Plan and granted nonqualified options not pursuant to a formal plan. In
connection with the Recapitalization, all vested option holders received cash
payment in cancellation of their options totaling $14.1 million and the Company
recorded $14.1 million in compensation expense. All unvested options were
canceled in connection with the Recapitalization.
F-13
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Under the 1997 Stock Option Plan (the Plan), incentive stock options to
purchase up to a total of 500,000 shares of common stock may be granted to
officers, directors, executives, and employees at the discretion of the Board of
Directors. Incentive stock options must be granted at not less than one hundred
percent of the fair market value of the shares of stock on the date of the
granting of the option if the optionee is not a ten percent shareholder, or one
hundred and ten percent of the fair market value of the shares of stock on the
date of the granting of the option if the optionee is a ten percent shareholder.
Options vest as determined by the Board of Directors.
During December 1997, the Company granted incentive stock options to
purchase 370,000 shares of common stock at $6.50 per share. These options vest
over four years.
A summary of all stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS PRICE PER
OUTSTANDING SHARE
----------- -------------
(IN THOUSANDS, EXCEPT
PER SHARE PRICE)
<S> <C> <C>
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
Granted............................................ 370 $ 6.500
Exercised.......................................... (22) $ 0.425
Canceled........................................... (1,578) $ 0.846
-----------
Balance at fiscal year ended 1997.................. 370 $ 6.500
-----------
-----------
</TABLE>
The Company accounts for its stock option plan in accordance with the
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 years ended 1997, 1996, and 1995 is 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.
WARRANTS
Warrants to purchase 964,000 shares of common stock of the Company at the
initial exercise price of $4.67 per share were issued to the holders of the
preferred stock. The warrants are immediately exercisable
F-14
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
until February 20, 2008. The exercise price and number of Warrant Shares are
both subject to adjustment in certain events.
7. DISCONTINUED OPERATION
On June 28, 1996, the Company disposed of certain of the assets related to
its custom-molded organic rubber products manufacturing operation for cash and
future consideration. The assets were sold to a newly formed corporation that is
not related to the Company.
The 1996 loss from the discontinued operation includes results through June
28, 1996. Net sales of the discontinued operation were $4,279,000 and $8,984,000
in 1996 and 1995, respectively.
8. PENSION AND RETIREMENT PLANS
The Company maintains a defined benefit pension plan covering substantially
all of its hourly employees in San Jose, California. The benefits are based on
years of service and the benefit credit rates stated in the provisions of the
plan. The Company funds the plan at the minimum amount required to be paid under
the provisions of the Employee Retirement and Income Security Act of 1976
(ERISA). Contributions are intended to provide for benefits attributed to
service to date as well as for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts
recognized in the Company's consolidated balance sheets at fiscal year end:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $ 2,894 $ 2,713
Nonvested benefit obligation.............................. 124 183
--------- ---------
Accumulated benefit obligation.............................. $ 3,018 $ 2,896
--------- ---------
--------- ---------
Plan assets at fair value, primarily listed stocks and U.S.
bonds..................................................... $ 3,066 $ 2,920
Projected benefit obligation................................ 3,018 2,896
--------- ---------
Plan assets in excess of projected benefit obligation....... 48 24
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions........ 116 352
Prior service cost not yet recognized in net periodic
pension cost.............................................. 337 166
--------- ---------
Prepaid pension cost........................................ $ 501 $ 542
--------- ---------
--------- ---------
</TABLE>
Net periodic pension expense for the fiscal years ended 1997, 1996, and 1995
included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the year......... $ 58 $ 65 $ 57
Interest cost on projected benefit obligation......... 220 193 183
Actual return on plan assets.......................... (254) (233) (342)
Net amortization and deferral......................... 44 58 168
--------- --------- ---------
Net periodic pension cost............................. $ 68 $ 83 $ 66
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PENSION AND RETIREMENT PLANS (CONTINUED)
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 8.25% in 1997, 7.75% in 1996, and
7.00% in 1995. The expected long-term rate of return on plan assets was 9.0% for
1997, 8.5% for 1996, and 8.5% for 1995.
The Company also maintains a defined contribution 401(k) plan covering
substantially all of its other regular employees. The employees become eligible
for participation after 1,000 hours of service. Participants may elect to
contribute up to 20% of their compensation to this plan, subject to Internal
Revenue Service (IRS) limits. The Company matches a portion of the employees'
contribution. The Company contributed approximately $156,000, $113,000, and
$105,000 to this plan in 1997, 1996, and 1995, respectively.
9. INCOME TAXES
The income tax provision (benefit) recognized in the consolidated statements
of operations consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ (383) $ 2,171 $ 2,527
State............................................ (38) 493 338
--------- --------- ---------
(421) 2,664 2,865
Deferred:
Federal.......................................... (1,211) 150 (407)
State............................................ (186) 91 (55)
--------- --------- ---------
(1,397) 241 (462)
--------- --------- ---------
$ (1,818) $ 2,905 $ 2,403
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1996 and 1997, the Company settled with the IRS certain issues relating
to the Company's income tax returns for 1988 through 1990 and 1992 through 1993,
respectively. As of fiscal year ended 1997, the Company had fully provided for
the taxes and interest which are payable as a result of the settlements.
A reconciliation of the income tax (benefit) provision at the U. S. federal
statutory rate (34%) to the income tax (benefit) provision at the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes computed at the U.S. federal statutory rate........... $ (1,958) $ 2,382 $ 1,189
State taxes (net of federal effect)................................ (148) 385 187
Federal and state audit provision.................................. 200 -- 1,000
Other individually immaterial items................................ 88 138 27
--------- --------- ---------
Income tax (benefit) provision..................................... $ (1,818) $ 2,905 $ 2,403
--------- --------- ---------
--------- --------- ---------
</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)
9. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities at fiscal years ended 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Increase in assets as a result of acquisition in 1988... $ (2,964) $ (3,064)
Depreciation............................................ (900) (380)
Other................................................... (117) (115)
--------- ---------
Total deferred tax liabilities.......................... (3,981) (3,559)
Deferred tax assets:
Net operating loss carryforwards........................ 1,853 --
Receivable allowances and inventory reserves............ 433 387
State taxes............................................. 1 199
Warranty reserve........................................ 166 196
Accrued vacation........................................ 291 255
Other................................................... 191 79
--------- ---------
Total deferred tax assets................................. 2,935 1,116
Valuation allowance....................................... -- --
--------- ---------
Net deferred tax liability................................ $ (1,046) $ (2,443)
--------- ---------
--------- ---------
</TABLE>
As of the end of fiscal 1997, the Company has federal and state net
operating loss carryforwards of approximately $5.1 million and $2.3 million,
respectively. The net operating loss carryforwards will expire in the years 2002
through 2012, if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
10. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid for interest.............................. $ 2,059 $ 1,950 $ 2,683
Cash paid for income taxes.......................... $ 3,047 $ 2,771 $ 1,315
Note payable incurred in connection with asset
acquisition....................................... $ -- $ -- $ 1,000
</TABLE>
11. SUBSEQUENT EVENT (UNAUDITED)
On April 21, 1998, the Company acquired all of the issued and outstanding
capital stock of Mercer Products Company, Inc. ("Mercer"), from Sovereign
Specialty Chemicals, Inc., for an aggregate purchase price of $35,750,000,
subject to working capital adjustments.
Financing for this acquisition and related expenses was provided, in large
part, from the sale of $30 million principal amount of Floating Interest Rate
Senior Notes Due 2007 ("Senior Notes"). The balance of the financing was
provided with $3.0 million from the sale of 3,000 shares of the Company's 6%
Series C Cumulative Convertible Preferred Stock and cash on hand.
F-17
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
The Senior Notes mature on August 15, 2007, with interest on the notes
payable semi-annually on February 15 and August 15, commencing August 15, 1998.
The Senior Notes bear interest at a rate per annum equal to LIBOR plus 400 basis
points, with the interest rate reset semiannually. The Senior Notes are
unconditionally guaranteed on a joint and several basis by each of the Company's
subsidiaries, including Mercer. Upon a change of control of the Company, the
Company will be required to make an offer to repurchase all outstanding Senior
Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon at the date of repurchase.
The Company also amended its existing bank credit facility to increase the
revolving credit facility from $15 million to $25 million and revise certain of
its restrictive covenants.
F-18
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED
------------------------
APRIL 3, APRIL 4,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net sales............................................................ $ 22,943 $ 23,124
Costs and expenses:
Cost of sales...................................................... 16,180 16,419
Selling, general and administrative................................ 3,256 3,182
----------- -----------
Income from operations............................................... 3,507 3,523
Interest expense, net................................................ 2,787 498
----------- -----------
Income before income tax provision................................... 720 3,025
Income tax provision................................................. 288 1,209
----------- -----------
Net income........................................................... $ 432 $ 1,816
----------- -----------
----------- -----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
F-19
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 2,
1998
(DERIVED FROM
APRIL 3, AUDITED
1998 FINANCIAL
(UNAUDITED) STATEMENTS)
------------ --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 3,884 $ 11,563
Restricted cash.................................................................... -- 1,070
Trade accounts receivable, less allowance of $375 as of April 3, 1998 and $334 as
of January 2, 1998............................................................... 12,561 11,186
Inventories........................................................................ 12,747 11,187
Other current assets............................................................... 4,406 5,540
------------ --------------
Total current assets............................................................... 33,598 40,546
Property, plant and equipment...................................................... 25,975 25,556
Accumulated depreciation and amortization.......................................... 10,893 10,536
------------ --------------
Net property, plant and equipment.................................................. 15,082 15,020
Goodwill, net...................................................................... 1,456 1,465
Other assets....................................................................... 5,779 5,806
------------ --------------
Total assets..................................................................... $ 55,915 $ 62,837
------------ --------------
------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses........................................ $ 5,054 $ 5,489
Other current liabilities.......................................................... 6,460 13,379
------------ --------------
Total current liabilities.......................................................... 11,514 18,868
Senior notes....................................................................... 110,000 110,000
Other noncurrent liabilities....................................................... 4,311 4,311
Preferred stock, no par value; 50,000 shares authorized; 30,000 Redeemable Series A
shares designated; 16,000 Redeemable Series A shares issued and outstanding;
5,000 Redeemable Series B shares designated; 2,000 Redeemable Series B shares
issued and outstanding........................................................... 16,652 16,148
Shareholders' equity (deficit):
Class A common stock, no par value:
Authorized shares--20,000,000
Issued and outstanding shares--3,857,000....................................... 25,464 25,464
Accumulated deficit.............................................................. (112,026) (111,954)
------------ --------------
Total shareholders' equity (deficit)............................................... (86,562) (86,490)
------------ --------------
Total liabilities and shareholders' equity (deficit)............................. $ 55,915 $ 62,837
------------ --------------
------------ --------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
F-20
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED
------------------------
APRIL 3, APRIL 4,
1998 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income......................................................... $ 432 $ 1,816
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization:
Property, plant and equipment.................................. 357 340
Goodwill....................................................... 9 9
Other adjustments to reconcile net income to net cash used in
operating activities: changes in operating assets and
liabilities.................................................... (5,073) (3,093)
----------- -----------
Net cash used in operating activities.............................. (4,275) (928)
INVESTING ACTIVITIES
Purchases of property, plant and equipment......................... (419) (419)
FINANCING ACTIVITIES
Restricted cash.................................................... 1,070 --
Borrowings of long-term debt....................................... -- 2,029
Repayments and settlement of long-term debt and capital lease
obligations...................................................... -- (587)
Payable to shareholders............................................ (3,934) --
Deferred financing costs........................................... (121) --
Other financing activities......................................... -- (95)
----------- -----------
Net cash provided by (used in) financing activities................ (2,985) 1,347
----------- -----------
Change in cash..................................................... (7,679) --
Cash at beginning of period........................................ 11,563 --
----------- -----------
Cash at end of period.............................................. $ 3,884 $ --
----------- -----------
----------- -----------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
F-21
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the Company
have been prepared without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The condensed consolidated balance sheet as of January 2,
1998 was derived from audited financial statements. The accompanying condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year ended
January 2, 1998 included elsewhere in the Prospectus.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the three months ended April 3, 1998 are
not necessarily indicative of the results to be expected for the full year.
The Company uses a 52 to 53-week fiscal year ending on the Friday closest to
December 31. The Company also follows a thirteen week quarterly cycle. The
three-month periods ended on April 4, 1997 and April 3, 1998.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
No. 130, "Reporting Comprehensive Income" (FAS 130) which establishes new rules
for the reporting and display of comprehensive income and its components. The
adoption of FAS 130 had no impact on the Company's net income or shareholders'
equity.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1998 1998
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials...................................... $ 5,458 $ 4,626
Work-in-process.................................... 2,150 1,593
Finished goods..................................... 5,139 4,968
----------- -------------
$ 12,747 $ 11,187
----------- -------------
----------- -------------
</TABLE>
3. SUBSEQUENT EVENTS
On April 21, 1998, the Company acquired all of the issued and outstanding
capital stock of Mercer Products Company, Inc. ("Mercer"), from Sovereign
Specialty Chemicals, Inc., for an aggregate purchase price of $35,750,000,
subject to working capital adjustments.
Financing for this acquisition and related expenses was provided, in large
part, from the sale of $30 million principal amount of Floating Interest Rate
Senior Notes Due 2007 ("Senior Notes"). The balance of the financing was
provided with $3.0 million from the sale of 3,000 shares of the Company's 6%
Series C Cumulative Convertible Preferred Stock and cash on hand.
The Senior Notes mature on August 15, 2007, with interest on the notes
payable semi-annually on February 15 and August 15, commencing August 15, 1998.
The Senior Notes bear interest at a rate per
F-22
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. SUBSEQUENT EVENTS (CONTINUED)
annum equal to LIBOR plus 400 basis points, with the interest rate reset
semiannually. The Senior Notes are unconditionally guaranteed on a joint and
several basis by each of the Company's subsidiaries, including Mercer. Upon a
change of control of the Company, the Company will be required to make an offer
to repurchase all outstanding Senior Notes at 101% of the aggregate principal
amount thereof plus accrued and unpaid interest thereon at the date of
repurchase.
The Company also amended its existing bank credit facility to increase the
revolving credit facility from $15 million to $25 million and revise certain of
its restrictive covenants.
F-23
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Mercer Products Company, Inc.:
We have audited the accompanying balance sheet of Mercer Products Company,
Inc. (a wholly owned subsidiary of Laporte plc) as of December 31, 1996, and the
related statements of earnings and retained earnings and cash flows for the year
then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercer Products Company,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Orlando, Florida
January 31, 1997
F-24
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $ 24,558
Cost of sales...................................................................... 17,668
---------
Gross profit..................................................................... 6,890
Selling, general and administrative expenses....................................... 4,668
---------
Operating income................................................................. 2,222
Interest expense................................................................... 964
---------
Earnings before income taxes..................................................... 1,258
Income taxes....................................................................... 675
---------
Net earnings..................................................................... 583
Retained earnings at December 31, 1995............................................. 8,715
Dividends paid..................................................................... (60)
---------
Retained earnings at December 31, 1996............................................. $ 9,238
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................. $ 392
Accounts receivable:
Trade, less allowance for doubtful accounts of $130............................ 2,929
Affiliates..................................................................... 93
Inventories, net................................................................. 2,407
Prepaid expenses and other assets................................................ 48
Deferred income taxes............................................................ 105
---------
Total current assets........................................................... 5,974
Property and equipment, net........................................................ 3,578
Goodwill, net of accumulated amortization.......................................... 7,243
Deferred income taxes.............................................................. 423
---------
Total assets..................................................................... $ 17,218
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable:
Trade.......................................................................... $ 991
Affiliates..................................................................... 1,219
Accrued expenses................................................................. 499
Income taxes payable............................................................. 616
---------
Total current liabilities...................................................... 3,325
Loan due to affiliated company..................................................... 4,655
---------
Total liabilities.............................................................. 7,980
Stockholder's equity:
Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and
outstanding.................................................................... --
Retained earnings................................................................ 9,238
---------
Total liabilities and stockholder's equity..................................... $ 17,218
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net earnings..................................................................... $ 583
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization.................................................... 953
Deferred income taxes............................................................ 151
Cash provided by (used for) changes in:
Accounts receivable............................................................ (49)
Inventories.................................................................... 330
Prepaid expenses and other current assets...................................... 123
Income taxes................................................................... 402
Accounts payable and accrued expenses.......................................... 328
---------
Net cash provided by operating activities.................................... 2,821
---------
Cash flows from investing activities:
Additions to property and equipment.............................................. (367)
---------
Net cash used for investing activities....................................... (367)
---------
Cash flows from financing activities:
Repayments of intercompany loan.................................................. (2,308)
Dividends paid................................................................... (60)
---------
Net cash provided by financing activities.................................... (2,368)
---------
Net increase in cash......................................................... 86
Cash at beginning of year.......................................................... 306
---------
Cash at end of year................................................................ $ 392
---------
---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest....................................................................... $ 946
---------
---------
Income taxes................................................................... $ 98
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
Mercer Products Company, Inc. (the "Company") has been in business for 39
years in Eustis, Florida. The Company is a manufacturer of extruded plastic
products and sells mainly to wholesale distributors. The major product line is
carpet and stairway moldings and trim for the construction industry.
(B) INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on the first-in, first-out basis. Obsolescence is identified through
quarterly inventory counts and any items appearing on more than two consecutive
counts are reviewed and, if necessary, prepared for re-grinding.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. The Company provides for depreciation and amortization on the
straight-line method over the estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Building............................................................................... 50
Machinery and equipment................................................................ 7-10
Furniture and fixtures................................................................. 3-5
Leasehold improvements................................................................. 15
</TABLE>
(D) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, which is 15 years. Accumulated amortization of goodwill
and covenants not to compete at December 31, 1996 was approximately $6,200. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
(E) INCOME TAXES
The Company is included within the consolidated Federal income tax return of
Laporte Inc. in the United States. Income tax expense is calculated using the
enacted rates in the United States as if the Company had been an independent
entity.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are
F-28
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rate is recognized in income in the period that includes the enactment date.
(F) USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles required management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's balance sheet for cash, trade
accounts receivable, due from affiliated companies, accounts payable, accrued
expenses, due to affiliated companies and other liabilities approximate their
fair value because of the short-term maturity of these instruments.
It is not practical to determine the fair value of long-term payable to
parent and affiliated companies because such amounts, bearing interest during
the period from January 1, 1996 to December 31, 1996, have no stated maturity
which makes it difficult to estimate fair value with precision.
(H) CONCENTRATION OF CREDIT RISK
The Company manufactures extruded plastic and vinyl products and markets
these products to wholesale, specialty, full line, and supply flooring
distributors and select national and export accounts. As a result, the Company
grants unsecured credit to customers who deal primarily in the industry. Such
risk is limited due to the large number of customers, generally short payment
terms, and their dispersion across geographic areas. However, economic factors
affecting the industry would have a direct impact on the Company and its
exposure to credit risk.
One customer accounted for approximately 10% of the Company's sales during
1996, and no account receivable from any customer exceeded 10% of the Company's
accounts receivable balance at December 31, 1996. The Company estimates an
allowance for doubtful accounts based on the credit worthiness of its customers
and general economic conditions. Consequently, an adverse change in these
factors would affect the Company's estimate of bad debts.
(2) INVENTORIES
A summary of inventories at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Raw materials....................................................... $ 585
Finished goods...................................................... 1,822
---------
$ 2,407
---------
---------
</TABLE>
F-29
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Land............................................................... $ 223
Buildings.......................................................... 2,484
Machinery and equipment............................................ 2,898
Leasehold improvements............................................. 20
Furniture and fixtures............................................. 339
Construction in progress........................................... 59
---------
6,023
Less accumulated depreciation and amortization..................... (2,445)
---------
$ 3,578
---------
---------
</TABLE>
(4) LEASES
The Company is obligated under various noncancelable operating leases for
buildings, machinery and equipment, and automobiles, which expire on various
dates through 2000. Rent expense for operating leases was $509 for the year
ended December 31, 1996. Future minimum annual lease payments under operating
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, OPERATING LEASES
- ---------------------------------------------------------------------------- -----------------
<S> <C>
1997........................................................................ $ 358
1998........................................................................ 358
1999........................................................................ 348
2000........................................................................ 334
------
Total minimum lease payments.............................................. $ 1,398
------
------
</TABLE>
(5) RELATED PARTY TRANSACTIONS
The Company entered into transactions in the ordinary course of business
with the parent company and affiliates.
(A) PURCHASES OF RAW MATERIALS
Approximately 75% of the raw materials purchased during 1996 were from an
affiliated company. Management considers that the terms for purchase were
similar to the terms the Company would have obtained from a third party.
(B) MANAGEMENT FEES
Expenses of $255 that were incurred during the year related to services
provided by Laporte plc to the Company. These services included general
management, treasury, tax, financial audit, financial reporting, insurance and
legal services. The Company has been charged for such services through corporate
allocations. These expenses were allocated to the Company based on estimates of
anticipated allocable
F-30
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
(5) RELATED PARTY TRANSACTIONS (CONTINUED)
costs incurred, less amounts charged as direct costs or expense rather than by
allocation. Management believes that the allocation methods used on common
expenses were reasonable, produce materially accurate results, and are
indicative of the expenses that would have been incurred had the Company been
operated as a stand-alone business.
(C) INTEREST EXPENSE
These financial statements include an allocation of the debt incurred by
Laporte plc when it originally acquired the Company. Accordingly, interest
expense at a rate of approximately 9% for 1996 associated with such debt has
been reflected in these financial statements.
(D) DUE FROM AFFILIATES
Due from affiliates at December 31, 1996 amounts to $93. These receivables
are noninterest bearing and represent amounts due from other subsidiaries of the
parent.
(E) DUE TO AFFILIATES
Due to affiliates at December 31, 1996 amounts to $1,219. A total of $649 of
this balance relates to raw materials purchased from AlphaGary Corporation for
use in the Company's operations. The remaining balance relates to interest
payable to the parent for the note outstanding. The payables are noninterest
bearing.
(F) NOTES PAYABLE TO PARENT
These financial statements include an allocation of the debt incurred by
Laporte plc when it originally acquired the Company. At December 31, 1996, the
balance on the loan, net of a receivable from Laporte plc, was $4,655.
(6) INCOME TAXES
Income tax expense for the year ended December 31, 1996 consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Federal........................................................... $ 462 $ 135 $ 597
State............................................................. 62 16 78
----- ----- ---------
$ 524 $ 151 $ 675
----- ----- ---------
----- ----- ---------
</TABLE>
F-31
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(IN THOUSANDS)
(6) INCOME TAXES (CONTINUED)
The actual income tax expense for the year ended December 31, 1996 differs
from the expected income tax expense computed by applying the federal statutory
rate of 34% to earnings before income taxes as follows:
<TABLE>
<S> <C>
Expected tax expense................................................. $ 427
Goodwill and other nondeductible items............................... 196
State income taxes, net of federal income tax benefit................ 52
---------
$ 675
---------
---------
</TABLE>
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax assets and liabilities and their approximate tax effects are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Reserves and allowances............................................ $ 105
Goodwill........................................................... 652
---------
Total deferred tax assets............................................ 757
---------
Deferred tax liability:
Depreciation....................................................... 229
---------
Total deferred tax liability..................................... 229
---------
Net deferred tax liability....................................... $ 528
---------
---------
</TABLE>
(7) EMPLOYEE BENEFIT PLANS
The Company sponsors two defined-contribution plans (an IRS qualifying
401(k) plan and a money purchase pension plan). Participation in these plans is
available to all salaried and hourly employees of the Company. Participating
employees contribute to the 401(k) plan based on a percentage of their
compensation. A percentage of employee contributions are matched by the Company.
The Company further contributes an amount based on a percentage of employee's
pay to the money purchase pension plan. The costs of these plans amounted to
approximately $176 for 1996.
F-32
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Mercer Products Company, Inc.
We have audited the accompanying balance sheet of Mercer Products Company,
Inc. as of August 4, 1997 (wholly-owned subsidiary of Laporte plc), and the
related statements of operations and retained earnings and cash flows for the
period from January 1, 1997 to August 4, 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercer Products Company,
Inc. as of August 4, 1997, and the results of its operations and its cash flows
for the period from January 1, 1997 to August 4, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 21, 1997
F-33
<PAGE>
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Assets
Current assets:
Cash............................................................................. $ 63
Trade accounts receivable, less allowance for doubtful accounts of $200.......... 2,747
Inventories...................................................................... 3,456
Prepaid expenses and other current assets........................................ 187
Deferred income taxes............................................................ 273
---------
Total current assets............................................................... 6,726
Property, plant, and equipment, net................................................ 3,408
Goodwill, net...................................................................... 6,834
---------
Total assets....................................................................... $ 16,968
---------
---------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................................. $ 2,181
Accrued expenses................................................................. 485
Income taxes payable............................................................. 267
---------
Total current liabilities.......................................................... 2,933
Long-term payable--Parent and affiliated companies................................. 4,777
Deferred income taxes.............................................................. 88
Stockholders' equity:
Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and
outstanding.................................................................... --
Retained earnings................................................................ 9,170
---------
Total stockholders' equity....................................................... 9,170
---------
Total liabilities and stockholders' equity......................................... $ 16,968
---------
---------
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $ 14,954
Cost of goods sold................................................................. 9,578
---------
Gross profit....................................................................... 5,376
Selling, general, and administrative expenses...................................... 2,328
Management fees.................................................................... 167
Amortization of goodwill........................................................... 409
---------
Operating income................................................................... 2,472
Interest expense................................................................... 544
---------
Income before income taxes......................................................... 1,928
Income tax expense................................................................. 771
---------
Net income......................................................................... 1,157
Retained earnings at December 31, 1996............................................. 9,238
Dividends paid..................................................................... (1,225)
---------
Retained earnings at August 4, 1997................................................ $ 9,170
---------
---------
</TABLE>
See accompanying notes to financial statements
F-35
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 1,157
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.................................................... 565
Deferred income taxes............................................................ 458
Loss on disposal of property, plant, and equipment............................... 74
Changes in operating assets and liabilities:
Trade accounts receivable...................................................... 182
Inventories.................................................................... (1,019)
Prepaid expenses and other current assets...................................... (138)
Accounts payable............................................................... 1,109
Accrued expenses............................................................... (5)
Income taxes payable........................................................... 267
---------
Net cash provided by operating activities.......................................... 2,650
INVESTING ACTIVITIES
Capital expenditures............................................................... (60)
---------
Net cash used in investing activities.............................................. (60)
FINANCING ACTIVITIES
Payments on long-term liabilities due to parent and affiliated companies, net...... (1,694)
Dividends paid..................................................................... (1,225)
---------
Net cash used in financing activities.............................................. (2,919)
---------
Net decrease in cash............................................................... (329)
Cash at beginning of period........................................................ 392
---------
Cash at end of period.............................................................. $ 63
---------
---------
Supplemental cash flow information:
Cash paid for interest............................................................. $ 454
---------
---------
Cash paid for income taxes......................................................... $ 778
---------
---------
</TABLE>
See accompanying notes to financial statements
F-36
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mercer Products Company, Inc. (the Company) is a wholly owned subsidiary of
Laporte plc. The Company is primarily a producer of rubber and vinyl products
for sale to wholesale distributors, mainly in the construction, industrial, and
flooring industry. The Company sells domestically to customers throughout the
United States. A significant portion of the Company's sales are to customers in
the construction, industrial, and flooring industry, and as such the company is
affected by the well-being of that industry. The Company does not require
collateral, and all their accounts receivable are unsecured; and while they
believe their trade receivables will be collected, the Company anticipates that
in the event of default they will follow normal collection procedures. Overall,
credit risk related to the Company is limited due to a large number of customers
in differing industries and geographic areas.
Effective August 5, 1997, the Company was purchased by Sovereign Specialty
Chemicals, Inc.
INVENTORIES
Inventories are stated at the lower of cost, using the first in, first out
method, or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost.
Depreciation on property, plant, and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. The
following table summarizes the estimated useful lives of the Company's property,
plant, and equipment:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building............................................................................... 40
Machinery and equipment................................................................ 15
</TABLE>
GOODWILL
Goodwill, which represents the excess of purchase price allocated to the
Company over fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, which is 15 years. Accumulated
amortization of goodwill at August 4, 1997, was $6,689. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The amount
of goodwill impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
INCOME TAXES
The Company is included within the consolidated federal income tax return of
Laporte plc in the United States. For the purposes of these financial statements
income tax expense is calculated, using the enacted rates in the United States
as if the Company had been an independent entity.
F-37
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's balance sheet for cash, trade
accounts receivable due from affiliated companies, accounts payable, accrued
expenses, due to affiliated companies and other liabilities approximate their
fair value because of the short-term maturity of these instruments.
It is not practical to determine the fair value of long-term payable--parent
and affiliated companies because such amounts, bearing interest during the
period from January 1, 1997 to August 4, 1997, of 9%, have no stated maturity
which makes it difficult to estimate fair value with precision.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts which are
from its domestic and international customers. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed, although
collateral is not required. In addition, the Company maintains an allowance for
potential credit losses.
2. INVENTORIES
The components of inventories at August 4, 1997, are as follows:
<TABLE>
<S> <C>
Finished goods..................................................... $ 2,526
Raw materials...................................................... 930
---------
Total inventories.................................................. $ 3,456
---------
---------
</TABLE>
F-38
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
3. PROPERTY, PLANT, AND EQUIPMENT
At August 4, 1997, property, plant, and equipment are summarized as follows:
<TABLE>
<S> <C>
Land............................................................... $ 223
Buildings.......................................................... 2,568
Machinery and equipment............................................ 3,062
---------
5,853
Less: Accumulated depreciation.................................... (2,445)
---------
Property, plant, and equipment, net................................ $ 3,408
---------
---------
</TABLE>
4. OPERATING LEASES
The Company is a lessee under several noncancelable operating leases for
buildings and machinery and equipment, which expire on various dates through
2004. Rent expense was $110 for the period from January 1, 1997 through August
4, 1997. Future minimum annual lease payments under operating leases are as
follows:
<TABLE>
<S> <C>
Remainder of 1997................................................... $ 253
1998................................................................ 598
1999................................................................ 573
2000................................................................ 379
2001................................................................ 251
Later years......................................................... 130
---------
Total minimum lease payments........................................ $ 2,184
---------
---------
</TABLE>
5. INCOME TAXES
Income tax expense consists of:
<TABLE>
<S> <C>
U.S. federal......................................................... $ 250
State................................................................ 63
Deferred............................................................. 458
---------
$ 771
---------
---------
</TABLE>
F-39
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 4,
1997, are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts.................................... $ 80
Inventory capitalization........................................... 9
Accrued compensation, vacation, and bonus accrual.................. 184
---------
Total deferred tax assets............................................ $ 273
Deferred tax liabilities:
Accelerated depreciation........................................... $ (88)
---------
---------
</TABLE>
6. RELATED PARTY TRANSACTIONS
The company entered into transactions in the ordinary course of business
with the parent company and affiliates. The following table summarized the
company's most significant related party transactions for the period from
January 1, 1997 to August 4, 1997:
<TABLE>
<S> <C>
Purchases of raw materials(a)....................................... $ 2,925
Management fees(b).................................................. 167
Interest(c)......................................................... 544
</TABLE>
- ------------------------
(a) Mercer Products Company, Inc. purchases raw materials from AlphaGary
Corporation, an affiliated company, for use in production. The terms of the
purchases were terms similar to the terms Mercer Products Company, Inc.
would have obtained from a third party.
(b) Laporte plc and Laporte Inc. provided services to the Company including
general management, treasury, tax, financial audit, financial reporting,
insurance and legal services. The Company has been charged for such services
through corporate allocations. These expenses were allocated to the Company
for the period from January 1, 1997 through August 4, 1997, based on
estimates of anticipated allocable costs incurred, less amounts charged as
direct costs or expense rather than by allocation. Management believes that
the allocation methods used on common expenses were reasonable, produce
materially accurate results, and are indicative of the expenses that would
have been incurred had the Company been operated as a stand-alone business.
(c) These financial statements include an allocation of the debt incurred by
Laporte plc when it originally acquired the company. Accordingly, interest
expense at a rate of 9% for the period from January 1, 1997 to August 4,
1997, associated with such debt has been reflected in these financial
statements in addition to interest on funding balances as shown in Note 1.
7. EMPLOYEE BENEFIT PLANS
The Company sponsors two defined-contribution plans (an IRS qualified 401(k)
plan and a money purchase pension plan). Participation in these plans is
available to all salaried and hourly employees of the
F-40
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
7. EMPLOYEE BENEFIT PLANS (CONTINUED)
Company. Participating employees contribute to the 401(k) plan based on a
percentage of their compensation which are matched, based on a percentage of
employee contributions by the Company. The Company further contributes an amount
based on a percentage of employee's pay to the money purchase pension plan. The
Company recorded expense for approximately $358 for the period from January 1,
1997 to August 4, 1997.
8. CONCENTRATIONS OF CREDIT RISK
One customer accounted for 10% of the Company's sales during the period from
January 1, 1997 to August 4, 1997, and no accounts receivable from any customer
exceeded 10% of the Company's gross accounts receivable balance at August 4,
1997. The Company estimates an allowance for doubtful accounts based on the
credit worthiness of its customers as well as general economic conditions.
Consequently, an adverse change in those factors could affect the Company's
estimate of its bad debt.
The Company relies on several vendors to supply raw materials needed for its
products. Although there are a limited number of manufacturers capable of
supplying these needs, the Company believes that other suppliers could provide
for the Company's needs in comparable terms. Abrupt changes in the supply flow
could, however, cause a delay in manufacturing and possible inability to meet
sales commitments on schedule and a possible loss of sales, which would affect
operating results adversely.
F-41
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Mercer Products Company, Inc.
We have audited the accompanying balance sheet of Mercer Products Company,
Inc. as of December 31, 1997, and the related statements of operations,
stockholder's equity, and cash flows for the period from August 5, 1997 (date of
acquisition by Sovereign Specialty Chemicals, Inc.) to December 31, 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercer Products Company,
Inc. as of December 31, 1997 and the results of its operations and its cash
flows for the period from August 5, 1997 to December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 20, 1998
F-42
<PAGE>
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................. $ 501
Trade accounts receivable, less allowance for doubtful accounts of $170.......... 2,305
Due from affiliated companies.................................................... 815
Inventories...................................................................... 2,920
Prepaid expenses and other current assets........................................ 211
Deferred income taxes............................................................ 9
---------
Total current assets............................................................... 6,761
Property, plant, and equipment, net................................................ 4,952
Goodwill, net...................................................................... 24,809
Deferred financing costs, net...................................................... 1,842
---------
Total assets....................................................................... $ 38,364
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................. $ 1,276
Accrued expenses................................................................. 806
---------
Total current liabilities.......................................................... 2,082
Long-term debt--Parent Company..................................................... 30,000
Deferred income taxes.............................................................. 175
Stockholders' equity:
Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and
outstanding.................................................................... --
Additional paid-in capital....................................................... 6,105
Retained earnings................................................................ 2
---------
Total stockholder's equity......................................................... 6,107
---------
Total liabilities and stockholder's equity......................................... $ 38,364
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-43
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF INCOME
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales........................................................................... $ 9,945
Cost of goods sold.................................................................. 6,921
---------
Gross profit........................................................................ 3,024
Selling, general, and administrative expenses....................................... 1,478
Amortization of goodwill............................................................ 421
---------
Operating income.................................................................... 1,125
Interest expense.................................................................... 1,117
---------
Income before income taxes.......................................................... 8
Income taxes........................................................................ 6
---------
Net income.......................................................................... $ 2
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-44
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at August 5, 1997 (Date of Acquisition)................... $ -- $ 6,105 $ -- $ 6,105
Net income for the period from August 5, 1997 to December 31,
1997............................................................ -- -- 2 2
----- ----------- ----- ------
Balance at December 31, 1997...................................... $ -- $ 6,105 $ 2 $ 6,107
----- ----------- ----- ------
----- ----------- ----- ------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-45
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net Income........................................................................... $ 2
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization...................................................... 586
Amortization of deferred financing costs........................................... 113
Deferred income taxes.............................................................. 166
Changes in operating assets and liabilities:
Trade accounts receivable.......................................................... 442
Due from affiliated companies...................................................... (815)
Inventories........................................................................ 423
Prepaid expenses and other current assets.......................................... (176)
Accounts payable................................................................... (792)
Accrued expenses................................................................... 526
---------
Net cash provided by operating activities............................................ 475
INVESTING ACTIVITIES
Capital expenditures................................................................. (37)
---------
Net cash used in investing activities................................................ (37)
---------
Net increase in cash................................................................. 438
Cash at beginning of period.......................................................... 63
---------
Cash at end of period................................................................ $ 501
---------
---------
Supplemental cash flow information:
Cash paid for interest............................................................. $ 646
---------
---------
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-46
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mercer Products Company, Inc. (the Company) is a wholly-owned subsidiary of
Sovereign Specialty Chemicals, Inc. (Sovereign or the Parent Company). Effective
August 5, 1997, Sovereign acquired the Company from Laporte plc (Laporte). The
Company was purchased along with two affiliated companies (affiliated
wholly-owned subsidiaries of Laporte). The total purchase price of the
acquisitions was $133.7 million, including $2 million in acquisition costs. The
purchase price allocated to the Company, based on its estimated fair value was
approximately $35.8 million. The acquisition was accounted for as a purchase.
The Company is primarily a producer of rubber and vinyl products for sale to
wholesale distributors, mainly in the construction, industrial, and flooring
industry. The Company sells domestically to customers throughout the United
States. A significant portion of the Company's sales are to customers in the
construction, industrial, and flooring industry, and as such the company is
affected by the well-being of that industry. The Company does not require
collateral and all their accounts receivable are unsecured; and while they
believe their trade receivables will be collected, the Company anticipates that
in the event of default they will follow normal collection procedures. Overall,
credit risk related to the Company is limited due to a large number of customers
in differing industries and geographic areas.
INVENTORIES
Inventories are stated at the lower of cost, using the first in, first out
method, or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost.
Depreciation on property, plant, and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. The
following table summarizes the estimated useful lives of the Company's property,
plant, and equipment:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building............................................................................... 39
Machinery and equipment................................................................ 3-10
</TABLE>
GOODWILL
Goodwill, which represents the excess of purchase price allocated to the
Company over fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, which is 25 years. Accumulated
amortization of goodwill at December 31, 1997, was $421. The Company assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
F-47
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized using the straight-line method
over the term of the related debt of 7 years. Accumulated amortization was $113,
at December 31, 1997.
INCOME TAXES
The Company will be included in the consolidated federal income tax return
of Sovereign Specialty Chemicals, Inc. For the purposes of these financial
statements, income tax expense has been calculated as if the Company had been an
independent entity.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's balance sheet for cash, trade
accounts receivable, due from affiliated companies, accounts payable, accrued
expenses, due to affiliated companies and other liabilities approximate their
fair value because of the short-term maturity of these instruments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts which are
from its domestic and international customers. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed, although
collateral is not required. In addition, the Company maintains an allowance for
potential credit losses.
2. INVENTORIES
The components of inventories at December 31, 1997, are as follows:
<TABLE>
<S> <C>
Finished goods...................................................... $ 2,126
Raw materials....................................................... 794
---------
Total inventories................................................... $ 2,920
---------
---------
</TABLE>
F-48
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
3. PROPERTY, PLANT, AND EQUIPMENT
At December 31, 1997, property, plant, and equipment are summarized as
follows:
<TABLE>
<S> <C>
Land................................................................ $ 223
Buildings........................................................... 2,059
Machinery and equipment............................................. 2,835
---------
5,117
Less: Accumulated depreciation...................................... 165
---------
Property, plant, and equipment, net................................. $ 4,952
---------
---------
</TABLE>
4. ACCRUED EXPENSES
At December 31, 1997, accrued expenses are summarized as follows:
<TABLE>
<S> <C>
Interest............................................................. $ 358
Compensation......................................................... 190
Other................................................................ 258
---------
$ 806
---------
---------
</TABLE>
5. OPERATING LEASES
The Company is a lessee under several noncancelable operating leases for
buildings and machinery and equipment, which expire on various dates through
2004. Rent expense was $103 for the period from August 5, 1997 to December 31,
1997. Future minimum annual lease payments under operating leases are as
follows:
<TABLE>
<S> <C>
1998................................................................ $ 598
1999................................................................ 573
2000................................................................ 379
2001................................................................ 251
2002................................................................ 56
Later years......................................................... 74
---------
Total minimum lease payments........................................ $ 1,931
---------
---------
</TABLE>
F-49
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<S> <C>
Current:
Federal.............................................................. $ (124)
State................................................................ (36)
Deferred............................................................. 166
---------
$ 6
---------
---------
</TABLE>
The current tax benefits are reflected in the balance sheet as due from
affiliated companies as the benefits will be used by the Parent Company in its
consolidated tax returns.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997, are presented below:
<TABLE>
<S> <C>
Deferred tax assets:
Inventory capitalization........................................... $ 9
---------
Total deferred tax assets............................................ $ 9
---------
---------
Deferred tax liabilities:
Accelerated depreciation........................................... (69)
Amortization of goodwill........................................... (106)
---------
Total deferred tax liabilities....................................... $ (175)
---------
---------
</TABLE>
7. LONG-TERM DEBT--PARENT COMPANY
In connection with the purchase of the Company by Sovereign, $30 million in
debt was pushed down to the Company and is reflected as a long-term obligation
to Sovereign. The debt bears interest at 8.25%. In addition, the Company has
recorded $1,955 in deferred financing costs.
8. CORPORATE ALLOCATION OF EXPENSES
Since its acquisition by Sovereign, the Company has operated as a
stand-alone entity. As such, for the period from August 5, 1997 to December 31,
1997, expenses have been paid directly by the Company and no allocation of
Corporate expenses were made by Sovereign. Management believes that the costs
reflected by the Company for the period ended December 31, 1997, are indicative
of the expenses that would have been incurred had the Company been a stand-alone
entity.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined-contribution plan (an IRS qualified 401(k)
plan). Participation in this plan is available to all salaried and hourly
employees of the Company. Participating employees contribute to the 401(k) plan
based on a percentage of their compensation which are matched, based on a
F-50
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
percentage of employee contributions by the Company. The Company recorded
expense for approximately $48 for the period from August 5, 1997 to December 31,
1997.
10. RISK OF CREDIT CONCENTRATIONS
One customer accounted for 10% of the Company's sales during the period from
August 5, 1997 to December 31, 1997, and no accounts receivable from any
customer exceeded 10% of the Company's gross accounts receivable balance at
December 31, 1997. The Company estimates an allowance for doubtful accounts
based on the credit worthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could affect the
Company's estimate of its bad debts.
The Company relies on several vendors to supply raw materials needed for its
products. Although there are a limited number of manufacturers capable of
supplying these needs, the Company believes that other suppliers could provide
for the Company's needs in comparable terms. Abrupt changes in the supply flow
could, however, cause a delay in manufacturing and possible inability to meet
sales commitments on schedule and a possible loss of sales, which would affect
operating results adversely.
11. SUBSEQUENT EVENT (UNAUDITED)
On March 5, 1998, Sovereign entered into a stock purchase agreement (the
Agreement) for the sale of the Company to Burke Industries, Inc. The purchase
price of the sale as stated in the Agreement is approximately $35.8 million and
includes potential adjustments to the price based upon working capital
measurements. Closing of the sale is anticipated to be prior to April 30, 1998.
F-51
<PAGE>
MERCER PRODUCTS COMPANY, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD ENDED
MARCH 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Net sales................................................................... $ 6,204 $ 5,998
Cost of goods sold.......................................................... 3,923 4,042
--------- ---------
Gross profit................................................................ 2,281 1,956
Selling, general, and administrative expenses............................... 1,294 1,293
--------- ---------
Operating income............................................................ 987 663
Interest expense............................................................ 701 228
--------- ---------
Income before income taxes.................................................. 286 435
Income taxes................................................................ 114 174
--------- ---------
Net income.................................................................. $ 172 $ 261
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Condensed Financial Statements are an integral part of
these statements.
F-52
<PAGE>
MERCER PRODUCTS COMPANY, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER
31,
1997
(DERIVED
FROM
MARCH 31, AUDITED
1998 FINANCIAL
(UNAUDITED) STATEMENTS)
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash............................................................... $ 436 $ 501
Trade accounts receivable, less allowance for doubtful accounts of
$168 as of March 31, 1998 and $170 as of December 31, 1997....... 2,952 2,305
Due from affiliated companies...................................... 813 815
Inventories........................................................ 3,179 2,920
Prepaid expenses and other current assets.......................... 124 211
Deferred income taxes.............................................. 9 9
----------- -----------
Total current assets................................................. 7,513 6,761
Property, plant, and equipment, net.................................. 4,862 4,952
Goodwill, net........................................................ 24,749 24,809
Deferred financing costs, net........................................ 1,772 1,842
----------- -----------
Total assets......................................................... $ 38,896 $ 38,364
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................... $ 1,534 $ 1,276
Accrued expenses................................................... 613 806
Taxes payable...................................................... 126 --
----------- -----------
Total current liabilities............................................ 2,273 2,082
Long-term debt--Parent Company....................................... 30,000 30,000
Deferred income taxes................................................ 175 175
Other non-current liabilities........................................ 169 --
Stockholders' equity:
Common stock, $0.1 par value, 1,000 shares authorized, 10 shares
issued and outstanding -- --
Additional paid-in capital......................................... 6,105 6,105
Retained earnings.................................................. 174 2
----------- -----------
Total stockholder's equity........................................... 6,279 6,107
----------- -----------
Total liabilities and stockholder's equity........................... $ 38,896 $ 38,364
----------- -----------
----------- -----------
</TABLE>
The accompanying Notes to Condensed Financial Statements are an integral part of
these statements.
F-53
<PAGE>
MERCER PRODUCTS COMPANY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTH
PERIOD
ENDED MARCH 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income................................................................. $ 172 $ 261
Adjustments to reconcile net income to cash used in operating activities:
Depreciation............................................................. 102 69
Amortization............................................................. 295 175
Changes in operating assets and liabilities:
Trade accounts receivable.............................................. (647) 111
Due from affiliated companies.......................................... 2 --
Inventories............................................................ (259) (299)
Prepaid expenses and other current assets.............................. (78) 8
Accounts payable....................................................... 258 492
Accrued expenses....................................................... (193) (574)
Taxes payable.......................................................... 126 (616)
Other non-current liabilities.......................................... 169 --
--------- ---------
TOTAL CASH USED IN OPERATING ACTIVITIES.................................... (53) (373)
INVESTING ACTIVITIES
Purchase of property, plant and equipment................................ (12) (18)
NET CASH USED IN INVESTING ACTIVITIES...................................... (12) (18)
FINANCING ACTIVITIES
Increase in long-term payable -parent.................................... -- 341
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. -- 341
Increase (decrease) in cash in current period.............................. (65) (50)
Cash at beginning of period................................................ 501 392
--------- ---------
Cash at end of period...................................................... $ 436 $ 342
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Condensed Financial Statements are an integral part of
these statements.
F-54
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements of the Company have been
prepared without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The condensed balance sheet as of December 31, 1997 was derived
from audited financial statements. The accompanying condensed financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included elsewhere in the Prospectus.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the three months ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -------------
<S> <C> <C>
(IN THOUSANDS)
Raw materials....................................................... $ 761 $ 794
Finished goods...................................................... 2,418 2,126
----------- ------
$ 3,179 $ 2,920
----------- ------
----------- ------
</TABLE>
3. SUBSEQUENT EVENT
On April 21, 1998, the Company was acquired by Burke Industries, Inc. for an
aggregate purchase price of $35,750,000, subject to working capital adjustments.
F-55
<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 OCTOBER 12, 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 FLOATING RATE SENIOR NOTES DUE 2007
($30,000,000 PRINCIPAL AMOUNT) FOR FLOATING INTEREST RATE SENIOR NOTES DUE 2007.
BURKE INDUSTRIES, INC.
PAYMENT OF PRINCIPAL AND INTEREST UNCONDITIONALLY GUARANTEED BY SUBSTANTIALLY
ALL OF 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 2, 1998 and January 3, 1997, and for each of the three fiscal
years in the period ended January 2, 1998, and have issued our report thereon
dated February 26, 1998 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
February 26, 1998
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)
Three months ended April 3, 1998........................... $ 334 $ 42 $ 1 $ 375
Year ended January 2, 1998................................. 189 240 95 334
Year ended January 3, 1997................................. 336 225 372 189
Year ended December 29, 1995............................... 95 367 126 336
</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) 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
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>
1.1 Purchase Agreement, dated April 17, 1998, between the Company and the Initial Purchaser.(1)
2.1 Stock Purchase Agreement, dated as of March 5, 1998 among Burke, Sovereign and Mercer.(2)
3.1 Articles of Incorporation of the Company.(3)
3.2 Bylaws of the Company.(3)
3.3 Articles of Incorporation of Burke Flooring Products, Inc.(3)
3.4 Bylaws of Burke Flooring Products, Inc.(3)
3.5 Articles of Incorporation of Burke Rubber Company, Inc.(3)
3.6 Bylaws of Burke Rubber Company, Inc.(3)
3.7 Articles of Incorporation of Burke Custom Processing, Inc.(3)
3.8 Bylaws of Burke Custom Processing, Inc.(3)
3.9 Articles of Incorporation of Mercer Products Company, Inc.(1)
3.10 Bylaws of Mercer Products Company, Inc.(1)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York,
relating to the Notes, dated as of April 21, 1998.(1)
4.2 First Supplemental Indenture, dated April 21, 1998, between the Company, the Subsidiary Guarantors
and United States Trust Company of New York.(1)
4.3 Form of Note (included in Exhibit 4.1).(1)
4.4 Registration Rights Agreement, dated April 21, 1998, between the Company and the Holders.(1)
5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent.(1)
8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange
Offer.(1)
10.1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.(3)
10.2 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company
Shareholders, JFLEI and MergerCo.(3)
10.3 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York,
relating to the Existing Notes, dated as of August 20, 1997.(3)
10.4 Registration Rights Agreement, dated August 20, 1997, between the Company and the Existing Note
Holders.(3)
10.5 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and NationsBank,
N.A.(3)
10.6 Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, dated April 21, 1998, between
the Company, Mercer and NationsBank, N.A.(1)
10.7 Form of Revolving Note (included in Exhibit 10.6).(1)
10.8 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.(3)
10.9 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the Subsidiaries.(3)
10.10 Assignment for Security, dated April 21, 1998, by Mercer.(1)
10.11 First Amendment to Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and
Fixture Filing, dated April 21, 1998, between the Company and NationsBank, N.A.(1)
10.12 Florida Mortgage, Security Agreement and Assignment of Leases and Rents, dated April 21, 1998,
between Mercer and NationsBank, N.A. (unrecorded)(1)
10.13 Stock Pledge Agreement, dated August 20, 1997.(3)
10.14 Pledge Agreement, dated April 21, 1998, between the Company and NationsBank, N.A.(1)
10.15 Consent Solicitation Statement dated March 30, 1998.(1)
10.16 Form of Consent to Amendments to Indenture.(1)
10.17 Investment Agreement, dated August 20, 1997, between the Company and preferred shareholders.(3)
10.18 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.(3)
10.19 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the
shareholders.(3)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.20 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the
warrantholders.(3)
10.21 Form of Warrant Certificate.(3)
10.22 Form of Election Form for Series C Preferred Stock.(1)
10.23 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman & Company.(3)
10.24 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for the premises
at 2049 Senter Road, San Jose, CA.(3)
10.25 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial Park (3),
Inc. for the premises at 870 Thomas Drive, Bensenville, IL.(3)
10.26 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company for the
premises at 13767 Freeway Drive, Santa Fe Springs, CA.(3)
10.27 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at
14910 Carmenita Blvd., Norwalk, CA.(3)
10.28 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.(3)
10.29 Lease Agreement, dated June 5, 1995, between the Company and Stephen S. Gray, the duly appointed
Chapter 7 Trustee of the Estate of Haskon Corporation for the premises at 336 Weir Street, Taunton,
MA.(3)
10.30 Consent to sale of all of the outstanding shares of Mercer Products Company, Inc. to Burke
Industries, Inc., dated March 20, 1998 by Land Co. Leasing & New Development Co. and related
Standard/Industrial Commercial Single-Tenant Lease-Gross, dated June 22, 1994, as amended, between
The Childs Family Trust u/t/a of April 30, 1981 and The A.G. Gardner Trust u/t/a of March 5, 1981
dba Landco and Mercer.(1)
10.31 Consent of Lessor dated April 21, 1998 and related Agreement of Lease dated December 1, 1998, as
amended, between RTC Properties, Inc. and Mercer.(1)
10.32 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107
South Riverside Drive, Modesto, CA.(3)
10.33 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(3)
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.(1)
21.1 Subsidiaries of the Company.(1)
23.1 Consent of Gibson, Dunn & Crutcher LLP (to be included in Exhibit 5.1) LLP.(1)
23.2 Consent of Ernst & Young LLP.(4)
23.3 Consent of KPMG Peat Marwick LLP.(4)
24.1 Powers of Attorney .(1)
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.(1)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule.(4)
27.2 Financial Data Schedule, Mercer Products Company, Inc.(4)
99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer.(1)
99.2 Notice of Guaranteed Delivery regarding Old Notes.(1)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Incorporated by reference to the Company's 1997 annual report on Form 10-K,
File No. 333-36675.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-4, File No. 333-36675.
(4) Filed concurrently herewith.
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedules are filed with Part II of this
Registration Statement:
<TABLE>
<CAPTION>
SCHEDULE NUMBER DESCRIPTION OF SCHEDULE
- ---------------- ---------------------------------------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
applicable instructions or are inapplicable and therefore have been omitted.
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-4
<PAGE>
(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 dollar value of securities
offered would not exceed that which was registered) and any 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-5
<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 13th day of July, 1998.
<TABLE>
<S> <C> <C>
BURKE INDUSTRIES, INC.
a California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
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 July 13, 1998
Rocco C. Genovese Officer)
/s/ DAVID E. WORTHINGTON* Vice President--Finance
- ------------------------------ (Principal Financial and July 13, 1998
David E. Worthington Accounting Officer)
/s/ REED C. WOLTHAUSEN*
- ------------------------------ Director July 13, 1998
Reed C. Wolthausen
/s/ JOHN F. LEHMAN*
- ------------------------------ Director July 13, 1998
John F. Lehman
/s/ DONALD GLICKMAN*
- ------------------------------ Director July 13, 1998
Donald Glickman
/s/ GEORGE SAWYER*
- ------------------------------ Director July 13, 1998
George Sawyer
/s/ KEITH OSTER*
- ------------------------------ Director July 13, 1998
Keith Oster
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ OLIVER C. BOILEAU*
- ------------------------------ Director July 13, 1998
Oliver C. Boileau
/s/ THOMAS G. POWNALL*
- ------------------------------ Director July 13, 1998
Thomas G. Pownall
/s/ JOSEPH A. STROUD*
- ------------------------------ Director July 13, 1998
Joseph A. Stroud
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROCCO C. GENOVESE
-------------------------
Rocco C. Genovese
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the 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 13th day of July, 1998.
<TABLE>
<S> <C> <C>
BURKE FLOORING PRODUCTS, INC.
a California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese
PRESIDENT
</TABLE>
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 Executive July 13, 1998
Rocco C. Genovese Officer)
/s/ DAVID E. WORTHINGTON* Vice President--Finance
- ------------------------------ (Principal Financial and July 13, 1998
David E. Worthington Accounting Officer)
/s/ KEITH OSTER*
- ------------------------------ Director July 13, 1998
Keith Oster
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROCCO C. GENOVESE
-------------------------
Rocco C. Genovese
ATTORNEY-IN-FACT
</TABLE>
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 13th day of July, 1998.
<TABLE>
<S> <C> <C>
BURKE RUBBER COMPANY, INC.
a California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese
PRESIDENT
</TABLE>
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 Executive July 13, 1998
Rocco C. Genovese Officer)
/s/ DAVID E. WORTHINGTON* Vice President--Finance
- ------------------------------ (Principal Financial and July 13, 1998
David E. Worthington Accounting Officer)
/s/ KEITH OSTER*
- ------------------------------ Director July 13, 1998
Keith Oster
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROCCO C. GENOVESE
-------------------------
Rocco C. Genovese
ATTORNEY-IN-FACT
</TABLE>
II-9
<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 13th day of July, 1998.
<TABLE>
<S> <C> <C>
BURKE CUSTOM PROCESSING, INC.
a California corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese
PRESIDENT
</TABLE>
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 Executive July 13, 1998
Rocco C. Genovese Officer)
/s/ DAVID E. WORTHINGTON* Vice President--Finance
- ------------------------------ (Principal Financial and July 13, 1998
David E. Worthington Accounting Office)
/s/ KEITH OSTER*
- ------------------------------ Director July 13, 1998
Keith Oster
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROCCO C. GENOVESE
-------------------------
Rocco C. Genovese
ATTORNEY-IN-FACT
</TABLE>
II-10
<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 13th day of July, 1998.
<TABLE>
<S> <C> <C>
MERCER PRODUCTS COMPANY, INC.
a New Jersey corporation
By: /s/ ROCCO C. GENOVESE
-----------------------------------------
Rocco C. Genovese
PRESIDENT
</TABLE>
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 Executive July 13, 1998
Rocco C. Genovese Officer)
/s/ DAVID E. WORTHINGTON* Vice President--Finance
- ------------------------------ (Principal Financial and July 13, 1998
David E. Worthington Accounting Office)
/s/ KEITH OSTER*
- ------------------------------ Director July 13, 1998
Keith Oster
<TABLE>
<S> <C> <C> <C>
*By: /s/ ROCCO C. GENOVESE
-------------------------
Rocco C. Genovese
ATTORNEY-IN-FACT
</TABLE>
II-11
<PAGE>
REGISTRATION NO. 333-57211
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
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>
1.1 Purchase Agreement, dated April 17, 1998, between the Company and the Initial Purchaser.(1)
2.1 Stock Purchase Agreement, dated as of March 5, 1998 among Burke, Sovereign and Mercer.(2)
3.1 Articles of Incorporation of the Company.(3)
3.2 Bylaws of the Company.(3)
3.3 Articles of Incorporation of Burke Flooring Products, Inc.(3)
3.4 Bylaws of Burke Flooring Products, Inc.(3)
3.5 Articles of Incorporation of Burke Rubber Company, Inc.(3)
3.6 Bylaws of Burke Rubber Company, Inc.(3)
3.7 Articles of Incorporation of Burke Custom Processing, Inc.(3)
3.8 Bylaws of Burke Custom Processing, Inc.(3)
3.9 Articles of Incorporation of Mercer Products Company, Inc.(1)
3.10 Bylaws of Mercer Products Company, Inc.(1)
4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York,
relating to the Notes, dated as of April 21, 1998.(1)
4.2 First Supplemental Indenture, dated April 21, 1998, between the Company, the Subsidiary Guarantors and
United States Trust Company of New York.(1)
4.3 Form of Note (included in Exhibit 4.1).(1)
4.4 Registration Rights Agreement, dated April 21, 1998, between the Company and the Holders.(1)
5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent.(1)
8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange
Offer.(1)
10.1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.(3)
10.2 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company
Shareholders, JFLEI and MergerCo.(3)
10.3 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York,
relating to the Existing Notes, dated as of August 20, 1997.(3)
10.4 Registration Rights Agreement, dated August 20, 1997, between the Company and the Existing Note
Holders.(3)
10.5 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and NationsBank,
N.A.(3)
10.6 Amendment No. 1, Waiver Joinder Agreement to Loan Security Agreement, dated April 21, 1998, between the
Company, Mercer and NationsBank, N.A.(1)
10.7 Form of Revolving Note (included in Exhibit 10.6).(1)
10.8 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.(3)
10.9 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the Subsidiaries.(3)
10.10 Assignment for Security, dated April 21, 1998, by Mercer.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.11 First Amendment to Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and
Fixture Filing, dated April 21, 1998, between the Company and NationsBank, N.A.(1)
10.12 Florida Mortgage, Security Agreement and Assignment of Leases and Rents, dated April 21, 1998, between
Mercer and NationsBank, N.A. (unrecorded)(1)
10.13 Stock Pledge Agreement, dated August 20, 1997.(3)
10.14 Pledge Agreement, dated April 21, 1998, between the Company and NationsBank, N.A.(1)
10.15 Consent Solicitation Statement dated March 30, 1998.(1)
10.16 Form of Consent to Amendments to Indenture.(1)
10.17 Investment Agreement, dated August 20, 1997, between the Company and preferred shareholders.(3)
10.18 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.(3)
10.19 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the
shareholders.(3)
10.20 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the
warrantholders.(3)
10.21 Form of Warrant Certificate.(3)
10.22 Form of Election Form for Series C Preferred Stock.(1)
10.23 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman & Company.(3)
10.24 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for the premises at
2049 Senter Road, San Jose, CA.(3)
10.25 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial Park (3), Inc.
for the premises at 870 Thomas Drive, Bensenville, IL.(3)
10.26 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company for the
premises at 13767 Freeway Drive, Santa Fe Springs, CA.(3)
10.27 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910
Carmenita Blvd., Norwalk, CA.(3)
10.28 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.(3)
10.29 Lease Agreement, dated June 5, 1995, between the Company and Stephen S. Gray, the duly appointed Chapter
7 Trustee of the Estate of Haskon Corporation for the premises at 336 Weir Street, Taunton, MA.(3)
10.30 Consent to sale of all of the outstanding shares of Mercer Products Company, Inc. to Burke Industries,
Inc., dated March 20, 1998 by Land Co. Leasing & New Development Co. and related Standard/Industrial
Commercial Single-Tenant Lease-Gross, dated June 22, 1994, as amended, between The Childs Family Trust
u/t/a of April 30, 1981 and The A.G. Gardner Trust u/t/a of March 5, 1981 dba Landco and Mercer.(1)
10.31 Consent of Lessor dated April 21, 1998 and related Agreement of Lease dated December 1, 1998, as
amended, between RTC Properties, Inc. and Mercer.(1)
10.32 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South
Riverside Drive, Modesto, CA.(3)
10.33 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.(3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
12.1 Statement re: Computation of Ratio of Earnings to Fixed Charges.(1)
21.1 Subsidiaries of the Company.(1)
23.1 Consent of Gibson, Dunn & Crutcher LLP (to be included in Exhibit 5.1) LLP.(1)
23.2 Consent of Ernst & Young LLP.(4)
23.3 Consent of KPMG Peat Marwick LLP.(4)
24.1 Powers of Attorney .(1)
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.(1)
27.1 Financial Data Schedule.(4)
27.2 Financial Data Schedule, Mercer Products Company, Inc.(4)
99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer.(1)
99.2 Notice of Guaranteed Delivery regarding Old Notes.(1)
</TABLE>
- ------------------------
(1) Previously filed.
(2) Incorporated by reference to the Company's 1997 annual report on Form 10-K,
File No. 333-36675.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-4, File No. 333-36675.
(4) Filed concurrently herewith.
<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 February 26,
1998, with respect to the consolidated financial statements and schedule of
Burke Industries, Inc., and to the use of our reports dated November 21, 1997
and February 20, 1998 with respect to the financial statements of Mercer
Products Company, Inc. included in the Registration Statement (Amendment No.
1 to Form S-4) and related Prospectus of Burke Industries, Inc. for the
registration of $30,000,000 aggregate principal amount of its Floating
Interest Rate Senior Notes due 2007.
Ernst & Young LLP
San Jose, California
July 13, 1998
<PAGE>
EXHIBIT 23.3
[LETTERHEAD]
111 North Orange Avenue, Suite 1800
P.O. Box 3031
Orlando, FL 32802
The Board of Directors
Mercer Products Company, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Orlando, Florida
July 13, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BURKE INDUSTRIES, INC. AND ITS
SUBSIDIARIES AND CO-REGISTRANTS, INCLUDING BURKE FLOORING PRODUCTS, INC., BURKE
RUBBER COMPANY, INC. AND BURKE CUSTOM PROCESSING, INC., FOR THE YEAR ENDED
AND AS OF JANUARY 2, 1998 AND AS OF AND FOR THE THREE MONTH PERIOD ENDED
APRIL 3, 1998, RESPECTIVELY.
</LEGEND>
<CIK> 0001046777
<NAME> BURKE INDUSTRIES, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> JAN-02-1998 JAN-01-1999
<PERIOD-START> JAN-04-1997 JAN-03-1998
<PERIOD-END> JAN-02-1998 APR-03-1998
<CASH> 11,563 3,884
<SECURITIES> 0 0
<RECEIVABLES> 11,520 13,037
<ALLOWANCES> (334) 476
<INVENTORY> 11,187 12,747
<CURRENT-ASSETS> 40,546 33,598
<PP&E> 25,556 25,975
<DEPRECIATION> (10,536) 10,893
<TOTAL-ASSETS> 62,837 55,915
<CURRENT-LIABILITIES> 18,868 11,514
<BONDS> 110,000 110,000
16,148 16,652
0 0
<COMMON> 25,464 25,464
<OTHER-SE> (111,954) (112,026)
<TOTAL-LIABILITY-AND-EQUITY> 62,837 55,915
<SALES> 90,228 22,943
<TOTAL-REVENUES> 90,228 0
<CGS> 62,917 16,180
<TOTAL-COSTS> 62,917 16,180
<OTHER-EXPENSES> (27,424) 0
<LOSS-PROVISION> (240) 0
<INTEREST-EXPENSE> 5,408 2,787
<INCOME-PRETAX> (5,761) 720
<INCOME-TAX> (1,818) 288
<INCOME-CONTINUING> (3,943) 3,507
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,943) 432
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001048918
<NAME> MERCER PRODUCTS COMPANY, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 436
<SECURITIES> 0
<RECEIVABLES> 3,933
<ALLOWANCES> (168)
<INVENTORY> 3,179
<CURRENT-ASSETS> 7,513
<PP&E> 5,129
<DEPRECIATION> (267)
<TOTAL-ASSETS> 38,896
<CURRENT-LIABILITIES> 2,273
<BONDS> 30,000
0
0
<COMMON> 0
<OTHER-SE> 6,279
<TOTAL-LIABILITY-AND-EQUITY> 38,896
<SALES> 6,204
<TOTAL-REVENUES> 6,204
<CGS> 3,923
<TOTAL-COSTS> 3,923
<OTHER-EXPENSES> 1,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 701
<INCOME-PRETAX> 286
<INCOME-TAX> 114
<INCOME-CONTINUING> 172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
