-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JpGMbrIRM6rr02UjEpG0g+5Kyqvcfj1k2n5wPpl53WxiD/lCVfqH146aT23vDf3H s2SGZtTQ8jP2hJzXU2Cl+A== 0001047469-97-006964.txt : 19971208 0001047469-97-006964.hdr.sgml : 19971208 ACCESSION NUMBER: 0001047469-97-006964 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971205 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE INDUSTRIES INC /CA/ CENTRAL INDEX KEY: 0001046777 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 943081144 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-36675 FILM NUMBER: 97733438 BUSINESS ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4082973500 MAIL ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE CUSTOM PROCESSING INC CENTRAL INDEX KEY: 0001050661 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 942157282 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-36675-03 FILM NUMBER: 97733439 BUSINESS ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4082973500 MAIL ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE RUBBER CO INC CENTRAL INDEX KEY: 0001050662 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 942157283 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-36675-02 FILM NUMBER: 97733440 BUSINESS ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4082973500 MAIL ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BURKE FLOORING PRODUCTS INC CENTRAL INDEX KEY: 0001050664 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 942157284 STATE OF INCORPORATION: CA FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-36675-01 FILM NUMBER: 97733441 BUSINESS ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4082973500 MAIL ADDRESS: STREET 1: 2250 SOUTH TENTH STREET CITY: SAN JOSE STATE: CA ZIP: 95112 S-4/A 1 S-4/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1997 REGISTRATION NO. 333-36675 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 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) CALIFORNIA 3069 94-3081144 (State of Incorporation or (Primary standard industrial (I.R.S. employer organization) classification code number) identification number)
------------------------ 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
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE 10% Senior Notes due 2007 $110,000,000 100% $110,000,000 $33,333.33 Guarantees of the 10% Notes due 2007 $110,000,000 None(2) None(2) None(2)
(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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF OTHER REGISTRANTS
PRIMARY STANDARD ADDRESS INCLUDING ZIP CODE JURISDICTION INDUSTRIAL IRS EMPLOYEE AND AREA CODE AND TELEPHONE OF CLASSIFICATION IDENTIFICATION NUMBER OF THE PRINCIPAL NAME OF CORPORATION INCORPORATION NUMBER NUMBER EXECUTIVE OFFICES - ------------------------------------ ------------- ------------ ---------------- --------------------------- 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
PROSPECTUS [LOGO] OFFER TO EXCHANGE ALL OUTSTANDING 10% SENIOR NOTES DUE 2007 WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT (GUARANTEED BY SUBSTANTIALLY ALL OF ITS SUBSIDIARIES) ($110,000,000 PRINCIPAL AMOUNT OUTSTANDING) FOR 10% SENIOR NOTES DUE 2007 (GUARANTEED BY ALL OF ITS SUBSIDIARIES) THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JANUARY 23, 1998 (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION DATE"). Burke Industries, Inc., a California corporation (the "Company" or "Burke"), hereby offers upon the terms and subject to the conditions set forth in this Prospectus (as the same may be amended or supplemented from time to time, the "Prospectus") and the accompanying letter of transmittal relating to the Old Notes (as defined) (the "Notes Letter of Transmittal", which together constitute the "Exchange Offer"), to exchange $1,000 principal amount of its 10% Senior Notes due 2007 (the "New Notes") for each $1,000 in principal amount of its outstanding 10% Senior Notes due 2007 (the "Old Notes") (the Old Notes and the New Notes are collectively referred to herein as the "Notes"). An aggregate principal amount of $110,000,000 of Old Notes is outstanding. See "The Exchange Offer." Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The Company will accept for exchange any and all Old Notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement, dated as of August 20, 1997 (the "Registration Rights Agreement"), among the Company, the Subsidiary Guarantors (as defined herein), and NationsBanc Capital Markets, Inc. (the "Initial Purchaser"). The Old Notes may be tendered only in multiples of $1,000. See "The Exchange Offer." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 20 HEREIN FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY HOLDERS IN EVALUATING THE EXCHANGE OFFER. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE 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 December 5, 1997 The Old Notes were issued in a transaction (the "Prior Offering") pursuant to which the Company issued an aggregate of $110,000,000 principal amount of the Old Notes to the Initial Purchaser on August 20, 1997 (the "Closing Date") pursuant to a Purchase Agreement, dated August 14, 1997 (the "Purchase Agreement"), among the Company and the Initial Purchaser. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"). The Company, the Subsidiary Guarantors, and the Initial Purchaser also entered into the Registration Rights Agreement, dated August 20, 1997, pursuant to which the Company granted certain registration rights for the benefit for the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and Effect." The Old Notes were, and the New Notes will be, issued under the Indenture, dated as of August 20, 1997 (the "Indenture"), among the Company, the Subsidiary Guarantors, and United States Trust Company of New York, as trustee (the "Trustee"), and the New Notes and the Old Notes will constitute a single series of debt securities under the Indenture. The terms of the New Notes are identical in all material respects to the terms of the Old Notes except that (i) the New Notes will have been registered under the Securities Act and thus will not bear restrictive legends restricting their transfer pursuant to the Securities Act and will not be entitled to registration rights, (ii) holders of New Notes will not be entitled to liquidated damages for the Company's failure to register the Old Notes or New Notes under the Registration Rights Agreement, and (iii) holders of New Notes will not be, and upon the consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to United States Trust Company of New York, as registrar of the Old Notes (in such capacity, the "Registrar") under the Indenture, of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are validly tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights," "--Procedures for Tendering Old Notes" and "Description of Notes." In the event that the Exchange Offer is consummated, any Old Notes which remain outstanding after consummation of the Exchange Offer and the New Notes issued in the Exchange Offer will vote together as a single class for purposes of determining whether holders of the requisite percentage in outstanding principal amount of Notes have taken certain actions or exercised certain rights under the Indenture. The New Notes will bear interest at a rate of 10% per annum. Interest on the New Notes is payable semiannually, commencing February 15, 1998, on February 15 and August 15 of each year (each, an "Interest Payment Date") and shall accrue from August 20, 1997 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. The New Notes will mature on August 15, 2007. See "Description of Notes." The New Notes will not be redeemable at the Company's option prior to August 15, 2002. Thereafter, the New Notes will be redeemable by the Company at the redemption prices and subject to the conditions set forth in "Description of Notes--Optional Redemption." Notwithstanding the foregoing, at any time on or before August 15, 2000, the Company may redeem up to 35% in aggregate principal amount of (i) the initial aggregate principal amount of the New Notes and (ii) the initial principal amount of any Additional Notes (as defined herein), on one or more occasions, with the net cash proceeds of one or more Public Equity Offerings (as defined herein) at a redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages (as defined herein), if any, thereon to the redemption date, PROVIDED THAT at least 65% of the sum of (i) the initial aggregate principal amount of the New Notes and (ii) the initial aggregate principal amount of any Additional Notes remain outstanding immediately after redemption. See "Description of Notes--Redemption--Optional Redemption." Upon the occurrence of a Change of Control (as defined herein), the Company (i) will be required to make an offer to repurchase all outstanding New Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, and Liquidated Damages, if any, to the date of repurchase and (ii) prior to August 15, 2002 will have the option to redeem the New Notes, in 2 whole or in part, at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, if any, and Liquidated Damages (as defined herein), if any, to the redemption date plus the Applicable Premium (as defined herein). See "Description of Notes--Redemption--Optional Redemption Upon Change of Control" "--Purchase of Notes Upon Change of Control or Asset Sale" and "--Certain Covenants-- Purchase of Notes Upon Change of Control." Depending upon the circumstances prevailing at the time of such a Change of Control, there is a risk that the Company may be unable to satisfy such obligations. See "Risk Factors--Potential Inability to Fund Change of Control Offer." The New Notes will be general unsecured obligations of the Company, senior to all existing and future subordinated indebtedness of the Company and PARI PASSU in right of payment with all other existing and future unsubordinated indebtedness of the Company, including indebtedness under the New Credit Facility (as defined herein). However, the obligations of the Company under the New Credit Facility will be secured by substantially all of the assets of the Company. Accordingly, such secured indebtedness will effectively rank senior to the Notes to the extent of such assets. The Indenture for the Notes restricts, but does not prohibit, the Company from incurring additional indebtedness. See "Description of Notes--Ranking." See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The New Notes will be unconditionally guaranteed on a joint and several basis by three subsidiaries of the Company (the "Note Guarantees"); Burke Flooring Products, Inc., a California Corporation, Burke Rubber Company, Inc., a California Corporation, and Burke Custom Processing, Inc., a California Corporation (collectively the "Subsidiary Guarantors"), on an unsecured, senior subordinated basis. The Note Guarantees will rank senior to all existing and future subordinated indebtedness of the Subsidiary Guarantors and PARI PASSU with all other unsubordinated indebtedness of the Subsidiary Guarantors, including the guarantees of indebtedness under the New Credit Facility. Any Subsidiary Guarantor's obligations under the New Credit Facility, however, will be secured by substantially all of the assets of such Subsidiary Guarantor. Accordingly, such secured indebtedness will rank prior to the Note Guarantees with respect to such assets. The Indenture restricts, but does not prohibit, the Subsidiary Guarantors from incurring additional secured indebtedness. As of the date of this Prospectus, the Company has no significant subsidiaries. See "Description of Notes--Note Guarantees." Based on existing interpretations of the Securities Act by the staff of the Securities and Exchange Commission (the "Commission") set forth in "no-action" letters issued to third parties in other transactions, the Company believes that New Notes issued pursuant to the Exchange Offer to any holder of Old Notes in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is not an affiliate of the Company, is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Holders wishing to accept the Exchange Offer must represent to the Company, as required by the Registration Rights Agreement, that such conditions have been met. In addition, if such holder is not a broker-dealer, it must represent that it is not engaged in, and does not intend to engage in, a distribution of the New Notes. Each broker-dealer that receives New Notes as a result of market-making or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes." For a period of 180 days from the Expiration Date, the Company will make this Prospectus, as amended or supplement available to any broker-dealer for use in connection with any such resale. See "Plan of Disbtribution." There has previously been only a limited secondary market, and no public market, for the Old Notes. The Old Notes are eligible for trading in the Private Offering, Resales and Trading through Automatic Linkages ("PORTAL") market. In addition, the Initial Purchaser has advised the Company that it currently intends to make a market in the New Notes; however, the Initial Purchaser is not obligated to do so and any market 3 making activities may be discontinued by the Initial Purchaser at any time. Therefore, there can be no assurance that an active market for the New Notes will develop. If such a trading market develops for the New Notes, future trading prices will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on such factors, the New Notes may trade at a discount from their face value. See "Risk Factors--Lack of Public Market." The Old Notes were issued originally in global form (the "Global Old Note"). The Global Old Note was deposited with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global Note Holder"). The use of the Global Old Note to represent certain of the Old Notes permits the Depositary's participants, and anyone holding a beneficial interest in an Old Note registered in the name of such a participant, to transfer interests in the Old Notes electronically in accordance with the Depositary's established procedures without the need to transfer a physical certificate. New Notes issued in exchange for the Global Old Note will also be issued initially as a note in global form (the "Global New Note," and, together with the Global Old Note, the "Global Notes") and deposited with, or on behalf of, the Depositary. After the initial issuance of the Global New Note, New Notes in certificated form will be issued in exchange for a holder's proportionate interest in the Global New Note only as set forth in the Indenture. Any Old Notes not tendered and accepted in the Exchange Offer will remain outstanding and will be entitled to all the same rights and will be subject to the same limitations applicable thereto under the Indenture (except for those rights which terminate upon consummation of the Exchange Offer). Following consummation of the Exchange Offer, the Holders of Old Notes will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders (other than to certain Holders under certain limited circumstances) to provide for registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, a Holder's ability to sell untendered Old Notes could be adversely affected. See "Risk Factors--Consequences of Failure to Exchange" and "The Exchange Offers--Certain Consequences of a Failure to Exchange." This Prospectus, together with the Letter of Transmittal is being sent to all registered Holders of Old Notes as of December 10, 1997. The Company will not receive any proceeds from this Exchange Offer. Pursuant to the Registration Rights Agreement, the Company will bear certain registration expenses. 4 TABLE OF CONTENTS
PAGE --- Available Information....................................................................................... 6 Prospectus Summary.......................................................................................... 7 Risk Factors................................................................................................ 20 The Transactions............................................................................................ 27 Use of Proceeds............................................................................................. 28 The Exchange Offer.......................................................................................... 29 Capitalization.............................................................................................. 37 Unaudited Pro Forma Consolidated Income Statements.......................................................... 38 Selected Historical Consolidated Financial Data............................................................. 42 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 44 Business.................................................................................................... 50 Management.................................................................................................. 64 Security Ownership of Certain Beneficial Owners and Management.............................................. 69 Certain Relationships And Related Transactions.............................................................. 70 Description of Notes........................................................................................ 72 Description of New Credit Facility.......................................................................... 101 Description of Redeemable Preferred Stock and Warrants...................................................... 103 Plan of Distribution........................................................................................ 107 Legal Matters............................................................................................... 108 Experts..................................................................................................... 108 Index to Consolidated Financial Statements.................................................................. F-1
5 AVAILABLE INFORMATION The Company has filed a registration statement on Form S-4 (together with any amendments thereto, the "Registration Statement") with the Commission under the Securities Act with respect to the New Notes. This Prospectus, which constitutes a part of the Registration Statement, omits certain information contained in the Registration Statement and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the New Notes offered hereby. This Prospectus contains summaries of the material terms and provisions of certain documents and in each instance reference is made to the copy of such document filed as an exhibit to the Registration Statement. Each such summary is qualified in its entirety by such reference. Upon the effectiveness of the Registration Statement filed with the Commission, the Company will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, will be required to file reports and other information with the Commission. In addition, upon registration of the guarantees of the New Notes in connection with the Exchange Offer, each Subsidiary Guarantor will also become subject to the reporting requirements of the Exchange Act, subject to obtaining exemptive relief from the Commission or no-action advise from the Commission staff. The Registration Statement (including the exhibits and schedules thereto) and the periodic reports and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference facilities in New York, New York and Chicago, Illinois, at prescribed rates. Such information may also be accessed electronically by means of the Commission's homepage on the Internet at http://www.sec.gov., which contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the consolidated financial statements and notes thereto, included elsewhere in this Prospectus. All references herein to "Burke" or "the Company" refer to Burke Industries, Inc. and include its subsidiaries and JFL Merger Co. ("MergerCo"), unless the context otherwise requires. The Company's fiscal year ends on the Friday closest to December 31. The financial information contained herein for years prior to 1996 has been restated to exclude the financial results of the custom-molded products unit, which was sold in 1996. Pro forma information gives effect to the Transactions (as defined herein), including the Prior Offering, and the application of the estimated proceeds therefrom as if each had occurred on December 30, 1995 with respect to the pro forma consolidated statement of income for the year ended January 3, 1997; on January 4, 1997 with respect to the pro forma consolidated statement of income for the nine months ended October 3, 1997; and on October 3, 1997 with respect to the pro forma consolidated balance sheet as of October 3, 1997. THE COMPANY OVERVIEW Burke, headquartered in San Jose, California, is a leading, diversified manufacturer of highly engineered, rubber, silicone and vinyl-based (herein "elastomer") products. Through its vertically integrated operations and reputation for quality elastomer-based products, Burke has become (i) the largest domestic producer of precision silicone seals for commercial and military aircraft ("Aerospace Products"), (ii) the dominant west coast producer of rubber cove base and floor covering accessories for commercial and industrial applications ("Flooring Products") and (iii) a value-added producer of high-performance silicone hose, roofing and membrane products for the heavy-duty truck, commercial building and environmental industries, respectively ("Commercial Products"). The Company bases its belief that it is the largest domestic producer of certain components used in commercial and military aircraft upon internal Company analysis and informal feedback from customers and competitors. The Company has grown through new product development and the successful integration of acquired product lines and production assets. As a result, net sales increased from $28.2 million in 1992 to $86.8 million for the twelve-month period ended October 3, 1997. Net sales for the nine months ended October 3, 1997 totaled $68.8 million, up 26.2% from $54.5 million for the same period in 1996. AEROSPACE PRODUCTS Burke is the largest domestic producer of precision silicone seals used at airframe and internal component junctures in commercial and military aircraft. Burke seals are specified on virtually all major domestically produced commercial aircraft, including every aircraft series manufactured by The Boeing Company's Commercial Airplane Group ("Boeing") and on substantially all United States military aircraft including cargo, fighter and bomber series airplanes and several helicopter models. As a result, Burke's products have been designed into some of the most successful commercial and military aircrafts in the world, including the Boeing 737, 747, 757, 767 and 777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Products are engineered to customer specifications for selected aircraft body and engine models and are generally made from custom tooling maintained and controlled by Burke for use over the life of the specific aircraft program. Burke benefits from a lengthy product-demand cycle, which can remain active for as long as 30 years, driven by new aircraft assembly and retrofit and maintenance projects. Retrofit and maintenance projects accounted for approximately two-thirds of the Company's 1996 Aerospace Products sales. The Aerospace Products business also manufactures low-observable, radar-absorbing seals and exterior tapes and coatings for stealth military aircraft and other military applications. These products are currently in use on the B-2 bomber and will also be used in the F-22 Advanced Tactical Fighter ("F-22"), which is being developed to replace the F-15 as the premier fighter in the United States military arsenal. 7 Aerospace Products sales increased from $3.6 million in 1993, the year that Burke first entered the aerospace market with its purchase of assets of Purosil, Inc. ("Purosil"), to $24.6 million in 1996, accounting for approximately 34.0% of the Company's total net sales in 1996. Management believes the Aerospace Products business is well positioned to benefit from the strong increase in commercial aircraft build rates currently occurring and projected by industry analysts to continue, along with the associated retrofit, refurbishment, replacement and upgrade projects that are required over the life of the aircraft. FLOORING PRODUCTS Through its Flooring Products business, Burke is the dominant supplier of rubber cove base (floor border that joins flooring or carpet to a wall), manufactured under the name BurkeBase, and other rubber-based flooring accessories for commercial and industrial applications in the western United States. Its principal product offerings include vinyl cove base and rubber cove base, tile, stair treads, corners, shapes and other flooring accessories. Demand for the Company's cove base is driven by new commercial construction, remodeling, redecorating and general maintenance. During periods of slower growth in new commercial construction, remodeling and redecorating activities tend to increase, providing stable overall demand for the Company's products. Flooring Products sales were $20.5 million in 1996, comprising 28.4% of the Company's total net sales in 1996. In 1996, the Company diversified its Flooring Products offerings with the introduction of new tiling products and photoluminescent emergency lighting products marketed under the name BurkeEmerge, and the acquisition of vinyl cove base production assets. Management believes that the addition of the vinyl product line will enable it to increase revenues through the increased penetration of existing markets and the expansion of its product line to markets where vinyl cove base is more popular than rubber cove base, such as the midwestern and eastern United States. COMMERCIAL PRODUCTS Burke's expertise in the mixing, blending and formulation of silicone and organic rubber compounds has established its Commercial Products business as a growing, value-added supplier of elastomer products for use in both intermediate and end products. The Commercial Products business is comprised of three primary product lines: (i) high-performance silicone truck hoses for heavy-duty trucks and buses marketed under the Purosil brand name, (ii) membranes for commercial roofing and fluid containment systems marketed under the Burkeline trade name and manufactured from DuPont's patented Hypalon polymer material and (iii) precision-formulated custom products and sheet goods that utilize Burke's extensive formulation and production capabilities for use in end-product elastomer applications. Commercial Products net sales increased from $10.0 million in 1992 to $27.3 million in 1996, and represented 37.6% of the Company's total net sales in 1996. Management believes that the Commercial Products business has significant growth potential primarily through the expansion of the Purosil line of high-end hoses to new customers and channels of distribution and the development of new applications for the silicone custom product line. COMPETITIVE STRENGTHS Burke has secured a strong competitive position in each of its specialized market segments. Burke is the largest provider of aerospace seals to the domestic commercial and military aerospace industries and also maintains strong positions in its flooring, roofing and membrane, truck hose and custom product lines. These competitive positions are sustained through the following strengths: ESTABLISHED CUSTOMER RELATIONSHIPS. The Company enjoys long-term relationships with many of its customers in each of its markets. These relationships, whether built by Burke over its long history or assumed in recent asset acquisitions, provide the Company with a stable base from which to pursue future expansion and give Burke a significant advantage over potential competitors seeking to enter the Company's markets. Several of the Burke trademarks and trade names (BurkeBase, Burkeline, SFS, 8 Haskon and Purosil) are widely recognized by end users and distributors and are generally associated with superior levels of quality and customer service in their respective markets. DIVERSE REVENUE BASE. The Company's products are used in a wide variety of industries and applications and a significant share of the Company's revenue is derived from the repair and replacement market for its products, including aerospace seals and tape, cove base, truck hoses and fluid containment membrane. Replacement demand is typically less affected by slower economic periods. Management believes that this diversity has and will continue to mitigate the effect of economic fluctuations. TECHNOLOGICAL LEADERSHIP IN ELASTOMER-BASED PRODUCTS DEVELOPMENT AND MANUFACTURE. Burke is widely recognized as a technological leader in elastomer-based products due to its strong engineering, design and research capabilities. Burke has 25 specialists in its engineering, design and laboratory departments devoted to new product development and product cost reduction. Management believes that its aerospace technical staff is significantly larger than those of its direct competitors, providing the Company with a competitive advantage in pursuing and maintaining relationships in the technologically advanced defense and commercial aerospace industries. VERTICALLY INTEGRATED PRODUCTION CAPABILITIES. Burke has vertically integrated production capabilities that enable it to transform raw organic rubber and silicone gum into a diverse array of finished products. This capability allows management more direct control over the Company's product development, cost structure and quality requirements, providing a competitive edge in its targeted market segments and enables Burke's Commercial Products business to selectively participate in market segments as a value-added, intermediate supplier to other elastomer product producers and users. EXPERIENCED MANAGEMENT TEAM. The management team has extensive experience both with the Company and within the industry and encompasses a balance of both senior leadership and a strong group of young managers. This management team has successfully orchestrated the acquisition and integration of four independent operations since 1993, as well as the Company's ongoing vertical integration efforts. BUSINESS STRATEGY Burke intends to capitalize on its aforementioned competitive strengths in a variety of ways in each of its major businesses. Key components of this strategy for each of the Company's businesses include: AEROSPACE PRODUCTS - PENETRATE INTERNATIONAL MARKET FOR AEROSPACE SEALS. Management believes that the Company is the only domestic aerospace seal manufacturer with the production capacity to market beyond the United States. The Company's recent acquisitions dramatically increased production capacity and, as a result, the Company recently sought and was successful in being designated as a qualified parts manufacturer for a large subcontractor of Airbus Industries ("Airbus"). - FOCUS ON VALUE-ADDED MANUFACTURING. Management intends to further increase its participation in the trend towards integrating higher levels of processing and finishing to products before shipping to original equipment manufacturers ("OEMs"). - MAINTAIN STRONG RELATIONSHIPS WITH LEADING PRIME CONTRACTORS. Management believes that its existing relationships with leading prime military contractors have positioned the Company to continue to participate in "next generation" stealth military programs, including the Joint Strike Fighter currently being developed for NATO, through the sale of low-observable seals and tape. FLOORING PRODUCTS - BROADEN DOMESTIC DISTRIBUTION OF FLOORING PRODUCTS. Although the Company is the dominant producer of rubber cove base in the western United States, the Company believes it can successfully 9 expand this product line into other geographic regions by offering the full complement of its rubber and newly acquired vinyl flooring products. - LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS THROUGH PRODUCT LINE EXTENSIONS. The Company intends to continue to capitalize on the BurkeBase trademark by expanding and upgrading its existing product line. In addition, the Company believes that it can leverage its strong distribution network for its flooring products through the introduction of flooring accessories. For example, the Company's new BurkeEmerge product line of photoluminescent emergency lighting is an alternative to strip lighting at a 70% lower cost. Emergency lighting is increasingly being utilized due to heightened public awareness of the dangers that can result from unlit corridors and confusing exit signs. COMMERCIAL PRODUCTS - INCREASE PENETRATION OF PUROSIL SILICONE HOSES. The Company believes the growth opportunities for its Purosil silicone hoses have not yet fully been exploited, particularly in the heavy-duty truck and bus aftermarket. New initiatives include increasing customer share at Mack Truck, Inc. ("Mack Truck") and other targeted accounts as well as initiating production of silicone hoses for a major new customer. - PROMOTE ADDITIONAL HYPALON APPLICATIONS. Management is continuing to work with DuPont to promote Hypalon as a durable and environmentally sound liner product suitable for new water-containment applications. In addition to these internal growth strategies, the Company intends to seek selective acquisitions where it can expand and strengthen existing product lines and its distribution and technological capabilities. The Company believes that certain market niches in which it competes are highly fragmented, with a number of manufacturers that would make attractive acquisition candidates. The Company's principal executive offices are located at 2250 South Tenth Street, San Jose, California 95112, telephone: (408) 297-3500. SUMMARY OF THE TRANSACTIONS THE INVESTORS J.F. Lehman Equity Investors I, L.P. ("JFLEI") was formed in February 1997 by John F. Lehman, Donald Glickman and George Sawyer, the managing principals of J.F. Lehman & Company ("Lehman"), and managing members of JFL Investors, L.L.C., the general partner of JFLEI. Lehman is a private investment firm with offices in New York, NY and Washington, D.C. that has focused on purchasing defense, aerospace, marine and other niche manufacturing and service companies since 1992. During this time, Lehman has made investments in middle market companies that design and manufacture advanced electronic navigation and guidance systems for marine and aerospace uses, electronic and electromechanical devices and subsystems for military and commercial applications, and infrared decoy flares and medium caliber ammunition. In each of its investments, Lehman has taken an active, hands-on approach toward portfolio company oversight. Lehman expects to provide the Company with additional strategic opportunities utilizing its general and limited partners with significant experience in the defense and aerospace industries. These partners include: Mr. Oliver C. Boileau, Jr., former President of Boeing Aerospace and General Dynamics Corporation; Mr. Thomas G. Pownall, former Chairman and Chief Executive Officer of Martin Marietta; Sir Christopher Lewinton, current Chairman of TI Group plc; and General P.X. Kelley, former Commandant of the United States Marine Corps. See "Management" for a description of the Company's Board of Directors. 10 THE RECAPITALIZATION The Company entered into an Agreement and Plan of Merger, dated as of August 13, 1997 (the "Merger Agreement"), among JFLEI, MergerCo and certain shareholders of the Company, pursuant to which the Company was recapitalized (the "Recapitalization") by means of a merger of MergerCo into the Company (the "Merger"), with the Company as the surviving corporation. Pursuant to the Merger, all shares of the Company's common stock (the "Common Stock"), other than those shares (the "Continuing Shares") retained by certain members of management and certain other shareholders of the Company (the "Continuing Shareholders"), were converted into the right to receive an amount in cash equal to approximately $9.33 per share (the "Recapitalization Consideration"). Immediately after consummation of the Recapitalization, JFLEI and the Continuing Shareholders owned 65% and 15%, respectively, of the issued and outstanding shares of the Company's Common Stock, on a fully diluted basis. Warrants to purchase an aggregate of 20% of the Company's Common Stock, on a fully diluted basis (the "Warrants"), were issued to the purchasers of $16.0 million in Series A and $2.0 million in Series B 11 1/2% Cumulative Redeemable Preferred Stock (collectively, the "Redeemable Preferred Stock") of the Company. In connection with the Recapitalization, the Company entered into certain financing transactions, including the Prior Offering, described more fully elsewhere in this Prospectus. The consummation of the Prior Offering, the Recapitalization and the financing thereof (collectively, the "Transactions") were conditioned upon each other. See "The Transactions," "Description of New Credit Facility" and "Description of Redeemable Preferred Stock and Warrants." The following table sets forth the sources and uses of funds in connection with the Transactions:
(DOLLARS IN THOUSANDS) Sources of Funds: Issuance of Senior Notes.............................................. $ 110,000 JFLEI Investment...................................................... 20,000 Issuance of Redeemable Preferred Stock and Warrrants.................. 18,000 Continuing Shares(1).................................................. 6,740 New Credit Facility................................................... 0 -------- $ 154,740 -------- -------- Uses of Funds: Aggregate Recapitalization Consideration(1)........................... $ 117,892 Repayment of Existing Credit Facility and Subordinated Debt........... 19,014 Transaction Expenses.................................................. 7,305 Working Capital....................................................... 10,529 -------- $ 154,740 -------- --------
- ------------------------ (1) Pursuant to the Recapitalization, (i) 8,676,168 shares of Common Stock of the Company converted into the right to receive the Recapitalization Consideration, (ii) options to purchase 1,542,000 shares of Common Stock of the Company were converted into the right to receive the Recapitalization Consideration less the applicable exercise price, (iii) warrants to purchase 1,700,000 shares of Common Stock of the Company were converted into the right to receive the Recapitalization consideration less the applicable exercise price and (iv) 722,702 Continuing Shares were retained by the Continuing Shareholders, which represent an aggregate of 15% of the issued and outstanding shares of the Company on a fully diluted basis. See "The Transactions." These line items include the value of the Continuing Shares based on the Recapitalization Consideration. 11 THE PRIOR OFFERING The outstanding $110.0 million principal amount of Old Notes were sold by the Company to the Initial Purchaser on the Closing Date pursuant to the Purchase Agreement among the Company and the Initial Purchaser. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company, the Subsidiary Guarantors and the Initial Purchaser also entered into the Registration Rights Agreement pursuant to which the Company granted certain registration rights for the benefit of the holders of the Old Notes. The Exchange Offer is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement with respect to the Old Notes. See "The Exchange Offer--Purpose and Effect." THE EXCHANGE OFFER The Exchange Offer........... The Company is offering upon the terms and subject to the conditions set forth herein and in the accompanying letter of transmittal (the "Letter of Transmittal"), to exchange $1,000 in principal amount of its 10% Senior Notes due 2007 (the "New Notes," with the Old Notes and the New Notes collectively referred to herein as the "Notes") for each $1,000 in principal amount of the outstanding Old Notes (the "Exchange Offer"). As of the date of this Prospectus, $110.0 million in aggregate principal amount of the Old Notes is outstanding. See "The Exchange Offer--Terms of the Exchange Offer." Expiration Date.............. 5:00 p.m., New York City time, on January 23, 1998 as the same may be extended. See "The Exchange Offer--Expiration Date; Extensions; Amendments." Conditions of the Exchange Offer...................... The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. The only condition to the Exchange Offer is the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part. See "The Exchange Offer--Conditions of the Exchange Offer." Termination of Certain Rights..................... Pursuant to the Registration Rights Agreement and the Old Notes, holders of Old Notes (i) have rights to receive Liquidated Damages and (ii) have certain rights intended for the holders of unregistered securities. "Liquidated Damages" means damages of $0.05 per week per $1,000 principal amount of Old Notes (up to a maximum of $0.30 per week per $1,000 principal amount) during the period in which a Registration Default is continuing pursuant to the terms of the Registration Rights Agreement. Holders of New Notes will not be and, upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the right to receive the Liquidated Damages or (ii) certain other rights under the Registration Rights Agreement intended for holders of unregistered securities. See "The Exchange Offer--Termination of Certain Rights" and "--Procedures for Tendering Old Notes." Accrued Interest............. The New Notes will bear interest at a rate equal to 10% per annum. Interest shall accrue from August 20, 1997 or from the most recent
12 Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of Notes--Principal, Maturity and Interest." Procedures for Tendering Old Notes...................... Unless a tender of Old Notes is effected pursuant to the procedures for book-entry transfer as provided herein, each holder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon guaranteed if required by the Letter of Transmittal, and mail or deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery and any other required documents (such as evidence of authority to act, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined) at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. Any Beneficial Owner (as defined) of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender Old Notes in the Exchange Offer, should instruct such entity or person to promptly tender on such Beneficial Owner's behalf. See "The Exchange Offer--Procedures for Tendering Old Notes." Guaranteed Delivery Procedures................. Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer--Guaranteed Delivery Procedures." Acceptance of Old Notes and Delivery of New Notes...... Upon effectiveness of the Registration Statement of which this Prospectus constitutes a part and consummation of the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. See "The Exchange Offer--Acceptance of Old Notes for Exchange; Delivery of New Notes." Withdrawal Rights............ Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer--Withdrawal Rights." The Exchange Agent........... United States Trust Company of New York is the exchange agent (in such capacity, the "Exchange Agent"). The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer--The Exchange Agent; Assistance." Fees and Expenses............ All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights
13 Agreement will be borne by the Company. The Company will also pay certain transfer taxes applicable to the Exchange Offer. See "The Exchange Offer--Fees and Expenses." Resales of the New Notes..... Based on existing interpretations by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by a holder (other than (i) a broker-dealer who purchased the Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. Each broker-dealer that receives New Notes in exchange for Old Notes, where such Old Notes were acquired by such broker as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. See "The Exchange Offer--Resales of the New Notes" and "Plan of Distribution." Effect of Not Tendering Old Notes for Exchange......... Old Notes that are not tendered or that are not properly tendered will, following the expiration of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. The Company will have no further obligations to provide for the registration under the Securities Act of such Old Notes and such Old Notes will, following the expiration of the Exchange Offer, bear interest at the same rate as the New Notes. Certain Federal Income Tax Consequences............... The Company believes that the exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Certain Federal Income Tax Consequences of the Exchange Offer."
DESCRIPTION OF NEW NOTES The form and terms of the New Notes will be identical in all material respects to the form and terms of the Old Notes, except that (i) the New Notes have been registered under the Securities Act and, therefore, will not bear legends restricting the transfer thereof, (ii) holders of the New Notes will not be entitled to Liquidated Damages and (iii) holders of the New Notes will not be, and upon consummation of the Exchange Offer, holders of the Old Notes will no longer be, entitled to certain rights under the Registration Rights Agreement intended for the holders of unregistered securities, except in limited circumstances. See "Exchange Offer--Termination of Certain Rights." The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of the New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are tendered by holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--Termination of Certain Rights" and "Procedures for Tendering Old Note;" and "Description of Notes." 14 Securities Offered........... $110,000,000 aggregate principal amount of 10% Senior Subordinated Notes Due 2007. Maturity Date................ August 15, 2007. Interest Payment Dates....... August 15 and February 15, commencing February 15, 1998. Ranking...................... The Notes will be general unsecured obligations of the Company, senior to all existing and future subordinated indebtedness of the Company and PARI PASSU in right of payment with all other existing and future unsubordinated indebtedness of the Company, including indebtedness under the New Credit Facility. However, the obligations of the Company under the New Credit Facility will be secured by substantially all of the assets of the Company. Accordingly, such secured indebtedness will effectively rank senior to the Notes to the extent of such assets. The Indenture for the Notes (the "Indenture") restricts, but does not prohibit, the Company from incurring additional indebtedness. See "Description of Notes--Ranking." Optional Redemption.......... On or after August 15, 2002, the Company may redeem the Notes, in whole or in part, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, and Liquidated Damages, if any, to the date of redemption. Notwithstanding the foregoing, at any time on or before August 15, 2000, the Company may redeem up to 35% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes, on one or more occasions, with the net cash proceeds of one or more Public Equity Offerings (as defined herein) at a redemption price of 110% of the principal amount thereof, plus accrued and unpaid interest, if any, and Liquidated Damages, if any, to the date of redemption provided that at least 65% of the sum of (i) the initial aggregate principal amount of Notes and (ii) the initial aggregate principal amount of any Additional Notes remain outstanding immediately after redemption. See "Description of Notes-- Redemption--Optional Redemption." Guarantees................... The Notes will be unconditionally guaranteed on a joint and several basis (the "Note Guarantees") by substantially all of the subsidiaries of the Company, (collectively, the "Subsidiary Guarantors"). The Note Guarantees will rank senior to all existing and future subordinated indebtedness of the Subsidiary Guarantors and PARI PASSU with all other unsubordinated indebtedness of the Subsidiary Guarantors, including the guarantees of indebtedness under the New Credit Facility. Any Subsidiary Guarantor's obligations under the New Credit Facility, however, will be secured by substantially all of the assets of such Subsidiary Guarantor. Accordingly, such secured indebtedness will rank prior to the Note Guarantees with respect to such assets. The Indenture restricts, but does not prohibit, the Subsidiary Guarantors from incurring additional secured indebtedness. As of the date of this Prospectus, the Company has no significant subsidiaries. See "Description of Notes--Note Guarantees."
15 Mandatory Redemption......... None. Change of Control............ Upon a Change of Control (as defined herein), the Company (i) will be required to make an offer to repurchase all outstanding Notes at 101% of the principal amount thereof plus accrued and unpaid interest thereon, if any, and Liquidated Damages, if any, to the date of repurchase and (ii) prior to August 15, 2002 will have the option to redeem the Notes, in whole or in part, at a redemption price equal to the principal amount thereof, plus accrued and unpaid interest, if any, and Liquidated Damages, if any, to the redemption date plus the Applicable Premium (as defined herein). See "Description of Notes-- Redemption--Optional Redemption Upon Change of Control," "--Purchase of Notes Upon Change of Control or Asset Sale" and "--Certain Covenants--Purchase of Notes Upon Change of Control." There can be no assurance that sufficient funds will be available to the Company at the time of any Change of Control to make any required repurchases of Notes. See "Risk Factors--Potential Inability to Fund Change of Control Offer." Covenants.................... The Indenture will restrict, among other things, the Company's and its subsidiaries' ability to incur additional indebtedness, pay dividends or make certain other restricted payments, incur liens, sell preferred stock of subsidiaries, apply net proceeds from certain asset sales, merge or consolidate with any other person, sell, assign, transfer, lease, convey or otherwise dispose of substantially all of the assets of the Company or enter into certain transactions with affiliates. See "Description of Notes--Certain Covenants." Use of Proceeds.............. The proceeds of the Prior Offering and of other financing transactions described herein were used to pay the Recapitalization Consideration, to repay certain existing indebtedness of the Company and to pay fees and expenses of the Transactions, including the Prior Offering, and for general corporate purposes. See "The Transactions" and "Use of Proceeds." Absence of a Public Market for the New Notes.......... The New Notes are a new issue of securities with no established market. Accordingly, there can be no assurance as to the development or liquidity of any market for the New Notes. The Initial Purchaser has advised the Company that it currently intends to make a market in the New Notes. However, the Initial Purchaser is not obligated to do so, and any market making with respect to the New Notes may be discontinued at any time without notice. The Company does not intend to apply for listing of the New Notes on a securities exchange.
RISK FACTORS For a discussion of certain matters that should be considered by prospective investors in connection with the Exchange Offer, see "Risk Factors." 16 SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following sets forth summary unaudited pro forma consolidated financial data derived from the unaudited pro forma consolidated financial data contained elsewhere herein (the "Pro Formas"). The following unaudited pro forma consolidated statement of income data of the Company for the year ended January 3, 1997 and for the nine months ended October 3, 1997 give effect to the Transactions as if they had occurred on December 30, 1995. No unaudited consolidated balance sheet data of the Company has been presented as the effects of the transactions are reflected in the unaudited financial statements of the Company as at and for the nine months ended October 3, 1997, appearing elsewhere herein. Certain management assumptions and adjustments relating to the Transactions are described in the accompanying notes hereto. This pro forma information is not necessarily indicative of the results that would have occurred had the Transactions been completed on the dates indicated or the Company's actual or future results or financial position. The summary pro forma consolidated financial data should be read in conjunction with the information contained in the financial statements of the Company and the notes thereto, "Unaudited Pro Forma Consolidated Income Statements," "Selected Historical Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. 17 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA (CONTINUED) (DOLLARS IN THOUSANDS)
PRO FORMA ---------------------------- NINE MONTHS FISCAL ENDED YEAR 1996 OCTOBER 3, 1997 ----------- --------------- OPERATING DATA: Net sales............................................................................. $ 72,466 $ 68,785 Cost of sales......................................................................... 49,689 48,423 ----------- --------------- Gross profit.......................................................................... 22,777 20,362 Selling, general and administrative expenses.......................................... 11,818 9,275 ----------- --------------- Income from operations................................................................ 10,959 11,087 Interest expense, net................................................................. 11,000 8,250 ----------- --------------- Income before income tax provision and discontinued operation......................... (41) 2,837 Income tax provision.................................................................. (17) 1,021 ----------- --------------- Income from continuing operations before discontinued operation....................... $ (24) $ 1,816 ----------- --------------- ----------- --------------- OTHER DATA: EBITDA(1)............................................................................. $ 12,378 $ 12,146 EBITDA margin(1)...................................................................... 17.1% 18% Depreciation and amortization......................................................... 1,419 1,059 Capital expenditures(2)............................................................... 1,684 727 Cash interest expense................................................................. 11,000 8,250 Ratio of EBITDA to cash interest expense.............................................. 1.1x 1.5x Ratio of earnings to fixed charges(3)................................................. -- 1.3x Ratio of earnings to combined fixed charges(4)........................................ -- -- Net cash (used in) provided by operating activities................................... (335) 3,391 Net cash provided by investing activities............................................. 134 727 Net cash provided by (used in) financing activities................................... 13,482 (818)
- ------------------------ (1) EBITDA is the sum of income before discontinued operation (as applicable), income tax provision and interest, depreciation and amortization expense. EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) and should not be construed as an indication of a company's operating performance or as a measure of liquidity. (2) Capital expenditures for 1996 include the acquisition of assets of Kentile ($854). (3) In calculating the ratio of earnings to fixed charges, earnings consist of income before income tax provision, discontinued operation (as applicable) plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense incurred (which includes amortization of deferred financing costs) whether expensed or capitalized and a portion of rental expense estimated to be attributable to interest. Earnings were insufficient to cover the pro forma fixed charges by $60 for fiscal year 1996 (4) In calculating the ratio of earnings to combined fixed charges, combined fixed charges consist of fixed charges, paid-in-kind dividends on the Redeemable Preferred Stock and accretion of the carrying value of the Redeemable Preferred Stock. Earnings were insufficient to cover the pro forma combined fixed charges by $3,685 and $95 for fiscal year 1996 and the nine months ended October 3, 1997, respectively. 18 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA The summary consolidated financial data below for the three years ended January 3, 1997 and as of December 29, 1995 and January 3, 1997 have been derived from the Consolidated Financial Statements of the Company which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The summary consolidated financial data below for the years ended January 1, 1993 and December 31, 1993 and as of January 1, 1993, December 31, 1993 and December 30, 1994 have been derived from the Consolidated Financial Statements of the Company which have also been audited by Ernst & Young LLP, but which are not included elsewhere herein. The summary financial data for the nine months ended September 27, 1996 and as of and for the nine months ended October 3, 1997 have been derived from the Company's Unaudited Consolidated Financial Statements for those periods included elsewhere in the Prospectus and the summary financial data as of September 27, 1996 have been derived from the Company's Unaudited Consolidated Financial Statements for that period, but are not included elsewhere herein and, in each case, include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the nine months ended October 3, 1997 are not necessarily indicative of the results that may be expected for the entire year. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Selected Historical Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes included elsewhere in this Prospectus. The data below reflect the acquisition by the Company of certain assets of Purosil in March 1993; of Silicone Fabrication Specialists, Inc. ("SFS") in February 1995; of Haskon Corporation ("Haskon") in June 1995 and of Kentile Corporation ("Kentile") in April 1996.
NINE MONTHS ENDED ------------- FISCAL YEAR ----------------------------------------------------- SEPTEMBER 27, 1992 1993 1994 1995 1996 1996 --------- --------- --------- --------- --------- ------------- OPERATING DATA: (DOLLARS IN THOUSANDS) Net sales......................................... $ 28,195 $ 36,431 $ 44,370 $ 68,411 $ 72,466 $ 54,476 Cost of sales..................................... 18,714 25,355 29,998 49,226 49,689 37,722 --------- --------- --------- --------- --------- ------------- Gross profit...................................... 9,481 11,076 14,372 19,185 22,777 16,754 Selling, general and administrative expenses(1)... 8,630 9,215 8,152 10,212 11,610 8,305 --------- --------- --------- --------- --------- ------------- Income (Loss) from operations..................... 851 1,861 6,220 8,973 11,167 8,449 Interest expense, net............................. 2,828 2,897 2,812 3,007 2,668 2,054 --------- --------- --------- --------- --------- ------------- Income (loss) before income tax provision (benefit), cumulative effect of accounting change, extraordinary loss and discontinued operation(2).................................... (1,977) (1,036) 3,408 5,966 8,499 6,395 Income tax provision (benefit).................... (3) 146 1,395 3,393 3,466 2,558 --------- --------- --------- --------- --------- ------------- Income (loss) from continuing operations before cumulative effect of accounting change, extraordinary loss and discontinued operation(2).................................... $ (1,974) $ (1,182) $ 2,013 $ 2,573 $ 5,033 $ 3,837 --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- ------------- Net income (loss)(2).............................. $ (2,180) $ (657) $ 1,502 $ 1,094 $ 4,101 $ 2,905 --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- ------------- OTHER DATA: Ratio of earnings to fixed charges(3)............. BALANCE SHEET DATA (AT PERIOD END): Working capital................................... $ 2,096 $ 4,932 $ 4,766 $ 5,402 $ 5,328 $ 6,837 Total assets...................................... 24,469 30,535 28,551 39,729 40,673 38,065 Long-term obligations, less current portion....... 19,406 20,011 16,937 21,803 18,126 17,008 Shareholders' equity (deficit).................... (4) (654) 849 340 4,283 2,981 OCTOBER 3, 1997 ----------- OPERATING DATA: Net sales......................................... $ 68,785 Cost of sales..................................... 48,423 ----------- Gross profit...................................... 20,362 Selling, general and administrative expenses(1)... 24,833 ----------- Income (Loss) from operations..................... (4,471 ) Interest expense, net............................. 2,625 ----------- Income (loss) before income tax provision (benefit), cumulative effect of accounting change, extraordinary loss and discontinued operation(2).................................... (7,096 ) Income tax provision (benefit).................... (2,555 ) ----------- Income (loss) from continuing operations before cumulative effect of accounting change, extraordinary loss and discontinued operation(2).................................... $ (4,541 ) ----------- ----------- Net income (loss)(2).............................. $ (4,541 ) ----------- ----------- OTHER DATA: Ratio of earnings to fixed charges(3)............. -- BALANCE SHEET DATA (AT PERIOD END): Working capital................................... $ 21,501 Total assets...................................... 59,252 Long-term obligations, less current portion....... 110,000 Shareholders' equity (deficit).................... (86,620 )
- ------------------------------ (1) Selling, general and administrative expenses include amortization of acquisition costs $1,161 and $850 in 1992 and 1993, respectively; and a $14,105 unusual charge and $1,174 of expenses associated with the Transactions in the nine months ended October 3, 1997. (2) Net income reflects (i) benefit of cumulative effect of change in accounting method for income taxes of $551 in 1993, (ii) extraordinary loss on debt settlement, net of income tax benefit, of $815 in 1995 and (iii) losses, net of income tax benefit, of $206, $26, $511, $664 and $308 in 1992, 1993, 1994, 1995 and through September 27, 1996, respectively, incurred by the Company's custom-molded organic rubber products manufacturing operations, the assets of which were disposed of in June 1996, and loss, net of income tax benefit, of $624 in 1996 on disposal of those assets. (3) In calculating the ratio of earnings to fixed charges, earnings consist of loss before income tax 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 $7,120 for the the nine months ended October 3, 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. 19 RISK FACTORS In addition to the other information contained in this Prospectus, holders of Notes should consider carefully the following Risk Factors affecting the business of the Company, as well as the other information set forth elsewhere in this Prospectus. SIGNIFICANT LEVERAGE AND DEBT SERVICE After consummation of the Transactions, the Company and its subsidiaries incurred significant outstanding indebtedness and became highly leveraged. See "Capitalization." In addition, subject to the limitations set forth in the Indenture, the Company and its subsidiaries may incur additional indebtedness, including up to $15.0 million under the New Credit Facility. The degree to which the Company is leveraged could have important consequences to the holders of the Notes, including (i) the Company's vulnerability to adverse general economic and industry conditions, (ii) the Company's ability to obtain additional financing for future capital expenditures, general corporate or other purposes and (iii) the dedication of a substantial portion of the Company's cash flow from operations to the payment of principal and interest on indebtedness, thereby reducing the funds available for operations and future business opportunities. The Company's ability to make scheduled payments on the principal of, or interest on, or to refinance, its indebtedness will depend on its future operating performance and cash flow, which are subject to prevailing economic conditions, prevailing interest rate levels, and financial, competitive, business and other factors, many of which are beyond its control, as well as the availability of borrowings under the New Credit Facility or successor facilities. However, based upon the current and anticipated level of operations, the Company believes that its cash flow from operations, together with amounts available under the New Credit Facility and its other sources of liquidity, will be adequate to meet its anticipated cash requirements for the foreseeable future for working capital, capital expenditures, interest payments and principal payments. There can be no assurance, however, that the Company's business will continue to generate cash flow at or above current levels. If the Company is unable to generate sufficient cash flow from operations in the future to service its indebtedness, it may be required to refinance all or a portion of its existing indebtedness, including the Notes, or to obtain additional financing. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on the Company. Finally, in order to pay the principal balance of the Notes due at maturity, the Company may have to obtain alternative financing. RANKING OF NOTES; ASSET ENCUMBRANCE The Notes and Note Guarantees will be senior unsecured obligations and will rank PARI PASSU in right of payment with all other existing and future senior obligations of the Company and the Subsidiary Guarantors, respectively. Loans under the New Credit Facility will be secured by substantially all of the Company's assets and will be guaranteed by the Company's domestic subsidiaries, which guarantees will be secured by substantially all of the assets of the Company's domestic subsidiaries. Accordingly, the Notes and the Note Guarantees are effectively subordinated to all secured indebtedness to the extent of the collateral and will rank PARI PASSU in right of payment with all other existing and future senior obligations of the Company or the Subsidiary Guarantors, respectively. Upon an event of default under any such secured indebtedness, the lenders could elect to declare all amounts outstanding, together with accrued and unpaid interest thereon, to be immediately due and payable. If the Company or the Subsidiary Guarantors were unable to repay those amounts, the lenders could proceed against the collateral granted them to secure that indebtedness. There can be no assurance that the assets of the Company or the relevant subsidiary would be sufficient to repay in full any such secured indebtedness. 20 RESTRICTIVE COVENANTS The New Credit Facility and the Indenture will contain numerous restrictive covenants, which limit the discretion of the management of the Company with respect to certain business matters. These covenants will place significant restrictions on, among other things, the ability of the Company to incur additional indebtedness, to create liens or other encumbrances, to pay dividends or make other restricted payments, to make investments, loans and guarantees and to sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. The New Credit Facility also contains a number of financial covenants that will require the Company to meet certain financial ratios and tests and provide that a "change of control" will constitute an event of default. See "Description of Notes--Certain Covenants" and "Description of New Credit Facility." A failure to comply with the obligations contained in the New Credit Facility or the Indenture, if not cured or waived, could permit acceleration of the related indebtedness and acceleration of indebtedness under other instruments that contain cross-acceleration or cross-default provisions. In the case of an event of default under the New Credit Facility, the lenders under the New Credit Facility would be entitled to exercise the remedies available to a secured lender under applicable law. If the Company were obligated to repay all or a significant portion of its indebtedness, there can be no assurance that the Company would have sufficient cash to do so or that the Company could successfully refinance such indebtedness. Other indebtedness of the Company that may be incurred in the future may contain financial or other covenants more restrictive than those applicable to the New Credit Facility or the Notes. IMPORTANCE OF KEY CUSTOMERS TO THE AEROSPACE PRODUCTS BUSINESS Certain customers are material to the business and operations of the Company. Boeing accounted for $7.9 million, or 11.0% of the Company's total net sales and 32.3% of the Aerospace Products business' net sales in 1996, and for $6.4 million, or 9.4%, of the Company's total net sales and 27.5% of the Aerospace Products division's net sales in 1995. In 1996, the top five customers of the Aerospace Products division accounted for $16.5 million in net sales, representing 22.8% and 67.1%, respectively, of the Company's total and the Aerospace Product business' net sales in that year. The Company's prospects will continue to depend on the success of these customers whose products incorporate aerospace products manufactured by the Company, as well as Boeing's retention of the Company as a major supplier. Although the Company believes that it has excellent long-standing relationships with these customers and that such relationships are mutually beneficial, the Company does not have long-term contracts with Boeing or any of its other major customers and the loss of any as a customer, or a significant reduction in the Company's business with any of them would have a material adverse effect on the Company and its business, results of operations and financial condition. See "--Competition." DEPENDENCE ON CUSTOMERS IN CYCLICAL INDUSTRIES A majority of the Company's revenues were derived from customers who are in industries and businesses that are highly cyclical in nature, such as the commercial and military aerospace and commercial construction industries. The world-wide market for commercial jet aircraft is predominantly driven by long-term trends in airline passenger traffic. The principal factors underlying long-term traffic growth are sustained economic growth in developed and emerging countries and political stability. Demand for commercial aircraft is further influenced by airline industry profitability, world trade policies, government- to-government relations, technological changes and price and other competitive factors. The military aircraft industry is highly sensitive to changes in international political conditions, national priorities and United States government defense budgets. The commercial construction industry is affected by downturns in general economic conditions, raw material price fluctuations and adverse weather conditions. Each of these industries is also subject to changes in general economic conditions. In addition, because the Company conducts its operations in a variety of markets, it is subject to the economic conditions in each 21 such market. General economic downturns in the commercial and military aerospace and commercial construction industries could have a material adverse effect on the Company and its business, results of operations and financial condition. The Company's outlook for its aerospace business and its allocation of resources are premised on the continued growth in the commercial aerospace industry. If this growth fails to continue, the Company's results of operations could be adversely affected. COMPETITION The Company experiences significant competition in all of the areas in which it does business. In general, other than the aerospace seals market, the markets in which it competes are not dominated by a single company or a small number of companies; instead a large number of companies offer products that overlap and are competitive with those offered by the Company. A number of the Company's competitors are significantly larger and have greater financial resources than the Company, and some of these competitors are divisions or subsidiaries of large, diversified companies that have access to the financial resources of their parent companies. The Company believes that the principal competitive factors in the businesses in which it operates are technologically advanced production, management capability, past performance in terms of timeliness and quality of product and price. There can be no assurance that the Company will be able to compete successfully. See "Business--Products and Markets--Aerospace Products--Competition," "--Flooring Products--Competition" and "--Commercial Products--Competition." DEPENDENCE ON KEY PERSONNEL The Company's operations are largely dependent on the efforts of its senior management. There can be no assurance that the Company will be able to retain such persons. Additionally, in order to successfully manage its growth strategy, the Company must continue to attract qualified personnel. The Company does not maintain "key man" life insurance policies on any of its employees. If certain of the current key personnel should cease to be employed by the Company for any reason, or if the Company should be unable to continue to attract and retain qualified management personnel, the Company's business, financial condition and results of operations could suffer a material adverse effect. See "Management." CONTROL BY INVESTORS Following the Recapitalization, the Company is now controlled by JFLEI, which beneficially owns shares representing 65% of the voting interest in the Company, on a fully diluted basis, and has the right to designate eight of the nine directors of the Company. In addition, certain limited partners in JFLEI own warrants representing an additional 20% of the Common Stock on a fully diluted basis. Pursuant to the terms of the Shareholders Agreement (as defined herein), for so long as it, together with its related transferees, owns 75% of the Warrants initially issued to it, one of the holders of the Warrants has the right to designate the ninth director. In addition, pursuant to the terms in the Shareholders Agreement, for so long as it, together with its related transferees, owns 75% of the Warrants initially issued to it, another of the holders of the Warrants has the right to cause the number of directors of the Company to be increased to ten and to designate the tenth director. Accordingly, JFLEI and certain of the investors therein have the power to elect the Company's board of directors, appoint new management and approve any action requiring the approval of the holders of the Company's Common Stock, including adopting amendments to the Company's Articles of Incorporation and approving mergers or sales of substantially all of the Company's assets. The directors elected by JFLEI have the authority to make decisions affecting the capital structure of the Company, including the issuance of additional indebtedness and the declaration of dividends. See "Management," "Certain Relationships and Related Transactions" and "Security Ownership of Certain Beneficial Owners and Management." 22 GOVERNMENT PROCUREMENT POLICIES Approximately one-third of the Company's Aerospace Products division's net sales in 1996 were made pursuant to contracts between the United States government, on the one hand, and the Company or a customer of the Company, on the other hand. Management's projected growth in the Aerospace Products division is based, in part, on management's belief that there will continue to be growth in purchases made under United States government military aircraft contracts and that the Company will benefit, directly or indirectly through its customers, from such growth. There can be no assurance, however, that there will be continued growth in such purchases. See "--Dependence on Customers in Cyclical Industries." In addition, contracts with the United States government are subject to cancellation for default or for convenience by the government if deemed in its best interests. Contracts which are terminated for convenience generally provide for payments to a contractor for its costs and a proportionate share of profit for work accomplished through the date of termination. Contracts which are terminated for default generally provide that the government pay only for the work it has accepted, can require the contractor to pay the difference between the original contract price and the cost to reprocure the contract items net of the value of the work accepted from the original contractor, and can hold a contractor liable for damages. There can be no assurance that any current or prospective contract on which the Company is a primary contractor or any such contract on which the Company is a subcontractor or supplier will not be terminated for default or for convenience by the government or that any such cancellation will not result in the Company realizing a loss or failing to realize the expected profit on any such contract. FUTURE ACQUISITIONS The Company expects to continue a strategy of identifying and acquiring companies with complementary products or services that may be expected to enhance the Company's operations and profitability. There can be no assurance that the Company will be able to identify appropriate acquisition candidates, negotiate appropriate acquisition terms, obtain financing which may be needed to effect such acquisitions or integrate acquisitions successfully into the Company's operations or that any of such acquisitions will prove profitable. RAW MATERIALS Principal raw materials purchased by the Company for use in its products include various custom and standard grades of rubber, silicone gum and vinyl as well as the Hypalon polymer material. The Company has historically not experienced any significant supply restrictions and has generally been able to pass through increases in the price of these materials to customers. In 1995, however, the Company experienced a significant price increase in one of the raw materials used in the manufacture of one of its flooring products. Due to the competitive nature of the flooring products business and the Company's proprietary formula for this product, the Company was unable to fully pass this price increase along to its consumers and its gross margins for this product were adversely affected. Although the Company does not currently anticipate that it will experience any similar price increases for this or any other raw material used by the Company in the near future, there can be no assurance that such price increases will not occur and that the Company's results of operations will not be adversely affected thereby. INABILITY TO FUND CHANGE OF CONTROL OFFER Upon a Change in Control (as defined in the Indenture), each holder will have the right to require the Company to repurchase all or any part of such holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of repurchase. See "Description of Notes--Certain Covenants--Purchase of Notes Upon Change of Control." However, there can be no assurance that sufficient funds will be available to the Company at the time of the Change of Control to make any required repurchases of Notes tendered. Moreover, restrictions in the New Credit Facility prohibit the Company from making such required repurchases; therefore, any such repurchases would constitute an 23 event of default under the New Credit Facility absent a waiver. In addition, the holders of the Redeemable Preferred Stock may also require the Company to repurchase their shares of Redeemable Preferred Stock upon a Change of Control, which would also constitute a default under the New Credit Facility, absent a waiver. Notwithstanding these provisions, the Company could enter into certain transactions, including certain recapitalizations, that would not constitute a Change of Control but would increase the amount of debt outstanding at such time. See "Description of New Credit Facility." ENVIRONMENTAL MATTERS The Company is subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fees and sanctions for violations and, in many cases, could require the Company to remediate a site to meet applicable legal requirements. In connection with the Recapitalization, JFLEI conducted certain investigations (including, in some cases, reviewing environmental reports prepared by others) of the Company's operations and its compliance with applicable environmental laws. The investigations, which included Phase I assessments (consisting generally of a site visit, records review and non-intrusive investigation of conditions at the subject facility) by independent consultants, found that certain facilities have had or may have had releases of hazardous materials that may require remediation. Pursuant to the Merger Agreement, the shareholders of the Company have agreed, subject to certain limitations as to survival and amount, to indemnify the Company against certain environmental liabilities incurred prior to the consummation of the Recapitalization. See "The Transactions." Based in part on the investigations conducted and the indemnification provisions of the Merger Agreement with respect to environmental matters, the Company believes, although there can be no assurance, that its liabilities relating to these environmental matters will not have a material adverse effect on its future financial position or results of operations. The Company does not maintain a reserve for environmental liabilities. FRAUDULENT CONVEYANCE AND PREFERENCE CONSIDERATIONS Under applicable provisions of federal bankruptcy law or comparable provisions of state fraudulent conveyance law, if, among other things, the Company or any of the Subsidiary Guarantors, at the time it incurred the indebtedness evidenced by the Notes or its Note Guarantee, as the case may be, (i)(a) was or is insolvent or rendered insolvent by reason of such occurrence or (b) was or is engaged in a business or transaction of which the assets remaining with the Company or such Subsidiary Guarantor were unreasonably small or constitute unreasonably small capital or (c) intended or intends to incur, or believed, believes or should have believed that it would incur, debts beyond its ability to repay such debts as they mature and (ii) the Company or such Subsidiary Guarantor received or receives less than the reasonably equivalent value or fair consideration for the incurrence of such indebtedness, the Notes and the Note Guarantees could be invalidated or subordinated to all other debts of the Company or such Subsidiary Guarantors, as the case may be. The Notes or Note Guarantees could also be invalidated or subordinated if it were found that the Company or the Subsidiary Guarantor party thereto, as the case may be, incurred indebtedness in connection with the Notes or its Note Guarantee with the intent of hindering, delaying or defrauding current or future creditors of the Company or such Subsidiary Guarantor, as the case may be. In addition, the payment of interest and principal by the Company pursuant to the Notes or the payment of amounts by a Subsidiary Guarantor pursuant to a Note Guarantee could be voided and required to be returned to the person making such payment, or to a fund for the benefit of the creditors of the Company or such Subsidiary Guarantor, as the case may be. The measures of insolvency for purposes of the foregoing considerations will vary depending upon the law applied in any proceeding with respect to the foregoing. Generally, however, the Company or a Subsidiary Guarantor would be considered insolvent if (i) the sum of its debts, including contingent 24 liabilities, were greater than the sum of all of its assets at a fair valuation or if the present fair saleable value of its assets were less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature or (ii) it could not pay its debts as they become due. Additionally, under federal bankruptcy or applicable state insolvency law, if certain bankruptcy or insolvency proceedings were initiated by or against the Company or any Subsidiary Guarantor within 90 days after any payment by the Company or such Subsidiary Guarantor with respect to the Notes or a Note Guarantee, respectively, or after the issuance of a Note Guarantee, or if the Company or such Subsidiary Guarantor anticipated becoming insolvent at the time of such payment or issuance, all or a portion of such payment or such Note Guarantee could be avoided as a preferential transfer, and the recipient of any such payment could be required to return such payment. To the extent any Note Guarantees were voided as a fraudulent conveyance or held unenforceable for any other reason, holders of Notes would cease to have any claim in respect of such Subsidiary Guarantor and would be creditors solely of the Company and any Subsidiary Guarantor whose Note Guarantee was not avoided or held unenforceable. In such event, the claims of holders of Notes against the issuer of an invalid Note Guarantee would be subject to the prior payment of all liabilities and preferred stock claims of such Subsidiary Guarantor. There can be no assurance that, after providing for all prior claims and preferred stock interests, if any, there would be sufficient assets to satisfy the claims of holders of Notes relating to any voided portions of any Note Guarantees. The Company currently has no significant subsidiaries. On the basis of its historical financial information, and recent operating history, as discussed in "Prospectus Summary," "Unaudited Pro Forma Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company believes that, after giving effect to the indebtedness incurred in connection with the Transactions, it will not be insolvent, will not have unreasonably small assets or capital for the businesses in which it is engaged and will not incur debts beyond its ability to pay such debts as they mature. There can be no assurance, however, as to what standard a court would apply in making such determinations. ABSENCE OF PUBLIC MARKET FOR THE NOTES The New Notes are a new issue of securities, have no established trading market and may be widely distributed. The Company does not intend to list the New Notes on any national securities exchange or to seek the admission thereof to trading in the Nasdaq National Market System. The Company has been advised by the Initial Purchaser that it currently intends to make a market in the New Notes. However, the Initial Purchaser is not obligated to do so and may discontinue such market-making at any time without notice. In addition, such market-making activity will be subject to the limitations imposed by the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may be limited during the Exchange Offer. See "Plan of Distribution." Accordingly, there can be no assurance that an active public or other market will develop for the New Notes or as to the liquidity of or the trading for the New Notes. If a trading market does not develop or is not maintained,, holders of the New Notes may experience difficulty in reselling the New Notes or may be unable to sell them at all. If a public trading market develops for the New Notes, future trading prices of the New Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's results of operations and the market for similar securities. Depending on prevailing interest rates, the market for similar securities and other facts, including the financial condition of the Company, the New Notes may trade at a discount from their principal amount. 25 CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Old Notes under the Securities Act. New Notes issued pursuant to the Exchange Offer may be offered for resale, resold, or otherwise transferred by Holders thereof (other than any such holder which is an "affiliate" of the Company or any Guarantor within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act provided that such New Notes are in the ordinary course of such holders' business and such holders have no arrangement with any person to participate in the distribution of such notes. Each broker-dealer that receives New Notes as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that, by so acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." However, to comply with the Securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes will be adversely affected. 26 THE TRANSACTIONS Pursuant to the Merger Agreement among JFLEI, MergerCo, the Company and all of the shareholders of the Company, MergerCo merged with and into the Company with the Company surviving the Merger. The Merger, together with the related transactions described below are collectively referred to as the "Recapitalization." Pursuant to the terms of the Merger Agreement: - All outstanding shares of the Company's Common Stock, other than those retained by the Continuing Shareholders, were converted into the right to receive an amount in cash equal to the Recapitalization Consideration and all vested options to purchase the Company's Common Stock were canceled and converted into the right to receive an amount in cash equal to the Recapitalization Consideration less the applicable exercise price. - The Continuing Shareholders agreed to retain an aggregate of 722,702 Continuing Shares, which represents approximately 15% of the common equity of the Company, on a fully diluted basis, after consummation of the Recapitalization. - The shareholders of the Company prior to the Recapitalization made certain customary representations, warranties and covenants to the Company and JFLEI in connection with the Merger. These shareholders agreed to indemnify the Company and JFLEI against any losses brought about by a breach of these representations, warranties or covenants, up to an aggregate maximum amount of approximately $8.8 million (except for certain tax and title issues which are not subject to this indemnification cap). This indemnity, excluding these tax and title issues, will expire on March 31, 1998. The Merger was financed through a series of related transactions: - JFLEI made a capital contribution in the amount of $20.0 million to MergerCo (the "JFLEI Investment") and received 3,134,298 shares of common stock of MergerCo in consideration thereof; - Concurrently with the consummation of the Merger, in consideration for $18.0 million, the Company issued 18,000 shares of Redeemable Preferred Stock, together with the Warrants to purchase an aggregate of 20% of the issued and outstanding common stock of the Company, to certain purchasers thereof that are limited partners of JFLEI. See "Description of Redeemable Preferred Stock and Warrants;" - The Old Notes were issued by the Company concurrently with consummation of the Merger; and - The Company entered into a credit facility (the "New Credit Facility"), which provides for revolving credit borrowings of up to $15.0 million. No borrowings were or will be drawn under the New Credit Facility in connection with the Transactions. See "Description of New Credit Facility." Immediately following the consummation of the Transactions, (i) JFLEI and its affiliates owned approximately 65% of the common equity of the Company on a fully diluted basis, (ii) the holders of the Warrants obtained the right to purchase approximately 20% of the common equity of the Company, on a fully diluted basis and (iii) the Continuing Shareholders owned approximately 15% of the common equity of the Company, on a fully diluted basis. Accordingly, the merger was accounted for as a recapitalization for financial reporting purposes and the historical basis of the Company's assets and liabilities has not been impacted by the transaction. 27 USE OF PROCEEDS The gross proceeds to the Company from the Offering were $110.0 million before deducting commissions and estimated expenses of the Offering. The Company used the proceeds from the issuance of the Senior Notes, JFLEI Investment, the issuance of the Redeemable Preferred Stock and Warrants and the proceeds of the other Transactions, (i) to pay certain shareholders of the Company the Recapitalization Consideration for their shares of the Company's Common Stock and for their outstanding options to purchase the Company's Common Stock which were not Continuing Shares, (ii) to repay certain existing indebtedness of the Company, (iii) to pay certain expenses of the Transactions and (iv) for general corporate purposes. The following table sets forth the sources and uses of funds in connection with the Transactions:
(DOLLARS IN THOUSANDS) Sources of Funds: Issuance of Senior Notes............................................. $ 110,000 JFLEI Investment..................................................... 20,000 Issuance of Redeemable Preferred Stock and Warrants.................. 18,000 Continuing Shares(1)................................................. 6,740 New Credit Facility.................................................. 0 -------- $ 154,740 -------- -------- Uses of Funds: Aggregate Recapitalization Consideration(1).......................... $ 117,892 Repayment of Existing Credit Facility and Subordinated Debt(2)....... 19,014 Transaction Expenses(3).............................................. 7,305 Working Capital...................................................... 10,529 -------- $ 154,740 -------- --------
- ------------------------ (1) Pursuant to the Recapitalization, (i) 8,676,168 shares of Common Stock of the Company were converted into the right to receive the Recapitalization Consideration, (ii) options to purchase 1,542,000 shares of Common Stock of the Company were converted into the right to receive the Recapitalization Consideration less the applicable exercise price, (iii) warrants to purchase 1,700,000 shares of Common Stock of the Company were converted into the right to receive the Recapitalization Consideration less the applicable exercise price and (iv) 722,702 Continuing Shares were retained by the Continuing Shareholders, which represent an aggregate of 15% of the issued and outstanding shares of the Company, on a fully diluted basis. See "The Transactions." These line items include the value of the Continuing Shares based on the Recapitalization Consideration. (2) Consists of $12,170 at 7.88% interest at the date of repayment, $3,472 at 8.63% interest at the date of repayment, $1,333 at 9.13% interest at the date of repayment, accrued interest, prepayment penalty and other fees equal to approximately $289, and subordinated debt of $1,750 at 12.15% interest at the date of repayment. (3) Includes discounts and commissions and expenses incurred in connection with the Offering, fees and expenses paid in connection with the Recapitalization and the financing thereof, fees and expenses paid in connection with the issuance of the Preferred Stock and Warrants and fees and expenses paid in connection with the New Credit Facility. See "The Transactions," "Description of New Credit Facility," "Description of Redeemable Preferred Stock and Warrants" and "Certain Relationships and Related Transactions." 28 THE EXCHANGE OFFER PURPOSE AND EFFECT The Old Notes were sold by the Company to the Initial Purchaser on August 20, 1997 pursuant to the Purchase Agreement. The Initial Purchaser subsequently resold the Old Notes in reliance on Rule 144A under the Securities Act. The Company, the Subsidiary Guarantors and the Initial Purchaser entered into the Registration Rights Agreement, pursuant to which the Company and the Subsidiary Guarantors agreed, for the benefit of the Holders of the Old Notes, at the expense of the Company and the Subsidiary Guarantors, to (i) file on or prior to the 60th calendar day following the Closing Date a registration statement (the "Exchange Offer Registration Statement") with the Commission, (ii) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or prior to the 120th calendar day following the Closing Date, and (iii) use its best efforts to consummate the Exchange Offer on or prior to the 150th calendar day following the Closing Date. The Company will keep the Exchange Offer open for not less than 30 days and not more than 45 days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders of the Old Notes. This Exchange Offer is intended to satisfy the Company's exchange offer obligations under the Registration Rights Agreement. CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES Following the expiration of the Exchange Offer, holders of Old Notes not tendered, or not properly tendered will not have any further registration rights and such Old Notes will continue to be subject to the existing restrictions on transfer thereof. Accordingly, the liquidity of the market for a holder's Old Notes could be adversely affected upon expiration of the Exchange Offer if such holder elects to not participate in the Exchange Offer. TERMS OF THE EXCHANGE OFFER The Company hereby offers, upon the terms and subject to the conditions set forth herein and in the accompanying Letter of Transmittal, to exchange $1,000 in principal amount of the New Notes for each $1,000 in principal amount of the outstanding Old Notes. The Company will accept for exchange any and all Old Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to the terms and provisions of the Registration Rights Agreement. See "Conditions of the Exchange Offer." Old Notes may be tendered only in multiples of $1,000. Subject to the foregoing, holders of Old Notes may tender less than the aggregate principal amount represented by the Old Notes held by them, provided that they appropriately indicate this fact on the Letter of Transmittal accompanying the tendered Old Notes (or so indicate pursuant to the procedures for book-entry transfer). As of the date of this Prospectus, $110.0 million in aggregate principal amount of the Old Notes is outstanding, the maximum amount authorized by the Indenture for all Notes. Solely for reasons of administration (and for no other purpose), the Company has fixed the close of business on December 8, 1997, as the record date (the "Record Date") for purposes of determining the persons to whom this Prospectus and the Letter of Transmittal will be mailed initially. Only a holder of the Old Notes (or such holder's legal representative or attorney-in-fact) may participate in the Exchange Offer. There will be no fixed record date for determining holders of the Old Notes entitled to participate in the Exchange Offer. The Company believes that, as of the date of this Prospectus, no such holder is an affiliate (as defined in Rule 405 under the Securities Act) of the Company. 29 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 January 23, 1998 at 5:00 p.m., New York City time, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the Expiration Date shall be the latest date and time to which the Exchange Offer is extended. In order to extend the Exchange Offer, the Company will notify the Exchange Agent of any extension by oral or written notice and will make a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right, in its sole discretion, (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the conditions set forth below under "Conditions of the Exchange Offer" shall not have been satisfied, to terminate the Exchange Offer, by giving oral or written notice of such delay, extension, or termination to the Exchange Agent, and (iv) to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendments by means of a prospectus supplement that will be distributed to the registered holders of the Old Notes. CONDITIONS OF THE EXCHANGE OFFER The Exchange Offer is not conditioned upon any minimum principal amount of the Old Notes being tendered for exchange. However, the Exchange Offer is conditioned upon the declaration by the Commission of the effectiveness of the Registration Statement of which this Prospectus constitutes a part. TERMINATION OF CERTAIN RIGHTS Pursuant to the Registration Rights Agreement the Company and the Subsidiary Guarantors agreed, at their own expense, to (i) file on or prior to the 60th calendar day following the Closing Date a registration statement (the "Exchange Offer Registration Statement") with the Commission with respect to a registered offer to exchange the Old Notes for a new issue of debt securities of the Company (the "Exchange Notes") to be issued under the Indenture in the same aggregate principal amount as and with the terms that will be identical in all respects to the Old Notes (except that the Exchange Notes will not contain terms that will be identical in all respects to the interest rate step-up provision and transfer restrictions) and (ii) use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act on or prior to the 120th calendar day following the Closing Date and (iii) use its best effort to consummate the Exchange Offer on or prior to the 150th calendar day following the Closing Date. The Company agreed to keep the Exchange Offer open for not less than 30 days and not more than 45 days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders of the Old Notes. In the event that changes in the law or applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, or if for any reason the Exchange Offer is not consummated within 150 days of the Closing Date or in certain other circumstances, the Registration Rights Agreement provides that the Company and the Subsidiary Guarantors will, at their own expense, 30 (i) as promptly as practicable, and in any event on or prior to 60 days after such filing obligation arises, file with the Commission a shelf registration statement (the Shelf Registration Statement") covering resales of the Old Notes, (ii) use their best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act on or prior to 45 days after such filing occurs and (iii) keep effective the Shelf Registration Statement until two years after its effective date (or such shorter period that will terminate when all the Old Notes covered thereby have been sold pursuant thereto or in certain other circumstances). The Registration Rights Agreement provides that, subject to certain exceptions, in the event of a Registration Default (as defined below), holders of Old Notes are entitled to receive Liquidated Damages, with respect to the first 90-day period immediately following the occurrence of such Registration Default, an amount equal to $0.05 per week per $1,000 principal amount of Old Notes held by such holders. The amount of Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Old Notes with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum of amount of Liquidated Damages of $0.30 per week per $1,000 principal amount of Old Notes. A "Registration Default" with respect to the Exchange Offer shall occur if: (i) the Company fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (ii) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), or (c) the Company fails to consummate the Exchange Offer within 30 business days of the Effectiveness Target Date with respect to the Exchange Offer Registration Statement or (iv) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Notes during the periods specified in the Registration Rights Agreement. Holders of New Notes will not be and, upon consummation of the Exchange Offer, holders of Old Notes will no longer be, entitled to (i) the right to receive the Liquidated Damages or (ii) certain other rights under the Registration Rights Agreement intended for holders of Old Notes. The Exchange Offer shall be deemed consummated upon the occurrence of the delivery by the Company to the Registrar under the Indenture of New Notes in the same aggregate principal amount as the aggregate principal amount of Old Notes that are tendered by holders thereof pursuant to the Exchange Offer. ACCRUED INTEREST The New Notes will bear interest at a rate equal to 10% per annum, which interest shall accrue from August 20, 1997 or from the most recent Interest Payment Date with respect to the Old Notes to which interest was paid or duly provided for. See "Description of Notes--Principal, Maturity and Interest." PROCEDURES FOR TENDERING OLD NOTES The tender of a holder's Old Notes as set forth below and the acceptance thereof by the Company will constitute a binding agreement between the tendering holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal. Except as set forth below, a holder who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must transmit such Old Notes, together with a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to the Exchange Agent at the address set forth on the back cover page of this Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. 31 Any financial institution that is a participant in the Depositary's Book-Entry Transfer Facility system may make book-entry delivery of the Old Notes by causing the Depositary to transfer such Old Notes into the Exchange Agent's account in accordance with the Depositary's procedures for such transfer. In connection with a book-entry transfer, a Letter of Transmittal need not be transmitted to the Exchange Agent, provided that the book-entry transfer procedure must be complied with prior to 5:00 p.m., New York City time, on the Expiration Date. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant hereto are tendered (i) by a registered holder of the Old Notes who has not completed either the box entitled "Special Exchange Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal, or (ii) by an Eligible Institution (as defined). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or otherwise be an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If the Letter of Transmittal is signed by a person other than the registered holder of the Old Notes, the Old Notes surrendered for exchange must either (i) be endorsed by the registered holder, with the signature thereon guaranteed by an Eligible Institution, or (ii) be accompanied by a bond power, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution. The term "registered holder" as used herein with respect to the Old Notes means any person in whose name the Old Notes are registered on the books of the Registrar. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered and to reject any Old Notes the Company's acceptance of which might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right to waive any defects or irregularities or conditions of the Exchange Offer as to particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and Conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes for exchange must be cured within such period of time as the Company shall determine. The Company will use reasonable efforts to give notification of defects or irregularities with respect to tenders of Old Notes for exchange but shall not incur any liability for failure to give such notification. Tenders of the Old Notes will not be deemed to have been made until such irregularities have been cured or waived. If any Letter of Transmittal, endorsement, bond power, power of attorney or any other document required by the Letter of Transmittal is signed by a trustee, executor, corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, proper evidence satisfactory to the Company, in its sole discretion, of such person's authority to so act must be submitted. Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender Old Notes in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such Beneficial Owner's behalf. If such Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to completing and executing the Letter of Transmittal and tendering Old Notes, make appropriate arrangements to register ownership of the Old Notes in such Beneficial Owner's name. Beneficial Owners should be aware that the transfer of registered ownership may take considerable time. 32 By tendering, each registered holder will represent to the Company that, among other things (i) the New Notes to be acquired in connection with the Exchange Offer by the holder and each Beneficial Owner of the Old Notes are being acquired by the holder and each Beneficial Owner in the ordinary course of business of the holder and each Beneficial Owner, (ii) the holder and each Beneficial Owner are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the New Notes, (iii) the holder and each Beneficial Owner acknowledge and agree that any person participating in the Exchange Offer for the purpose of distributing the New Notes must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction of the New Notes acquired by such person and cannot rely on the position of the staff of the Commission set forth in no-action letters that are discussed herein under "Resales of New Notes," (iv) that if the holder is a broker-dealer that acquired Old Notes as a result of market making or other trading activities, it will deliver a Prospectus in connection with any resale of New Notes acquired in the Exchange Offer, (v) the holder and each Beneficial Owner understand that a secondary resale transaction described in clause (iii) above should be covered by an effective registration statement containing the selling security holder information required by Item 507 of Regulation S-K of the Commission and (vi) neither the holder nor any Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company except as otherwise disclosed to the Company in writing. In connection with a book-entry transfer, each participant will confirm that it makes the representations and warranties contained in the Letter of Transmittal. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery (as defined in the Letter of Transmittal) must be signed by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must have received from the Holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder, the certificate number or numbers of the tendered Old Notes, and the principal amount of tendered Old Notes, stating that the tender is being made thereby and guaranteeing that, within four (4) business days after the date of delivery of the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed Letter of Transmittal and any other required documents will be deposited by the Eligible Institution with the Exchange Agent and (iii) such properly completed and executed documents required by the Letter of Transmittal and the tendered Old Notes in proper form for transfer (or confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at the Depositary) must be received by the Exchange Agent within four (4) business days after the Expiration Date. Any Holder who wishes to tender Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old Notes prior to 5:00 p.m., New York City time, on the Expiration Date. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all the conditions to the Exchange Offer, the Company will accept any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly after acceptance of the Old Notes. For purposes of the Exchange Offer, the Company shall be deemed to have accepted validly tendered Old Notes, when, as, and if the Company has given oral or written notice thereof to the Exchange Agent. 33 In all cases, issuances of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of such Old Notes, a properly completed and duly executed Letter of Transmittal and all other required documents (or of confirmation of a book-entry transfer of such Old Notes into the Exchange Agent's account at the Depositary); provided, however, that the Company reserves the absolute right to waive any defects or irregularities in the tender or conditions of the Exchange Offer. If any tendered Old Notes are not accepted for any reason, such unaccepted Old Notes will be returned without expense to the tendering Holder thereof as promptly as practicable after the expiration or termination of the Exchange Offer. WITHDRAWAL RIGHTS Tenders of the Old Notes may be withdrawn by delivery of a written notice to the Exchange Agent, at its address set forth on the back cover page of this Prospectus, at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes, as applicable), (iii) be signed by the Holder in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by a bond power in the name of the person withdrawing the tender, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered holder, with the signature thereon guaranteed by an Eligible Institution together with the other documents required upon transfer by the Indenture and (iv) specify the name in which such Old Notes are to be re-registered, if different from the Depositor, pursuant to such documents of transfer. Any questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Company, in its sole discretion. The Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are withdrawn will be returned to the Holder thereof without cost to such Holder as soon as practicable after withdrawal. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer--Procedures for Tendering Old Notes" at any time on or prior to the Expiration Date. THE EXCHANGE AGENT; ASSISTANCE United States Trust Company of New York is the Exchange Agent. All tendered Old Notes, executed Letters of Transmittal and other related documents should be directed to the Exchange Agent. Questions and requests for assistance and requests for additional copies of the Prospectus, the Letter of Transmittal and other related documents should be addressed to the Exchange Agent as follows: BY REGISTERED OR CERTIFIED MAIL : United States Trust Company of New York P.O. Box 844 Cooper Station New York, NY 10276-0844 Attn: Corporate Trust Services BY FACSIMILE: (212) 420-6152 34 BY OVERNIGHT COURIER: United States Trust Company of New York 770 Broadway, 13th Floor New York, New York 10003 Attn: Corporate Trust Services BY HAND: United States Trust Company of New York 111 Broadway Lower Level New York, New York 10006 Attn: Corporate Trust Services Confirm by Telephone 800-548-6565 FEES AND EXPENSES All expenses incident to the Company's consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Company, including, without limitation: (i) all registration and filing fees (including, without limitation, fees and expenses of compliance with state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for the New Notes in a form eligible for deposit with the Depositary and of printing Prospectuses), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) fees and disbursements of independent certified public accountants, (vi) rating agency fees, (vii) internal expenses of the Company (including, without limitation, all salaries and expenses of officers and employees of the Company performing legal or accounting duties) and (ix) fees and expenses incurred in connection with the listing of the New Notes on a securities exchange. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptance of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The New Notes will be recorded at the same carrying value as the Old Notes, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss will be recognized by the Company for accounting purposes. The expenses of the Exchange Offer will be amortized over the term of the New Notes. FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizing federal income tax consequences of the Exchange Offer reflects the opinion of Gibson, Dunn, & Crutcher LLP, counsel to the Company, as to material federal income tax consequences expected to result from the Exchange Offer. An opinion of counsel is not binding on the Internal Revenue Service ("IRS") or the courts, and there can be no assurances that the IRS will not take, and that a court would not sustain, a position contrary to that described below. Moreover, the following 35 discussion does not constitute comprehensive tax advice to any particular Holder of Old Notes. The summary is based on the current provisions of the Internal Revenue Code of 1986, as amended, and applicable Treasury regulations, judicial authority and administrative pronouncements. The tax consequences described below could be modified by future changes in the relevant law, which could have retroactive effect. Each Holder of Old Notes should consult its own tax adviser as to these and any other federal income tax consequences of the Exchange Offer as well as any tax consequences to it under foreign, state, local or other law. In the opinion of Gibson, Dunn & Crutcher LLP, exchanges of Old Notes for Notes pursuant to the Exchange Offer will be treated as a modification of the Old Notes that does not constitute a material change in their terms, and the Company intends to treat the exchanges in that manner. Therefore, a Note is treated as a continuation of the corresponding Old Note. An exchanging Holder's holding period for a Note will include such Holder's holding period for the Old Note. Such Holder will not recognize any gain or loss, and such Holder's basis in the Note will be the same as such Holder's basis in the Old Note. The Exchange Offer will result in no federal income tax consequences to a non-exchanging Holder. RESALES OF THE NEW NOTES Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that the New Notes issued pursuant to the Exchange Offer to a holder in exchange for Old Notes may be offered for resale, resold and otherwise transferred by such holder (other than (i) a broker-dealer who purchased Old Notes directly from the Company for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or (ii) a person that is an affiliate of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such holder is acquiring the New Notes in the ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. The Company has not requested or obtained an interpretive letter from the Commission staff with respect to this Exchange Offer, and the Company and the holders are not entitled to rely on interpretive advice provided by the staff to other persons, which advice was based on the facts and conditions represented in such letters. However, the Exchange Offer is being conducted in a manner intended to be consistent with the facts and conditions represented in such letters. If any holder acquires New Notes in the Exchange Offer for the purpose of distributing or participating in a distribution of the New Notes, such holder cannot rely on the position of the staff of the Commission enunciated in MORGAN STANLEY & CO., INCORPORATED (available June 5, 1991) and EXXON CAPITAL HOLDINGS CORPORATION (available April 13, 1989), or interpreted in the Commission's letter to SHEARMAN AND STERLING (available July 2, 1993), or similar no-action or interpretive letters and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction, unless an exemption from registration is otherwise available. Each broker-dealer that receives New Notes in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." It is expected that the New Notes will be freely transferable by the holders thereof, subject to the limitations described in the immediately preceding paragraph. Sales of New Notes acquired in the Exchange Offer by holders who are "affiliates" of the Company within the meaning of the Securities Act will be subject to certain limitations on resale under Rule 144 of the Securities Act. Such persons will only be entitled to sell New Notes in compliance with the volume limitations set forth in Rule 144, and sales of New Notes by affiliates will be subject to certain Rule 144 requirements as to the manner of sale, notice and the availability of current public information regarding the Company. The foregoing is a summary only of Rule 144 as it may apply to affiliates of the Company. Any such persons must consult their own legal counsel for advice as to any restrictions that might apply to the resale of their Notes. 36 CAPITALIZATION The following table sets forth the capitalization of the Company on a historical basis as of October 3, 1997. The historical balance sheet as of October 3, 1997 already reflects the effect of the Recapitalization. The Old Notes surrendered in exchange for the New Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the New Notes will not result in any increase or decrease in the indebtedness of the Company. As such, no effect has been given to the Exchange Offer in this capitalization table. This table should be read in conjunction with "The Transactions," "Description of Notes," "Description of New Credit Facility," "Description of Preferred Stock and Warrants," the Unaudited Pro Forma Consolidated Income Statements and the notes thereto and the Consolidated Financial Statements and the notes thereto appearing elsewhere in this Prospectus.
OCTOBER 3, 1997 ------------------- HISTORICAL ------------------- (DOLLARS IN THOUSANDS) ---------- ---------- Long-term obligations (net of current maturities): 10% Senior Notes due 2007.................................................................... $ 110,000 ---------- Total long-term obligations:................................................................. 110,000 Redeemable Preferred Stock, no par value; 50,000 shares authorized; 18,000 shares issued and outstanding(1)............................................................................. 15,681 Shareholders' equity: Common Stock, no par value; 20,000,000 shares authorized; 3,857,000 shares issued and outstanding(2)............................................................................. 25,464 Accumulated deficit.......................................................................... (112,084) ---------- Capital deficiency........................................................................... (86,620) ---------- Total capitalization......................................................................... $ 39,061 ---------- ----------
- ------------------------ (1) The warrants attached to the preferred stock were valued at $2,500. Dividends on the Redeemable Preferred Stock are cumulative, accrue quarterly at the rate of 11 1/2% per annum on the stated value of $18,000 and are paid in-kind through July 15, 2000. The amount shown is net of the accretion of the warrants, the dividend-in-kind and expenses associated with issuance totaling $181. See "Description of Redeemable Preferred Stock and Warrants." (2) Excludes 964,000 shares of Common Stock reserved for issuance pursuant to the Warrants. See "The Transactions" and "Description of Preferred Stock and Warrants." 37 UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS The following Unaudited Pro Forma Consolidated Income Statements (as defined below) of the Company are based on the audited and unaudited financial statements of the Company appearing elsewhere in this Prospectus, as adjusted to illustrate the estimated effects of the Transactions. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The Unaudited Pro Forma Consolidated Income Statements and accompanying notes should be read in conjunction with the historical financial statements of the Company and other financial information pertaining to the Company appearing elsewhere in this Prospectus including "The Transactions," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Unaudited Pro Forma Consolidated Income Statements have been prepared to give effect to the Transactions, including the Offering, and the application of the net proceeds therefrom, as if such transactions had occurred on December 30, 1995 for the statement of income for the year ended January 3, 1997, and for the statement of income for the nine months ended October 3, 1997 (the "Unaudited Pro Forma Consolidated Income Statements") A Unaudited Pro Forma Consolidated Balance Sheet has not being prepared as the effects of the Transactions, including the Offering are reflected in the unaudited financial statements of the Company as at and for the nine months ended October 3, 1997, appearing elsewhere in this Prospectus. The Unaudited Pro Forma Consolidated Income Statements do not purport to be indicative of what the Company's results of operation would actually have been had the Transactions been completed at the beginning of the period indicated or to project the Company's results of operations for any future date. 38 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 3, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL FISCAL YEAR END PRO FORMA 1996 ADJUSTMENTS PRO FORMA -------------- ----------- ----------- Net sales.............................................................. $ 72,466 $ -- $ 72,466 Costs and expenses: Cost of sales........................................................ 49,689 -- 49,689 Selling.............................................................. 6,824 -- 6,824 General and administrative........................................... 4,786 (292)(1) 4,994 500(1) ------- ----------- ----------- Income from operations................................................. 11,167 (208) 10,959 Interest expense, net.................................................. 2,668 8,332(2) 11,000 ------- ----------- ----------- Income (loss) before income tax provision (benefit) and discontinued operation............................................................ 8,499 (8,540) (41) Income tax provision (benefit)......................................... 3,466 (3,483) (17) ------- ----------- ----------- Income (loss) from continuing operations before discontinued operation............................................................ 5,033 $ (5,057) $ (24) ------- ----------- ----------- ----------- ----------- Loss from discontinued operation, net of income tax benefit of $205.... (308) Loss on disposal of discontinued operation, net of income tax benefit of $356.............................................................. (624) ------- Net Income............................................................. $ 4,101 ------- -------
The accompanying notes to the unaudited pro forma consolidated statements of income are an integral part of this statement. 39 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED OCTOBER 3, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL NINE MONTHS ENDED OCTOBER 3, PRO FORMA 1997 ADJUSTMENTS PRO FORMA -------------- ----------- ----------- Net sales.............................................................. $ 68,785 $ -- $ 68,785 Costs and expenses: Cost of sales........................................................ 48,423 -- 48,423 Selling.............................................................. 5,508 -- 5,508 General and administrative........................................... 5,220 (279)(1) 3,767 (1,174)(4) Stock option purchase................................................ 14,105 (14,105)(3) -- ------- ----------- ----------- (Loss) income from operations.......................................... (4,471) 15,558 11,087 Interest expense, net.................................................. 2,625 5,625(2) 8,250 ------- ----------- ----------- (Loss) income before income tax (benefit) provision.................... (7,096) 9,933 2,837 Income tax (benefit) provision......................................... (2,555) 3,576 1,021 ------- ----------- ----------- Net (loss) income...................................................... $ (4,541) $ 6,357 $ 1,816 ------- ----------- ----------- ------- ----------- -----------
The accompanying notes to the unaudited pro forma consolidated statements of income are an integral part of this statement. 40 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS) The pro forma financial data have been derived from the application of pro forma adjustments to the Company's historical financial statements for the period noted. The Merger has been accounted for as a recapitalization that will have no impact on the historical basis of assets and liabilities. The pro forma data assume that there are no dissenting shareholders to the Merger. (1) The pro forma adjustment to general and administrative expenses reflects the elimination of annual management fee payable to a director and to an affiliate of the principal shareholders of the Company. Upon consummation of the transactions, the Company entered into a Management Agreement with Lehman whereby the Company has agreed to pay Lehman an annual management fee. (2) The pro forma adjustment to interest expense, net, reflects the following:
YEAR ENDED JAN. 3, NINE MONTHS ENDED 1997 OCTOBER 3, 1997 ----------- ----------------- Interest expense on the Senior Notes.......................... $ 11,000 $ 8,250 Amortization of debt issuance costs (10 years)................ 500 375 Less interest income.......................................... (500) (375) Less historical net interest of existing debt refinanced...... (2,668) (2,625) ----------- ------ Incremental interest expense.................................. $ 8,332 $ 5,625 ----------- ------ ----------- ------
(3) The pro forma adjustments for the fiscal year ended 1996 do not include a $14,105 unusual charge and related tax benefit. The pro forma adjustments for the nine months ended October 3, 1997, include the elimination of a $14,105 unusual charge and related tax benefit. The $14,105 represents the Company's cost to purchase options issued and outstanding under the Company's stock option plan. (4) The pro forma adjustments for the nine months ended October 3, 1997, reflect the elimination of expenses accounted with the transaction of $1,174. 41 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected consolidated financial data below for the three years ended January 3, 1997 and as of December 29, 1995 and January 3, 1997 have been derived from the Consolidated Financial Statements of the Company which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Prospectus. The selected consolidated financial data below for the years ended January 1, 1993 and December 31, 1993 and as of January 1, 1993, December 31, 1993 and December 30, 1994 have been derived from the Consolidated Financial Statements of the Company which have also been audited by Ernst & Young LLP, but which are not included elsewhere herein. The selected financial data for the nine months ended September 27, 1996 and as of and for the nine months ended October 3, 1997 have been derived from the Company's Unaudited Consolidated Financial Statements for those periods included elsewhere in the Prospectus and the selected financial data as of September 27, 1996 have been derived from the Company's Unaudited Consolidated Financial Statements for that period, but are not included elsewhere herein and, in each case, include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the unaudited interim periods. Results for the nine months ended October 3, 1997 are not necessarily indicative of the results that may be expected for the entire year. The information presented below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes included elsewhere in this Prospectus. The data below reflect the acquisition by the Company of certain assets of Purosil in March 1993; of SFS in February 1995; of Haskon in June 1995 and of Kentile in April 1996.
NINE MONTHS ENDED FISCAL YEAR -------------------------- ----------------------------------------------------- SEPTEMBER 27, OCTOBER 3, 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ------------- ----------- (DOLLARS IN THOUSANDS) OPERATING DATA: Net sales............................ $ 28,195 $ 36,431 $ 44,370 $ 68,411 $ 72,466 $ 54,476 $ 68,785 Cost of sales........................ 18,714 25,355 29,998 49,226 49,689 37,722 48,423 --------- --------- --------- --------- --------- ------------- ----------- Gross profit......................... 9,481 11,076 14,372 19,185 22,777 16,754 20,362 Selling, general and administrative expenses(1)........................ 8,630 9,215 8,152 10,212 11,610 8,305 24,833 --------- --------- --------- --------- --------- ------------- ----------- Income (Loss) from operations........ 851 1,861 6,220 8,973 11,167 8,449 (4,471) Interest expense, net................ 2,828 2,897 2,812 3,007 2,668 2,054 2,625 --------- --------- --------- --------- --------- ------------- ----------- Income (loss) before income tax provision (benefit), cumulative effect of accounting change, extraordinary loss and discontinued operation(2)....................... (1,977) (1,036) 3,408 5,966 8,499 6,395 (7,096) Income tax provision (benefit)....... (3) 146 1,395 3,393 3,466 2,558 (2,555) --------- --------- --------- --------- --------- ------------- ----------- Income (loss) from continuing operations before cumulative effect of accounting change, extraordinary loss and discontinued operation(2)....................... $ (1,974) $ (1,182) $ 2,013 $ 2,573 $ 5,033 $ 3,837 $ (4,541) --------- --------- --------- --------- --------- ------------- ----------- --------- --------- --------- --------- --------- ------------- ----------- Net income (loss)(2)................. $ (2,180) $ (657) $ 1,502 $ 1,094 $ 4,101 $ 2,905 $ (4,541) --------- --------- --------- --------- --------- ------------- ----------- --------- --------- --------- --------- --------- ------------- ----------- OTHER DATA: Ratio of earnings to fixed charges(3)......................... --x
42
AS OF AS OF FISCAL YEAR END -------------------------- ----------------------------------------------------- SEPTEMBER 27, OCTOBER 3, 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ------------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital.................... $ 2,096 $ 4,932 $ 4,766 $ 5,402 $ 5,328 $ 6,837 $ 21,501 Total assets....................... 24,469 30,535 28,551 39,729 40,673 38,065 59,252 Long-term obligations, less current portion.......................... 19,406 20,011 16,937 21,803 18,126 $ 17,008 110,000 Shareholders' equity (deficit)..... (4) (654) 849 340 4,283 $ 2,981 (86,620)
- -------------------------- (dollars in thousands) (1) Selling, general and administrative expenses include amortization of acquisition costs of $1,161 and $850 in 1992 and 1993, respectively; and a $14,105 unusual charge and $1,174 of expenses associated with the Transactions in the nine months ended October 3, 1997. (2) Net income reflects (i) benefit of cumulative effect of change in accounting method for income taxes of $551 in 1993, (ii) extraordinary loss on debt settlement, net of income tax benefit, of $815 in 1995 and (iii) losses, net of income tax benefit, of $206, $26, $511, $664 and $308 in 1992, 1993, 1994, 1995 and through September 27, 1996, respectively, incurred by the Company's custom-molded organic rubber products manufacturing operations, the assets of which were disposed of in June 1996, and loss, net of income tax benefit, of $624 in 1996 on disposal of those assets. (3) In calculating the ratio of earnings to fixed charges, earnings consist of loss before income tax 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 $7,120 for the nine months ended October 3, 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. 43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis should be read in conjunction with "Selected Historical Consolidated Financial Data" and the audited Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. The Company operates within one industry segment, elastomer products, and is organized into three product groups: Aerospace Products, which produces precision silicone seals and other products used on commercial and military aircraft; Flooring Products, which produces and distributes rubber and vinyl cove base and other floor covering accessory products; and Commercial Products, which produces various intermediate and finished silicone and organic rubber products. Burke entered the Aerospace Products business through the acquisition of Purosil assets in 1993. The Company subsequently expanded its Aerospace Products business by purchasing the assets of two of its largest competitors, SFS and Haskon, in 1995. These acquisitions were completed in order to broaden Burke's Aerospace Products line and to incorporate advanced military stealth capability into this product group. Subsequent to these acquisitions, in December 1995, the Company integrated all of its aerospace operations in anticipation of increased demand as communicated by aircraft OEMs. In general, Aerospace Products revenues are driven by both the building of new aircraft by OEM manufacturers and the repair and replacement of existing aircraft (aftermarkets). OEMs typically depend on a select group of suppliers to provide their seal requirements, working closely with them to design the customized tooling necessary to satisfy the industry's rigorous product testing standards. As a result of the Company's consolidation efforts throughout the mid-'90s, it is now positioned as the leading seals supplier for the domestic commercial aircraft industry and is OEM-specified on virtually every existing commercial and military aircraft platform in production. Aircraft seal revenues for 1996 were approximately evenly split between sales to OEM manufacturers and the aftermarket. In addition, commercial aircraft manufacturing has resulted in 70% of 1996 seal revenues being derived from the commercial market, compared with approximately 30% from the U.S. military. Aerospace revenues in 1995 were approximately $3.0 million higher than might otherwise have been expected due to the significant unfilled backlog created by the inability of SFS and Haskon to deliver product prior to Burke's ownership. Sales of precision silicone seals comprised approximately 89% of 1996 revenues for the Aerospace Products business. The remaining 11% was derived primarily from the sale of low-observable seals and tape to the military for use on stealth aircraft, cruise missiles, and armored vehicles. Revenues of low- observable seals and tape are derived from both the retrofit of existing aircraft, such as the B-1 bomber and the initial installation and replacement of existing low-observable material on aircraft, such as the B-2 bomber. Historically, revenues in the Flooring Products business have been driven by both new commercial construction and the continuous repair and remodeling of existing commercial space. Until recently, operations have been concentrated in the western United States and Burke has sold primarily rubber cove base molding. The Company has developed a well-known brand name (BurkeBase) in the western United States by targeting the architectural community and installers of commercial flooring. Growth in Flooring Products revenues has been moderate but steady due to the strength of the repair and remodel market, which has offset the depressed commercial construction market in the western United States. In 1996, the Company acquired vinyl cove base production assets, which are expected to diversify the Flooring Products revenue base, primarily by increasing distribution of BurkeBase in the midwest and eastern United States. The Commercial Products business is comprised of: (i) Purosil brand high-performance silicone truck and bus engine hoses; (ii) roofing and other fluid barrier membrane products and (iii) various intermediate and end use products based upon Burke's extensive elastomer manufacturing capabilities. Revenues 44 generated by silicone hose sales are driven by both new truck and bus manufacturing as well as the replacement market. OEM and aftermarket customers specify and prefer silicone hoses due to their high performance and relatively minor absolute cost. In addition, silicone hoses are increasingly being specified on trucks and buses due to the higher performance requirements of new engine design. Burke roofing and fluid containment system sales have tended to be relatively steady over time. Roofing and fluid barrier membranes are used in numerous applications including new and replacement commercial roofs and reservoirs. The Hypalon product provides significant wear and durability advantages compared with less expensive products. Revenues from these products can be materially affected on a quarter-to-quarter basis by the size and timing of certain reservoir projects. RESULTS OF OPERATIONS The following table sets forth certain income statement information for the Company for the fiscal years ended December 30, 1994, December 29, 1995, and January 3, 1997 and the nine-month periods ended September 27, 1996 and October 3, 1997:
FISCAL YEAR ENDED NINE MONTHS ENDED ---------------------------------------------------------------------------- ------------------------------ PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE OF OF OF SEPTEMBER 27, OF 1994 NET SALES 1995 NET SALES 1996 NET SALES 1996 NET SALES --------- ------------- --------- ------------- --------- ------------- --------------- ------------- (DOLLARS IN THOUSANDS) Net sales: Aerospace Products..... $ 4,787 10.8% $ 23,254 34.0% $ 24,622 34.0% $ 18,495 34.0% Flooring Products..... 19,507 44.0 19,693 28.8 20,546 28.4 15,463 28.4 Commercial Products..... 20,076 45.2 25,464 37.2 27,298 37.6 20,518 37.6 --------- ------ --------- ------ --------- ------ --------------- ------ Total net sales...... 44,370 100.0 68,411 100.0 72,466 100.0 54,476 100.0 Cost of sales.... 29,998 67.6 49,226 72.0 49,689 68.6 37,722 69.2 --------- ------ --------- ------ --------- ------ --------------- ------ Gross profit..... 14,372 32.4 19,185 28.0 22,777 31.4 16,754 30.8 Selling, general and administrative expenses....... 8,152 18.4 10,212 14.9 11,610 16.0 8,305 15.3 --------- ------ --------- ------ --------- ------ --------------- ------ Income (loss) from operations..... 6,220 14.0 8,973 13.1 11,167 15.4 8,449 15.5 Interest expense, net............ 2,812 6.3 3,007 4.4 2,668 3.7 2,054 3.8 --------- ------ --------- ------ --------- ------ --------------- ------ Income (loss) before income tax provision (benefit), extraordinary loss and discontinued operation...... 3,408 7.7 5,966 8.7 8,499 11.7 6,395 11.7 Income tax provision (benefit)...... 1,395 3.1 3,393 5.0 3,466 4.8 2,558 4.7 --------- ------ --------- ------ --------- ------ --------------- ------ Income (loss) from continuing operations before extraordinary loss and discontinued operation...... $ 2,013 4.6% $ 2,573 3.7% $ 5,033 6.9% $ 3,837 7.0% --------- ------ --------- ------ --------- ------ --------------- ------ --------- ------ --------- ------ --------- ------ --------------- ------ Net Income (loss) ............... $ 1,502 3.4% $ 1,094 1.6% $ 4,101 5.7% $ 2,905 5.3% --------- ------ --------- ------ --------- ------ --------------- ------ --------- ------ --------- ------ --------- ------ --------------- ------ PERCENTAGE OCTOBER 3, OF 1997 NET SALES ----------- ------------- Net sales: Aerospace Products..... $ 23,387 34.0% Flooring Products..... 17,886 26.0 Commercial Products..... 27,512 40.0 ----------- ------ Total net sales...... 68,785 100.0 Cost of sales.... 48,423 70.4 ----------- ------ Gross profit..... 20,362 29.6 Selling, general and administrative expenses....... 24,833 36.1 ----------- ------ Income (loss) from operations..... (4,471) 6.5 Interest expense, net............ 2,625 3.8 ----------- ------ Income (loss) before income tax provision (benefit), extraordinary loss and discontinued operation...... (7,096) 10.3 Income tax provision (benefit)...... (2,555) 3.7 ----------- ------ Income (loss) from continuing operations before extraordinary loss and discontinued operation...... $ (4,541) 6.6% ----------- ------ ----------- ------ Net Income (loss) ............... $ (4,541) 6.6% ----------- ------ ----------- ------
45 NINE MONTHS ENDED SEPTEMBER 27, 1996 VERSUS NINE MONTHS ENDED OCTOBER 3, 1997 NET SALES. Total net sales increased 26.3% from $54.5 million for the nine months ended September 27, 1996 to $68.8 million for the nine months ended October 3, 1997. Aerospace Products grew 26.5% as the result of strong expansion of commercial aircraft build rates. Flooring Products grew 15.7% as the result of generally stronger demand for construction products in California and the introduction of vinyl cove base products. Commercial Products grew 34.1% due to a major sale of Membrane Products for a liner application and due to orders from a new customer. COST OF SALES. Cost of sales increased 28.4%, from $37.7 million for the nine months ended September 27, 1996 to $48.4 million for the nine months ended October 3, 1997. The increase was primarily due to the increase in net sales over the same period. As a percentage of net sales, gross profit decreased from 30.8% for the nine months ended September 27, 1996 to 29.6% for the nine months ended October 3, 1997. The decrease was due to the fact that Membrane Products, which have a lower gross profit margin than the Company's other product lines constituted a larger portion of total net sales for the nine months ended October 3, 1997 compared with the nine months ended September 27, 1996. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 199.0%, from $8.3 million for the nine months ended September 27, 1996 to $24.8 million for the nine months ended October 3, 1997. The increase included $14.1 million for the purchase of stock options and $1.2 million in other expenses related to the Merger. Net of these expenses, selling, general and administrative expenses increased 15.0%, from $8.3 million for the nine months ended September 27, 1996 to $9.6 million for the nine months ended October 3, 1997. The net increase was due primarily to additional expenses incurred in support of the Company's sales growth. The additional expenses were primarily for the addition of Flooring and Commercial sales personnel. The net costs declined as a percentage of sales from 15.3% for the nine months ended September 27, 1996 to 13.9% for the nine months ended October 3, 1997. INCOME/(LOSS) FROM OPERATIONS. As a result of the above factors, income (loss) from operations decreased 152.9%, from income of $8.4 million for the nine months ended September 27, 1996 to loss of $4.5 million for the nine months ended October 3, 1997. INTEREST EXPENSE. Interest expense increased 27.8%, from $2.1 million for the nine months ended September 27, 1996 to $2.6 million for the nine months ended October 3, 1997. The increase was due to the issuance of the Senior notes on August 20, 1997. INCOME/(LOSS) FROM CONTINUING OPERATIONS. As a result of the above factors, income/(loss) from continuing operations decreased 218.3% from income of $3.8 million for the nine months ended September 27, 1996 to a loss of $4.5 million for the nine months ended October 3, 1997. YEAR ENDED JANUARY 3, 1997 VERSUS YEAR ENDED DECEMBER 29, 1995 NET SALES. Total net sales increased 5.9%, from $68.4 million in 1995 to $72.5 million in 1996. Aerospace Products grew 5.9%, reflecting the positive effect of a full year of the deployment of the assets of Haskon acquired in June 1995, which was partially offset by the expiration of a significant supply contract in 1995. Flooring Products grew 4.3% as the result of the introduction of new products, price increases (2.6%), and volume increases (1.0%). Commercial Products grew 7.2% due to orders from a new customer and to increases sales of the Company's silicone Custom Products, offset by a decrease in Membrane Products sales due to a customer's deferral of a major liner project. COST OF SALES. Cost of sales increased 0.9%, from $49.2 million in 1995 to $49.7 million in 1996. The increase was primarily due to the increase in net sales over the same period. As a percentage of net sales, gross profit increased from 28.0% in 1995 to 31.4% in 1996. The increase of 3.4% was due to the full 46 integration of assets acquired from SFS and Haskon (1.6%); to decreases in the cost of raw materials used in the Company's Flooring Products (0.9%); and to general pricing, operational, and overhead absorption improvements (0.9%). The Flooring raw material prices returned to normal levels. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 13.7%, from $10.2 million in 1995 to $11.6 million in 1996. The increase was due to general cost increases to selling expenses associated with expanding Flooring Products into markets in the eastern United States and a full year of selling expenses associated with the assets of Haskon acquired in 1995. As a percentage of sales, these costs increased from 14.9% in 1995 to 16.0% in 1996, because of the time lag between the Flooring expansion spending and the realization of the resultant sales. INCOME FROM OPERATIONS. As a result of the above factors, income from operations increased 24.5%, from $9.0 million in 1995 to $11.2 million in 1996. INTEREST EXPENSE. Interest expense decreased 11.3%, from $3.0 million in 1995 to $2.7 million in 1996. The decrease was due to lower total debt outstanding. INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income from continuing operations increased 95.6%, from $2.6 million in 1995 to $5.0 million in 1996. YEAR ENDED DECEMBER 29, 1995 VERSUS YEAR ENDED DECEMBER 30, 1994 NET SALES. Total net sales increased 54.2%, from $44.4 million in 1994 to $68.4 million in 1995. Aerospace Products grew 385.8%, due to the acquisition of the assets of SFS and Haskon in February and June 1995, respectively. Flooring Products grew 1.0% due to price increases and continued demand in the repair and remodel segment of the construction industry, offset by generally weaker demand for construction products in California. Commercial Products grew 26.8% due to the acquisition of the assets of SFS used to produce silicone Custom Products. COST OF SALES. Cost of sales increased 64.1%, from $30.0 million in 1994 to $49.2 million in 1995. The increase was primarily due to the increase in net sales over the same period. As a percentage of net sales, gross profit decreased from 32.4% in 1994 to 28.0% in 1995. The decrease of 4.1% was due primarily to the start-up costs associated with the assets of SFS and Haskon acquired in 1995 (3.1%); and to increases in the cost of raw materials used in the Company's Flooring Products. The raw material prices were abnormally high throughout calendar 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 25.3%, from $8.2 million in 1994 to $10.2 million in 1995. The increase was due to additional selling expenses associated with the assets Haskon and SFS acquired in 1995. However, as a percentage of net sales, these costs declined from 18.4% to 14.9% over the same period. INCOME FROM OPERATIONS. As a result of the above factors, income from operations increased 44.3%, from $6.2 million in 1994 to $9.0 million in 1995. INTEREST EXPENSE. Interest expense increased 6.9%, from $2.8 million in 1994 to $3.0 million in 1995. The increase was due to higher total debt outstanding, resulting from the acquisition of SFS and Haskon assets in 1995. INCOME FROM CONTINUING OPERATIONS. As a result of the above factors, income from continuing operations increased 27.8%, from $2.0 million in 1994 to $2.6 million in 1995. 47 LIQUIDITY AND CAPITAL RESOURCES CASH FLOW. The Company's principal uses of cash are to finance working capital and capital expenditures related to asset acquisitions and internal growth. Net cash provided by operating activities was $8.3 million in 1996. CAPITAL REQUIREMENTS. The Company expects to spend approximately $1.5 million during 1997 on capital expenditures not directly related to acquisitions. Cash flow from operations, to the extent available, may also be used to fund a portion of any acquisition expenditures. The Company is actively seeking acquisition opportunities. The Company intends to seek additional capital as necessary to fund potential acquisitions through one or more funding sources that may include borrowings under the New Credit Facility described below. SOURCES OF CAPITAL. In July 1997, a commitment letter to provide senior credit financing was issued to JFLEI. The New Credit Facility will provide for $15.0 million of revolving credit borrowings. The New Credit Facility will mature on the fifth anniversary of the Recapitalization. Interest on loans under the New Credit Facility will bear interest at rates based upon either, at the Company's option, Eurodollar Rates plus a margin of 2.50% or upon the Prime Rate plus a margin of .50%. Loans under the New Credit Facility will be secured by security interests in substantially all of the assets of the Company and will be guaranteed by any and all current or future subsidiaries of the Company, which guarantees will be secured by substantially all of the assets of the subsidiaries. The New Credit Facility will contain customary covenants restricting the Company's ability to, among other things, incur additional indebtedness, create liens or other encumbrances, pay dividends or make other restricted payments, make investments, loans and guarantees or sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. The New Credit Facility will also contain a number of financial covenants that will require the Company to meet certain financial ratios and tests and provide that a "change of control" will constitute an event of default. For a more complete description of the New Credit Facility, see "Risk Factors-- Significant Leverage and Debt Service," "--Ranking of Notes; Asset Encumbrance," "--Restrictive Covenants" and "Description of New Credit Facility." The Company anticipates that its principal use of cash following the Recapitalization will be working capital requirements, debt service requirements and capital expenditures as well as expenditures relating to acquisitions and integrating acquired businesses. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the New Credit Facility, will be adequate to meet its anticipated requirements for the foreseeable future for working capital, capital expenditures and interest payments. In June 1997, the FASB released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. The Company believes that adoption of FAS 130 will not have a material impact on the Company's consolidated financial statements. In June 1997, the FASB released Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to stockholders. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of the application of the new rules on the Company's consolidated financial statements. INCOME TAX PROVISION For 1995 and 1996, the Company recorded an income tax provision of 56.9% and 40.8%, respectively, which differs from the federal statutory rate primarily due to state income taxes (net of federal benefit), 48 and for 1995 due to an additional provision for potential Internal Revenue Service (IRS) audit adjustments. In 1996 the Company settled with the IRS certain issues relating to the Company's income tax returns for 1988 through 1990. As of January 3, 1997, the Company had fully provided for the taxes and interest which are payable as a result of the settlement. In addition to the above settlement, the Company received a "Notice of Deficiency" from the IRS for 1992 and 1993, also related to the reorganization of the Company in 1988, resulting in proposed deficiencies of approximately $1,534,000. Penalties on the proposed deficiencies described above would be $290,000. The Company filed a tax court petition contesting the proposed tax deficiencies. The Company believes that it has meritorious legal defenses to the proposed IRS adjustments. Based upon the Company's analysis of the issues, management believes that an adequate provision has been made for additional liabilities that may ultimately result. For 1994 and 1995, the Company recorded an income tax provision of 40.9% and 56.9%, respectively, which differs from the federal statutory rate primarily due to state income taxes (net of federal benefit) and, for 1995 only, due to an additional provision for potential Internal Revenue Service (IRS) audit adjustments. For the nine months ended September 27, 1996 the Company recorded an income tax provision of 40% which differs from the federal statutory rate primarily due to state income taxes (net of federal benefit). For the nine months ended October 3, 1997 the Company recorded an income tax benefit of 36% which differs from the federal statutory rate primarily due to state income taxes (net of federal benefit). The effective tax rate differed between the nine months ended September 27, 1996 and the nine months ended October 3, 1997 due to limitations on state net operating loss carryforwards originating in 1997. In 1997 the Company settled with the IRS certain issues related to the Company's income tax returns for 1992 and 1993. As of October 3, 1997, the Company has fully provided for the taxes and interest which are payable as a result of the settlement. 49 BUSINESS OVERVIEW Burke, headquartered in San Jose, California, is a leading, diversified manufacturer of highly engineered, rubber, silicone and vinyl-based (herein "elastomer") products. Through its vertically integrated operations and reputation for quality elastomer-based products, Burke has become (i) the largest domestic producer of precision silicone seals for commercial and military aircraft ("Aerospace Products"), (ii) the dominant west coast producer of rubber cove base and floor covering accessories for commercial and industrial applications ("Flooring Products") and (iii) a value-added producer of high-performance silicone hose, roofing and membrane products for the heavy-duty truck, commercial building and environmental industries, respectively ("Commercial Products"). The Company has grown through new product development and the successful integration of acquired product lines and production assets. As a result, net sales increased from $28.2 million in 1992 to $86.8 million for the twelve-month period ended October 3, 1997. Net sales for the nine months ended October 3, 1997 totaled $68.8 million, up 26.2% from $54.5 million for the same period in 1996. AEROSPACE PRODUCTS Burke is the largest domestic producer of precision silicone seals used at airframe and internal component junctures in commercial and military aircraft. Burke seals are specified on virtually all major domestically produced commercial aircraft, including every aircraft series manufactured by Boeing and on substantially all United States military aircraft including cargo, fighter and bomber series airplanes and several helicopter models. As a result, Burke's products have been designed into some of the most successful commercial and military aircrafts in the world, including the Boeing 737, 747, 757, 767 and 777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Products are engineered to customer specifications for selected aircraft body and engine models and are generally made from custom tooling maintained and controlled by Burke for use over the life of the specific aircraft program. Burke benefits from a lengthy product-demand cycle, which can remain active for as long as 30 years, driven by new aircraft assembly and retrofit and maintenance projects. Retrofit and maintenance projects accounted for approximately two-thirds of the Company's 1996 Aerospace Products sales. The Aerospace Products business also manufactures low-observable, radar-absorbing seals and exterior tapes and coatings for stealth military aircraft and other military applications. These products are currently in use on the B-2 bomber and will also be used in the F-22, which is being developed to replace the F-15 as the premier fighter in the United States military arsenal. Aerospace Products sales increased from $3.6 million in 1993, the year that Burke first entered the aerospace market with its purchase of assets of Purosil, to $24.6 million in 1996, accounting for approximately 34.0% of the Company's total net sales in 1996. Management believes the Aerospace Products business is well positioned to benefit from the strong increase in commercial aircraft build rates currently occurring and projected by industry analysts to continue, along with the associated retrofit, refurbishment, replacement and upgrade projects that are required over the life of the aircraft. FLOORING PRODUCTS Through its Flooring Products business, Burke is the dominant supplier of rubber cove base (floor border that joins flooring or carpet to a wall), manufactured under the name BurkeBase, and other rubber-based flooring accessories for commercial and industrial applications in the western United States. Its principal product offerings include vinyl cove base and rubber cove base, tile, stair treads, corners, shapes and other flooring accessories. Demand for the Company's cove base is driven by new commercial construction, remodeling, redecorating and general maintenance. During periods of slower growth in new 50 commercial construction, remodeling and redecorating activities tend to increase, providing stable overall demand for the Company's products. Flooring Products sales were $20.5 million in 1996, comprising 28.4% of the Company's total net sales in 1996. In 1996, the Company diversified its Flooring Products offerings with the introduction of new tiling products and photoluminescent emergency lighting products marketed under the name BurkeEmerge, and the acquisition of vinyl cove base production assets. Management believes that the addition of the vinyl product line will enable it to increase revenues through the increased penetration of existing markets and the expansion of its product line to markets where vinyl cove base is more popular than rubber cove base, such as the midwestern and eastern United States. COMMERCIAL PRODUCTS Burke's expertise in the mixing, blending and formulation of silicone and organic rubber compounds has established its Commercial Products business as a growing, value-added supplier of elastomer products for use in both intermediate and end products. The Commercial Products business is comprised of three primary product lines: (i) high-performance silicone truck hoses for heavy-duty trucks and buses marketed under the Purosil brand name, (ii) membranes for commercial roofing and fluid containment systems marketed under the Burkeline trade name and manufactured from DuPont's patented Hypalon polymer material and (iii) precision-formulated custom products and sheet goods that utilize Burke's extensive formulation and production capabilities for use in end-product elastomer applications. Commercial Products net sales increased from $10.0 million in 1992 to $27.3 million in 1996, and represented 37.6% of the Company's total net sales in 1996. Management believes that the Commercial Products business has significant growth potential primarily through the expansion of the Purosil line of high-end hoses to new customers and channels of distribution and the development of new applications for the silicone custom product line. COMPETITIVE STRENGTHS Burke has secured a strong competitive position in each of its specialized market segments. Burke is the largest provider of aerospace seals to the domestic commercial and military aerospace industries and also maintains strong positions in its flooring, roofing and membrane, truck hose and custom product lines. These competitive positions are sustained through the following strengths. ESTABLISHED CUSTOMER RELATIONSHIPS. The Company enjoys long-term relationships with many of its customers in each of its markets. These relationships, whether built by Burke over its long history or assumed in recent asset acquisitions, provide the Company with a stable base from which to pursue future expansion and give Burke a significant advantage over potential competitors seeking to enter the Company's markets. Several of the Burke trademarks and trade names (BurkeBase, Burkeline, SFS, Haskon and Purosil) are widely recognized by end users and distributors and are generally associated with superior levels of quality and customer service in their respective markets. DIVERSE REVENUE BASE. The Company's products are used in a wide variety of industries and applications and a significant share of the Company's revenue is derived from the repair and replacement market for its products, including aerospace seals and tape, cove base, truck hoses and fluid containment membrane. Replacement demand is typically less affected by slower economic periods. Management believes that this diversity has and will continue to mitigate the effect of economic fluctuations. TECHNOLOGICAL LEADERSHIPS IN ELASTOMER-BASED PRODUCTS DEVELOPMENT AND MANUFACTURE. Burke is widely recognized as a technological leader in elastomer-based products due to its strong engineering, design and research capabilities. Burke has 25 specialists in its engineering, design and laboratory departments devoted to new product development and product cost reduction. Management believes that its aerospace technical staff is significantly larger than those of its direct competitors, providing the Company with a competitive advantage in pursuing and maintaining relationships in the technologically advanced defense and commercial aerospace industries. 51 VERTICALLY INTEGRATED PRODUCTION CAPABILITIES. Burke has vertically integrated production capabilities that enable it to transform raw organic rubber and silicone gum into a diverse array of finished products. This capability allows management more direct control over the Company's product development, cost structure and quality requirements, providing a competitive edge in its targeted market segments and enables Burke's Commercial Products business to selectively participate in market segments as a value-added, intermediate supplier to other elastomer product producers and users. EXPERIENCED MANAGEMENT TEAM. The management team has extensive experience both with the Company and within the industry and encompasses a balance of both senior leadership and a strong group of young managers. This management team has successfully orchestrated the acquisition and integration of four independent operations since 1993, as well as the Company's ongoing vertical integration efforts. BUSINESS STRATEGY Burke intends to capitalize on its aforementioned competitive strengths in a variety of ways in each of its major businesses. Key components of this strategy for each of the Company's businesses include: AEROSPACE PRODUCTS - PENETRATE INTERNATIONAL MARKET FOR AEROSPACE SEALS. Management believes that the Company is the only domestic aerospace seal manufacturer with the production capacity to market beyond the United States. With the Company's recent acquisitions dramatically increased production capacity and, as a result, the Company recently sought and was successful, in being designated as a qualified parts manufacturer for a large subcontractor of Airbus. - FOCUS ON VALUE-ADDED MANUFACTURING. Management intends to further increase its participation in the trend towards integrating higher levels of processing and finishing to products before shipping to OEMs. - MAINTAIN STRONG RELATIONSHIPS WITH LEADING PRIME CONTRACTORS. Management believes that its existing relationships with leading prime military contractors have positioned the Company to continue to participate in "next generation" stealth military programs, including the Joint Strike Fighter currently being developed for NATO, through the sale of low-observable seals and tape. FLOORING PRODUCTS - BROADEN DOMESTIC DISTRIBUTION OF FLOORING PRODUCTS. Although the Company is the dominant producer of rubber cove base in the western United States, the Company believes it can successfully expand this product line into other geographic regions by offering the full complement of its rubber and newly acquired vinyl flooring products. - LEVERAGE BRAND NAME RECOGNITION AND EXISTING DISTRIBUTION CHANNELS THROUGH PRODUCT LINE EXTENSIONS. The Company intends to continue to capitalize on the BurkeBase trade name by expanding and upgrading its existing product line. In addition, the Company believes that it can leverage its strong distribution network for its flooring products through the introduction of flooring accessories. For example, the Company's new BurkeEmerge product line of photoluminescent emergency lighting is an alternative to strip lighting at a 70% lower cost. Emergency lighting is increasingly being utilized due to heightened public awareness of the dangers that can result from unlit corridors and confusing exit signs. 52 COMMERCIAL PRODUCTS - INCREASE PENETRATION OF PUROSIL SILICONE HOSES. The Company believes the growth opportunities for its Purosil silicone hoses have not yet fully been exploited, particularly in the heavy-duty truck and bus aftermarket. New initiative includes increasing customer share at Mack Truck and other targeted accounts as well as initiating production of silicone hoses for a major new customer. - PROMOTE ADDITIONAL HYPALON APPLICATIONS. Management is continuing to work with DuPont to promote Hypalon as a durable and environmentally sound liner product suitable for new water-containment applications. In addition to these internal growth strategies, the Company intends to seek selective acquisitions where it can expand and strengthen existing product lines and its distribution and technological capabilities. The Company believes that certain market niches in which it competes are highly fragmented, with a number of manufacturers that would make attractive acquisition candidates. INDUSTRY OVERVIEW Virtually every industry contains applications for elastomeric products. These products are used wherever there is a need for materials that are flexible, yet retain their original shape and other properties. Elastomeric products tend to be a small portion of the total cost of any product, yet can be critical to a successful design. The Company believes that demand for elastomeric products will continue to grow as the performance requirements of various products are increased. The Company serves a number of industries with significant usage of highly-engineered elastomer-based products, including organic rubber, silicone rubber, and vinyl. Customers in these industries value quality, on-time performance, and the ability to provide technical problem-solving capabilities. The increasingly complex product design efforts of companies in these and other industries provides ongoing and new opportunities for elastomeric product applications. The Company believes that its technical resources, experience, and reputation provide it with a competitive advantage in seeking to provide products to these industries. HISTORY The Burke Rubber Company was founded in 1942 as a family-owned manufacturer of custom industrial rubber products. By the early 1950s, Burke manufactured a proprietary line of rubber floor tile and cove base as well as custom-molded rubber products. The Burke product line subsequently grew to include flexible membrane products for industrial uses, as well as engineered elastomer-based products for defense-related applications. In 1970, Burke developed an improved roofing and fluid barrier technology based upon DuPont patented Hypalon elastomer polymer. The Company was renamed Burke Industries, Inc. in 1972 to reflect its broadened base of business. The Company began expanding beyond its traditional product lines with its acquisition of the silicone-based aerospace seal and automotive hose production assets of Purosil in March 1993. In 1995, recognizing that the seals segment of the aerospace industry was fragmented and ripe for consolidation, Burke sought to expand its position in the category through the acquisition of assets of two former industry leaders that were then experiencing financial difficulties: California-based SFS and Massachusetts-based Haskon. Purosil, SFS and Haskon had each been an independent producer of precision silicone aerospace components, and together had over 85 years of service to the commercial and military aerospace industry. In the Flooring Products division, the Company expanded its product lines through the purchase of Kentile's vinyl cove base production assets in April 1996. 53 Burke's integration of these acquisitions has led to a dominant position in the aerospace seals market, opened new markets for its Flooring Business, improved operating efficiencies, consolidated overhead and strengthened technical capabilities. PRODUCTS AND MARKETS Burke is a leader in a number of markets where the Company's vertically integrated production capabilities and design, engineering and manufacturing expertise result in a strong competitive position. The Company currently serves markets for aerospace components, floor covering accessories and a variety of other commercial products. AEROSPACE PRODUCTS Operating out of Santa Fe Springs, California and Taunton, Massachusetts, Burke, through its Aerospace Products business, is the leading domestic manufacturer of two principal product lines: highly engineered elastomer-based seals for commercial and military aircraft and low-observable, radar-absorbing materials for stealth military applications. Burke's non-stealth aerospace components are marketed under the SFS and Haskon trade names. PRODUCTS Burke's major aerospace seals products include: aerodynamic seals for commercial and military airframes, firewall seals for aircraft engines and nacelles, aircraft door and hatch seals, inflatable seals for cockpit canopies and large openings, aircraft window seals, and aircraft conductive seals for electromagnetic interference survivable conditions. Burke's product line ranges from the most basic extruded seals, costing an average of $30 to $40, to exceptionally complex seals which may cost in excess of $10,000. Burke's design and engineering teams have a history of developing solutions for difficult sealing and shielding problems. Burke's silicone seals are also reinforced (if required) with a variety of materials including Kevlar, Dacron, Nomex, ceramic cloth, fiberglass, conductive fabrics, metal mesh, nylon and other materials which accommodate their demanding applications. During the late 1980s and early 1990s, SFS invested significant capital towards the research and development of radar-absorbing and signature-masking composite materials. This initial research and development established SFS as the technological leader in this niche defense-related area. Burke has continued the development of this technology since its acquisition of SFS in 1995. Generally, Burke works on an exclusive basis with the United States military to test and develop these highly engineered and technical materials. Once a contract has been awarded, Burke has historically become the sole supplier to the United States government as an approved defense contractor. Based on its history and the Company's proven record in this area, management believes that Burke will remain a critical partner in product development opportunities in this sector. Burke maintains a classified area within the Santa Fe Springs facility where stealth technology products are developed, manufactured and tested. MARKETS AND CUSTOMERS Burke's silicone seals are sold directly to manufacturers of commercial and military aircraft, aerospace component distributors and the United States government. Burke has maintained its leading position in this market through its advanced in-house design, engineering, technical and production capabilities coupled with superior customer service. The engineering staff at Burke works directly with OEMs to design custom silicone sealing applications. Burke's aerospace products are designed by Burke engineers in accordance with precise OEM specifications and quality requirements. Products are rigorously tested against ISO and OEM standards by Burke and its customers before final approval. In 1996, the top five customers of the Aerospace Products division accounted for $16.5 million in net sales, representing 22.8% and 67.1%, respectively, of the Company's total and the Aerospace Product division's net sales in that year. 54 Boeing is the single largest customer of Aerospace Products and, management believes Burke is likewise the leading supplier of these products to Boeing. Boeing currently controls over 60% of the worldwide commercial passenger aircraft market and is enjoying a dramatic expansion in its backlog and orders. In addition to Boeing, the Company produces seals for every major commercial aircraft manufacturer in the world and for substantially all major military manufactures in the United States, including McDonnell Douglas, Lockheed Martin, Northrop Grumman, Airbus Industries, Pratt & Whitney, General Electric, Gulfstream, Rohr, Bombardier and Textron. As a result, Burke's products have been designed into some of the most successful commercial and military aircrafts in the world, including the Boeing 737, 747, 767 and 777, the McDonnell Douglas DC and MD series, the Northrop Grumman F-14 and the Lockheed Martin L1011. Burke's Advanced Aerospace Products business has successfully introduced several technologies in use by branches of the United States Navy, Air Force and Army. These include radar-absorbing seals, tapes and other composite materials utilized on the B-2 bomber, the F-22 fighter and naval surface ships. Ground-based applications are also being developed in conjunction with United Defense. The Burke radar-absorbing material technology has potentially much broader applications than are currently in use, and the Company is presently involved in initiatives that management believes will greatly expand the market for its Advanced Aerospace Products business. The Northrop Grumman B-2 radar-resistant tape program is the largest of Burke's existing government contracts. Burke's revenues from this contract are generated both by new aircraft production and by replacement tape applied as part of the repair or scheduled maintenance of the aircraft. Burke has also been qualified to supply the F-22 program. The F-22 is the latest generation United States military fighter aircraft and is designed to replace the F-15 as the premier fighter in the United States military arsenal. The Advanced Aerospace Products business is also in the second phase of redesigning the original "over-wing-fairing" seal for the B-1 bomber. This redesign will proceed with the sale by the Company of working models of the seal to the United States government in late 1997 or early 1998, followed by the sale of refurbishment seal sets for each of the 95 existing B-1 bombers. The Company is also in discussions with Boeing and Lockheed Martin to supply seals for the new Joint Strike Fighter program. Both Boeing and Lockheed Martin have been selected as the finalists for this program which is ultimately expected to procure approximately 3,000 multi-service aircraft for the United States Air Force, Marine Corps and Navy and the United Kingdom Royal Navy. COMPETITION Burke is the largest domestic supplier of highly-engineered silicone seals for the aerospace OEM market and aftermarket. Burke's domestic competitors are primarily small, privately-held companies which generally lack Burke's track record, long-term OEM relationships and capabilities. These competitors include Kirkhill Rubber Company, Chase-Walton Elastomers, Inc. and Elastomeric Silicone Products. Management believes that each of Burke's competitors had silicone aerospace seals revenues that were significantly smaller than the Company's revenues from those products in 1996. Additionally, the Company has two principle European competitors, Dunlop France S.A. and Bestobell Aviation, of the United Kingdom, which enjoy significant market share among European aircraft manufacturers, including Airbus Industries, but have not made significant inroads in the United States commercial aerospace market. Management believes that Burke's long-standing customer relationships, unique design capabilities and superior product quality will continue to support its position as the leading supplier of engineered silicone seals within this fragmented market. Burke is one of only a few companies with the combination of knowledge and manufacturing capabilities required to develop, test and manufacture engineered elastomer-based products to military specifications. Many of Burke's Advanced Aerospace Products are classified in nature, and in many cases 55 project leaders return to previous classified product suppliers for a preliminary assessment of future development opportunity. GROWTH AND OPPORTUNITIES The strong expansion in commercial aircraft build rates is expected to drive long-term growth within Burke's Aerospace Products business. Boeing and other aircraft producers continue to build backlog and to experience increased demand for new aircraft. According to industry sources, at the end of 1996, Boeing, Airbus and McDonnell Douglas had a combined backlog of 2,370 aircraft. According to Boeing's 1997 Current Market Outlook, Boeing will deliver 340 new aircraft and will ramp its build rate up to 40 aircraft per month, its highest level ever, by the end of this year. This surge in deliveries is the beginning of what many industry analysts believe will be a prolonged industry upturn during which industry analysts project 16,160 airplanes will be delivered by the major manufacturers over the next 20 years. The demand for new aircraft is being driven by increases in passenger miles traveled and an aging aircraft fleet worldwide. The Aerospace Industries Association reports that approximately 3,900 existing aircraft will require replacement over the next 20 years due to age, regulations and prohibitive maintenance costs. The two largest commercial aircraft manufacturers, Boeing and Airbus, have recently released their annual market forecasts which corroborate this view. Management believes that the continuing need for aircraft replacement parts and upgrades will provide ongoing sales opportunities for Burke over the life of the aircraft due to Burke's proprietary, in-house tooling for specified seals and related components. As an OEM-specified supplier of multiple seals and related components to a variety of aircraft, Burke should benefit from a substantial installed base for future retrofit and refurbishment projects. Defense-related applications are also expected to provide significant, ongoing growth. Lockheed Martin is the primary contractor for the F-22 program and has been selected as a finalist, along with Boeing, to develop the Joint Strike Fighter for the United States military and the United Kingdom Royal Navy. Management believes that Burke's existing supplier relationships with both of these prime contractors will provide opportunities to participate in these and other future program developments. Burke management is also participating in a trend towards more value-added manufacturing for aerospace OEMs by integrating higher levels of processing and finishing to components before shipping to OEMs. Burke is encouraging this higher value-added, higher margin practice with several of its customers in an effort to strengthen its position as a long-term key supplier. Burke is currently cooperating with United Defense to develop and test products that utilize the Company's signature-masking stealth capabilities for conventional ground-based military applications. Management is optimistic that one or more of these concepts will receive federal funding and become important products for Burke. Management has committed significant technical, engineering and production resources to the Advanced Products division and believes that programs from this division have the potential to generate substantial revenues and profitability going forward. FLOORING PRODUCTS Burke is the leading producer and distributor of specialty rubber flooring accessory products for use in commercial markets in the western United States. Burke's trademark BurkeBase has enjoyed a dominant market share in that region since the early 1950s and is well known throughout the industry. In addition, Burke has extended its BurkeBase flooring product lines beyond rubber products through its 1996 acquisition of the vinyl cove base production assets of Kentile. Kentile was a nationally recognized producer of vinyl cove base and flooring products which were sold into the commercial construction and refurbishment markets. Burke purchased the cove base manufacturing assets and subsequently relocated them to its San Jose, California facility. The integration of these assets significantly enhances Burke's national market position in flooring accessories given vinyl's broad appeal in geographic regions where rubber products have traditionally been less popular. 56 PRODUCTS Burke's flooring product line consists of a variety of commercial rubber and vinyl flooring products and accessories including vinyl cove base, and rubber core base flooring tiles, stair treads, corners, shapes, special application adhesives and newly developed luminescent emergency lighting accessories sold under the BurkeEmerge trademark. Burke flooring and flooring accessory products are generally recognized by architects, builders, and contractors as the highest-quality commercial rubber flooring and flooring accessory products available in terms of construction, durability and ease of installation. In its principal markets, BurkeBase is utilized in most commercial applications using resilient tile flooring and virtually all commercial applications involving carpeting. Other Burke flooring products are employed in commercial and institutional settings where durability and resilience are of primary importance. The addition of commercial vinyl cove base production capabilities from the acquisition of the Kentile assets in 1996 is an important complement to Burke's traditional product offerings. Rubber flooring products are generally more expensive than vinyl products due to their material and manufacturing cost but yield a longer-lasting product. However, vinyl flooring products are extremely popular for less demanding applications and are the predominant commercial flooring construction material in geographic regions outside of the western United States. The addition of a vinyl cove base product line will create a lower-cost, complementary offering targeted at less demanding, more cost-sensitive applications. New product developments, including profile stair treads, tiles and other shapes, are becoming increasingly important components of the Flooring Products business as well. For example, Burke previously sourced its profile tile from an offshore manufacturer of specialty flooring products. However, in 1996 the Company invested in production machinery and tooling necessary to manufacture profile tile in the San Jose facility. This investment will enable Burke to service this market in a more responsive and price-competitive manner. Utilizing a proprietary, patent-pending system developed by Burke, the BurkeEmerge safety strips are photoluminescent runners which can be attached to cove bases in corridors, on stairwell treads and hand rails, around doors, windows and signs and in basements, providing up to eight hours of illumination and leading people to building exits in the event of a power failure. Unlike conventional emergency lighting, BurkeEmerge requires no batteries or other electrical power source. These safety strips serve a market for internal emergency exit aids that has grown due to heightened public awareness of the dangers that can result from unlit corridors and confusing exit signage. BurkeEmerge is available in a variety of colors and can be easily installed over existing cove base, making it suitable for new construction as well as emergency retrofitting applications. MARKETS AND CUSTOMERS Burke's Flooring Products are sold primarily to dealers and distributors in the western United States and through a network of flooring products distributors in other regions. BurkeBase products are mostly found in commercial and industrial buildings in the western United States, where the Company enjoys a dominant market share, including an estimated 80% share of the commercial rubber cove base market in California. In addition to the San Jose manufacturing facility, the Company has distribution facilities in Santa Fe Springs, California and in Bensonville, Illinois, and has hired additional sales personnel to expand the Company's historically regional focus. As vinyl cove base is more widely used than rubber cove base at the national level, the introduction of a Burke vinyl cove base product is expected to create significant opportunities beyond Burke's traditional product line and geographic territories. In 1996, the top five customers of the Flooring Products division accounted for $6.8 million in net sales, representing 9.4% and 33.2%, respectively, of the Company's total and the Flooring Product division's net sales in that year. 57 COMPETITION While there are a number of companies, both large and small, servicing the floor covering market, Burke is the largest producer of rubber cove base in the western United States. Burke's focus over many years on this specialized niche has created significant brand awareness and customer loyalty. The Company's primary competitors in rubber flooring accessories products include Roppe Corporation, Johnsonite, Flexco and Vinyl Plastics Incorporated. GROWTH AND OPPORTUNITIES While Burke enjoys the leading share of the western United States rubber cove base market, management believes there are opportunities to increase its national presence through promotional and incentive-based distributor programs and through the introduction of its vinyl product line. The addition of vinyl cove base products should have a significant impact on the Company's penetration into eastern United States markets where vinyl has historically been preferred. Burke's distributor organization is being strengthened as new distributors either take on Burke as a new supplier due to its new vinyl production capabilities or, in an effort to consolidate their supplier base, allow Burke, as its existing rubber flooring products supplier, to displace other vinyl flooring products suppliers. A relatively small portion of Burke's Flooring Products sales are currently made outside of the western United States, although the market for rubber cove base nationwide is estimated by management at approximately $100 million. Management believes that its new vinyl product line and midwestern distribution center will increase Burke's scope and presence in the midwestern and eastern regions. These initiatives, along with Burke-produced profile tile and BurkeEmerge safety luminescent products, are expected to support the ongoing growth within and beyond Burke's traditional markets. COMMERCIAL PRODUCTS Burke's Commercial Products business serves end markets with both intermediate and finished silicone and organic rubber-based compounds and products. PRODUCTS SILICONE HOSE PRODUCTS. Burke manufactures and markets a wide range of private label and Purosil-branded engineered silicone hose products for high- pressure, heat-sensitive applications. These high-performance products are sold primarily to OEMs and the aftermarket for heavy-duty trucks and buses. Burke was the first silicone hose producer in the industry to become ISO 9002 certified and is preparing for QS 9000 certification. The Company guarantees the performance of certain higher quality silicone truck hoses for 1,000,000 miles and experiences negligible product returns and warranty claims each year. The Company also manufactures silicone hose products for applications in the powerboat, potable water and food service industries. New product development is an important focus within this group. Purosil has responded to recent market demand with newly designed charged-activated-coupling and knitted hose products for specific applications within the Class 8 truck market. These additions are expected to strengthen the silicone hose product line and increase Burke's penetration of the OEM market. MEMBRANE PRODUCTS. Burke's Membrane Products business utilizes the Company's elastomer-based manufacturing expertise to produce high-end, single-ply commercial roof-covering systems and flexible liner membranes. Commercial roofing systems are sold into the new roofing and re-roofing markets under the Burkeline trade name and have been installed in large and small commercial and institutional facilities around the world. The Company's Membrane Products are also used as reservoir liners and floating potable and waste water covers. 58 Burke's roofing and liner membrane systems are designed with DuPont's patented Hypalon polymer material, which is an extremely durable and flexible material, widely regarded as the highest-quality single-ply product available in the commercial roofing and membrane market. Burke's Membrane products typically incorporate structural fabric laminated between thin layers of Hypalon. Burkeline roofing systems are installed by Burke-approved contractors and technical assistants and are fully warrantied for up to 20 years. Membrane liners and covers are used primarily for protective purposes in potable water and wastewater projects. The liners and covers are most often used to protect against contamination of potable water during its storage and transfer. Hypalon is one of the few polymers which meets environmental standards regarding sanctioned potable water contact materials. Burke's in-house technical and engineering groups work directly with municipal engineers and with distributors and fabricators to assist in the design, testing and selection of the final product. Burke also manufactures and provides a full line of custom-made shrouds, gas vents, adhesives and other components necessary to produce a complete system package. CUSTOM PRODUCTS. The custom products group within Burke's Commercial Products division has capitalized on the Company's sophisticated formulation and production capabilities to become a value-added partner that collaborates closely with its customers in designing application-specific advanced products in both the silicone and organic rubber product markets. The group focuses on identifying high-margin products that complement its existing product lines and utilize excess production capacity. These custom products are typically complex blending and compounding formulations serving as intermediate or finished products for manufacturers of specialty rubber products and include oil drilling equipment components, road tape, rocket motor insulation and surface ship bow domes. MARKETS AND CUSTOMERS Management believes that the Company is the only approved supplier of silicone hoses to Mack Trucks. Burke's automotive hose products are also designed and specified into model builds of other major Class 8 truck OEMs including Peterbilt and Freightliner. Burke's membrane roofing products are sold both to distributors and directly to end-users who favor higher-quality roofing systems and who select Burke based on its reputation for quality. These roofing systems are typically employed in high value-added applications where quality, as measured by durability and ease of maintenance, is critical. Burke's liner membrane products are used in applications which are typically outsourced by municipalities on a bid basis and take several months to complete. Burke's covers and liners are sold to distributors and fabricators who heat weld the Hypalon-constructed sheets together to create a final product. It is not unusual for Burke to work with multiple distributors who are bidding for the same municipal project. Most of Burke's customers of the custom products unit are repeat users and range from large industrial companies to niche manufacturers producing specialized elastomeric products. Burke has developed long-standing relationships with a broad base of customers as a supplier of both intermediate and finished products whose technical complexities are suited to its unique capabilities. Burke markets these products using direct and independent sales representatives in both the United States and Europe. In 1996, the top five customers of the Commercial Products division accounted for $7.4 million in net sales, representing 10.2% and 27.1%, respectively, of the Company's total and the Custom Product division's net sales in that year. 59 COMPETITION The marketplace for engineered silicone hose applications is supplied by four principal companies: Flexfab Horizons International, Thermopol Incorporated, Gates Rubber Company and the Company. In both roofing and liner systems, Burke competes with other Hypalon-based product manufacturers and with lower-cost alternatives. Leading manufacturers of these alternative systems include JPS Elastomerics Corp. and Carlisle Companies, Inc. Each has significant single-ply membrane roofing businesses and emphasize their membrane products manufactured from alternative materials as lower-cost, higher-volume products. Their Hypalon offerings represent a small portion of their aggregate sales. There are a number of manufacturers that compete in custom-mixing and product formulation business, although management believes that only a few match Burke's comprehensive capabilities in terms of its research, design, materials compounding, engineering and laboratory testing resources. Burke's custom products product line has developed a reputation for solving complex formulation problems and is staffed with experienced compounding professionals. GROWTH AND OPPORTUNITIES Management believes that the Commercial Products division has significant growth potential. The Company's Purosil line of silicone truck and industrial hose is expected to command an increased share of the market based on its development of new clients and new distribution channels. Management is also examining the potential for product line extensions in this area of the business. Management also foresees significant growth potential in the membrane products line as it works with DuPont to promote Hypalon as a durable and environmentally sound liner product for new applications. Moreover, management continues to look for opportunities to capitalize on the Company's vertical integration, wide customer base and technological leadership to identify new high-margin custom elastomer-based products. SALES AND MARKETING Burke's sales and marketing personnel are organized by product lines. Based on the nature of the markets served and the established distribution channels in a particular segment, products are sold either directly to end-users or through distributors and independent sales representatives. Burke's Aerospace Products business has long-standing direct relationships with OEMs and aftermarket suppliers to the aerospace industry and supports these relationships by integrating its engineering and operating groups during the design, tooling and production phases of a customer's project. Burke solidifies its relationships through ongoing technical support throughout the life of a project. Burke's Flooring Products business sells through a direct sales effort and through flooring products distributors. The addition of a vinyl-based product line will enable Burke to increase its number of first-tier distributors, specifically in the midwest and east, who, in the past, have not carried Burke products due to Burke's lack of a vinyl product offering, and displace other vinyl suppliers with distributors that already carry Burke's rubber flooring products line. The Flooring Products business currently utilizes 14 direct sales representatives who manage direct sales and orchestrate the Company's national marketing efforts through approximately 90 commercial flooring products distributor locations. Burke's Commercial Products business utilizes several different sales and marketing approaches due to the scope of its product offering. Purosil's high-performance silicone hoses are sold directly to OEMs in the heavy-duty truck and bus market. The Company also manufactures a number of "standard" product hoses which are marketed through sales representatives and a national network of distributors. The other commercial products that Burke produces are primarily sold through specialized in-house representatives adept at identifying potential customers who can benefit from Burke's vertically integrated manufacturing, compound formulation and engineering capabilities. 60 RAW MATERIALS Principal raw materials purchased by the Company for use in its products include various custom and standard grades of rubber, silicone gum and vinyl as well as the Hypalon polymer material. The Company has historically not experienced any significant supply restrictions and has generally been able to pass through increases in the price of these materials to customers. In 1995, however, the Company experienced a significant price increase in one of the raw materials used in the manufacture of one of its flooring products. Due to the competitive nature of the flooring products business and the Company's proprietary formula for this product, the Company was unable to fully pass this price increase along to its consumers and its gross margins for this product were adversely affected. Although the Company does not currently anticipate that it will experience any similar price increases for this or any other raw material used by the Company in the near future, there can be no assurance that such price increases will not occur and that the Company's results of operations will not be adversely affected thereby. MANUFACTURING AND VERTICAL INTEGRATION Burke's operations are vertically integrated for the production of both silicone and organic rubber-based products. The Company's production process commences with the receipt of raw materials, followed by a variety of production steps which generally include mixing, milling, calendering (or extrusion or stripping), forming and molding and, in the case of silicone, roto-curing. Management believes Burke's vertical integration provides a key competitive advantage within the markets it serves. FACILITIES San Jose, California serves as the corporate headquarters as well as the manufacturing site for the Flooring Products business and the organic rubber portion of the Commercial Products business. Santa Fe Springs, California is the manufacturing headquarters for Burke's silicone production activities and houses most of its Aerospace Products and all of its silicone Commercial Products businesses. Along with the industrial hose production, the Aerospace Products business classified development and production areas are also located at the Santa Fe Springs facility. The Taunton, Massachusetts facility is the manufacturing site for Burke's Haskon aerospace operations. This location provides Burke with an alternative eastern United States manufacturing presence for its aerospace customers. As of July 4, 1997, the Company maintained operations at the following locations:
SQUARE LOCATION FOOTAGE OWNERSHIP FUNCTION - ---------------------------------- --------- ----------- ------------------------------------------------------- San Jose, CA...................... 123,000 Owned Manufacturing, Engineering, Distribution, Offices San Jose, CA...................... 82,000 Leased Manufacturing, Warehouse Santa Fe Springs, CA.............. 80,000 Leased Manufacturing, Engineering, Distribution, Offices Santa Fe Springs, CA.............. 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
These facilities produce molded, extruded and calendered forms of organic rubber and silicone which are then fabricated by machine or by skilled labor into finished products. The Company's engineering, design and research and development departments play a significant role in the initial product design and compound formulation used in the production process. Burke has sophisticated laboratories in each of its manufacturing facilities which allow the Company to perform most of its necessary testing in-house. In addition to the facilities identified above, the Company leases a 113,000 square foot facility in Modesto, California, which is subleased to the purchaser of the Company's custom-molded products business in connection with the sale of that business in 1996. The Company believes that its facilities are in good 61 condition and that the facilities, together with anticipated capital improvements and additions, are adequate for its operating needs for the foreseeable future. BACKLOG AND WARRANTY The Company's backlog consists of cancelable orders and is dependent upon trends in consumer demand throughout the year. Customer order patterns vary from year to year, largely because of annual differences in consumer end-product demand, marketing strategies, overall economic and weather conditions. Orders for the Company's products are generally subject to cancellation until shipment. As a result, comparison of backlog as of any date in a given year with backlog at the same date in a prior year is not necessarily indicative of sales trends. Moreover, the Company does not believe that backlog is necessarily indicative of the Company's future results of operations or prospects. The Company's warranty policy is to accept returns of products with defects in materials or workmanship. The Company will also accept returns of incorrectly shipped goods where the Company has been notified on a timely basis and, in certain cases, to maintain customer goodwill. In accordance with normal industry practice, the Company ordinarily accepts returns only from its customers and does not ordinarily accept returns directly from consumers. Certain of the products returned to the Company by its customers, however, may have been returned to those customers by consumers. The Company generally warrants its roofing products for two years, for which the related costs are not significant. In addition, the Company sells extended warranties on roofing products for ten to twenty years. During the three-year period ended January 3, 1997, the Company incurred insignificant warranty costs with respect to its roofing products. EMPLOYEES The Company employed at October 3, 1997, 890 employees at its three locations, including 775 involved in manufacturing and manufacturing support and 83 involved in product sales. Employees at the Company's three locations receive comparable insurance and benefit programs. Burke's employees at the San Jose and Taunton locations are represented by the International Association of Machinists and Electrical Workers Unions, respectively. The collective bargaining agreement for the Taunton location was renegotiated in June 1997 for a three-year term and the agreement for the San Jose location will expire in October 1997. While the Company has not experienced a work stoppage due to a labor dispute since 1975 and management believes that the Company's relationships with its employees and unions are good, there can be no assurance that the collective bargaining agreement for the San Jose location will be renegotiated on terms satisfactory to the Company and its employees. PATENTS, TRADEMARKS, TRADE NAMES AND TRADE SECRETS The success of the Company's various businesses depends in part on the Company's ability to exploit certain proprietary patents, trademarks, trade names and trade secrets on an exclusive basis in reliance upon the protections afforded by applicable copyright, patent and trademark laws and regulations. The loss of certain of the Company's rights to such patents, trademarks, trade names and trade secrets or the inability of the Company effectively to protect or enforce such rights could adversely affect the Company. The duration of the Company's intellectual property rights is as follows: PATENTS
GATT PATENT NO. TITLE EXPIRY - ------------------------ -------------------------------------------------------- --------- 4,608,792............... Roof membrane holdown system 11/12/08 4,603,790............... Tensioned reservoir cover, rainwater run-off enhancement 3/11/05 system
62 TRADEMARKS
MARK EXPIRATION - ---------------------------------------------------------------------------------- ----------- 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
ENVIRONMENTAL LIABILITY The Company is subject to various evolving federal, state and local environmental laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous and non-hazardous substances and wastes. These laws and regulations provide for substantial fees and sanctions for violations and, in many cases, could require the Company to remediate a site to meet applicable legal requirements. In connection with the Recapitalization, JFLEI conducted certain investigations (including, in some cases, reviewing environmental reports prepared by others) of the Company's operations and its compliance with applicable environmental laws. The investigations, which included Phase I assessments (consisting generally of a site visit, records review and non-intrusive investigation of conditions at the subject facility) by independent consultants, found that certain facilities have had or may have had releases of hazardous materials that may require remediation. Pursuant to the Merger Agreement, the shareholders of the Company have agreed, subject to certain limitations as to survival and amount, to indemnify the Company against certain environmental liabilities incurred prior to the consummation of the Recapitalization. See "The Transactions." Based in part on the investigations conducted and the indemnification provisions of the Merger Agreement with respect to environmental matters, the Company believes, although there can be no assurance, that its liabilities relating to these environmental matters will not have a material adverse effect on its future financial position or results of operations. The Company does not maintain a reserve for environmental liabilities. LEGAL PROCEEDINGS The Company is routinely involved in legal proceedings related to the ordinary course of its business. Management does not believe any such matters will have a material adverse effect on the Company. The Company maintains property, general liability and product liability insurance in amounts which it believes are consistent with industry practices and adequate for its operations. 63 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name, age and position of each of the persons who became directors and executive officers of the Company upon completion of the Prior Offering. Each director will hold office until the next annual meeting of the shareholders or until his successor has been elected and qualified. Officers will be elected by the Board of Directors and will serve at the discretion of the Board.
NAME AGE POSITIONS - ----------------------------------------------------- --- ----------------------------------------------------- Rocco C. Genovese.................................... 60 Vice Chairman of the Board, President and Chief Executive Officer Reed C. Wolthausen................................... 50 Director, Treasurer, Senior Vice President and General Manager--Silicone Products David E. Worthington................................. 44 Vice President--Finance Robert F. Pitman..................................... 42 Vice President and Technical Director--San Jose Craig A. Carnes...................................... 37 Vice President--Sales and Marketing--Flooring Products Ronald A. Stieben.................................... 50 Vice President--Sales and Marketing--Silicone Products Robert G. Engle...................................... 56 Vice President--Operations--Santa Fe Springs Hisham Alameddine.................................... 39 Vice President--Operations--San Jose John F. Lehman....................................... 54 Director Donald Glickman...................................... 64 Director George Sawyer........................................ 66 Director Keith Oster.......................................... 36 Director Oliver C. Boileau, Jr................................ 70 Director Thomas G. Pownall.................................... 75 Director Bruce D. Gorchow..................................... 39 Director
ROCCO C. GENOVESE, Vice Chairman, President and Chief Executive Officer, has been with the Company for 41 years. Mr. Genovese joined Burke in 1955 and has held a number of operations and sales positions within the Company since that time. Mr. Genovese assumed his current role as Chairman, President and Chief Executive Officer in 1989. He is active in all aspects of Burke's business and is a participant in several industry associations. REED C. WOLTHAUSEN, Treasurer, Senior Vice President and General Manager--Silicone Products, has been with the Company for eight years. Initially serving as the Company's Chief Financial Officer, Mr. Wolthausen is now the Company's Treasurer and manages Burke's silicone businesses. Prior to joining Burke, he served as Chief Financial Officer for Micronix Corp. and as Controller for Velo-Bind, Inc. DAVID E. WORTHINGTON, Vice President--Finance, has been with the Company for six years. Mr. Worthington joined Burke as Corporate Controller in 1990 and served in that capacity until 1997 when he was promoted to his current position. Prior to joining the Company, he served as Chief Financial Officer for Electro-Technology Corporation. ROBERT F. PITMAN, Vice President and Technical Director--San Jose, has been with the Company since 1980 and currently oversees all technical and product development for the San Jose-based businesses as well as sales and marketing for the San Jose portion of the Commercial Products business. During his tenure with Burke, Mr. Pitman has held a number of positions including Director of Technical Services and Material/Process Development Engineer. He has served in his current position since 1994. 64 CRAIG A. CARNES, Vice President--Sales and Marketing--Flooring Products, joined the Company in 1996. Prior to joining the Company, Mr. Carnes was Vice President of Sales and Marketing for Color Spot, Inc., a subsidiary of Pacificorp and a consumer perishable product company that is the nations largest producer of garden bedding flowers. For five years prior to joining Color Spot, Inc., Mr. Carnes held senior sales and marketing positions with Levolor Corporation, an industry leader and manufacturer of hard window coverings. RONALD A. STIEBEN, Vice President--Sales and Marketing--Silicone Products, has worked for the Company for two years. Prior to joining Burke, Mr. Stieben worked for 16 years at Kirkhill Rubber Company, one of Burke's competitors. He served as Vice President of Sales for Kirkhill for five years before joining Burke in 1995. ROBERT G. ENGLE, Vice President--Operations--Santa Fe Springs, joined Burke as Industrial Engineering Manager in 1986 and has since held the positions of Engineering Manager and Vice President of Manufacturing. Before joining Burke, Mr. Engle served as Manager of Engineering Services and Chief Industrial Engineer for Norton Company. HISHAM ALAMEDDINE, Vice President--Operations--San Jose, has been with the Company for five years. Before serving in his current position, Mr. Alameddine served as Director of Engineering Services for the Company. Prior to joining Burke, Mr. Alameddine was the Vice President of Manufacturing for Sonfarrel, Inc. and has held senior operations positions with two other companies. JOHN F. LEHMAN, became a director of the Company upon consummation of the Recapitalization, is a Managing Principal of Lehman. Prior to founding Lehman in 1990, Dr. Lehman was an investment banker with Paine Webber, Inc. from 1988 to 1990, and served as a Managing Director in Corporate Finance. Dr. Lehman served for six years as Secretary of the Navy, was a member of the National Security Council Staff, served as a delegate to the Mutual Balanced Force Reductions negotiations and was the Deputy Director of the Arms Control and Disarmament Agency. Dr. Lehman served as Chairman of the Board of Directors of Sperry Marine, Inc., and is a member of the Board of Directors of Sedgwick Group plc, Ball Corporation and ISO Inc., and is currently Vice Chairman of the Princess Grace Foundation, a director of OpiSail Foundation and a trustee of Spence School. DONALD GLICKMAN, who became a director of the Company upon consummation of the Recapitalization, is a Managing Principal of Lehman. For the past five years, Mr. Glickman has also been the President of Donald Glickman Company, Inc., which together with Lehman, acquires as principal significant corporations in the aerospace, marine, and defense industries. Prior to joining Donald Glickman Company, Inc., Mr. Glickman was a principal of the Peter J. Solomon Company, a Managing Director of Shearson Lehman Brothers Merchant Banking Group and Senior Vice President and Regional Head of The First National Bank of Chicago. Mr. Glickman served as an armored calvary officer in the Seventh U.S. Army. Mr. Glickman is currently a director of Cal-Tex Industries, Inc. and Monro Muffler Brake, Inc. and is a trustee of MassMutual Corporate Investors, MassMutual Participation Investors and Wolf Trap Foundation for the Performing Arts. GEORGE SAWYER, became a director of the Company upon consummation of the Recapitalization, is a Managing Principal of Lehman and has been affiliated with Lehman for the past five years. From 1993-1995, Mr. Sawyer served as the President and Chief Executive Officer of Sperry Marine Inc. Prior to that, Mr. Sawyer held a number of prominent positions in private industry and in the U.S. government, including serving as the President of John J. McMullen Associates, the President and Chief Operating Officer of TRE Corporation, the Vice President of International Operations for Bechtel Corporation and the Assistant Secretary of the Navy for Shipbuilding and Logistics under Mr. Lehman. KEITH OSTER, became a director of the Company upon consummation of the Recapitalization, is a Principal of Lehman. Mr. Oster joined Lehman in 1992 and is principally responsible for financial structuring and analysis. Prior to joining Lehman, Mr. Oster was with the Carlyle Group, where he was 65 responsible for analyzing acquisition opportunities and arranging debt financing, and was a Senior Financial Analyst with Prudential-Bache Capital Funding, working in the Mergers, Acquisitions and Leveraged Buyout Department. OLIVER C. BOILEAU, JR., became a director of the Company upon consummation of the Recapitalization, joined The Boeing Company in 1953 as a research engineer. He progressed through several technical and management positions and was named Vice President in 1968 and then President of Boeing Aerospace in 1973. In 1980, he joined General Dynamics Corporation as President and a member of the Board of Directors. In January 1988, Mr. Boileau was promoted to Vice Chairman and then retired in May 1988. Mr. Boileau joined Northrop Grumman Corporation in December 1989 as Vice President and President and General Manager of the B-2 Division. He also served as President and Chief Operating Officer of the Grumman Corporation, a subsidiary of Northrop Grumman, and as a member of the Board of Directors of Northrop Grumman. Mr. Boileau retired from Northrop Grumman in 1995. He is an Honorary Fellow of the American Institute of Aeronautics and Astronautics, a member of the National Academy of Engineering, the Board of Trustees of St. Louis University, and Chairman of the Massachusetts Institute of Technology-Lincoln Laboratory Advisory Board. THOMAS G. POWNALL, became a director of the Company upon consummation of the Recapitalization, is a member of the investment advisory board of Lehman. Mr. Pownall was Chairman of the Board of Directors from 1983 until 1992 and Chief Executive Officer of Martin Marietta Corporation from 1982 until his retirement in 1988. Mr. Pownall joined Martin Marietta Corporation in 1963 as President of its Aerospace Advanced Planning unit, became President of Aerospace Operations and, in succession, Vice President and President and Chief Operating Officer of the corporation. Mr. Pownall is also a director of the Titan Corporation and Director Emeritus of Sundstrand Corporation, serves as a member of the advisory boards of Ferris, Baker Watts Incorporated and Sedgwich New York Metropolitan and as a director of the U.S. Naval Academy Foundation and a trustee of Salem-Teikyo University. BRUCE D. GORCHOW, became a director of the Company upon consummation of the Recapitalization, is a member of the investment advisory board of Lehman. Since 1991, Mr. Gorchow has been Executive Vice President and head of the Private Finance Group of PPM America, Inc. Mr. Gorchow is also a Director of Global Imaging Systems, Inc., Leiner Health Products, Inc., Tomah Products, Inc. and is an investment director of several investment limited partnerships. Mr. Gorchow also represents PPM America, Inc. on the boards of ten of its portfolio companies. Prior to his position at PPM America, Mr. Gorchow was a Vice President at Equitable Capital Management, Inc. CERTAIN RIGHTS OF HOLDERS OF REDEEMABLE PREFERRED STOCK Under certain circumstances, the holders of the Redeemable Preferred Stock may have the right to elect a majority of the directors of Company. See "Description of Redeemable Preferred Stock and Warrants--Redeemable Preferred Stock--Voting Rights." COMMITTEES OF THE BOARD OF DIRECTORS It is expected that the Board of Directors will establish an Audit Committee and a Compensation Committee. The membership of these committees has not yet been determined. The Compensation Committee will make recommendations concerning the salaries and incentive compensation of employees of and consultants to the Company, and will oversee and administer the Company's stock option plans. The Audit Committee will be responsible for reviewing the results and scope of audits and other services provided by the Company's independent auditors. EXECUTIVE COMPENSATION The information set forth in this section relates to the Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company as of January 3, 1997. It is expected 66 that, following the consummation of the Transactions, the Company generally will provide its executives with compensation (including cash compensation and benefits) comparable to the compensation provided to them prior to the Recapitalization, with such additions or modifications as may be negotiated by the Company and management. COMPENSATION SUMMARY The following summary compensation table sets forth for the fiscal years ended January 3, 1997, December 29, 1995 and December 30, 1994, the historical compensation for services to the Company of the Chief Executive Officer and the four most highly compensated executive officers (the "Named Executive Officers") as of January 3, 1997:
LONG-TERM ANNUAL COMPENSATION COMPENSATION(1) ------------- -------------------- SECURITIES ALL OTHER FISCAL SALARY BONUS UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($)(2) OPTIONS ($)(3) - ----------------------------------------------------- ----------- --------- --------- ------------- ----------------- Rocco C. Genovese ................................... 180,050 150,000 750 President and Chief 1996 1995 189,614 120,000 336,000 -- 750 Executive Officer 1994 170,000 75,000 100,000 750 Reed C. Wolthausen .................................. 141,378 100,000 750 Senior Vice President and 1996 1995 133,664 60,000 224,000 -- 750 General Manager--Silicone Products 1994 115,050 40,000 25,000 750 Ronald A. Stieben(4) ................................ 130,000 -- -- 750 Vice President--Sales and 1996 1995 82,500 -- 25,000 480 Marketing--Silicone Products 1994 -- -- -- -- Robert F. Pitman .................................... 90,750 27,500 -- 750 Vice President and 1996 1995 84,273 22,500 -- 750 Technical Director--San Jose 1994 81,249 21,500 20,000 750 90,794 25,000 -- 750 David E. Worthington ................................ 1996 1995 87,791 20,000 -- 750 Vice President--Finance 1994 83,799 10,000 10,000 750
- ------------------------ (1) Perquisites and other personal benefits paid in 1996 for the Named Executive Officers aggregated less than the lesser of $50,000 and 10% of the total annual salary and bonus set forth in the columns entitled "Salary" and "Bonus" for each named executive officer and, accordingly, are omitted from the table as permitted by the rules of the Commission. (2) Annual bonuses are indicated for the year in which they were earned and accrued. Annual bonuses for any year are generally paid in the following fiscal year. (3) The Company's contributions to the Company's 401(k) plan on behalf of the Named Executive Officers. (4) Mr. Stieben was hired by the Company on May 15, 1995. 1989 STOCK OPTION PLAN AND STOCK OPTION GRANTS Prior to consummation of the Recapitalization, the Company maintained the 1989 Stock Option Plan, pursuant to which incentive and nonqualified options to purchase an aggregate of 1,182,000 shares of Common Stock were vested and outstanding at July 4, 1997. In addition, in 1996 the Board of Directors granted nonqualified options to purchase an aggregate of 360,000 shares of Common Stock to certain 67 executive officers not pursuant to a formal plan. In connection with the Recapitalization, all vested options outstanding as of the consummation of the Recapitalization were converted into the right to receive the Recapitalization Consideration less the applicable exercise price. The following table summarizes options granted in 1996 to the Named Executive Officers. OPTIONS GRANTED IN 1996
INDIVIDUAL GRANTS(1) ------------------------------------------------------------------ PERCENTAGE OF TOTAL OPTIONS EXERCISE SHARES UNDERLYING GRANTED TO PRICE PER EXPIRATION NAME OPTIONS EMPLOYEES SHARE DATE - ------------------------------------------------- ----------------- --------------------- ----------- ----------- Rocco C. Genovese................................ 336,000 54.4% $ 1.500 June 2006 Reed C. Wolthausen............................... 224,000 36.2% 1.500 June 2006
- ------------------------ (1) All vested options outstanding immediately prior to the Recapitalization will be canceled and converted into the right to receive the Recapitalization consideration less the applicable exercise price. The following table summarizes information with respect to the year-end values of all options held by Named Executive Officers. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS SHARES ACQUIRED VALUE REALIZED YEAR-END (#) AT FISCAL YEAR-END NAME ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE ($) - ------------------------------------------ ----------------- --------------- ----------------------- -------------------- Rocco C. Genovese......................... 0 0 611,000/0 $ 295,000 Reed C. Wolthausen........................ 0 0 354,000/0 $ 139,750 Ronald A. Stieben......................... 0 0 20,000/5,000 $ 0 Robert F. Pitman.......................... 0 0 63,750/0 $ 68,531 David E. Worthington...................... 0 0 45,000/0 $ 48,375
COMPENSATION OF DIRECTORS It is anticipated that none of the directors who are officers of the Company will receive any compensation directly for their service on the Company's Board of Directors. All other directors will receive customary directors' fees for their services. In addition, the Company has agreed to pay Lehman certain fees for various management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. See "Certain Relationships and Related Transactions." 68 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's common stock as of July 4, 1997, assuming the Transactions occurred on that date, by (i) each director, (ii) each of the executive officers of the Company, (iii) all executive officers and directors as a group and (iv) each person expected by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock of the Company immediately after consummation of the Recapitalization.
PERCENTAGE OF NUMBER OF SHARES NAME OF INDIVIDUAL OR ENTITY(1) SHARES(2) OUTSTANDING(3) - ------------------------------------------------------------------------------ ---------- -------------- JFLEI(4)...................................................................... 3,134,298 65.0% John F. Lehman(5)............................................................. 3,134,298 65.0 George Sawyer(5).............................................................. 3,134,298 65.0 Donald Glickman(5)............................................................ 3,134,298 65.0 Keith Oster(5)................................................................ 3,134,298 65.0 Rocco C. Genovese............................................................. 241,000 5.0 Reed C. Wolthausen............................................................ 193,602 4.0 David E. Worthington.......................................................... 14,500 * Robert F. Pitman.............................................................. 8,600 * Craig A. Carnes............................................................... 5,300 * Ronald A. Stieben............................................................. 1,100 * Robert F. Engle............................................................... 5,300 * Hisham Alameddine............................................................. 4,300 * Oliver C. Boileau, Jr.(6)..................................................... -- -- Thomas G. Pownall(7).......................................................... -- -- Bruce D. Gorchow(8)........................................................... -- -- Jackson National(9)........................................................... 428,444 8.9 MassMutual(9)................................................................. 428,444 8.9 Paribas(9).................................................................... 107,112 2.2 All directors and executive officers as a group (15 persons).................. 3,608,000 74.9%
- ------------------------ * Less than 1% (1) The address of JFLEI and Messrs. Lehman, Sawyer, Glickman and Oster is 2001 Jefferson Davis Highway, Suite 607, Arlington, Virginia 22202. The address of Jackson National and Mr. Gorchow is 225 West Wacker Drive, Chicago, Illinois 60606. The address of MassMutual is 1295 State Street, Springfield, Massachusetts 01111. The address of Paribas is 787 Seventh Avenue, New York, New York 10019. (2) As used in this table, beneficial ownership means the sole or shared power to vote, or to direct the voting of a security, or the sole or shared power to dispose, or direct the disposition of, a security. (3) Computed based upon the total number of shares of the Company's Common Stock outstanding and the number of shares of the Company's Common Stock underlying options or warrants held by that person exercisable within 60 days after consummation of the Transactions. In accordance with Rule 13(d)-3 of the Exchange Act, any Common Stock that will not be outstanding at the consummation of the Transactions that is subject to options or warrants exercisable within 60 days is deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Company's Common Stock owned by the person holding such options or warrants, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares of the Company's Common Stock owned by any other person. (4) JFLEI is a Delaware limited partnership managed by Lehman, which is an affiliate of the general partner of JFLEI. Each of Messrs. Lehman, Glickman, Sawyer and Oster, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control Lehman and such general partner. Lehman and such general partner may be deemed to control the voting and disposition of the shares of the Company common stock owned by JFLEI. Accordingly, for certain purposes, Messrs. Lehman, Glickman, Sawyer, Oster may be deemed to be beneficial owners of the shares of the Company's Common Stock owned by JFLEI. 69 (5) Includes the shares beneficially owned by JFLEI, of which Messrs. Lehman, Glickman, Sawyer and Oster are affiliates. (6) Mr. Boileau is a limited partner of JFLEI. (7) Mr. Pownall is a limited partner of JFLEI and is on the investment advisory board of Lehman. (8) Mr. Gorchow is on the investment advisory board of Lehman. (9) All shares are obtainable upon the exercise of the Warrants. See "The Transactions" and "Description of Redeemable Preferred Stock and Warrants." CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT PARTICIPATION IN THE TRANSACTIONS COMMON STOCK. The executive officers and directors of the Company will receive a total of approximately $13.8 million, representing the Recapitalization Consideration. Certain executive officers and directors of the Company will also retain the Continuing Shares. See "The Transactions" and "Security Ownership of Certain Beneficial Owners and Management." TREATMENT OF STOCK OPTIONS. Certain of the directors and executive officers of the Company held options to purchase the Company's Common Stock that were terminated upon the effectiveness of the Merger and, as to a portion of which, such persons received cash pursuant to the terms of the Merger Agreement. Prior to the effective date of the Merger, the Company agreed, pursuant to the terms of the Merger Agreement, to take all necessary action to cancel all outstanding options to purchase the Company's Common Stock, whether or not exercisable. As of July 4, 1997, there were options vested and outstanding to purchase an aggregate of 1,542,000 shares of the Company's Common Stock at a weighted average exercise price of $0.840 per share, which options were held by 28 persons. MANAGEMENT AGREEMENT Pursuant to the terms of a ten-year Management Agreement (the "Management Agreement") entered into between Lehman and the Company, (i) upon consummation of the Transactions, the Company paid Lehman a fee in the amount of $1.5 million and (ii) the Company agreed to pay Lehman an annual management fee equal to $500,000 that shall commence accruing on October 1, 1998 and shall be payable in arrears on a quarterly basis commencing on January 1, 1999. SHAREHOLDERS AGREEMENT In connection with the Recapitalization, the Company, JFLEI, the Continuing Shareholders and, in their capacity as holders of the Warrants, Jackson National, Paribas and MassMutual (collectively, the "Shareholders") entered into a Shareholders Agreement (the "Shareholders Agreement"), the principal terms of which are summarized below: RESTRICTIONS ON TRANSFER. The shares of the Company's Common Stock held by each of the parties to the Shareholders Agreement, and certain of their transferees, are subject to restrictions on transfer. The shares of Common Stock may be transferred only to certain related transferees, including (i) in the case of individual Shareholders, family members or their legal representatives or guardians, heirs and legatees and trusts, partnerships and corporations the sole beneficiaries, partners or shareholders, as the case may be, of which are family members, (ii) in the case of partnership entity Shareholders (other than JFLEI), the partners of such partnership, (iii) in the case of entity Shareholders (other than JFLEI), affiliates of such entity, or to transferees of shares sold in transactions complying with the applicable provisions of the 70 Shareholder or Company Right of First Offer or the Tag-Along or Drag-Along Rights (as each term is defined below) or in a Registered Offering (as defined below). RIGHTS OF FIRST OFFER. If any Shareholder desires to transfer any shares of the Company's Common Stock or Warrants (other than pursuant to certain permitted transfers) and if such Shareholder has not received a bona fide offer from an unrelated third-party that such shareholder wishes to accept (a "Third-Party Offer"), all other Shareholders have a right of first offer (the "Right of First Offer") to purchase the shares or warrants (the "Subject Shares") upon such terms and subject to such conditions as are set forth in a notice (a "First Offer Notice") sent by the selling Shareholder to such other Shareholders. If the Shareholders elect to exercise their Rights of First Offer with respect to less than all of the Subject Shares, the Company has a right to purchase all of the Subject Shares that the Shareholders have not elected to purchase. If the Shareholders receiving the First Offer Notice and the Company elect to exercise their respective rights of first offer with respect to less than all of the Subject Shares, the selling Shareholder may solicit Third-Party Offers to purchase all (but not less than all) of the Subject Shares upon such terms and subject to such conditions as are, in the aggregate, no less favorable to the selling Shareholder than those set forth in the First Offer Notice; provided that the price may not be less than 90% of the price set forth in the First Offer Notice. Any sale pursuant to a Third-Party Offer must be consummated within 180 days after the expiration of the Company's Right of First Refusal and will be subject to applicable Tag-Along Rights. SUBSCRIPTION OFFER WITH RESPECT TO PRIMARY ISSUANCES. The Shareholders Agreement provides that the Company may not issue equity securities, or securities convertible into equity securities unless the Company has offered to issue to each of the other Shareholders, on a pro rata basis, an opportunity to purchase such securities on the same terms, including price, and subject to the same conditions as those applicable to the proposed purchaser. TAG-ALONG RIGHTS. The Shareholders Agreement provides that, if the Shareholders and the Company fail to exercise their respective rights of first refusal with respect to all of the Subject Shares, the Shareholders have the right to "tag along" (the "Tag-Along Right") upon the sale of the Company's Common Stock by JFLEI pursuant to a Third-Party Offer . DRAG-ALONG RIGHTS. The Shareholders Agreement provides that if one or more Shareholders holding a majority of the Company's Common Stock (the "Majority Shareholders") propose to sell all of the Common Stock owned by the Majority Shareholders, the Majority Shareholders have the right (the "Drag-Along Right") to compel the other Shareholders to sell all of the shares of Common Stock and all of the Warrants held by such other Shareholders upon the same terms and subject to the same conditions as the terms and conditions applicable to the sale by the Majority Shareholders. MERGER. The Shareholders Agreement provides that the Company may not enter into any merger, consolidation or similar business combination unless the terms of such merger provide for all Shareholders to receive the same consideration for their shares of Common Stock. REGISTERED OFFERINGS. The shares of Common Stock may be transferred in a bona fide public offering for cash pursuant to an effective registration statement (a "Registered Offering") without compliance with the provisions of the Shareholders Agreement related to the Right of First Offer or the Tag-Along or Drag-Along Rights. LEGENDS. The shares of Common Stock subject to the Shareholders Agreement will bear a legend related to the Right of First Offer and the Tag-Along and Drag-Along Rights, which legends will be removed when the shares of Common Stock are, pursuant to the terms of the Shareholders Agreement, no longer subject to the restrictions on transfer imposed by the Shareholders Agreement. REGISTRATION RIGHTS. JFLEI and certain other shareholders are entitled to one "demand" and unlimited piggyback registration rights, subject to additional customary rights and limitations. 71 The term of the Shareholders Agreement will expire on the earliest of (i) 10 years from the consummation of the Recapitalization, (ii) the date on which none of the Shareholders nor any of their permitted transferees are subject to the terms of the Shareholders Agreement, (iii) the date on which none of the shares of Common Stock are subject to the restrictions on transfer imposed by the Shareholders Agreement or (iv) the consummation of a Registered Offering for an aggregate offering price of $25.0 million or more. REGISTRATION RIGHTS FOR WARRANTHOLDERS The holders of the shares issuable upon exercise of the Warrants will be entitled to one "demand" registration right at any time on or after the later of (i) August 20, 2002 and (ii) the 181st day after completion of the initial public offering by the Company of its Common Stock, subject to additional customary rights and limitations. In addition, holders of the shares issuable upon exercise of the Warrants will be entitled to unlimited "piggyback" registration rights after the date of the Company's initial public offering of its Common Stock, subject to customary rights and limitations. See "Description of Redeemable Preferred Stock and Warrants--Registration Rights for Warrant Shares." INDEMNIFICATION OF OFFICERS AND DIRECTORS The Articles of Incorporation of the Company contain provisions eliminating the personal liability of directors for monetary damages for breaches of their duty of care, except in certain prescribed circumstances. The Bylaws of the Company also provide that directors and officers will be indemnified to the fullest extent authorized by California law, as it now stands or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. The Bylaws of the Company provide that the rights of directors and officers to indemnification is not exclusive of any other right now possessed or hereinafter acquired under any statute, agreement or otherwise. DESCRIPTION OF NOTES Except as otherwise indicated below, the following summary applies to both the Old Notes and the New Notes. As used herein, the term "Notes" shall mean the Old Notes and the New Notes, unless otherwise indicated. The form and terms of the New Notes are substantially identical to the form and terms of the Old Notes, except that the New Notes (i) will be registered under the Securities Act, (ii) will not provide for payment of penalty interest as Liquidated Damages, which terminate upon consummation of the Exchange Offer, and (iii) will not bear any legends restricting transfer thereof. The New Notes will be issued solely in exchange for an equal principal amount of Old Notes. As of the date hereof, $110.0 million aggregate principal amount of Old Notes is outstanding. See "The Exchange Offer." GENERAL The Old Notes were issued and the New Notes will be issued pursuant to an Indenture (the "Indenture") between the Company, the Subsidiary Guarantors referred to below and United States Trust Company of New York, as trustee (the "Trustee"). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The Notes are subject to all such terms, and Holders of Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of certain provisions of the Indenture is materially complete but is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. A copy of the Indenture is available as set forth under "Additional Information." The definitions of certain terms used in the following summary are set forth below under the caption "Certain Definitions." 72 PRINCIPAL, MATURITY AND INTEREST The Notes will mature on August 15, 2007, will initially be limited to $110.0 million aggregate principal amount and will be senior unsecured obligations of the Company. The Indenture provides for the issuance of up to $75.0 million aggregate principal amount of additional Notes having identical terms and conditions to the Notes offered hereby (the "Additional Notes"), subject to compliance with the covenants contained in the Indenture. Any Additional Notes will be part of the same issue as the New Notes offered hereby and will vote on all matters with the New Notes offered hereby. For purposes of this "Description of the Notes," reference to the Notes does not include Additional New Notes. Except as otherwise described below, each Note will bear interest at 10% per annum from August 20, 1997 or from the most recent interest payment date to which interest has been paid or duly provided for, payable semiannually on February 15 and August 15 in each year, commencing February 15, 1998, until the principal thereof is paid or duly provided for, to the person in whose name the Note (or any predecessor Note) is registered at the close of business on the February 1 or August 1 next preceding such interest payment date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The principal of and premium, if any, and interest on the Notes will be payable, and the Notes will be exchangeable and transferable, at the office or agency of the Company in The City of New York maintained for such purposes (which initially will be the office of the Trustee located at 111 Broadway, Lower Level, New York, N.Y., 10006) or, at the option of the Company, interest may be paid by check mailed to the address of the person entitled thereto as such address appears in the security register; PROVIDED that all payments with respect to Global Notes and Certificated Notes (as such terms are defined below under the caption "--Book Entry, Delivery and Form") the holders of which have given wire transfer instructions to the Company will be required to be made by wire transfer of immediately available funds to the accounts specified by the holders thereof. The Notes will be issued only in registered form without coupons and only in denominations of $1,000 and any integral multiples thereof. No service charge will be made for any registration of transfer or exchange or redemption of Notes, but the Company may require payment in certain circumstances of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Old Notes that remain outstanding after the consummation of the Exchange Offer and New Notes issued in connection with the Exchange Offer will be treated as a single class of securities under the Indenture. The Notes will not be entitled to the benefit of any sinking fund. NOTE GUARANTEES Payment of the principal of (and premium, if any) and interest on the Notes, when and as the same become due and payable, will be guaranteed, jointly and severally, on a senior unsecured basis (the "Note Guarantees") by the Subsidiary Guarantors referred to below. The obligations of the Subsidiary Guarantors under the Note Guarantees will be limited so as not to constitute a fraudulent conveyance under applicable law. See "Risk Factors--Fraudulent Conveyance and Preference Considerations." The Company's Restricted Subsidiaries will be Subsidiary Guarantors and will consist of Burke Rubber Company, Inc., Burke Flooring Products, Inc. and Burke Custom Processing, Inc. However, under certain circumstances, the Company will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive covenants set forth in the Indenture. The Indenture will require that each Restricted Subsidiary organized within the United States and certain other Restricted Subsidiaries issue a Note Guarantee. See "Certain Covenants--Limitations on Guarantees of Indebtedness by Restricted Subsidiaries." The Indenture provides that, in the event of any sale, exchange or transfer (including by way of merger of such Restricted Subsidiary) to any person not an Affiliate of the Company of all of the 73 Company's and the Restricted Subsidiaries' Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture), then such Subsidiary Guarantor will be deemed automatically and unconditionally released and discharged from all of its obligations under its Note Guarantee without any further action on the part of the Trustee or any holder of the Notes; provided that the Net Proceeds of such sale, transfer or other disposition are applied in accordance with the "Limitation on Certain Asset Sales" covenant to the extent required thereby. In addition, any Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in accordance with the terms of the Indenture may be released and relieved of its obligations under its Note Guarantee. RANKING The Notes will be senior unsecured obligations of the Company and will rank PARI PASSU in right of payment with all other existing and future senior obligations of the Company. Loans under the Bank Credit Agreement will be secured by substantially all of the Company's assets. Accordingly, while the Notes rank PARI PASSU in right of payment with the loans under the Bank Credit Agreement, the Notes will be effectively subordinated to the loans outstanding under the Bank Credit Agreement to the extent of the value of the assets securing such loans. Subject to certain limitations, the Company and its Restricted Subsidiaries may incur additional Indebtedness in the future. Each Note Guarantee will be a senior unsecured obligation of the respective Subsidiary Guarantor, ranking PARI PASSU in right of payment with all existing and future senior obligations of such Subsidiary Guarantor. Loans under the Bank Credit Agreement will be guaranteed by the Company's Subsidiaries, which guarantees will be secured by substantially all of the assets of the Company's Subsidiaries. Accordingly, while a Note Guarantee will rank PARI PASSU in right of payment with such Subsidiary's guarantee under the Bank Credit Agreement, such Note Guarantee will be effectively subordinated to such Subsidiary's guarantee under the Bank Credit Agreement to the extent of the value of the assets securing such guarantee. REDEMPTION OPTIONAL REDEMPTION. The Notes will be redeemable, at the option of the Company, as a whole or from time to time in part, at any time on or after August 15, 2002, on not less than 30 nor more than 60 days' prior notice at the redemption prices (expressed as percentages of principal amount) set forth below, if redeemed during the 12-month period beginning on August 15 of the years indicated below (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date):
REDEMPTION YEAR PRICE - --------------------------------------------------------------------------------- ----------- 2002............................................................................. 105.000% 2003............................................................................. 103.333 2004............................................................................. 101.667
and thereafter at 100% of the principal amount, together with accrued interest, if any, to the redemption date. In addition, at any time or from time to time prior to August 15, 2000, the Company may redeem up to 35% of the sum of (i) the initial aggregate principal amount of the Notes and (ii) the initial aggregate principal amount of any Additional Notes on one or more occasions with the net proceeds of one or more Public Equity Offerings at a redemption price equal to 110% of the principal amount thereof, plus accrued interest, if any, and Liquidated Damages, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date); PROVIDED that, immediately after giving effect to such redemption, at least 65% of the sum of (x) the initial aggregate principal amount of the Notes and (y) the initial aggregate principal amount of any Additional Notes 74 remains outstanding; PROVIDED FURTHER that such redemptions shall occur within 45 days of the date of closing of each Public Equity Offering. If less than all the Notes are to be redeemed, the particular Notes to be redeemed will be selected not more than 60 days prior to the redemption date by the Trustee by such method as the Trustee deems fair and appropriate. OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control prior to August 15, 2002, the Notes will be redeemable, in whole or in part, at the option of the Company, upon not less than 30 nor more than 60 days prior notice to each holder of Notes to be redeemed, at a redemption price equal to the sum of (i) the then outstanding principal amount thereof plus (ii) accrued an unpaid interest thereon and Liquidated Damages, if any, to the redemption date plus (iii) the Applicable Premium. The following definitions are used to determine the Applicable Premium: "Applicable Premium" will be defined, with respect to a Note, as the greater of (i) 5% of the then outstanding principal amount of such Note and (ii) the excess of (A) the present value of the remaining required interest and principal payments due on such Note (exclusive of accrued and unpaid interest), computed using a discount rate equal to the Treasury Rate plus 100 basis points, over (B) the then outstanding principal amount of such Note. "Treasury Rate" will be defined as the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) which has become publicly available at least two Business Days prior to the date fixed for prepayment (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining Average Life to Stated Maturity of the Notes; PROVIDED; HOWEVER, that if the Average Life to Stated Maturity of the Notes is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the Average Life to Stated Maturity of the Notes is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. PURCHASE OF NOTES UPON CHANGE OF CONTROL OR ASSET SALE. Each holder of the Notes will have certain rights to require the Company to purchase such holder's Notes upon the occurrence of a Change of Control. See "Certain Covenants--Purchase of Notes upon Change of Control" below. Under certain circumstances, the Company will be required to make an offer to purchase all or a portion of the Notes with proceeds received from an Asset Sale. See "--Certain Covenants--Limitation on Certain Asset Sales" below. CERTAIN COVENANTS The Indenture will contain, among others, the following covenants: LIMITATION ON INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK. The Company will not, and will not permit any Restricted Subsidiary to, create, issue, assume, guarantee or in any manner become directly or indirectly liable for the payment of, or otherwise incur (collectively, "incur"), any Indebtedness (including Acquired Indebtedness and the issuance of Disqualified Stock), except that the Company or any Subsidiary Guarantor may incur Indebtedness if, at the time of such event, the Fixed Charge Coverage Ratio for the immediately preceding four full fiscal quarters for which internal financial statements are available, taken as one accounting period, would have been equal to at least 2.0 to 1.0. In making the foregoing calculation for any four-quarter period that includes the Closing Date, pro forma effect will be given to the Prior Offering and the Recapitalization, as if such transactions had occurred at the beginning of such four-quarter period. In addition (but without duplication), in making the foregoing calculation, pro forma effect will be given to: (i) the incurrence of such Indebtedness and (if 75 applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred and the application of such proceeds occurred at the beginning of such four-quarter period, (ii) the incurrence, repayment or retirement of any other Indebtedness by the Company or its Restricted Subsidiaries since the first day of such four-quarter period as if such Indebtedness was incurred, repaid or retired at the beginning of such four-quarter period and (iii) the acquisition (whether by purchase, merger or otherwise) or disposition (whether by sale, merger or otherwise) of any company, entity or business acquired or disposed of by the Company or its Restricted Subsidiaries, as the case may be, since the first day of such four-quarter period, in each case as if such acquisition or disposition (and the reduction or increase of any associated Fixed Charge obligations and the change in Consolidated EBITDA resulting therefrom) had occurred at the beginning of such four-quarter period. If since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any acquisition (whether by purchase, merger or otherwise) or disposition that would have required adjustment pursuant to this definition, then the Fixed Charge Coverage Ratio shall be calculated giving PRO FORMA effect thereto as if such acquisition or disposition had occurred at the beginning of the applicable four-quarter period. In making a computation under the foregoing clause (i) or (ii), (A) the amount of Indebtedness under a revolving credit facility will be computed based on the average daily balance of such Indebtedness during such four-quarter period, (B) if such Indebtedness bears, at the option of the Company, a fixed or floating rate of interest, interest thereon will be computed by applying, at the option of the Company, either the fixed or floating rate and (C) the amount of any Indebtedness that bears interest at a floating rate will be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Hedging Obligations applicable to such Indebtedness if such Hedging Obligations have a remaining term at the date of determination in excess of 12 months). For purposes of this definition, whenever PRO FORMA effect is to be given to a transaction, the PRO FORMA calculations shall be made in good faith by the chief financial officer of the Company. Notwithstanding the foregoing, the Company may, and may permit its Restricted Subsidiaries to, incur the following Indebtedness ("Permitted Indebtedness"): (i) Indebtedness of the Company or any Restricted Subsidiary under the Bank Credit Agreement or one or more other credit facilities (and the incurrence by any Restricted Subsidiary of guarantees thereof) in an aggregate principal amount at any one time outstanding not to exceed the greater of (x) $15 million or (y) the amount of the Borrowing Base, less any amounts applied to the permanent reduction of such credit facilities pursuant to the "--Limitation on Certain Asset Sales" covenant; (ii) Indebtedness of the Company or any Restricted Subsidiary outstanding on the Closing Date and listed on a schedule to the Indenture (other than Indebtedness described under clause (i) above); (iii) Indebtedness owed by the Company to any Wholly Owned Restricted Subsidiary or owed by any Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary (provided that such Indebtedness is held by the Company or such Restricted Subsidiary); PROVIDED, HOWEVER, that any Indebtedness of the Company owing to any such Restricted Subsidiary is unsecured and subordinated in right of payment from and after such time as the Notes shall become due and payable (whether at Stated Maturity, acceleration, or otherwise) to the payment and performance of the Company's obligations under the Notes; (iv) Indebtedness represented by the Notes (other than the Additional Notes) and the Note Guarantees (including any Note Guarantees issued pursuant to "--Limitation on Guarantees of Indebtedness by Restricted Subsidiaries"); (v) Indebtedness of the Company or any Restricted Subsidiary under Hedging Obligations incurred in the ordinary course of business; 76 (vi) Indebtedness of the Company or any Restricted Subsidiary consisting of guarantees, indemnities or obligations in respect of purchase price adjustments in connection with the acquisition or disposition of assets, including, without limitation, shares of Capital Stock; (vii) either (A) Capitalized Lease Obligations of the Company or any Restricted Subsidiary or (B) Indebtedness under purchase money mortgages or secured by purchase money security interests, in each case incurred for the purpose of financing or refinancing all or any part of the purchase price or cost of construction or improvement of any property (real or personal) or other assets that are used or useful in the business of the Company or such Restricted Subsidiary (whether through the direct purchase of assets or the Capital Stock of any Person owning such assets and whether such Indebtedness is owed to the seller or Person carrying out such construction or improvement or to any third party), so long as (x) such Indebtedness is not secured by any property or assets of the Company or any Restricted Subsidiary other than the property and assets so acquired, constructed or improved and (y) such Indebtedness is created within 90 days of the acquisition or completion of construction or improvement of the related property; provided that the aggregate amount of Indebtedness under clauses (A) and (B) does not exceed $7.5 million at any one time outstanding; (viii) Indebtedness of the Company or any Restricted Subsidiary not permitted by any other clause of this definition, in an aggregate principal amount not to exceed $10 million at any one time outstanding; (ix) Indebtedness under (or constituting reimbursement obligations with respect) to letters of credit issued in the ordinary course of business, including without limitation letters of credit in respect of workers' compensation claims or self-insurance, or other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims; PROVIDED, HOWEVER, that upon the drawing of such letters of credit or other obligations, such obligations are reimbursed within five days following such drawing; and (x) any renewals, extensions, substitutions, refinancings or replacements (each, for purposes of this clause, a "refinancing") of any outstanding Indebtedness, other than Indebtedness incurred pursuant to clause (i), (iii), (v), (vi), (vii), (viii) or (ix) of this definition, including any successive refinancings thereof, so long as (A) any such new Indebtedness is in a principal amount that does not exceed the principal amount so refinanced, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Indebtedness refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing, plus the amount of the expenses of the Company incurred in connection with such refinancing, (B) in the case of any refinancing of Subordinated Indebtedness, such new Indebtedness is made subordinate to the Notes at least to the same extent as the Indebtedness being refinanced and (C) such refinancing Indebtedness does not have an Average Life less than the Average Life of the Indebtedness being refinanced and does not have a final scheduled maturity earlier than the final scheduled maturity, or permit redemption at the option of the holder earlier than the earliest date of redemption at the option of the holder, of the Indebtedness being refinanced. LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, take any of the following actions: (a) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Capital Stock (including, without limitation any payment in connection with any merger or consolidation involving the Company) or to the direct or indirect holders of the Company's or any of its Restricted Subsidiaries' Capital Stock in their capacity as such, other than (i) dividends, payments or distributions payable solely in Qualified Equity Interests, (ii) dividends, payments or distributions by a Restricted Subsidiary payable to the Company or another Restricted Subsidiary or (iii) pro rata dividends, payments or distributions on common stock of Restricted Subsidiaries held by minority stockholders, provided that such dividends, payments 77 or distributions do not in the aggregate exceed the minority stockholders' pro rata share of such Restricted Subsidiaries' net income from the first day of the Company's fiscal quarter during which the Closing Date occurs; (b) purchase, redeem or otherwise acquire or retire for value, directly or indirectly, any shares of Capital Stock, or any options, warrants or other rights to acquire such shares of Capital Stock of (i) the Company or (ii) any Restricted Subsidiary held by any Affiliate of the Company (other than, in either case, any such Capital Stock owned by the Company or any of its Restricted Subsidiaries); (c) make any principal payment on, or repurchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled principal payment, sinking fund payment or maturity, any Subordinated Indebtedness; and (d) make any Investment (other than a Permitted Investment) in any person (such payments or other actions described in (but not excluded from) clauses (a) through (d) being referred to as "Restricted Payments"), unless at the time of, and immediately after giving effect to, the proposed Restricted Payment: (i) no Default or Event of Default has occurred and is continuing, (ii) the Company could incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of the "Limitation on Indebtedness and Issuance of Disqualified Stock" covenant and (iii) the aggregate amount of all Restricted Payments made after the Closing Date does not exceed the sum of: (A) 50% of the aggregate Consolidated Adjusted Net Income of the Company during the period (taken as one accounting period) from the first day of the Company's first fiscal quarter commencing after the Closing Date to the last day of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Adjusted Net Income is a loss, minus 100% of such amount); plus (B) 100% of the aggregate net cash proceeds received by the Company after the Closing Date from (x) the issuance or sale (other than to a Restricted Subsidiary) of either (1) Qualified Equity Interests of the Company or (2) Indebtedness or Disqualified Stock (other than the Series A Preferred Stock and any refinancings thereof) that has been converted into or exchanged for Qualified Equity Interests of the Company, together with the aggregate net cash proceeds received by the Company at the time of such conversion or exchange or (y) cash capital contributions received by the Company after the Closing Date with respect to Qualified Equity Interests; plus (C) $3 million. Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions, so long as (other than with respect to the action described in clause (a) below) no Default or Event of Default has occurred and is continuing or would occur: (a) the payment of any dividend within 60 days after the date of declaration thereof, if at the declaration date such payment would not have been prohibited by the foregoing provisions; (b) the repurchase, redemption or other acquisition or retirement for value of any shares of Capital Stock of the Company, in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, Qualified Equity Interests of the Company; 78 (c) the purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance and sale (other than to a Subsidiary) of, shares of Qualified Equity Interests of the Company; (d) the purchase, redemption, defeasance or other acquisition or retirement for value of Subordinated Indebtedness in exchange for, or out of the net cash proceeds of a substantially concurrent issuance or sale (other than to a Restricted Subsidiary) of, Subordinated Indebtedness, so long as the Company or a Restricted Subsidiary would be permitted to refinance such original Subordinated Indebtedness with such new Subordinated Indebtedness pursuant to clause (x) of the definition of Permitted Indebtedness; (e) the purchase, redemption, acquisition, cancellation or other retirement for value of shares of Capital Stock of the Company, options or warrants to acquire any such shares or related stock appreciation rights held by officers, directors or employees of the Company or its Subsidiaries or former officers, directors or employees (or their respective estates or beneficiaries under their estates) of the Company or its Subsidiaries or by any plan for their benefit, in each case, upon death, disability, retirement or termination of employment or pursuant to the terms of any benefit plan or any other agreement under which such shares of stock or options, warrants or rights were issued; provided that the aggregate cash consideration paid for such purchase, redemption, acquisition, cancellation or other retirement of such shares of Capital Stock or options, warrants or rights after the Closing Date does not exceed in any fiscal year the sum of (i) $500,000, (ii) the cash proceeds received by the Company after the Closing Date from the sale of Qualified Equity Interests to employees, directors or officers of the Company and its Subsidiaries that occurs in such fiscal year and (iii) amounts referred to in clauses (i) through (ii) that remain unused from the immediately preceding fiscal year; and (f)(i)the payment of any regular quarterly dividends in respect of the Series A Preferred Stock in the form of additional shares of Series A Preferred Stock having the terms and conditions set forth in the Certificate of Determination for the Series A Preferred Stock as in effect on the Closing Date; and (ii) commencing October 15, 2000, the payment of regular quarterly cash dividends (in the amount no greater than that provided for in the Certificate of Determination for the Series A Preferred Stock as in effect on the Closing Date), out of funds legally available therefor, on any of the shares of Series A Preferred Stock issued and outstanding on the Closing Date and on any shares of Series A Preferred Stock issued in payment of dividends made or subsequently issued in payment of dividends thereon in respect of such shares of Series A Preferred Stock outstanding on the Closing Date, PROVIDED that, at the time of and immediately after giving effect to the payment of such cash dividend, the Fixed Charge Coverage Ratio, giving pro forma effect to the payment of such dividend as if it had occurred at the beginning of the four full fiscal quarters immediately preceding the date on which the dividend is to be paid, would have been equal to at least 2.25 to 1.0. The actions described in clauses (b), (c), (e) and (f)(ii) of this paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph but will be considered Restricted Payments for purposes of clause (iii) of the first paragraph of this covenant and the actions described in clauses (a), (d) and (f)(i) of this paragraph will be Restricted Payments that will be permitted to be taken in accordance with this paragraph but will not be considered Restricted Payments for purposes of clause (iii) of the first paragraph of this covenant. For the purpose of making any calculations under the Indenture (i) if a Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company will be deemed to have made an Investment in an amount equal to the fair market value of the net assets of such Restricted Subsidiary at the time of such designation as determined by the Board of Directors of the Company, whose good faith determination will be conclusive, (ii) any property transferred to or from an Unrestricted Subsidiary will be valued at fair market value at the time of such transfer, as determined by the Board of Directors of the Company, whose 79 good faith determination will be conclusive and (iii) subject to the foregoing, the amount of any Restricted Payment, if other than cash, will be determined by the Board of Directors of the Company, whose good faith determination will be conclusive. If the aggregate amount of all Restricted Payments calculated under the foregoing provision includes an Investment (other than a Permitted Investment) in an Unrestricted Subsidiary or other person that thereafter becomes a Restricted Subsidiary, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the lesser of (x) the net asset value of such Subsidiary at the time it becomes a Restricted Subsidiary and (y) the initial amount of such Restricted Payment. If an Investment resulted in the making of a Restricted Payment, the aggregate amount of all Restricted Payments calculated under the foregoing provision will be reduced by the amount of any net reduction in such Investment (resulting from the payment of interest or dividends, loan repayment, transfer of assets or otherwise), to the extent such net reduction is not included in the Company's Consolidated Adjusted Net Income; provided that the total amount by which the aggregate amount of all Restricted Payments may be reduced may not exceed the lesser of (x) the cash proceeds received by the Company and its Restricted Subsidiaries in connection with such net reduction and (y) the initial amount of such Restricted Payment. In computing the Consolidated Adjusted Net Income of the Company for purposes of the foregoing clause (iii)(A), (i) the Company may use audited financial statements for the portions of the relevant period for which audited financial statements are available on the date of determination and unaudited financial statements and other current financial data based on the books and records of the Company for the remaining portion of such period and (ii) the Company will be permitted to rely in good faith on the financial statements and other financial data derived from its books and records that are available on the date of determination. If the Company makes a Restricted Payment that, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the requirements of the Indenture, such Restricted Payment will be deemed to have been made in compliance with the Indenture notwithstanding any subsequent adjustments made in good faith to the Company's financial statements affecting Consolidated Adjusted Net Income of the Company for any period. PURCHASE OF NOTES UPON A CHANGE OF CONTROL. If a Change of Control occurs at any time, then, unless irrevocable notice of redemption for all of the Notes is given within 30 days after the occurrence of such Change of Control in accordance with the provisions of "--Optional Redemption Upon a Change of Control," each holder of Notes or Additional Notes will have the right to require that the Company purchase such holder's Notes or Additional Notes, as applicable, in whole or in part in integral multiples of $1,000, at a purchase price in cash equal to 101% of and Liquidated Damages, if any, the principal amount of such Notes or Additional Notes, plus accrued and unpaid interest, if any, to the date of purchase, pursuant to the offer described below (the "Change of Control Offer") and the other procedures set forth in the Indenture. Within 30 days following any Change of Control, the Company will notify the Trustee thereof and give written notice of such Change of Control to each holder of Notes or Additional Notes by first-class mail, postage prepaid, at its address appearing in the security register, stating, among other things, (i) the purchase price and the purchase date, which will be a Business Day no earlier than 30 days nor later than 60 days from the date such notice is mailed or such later date as is necessary to comply with requirements under the Exchange Act; (ii) that any Note or Additional Note not tendered will continue to accrue interest; (iii) that, unless the Company defaults in the payment of the purchase price, any Notes or Additional Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest after the Change of Control purchase date; and (iv) certain other procedures that a holder of Notes or Additional Notes must follow to accept a Change of Control Offer or to withdraw such acceptance. 80 Neither the Board of Directors of the Company nor the Trustee may waive the covenant relating to the holders' right to redeem the Notes upon a "Change of Control". However, if a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the purchase price for all of the Notes and Additional Notes that might be tendered by holders of the Notes and Additional Notes seeking to accept the Change of Control Offer. The failure of the Company to make or consummate the Change of Control Offer or pay the applicable Change of Control purchase price when due would result in an Event of Default and would give the Trustee and the holders of the Notes and Additional Notes the rights described under "--Events of Default". One of the events that constitutes a Change of Control under the Indenture, subject to exceptions, is the disposition of "all or substantially all" of the Company's assets. This term has not been interpreted under New York law (which is the governing law of the Indenture) to represent a specific quantitative test. As a consequence, in the event holders of the Notes or Additional Notes elect to require the Company to purchase the Notes or Additional Notes and the Company elects to contest such election, there can be no assurance as to how a court interpreting New York law would interpret the phrase in many circumstances. The existence of a holder's right to require the Company to purchase such holder's Notes or Additional Notes upon a Change of Control may deter a third party from acquiring the Company in a transaction that constitutes a Change of Control. The definition of "Change of Control" in the Indenture is limited in scope. The provisions of the Indenture do not afford holders of Notes or Additional Notes the right to require the Company to repurchase such Notes or Additional Notes in the event of a highly leveraged transaction or certain transactions with the Company's management or its affiliates, including a reorganization, restructuring, merger or similar transaction involving the Company (including, in certain circumstances, an acquisition of the Company by management or its affiliates) that may adversely affect holders of the Notes or Additional Notes, if such transaction is not a transaction defined as a Change of Control. See "Certain Definitions" below for the definition of "--Change of Control". A transaction involving the Company's management or its affiliates, or a transaction involving a recapitalization of the Company, would result in a Change of Control if it is the type of transaction specified in such definition. The Company will comply with the applicable tender offer rules including Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations in connection with a Change of Control Offer. To the extent that provisions of any applicable securities laws or regulations conflict with provisions of this covenant, the Company will comply with such securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. The Company's New Credit Agreement will contain prohibitions of certain events that would constitute a Change of Control and provides that such events constitute events of defaults thereunder. LIMITATION ON CERTAIN ASSET SALES. (a) The Company will not, and will not permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the consideration received by the Company or such Restricted Subsidiary for such Asset Sale is not less than the fair market value of the assets sold (as determined by the Board of Directors of the Company, whose good faith determination will be conclusive) and (ii) the consideration received by the Company or the relevant Restricted Subsidiary in respect of such Asset Sale consists of at least 75% cash or cash equivalents (including, for purposes of this clause (ii), the principal amount of any Indebtedness for money borrowed (as reflected on the Company's consolidated balance sheet) of the Company or any Restricted Subsidiary that (x) is assumed by any transferee of any such assets or other property in such Asset Sale or (y) with respect to the sale or other disposition of all of the Capital Stock of any Restricted Subsidiary, remains the liability of such Subsidiary subsequent to such sale or other disposition, but only to the extent that such assumption, sale or other disposition, as the case may be, is effected on a basis under which there is no further recourse to the Company or any of its Restricted Subsidiaries with respect to such liability). 81 (b) If the Company or any Restricted Subsidiary engages in an Asset Sale, the Company may, at its option, within 12 months after such Asset Sale, (i) apply all or a portion of the Net Cash Proceeds to the reduction of amounts outstanding under the Bank Credit Agreement or to the permanent repayment of other senior Indebtedness of the Company or a Restricted Subsidiary, or (ii) invest (or enter into a legally binding agreement to invest) all or a portion of such Net Cash Proceeds in the making of capital expenditures, the acquisition of a controlling interest in a Permitted Business or acquisition of other long-term assets, in each case, that will be used or useful in the Permitted Businesses of the Company or its Restricted Subsidiaries, as the case may be. Pending the final application of any such Net Cash Proceeds, the Company may temporarily reduce revolving credit Indebtedness to the extent not prohibited by the Indenture. If any such legally binding agreement to invest such Net Cash Proceeds is terminated, the Company may, within 90 days of such termination or within 12 months of such Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard to the parenthetical contained in such clause (ii)) above. The amount of such Net Cash Proceeds not so used as set forth above in this paragraph (b) constitutes "Excess Proceeds." (c) When the aggregate amount of Excess Proceeds exceeds $5 million, the Company will, within 30 days thereafter, make an offer to purchase from all holders of Notes and Additional Notes, on a pro rata basis, in accordance with the procedures set forth in the Indenture, the maximum principal amount (expressed as a multiple of $1,000) of Notes and Additional Notes that may be purchased with the Excess Proceeds, at a purchase price in cash equal to 100% of the principal amount thereof, plus accrued interest, if any, and Liquidated Damages, if any, to the date such offer to purchase is consummated. To the extent that the aggregate principal amount of Notes and Additional Notes tendered pursuant to such offer to purchase is less than the Excess Proceeds, the Company or its Restricted Subsidiaries may use such deficiency for general corporate purposes. If the aggregate principal amount of Notes and Additional Notes validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes and Additional Notes to be purchased will be selected on a pro rata basis. Upon completion of such offer to purchase, the amount of Excess Proceeds will be reset to zero. (d) The Company will comply with the applicable tender offer rules including Rule-14e under the Exchange Act, and any other applicable securities laws and regulations in connection with an offer made pursuant to clause (c) above. To the extent that provisions of any applicable securities laws or regulations conflict with provisions of this covenant, the Company will comply with such securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or suffer to exist any transaction with, or for the benefit of, any Affiliate of the Company or any beneficial owner of 10% or more of any class of the Capital Stock of the Company at any time outstanding ("Interested Persons"), unless (a) such transaction is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could have been obtained in an arm's length transaction with third parties who are not Interested Persons and (b) the Company delivers to the Trustee (i) with respect to any transaction or series of related transactions entered into after the Closing Date involving aggregate payments in excess of $1.0 million, a resolution of the Board of Directors of the Company set forth in an officers' certificate certifying that such transaction or transactions complies with clause (a) above and that such transaction or transactions have been approved by the Board of Directors (including a majority of the Disinterested Directors) of the Company and (ii) with respect to a transaction or series of related transactions involving aggregate payments equal to or greater than $5 million, a written opinion as to the fairness to the Company or such Restricted Subsidiary of such transaction or series of transactions from a financial point of view issued by an independent investment banking, accounting or valuation firm of national standing. The foregoing covenant will not restrict (A) transactions among the Company and/or its Restricted Subsidiaries; 82 (B) transactions (including Permitted Investments) permitted by the provisions of the "--Limitations on Restricted Payments" covenant; (C) employment agreements on customary terms and the payment of regular and customary compensation to employees, officers or directors in the ordinary course of business; (D) the payment to the Principals or their Related Parties and Affiliates, of annual management and advisory fees and related expenses, provided that the amount of any such fees and expenses shall not exceed $500,000 per fiscal year, provided further that any such fees shall only commence accruing on October 1, 1998 and shall be payable in arrears on a quarterly basis commencing on January 1, 1999; (E) loans or advances to officers or employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business not to exceed $250,000 in the aggregate at any one time outstanding; (F) the payment of all fees and expenses related to the Recapitalization; and (G) any agreement to which the Company or any Restricted Subsidiary is a party as in effect as of the date of the Indenture as set forth in a schedule thereto or any amendment thereto (as long as any such amendment is not disadvantageous to the Holders in any material respect) or any transaction contemplated thereby. LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, (b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make loans or advances to the Company or any other Restricted Subsidiary or (d) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of: (i) any agreement in effect on the Closing Date; (ii) any agreement or other instrument of a person acquired by the Company or any Restricted Subsidiary in existence at the time of such acquisition (but not created in contemplation thereof), which encumbrance or restriction is not applicable to any person, or the properties or assets of any person, other than the person, or the property or assets of the person, so acquired; (iii) any security or pledge agreements or leases (or similar agreements) containing customary restrictions on transfers of the assets encumbered thereby or leased or on the leasehold interest represented thereby; (iv) any contracts for the sale of assets, including, without limitation, any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary, pending the closing of such sale or disposition, PROVIDED that any such restriction relates solely to the assets that are the subject of such agreement; (v) restrictions on cash or other deposits or net worth imposed by leases entered into in the ordinary course of business; and (vi) any encumbrances or restrictions imposed by any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (i) and (ii), PROVIDED that any encumbrances or restrictions imposed by such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are not materially more restrictive than those contained in the contract, instrument or obligation prior to such amendment, modification, restatement, renewal, increase, supplement, refunding, replacement or refinancing. 83 LIMITATION ON ISSUANCES AND SALES OF PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will not permit any Restricted Subsidiary to issue any Preferred Stock. PAYMENTS FOR CONSENT. The Indenture will provide that neither the Company nor any of its Restricted Subsidiaries will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any Holder of any Notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the Notes unless such consideration is offered to be paid or is paid to all Holders of the Notes that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES. The Company will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in any other manner become liable for the payment of any Indebtedness of the Company or any Indebtedness of any other Restricted Subsidiary, unless (a) such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture and a Note Guarantee providing for a guarantee of payment of the Notes by such Restricted Subsidiary and (b) with respect to any guarantee of Subordinated Indebtedness by a Restricted Subsidiary, any such guarantee is subordinated to such Restricted Subsidiary's guarantee with respect to the Notes at least to the same extent as such Subordinated Indebtedness is subordinated to the Notes. Any Note Guarantee by a Restricted Subsidiary of the Notes pursuant to the preceding paragraph will provide by its terms that it will be automatically and unconditionally released and discharged upon (i) any sale, exchange or transfer to any person not an Affiliate of the Company of all of the Company's and the Restricted Subsidiaries' Capital Stock in, or all or substantially all the assets of, such Restricted Subsidiary (which sale, exchange or transfer is not prohibited by the Indenture), (ii) the release or discharge of the guarantee that resulted in the creation of such guarantee of the Notes, except a discharge or release by or as a result of payment under such guarantee or (iii) the designation of such Restricted Subsidiary as an Unrestricted Subsidiary in accordance with the terms of the Indenture. ISSUANCES OF GUARANTEES BY CERTAIN NEW RESTRICTED SUBSIDIARIES. The Company will provide to the Trustee, on the date that any Person becomes a Restricted Subsidiary, a supplemental indenture to the Indenture, executed by such new Restricted Subsidiary, providing for a full and unconditional guarantee on a senior basis by such new Restricted Subsidiary of the Company's obligations under the Notes and the Indenture to the same extent as that set forth in the Indenture, PROVIDED that any such Restricted Subsidiary that is organized outside the United States shall not be required to provide a Note Guarantee so long as such Restricted Subsidiary has not guaranteed any other Indebtedness of the Company or any other Restricted Subsidiary. LINE OF BUSINESS. The Company will not and will not cause or permit any of its Restricted Subsidiaries to engage in any businesses other than the businesses in which the Company is engaged on the Closing Date and any businesses reasonably related or complimentary to one or more of its businesses on the Closing Date (as determined in good faith by the Company's Board of Directors). UNRESTRICTED SUBSIDIARIES. (a) The Board of Directors of the Company may designate any Subsidiary (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the Company nor any Restricted Subsidiary is directly or indirectly liable for any Indebtedness of such Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary would permit (upon notice, lapse of time or otherwise) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity, (iii) any Investment in such Subsidiary made as a result of designating such Subsidiary an Unrestricted Subsidiary will not violate the provisions of the "Limitation on Restricted Payments" covenant, (iv) neither the Company nor any Restricted Subsidiary has a contract, agreement, arrangement, understanding or obligation of any kind, whether written or oral, with such 84 Subsidiary other than those that might be obtained at the time from persons who are not Affiliates of the Company and (v) neither the Company nor any Restricted Subsidiary has any obligation to subscribe for additional shares of Capital Stock or other equity interest in such Subsidiary, or to maintain or preserve such Subsidiary's financial condition or to cause such Subsidiary to achieve certain levels of operating results. (b) The Board of Directors of the Company may designate any Unrestricted Subsidiary as a Restricted Subsidiary; PROVIDED that (i) no Default or Event of Default has occurred and is continuing following such designation and (ii) the Company could incur at least $1.00 of additional Debt (other than Permitted Debt) pursuant to the first paragraph of the "--Limitation on Indebtedness and Issuance of Disqualified Stock" covenant (treating any Debt of such Unrestricted Subsidiary as the incurrence of Debt by a Restricted Subsidiary). LIMITATION ON LIENS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien of any kind on or with respect to any of its property or assets, including any shares of stock or debt of any Restricted Subsidiary, whether owned at the Closing Date or thereafter acquired, or any income, profits or proceeds therefrom, or assign or otherwise convey any right to receive income thereon, unless (a) in the case of any Lien securing Subordinated Indebtedness, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Lien and (b) in the case of any other Lien, the Notes are equally and ratably secured with the obligation or liability secured by such Lien. Notwithstanding the foregoing, the Company may, and may permit any Subsidiary to, incur the following Liens ("Permitted Liens"): (i) Liens (other than Liens securing Indebtedness under the Bank Credit Agreement) existing as of the Closing Date; (ii) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness under the Bank Credit Agreement or one or more other credit facilities in a principal amount not to exceed the principal amount of the outstanding Indebtedness permitted by clause (i) of the definition of "Permitted Indebtedness"; (iii) Liens on any property or assets of a Restricted Subsidiary granted in favor of the Company or any Wholly Owned Restricted Subsidiary; (iv) Liens securing the Notes or any Note Guarantee; (v) any interest or title of a lessor under any Capitalized Lease Obligation or Sale and Leaseback Transaction that was not entered into in violation of the "--Limitation on Indebtedness and Issuance of Disqualified Stock" covenant; (vi) Liens securing Acquired Indebtedness created prior to (and not in connection with or in contemplation of) the incurrence of such Indebtedness by the Company or any Restricted Subsidiary; PROVIDED that such Lien does not extend to any property or assets of the Company or any Restricted Subsidiary other than the property and assets acquired in connection with the incurrence of such Acquired Indebtedness; (vii) Liens securing Hedging Obligations permitted to be incurred pursuant to clause (v) of the definition of "Permitted Indebtedness"; (viii) Liens securing Indebtedness permitted to be incurred under paragraph (vii) of the definition of "Permitted Indebtedness" in the covenant described under the caption "--Limitation on Indebtedness and Issuance of Disqualified Stock"; (ix) statutory Liens or landlords', carriers', warehouseman's, mechanics', suppliers', materialmen's, repairmen's or other like Liens arising in the ordinary course of business and with respect to 85 amounts not yet delinquent or being contested in good faith by appropriate proceedings and, if required by GAAP, a reserve or other appropriate provision has been made therefor; (x) Liens for taxes, assessments, government charges or claims that are not yet delinquent or being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and, if required by GAAP, a reserve or other appropriate provision has been made therefor; (xi) Liens incurred or deposits made to secure the performance of tenders, bids, leases, statutory obligations, surety and appeal bonds, government contracts, performance bonds and other obligations of a like nature incurred in the ordinary course of business (other than contracts for the payment of money); (xii) easements, rights-of-way, restrictions and other similar charges or encumbrances not interfering in any material respect with the business of the Company or any Restricted Subsidiary incurred in the ordinary course of business; (xiii) Liens arising by reason of any judgment, decree or order of any court, so long as such Lien is adequately bonded and any appropriate legal proceedings that may have been duly initiated for the review of such judgment, decree or order have not been finally terminated or the period within which such proceedings may be initiated has not expired; (xiv) Liens securing reimbursement obligations with respect to letters of credit that encumber documents and other property relating to such letters of credit and the products and proceeds thereof; (xv) Liens upon specific items of inventory or other goods and proceeds of the Company or any Restricted Subsidiary securing its obligations in respect of bankers' acceptances issued or created for the account of any person to facilitate the purchase, shipment or storage of such inventory or other goods; (xvi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xvii) Liens incurred in the ordinary course of business of the Company or any Restricted Subsidiary of the Company with respect to obligations that do not exceed $500,000 at any one time outstanding and that (a) are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than trade credit in the ordinary course of business) and (b) do not in the aggregate materially detract from the value of the property or materially impair the use thereof in the operation of the businesses of the Company or such Restricted Subsidiary; (xviii) leases or subleases to third parties; (xix) Liens in connection with workers' compensation obligations of the Company and its Restricted Subsidiaries incurred in the ordinary course; and (xx) any extension, renewal or replacement, in whole or in part, of any Lien described in the foregoing clauses (i) through (xix); provided that any such extension, renewal or replacement is no more restrictive in any material respect than the Lien so extended, renewed or replaced and does not extend to any additional property or assets. REPORTS. At all times from and after the earlier of (i) the date of the commencement of the Exchange Offer (the "Registration") and (ii) the date 120 days after the Closing Date, in either case, whether or not the Company is then required to file reports with the Commission, the Company will file with the Commission (to the extent accepted by the Commission) all such annual reports, quarterly reports and other documents that the Company would be required to file if it were subject to Sections 13(a) or 15(d) under the Exchange Act. The Company will also be required (a) to supply to the Trustee and each holder of Notes, or supply to the Trustee for forwarding to each such holder, without cost to such holder, copies of such reports and other documents within 15 days after the date on which the Company files such 86 reports and documents with the Commission or the date on which the Company would be required to file such reports and documents if the Company were so required and (b) if filing such reports and documents with the Commission is not accepted by the Commission or is prohibited under the Exchange Act, to supply at the Company's cost copies of such reports and documents to any prospective holder of Notes promptly upon written request. In addition, at all times prior to the earlier of the date of the Registration and the date 120 days after the Closing Date, the Company will, at its cost, deliver to each holder of the Notes quarterly and annual reports substantially equivalent to those that would be required by the Exchange Act. Furthermore, at all times prior to the date of Registration, the Company will supply at the Company's cost copies of such reports and documents to any prospective holder of Notes promptly upon written request. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company may not, in a single transaction or series of related transactions, consolidate or merge with or into (other than the consolidation or merger of a Restricted Subsidiary with another Restricted Subsidiary or into the Company) (whether or not the Company or such Restricted Subsidiary is the surviving corporation), or directly and/or indirectly through its Restricted Subsidiaries, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets (determined on a consolidated basis for the Company and its Restricted Subsidiaries taken as a whole) in one or more related transactions to, another corporation, person or entity or permit any of its Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the properties or assets of the Company and its Restricted Subsidiaries (determined on a consolidated basis for the Company and its Restricted Subsidiaries taken as a whole) unless: (a) either (i) the Company, in the case of a transaction involving the Company, or such Restricted Subsidiary, in the case of a transaction involving a Restricted Subsidiary, is the surviving corporation or (ii) in the case of a transaction involving the Company, the entity or the person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (the "Surviving Entity") is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia and assumes all the obligations of the Company under the Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (b) immediately after giving effect to such transaction and treating any obligation of the Company or a Restricted Subsidiary in connection with or as a result of such transaction as having been incurred as of the time of such transaction, no Default or Event of Default has occurred and is continuing; (c) the Company (or the Surviving Entity if the Company is not the continuing obligor under the Indenture) could, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the first paragraph of the "--Limitation on Indebtedness and Issuance of Disqualified Stock" covenant; (d) if the Company is not the continuing obligor under the Indenture, each Subsidiary Guarantor, unless it is the other party to the transaction described above, has by supplemental indenture confirmed that its Note Guarantee applies to the Surviving Entity's obligations under the Indenture and the Notes; (e) if any of the property or assets of the Company or any of its Restricted Subsidiaries would thereupon become subject to any Lien, the provisions of the "Limitation on Liens" covenant are complied with; 87 (f) immediately after giving effect to such transaction on a pro forma basis, the Consolidated Net Worth of the Company (or of the Surviving Entity if the Company is not the continuing obligor under the Indenture) is equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction; and (g) the Company delivers, or causes to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an officers' certificate and an opinion of counsel, each stating that such transaction complies with the requirements of the Indenture. The Indenture will provide that no Subsidiary Guarantor may consolidate with or merge with or into any other person or convey, sell, assign, transfer, lease or otherwise disposed of its properties and assets substantially as an entirely to any other person (other than the Company or another Subsidiary Guarantor) unless: (a) such Subsidiary Guarantor is released from its Note Guarantees pursuant to the terms of the Indenture (see "Note Guarantees" above) or (b)(i) subject to the provisions of the following paragraph, the person formed by or surviving such consolidation or merger (if other than such Subsidiary Guarantor) or to which such properties and assets are transferred assumes all of the obligations of such Subsidiary Guarantor under the Indenture and its Note Guarantee, pursuant to a supplemental indenture in form and substance satisfactory to the Trustee and (ii) immediately after giving effect to such transaction, no Default or Event of Default has occurred and is continuing. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Restricted Subsidiaries the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. In the event of any transaction described in and complying with the conditions listed in the first paragraph of this covenant in which the Company is not the continuing obligor under the Indenture, the Surviving Entity will succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, and thereafter the Company will, except in the case of a lease, be discharged from all its obligations and covenants under the Indenture and Notes. EVENTS OF DEFAULT The following will be "Events of Default" under the Indenture: (a) default in the payment of any interest or Liquidated Damages, if any, on any Note when it becomes due and payable, and continuance of such default for a period of 30 days; (b) default in the payment of the principal of (or premium, if any, on) any Note when due; (c) failure to perform or comply with the Indenture provisions described under the captions "--Consolidation, Merger and Sale of Assets," "--Covenants--Limitation on Indebtedness and Issuance of Disqualified Stock" and "--Limitation on Restricted Payments" or failure to make a Change of Control Offer or an Excess Proceeds Offer, in each case, within the time periods specified in the Indenture; (d) default in the performance, or breach, of any covenant or agreement of the Company or any Subsidiary Guarantor contained in the Indenture or any Note Guarantee (other than a default in the performance, or breach, of a covenant or agreement that is specifically dealt with elsewhere herein), and continuance of such default or breach for a period of 60 days after written notice has been given to the Company by the Trustee or to the Company and the Trustee by the holders of at least 25% in aggregate principal amount of the Notes then outstanding; (e) (i) an event of default has occurred under any mortgage, bond, indenture, loan agreement or other document evidencing an issue of Indebtedness of the Company or any Restricted Subsidiary, 88 which issue has an aggregate outstanding principal amount of not less than $5 million ("Specified Indebtedness"), and such default has resulted in such Indebtedness becoming, whether by declaration or otherwise, due and payable prior to the date on which it would otherwise become due and payable or (ii) a default in any payment when due at final maturity of any such Specified Indebtedness; (f) failure by the Company or any of its Restricted Subsidiaries to pay one or more final judgments the uninsured portion of which exceeds in the aggregate $5 million, which judgment or judgments are not paid, discharged or stayed for a period of 60 days; (g) any Note Guarantee ceases to be in full force and effect or is declared null and void or any such Subsidiary Guarantor denies that it has any further liability under any Note Guarantee, or gives notice to such effect (other than by reason of the termination of the Indenture or the release of any such Note Guarantee in accordance with the Indenture); or (h) the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to the Company or any Significant Subsidiary. If an Event of Default (other than as specified in clause (h) above) occurs and is continuing, the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may, and the Trustee at the request of such holders will, declare the principal of and accrued interest and Liquidated Damages, if any, on all of the outstanding Notes immediately due and payable and, upon any such declaration, such principal and such interest will become due and payable immediately. If an Event of Default specified in clause (h) above occurs and is continuing, then the principal of and accrued interest and Liquidated Damages, if any, on all of the outstanding Notes will IPSO FACTO become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder of Notes. At any time after a declaration of acceleration under the Indenture, but before a judgment or decree for payment of the money due has been obtained by the Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes, by written notice to the Company and the Trustee, may rescind such declaration and its consequences if (i) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Notes, (B) all unpaid principal of (and premium, if any, on) any outstanding Notes that has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Notes, (C) to the extent that payment of such interest is lawful, interest upon overdue interest and overdue principal at the rate borne by the Notes and (D) all sums paid or advanced by the Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (ii) all Events of Default, other than the non-payment of amounts of principal of (or premium, if any, on) or interest on the Notes that have become due solely by such declaration of acceleration, have been cured or waived. No such rescission will affect any subsequent default or impair any right consequent thereon. No holder of any of the Notes has any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless the holders of at least 25% in aggregate principal amount of the outstanding Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding within 60 days after receipt of such notice and the Trustee, within such 60-day period, has not received directions inconsistent with such written request by holders of a majority in aggregate principal amount of the outstanding Notes. Such limitations do not apply, however, to a suit instituted by a holder of a Note for the enforcement of the payment of the principal of, premium, if any, or interest on such Senior Note on or after the respective due dates expressed in such Note. The holders of not less than a majority in aggregate principal amount of the outstanding Notes may, on behalf of the holders of all of the Notes, waive any past defaults under the Indenture, except a default in the payment of the principal of (and premium, if any) or interest on any Note, or in respect of a covenant 89 or provision that under the Indenture cannot be modified or amended without the consent of the holder of each Note outstanding. If a Default or an Event of Default occurs and is continuing and is known to the Trustee, the Trustee will mail to each holder of the Notes notice of the Default or Event of Default within 90 days after the occurrence thereof. However, except in the case of a Default or an Event of Default in payment of principal of (and premium, if any, on) or interest on any Notes, the Trustee may withhold the notice to the holders of the Notes if a committee of its trust officers in good faith determines that withholding such notice is in the interests of the holders of the Notes. The Company is required to furnish to the Trustee annual statements as to the performance by the Company and the Subsidiary Guarantors of their obligations under the Indenture and as to any default in such performance. The Company is also required to notify the Trustee within five days of any Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such waiver is against public policy. DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE The Company may, at its option and at any time, terminate the obligations of the Company and the Subsidiary Guarantor with respect to the outstanding Notes, the Note Guarantees and the Indenture ("defeasance"). Such defeasance means that the Company will be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes, except for (i) the rights of holders of outstanding Notes to receive payments in respect of the principal of (and premium, if any, on) and interest and Liquidated Damages, if any, on such Notes when such payments are due, (ii) the Company's obligations to issue temporary Notes, register the transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office or agency for payments in respect of the Notes and segregate and hold such payments in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee and (iv) the defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to terminate the obligations of the Company and any Subsidiary Guarantor with respect to certain covenants set forth in the Indenture, including those described under "--Certain Covenants" above, and any omission to comply with such obligations would not constitute a Default or an Event of Default with respect to the Notes ("covenant defeasance"). In order to exercise either defeasance or covenant defeasance, (a) the Company must irrevocably deposit or cause to be deposited with the Trustee, as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Notes, money in an amount, or U.S. Government Obligations (as defined in the Indenture) that through the scheduled payment of principal and interest thereon will provide money in an amount, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay and discharge the principal of (and premium, if any, on) and interest on the outstanding Notes at maturity (or upon redemption, if applicable) of such principal or installment of interest; (b) no Default or Event of Default has occurred and is continuing on the date of such deposit or, insofar as an event of bankruptcy under clause (h) of "Events of Default" above is concerned, at any time during the period ending on the 91st day after the date of such deposit; (c) such defeasance or covenant defeasance may not result in a breach or violation of, or constitute a default under, the Indenture or any material agreement or instrument to which the Company or any Subsidiary Guarantor is a party or by which it is bound; (d) in the case of defeasance, the Company 90 must deliver to the Trustee an opinion of counsel stating that the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or since the date hereof, there has been a change in applicable federal income tax law, to the effect, and based thereon such opinion must confirm that, the holders of the outstanding Notes will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (e) in the case of covenant defeasance, the Company must have delivered to the Trustee an opinion of counsel to the effect that the Holders of the Notes outstanding will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (f) the Company must have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to either the defeasance or the covenant defeasance, as the case may be, have been complied with. TRANSFER AND EXCHANGE A Holder may transfer or exchange Notes in accordance with the Indenture. The Company, the Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents as well as certifications, legal opinions and other information and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company is not required to transfer or exchange any Note selected for redemption. Also, the Company is not required to transfer or exchange any Note for a period of 15 days before a selection of Notes to be redeemed. SATISFACTION AND DISCHARGE Upon the request of the Company, the Indenture will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) and the Trustee, at the expense of the Company, will execute proper instruments acknowledging satisfaction and discharge of the Indenture when (a) either (i) all the Notes theretofore authenticated and delivered (other than destroyed, lost or stolen Notes that have been replaced or paid and Notes that have been subject to defeasance under "--Defeasance or Covenant Defeasance of Indenture") have been delivered to the Trustee for cancellation or (ii) all Notes not theretofore delivered to the Trustee for cancellation (A) have become due and payable, (B) will become due and payable at maturity within one year or (C) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in trust for the purpose in an amount sufficient to pay and discharge the entire Indebtedness on such Notes not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any, on) and interest on the Notes to the date of such deposit (in the case of Notes that have become due and payable) or to the Stated Maturity or redemption date, as the case may be; (b) the Company has paid or caused to be paid all sums payable under the Indenture by the Company; and (c) the Company has delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided in the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. AMENDMENTS AND WAIVERS Modifications and amendments of the Indenture, the Notes and any Note Guarantee may be made by the Company, any affected Subsidiary Guarantor and the Trustee with the consent of the holders of a majority in aggregate outstanding principal amount of the Notes (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Notes); provided, 91 however, that no such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby, (a) change the Stated Maturity of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the coin or currency in which any Note or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the redemption date); (b) reduce the percentage in principal amount of outstanding Notes, the consent of whose holders is required for any waiver of compliance with certain provisions of, or certain defaults and their consequences provided for under, the Indenture; (c) waive a default in the payment of principal of, or premium, if any, or interest on the Notes; or (d) release any Subsidiary Guarantor that is a Significant Subsidiary from any of its obligations under its Note Guarantee or the Indenture other than in accordance with the terms of the Indenture. The holders of a majority in aggregate principal amount of the Notes outstanding may waive compliance with certain restrictive covenants and provisions of the Indenture. Without the consent of any holders, the Company and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental to the Indenture for any of the following purposes: (1) to evidence the succession of another person to the Company or any Subsidiary Guarantor and the assumption by any such successor of the covenants of the Company or any Subsidiary Guarantor in the Indenture and in the Notes; or (2) to add to the covenants of the Company or any Subsidiary Guarantor for the benefit of the holders, or to surrender any right or power herein conferred upon the Company or any Subsidiary Guarantor; or (3) to add additional Events of Defaults; or (4) to provide for uncertificated Notes in addition to or in place of the Certificated Notes; or (5) to evidence and provide for the acceptance of appointment under the Indenture by a successor Trustee; or (6) to secure the Notes or any Note Guarantee; or (7) to cure any ambiguity, to correct or supplement any provision in the Indenture that may be defective or inconsistent with any other provision in the Indenture, or to make any other provisions with respect to matters or questions arising under the Indenture, provided that such actions pursuant to this clause do not adversely affect the interests of the holders in any material respect; or (8) to comply with any requirements of the Commission in order to effect and maintain the qualification of the Indenture under the Trust Indenture Act; or (9) to release any Subsidiary Guarantor from its Note Guarantee in accordance with the provisions of the Indenture (including in connection with a sale of all of the Capital Stock of such Subsidiary Guarantor). THE TRUSTEE United States Trust Company of New York, the Trustee under the Indenture, will be the initial paying agent and registrar for the Notes. The Trustee's current address is 111 Broadway, Lower Level, New York, New York 10006. The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. Under the Indenture, the holders of a majority in outstanding principal amount of the Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. If an Event of Default has occurred and is continuing, the Trustee will exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. The Indenture and provisions of the Trust Indenture Act of 1939, as amended, incorporated by reference therein, contain limitations on the rights of the Trustee thereunder, should it become a creditor 92 of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided, however, that, if it acquires any conflicting interest (as defined), it must eliminate such conflict upon the occurrence of an Event of Default or else resign. GOVERNING LAW The Indenture and the Notes will be governed by, and construed in accordance with, the laws of the State of New York. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Indenture without charge by writing to Burke Industries, Inc., 2250 South Tenth Street, San Jose, CA 95112, Attention: Chief Financial Officer. BOOK-ENTRY, DELIVERY AND FORM The New Notes will initially be issued in the form of one Global Note (the "Global Note"). The Global Note will be deposited on the Closing Date with, or on behalf of, The Depository Trust Company (the "Depositary") and registered in the name of Cede & Co., as nominee of the Depositary (such nominee being referred to herein as the "Global Note Holder"). The Depositary is a limited-purpose trust company that was created to hold securities for its participating organizations (collectively, the "Participants" or the "Depositary's Participants") and to facilitate the clearance and settlement of transactions in such securities between Participants through electronic book-entry changes in accounts of its Participants. The Depositary's Participants include securities brokers and dealers, banks and trust companies, clearing corporations and certain other organizations. Access to the Depositary's system is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the "Indirect Participants" or the "Depositary's Indirect Participants") that clear through or maintain a custodial relationship with a Participant, either directly or indirectly. Persons who are not Participants may beneficially own securities held by or on behalf of the Depositary only through the Depositary's Participants or the Depositary's Indirect Participants. The Company expects that pursuant to procedures established by the Depositary (i) upon deposit of the Global Note, the Depositary will credit the accounts of Participants exchanging Old Notes for New Notes with portions of the principal amount of the Global Note and (ii) ownership of the Notes evidenced by the Global Note will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by the Depositary (with respect to the interests of the Depositary's Participants), the Depositary's Participants and the Depositary's Indirect Participants. Prospective purchasers are advised that the laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to own, transfer or pledge Notes evidenced by the Global Note will be limited to such extent. So long as the Global Note Holder is the registered owner of any Notes, the Global Note Holder will be considered the sole Holder under the Indenture of any Notes evidenced by the Global Note. Beneficial owners of Notes evidenced by the Global Note will not be considered the owners or Holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records of the Depositary or for maintaining, supervising or reviewing any records of the Depositary relating to the Notes. Payments in respect of the principal of, premium, if any, and interest on any Notes registered in the name of the Global Note Holder on the applicable record date will be payable by the Trustee to or at the direction of the Global Note Holder in its capacity as the registered Holder under the Indenture. Under 93 the terms of the Indenture, the Company and the Trustee may treat the persons in whose names Notes, including the Global Note, are registered as the owners thereof for the purpose of receiving such payments. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of Notes. The Company believes, however, that it is currently the policy of the Depositary to immediately credit the accounts of the relevant Participants with such payments, in amounts proportionate to their respective holdings of beneficial interests in the relevant security as shown on the records of the Depositary. Payments by the Depositary's Participants and the Depositary's Indirect Participants to the beneficial owners of Notes will be governed by standing instructions and customary practice and will be the responsibility of the Depositary's Participants or the Depositary's Indirect Participants. CERTIFICATED NOTES Any beneficial owner of Notes evidenced by the Global Note may obtain Notes in the form of registered definitive Notes ("Certificated New Notes"). If the Company notifies the Trustee in writing that the Depositary is no longer willing or able to act as a depositary and the Company is unable to locate a qualified successor within 90 days then, upon surrender by the Global Note Holder of its Global Note, Notes in such form will be issued to each person that the Global Note Holder and the Depositary identify as being the beneficial owner of the related Notes. Neither the Company nor the Trustee will be liable for any delay by the Global Note Holder or the Depositary in identifying the beneficial owners of Notes and the Company and the Trustee may conclusively rely on, and will be protected in relying on, instructions from the Global Note Holder or the Depositary for all purposes. SAME-DAY SETTLEMENT AND PAYMENT The Indenture will require that payments in respect of the Notes represented by the Global Note (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the Global Note Holder. With respect to Certificated Notes, the Company will make all payments of principal, premium, if any, and interest by wire transfer of immediately available funds to the accounts specified by the Holders thereof or, if no such account is specified, by mailing a check to each such Holder's registered address. Secondary trading in long-term notes and debentures of corporate issuers is generally settled in clearinghouse or next-day funds. In contrast, the Notes represented by the Global Note are eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such Notes will, therefore, be required by the Depositary to be settled in immediately available funds. The Company expects that secondary trading in the Certificated Notes will also be settled in immediately available funds. CERTAIN DEFINITIONS "Acquired Indebtedness" means Indebtedness of a person (a) existing at the time such person is merged with or into the Company or becomes a Subsidiary or (b) assumed in connection with the acquisition of assets from such person. "Affiliate" means, with respect to any specified person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 10% or more of such specified person's Capital Stock or any executive officer or director of any such specified person or other person or, with respect to any natural person, any person having a relationship with such person by blood, marriage or adoption not more remote than first cousin. For the purposes of this definition, "control", when used with respect to any specified person, means the power to direct the management and policies of such person, directly or 94 indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Sale" means (i) the sale, lease, conveyance or other disposition of any assets (including, without limitation, by way of merger, consolidation or Sale and Leaseback Transaction or similar arrangement) (collectively, a "transfer") by the Company or any Restricted Subsidiary other than in the ordinary course of business, whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $1.0 million or (b) for aggregate net proceeds in excess of $1.0 million. For the purposes of this definition, the term "Asset Sale" does not include (i) any transfer of properties or assets that is governed by the provisions of the Indenture described under "--Consolidation, Merger and Sale of Assets", (ii) any transfer of properties or assets between or among the Company and its Restricted Subsidiaries pursuant to transactions that do not violate any other provision of the Indenture, (iii) any transfer of properties or assets representing obsolete or permanently retired equipment and facilities, (iv) a Restricted Payment or Permitted Investment that is permitted by the covenant described above under the caption "--Certain Covenants--Limitation on Restricted Payments" (including, without limitation, any formation of or contribution of assets to a joint venture), (v) leases or subleases, in the ordinary course of business, to third parties of real property owned in fee or leased by the Company or its Subsidiaries, (vi) the sale of Permitted Investments referred to in clause (a) of the definition thereof or (vii) any exchange of like kind property pursuant to Section 1031 of the Internal Revenue of 1986, as amended. "Attributable Debt" in respect of a sale and leaseback transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remainder of the lease included in such sale and leaseback transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended). "Average Life" means, as of the date of determination with respect to any Indebtedness or Disqualified Stock, the quotient obtained by dividing (a) the sum of the products of (i) the number of years from the date of determination to the date or dates of each successive scheduled principal or liquidation value payment of such Indebtedness or Disqualified Stock, respectively, multiplied by (ii) the amount of each such principal or liquidation value payment by (b) the sum of all such principal or liquidation value payments. "Bank Credit Agreement" means the loan and security agreement entered into among the Company, the Banks and NationsBank, N.A., as agent, on or prior to the Closing Date, as such agreement may be amended, restated, supplemented, refinanced, replaced or otherwise modified from time to time (including any such refinancing or replacement agented by a different institution). "Banks" means the banks and other financial institutions that from time to time are lenders under the Bank Credit Agreement. "Borrowing Base" means, as of any date, an amount equal to the sum of (a) 85% of the face amount of all accounts receivable owned by the Company and its Restricted Subsidiaries as of such date that are not more than 90 days past due, and (b) 60% of the book value of all inventory owned by the Company and its Subsidiaries as of such date, all calculated on a consolidated basis and in accordance with GAAP. To the extent that information is not available as to the amount of accounts receivable or inventory as of a specific date, the Company may utilize the most recent available information provided to the Banks under the Bank Credit Agreement for purpose of calculating the Borrowing Base. "Capital Stock" of any person means any and all shares, interests, partnership interests, participations, rights in or other equivalents (however designated) of such person's equity interest (however designated), whether now outstanding or issued after the Closing Date. 95 "Capitalized Lease Obligation" means, with respect to any person, an obligation incurred or assumed under or in connection with any capital lease of real or personal property that, in accordance with GAAP, has been recorded as a capitalized lease. "Change of Control" means the occurrence of any of the following events: (a) the consummation of any transaction (including, without limitation, any merger or consolidation) (i) prior to a Public Equity Offering by the Company, the result of which is that the Principals and their Related Parties become the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition) of less than 50% of the Voting Stock of the Company (measured by voting power rather than the number of shares) or (ii) after a Public Equity Offering of the Company, any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than the Principals and their Related Parties, becomes the beneficial owner (as defined above), directly or indirectly, of 35% or more of the Voting Stock of the Company and such person is or becomes, directly or indirectly, the beneficial owner of a greater percentage of the voting power of the Voting Stock of the Company, calculated on a fully diluted basis, than the percentage beneficially owned by the Principals and their Related Parties; (b) the Company, either individually or in conjunction with one or more Subsidiaries, sells, assigns, conveys, transfers, leases or otherwise disposes of, or the Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all or substantially all of the properties of the Company and the Subsidiaries, taken as a whole (either in one transaction or a series of related transactions), including Capital Stock of the Subsidiaries, to any person (other than the Company or a Restricted Subsidiary); (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; or (d) the Company is liquidated or dissolved or adopts a plan of liquidation or dissolution, other than in a transaction that complies with the provisions described under "--Consolidation, Merger and Sale of Assets". "Consolidated Adjusted Net Income" means, for any period, the net income (or net loss) of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, adjusted to the extent included in calculating such net income or loss by excluding (a) any net after-tax extraordinary or non-recurring gains or losses (less all fees and expenses relating thereto), (b) any net after-tax gains or losses (less all fees and expenses relating thereto) attributable to Asset Sales, (c) the portion of net income (or loss) of any person (other than the Company or a Restricted Subsidiary), including Unrestricted Subsidiaries, in which the Company or any Restricted Subsidiary has an ownership interest, except to the extent of the amount of dividends or other distributions actually paid to the Company or any Restricted Subsidiary in cash during such period, (d) solely for purposes of the covenant described under "--Certain Covenants--Limitation on Restricted Payments," the net income (or loss) of any person combined with the Company or any Restricted Subsidiary on a "pooling of interests" basis attributable to any period prior to the date of combination, and (e) the net income (but not the net loss) of any Restricted Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Restricted Subsidiary is at the date of determination restricted, directly or indirectly, except to the extent that such net income is actually paid to the Company or a Restricted Subsidiary thereof by loans, advances, intercompany transfers, principal repayments or otherwise; PROVIDED that, if any 96 Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated Adjusted Net Income will be reduced (to the extent not otherwise reduced in accordance with GAAP) by an amount equal to (A) the amount of the Consolidated Adjusted Net Income otherwise attributable to such Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares of outstanding common stock of such Restricted Subsidiary not owned on the last day of such period by the Company or any of its Restricted Subsidiaries divided by (2) the total number of shares of outstanding common stock of such Restricted Subsidiary on the last day of such period. "Consolidated EBITDA" means, for any period, the sum of, without duplication, Consolidated Adjusted Net Income for such period, plus (or, in the case of clause (d) below, plus or minus) the following items to the extent included in computing Consolidated Adjusted Net Income for such period: (a) Fixed Charges for such period, plus (b) the provision for federal, state, local and foreign taxes based on income or profits of the Company and its Restricted Subsidiaries for such period, plus (c) the aggregate depreciation and amortization expense of the Company and its Restricted Subsidiaries for such period, plus (d) any other non-cash charges for such period, and minus non-cash credits for such period, other than non-cash charges or credits resulting from changes in prepaid assets or accrued liabilities in the ordinary course of business; provided that fixed charges, income tax expense, depreciation and amortization expense and non-cash charges and credits of a Restricted Subsidiary will be included in Consolidated EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Adjusted Net Income for such period. "Consolidated Net Worth" means, at any date of determination, stockholders' equity of the Company and its Restricted Subsidiaries as set forth on the most recently available quarterly or annual consolidated balance sheet of the Company and its Restricted Subsidiaries, less any amounts attributable to Disqualified Stock or any equity security convertible into or exchangeable for Indebtedness, the cost of treasury stock and the principal amount of any promissory notes receivable from the sale of the Capital Stock of the Company or any of its Restricted Subsidiaries and less to the extent included in calculating such stockholders' equity of the Company and its Restricted Subsidiaries, the stockholders' equity attributable to Unrestricted Subsidiaries, each item to be determined in conformity with GAAP (excluding the effects of foreign currency adjustments under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 52). "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Disinterested Director" means, with respect to any transaction or series of transactions in respect of which the Board of Directors is required to deliver a resolution of the Board of Directors, to make a finding or otherwise take action under the Indenture, a member of the Board of Directors who does not derive any material direct or indirect financial benefit from such transaction or series of transactions. "Disqualified Stock" means any class or series of Capital Stock that, either by its terms, by the terms of any security into which it is convertible or exchangeable or by contract or otherwise (i) is or upon the happening of an event or passage of time would be, required to be redeemed prior to the final Stated Maturity of the Notes, (ii) is redeemable at the option of the holder thereof, at any time prior to such final Stated Maturity or (iii) at the option of the holder thereof is convertible into or exchangeable for debt securities at any time prior to such final Stated Maturity; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions therein giving holders thereof the right to cause the issuer thereof to repurchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the Stated Maturity of the Notes will not constitute Disqualified Stock if the "asset sale" or "change of control" provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in the "--Certain Covenants--Limitation on Certain Asset Sales" and "--Redemption--Purchase of Notes upon a Change of Control or Asset Sale" covenants described herein and such Capital Stock specifically provides that the issuer will not repurchase 97 or redeem any such stock pursuant to such provision prior to the Company's repurchase of such Notes as are required to be repurchased pursuant to the "--Certain Covenants--Limitation on Certain Asset Sales" and "--Redemption--Purchase of Notes upon a Change of Control or Asset Sale" covenants described herein. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fixed Charge Coverage Ratio" means, for any period, the ratio of Consolidated EBITDA for such period to Fixed Charges for such period. "Fixed Charges" means, for any period, without duplication, the sum of (a) the amount that, in conformity with GAAP, would be set forth opposite the caption "interest expense" (or any like caption) on a consolidated statement of operations of the Company and its Restricted Subsidiaries for such period, including, without limitation, (i) amortization of debt discount, (ii) the net cost of interest rate contracts (including amortization of discounts), (iii) the interest portion of any deferred payment obligation, (iv) amortization of debt issuance costs and (v) the interest component of Capitalized Lease Obligations, plus (b) cash dividends paid on Preferred Stock and Disqualified Stock by the Company and any Restricted Subsidiary (to any person other than the Company and its Restricted Subsidiaries), computed on a tax effected basis, plus (c) all interest on any Indebtedness of any person guaranteed by the Company or any of its Restricted Subsidiaries or secured by a lien on the assets of the Company or any of its Restricted Subsidiaries; PROVIDED, HOWEVER, that Fixed Charges will not include any gain or loss from extinguishment of debt, including the write-off of debt issuance costs. "Generally Accepted Accounting Principles" or "GAAP" means generally accepted accounting principles in the United States, as in effect on the date of the Indenture. "Hedging Obligations" means the obligations of any person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such person against fluctuations in interest rates or the value of foreign currencies. "Indebtedness" means (without duplication), with respect to any person, whether recourse is to all or a portion of the assets of such person and whether or not contingent, (a) every obligation of such person for money borrowed, (b) every obligation of such person evidenced by bonds, debentures, notes or other similar instruments, (c) every reimbursement obligation of such person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such person, (d) every obligation of such person issued or assumed as the deferred purchase price of property or services, (e) the Attributable Debt in respect of every Capitalized Lease Obligation of such person, (f) all Disqualified Stock of such person valued at its maximum fixed repurchase price, plus accrued and unpaid dividends, (g) all obligations of such person under or in respect of Hedging Obligations and (h) every obligation of the type referred to in clauses (a) through (g) of another person and all dividends of another person the payment of which, in either case, such person has guaranteed. For purposes of this definition, the "maximum fixed repurchase price" of any Disqualified Stock that does not have a fixed repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were purchased on any date on which Indebtedness is required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Stock, such fair market value will be determined in good faith by the board of directors of the issuer of such Disqualified Stock. Notwithstanding the foregoing, (i) trade accounts payable and accrued liabilities arising in the ordinary course of business, (ii) any liability for federal, state or local taxes or other taxes owed by such person and (iii) obligations with respect to performance and surety bonds and completion guarantees in the ordinary course of business will not be considered Indebtedness for purposes of this definition. "Investment" in any person means, (i) directly or indirectly, any advance, loan or other extension of credit (including, without limitation, by way of guarantee or similar arrangement) or capital contribution to such person, the purchase or other acquisition of any stock, bonds, notes, debentures or other securities 98 issued by such person, the acquisition (by purchase or otherwise) of all or substantially all of the business or assets of such person, or the making of any investment in such person, (ii) the designation of any Restricted Subsidiary as an Unrestricted Subsidiary and (iii) the fair market value of the Capital Stock (or any other Investment), held by the Company or any of its Restricted Subsidiaries, of (or in) any person that has ceased to be a Restricted Subsidiary. Investments exclude extensions of trade credit on commercially reasonable terms in accordance with normal trade practices. "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise), privilege, security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind, real or personal, movable or immovable, now owned or hereafter acquired. A person will be deemed to own subject to a Lien any property that such person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement, PROVIDED that an operating lease shall not constitute a Lien. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash or cash equivalents, including payments in respect of deferred payment obligations when received in the form of, or stock or other assets when disposed for, cash or cash equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary), net of (a) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment banks) related to such Asset Sale, (b) provisions for all taxes payable as a result of such Asset Sale, (c) payments made to retire or otherwise prepay Indebtedness where such Indebtedness is secured by the assets that are the subject of such Asset Sale or otherwise required to be prepaid in connection therewith, (d) amounts required to be paid to any person (other than the Company or any Restricted Subsidiary) owning a beneficial interest (by way of Capital Stock of the Person owning such assets or otherwise) in the assets that are subject to the Asset Sale and (e) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the seller after such Asset Sale, including pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale. "Permitted Business" means any business in which the Company or a Restricted Subsidiary is permitted to engage under the covenant described under the caption "--Certain Covenants--Line of Business." "Permitted Investments" means any of the following: (a) Investments in (i) securities with a maturity at the time of acquisition of one year or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof); (ii) certificates of deposit, Eurodollar deposits or bankers' acceptances with a maturity at the time of acquisition of one year or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus of not less than $500,000,000; (iii) any shares of money market mutual or similar funds having assets in excess of $500,000,000; and (iv) commercial paper with a maturity at the time of acquisition of one year or less issued by a corporation that is not an Affiliate of the Company and is organized under the laws of any state of the United States or the District of Columbia and having a rating (A) from Moody's Investors Service, Inc. of at least P-1 or (B) from Standard & Poor's Ratings Services of at least A-1; (b) Investments by the Company or any Restricted Subsidiary in another person, if as a result of such Investment (i) such other person becomes a Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor or (ii) such other person is merged or consolidated with or into, or transfers or conveys all or substantially all of its assets to, the Company or a Restricted Subsidiary; (c) Investments by the Company or a Restricted Subsidiary in the Company or a Restricted Subsidiary that is a Subsidiary Guarantor; 99 (d) Investments in existence on the Closing Date; (e) promissory notes received as a result of Asset Sales permitted under the "--Certain Covenants--Limitation on Certain Asset Sales" covenant; (f) any acquisition of assets solely in exchange for the issuance of Qualified Equity Interests of the Company; (g) stock, obligations or securities received in satisfaction of judgments, in bankruptcy proceedings or in settlement of debts; (h) Hedging Obligations otherwise permitted under the Indenture; (i) loans or advances to officers or employees of the Company or any of its Restricted Subsidiaries in the ordinary course of business not to exceed $250,000 in the aggregate at any one time outstanding; and (j) other Investments that do not exceed $4 million in the aggregate at any time outstanding. "Preferred Stock" means, with respect to any person, any and all shares, interests, partnership interests, participations, rights in or other equivalents (however designated) of such person's preferred or preference stock, whether now outstanding or issued after the Closing Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "Principals" means (i) Lehman, (ii) each Affiliate of Lehman as of the Closing Date, (iii) JFLEI, and (iv) each officer or employee (including their respective immediate family members) of Lehman as of the Closing Date. "Public Equity Offering" means an offer and sale of common stock (which is Qualified Stock) of the Company pursuant to a registration statement that has been declared effective by the Commission pursuant to the Securities Act (other than a registration statement on Form S-8 or otherwise relating to equity securities issuable under any employee benefit plan of the Company). "Qualified Equity Interest" means any Qualified Stock and all warrants, options or other rights to acquire Qualified Stock (but excluding any debt security that is convertible into or exchangeable for Capital Stock). "Qualified Stock" of any person means any and all Capital Stock of such person, other than Disqualified Stock. "Related Party" with respect to any Principal means (A) any controlling stockholder or 80% (or more) owned Subsidiary of such Principal or (B) trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). "Restricted Subsidiary" means any Subsidiary other than an Unrestricted Subsidiary. "Sale and Leaseback Transaction" means any transaction or series of related transactions pursuant to which a person sells or transfers any property or asset in connection with the leasing, or the resale against installment payments, of such property or asset to the seller or transferor. "Series A Preferred Stock" means the Series A Cumulative Redeemable Preferred Stock of the Company, no par value. 100 "Significant Subsidiary" means any Restricted Subsidiary of the Company that together with its Subsidiaries, (a) for the most recent fiscal year of the Company, accounted for more than 10% of the consolidated net sales of the Company and its Subsidiaries or (b) as of the end of such fiscal year, was the owner of more than 10% of the consolidated assets of the Company and its Restricted Subsidiaries, in the case of either (a) or (b), as set forth on the most recently available consolidated financial statements of the Company for such fiscal year or (c) was organized or acquired after the beginning of such fiscal year and would have been a Significant Subsidiary if it had been owned during such entire fiscal year. "Stated Maturity" means, when used with respect to any Senior Note or any installment of interest thereon, the date specified in such Senior Note as the fixed date on which the principal of such Note or such installment of interest is due and payable and, when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness or any installment of interest thereon is due and payable. "Subordinated Indebtedness" means Indebtedness of the Company or a Subsidiary Guarantor that is subordinated in right of payment to the Notes or the Note Guarantee issued by such Subsidiary Guarantor, as the case may be. "Subsidiary" means any person a majority of the equity ownership or Voting Stock of which is at the time owned, directly or indirectly, by the Company and/or one or more other Subsidiaries of the Company. "Subsidiary Guarantor" means any Restricted Subsidiary that is a party to a Note Guarantee pursuant to the terms of the Indenture. "Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the Board of Directors of the Company as an Unrestricted Subsidiary in accordance with the "Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted Subsidiary. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any person (irrespective of whether or not, at the time, stock of any other class or classes has, or might have, voting power by reason of the happening of any contingency). "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of the outstanding voting securities (other than directors' qualifying shares or shares of foreign Restricted Subsidiaries required to be owned by foreign nationals pursuant to applicable law) of which are owned, directly or indirectly, by the Company. DESCRIPTION OF NEW CREDIT FACILITY GENERAL Concurrently with the consummation of the Recapitalization, the Company entered into a Loan and Security Agreement (the "New Credit Agreement") with NationsBank, N.A., as administrative agent (the "Agent"), and other lending institutions party thereto (the "Banks"), which agreement provides the Company with a $15.0 million revolving credit facility (the "New Credit Facility"), to be guaranteed by each existing and future domestic subsidiary of the Company (in this context, the "Subsidiary Guarantors"). See "Use of Proceeds." The Prior Offering and the New Credit Facility were conditioned upon each other. This information relating to the New Credit Facility is materially complete but is qualified in its entirety by reference to the complete text of the documents entered into or to be entered into in connection therewith. The following is a description of the general terms of the New Credit Facility. SECURITY Indebtedness of the Company under the New Credit Facility is secured by (i) a first priority security interest in substantially all of the personal property (including, without limitation, accounts receivable, 101 inventory, machinery, equipment, contracts and contract rights, trademarks, copyrights, patents, license agreements and general intangibles) of the Company and its domestic subsidiaries, whether now owned or hereafter acquired, (ii) a first priority perfected pledge of 100% of the capital stock of its domestic subsidiaries and 66% of the Capital Stock of its non-United States Subsidiaries and (iii) a mortgage lien on the Company's presently owned real property and hereinafter acquired. INTEREST Indebtedness under the New Credit Facility bears interest at a floating rate of interest equal to, at the Company's option, the Eurodollar Rate (as defined in the New Credit Agreement) for one, two, three or six months, plus 2.50% or NationsBank, N.A.'s Prime Rate. The "Prime Rate" is a fluctuating interest rate equal to the higher of (i) the rate of interest announced publicly by the Agent as its prime rate and (ii) a rate equal to 1/2 of 1% per annum above the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as determined for any day by the Agent. Interest based on the Base Rate shall be payable monthly in arrears. Interest based on the Eurodollar Rate shall be payable in arrears at the earlier of the (a) end of the applicable interest period and (b) the first day of the month in which the Interest Payment Date occurs. BORROWING BASE Pursuant to the terms of the New Credit Agreement, advances under the New Credit Facility will be limited to the lesser of (a) $15.0 million and (b)(i) 85% of eligible accounts receivable plus (ii) 50% of eligible inventory minus (iii) the aggregate amount of all undrawn letters of credit issued under the New Credit Facility plus the aggregate amount of any unreimbursed drawings under any outstanding letters of credit. MATURITY Loans made pursuant to the New Credit Facility may be borrowed, repaid and reborrowed from time to time until the fifth anniversary of the Closing Date, subject to the satisfaction of certain conditions on the date of any such borrowing. FEES The Company is required to pay to the Banks in the aggregate a commitment fee equal to .50% per annum, payable in arrears on a monthly basis, on the committed undrawn amount of the New Credit Facility. The Agent and the Banks shall receive such other fees as have been separately agreed upon with the Agent, including, without limitation, in respect of letters of credit issued under the letter of credit subfacility. LETTERS OF CREDIT SUBFACILITY The New Credit Facility includes a subfacility for the issuance of letters of credit up to a maximum aggregate amount at any one time outstanding not to exceed $1.0 million. If any letter of credit is outstanding after the termination of the New Credit Facility, the Company would be required to post a standby letter of credit or deposit cash collateral in an amount sufficient to reimburse the Banks for amounts drawn under any such outstanding letter of credit. CONDITIONS TO CLOSING AND EXTENSIONS OF CREDIT The New Credit Agreement provides that the obligation of the Banks to close and make the initial loans will be subject to the satisfaction of certain conditions customary in transactions of this type, including, but not limited to, the consummation of the Recapitalization, the placement by the Company of the Notes, receipt by the Banks of customary opinions of counsel, corporate documents, financial 102 statements and a solvency letter, the absence of any material adverse change and the absence of any default or event of default under the New Credit Agreement. The obligation of the Banks to make subsequent loans or extend letters of credit after the Closing will be subject to the satisfaction of certain customary conditions including, but not limited to, the absence of a default or event of default under the New Credit Agreement, all representations and warranties under the New Credit Agreement being true and correct in all material respects and the absence of a material adverse change. COVENANTS The New Credit Agreement contains customary covenants of the Company and the subsidiary guarantors, including, without limitation, restrictions on (i) the incurrence of debt, (ii) the sale of assets, (iii) mergers, acquisitions and other business combinations, (iv) voluntary prepayment of other debt of the Company, (v) transactions with affiliates (as defined in the New Credit Agreement), (vi) investments, as well as prohibitions on the payment of dividends to, or the repurchase or redemption of stock from, shareholders and (vii) various financial covenants, including covenants requiring the maintenance of fixed charge coverage and maximum funded debt to EBITDA ratios. EVENTS OF DEFAULT; REMEDIES The New Credit Agreement contains customary events of default under the New Credit Facility, including the non-payment of principal or interest when due under the notes issued in connection with the New Credit Facility or, subject to applicable grace periods in certain circumstances, upon the non-fulfillment of the covenants described above, certain changes in control of the ownership of the Company, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, ERISA, judgment defaults and failure of any guaranty or security agreement supporting the New Credit Agreement to be in full force and effect. If any such event of default occurs, the Agent will be entitled, on behalf of the Banks, to take all actions permitted to be taken by a secured creditor under the Uniform Commercial Code and to accelerate the amounts due under the New Credit Facility and may require all such amounts outstanding thereunder to be immediately paid in full. INDEMNIFICATION Under the New Credit Agreement, the Company has agreed to indemnify the Agent, the Banks and related persons from and against any and all losses, liabilities, claims, damages or expenses (including, without limitations, fees and disbursements of counsel) that may be incurred by or asserted against any such indemnified party in connection with any investigation, litigation or other proceeding relating to the New Credit Agreement or related documents, provided that the Company is not liable for any such losses, liabilities, claims, damages or expenses resulting from such indemnified party's own gross negligence or willful misconduct. Finally, the New Credit Agreement contains customary provisions protecting the Banks in the event of unavailability of funding, illegality, capital adequacy requirements, increased costs, withholding taxes and funding losses. DESCRIPTION OF REDEEMABLE PREFERRED STOCK AND WARRANTS REDEEMABLE PREFERRED STOCK In connection with the consummation of the Recapitalization, the Company issued (i) 16,000 shares of Redeemable Preferred Stock designated as Series A 11 1/2% Cumulative Redeemable Preferred Stock to MassMutual and Jackson National, (ii) 2,000 shares of Redeemable Preferred Stock designated as Series B 11 1/2% Cumulative Redeemable Preferred Stock to Paribas and (iii) warrants to purchase approximately 964,000 shares of common stock of the Company at an initial exercise price of per share equal to one-half of the Recapitalization Consideration to MassMutual, Paribas and Jackson National. 103 RANKING. The Redeemable Preferred Stock ranks prior to the Company's Common Stock with respect to dividend rights and rights on liquidation, winding up or dissolution of the Company, and to all other classes and series of equity securities of the Company as may hereafter be issued, other than any class or series of equity securities of the Company expressly designated as being on a parity with ("Parity Securities") or senior to the Redeemable Preferred Stock. Such other classes or series of equity securities of the Company not expressly designated as being on a parity with or senior to the Redeemable Preferred Stock are referred to hereafter as "Junior Securities." The rights of holders of shares of the Redeemable Preferred Stock are subordinate to the rights of the Company's general creditors. The Company may not create or issue other classes of stock ranking on a parity with or senior to the Redeemable Preferred Stock unless it receives approval or consent of the holders of at least a two-thirds of the Redeemable Preferred Stock. See "--Voting Rights" below. DIVIDEND RIGHTS. Dividends shall be payable to holders of Redeemable Preferred Stock, out of funds legally available therefor, at the annual rate per share of 11.5% times the sum of (i) $1,000 and (ii) accrued but unpaid dividends as of the immediately preceding Dividend Payment Date (as defined below). Dividends shall be payable (A) at the annual rate per share of .115 shares of Redeemable Preferred Stock per share of Redeemable Preferred Stock from the original issue date of the Redeemable Preferred Stock (the "Issue Date") through July 15, 2000, and (B) in cash after July 15, 2000. Dividends on the Redeemable Preferred Stock will be payable quarterly on each January 15, April 15, July 15 and October 15 of each year (each a "Dividend Payment Date"), commencing October 15, 1997. Dividends payable for any period less than a full quarterly period shall be computed on the basis of a 360-day year with equal months of 30 days. Dividends for the first dividend period will accrue from the Issue Date. Dividends shall be fully cumulative and shall accrue on a quarterly basis (whether or not declared) from the Issue Date. Dividends declared will be payable to holders of record as they appear on the stock books of the Company at the close of business on such record dates, not exceeding 60 days nor fewer than 10 days preceding the Dividend Payment Date therefor. If at any time after July 15, 2000, the cash dividends payable on the Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive Dividend Payment Dates, then until the date on which all such dividends in arrears are paid in full, dividends shall accrue and be payable to the holders of Redeemable Preferred Stock at the annual rate of 13.5% times the sum of (i) $1,000 per share and (ii) accrued but unpaid dividends thereon. Upon payment in full of all dividends in arrears, cash dividends will thereafter be payable at the 11.5% annual rate set forth above. In addition, no dividends in any form shall be declared or paid or set apart for payment on any Junior Securities or Parity Securities for any dividend period unless full dividends on the Redeemable Preferred Stock for the then current dividend period shall have been paid or declared and set aside. When dividends on the Redeemable Preferred Stock are in arrears, dividends declared upon shares of the Redeemable Preferred Stock and Parity Securities shall be declared PRO RATA based upon the respective amounts that would have been paid on the Redeemable Preferred Stock and the Parity Securities had dividends been paid in full. So long as any shares of the Redeemable Preferred Stock are outstanding, the Company shall not, without the prior consent of the holders of two-thirds of the outstanding shares of Redeemable Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by the Company to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of the Company or other property (other than 104 dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities, whether directly or indirectly, and whether in cash, obligations, shares of the Company or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Company to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, the Company shall have repurchased, redeemed or retired shares of Redeemable Preferred Stock on a PRO RATA basis with the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. LIQUIDATION PREFERENCE. Holders of shares of Redeemable Preferred Stock shall be entitled to receive the stated liquidation value of $1,000 per share ($18.0 million in the aggregate based on 18,000 shares of Redeemable Preferred Stock to be issued on the Issue Date), plus an amount per share equal to any dividends accrued but unpaid, without interest (the "Liquidation Preference"), in the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, out of or to the extent of the net assets of the Company legally available for distribution, before any distributions are made with respect to any Common Stock of the Company or any other Junior Securities. After payment of the full amount of the Liquidation Preference, holders of shares of Redeemable Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. Upon any such liquidation, dissolution or winding up of the Company, such preferential amounts with respect to the Redeemable Preferred Stock and any class or series ranking on a parity with the Redeemable Preferred Stock if not paid in full shall be distributed PRO RATA in accordance with the aggregate preferential amounts of the Redeemable Preferred Stock and such other classes or series of stock. OPTIONAL REDEMPTION. The Company may, at its option, redeem at any time, out of funds legally available therefor, all or any portion of the shares (in whole shares only) of the Redeemable Preferred Stock on a PRO RATA basis, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption. MANDATORY REDEMPTION. On the date that is the one hundred and twenty-sixth (126th) month anniversary of the Issue Date, the Company shall redeem any and all outstanding shares of Redeemable Preferred Stock, out of funds legally available therefor, at a redemption price per share equal to 100% of the Liquidation Preference thereof on such date. REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control (as defined in the Certificate of Determination for the Redeemable Preferred Stock), the Redeemable Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal to 100% of the Liquidation Preference on the date of redemption provided, however, that the Company will not be obligated to redeem any Redeemable Preferred Stock upon a Change of Control prior to repurchase or redemption of such Notes then outstanding as the Company is required to repurchase or has called for redemption in connection with Chance of Control pursuant to the terms of the Indenture. VOTING RIGHTS. The holders of shares of Redeemable Preferred Stock shall not be entitled to any voting rights, except as required by applicable law and except as set forth below: Without the consent of the holders of at least two-thirds of the outstanding shares of Redeemable Preferred Stock, the Company may not (i) amend its Articles of Incorporation in any way that would adversely alter or change the powers, preferences, special rights or economics of the Redeemable Preferred Stock, (ii) create, authorize or issue any shares of capital stock ranking senior to or on a parity with the Redeemable Preferred Stock or (iii) create, authorize or issue any shares of capital stock constituting Junior Securities, unless such Junior Securities are expressly subordinate in right of payment 105 to the Redeemable Preferred Stock and such Junior Securities have no additional rights (directly or indirectly) upon the Company's failure to redeem such shares or to pay or declare a dividend or make a distribution with respect thereto. ADDITIONAL VOTING RIGHTS OF SERIES A REDEEMABLE PREFERRED STOCK. In addition to the voting rights set forth above under the caption "--Voting Rights," the holders of shares of Series A Redeemable Preferred Stock shall be entitled to voting rights as set forth below: Without the consent of the holders of at least two-thirds of the outstanding shares of Series A Redeemable Preferred Stock, the Company may not enter into any agreement which limits or otherwise adversely affects the Company's ability to comply with its mandatory redemption obligations described above, including, without limitation, any such agreement or plan entered into with respect to (i) the sale of all or substantially all of the assets of the Company, (ii) the voluntary liquidation, dissolution or winding up of the Company or (iii) the consolidation or merger of the Company with any one or more other corporations, other than a consolidation or merger in which the shareholders of the Company immediately prior to such transaction will hold more than 50% of the equity securities of the surviving entity immediately after the consummation of such transaction. If at any time after October 15, 2000, any amount of cash dividends payable on the Series A Redeemable Preferred Stock shall have been in arrears and unpaid for four or more successive Dividend Payment Dates, then the holders of the Series A Redeemable Preferred Stock, voting separately as a class and to the exclusion of the holders of all other classes and series of stock of the Company, shall have the right to elect the smallest number of directors constituting one-third of the authorized number of directors, and the holders of the Common Stock shall have the right to elect the remaining directors. If the Company shall fail to redeem shares of Series A Redeemable Preferred Stock in accordance with the mandatory redemption provisions described above, then the holders of the Series A Redeemable Preferred Stock, voting separately as a class and to the exclusion of the holders of all other classes and series of stock of the Company, shall have the right to elect the smallest number of directors constituting a majority of the authorized number of directors, and the holders of the Common Stock shall have the right to elect the remaining directors. The right of the holders of Series A Redeemable Preferred Stock to elect directors pursuant to the provisions described above shall continue until such time as (i) all such dividends in arrears are paid in full or (ii) all shares of Series A Redeemable Preferred Stock shall have been redeemed pursuant to the mandatory redemption provisions described above, as the case may be. TRANSFER RESTRICTIONS. There are no restrictions on the transferability of the Redeemable Preferred Stock, except as required by applicable securities laws. WARRANTS The Warrants issued in connection with the Recapitalization entitle the holders thereof to purchase in the aggregate up to approximately 964,000 shares of Common Stock of the Company (the "Warrant Shares"), or 20% of the outstanding Common Stock of the Company on a fully diluted basis upon the completion of the Transactions. The Warrants are immediately exercisable from and after the date of issuance until February 20, 2008 at an exercise price per share equal to one-half of the Recapitalization Consideration, payable in cash or by tendering shares of Redeemable Preferred Stock. The exercise price and number of Warrant Shares are both subject to adjustment in certain events. The Warrants will be transferable separately from the Redeemable Preferred Stock. There are no restrictions on the transferability of the Warrants, except as required by applicable securities laws and as may be set forth in the Shareholders' Agreement. 106 Unless and until the Warrants are exercised, the holders of the Warrants have no right to vote on matters submitted to the shareholders of the Company. The holders of the Warrants have no right to receive dividends; provided, however, that upon exercise of the Warrants, the exercise price therefor shall be reduced by an amount equal to the dividends in respect of the Common Stock that the holder of the Warrants would have received had the Warrants been exercised on the Issue Date. The holders of the Warrants are not entitled to share in the assets of the Company in the event of liquidation or dissolution of the Company or the winding up of the Company's affairs; provided, however, that the holders of the Warrants are entitled to receive at least 30 days' prior written notice of any such liquidation, dissolution or winding up of affairs and shall be afforded the opportunity to exercise the Warrants prior to such liquidation, dissolution or winding up of affairs. REGISTRATION RIGHTS FOR WARRANT SHARES The holders of the Warrant Shares are entitled to one "demand" registration right at any time on or after the later of (i) August 20, 2000 and (ii) the 181st day after completion of the initial public offering by the Company of its Common Stock, subject to additional customary rights and limitations. In addition, the holders of the Warrant Shares are entitled to unlimited "piggyback" registration rights after the date of the Company's initial public offering of its Common Stock, subject to customary rights and limitations. PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until , 199 , all dealers effecting transactions in the New Notes may be required to deliver a Prospectus. The Company will not receive any proceeds from any sales of New Notes by broker-dealers. New Notes received by broker-dealers pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of New Notes and any commissions or concessions received by such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. 107 LEGAL MATTERS The legality of the New Notes will be passed upon for the Company by Gibson, Dunn & Crutcher, LLP, Los Angeles, California. EXPERTS The Consolidated financial statements of Burke Industries, Inc. at December 29, 1995 and January 3, 1997, and for each of the three years in the period ended January 3, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 108 BURKE INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Ernst & Young LLP, Independent Auditors.......................................................... F-2 Consolidated Statements of Income for the three fiscal years ended January 3, 1997......................... F-3 Consolidated Balance Sheets at December 29, 1995 and January 3, 1997....................................... F-4 Consolidated Statements of Shareholders' Equity for the three fiscal years ended January 3, 1997........... F-5 Consolidated Statements of Cash Flows for the three fiscal years ended January 3, 1997..................... F-6 Notes to Consolidated Financial Statements................................................................. F-7 Consolidated Statements of Income for the nine months ended September 27, 1996 and October 3, 1997 (unaudited).............................................................................................. F-19 Consolidated Balance Sheets at January 3, 1997 and October 3, 1997 (unaudited)............................. F-20 Consolidated Statements of Cash Flows for the nine months ended September 27, 1996 and October 3, 1997 (unaudited).............................................................................................. F-21 Notes to Consolidated Financial Statements (unaudited)..................................................... F-22
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Burke Industries, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Burke Industries, Inc. and subsidiaries as of December 29, 1995 and January 3, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended January 3, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Burke Industries, Inc. and subsidiaries at December 29, 1995 and January 3, 1997, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Jose, California March 7, 1997 except for note 10, as to which the date is August 20, 1997 F-2 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS)
FISCAL YEARS ENDED 1994 1995 1996 --------- --------- --------- Net sales........................................................................ $ 44,370 $ 68,411 $ 72,466 Costs and expenses: Cost of sales.................................................................. 29,998 49,226 49,689 Selling........................................................................ 5,143 6,161 6,824 General and administrative..................................................... 3,009 4,051 4,786 --------- --------- --------- Income from operations........................................................... 6,220 8,973 11,167 Interest expense, net............................................................ 2,812 3,007 2,668 --------- --------- --------- Income before income tax provision, discontinued operation, and extraordinary loss........................................................................... 3,408 5,966 8,499 Income tax provision............................................................. 1,395 3,393 3,466 --------- --------- --------- Income from continuing operations before discontinued operation, and extraordinary loss............................................................. 2,013 2,573 5,033 Loss from discontinued operation, net of income tax benefit of $341 in 1994, $443 in 1995, and $205 in 1996...................................................... (511) (664) (308) Loss on disposal of discontinued operation, net of income tax benefit of $356.... -- -- (624) Extraordinary loss on debt settlement, net of income tax benefit of $547......... -- (815) -- --------- --------- --------- Net income....................................................................... $ 1,502 $ 1,094 $ 4,101 --------- --------- --------- --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements. F-3 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
FISCAL YEAR -------------------- 1995 1996 --------- --------- ASSETS CURRENT ASSETS: Trade accounts receivable, less allowance of $336 in 1995 and $189 in 1996.................. $ 9,856 $ 9,155 Inventories................................................................................. 7,218 8,616 Prepaid expenses and other current assets................................................... 552 630 Deferred income tax assets.................................................................. 1,238 1,014 --------- --------- Total current assets...................................................................... 18,864 19,415 Property, plant, and equipment: Land and improvements....................................................................... 1,884 1,884 Buildings and improvements.................................................................. 9,096 9,151 Equipment................................................................................... 10,788 12,329 Leasehold improvements...................................................................... 535 555 --------- --------- 22,303 23,919 Accumulated depreciation and amortization................................................... 7,748 9,101 --------- --------- 14,555 14,818 Construction-in-process....................................................................... 140 183 --------- --------- 14,695 15,001 Prepaid pension cost.......................................................................... 625 542 Goodwill, net................................................................................. 1,570 1,529 Note receivable from an affiliate of the principal shareholders............................... -- 4,066 Other assets.................................................................................. 132 120 Net assets of discontinued operation.......................................................... 3,843 -- --------- --------- Total assets.............................................................................. $ 39,729 $ 40,673 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Checks outstanding in excess of funds deposited............................................. $ 1,716 $ 828 Trade accounts payable and accrued expenses................................................. 4,514 6,454 Accrued compensation and related liabilities................................................ 1,813 1,937 Income taxes payable........................................................................ 2,571 2,468 Current portion of long-term obligations.................................................... 2,848 2,400 --------- --------- Total current liabilities................................................................. 13,462 14,087 Long-term obligations, less current portion................................................... 20,183 16,469 Other noncurrent liabilities.................................................................. 684 720 Deferred income tax liabilities............................................................... 3,440 3,457 Subordinated debt............................................................................. 1,620 1,657 SHAREHOLDERS' EQUITY: Class A common stock, no par value: Authorized shares--20,000 Issued and outstanding shares--9,431 in 1995 and 9,377 in 1996.......................... 5,633 6,716 Convertible Class B common stock, no par value: Authorized shares--5,000 Issued and outstanding shares--none..................................................... -- -- Accumulated deficit......................................................................... (5,293) (2,433) --------- --------- Total shareholders' equity................................................................ 340 4,283 --------- --------- Total liabilities and shareholders' equity................................................ $ 39,729 $ 40,673 --------- --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. F-4 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
CLASS A TOTAL COMMON STOCK SHAREHOLDERS' -------------------- ACCUMULATED EQUITY SHARES AMOUNT DEFICIT (DEFICIT) --------- --------- ------------ ------------- Balance (deficit) at fiscal year ended 1993...................... 10,017 $ 6,648 $ (7,302) $ (654) Net income..................................................... -- -- 1,502 1,502 Proceeds from sales of shares through employee stock plans..... 2 1 -- 1 --------- --------- ------------ ------------- Balance at fiscal year ended 1994................................ 10,019 6,649 (5,800) 849 Net income..................................................... -- -- 1,094 1,094 Increase in value of shareholder warrants...................... 587 (587) -- Repurchase of stock............................................ (588) (453) -- (453) Repurchase of warrants......................................... -- (1,150) -- (1,150) --------- --------- ------------ ------------- Balance at fiscal year ended 1995................................ 9,431 5,633 (5,293) 340 Net income..................................................... -- -- 4,101 4,101 Proceeds from sales of shares through employee stock plans..... 181 77 -- 77 Increase in value of shareholder warrants...................... -- 1,241 (1,241) -- Repurchase of stock............................................ (235) (235) -- (235) --------- --------- ------------ ------------- Balance at fiscal year ended 1996................................ 9,377 $ 6,716 $ (2,433) $ 4,283 --------- --------- ------------ ------------- --------- --------- ------------ -------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements F-5 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEARS ENDED ------------------------------- 1994 1995 1996 --------- --------- --------- OPERATING ACTIVITIES Net income........................................................................ $ 1,502 $ 1,094 $ 4,101 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization: Property, plant, and equipment................................................ 1,106 1,354 1,378 Goodwill and other............................................................ 164 134 41 Debt discount arising from warrants........................................... 275 259 37 Loss on disposal of discontinued operation...................................... -- -- 624 Extraordinary loss on debt settlement--noncash portion.......................... -- 1,362 -- Changes in net assets of discontinued operation................................. 398 (680) 1,401 Changes in operating assets and liabilities: Trade accounts receivable..................................................... (675) (4,326) 701 Inventories................................................................... (524) (2,539) (1,398) Prepaid expenses and other current assets..................................... (103) (68) (78) Cash in escrow................................................................ 2,027 -- -- Prepaid pension cost.......................................................... 32 66 83 Other assets.................................................................. (26) (31) 12 Trade accounts payable and accrued expenses................................... (436) 1,853 1,940 Accrued compensation and related liabilities.................................. 245 536 124 Deferred income taxes......................................................... 78 (462) 241 Income taxes payable.......................................................... (374) 1,798 (103) Other noncurrent liabilities.................................................. 68 (142) 36 --------- --------- --------- Net cash provided by operating activities......................................... 3,757 208 9,140 INVESTING ACTIVITIES Purchases of property, plant, and equipment....................................... (335) (3,647) (1,684) Proceeds from disposal of discontinued operation.................................. -- -- 1,818 Note receivable from an affiliate of the principal shareholders................... -- -- (4,066) Proceeds from sale of equipment................................................... -- 123 -- --------- --------- --------- Net cash used in investing activities............................................. (335) (3,524) (3,932) FINANCING ACTIVITIES Net borrowings (repayments) of long-term debt..................................... (3,326) 3,691 (4,162) Checks outstanding in excess of funds deposited................................... (97) 1,228 (888) Repurchase of common stock and warrants........................................... -- (1,603) (235) Proceeds from sales of shares through employee stock plans........................ 1 -- 77 --------- --------- --------- Net cash provided by (used in) financing activities............................... (3,422) 3,316 (5,208) --------- --------- --------- Change in cash.................................................................... -- -- -- Cash at beginning of year......................................................... -- -- -- --------- --------- --------- Cash at end of year............................................................... $ -- $ -- $ -- --------- --------- --------- --------- --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements F-6 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Burke Industries, Inc. and its wholly owned subsidiaries (the Company) develop, manufacture, and market various elastomer products for use in commercial and military applications. The Company operates within one industry segment, which includes the developing, manufacturing and marketing of various elastomer products for use in commercial and military applications. The Company sells its products through a network of distributors or directly to customers in the aerospace construction and defense, industries and other commercial markets, primarily in North America. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral. One customer accounted for approximately 11.0% of net sales in fiscal 1996. No other customer constituted 10% or more of net sales in any of the three fiscal years ended in 1996. Substantially all of the Company's hourly workers in San Jose, California are represented by the International Association of Machinists and Aerospace Workers through a collective bargaining agreement that expires October 2, 1997. Substantially all of the Company's hourly workers in Taunton, Massachusetts are represented by the United Electrical, Radio, and Machine Workers of America through a collective bargaining agreement that expires June 5, 1997. CONSOLIDATION The accompanying consolidated financial statements include the accounts of Burke Industries, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue from sales of products is generally recognized upon shipment to customers. For contracts relating to certain products, a portion of the revenue is recognized upon completion of a part of the manufacturing process and upon customer acceptance. The remaining revenue is recognized upon completion of the manufacturing process and shipment. WARRANTY The Company generally warrants its roofing products for two years, for which the related costs are not significant. In addition, the Company sells extended warranties for ten to twenty years. Revenues received for extended warranties are deferred and amortized over the period in which warranty costs are expected F-7 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to be incurred. Warranty reserves and deferred warranty revenues are included in accrued expenses and other noncurrent liabilities on the accompanying consolidated balance sheets. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation is computed over the estimated useful lives (three to forty years) of the assets using the straight-line method. Leasehold improvements are amortized by the straight-line method over the shorter of the estimated useful life of the asset or the term of the related lease. Amortization of assets under capital leases is included in depreciation expense. FINANCIAL INSTRUMENTS The carrying value of accounts receivable and payable and accrued liabilities approximates fair value due to the short-term maturities of these assets and liabilities. ACCOUNTING PERIODS The Company's fiscal year ends on the Friday closest to December 31. The Company maintains a fifty-two/fifty-three week fiscal year cycle, which resulted in a fifty-three week year in fiscal 1996. For convenience the accompanying financial statements have been referred to as fiscal year ended 1994, 1995 and 1996 for the periods ended December 30, 1994, December 29, 1995 and January 3, 1997, respectively. COMPREHENSIVE INCOME In June 1997, the FASB released Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. The Company believes that adoption of FAS 130 will not have a material impact on the Company's consolidated financial statements. SEGMENT INFORMATION In June 1997, the FASB released Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 will change the way companies report selected segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to stockholders. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Company is currently evaluating the impact of the application of the new rules on the Company's consolidated financial statements. F-8 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. INVENTORIES Inventories consist of the following at fiscal year ended:
1995 1996 --------- --------- (IN THOUSANDS) Raw materials.............................................................. $ 2,850 $ 3,260 Work-in-process............................................................ 1,238 1,433 Finished goods............................................................. 3,130 3,923 --------- --------- $ 7,218 $ 8,616 --------- --------- --------- ---------
3. GOODWILL AND LONG-LIVED ASSETS Goodwill represents the excess of the purchase price of acquired companies over the estimated fair value of the tangible and specifically identified intangible net assets acquired. In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of," the carrying value of long-lived assets and related goodwill is reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the carrying value of these assets will not be recoverable, as determined based on the undiscounted net cash flows of the entity acquired over the remaining amortization period, the Company's carrying value is reduced to its estimated fair value (based on an estimate of discounted future net cash flows). Goodwill is being amortized on a straight-line basis over forty years. Accumulated amortization totaled $262,000 and $303,000 at fiscal year ended 1995 and 1996, respectively. F-9 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND LEASE OBLIGATIONS Long-term debt consists of the following at fiscal year ended:
1995 1996 --------- --------- (IN THOUSANDS) Promissory note......................................................... $ 1,000 $ -- Line of credit with bank................................................ 9,134 5,099 Term loans payable to bank.............................................. 12,897 13,770 --------- --------- Total senior long-term obligations...................................... 23,031 18,869 Less current portion.................................................... 2,848 2,400 --------- --------- $ 20,183 $ 16,469 --------- --------- --------- --------- Senior subordinated note payable to an affiliate of the principal shareholders.......................................................... $ 1,000 $ 1,000 Junior subordinated notes payable to shareholders, net of unamortized discount of $130,000 in 1995 and $93,000 in 1996...................... 620 657 --------- --------- Total subordinated debt................................................. $ 1,620 $ 1,657 --------- --------- --------- --------- Long-term debt is due as follows (in thousands): 1997............................................................................... $ 2,400 1998............................................................................... 2,400 1999............................................................................... 2,400 2000............................................................................... 13,326 --------- $ 20,526 --------- ---------
SENIOR LONG-TERM OBLIGATIONS The Company maintains a credit facility with a bank, which provides available borrowings up to a maximum of $30,000,000, subject to certain limitations. Borrowings under this facility, which expire September 15, 2000 (thereafter, the facility automatically renews for one-year periods under certain conditions), may be term loans, letters of credit, or a revolving line of credit. All borrowings under this facility are secured by the Company's accounts receivable, inventories, equipment, real estate, and general intangibles. The term loans under the credit facility bear interest payable monthly at 2.75% (2.25% after fiscal year ended 1996) to 3.50% above the London Interbank Offer Rate (LIBOR) (5.69% at fiscal year ended 1996). One term loan ($2,417,000 at fiscal year ended 1996) is subject to a one-time reduction (from a 3.50% increment to 3.00%) if the Company meets certain financial ratios at any time after December 30, 1997. The term loans require aggregate monthly principal payments of approximately $200,000 with all unpaid principal due September 15, 2000. The term loans also require that the proceeds from sales of certain property or equipment be used to reduce the principal balance of the loans. The credit facility also provides for a nonrevolving equipment line of credit up to $3,000,000 that can be utilized for up to 100% of the value of the equipment financed. Amounts drawn under this line are limited to $1,500,000 per annum and are converted into notes once a year. Amounts drawn under this line as well as under the notes bear an interest rate of 2.75% above LIBOR (2.25% after fiscal year ended F-10 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) 1996). Included in term loans at fiscal year ended 1996 is approximately $1,159,000 drawn under this line of which approximately $264,000 has been converted into a term loan at fiscal year ended 1996. The credit facility also provides for letters of credit not to exceed the lesser of $1,100,000 or 17% of the fair value of the Company's interest in certain property. There were no outstanding letters of credit at fiscal year ended 1995 and 1996. Under the facility, the Company may also borrow on a revolving line of credit up to its borrowing base, representing certain accounts receivable, inventories, and other assets up to a maximum of $30,000,000, less the amounts of any outstanding term loans and letters of credit. At fiscal year ended 1996, the Company had $4,686,000 available under the facility. Line of credit borrowings bear interest computed daily and are payable monthly at LIBOR plus 2.75% (2.25% after fiscal year ended 1996). The Company has maintained required minimum working capital, tangible net worth, operating income, and financial ratios and is prohibited from distributing dividends on the Company's common stock under certain covenants and restrictions of the credit facility and senior subordinated note. SUBORDINATED NOTES PAYABLE The senior subordinated note payable to an affiliate of the principal shareholders (senior note) and the junior subordinated notes payable to certain shareholders (junior notes) are due October 10, 2000 and require monthly interest payments at 12.14% with all unpaid principal due on October 10, 2000. The senior and junior notes contain certain prepayment penalties; however, the Company may not make principal payments on the junior notes without written agreement from the shareholder under a subordination agreement between the Company and the shareholders. The senior note is secured by substantially all of the Company's tangible assets, subordinate to the security interests of the nonsubordinated bank debt discussed below. The junior notes are subordinate to and cross-defaulted with the senior note and nonsubordinated bank debt discussed above. The shareholders holding the junior notes hold warrants to purchase approximately 1,700,000 shares of the Company's Class A common stock for $0.425 per share. Interest expense consists of the following:
1994 1995 1996 --------- --------- --------- Interest incurred................................................ $ 2,836 $ 3,039 $ 2,771 Capitalized...................................................... (11) (30) (19) Interest income.................................................. (13) (2) (84) --------- --------- --------- Interest expense, net............................................ $ 2,812 $ 3,007 $ 2,668 --------- --------- --------- --------- --------- ---------
Included in interest expense is $1,388,000, $1,108,000 and $212,000 incurred on subordinated shareholder notes in 1994, 1995 and 1996, respectively. There was no interest payable to these shareholders at fiscal year ended 1995 and 1996. The Company has met the specified minimum operating income and financial ratios required to reduce the interest rate on most of its facility by 0.50%, effective fiscal year ended 1996. Therefore, the F-11 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED) Company believes the fair value of the long-term debt at fiscal year ended 1996 approximates the carrying value of such debt at fiscal year ended 1996. LEASE OBLIGATIONS The Company also leases certain manufacturing, warehousing, and administrative space under noncancelable operating leases. At fiscal year ended 1996, future minimum payments under noncancelable operating leases are as follows (in thousands): 1997................................................................ $ 1,097 1998................................................................ 1,015 1999................................................................ 976 2000................................................................ 897 2001................................................................ 387 --------- Total minimum lease payments........................................ $ 4,372 --------- ---------
Rental expense approximated $522,000, $1,006,000, and $1,143,000 in 1994, 1995, and 1996, respectively. Rental expense is before sublease income of $206,000 in 1996. Future sublease rental income commitments aggregated $1,616,000 at fiscal year ended 1996. 5. SHAREHOLDERS' EQUITY AND SHAREHOLDERS' TRANSACTIONS COMMON STOCK Class A common stock and convertible Class B common stock have identical rights, terms and conditions except that convertible Class B common stock is nonvoting. The following summarizes the shares of common stock reserved for issuance at January 3, 1997:
CLASS A COMMON STOCK --------------- (IN THOUSANDS) Exercise of warrants........................................................... 1,700 Exercise of options under the 1989 Stock Option Plan........................... 1,600 ----- 3,300 ----- -----
WARRANTS AND SHAREHOLDERS' TRANSACTIONS At fiscal year ended 1994, a bank held warrants (bank warrants) to purchase approximately 3,333,000 shares of convertible Class B common stock at $0.425 per share. On October 10, 1995, the Company and the bank owning the warrants entered into a settlement agreement whereby the Company repurchased the outstanding warrants and shares held by the bank and repaid the senior subordinated debt owed to the bank. As a result of these transactions, an unamortized debt discount of $950,000 and settlement fees of $412,000 have been expensed. These amounts are shown as an extraordinary item in the 1995 income statement, net of tax. F-12 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SHAREHOLDERS' EQUITY AND SHAREHOLDERS' TRANSACTIONS (CONTINUED) The shareholder warrants, issued in connection with the junior subordinated notes described in Note 4, expire on January 30, 2002. Any time after January 30, 1995, the Company may call or the shareholders may put all or a portion of the warrants at a price based on the difference between the fair value of the Class A common stock (determined by an agreed-upon independent appraiser) and the exercise price of the warrants. The aggregate increase in the difference between the fair value of the Class A common stock and the exercise price of the shareholder warrants ($587,000 in 1995 and $1,241,000 in 1996) has been charged to accumulated deficit. On October 25, 1996, the Company loaned $4,000,000 to an affiliate of the principal shareholders which note bears interest at the highest rate actually charged to the Company under its credit facility with a bank. All unpaid principal and interest are due on October 25, 2001. The Company is charged a management fee by an affiliate of the principal shareholders which was $250,000 in each of the three fiscal years ended 1996. STOCK OPTIONS The Company accounts for its stock option plan in accordance with provisions of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25). In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), that provides an alternative to APB Opinion No. 25. The Company will continue to account for its employee stock plans in accordance with the provisions of APB Opinion No. 25 with footnote disclosures of the material impact of FAS 123. The number of shares granted in fiscal year ended 1995 and 1996 are not material, therefore, the effect of applying the FAS 123 minimum value method to the Company's stock option grants would not result in pro forma net income materially different from historical amounts reported. Therefore, such pro forma information and weighted average assumptions specified in FAS 123 are not separately presented herein. Future pro forma net income results may be materially different from actual amounts reported. Under the 1989 Stock Option Plan (the Plan), incentive and nonqualified options to purchase up to a total of 1,600,000 shares of Class A common stock may be granted to officers and employees at the discretion of the Board of Directors. Incentive stock options must be granted at not less than the fair value of the Company's common stock at the date of grant, and nonqualified stock options must be granted at not less than 85% of the fair value of the Company's common stock at the date of grant. Options vest as determined by the Board of Directors. Currently, substantially all outstanding options vest ratably over five years from date of grant. During 1996, the Company granted 200,000 incentive options to two officers under the Plan which vested immediately on the date of grant. During 1996, the Company also granted 360,000 nonqualified options to two officers which vested immediately on the date of grant. F-13 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. SHAREHOLDERS' EQUITY AND SHAREHOLDERS' TRANSACTIONS (CONTINUED) A summary of all stock option activity is as follows:
OPTIONS WEIGHTED AVERAGE OUTSTANDING PRICE PER SHARE ------------- ----------------- (IN THOUSANDS, EXCEPT PER SHARE PRICE) Balance at fiscal year ended 1993............................. 1,184 $ 0.425 Granted..................................................... 200 $ 0.425 Exercised................................................... (2) $ 0.425 Canceled.................................................... (4) $ 0.425 ----- Balance at fiscal year ended 1994............................. 1,378 $ 0.425 Granted..................................................... 25 $ 0.425 Exercised................................................... -- $ -- Canceled.................................................... (144) $ 0.425 ----- Balance at fiscal year ended 1995............................. 1,259 $ 0.425 Granted..................................................... 618 $ 1.500 Exercised................................................... (181) $ 0.425 Canceled.................................................... (96) $ 0.425 ----- Balance at fiscal year ended 1996............................. 1,600 $ 0.840 ----- -----
There were approximately 1,564,000 options exercisable at fiscal year ended 1996. Options outstanding at fiscal year ended 1996 ranged in price from $0.425 to $1.500 and had a weighted average contractual life of fifty-three months. 6. DISCONTINUED OPERATION On June 28, 1996, the Company disposed of certain of the assets related to its custom-molded organic rubber products manufacturing operation for cash and future consideration. The 1996 loss from the discontinued operation includes results through June 28, 1996. Net sales of the discontinued operation were $9,099,000, $8,984,000, and $4,279,000 in 1994, 1995, and 1996, respectively. 7. PENSION AND RETIREMENT PLANS The Company maintains a single employer defined benefit pension plan covering substantially all of its hourly employees in San Jose, California. The benefits are based on years of service and the benefit credit rates stated in the provisions of the plan. The Company funds the plan at the minimum amount required to be paid under the provisions of the Employee Retirement and Income Security Act of 1976 (ERISA). Contributions are intended to provide for benefits attributed to service to date as well as for those expected to be earned in the future. F-14 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. PENSION AND RETIREMENT PLANS (CONTINUED) The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets as of fiscal year end:
1995 1996 --------- --------- (IN THOUSANDS) Actuarial present value of benefit obligations: Vested benefit obligation................................................ $ 2,661 $ 2,713 Nonvested benefit obligation............................................. 114 183 --------- --------- Accumulated benefit obligation............................................. $ 2,775 $ 2,896 --------- --------- --------- ---------
1995 1996 --------- --------- (IN THOUSANDS) Plan assets at fair value, primarily listed stocks and U.S. bonds.......... $ 2,789 $ 2,920 Projected benefit obligation............................................... 2,775 2,896 --------- --------- Plan assets in excess of projected benefit obligation...................... 14 24 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions........................................ 406 352 Prior service cost not yet recognized in net periodic pension cost......... 205 166 --------- --------- Prepaid pension cost....................................................... $ 625 $ 542 --------- --------- --------- ---------
Net periodic pension expense for 1994, 1995, and 1996 included the following components:
1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Service cost--benefits earned during the year....................... $ 68 $ 57 $ 65 Interest cost on projected benefit obligation....................... 169 183 193 Actual return on plan assets........................................ 30 (342) (233) Net amortization and deferral....................................... (235) 168 58 --------- --------- --------- Net periodic pension cost........................................... $ 32 $ 66 $ 83 --------- --------- --------- --------- --------- ---------
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.0% in 1994, 7.00% in 1995, and 7.75% in 1996. The expected long-term rate of return on plan assets was 8.50% for all of the years presented. The Company also maintains a defined contribution 401(k) plan covering substantially all of its other regular employees. The employees become eligible for participation after 1,000 hours of service. Participants may elect to contribute up to 20% of their compensation to this plan, subject to Internal Revenue Service (IRS) limits. The Company matches a portion of the employee's contribution. The Company contributed approximately $75,000, $105,000, and $113,000 to this plan in 1994, 1995, and 1996, respectively. F-15 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES The income tax provision recognized in the consolidated statements of operations consists of the following:
1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Deferred: Federal........................................................ $ 49 $ (407) $ 150 State.......................................................... 29 (55) 91 --------- --------- --------- 78 (462) 241 Current: Federal........................................................ 761 2,527 2,171 State.......................................................... 215 338 493 --------- --------- --------- 976 2,865 2,664 --------- --------- --------- $ 1,054 $ 2,403 $ 2,905 --------- --------- --------- --------- --------- ---------
In 1996, the Company settled with the IRS certain issues relating to the Company's income tax returns for 1988 through 1990. As of fiscal year ended 1995, the Company has fully provided for the taxes and interest payable as a result of the settlement. A reconciliation of the income tax provision at the U.S. federal statutory rate (34%) to the income tax provision at the effective tax rate is as follows:
1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Income taxes computed at the U.S. federal statutory rate......... $ 869 $ 1,189 $ 2,382 State taxes (net of federal benefit)............................. 161 187 385 IRS settlement................................................... -- 1,000 -- Other individually immaterial items.............................. 24 27 138 --------- --------- --------- Income tax provision............................................. $ 1,054 $ 2,403 $ 2,905 --------- --------- --------- --------- --------- ---------
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 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) purposes. Significant components of the Company's deferred tax assets and liabilities at fiscal years ended 1995 and 1996 are as follows:
1995 1996 --------- --------- (IN THOUSANDS) Deferred tax liabilities: Increase in assets as a result of acquisition in 1988.................. $ (3,141) $ (3,064) Depreciation........................................................... (334) (380) Other.................................................................. (137) (115) --------- --------- Total deferred tax liabilities........................................... (3,612) (3,559) Deferred tax assets: Receivable allowances and inventory valuation.......................... 483 387 State taxes............................................................ 117 199 Warranty reserve....................................................... 204 196 Accrued vacation....................................................... 258 255 Other.................................................................. 348 79 --------- --------- Total deferred tax assets................................................ 1,410 1,116 Valuation allowance...................................................... -- -- --------- --------- Net deferred tax liability............................................... $ (2,202) $ (2,443) --------- --------- --------- ---------
In addition to the settlement described above, the Company received a "Notice of Deficiency" from the IRS for 1992 and 1993, also related to the reorganization of the Company in 1988, resulting in proposed tax deficiencies of approximately $1,534,000. Penalties on these proposed deficiencies would be $290,000. The Company filed a tax court petition contesting the proposed tax deficiencies. The Company believes that it has meritorious legal defenses to the proposed IRS adjustments. Based upon the Company's analysis of the issues, management believes that an adequate provision has been made for additional liabilities that may ultimately result. 9. SUPPLEMENTAL CASH FLOW INFORMATION
1994 1995 1996 --------- ---------- --------- (IN THOUSANDS) Cash paid for interest.......................................................... $ 2,438 $ 2,683 $ 1,950 Cash paid for income taxes...................................................... $ 1,395 $ 1,315 $ 2,771 Borrowings of long-term debt.................................................... $ 54,638 $ 101,393 $ 79,516 Repayments and settlement of long-term debt and capital lease obligations....... $ 57,964 $ 97,702 $ 83,678 Long-term capital lease obligations incurred in connection with the acquisition of equipment.................................................................. $ 80 $ -- $ -- Note payable issued in connection with asset acquisition........................ $ -- $ 1,000 $ --
F-17 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. SUBSEQUENT EVENTS The Company has renewed its collective bargaining agreement with United Electrical Radio, and Machine Workers of America, who represent the Company's hourly workers in Tauton, Massachusetts, through June 6, 2000. In August 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the Company was recapitalized (the "Recapitalization"). Pursuant to the Merger Agreement, all shares of the Company's common stock, other than those retained by certain members of management and certain other shareholders ("Continuing Shareholders"), were converted into the right to receive cash based upon a formula. The Continuing Shareholders agreed to retain approximately 15% of the common equity of the Company. In order to finance the transactions contemplated by the Recapitalization, the Company (i) issued $110 million of senior notes in a debt offering; (ii) received $20.0 million in cash from an investor group for Common Stock and (iii) received $18.0 million in cash for the issuance of Redeemable Preferred Stock (the "Transactions"). In addition, the Company entered into a credit facility which provides for revolving credit borrowings of up to $15.0 million. The Company has four wholly owned subsidiaries, consisting of Burke Flooring Products, Inc., Burke Rubber Company, Inc., Burke Custom Processing, Inc., (the "Guarantor Subsidiaries") and Burkeline Construction Company, Inc. (the "Non-Guarantor Subsidiary"). The Guarantor Subsidiaries comprise all of the direct and indirect subsidiaries of the Company (other than the Non-Guarantor Subsidiary, which has no assets or liabilities and generates none of the consolidated revenues of the Company). Each of the Guarantor Subsidiarys' guarantees of the Company's $110 million senior notes, is full, unconditional and joint and several. The Company's subsidiaries have no operations or assets and liabilities and therefore no separate financial statements of the Company's subsidiaries are presented because management has determined that they are not material to investors. F-18 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED ------------------------- SEPT 27, 1996 OCT 3, 1997 ------------ ----------- Net sales.............................................................................. $ 54,476 $ 68,785 Costs and expenses: Cost of sales........................................................................ 37,722 48,423 Selling.............................................................................. 5,097 5,508 General and administrative........................................................... 3,208 5,220 Stock option purchase................................................................ -- 14,105 ------------ ----------- Income (loss)from operations........................................................... 8,449 (4,471) Interest expense, net.................................................................. 2,054 2,625 ------------ ----------- Income (loss) before income tax provision (benefit) and discontinued operation......... 6,395 (7,096) Income tax provision (benefit)......................................................... 2,558 (2,555) ------------ ----------- Income (loss) from continuing operations before discontinued operation................. 3,837 (4,541) Loss from discontinued operation, net of income tax benefit of $205.................... (308) -- Loss on disposal of discontinued operation, net of income tax benefit of $356.......... (624) -- ------------ ----------- Net income (loss)...................................................................... $ 2,905 $ (4,541) ------------ ----------- ------------ -----------
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. F-19 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JANUARY 3, OCTOBER 3 1997 1997 ----------- ----------- (1) (UNAUDITED) ASSETS Current assets: Cash................................................................................... $ -- $ 10,670 Trade accounts receivable, less allowance of $189 in 1996 and $331 in 1997............. 9,155 12,547 Inventories............................................................................ 8,616 9,924 Prepaid expenses and other current assets.............................................. 630 572 Refundable income taxes................................................................ -- 2,796 Deferred income tax assets............................................................. 1,014 1,014 ----------- ----------- Total current assets................................................................. 19,415 37,523 Property, plant, and equipment: Land and improvements.................................................................. 1,884 1,884 Buildings and improvements............................................................. 9,151 9,151 Equipment.............................................................................. 12,329 12,777 Leasehold improvements................................................................. 555 555 ----------- ----------- 23,919 24,367 Accumulated depreciation and amortization................................................ 9,101 10,126 ----------- ----------- 14,818 14,241 Construction-in-process.................................................................. 183 462 ----------- ----------- 15,001 14,703 Prepaid pension cost..................................................................... 542 542 Deferred financing costs................................................................. 4,877 Goodwill, net............................................................................ 1,529 1,495 Note receivable from an affiliate of the principal shareholders.......................... 4,066 -- Other assets............................................................................. 120 112 ----------- ----------- Total assets......................................................................... $ 40,673 $ 59,252 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Checks outstanding in excess of funds deposited........................................ $ 828 $ -- Trade accounts payable and accrued expenses............................................ 6,454 7,720 Accrued compensation and related liabilities........................................... 1,937 2,420 Income taxes payable................................................................... 2,468 -- Current portion of long-term obligations............................................... 2,400 -- Payable to shareholders................................................................ -- 5,882 ----------- ----------- Total current liabilities............................................................ 14,087 16,022 Long-term obligations, less current portion.............................................. 16,469 -- Senior Notes............................................................................. -- 110,000 Other noncurrent liabilities............................................................. 720 712 Deferred income tax liabilities.......................................................... 3,457 3,457 Subordinated debt........................................................................ 1,657 -- Redeemable Preferred stock, no par value: Authorized shares -- 0 in 1996 and 50 in 1997. Issued and outstanding shares -- 0 in 1996 and 18 in 1997.................................................................. -- 15,681 Shareholders' equity: Class A common stock, no par value: Authorized shares--20,000 Issued and outstanding shares--9,377 in 1996 and 3,857 in 1997....................... 6,716 25,464 Convertible Class B common stock, no par value: Authorized shares--5,000 Issued and outstanding shares--none.................................................. -- -- Accumulated deficit.................................................................... (2,433) (112,084) ----------- ----------- Total shareholders' equity (deficit)................................................. 4,283 (86,620) ----------- ----------- Total liabilities and shareholders' equity........................................... $ 40,673 $ 59,252 ----------- ----------- ----------- -----------
- ------------------------------ (1) The information in this column was derived from the Company's audited consolidated financial statements at January 3, 1997. The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. F-20 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
NINE MONTHS ENDED --------------------- SEPT 27, OCT 3, 1996 1997 --------- ---------- OPERATING ACTIVITIES Net income (loss)........................................................................... $ 2,905 $ (4,541) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization: Property, plant, and equipment.......................................................... 1,049 1,025 Deferred financing costs................................................................ -- 66 Goodwill................................................................................ 30 34 Debt discounts arising from warrants.................................................... 28 93 Interest on shareholder note............................................................ -- (240) Loss on dispoal of discontinued operations................................................ 624 -- Changes in net assets of discontinued operations.......................................... 1,401 -- Changes in operating assets and liabilities: Trade accounts receivable............................................................... (1,310) (3,392) Inventories............................................................................. (274) (1,308) Prepaid expenses and other current assets............................................... (331) 58 Refundable income tax................................................................... (206) (5,264) Deferred income tax..................................................................... 9 -- Other assets............................................................................ (24) 8 Trade accounts payable and accrued expenses............................................. 2,996 1,266 Accrued compensation and related liabilities............................................ (306) 483 Other noncurrent liabilities............................................................ -- (8) --------- ---------- Net cash provided by (used in) operating activities......................................... $ 6,591 (11,720) INVESTING ACTIVITIES Purchases of property, plant, and equipment................................................. (1,319) (727) Proceeds from disposal of discontinued operation............................................ 1,818 -- Note receivable from an affiliate of the principal shareholders............................. -- 4,306 --------- ---------- Net cash provided by investing activities................................................... 499 3,579 FINANCING ACTIVITIES Net borrowings (repayments) of long-term debt............................................... (5,890) -- Checks outstanding in excess of funds deposited............................................. (1,030) (828) Payable to shareholder...................................................................... -- 5,882 Repurchase of common stock and warrants..................................................... (235) -- Proceeds from sales of shares through employee stock plans.................................. 65 10 --------- ---------- Deferred financing costs.................................................................... -- (4,943) Re-payment of long term debt................................................................ -- (18,869) Re-payment of sub debt...................................................................... -- (1,750) Issuance of long-term debt.................................................................. -- 110,000 Issuance of preferred stock, net of issuance costs.......................................... -- 17,895 Issuance for common stock, net of issuance costs............................................ -- 18,724 Net recapitalization consideration.......................................................... -- (107,310) --------- ---------- Net cash provided by (used in) financing activities......................................... (7,090) 18,811 --------- ---------- Change in cash.............................................................................. -- 10,670 Cash at beginning of period................................................................. -- -- --------- ---------- Cash at end of period....................................................................... $ -- $ 10,670 --------- ---------- --------- ----------
The accompanying Notes to Consolidated Financial Statements (Unaudited) are an integral part of these statements. F-21 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AND ACCOUNTING PERIODS The accompanying consolidated financial statements of Burke Industries, Inc. and subsidiaries (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the nine months ended October 3, 1997 are not necessarily indicative of the results that may be expected for the year ending January 2, 1998. The Company uses a 52 to 53-week fiscal year ending on the Friday closest to December 31. The Company also follows a 4/4/5 week quarterly cycle. The nine-month periods ended on September 27, 1996 and October 3, 1997. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. INVENTORIES Inventories consist of the following:
JANUARY 3, 1997 OCTOBER 3, 1997 --------------- --------------- (IN THOUSANDS) Raw materials................................................ $ 3,260 $ 4,205 Work-in-process.............................................. 1,433 1,637 Finished goods............................................... 3,923 4,082 ------ ------ $ 8,616 $ 9,924 ------ ------ ------ ------
4. DISCONTINUED OPERATION On June 28, 1996, the Company disposed of certain assets related to its custom-molded organic rubber products manufacturing operations for cash and future consideration. The 1996 loss from discontinued operation includes results through June 28, 1996. F-22 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. SHAREHOLDERS' EQUITY Changes in shareholders' equity from January 4, 1997 to October 3, 1997 are as follows (in thousands):
CLASS A COMMON STOCK -------------------- ACCUMULATED SHARES AMOUNT DEFICIT --------- --------- ------------ Balance at January 4, 1997.................................. 9,377 $ 6,716 $ (2,433) Net income................................................ -- -- (4,541) Proceeds from sales of shares through employees stock plans................................................... 22 10 Increase in value of shareholder warrants................. -- 5,100 (5,100) Preferred stock dividend in kind.......................... (259) Warrant accretion......................................... (27) Preferred stock warrant value............................. 2,500 Proceeds from sales of common stock, net of issuance costs................................................... 3,134 18,724 Recapitalization of Company............................... (8,676) (5,086) (102,224) --------- --------- ------------ Balance at October 3, 1997.................................. 3,857 $ 25,464 $ (112,084) --------- --------- ------------ --------- --------- ------------
The Company has renewed its collective bargaining agreement with United Electrical Radio, and Machine Workers of America, who represent the Company's hourly workers in Tauton, Massachusetts through June 6, 2000. In August 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the Company was recapitalized (the "Recapitalization"). Pursuant to the Merger Agreement, all shares of the Company's common stock, other than those retained by certain members of management and certain other shareholders ("Continuing Shareholders"), were converted into the right to receive cash based upon a formula. The Continuing Shareholders agreed to retain approximately 15% of the common equity of the Company. In order to finance the transactions contemplated by the Recapitalization, the Company (i) issued $110 million of senior notes in a debt offering; (ii) received $20.0 million in cash from an investor group for Common Stock and (iii) received $18.0 million in cash for the issuance of Redeemable Preferred Stock (the "Transactions"). In addition, the Company entered into a credit facility which provides for revolving credit borrowings of up to $15.0 million. The Company has four wholly owned subsidiaries, consisting of Burke Flooring Products, Inc., Burke Rubber Company, Inc., Burke Custom Processing , Inc., (the "Guarantor Subsidiaries") and Burkeline Construction Company, Inc. (the "Non-Guarantor Subsidiary"). Each of the Guarantor Subsidiarys' guarantees of the Company's $110 million senior notes, is full, unconditional and joint and several. The Company's subsidiaries have no operations or assets and liabilities and therefore no separate financial statements of the Company's subsidiaries are presented. In connection with the above August 1997 transactions, the tax benefit the Company will receive associated with the cost to purchase options issued and outstanding under the Company's stock option plan, in addition to other tax savings associated with the transaction, will be distributed to the Company's continuing and former shareholders when realized by the Company. Accordingly the Company has recognized a liability of approximately $5,882 at October 3, 1997. F-23 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 MARCH 5, 1998 (90 DAYS FROM THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS. OFFER TO EXCHANGE ALL OUTSTANDING 10% SENIOR NOTES DUE 2007 ($110,000,000 PRINCIPAL AMOUNT) FOR 10% SENIOR NOTES DUE 2007. [LOGO] PAYMENT OF PRINCIPAL AND INTEREST UNCONDITIONALLY GUARANTEED BY ITS SUBSIDIARIES --------------------- PROSPECTUS --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE ----- Report of Independent Auditors............................................................................. S-2 Schedule II--Valuation and Qualifying Accounts............................................................. S-3
S-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders Burke Industries, Inc. and Subsidiaries We have audited the consolidated financial statements of Burke Industries, Inc. as of January 3, 1997 and December 29, 1995, and for each of the three years in the period ended January 3, 1997, and have issued our report thereon dated March 7, 1997 except for note 10, as to which the date is August 20, 1997 included elsewhere in this Registration Statement. Our audits also included the financial statement schedule listed in Item 21(b) of this Registration Statement. This Schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP San Jose, California March 7, 1997 S-2 SCHEDULE II VALUATION & QUALIFYING ACCOUNTS BURKE INDUSTRIES, INC. (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BEGINNING OF COSTS AND (A) BALANCE AT DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD - ------------------------------------------------------------ --------------- ------------- ------------- --------------- Allowance for doubtful accounts (deducted from accounts receivable) Year ended January 3, 1997................................ $ 336 $ 225 $ 372 $ 189 Year ended December 29, 1995.............................. 95 367 126 336 Year ended December 30, 1994.............................. 75 100 80 95
- ------------------------ (a) Includes write-offs and reversals S-3 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company is a California corporation. Section 317 of the California Corporations Code authorizes the indemnification by a California corporation of any person who was or is a party or is threatened to be made a party to any proceeding by reason of that person's status as an agent of the corporation; provided that no such indemnification may be provided for any person if he or she shall (i) not have acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation, or (ii) in any criminal proceeding, not have had reasonable cause to believe his or her conduct was not unlawful. In the case of actions brought by or in the right of the corporation, indemnification may only be provided if the person acted in good faith, and in a manner the person believe to be in the best interests of the corporation and its shareholders. Indemnification must be provided to the extent that an agent has been successful, on the merits or otherwise, in defense of an action of the type described in the first and second sentences of this paragraph. The Bylaws of the Company provide that it shall indemnify and hold harmless any person who is or was a director or officer of the Company, or who is or was serving at the request of the Board of Directors of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise (an "Agent"), from and against any expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any "proceeding" (as defined in Section 317(a)) to the fullest extent permitted by applicable law. In the event of such person's death, the right of indemnification under the Bylaws of the Company shall extend to such person's legal representatives. The right of indemnification under the Company's ByLaws is not exclusive of any other rights such person may have whether by law or under any agreement, insurance policy, vote of directors or shareholders, or otherwise. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------------------- 1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.** 2.1 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company Shareholders, JFLEI and MergerCo.** 3.1 Articles of Incorporation of the Company.** 3.2 Bylaws of the Company.** 3.3 Articles of Incorporation of Burke Flooring Products, Inc.** 3.4 Bylaws of Burke Flooring Products, Inc.** 3.5 Articles of Incorporation of Burke Rubber Company, Inc.** 3.6 Bylaws of Burke Rubber Company, Inc.** 3.7 Articles of Incorporation of Burke Custom Processing, Inc.** 3.8 Bylaws of Burke Custom Processing, Inc.** 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Old Notes and the New Notes, dated as of August 20, 1997.** 4.2 Form of Note (included in Exhibit 4.1).** 4.3 Registration Rights Agreement, dated August 20, 1997, between the Company and the Holders.**
II-1
EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------------------- 5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent. 8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange Offer. 10.1 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and NationsBank, N.A.** 10.2 Form of Revolving Note.** 10.3 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.** 10.4 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the Subsidiaries.** 10.5 Stock Pledge Agreement, dated August 20, 1997.** 10.6 Investment Agreement, dated August 20, 1997, between the Company and preferred shareholders.** 10.7 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.** 10.8 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the shareholders. 10.9 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the warrantholders.** 10.10 Form of Warrant Certificate.** 10.11 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman & Company.** 10.12 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for the premises at 2049 Senter Road, San Jose, CA.** 10.13 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensenville, IL.** 10.14 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, CA.** 10.15 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Blvd., Norwalk, CA.** 10.16 Lease Agreement, dated March 29, 1996, between the Company and S&M Development Co., a general partnership for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.** 10.17 Lease Agreement, dated June 5, 1995, between the Company and Stephen S. Gray, the duly appointed Chapter 7 Trustee of the Estate of Haskon Corporation for the premises at 336 Weir Street, Taunton, MA.** 10.18 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.** 10.19 Servicing Agreement, dated April 26, 1996, between the Company and Westland Technologies.** 12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends.** 21.1 Subsidiaries of the Company.** 23.1 Consent of Gibson, Dunn & Crutcher (to be included in Exhibit 5.1) LLP.
II-2
EXHIBIT NO. DESCRIPTION - ------------- ------------------------------------------------------------------------------------------- 23.2 Consent of Ernst & Young LLP. 24.1 Powers of Attorney (see pages II-4 through II-8 of this Registration Statement).** 25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture filed as Exhibits 4.1 and 4.2, on Form T-1. 27.1 Financial Data Schedule.** 99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer. 99.2 Notice of Guaranteed Delivery regarding Old Notes.
- ------------------------ * To be filed by amendment. ** Previously Filed. (b) Financial Statement Schedule The following financial statement schedule is filed with Part II of this Registration Statement:
Schedule Number Description of Schedule - ------------------------------------- ------------------------------------- II Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS. The undersigned registrants hereby undertake with respect to the securities offered by them: 1. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act") may be permitted as to directors, officers and controlling persons of any Registrant pursuant to the provisions described in Item 20 or otherwise, the Registrants have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore unenforceable. In the event a claim for indemnification against such liabilities (other than the payment by any Registrant of expenses incurred or paid by a director, officer or controlling person of such Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, such Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 2. The undersigned Registrants hereby undertake to respond to requests for information that is incorporated by reference into the Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. 3. The undersigned Registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. 4. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any II-3 deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424 (b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; 5. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 6. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 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 5th day of December, 1997. BURKE INDUSTRIES, INC., a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese, CHIEF EXECUTIVE OFFICER AND PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- Director, Chief Executive /s/ ROCCO C. GENOVESE Officer and President - ------------------------------ (Principal Executive December 5, 1997 Rocco C. Genovese Officer) * Vice President--Finance - ------------------------------ (Principal Financial and December 5, 1997 David E. Worthington Accounting Officer) * - ------------------------------ Director December 5, 1997 Reed C. Wolthausen * - ------------------------------ Director December 5, 1997 John F. Lehman * - ------------------------------ Director December 5, 1997 Donald Glickman * - ------------------------------ Director December 5, 1997 George Sawyer * - ------------------------------ Director December 5, 1997 Keith Oster
II-5
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- * - ------------------------------ Director December 5, 1997 Oliver C. Boileau * - ------------------------------ Director December 5, 1997 Thomas G. Pownall * - ------------------------------ Director December 5, 1997 Bruce D. Gorchow *By: /s/ ROCCO C. GENOVESE - ------------------------------ Rocco C. Genovese ATTORNEY-IN-FACT
II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 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 5th day of December, 1997. BURKE FLOORING PRODUCTS, INC., a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese, PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 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 December 5, 1997 Rocco C. Genovese Executive Officer) * Vice President--Finance - ------------------------------ (Principal Financial and December 5, 1997 David E. Worthington Accounting Officer) * - ------------------------------ Director December 5, 1997 Keith Oster *By: /s/ ROCCO C. GENOVESE - ------------------------------ Rocco C. Genovese ATTORNEY-IN-FACT II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 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 5th day of December, 1997. BURKE RUBBER COMPANY, INC., a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese, PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 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 December 5, 1997 Rocco C. Genovese Executive Officer) * Vice President--Finance - ------------------------------ (Principal Financial and December 5, 1997 David E. Worthington Accounting Officer) * - ------------------------------ Director December 5, 1997 Keith Oster *By: /s/ ROCCO C. GENOVESE ------------------------- Rocco C. Genovese, ATTORNEY-IN-FACT II-8 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 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 5th day of December, 1997. BURKE CUSTOM PROCESSING, INC., a California corporation By: /s/ ROCCO C. GENOVESE ----------------------------------------- Rocco C. Genovese, PRESIDENT Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 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 December 5, 1997 Rocco C. Genovese Executive Officer) * Vice President--Finance - ------------------------------ (Principal Financial and December 5, 1997 David E. Worthington Accounting Officer) * - ------------------------------ Director December 5, 1997 Keith Oster *By: /s/ ROCCO C. GENOVESE ------------------------- Rocco C. Genovese, ATTORNEY-IN-FACT II-9 REGISTRATION NO. 333-36675 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BURKE INDUSTRIES, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 1 Purchase Agreement, dated August 14, 1997, between the Company and the Initial Purchaser.** 2.1 Agreement and Plan of Merger, dated as of August 13, 1997, by and among the Company, the Company Shareholders, JFLEI and MergerCo.** 3.1 Articles of Incorporation of the Company.** 3.2 Bylaws of the Company.** 3.3 Articles of Incorporation of Burke Flooring Products, Inc.** 3.4 Bylaws of Burke Flooring Products, Inc.** 3.5 Articles of Incorporation of Burke Rubber Company, Inc.** 3.6 Bylaws of Burke Rubber Company, Inc.** 3.7 Articles of Incorporation of Burke Custom Processing, Inc.** 3.8 Bylaws of Burke Custom Processing, Inc.** 4.1 Indenture among the Company, the Subsidiary Guarantors and United States Trust Company of New York, relating to the Old Notes and the New Notes, dated as of August 20, 1997.** 4.2 Form of Note (included in Exhibit 4.1).** 4.3 Registration Rights Agreement, dated August 20, 1997, between the Company and the Holders.** 5.1 Opinion of Gibson, Dunn & Crutcher LLP, including consent. 8.1 Opinion of Gibson, Dunn & Crutcher LLP with regard to federal income tax consequences of the Exchange Offer. 10.1 Loan and Security Agreement, dated August 20, 1997, between the Company, the Lenders and NationsBank, N.A.** 10.2 Form of Revolving Note.** 10.3 Subsidiary Guaranty, dated August 20, 1997, between the Company and the Subsidiaries.** 10.4 Subsidiary Security Agreement, dated August 20, 1997, between the Company and the Subsidiaries.** 10.5 Stock Pledge Agreement, dated August 20, 1997.** 10.6 Investment Agreement, dated August 20, 1997, between the Company and preferred shareholders.** 10.7 Shareholders' Agreement, dated August 20, 1997, between the Company and the shareholders.** 10.8 Shareholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the shareholders. 10.9 Warrantholders' Registration Rights Agreement, dated August 20, 1997, between the Company and the warrantholders.** 10.10 Form of Warrant Certificate.**
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.11 Management Agreement, dated August 20, 1997, between the Company and J. F. Lehman & Company.** 10.12 Lease Agreement, dated April 30, 1997 between the Company and Senter Properties, LLC for the premises at 2049 Senter Road, San Jose, CA.** 10.13 Lease Agreement, dated May 1, 1996, between the Company and SSMRT Bensenville Industrial Park (3), Inc. for the premises at 870 Thomas Drive, Bensenville, IL.** 10.14 Lease Agreement, dated October 20, 1995, between the Company and Lincoln Property Company for the premises at 13767 Freeway Drive, Santa Fe Springs, CA.** 10.15 Lease Agreement, dated April 25, 1983, between the Company and Donald M. Hypes for the premises at 14910 Carmenita Blvd., Norwalk, CA.** 10.16 Lease Agreement, dated March 29, 1996, between the Company and S&M Development Co., a general partnership for the premises at 13615 Excelsior Drive, Santa Fe Springs, CA.** 10.17 Lease Agreement, dated June 5, 1995, between the Company and Stephen S. Gray, the duly appointed Chapter 7 Trustee of the Estate of Haskon Corporation for the premises at 336 Weir Street, Taunton, MA.** 10.18 Sublease Agreement, dated February 20, 1992, between Burke Rubber Company for the premises at 107 South Riverside Drive, Modesto, CA.** 10.19 Servicing Agreement, dated June 27, 1996, between the Company and Westland Technologies.** 12.1 Statement re: Computation of Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends.** 21.1 Subsidiaries of the Company.** 23.1 Consent of Gibson, Dunn & Crutcher (to be included in Exhibit 5.1) LLP. 23.2 Consent of Ernst & Young LLP. 24.1 Powers of Attorney (see pages II-4 through II-8 of this Registration Statement).** 25.1 Statement of Eligibility of United States Trust Company of New York, as trustee under the Indenture filed as Exhibits 4.1 and 4.2, on Form T-1. 27.1 Financial Data Schedule.** 99.1 Form of Letter of Transmittal to be used in connection with the Notes Exchange Offer. 99.2 Notice of Guaranteed Delivery regarding Old Notes.
- ------------------------ * To be filed by amendment. ** Previously filed. EX-5.1 2 EX-5.1 OPINION OF GIBSON, DUNN & CRUTCHER LLP [LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP) December 5, 1997 (213) 229-7000 C 46196-00002 Burke Industries, Inc. 2250 South Tenth Street San Jose, California 95112 Re: BURKE INDUSTRIES, INC. -- REGISTRATION STATEMENT ON FORM S-4 (REG. NO. 333-36675) Ladies and Gentlemen: We have acted as special counsel for Burke Industries, Inc., a California corporation (the "Company"), in connection with the registration by the Company of up to $110,000,000 aggregate principal amount of the Company's 10% Senior Subordinated Notes due 2007 (the "New Notes") on Form S-4 Registration Statement No. 333-36675 (the "Registration Statement") under the Securities Act of 1933, as amended. The New Notes will be offered in exchange for a like principal amount of the Company's 10% Senior Subordinated Notes due 2007 (the "Old Notes") pursuant to that certain Registration Rights Agreement, dated as of August 20, 1997, by and among the Company, three of the Company's subsidiaries, Burke Flooring Products, Inc., a California corporation, Burke Custom Processing, Inc., a California corporation, and Burke Rubber Company, Inc., a California corporation (the "Subsidiary Guarantors"), and NationsBanc Capital Markets, Inc. (the "Registration Rights Agreement"). The Registration Rights Agreement was executed in connection with the private placement of the Old Notes. We have also acted as special counsel for the Subsidiary Guarantors in connection with the registration of the guarantees of the New Notes by the Subsidiary Guarantors under the Registration Statement (the "Guarantees"). Burke Industries, Inc. December 5, 1997 Page 2 The New Notes will be issued pursuant to that certain Indenture dated as of August 20, 1997, by and among the Company, the Subsidiary Guarantors, and United States Trust Company of New York, N.A., as Trustee (the "Indenture"). We are familiar with the actions taken and to be taken by the Company and the Subsidiary Guarantors in connection with the offering of the New Notes and the issuance of the Guarantees. On the basis of such knowledge and such investigation as we have deemed necessary, we are of the opinion that: (i) the New Notes have been duly authorized by the Company and, when issued in exchange for the Old Notes pursuant to the terms of the exchange offer described in the Registration Statement and the Indenture, will be validly issued and will constitute legal and binding obligations of the Company; and (ii) the Guarantees have been duly authorized by the Subsidiary Guarantors and, when issued along with the New Notes in accordance with the terms of the Indenture, will be validly issued and will constitute the legal and binding obligations of the Subsidiary Guarantors. Our opinions are subject to limitations imposed by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including, without limitation the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers or (ii) general principles of equity, whether considered at law or at equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing. We hereby consent to the filing of this opinion as an exhibit to Registration Statement No. 333-36675 and to the reference to this firm under the heading "Legal Matters" contained in the prospectus that forms a part of the Registration Statement. Very truly yours, GIBSON, DUNN & CRUTCHER LLP EX-8.1 3 EX-8.1 OPINION OF GIBSON, DUNN & CRUTCHER LLP TAX EXHIBIT 8.1 [LETTERHEAD OF GIBSON, DUNN & CRUTCHER LLP] December 5, 1997 (213) 229-7000 C 46196-00002 Burke Industries, Inc. 2250 South Tenth Street San Jose, California 95112 RE: EXCHANGE OF 10% SENIOR SUBORDINATED NOTES DUE 2007 Gentlemen: We have acted as special counsel to Burke Industries, Inc., a California corporation (the "Company"), in connection with the issuance by the Company of $110 million principal amount of 10% Senior Notes Due 2007 (the "Exchange Notes") issued in exchange for $110 million principal amount of the Company's 10% Senior Notes due 2007 (the "Old Notes"). The terms of the Old Notes and the Exchange Notes are described in the Prospectus dated December 5, 1997 (the "Prospectus") and the operative documents described therein. This opinion is based on the accuracy of the facts described and the representations made in the Prospectus. We have made such legal and factual examinations and inquiries as we have deemed necessary or appropriate for purposes of this opinion. We are opining herein as to the effect on the subject transaction only of the federal income tax laws of the United States, and we express no opinion with respect to the applicability thereto, or the effect thereon, of other federal laws, the laws of any other jurisdiction or as to any matters of municipal law or the laws of any other local agencies within any state. Based on the foregoing, we hereby confirm our opinion in the Prospectus described under the caption "Federal Income Tax Consequences." This opinion is based on various statutory provisions, regulations promulgated thereunder and interpretations thereof by the Internal Revenue Service and the courts having jurisdiction over such matters, all of which are subject to change either prospectively or retroactively. Any variation or difference in the facts from those set forth in the Prospectus or the operative documents described therein may affect the conclusions stated herein. We hereby consent to the use of our name and our opinion under the caption "Federal Income Tax Consequences" in the Prospectus. Very truly yours, GIBSON, DUNN & CRUTCHER LLP HB/clt EX-10.8 4 EX-10.8 SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT, dated as of August 20, 1997 (this "Agreement"), by and among BURKE INDUSTRIES, INC., a California corporation ("Company"), and the Persons listed on the signature pages hereto (the "Shareholders"). WHEREAS, the Board of Directors of Burke has effected a recapitalization of Burke pursuant to which, among other things, JFL Merger Co., a wholly owned subsidiary of J.F. Lehman Equity Investors I, L.P. ("MergerCo") has merged with and into Burke, with Burke surviving such merger (the "Merger"), pursuant to which Burke assumed the liabilities and obligations of MergerCo; WHEREAS, the Board of Directors has determined that it is in the best interests of the Company and the Shareholders that, in connection with the Merger, the Company provide the registration rights set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. DEFINITIONS. Unless otherwise defined herein, the following terms shall have the following meanings below: "COMMON STOCK" shall mean the common stock of the Company, no par value, upon consummation of the Merger. "OTHER HOLDERS" shall mean Persons who are holders of record of equity securities of the Company who have valid contractual registration rights under the Warrantholders Registration Rights Agreement entered into among certain holders of warrants to purchase Common Stock of the Company and the Company. "PERSON" shall mean an individual, corporation, unincorporated association, partnership, group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934), trust, joint stock company, joint venture, business trust or unincorporated organization, any governmental entity or any other entity of whatever nature. "REGISTRABLE SHARES" shall mean any shares of Common Stock which may be (i) held from time to time by the Shareholders or (ii) issued or distributed in respect of the Common Stock referred to in clause (i) above by way of stock dividend or stock split or other distribution, recapitalization or reclassification. As to any particular Registrable Share, such Registrable Share shall cease to be a Registrable Share when (i) it shall have been sold, transferred or otherwise disposed of or exchanged pursuant to a registration statement under the Securities Act or (ii) it shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act. 2. INCIDENTAL REGISTRATIONS. (a) RIGHT TO INCLUDE REGISTRABLE SHARES. After the completion of the initial public offering by the Company of its Common Stock, each time the Company shall determine to file a registration statement under the Securities Act in connection with the proposed offer and sale for cash of Common Stock (other than debt securities which are convertible into Common Stock and other than registration statements on Form S-4 or S-8) either by it or by any holders of its outstanding equity securities, the Company shall give prompt written notice of its determination to each Holder and of such Holder's rights under this Section 2, at least 20 days prior to the anticipated filing date of such registration statement. Upon the written request of each Holder made within 15 days after the receipt of any such notice from the Company, (which request shall specify the Registrable Shares intended to be disposed of by such Holder), the Company shall use its best efforts to effect the registration under the Securities Act of all Registrable Shares which the Company has been so requested to register by the Holders thereof, to the extent required to permit the disposition of the Registrable Shares so to be registered; PROVIDED, HOWEVER, that (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to proceed with the proposed registration of the securities to be sold by it, the Company may, at its election, give written notice of such determination to each Holder of Registrable Shares and thereupon shall be relieved of its obligation to register any Registrable Shares in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith) and (ii) if such registration involves an underwritten offering, all Holders of Registrable Shares requesting to be included in the Company's registration must sell their Registrable Shares to the underwriters on the same terms and conditions as apply to the Company, with such differences, including any with respect to indemnification, as may be customary or appropriate in combined primary and secondary offerings (provided that no Holder shall be required to provide indemnification which is more expansive than the indemnification provided in Section 9(b) hereof and provided, further, that the representations and warranties provided by any Holder shall be limited to such matters as the authority of such Holder to sell its Registrable Shares, its title thereto and the absence of liens thereon). If a registration requested pursuant to this Section 2(a) involves an underwritten public offering, any Holder of Registrable Shares requesting to be included in such registration may elect in writing prior to the effective date of the registration statement filed in connection with such registration, not to register such securities in connection with such registration. No registration effected under this Section 2 shall relieve the Company of its obligations to effect one registration upon request under Section 4 hereof. (b) PRIORITY IN INCIDENTAL REGISTRATIONS. If a registration pursuant to this Section 2 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities which the Company, the Holders and any other Persons intend to include in such registration exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price at which such securities can be sold), then the Company shall include in such registration: (i) FIRST, 100% of the securities the Company proposes to sell for its own account; and (ii) SECOND, such number of Registrable Shares which the Holders have requested 2 to be included in such registration and such number of securities which Other Holders have requested to be included in such registration which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number of Registrable Shares and securities of Other Holders to be included on a pro rata basis among all requesting Holders and Other Holders on the basis of the relative number of shares of Common Stock beneficially owned (as such term is used in Rule 13d-3 of the Exchange Act) by such Holders and Other Holders, PROVIDED that if the number of Registrable Shares requested to be included in such registration by the Other Holders pursuant to Section 2(a) of the Warrantholders Registration Rights Agreement and permitted to be included in such registration by the Other Holders pursuant to Section 2(b) of the Warrantholders Registration Rights Agreement exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be included in such registration by the Other Holders shall be allocated pro rata among such Other Holders on the basis set forth in Section 2(b) of the Warrantholders Registration Rights Agreement and, in such event, the Holders shall have no right to register shares pursuant to this Agreement; and (iii) THIRD, to the extent that the number of securities which are to be included in such registration pursuant to clauses (i) and (ii), in the aggregate, is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred to above, such number of other securities requested to be included in the offering for the account of any other Persons which, in the opinion of such managing underwriter, can be sold without having the adverse effect referred to above, such number to be allocated pro rata among all holders of such other securities on the basis of the relative number of such other securities each other person has requested to be included in such registration. 3. HOLDBACK AGREEMENTS. If any registration of Registrable Shares shall be effected in connection with an underwritten public offering, the Holders agree not to effect any public sale or distribution without the consent of the managing underwriter (except in connection with such public offering), of any equity securities of the Company, or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering), during the 180- day period (or such lesser period as the managing underwriter may permit) beginning on the effective date of such registration, if, and to the extent, the managing underwriter of any such offering determines such action is necessary or desirable to effect such offering and if and to the extent that each director and executive officer of the Company so agrees; PROVIDED, HOWEVER, that each Holder has received the written notice required by Section 2(a) hereof. 4. REGISTRATION ON DEMAND. (a) DEMAND BY HOLDERS. At any time on or after the later of (i) August 20, 2000 and (ii) the one hundred and eighty-first (181st) day after completion of the initial public offering by the Company of its Common Stock, upon the written request by Holders of at least 66-2/3% of all Registrable Shares, that the Company effect the registration under the Securities Act of all or part of the Registrable Shares of such requesting party, and specifying the amount and intended method of disposition thereof, the Company shall promptly give notice of such requested registration to all other Holders and, as expeditiously as possible, use its best efforts to effect the registration under the Securities Act of: (i) the Registrable Shares which the 3 Company has been so requested to register; and (ii) all other Registrable Shares which the Company has been requested to register by any other Holder by written request received by the Company within 15 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registrable Shares); PROVIDED, HOWEVER, that the Company shall not be required to effect such registration unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000; and PROVIDED, FURTHER, HOWEVER, that the Company shall not be required to effect more than one registration pursuant to this Section 4(a) unless (X) all of the Registrable Shares that the Holders initially requesting registration pursuant to this Section 4(a) requested to be registered are not included in such registration statement or (Y) the Company is eligible to file on Form S-3, in which case the Holders shall be entitled to request an unlimited number of registrations pursuant to this Section 4(a) except that the Company shall not be required to effect such registration pursuant to this clause (Y) unless the Registrable Shares requested to be so registered have an aggregate proposed offering price of not less than $5,000,000 and no other registration statement on Form S-3 has been filed by the Company and been declared effective within the previous twelve months. Promptly after the expiration of the 15-day period referred to in clause (ii) above, the Company shall notify all Holders to be included in the registration of the other Holders participating in such registration and the number of Registrable Shares requested to be included therein. The Holders initially requesting a registration pursuant to this Section 4(a) may, at any time prior to the effective date of the registration statement relating to such registration, revoke such request by providing a written notice to the Company revoking such request; PROVIDED, HOWEVER, that if such revocation occurs after the date of the filing of such registration statement, then the Registration Expenses incurred by the Company in connection with the revoked request shall be payable by the Holders participating in such demand registration. (b) EFFECTIVE REGISTRATION STATEMENT. A registration requested pursuant to this Section 4 shall not be deemed to have been effected unless it has become effective under the Securities Act and has remained effective for 180 days or such shorter period as all the Registrable Shares included in such registration have actually been sold thereunder. (c) PRIORITY IN DEMAND REGISTRATIONS. If a demand registration pursuant to this Section 4 involves an underwritten offering and the managing underwriter in good faith advises the Company in writing that, in its opinion, the number of securities requested to be included in such registration (including securities of the Company which are not Registrable Shares) exceeds the largest number of securities which can be sold in such offering without having an adverse effect on such offering (including the price, acceptable to the Holders requesting such registration, at which such securities can be sold), then the Company will include in such registration (i) FIRST, 100% of the Registrable Shares requested to be registered pursuant to Section 4(a) (provided that if the number of Registrable Shares requested to be registered pursuant to Section 4(a) exceeds the number which the Company has been advised can be sold in such offering without having the adverse effect referred to above, the number of such Registrable Shares to be included in such registration by the Holders shall be allocated pro rata among such Holders on the basis of the relative number of Registrable Shares each Holder has requested to be included in such registration); and (ii) SECOND, to the extent that the number of Registrable Shares requested to be registered pursuant to Section 4(a) is less than the number of securities which the Company has been advised can be sold in such offering without having the adverse effect referred 4 to above, such number of shares of equity securities that, FIRST, the Company and, SECOND, Other Holders may request to be included in such registration. 5. REGISTRATION PROCEDURES. (a) If and whenever the Company is required by the provisions of Sections 2 or 4 hereof to use its best efforts to effect or cause the registration of Registrable Shares, the Company shall as expeditiously as possible: (i) prepare and, in any event within 60 days after the end of the period within which a request for registration may be given to the Company, file with the Securities and Exchange Commission (the "SEC") a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective; (ii) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period not in excess of 90 days and to comply with the provisions of the Securities Act, the Exchange Act, and the rules and regulations promulgated thereunder with respect to the disposition of all the securities covered by such registration statement during such period in accordance with the intended methods of disposition by the Holders thereof set forth in such registration statement; PROVIDED, that the Company shall notify each Holder of Registrable Shares covered by such registration statement of any stop order issued or threatened by the SEC, any other order suspending the use of any preliminary prospectus or of the suspension of the qualification of the registration statement for offering or sale in any jurisdiction, and take all reasonable actions required to prevent the entry of such stop order, other order or suspension or to remove it if entered; (iii) furnish to each Holder and each underwriter, if applicable, of Registrable Shares covered by such registration statement such number of copies of the registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and summary prospectus), in conformity with the requirements of the Securities Act, and such other documents as each Holder of Registrable Shares covered by such registration statement may reasonably request in order to facilitate the disposition of the Registrable Shares owned by such Holder; (iv) use its best efforts to register or qualify such Registrable Shares covered by such registration statement under the state securities or blue sky laws of such jurisdictions as each Holder of Registrable Shares covered by such registration statement and, if applicable, each underwriter, may reasonably request, and do any and all other acts and things which may be reasonably necessary to consummate the disposition in such jurisdictions of the Registrable Shares owned by such Holder; PROVIDED, HOWEVER, that in connection therewith, the Company shall not be required to (A) qualify as a foreign corporation to do business or to register as a broker or dealer in any such jurisdiction where it would not otherwise be required to qualify 5 or register but for this clause (iv), (B) subject itself to taxation in any jurisdiction or (C) file a general consent to service of process in any such jurisdiction. (v) use its best efforts to cause such Registrable Shares covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the Holders thereof to consummate the disposition of such Registrable Shares; (vi) if at any time when a prospectus relating to the Registrable Shares is required to be delivered under the Securities Act any event shall have occurred as the result of which any such prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, immediately give written notice thereof to each Holder and the managing underwriter, if any, of such Registrable Shares and prepare and furnish to each such Holder a reasonable number of copies of an amended or supplemental prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (vii) use its best efforts to cause such Registrable Shares to be accepted for listing or quotation on any securities exchange or automated quotation system on which similar securities of the Company are then listed, and enter into customary agreements including a listing application and indemnification agreement in customary form, provided that the applicable listing requirements are satisfied, and provide a transfer agent and registrar for such Registrable Shares covered by such registration statement not later than the effective date of such registration statement; (viii) enter into such customary agreements (including an underwriting agreement in customary form) and take such other actions as each Holder of Registrable Shares being sold or the underwriter, if any, reasonably requests in order to expedite or facilitate the disposition of such Registrable Shares, including customary indemnification and opinions; (ix) to the extent reasonably requested by the Holders of at least 51% of the Registrable Shares being sold, or the underwriters, if any, use its best efforts to obtain a "cold comfort" letter or letters from the Company's independent public accountants in customary form and covering matters of the type customarily covered by "cold comfort" letters; (x) make available, at the Company's expense, for inspection by representatives of any Holder of Registrable Shares covered by such registration statement, by any underwriter participating in any disposition to be effected pursuant to such registration statement and by any attorney, accountant or other agent retained by such Holders or any such underwriter (collectively, the "HOLDER REPRESENTATIVES"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (excluding any such records and documents as are protected by attorney-client privilege or which the Company is prohibited from disclosing pursuant to the terms of any nondisclosure agreements to which the 6 Company or any of its subsidiaries is a party; PROVIDED that, to the extent permitted under any such nondisclosure agreement, the Company shall disclose any information subject to such nondisclosure agreement upon execution and delivery by such Holder or Holder Representative of a confidentiality agreement for the benefit of the parties to such nondisclosure agreement); (xi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable after the effective date of the registration statement, an earnings statement which shall satisfy the provisions of Section 11(a) of the Securities Act and the rules and regulations promulgated thereunder; and (xii) notify counsel for the Holders of Registrable Shares included in such registration statement and the managing underwriter, if any, immediately, and confirm the notice in writing, (A) when the registration statement, or any post-effective amendment to the registration statement, shall have become effective, or any supplement to the prospectus or any amendment prospectus shall have been filed and (B) of any request of the SEC to amend the registration statement or amend or supplement the prospectus or for additional information. (b) Each Holder of Registrable Shares hereby agrees that, upon receipt of any notice from the Company of the happening of any event of the type described in Section 5(a)(vi) hereof, such Holder shall forthwith discontinue disposition of such Registrable Shares covered by such registration statement or related prospectus until such Holder's receipt of the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. In the event the Company shall give any such notice, the period mentioned in Section 5(a)(ii) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(a)(vi) hereof and including the date when such Holder shall have received the copies of the supplemental or amended prospectus contemplated by Section 5(a)(vi) hereof. If for any other reason the effectiveness of any registration statement filed pursuant to Section 4 hereof is suspended or interrupted prior to the expiration of the time period regarding the maintenance of the effectiveness of such Registration Statement required by Section 5(a)(ii) hereof so that Registrable Shares may not be sold pursuant thereto, the applicable time period shall be extended by the number of days equal to the number of days during the period beginning with the date of such suspension or interruption to and ending with the date when the sale of Registrable Shares pursuant to such registration statement may be recommenced. (c) Each Holder hereby agrees to provide the Company, upon receipt of its request, with such information about such Holder to enable the Company to comply with the requirements of the Securities Act and to execute such certificates as the Company may reasonably request in connection with such information and otherwise to satisfy any requirements of law. Each Holder further agrees to furnish to the Company in writing such information regarding the Holder and his, her or its proposed distribution of Registrable Shares as the Company may from time to time reasonably request. 6. UNDERWRITTEN REGISTRATIONS. Subject to the provisions of Sections 2, 3 and 4 hereof, any of the Registrable Shares covered by a registration statement may be sold in an 7 underwritten offering at the discretion of the Holder thereof. In the case of an underwritten offering pursuant to Section 2 hereof, the managing underwriter or underwriters that will administer the offering shall be selected by the Company, PROVIDED that such managing underwriter or underwriters is reasonably satisfactory to the Holders of a majority of the Registrable Shares to be registered. In the case of any underwritten offering pursuant to Section 4 hereof, the managing underwriter or underwriters that will administer the offering shall be selected by the Holders of a majority of the Registrable Shares to be registered, PROVIDED that such underwriters are reasonably satisfactory to the Company. 7. SUSPENSION OF REGISTRATION REQUIREMENT. (a) Notwithstanding anything to the contrary set forth in this Agreement, the Company's obligation to use its best efforts to cause a registration statement and any filings with any state securities authorities to become effective or to amend or supplement any such registration statement or filings shall be suspended during such period as circumstances exist (including, without limitation, pending negotiations relating to, or the consummation of, any transaction) which (i) would require additional disclosure of material information by the Company in such registration statement or filing which the Company has a bona fide business purpose for not disclosing in such registration statement or (ii) render the Company unable to comply with SEC requirements (any such circumstances hereinafter referred to as a "Suspension Event"); PROVIDED that any suspension as a result of a Suspension Event shall occur on not more than one occasion during any 365-day period and shall continue only for so long as such event or its effect is continuing and in no event shall any such suspension continue for more than 120 days. To the extent that any such suspension occurs during a period in which a registration statement has been filed pursuant hereto and remains effective, the time during which the Company shall be required to maintain the effectiveness of such registration statement shall be extended for the number of days during which such suspension continued. (b) Notwithstanding anything to the contrary set forth in this Agreement, the Company shall not be required to cause a registration statement requested pursuant to Section 4(a) to become effective during the period beginning 30 days prior to the Company's good faith estimate of the date of filing of, and ending 180 days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective. (c) The Company shall give the holders written notice immediately upon the occurrence of any Suspension Event instructing such holders to suspend sales of Registrable Shares as a result of such Suspension Event. The Holders agree that after receipt of such notice they will not effect any sales of Registrable Shares pursuant to any registration statement filed pursuant to this Agreement until such time as such Holders shall have received further notice from the Company that such sales may be recommenced, which notice shall be given by the Company not later than five days after the conclusion of any such Suspension Event. 8. EXPENSES. 8 (a) The fees, costs and expenses of all registrations in accordance with Sections 2 and 4 hereof shall be borne by the Company, subject to the provisions of Section 8(b) hereof. (b) The fees, costs and expenses of registration to be borne as provided in Section 8(a) hereof shall include, without limitation, all expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all SEC and stock exchange or NASD registration and filing fees and expenses, fees and expenses of compliance with securities or blue sky laws (including without limitation reasonable fees and disbursements of counsel for the underwriters, if any, or for the selling Holders in connection with blue sky qualifications of the Registrable Shares), rating agency fees, printing expenses (including expenses of printing certificates for Registrable Shares and prospectuses), the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange or automated quotation system on which similar securities issued by the Company are then listed, and fees and disbursements of counsel for the Company and all independent certified public accountants (including the expenses of any annual audit, special audit and "cold comfort" letters required by or incident to such performance and compliance) (but in any event not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Shares by such Holders) (collectively, "Registration Expenses"). 9. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. In the event of any registration of any securities of the Company under the Securities Act pursuant to Sections 2 or 4 hereof, the Company shall, and it hereby does, indemnify and hold harmless, to the extent permitted by law, each of the Holders of any Registrable Shares covered by such registration statement, each affiliate of such Holder and their respective directors and officers (and the directors, officers, affiliates and controlling Persons thereof), each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such Holder or any such underwriter within the meaning of the Securities Act (collectively, the "Indemnified Parties"), against any and all losses, claims, damages or liabilities, joint or several, and expenses (including any amounts paid in any settlement effected with the Company's consent, which consent shall not be unreasonably withheld and including any expenses paid in connection with the enforcement of the indemnification rights contained herein) to which any Indemnified Party may become subject under the Securities Act, state securities or blue sky laws, common law, any other applicable law, foreign or domestic, or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof, whether or not such Indemnified Party is a party thereto) or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary, final or summary prospectus contained therein, or any amendment or supplement thereto, (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (iii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action required of or inaction by the Company in connection with any such registration, and the Company shall reimburse such Indemnified Party for any legal or any other expenses reasonably incurred by it in connection with 9 investigating or defending any such loss, claim, liability, action or proceeding; PROVIDED that the Company shall not be liable to any Indemnified Party in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement or amendment or supplement thereto or in any such preliminary, final or summary prospectus in reliance upon and in conformity with written information with respect to such Holder furnished to the Company by such Holder specifically for use therein. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Holder or any Indemnified Party and shall survive the transfer of such securities by such Holder. (b) INDEMNIFICATION BY THE HOLDERS AND UNDERWRITERS. The Company may require, as a condition to including any Registrable Shares in any registration statement filed in accordance with Sections 2 or 4 hereof, that the Company shall have received an undertaking reasonably satisfactory to it from the Holders of such Registrable Shares or any underwriter to, severally and not jointly, indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 9(a) hereof) the Company with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary, final or summary prospectus contained therein, or any amendment or supplement, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information with respect to such Holder or such underwriter furnished to the Company by such Holder or such underwriter specifically for use in such registration statement, preliminary, final or summary prospectus or amendment or supplement, or a document incorporated by reference into any of the foregoing; PROVIDED that no such Holder shall be liable for any indemnity claims in excess of the amount of net proceeds received by such Holder from the sale of Registrable Shares. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Company or any of the Holders, or any of their respective affiliates, directors, officers or controlling Persons, and shall survive the transfer of such securities by such Holder. (c) NOTICES OF CLAIMS, ETC. Promptly after receipt by an indemnified party hereunder of written notice of the commencement of any action or proceeding with respect to which a claim for indemnification may be made pursuant to this Section 9, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; PROVIDED that the failure of the indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 9, except to the extent that the indemnifying party is actually materially prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; PROVIDED that the indemnified party shall have the right to employ counsel to represent the indemnified party and its respective controlling persons, directors, officers, general or limited partners, employees or agents who may be subject to liability arising out of any 10 claim in respect of which indemnity may be sought by the indemnified party against such indemnifying party under this Section 9 PROVIDED that the employment of such counsel shall be at the expense of the indemnified party, unless (i) the indemnifying party shall have agreed in writing to pay the expenses of such counsel, (ii) the indemnifying party shall not have promptly employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action or counsel or (iii) any indemnified party shall have reasonably concluded that there may be defenses available to such indemnified party or its respective controlling persons, directors, officers, employees or agents which are in conflict with or in addition to those available to the indemnifying party, and in that event the reasonable fees and expenses of one firm of separate counsel for the indemnified party (in addition to the reasonable fees and expenses of one firm serving as local counsel) shall be paid by the indemnifying party. No indemnifying party shall consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) CONTRIBUTION. If the indemnification provided for in this Section 9 shall for any reason be unavailable to any indemnified party under Section 9(a) or 9(b) hereof or is insufficient to hold it harmless in respect of any loss, claim, damage or liability, or any action in respect thereof referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the indemnified party and indemnifying party or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the indemnified party and indemnifying party with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. Notwithstanding any other provision of this Section 9(d), no Holder of Registrable Shares shall be required to contribute an amount greater than the dollar amount of the proceeds received by such Holder with respect to the sale of any such Registrable Shares. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (e) OTHER INDEMNIFICATION. Indemnification and contribution similar to that specified in the preceding subdivisions of this Section 9 (with appropriate modifications) shall be given by the Company and each Holder of Registrable Shares with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. (f) NON-EXCLUSIVITY. The obligations of the parties under this Section 9 shall be in addition to any liability which any party may otherwise have to any other party. 10. ASSIGNABILITY. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the parties hereto other than the Company shall also be for 11 the benefit of and enforceable by any subsequent Holder of any Registrable Shares, subject to the provisions contained herein. The Company may not assign any of its rights or delegate any of its duties under this Agreement without the written consent of the Holders of 66K% of the Registrable Shares. 11. NOTICES. Any and all notices, designations, consents, offers, acceptances or any other communications shall be given in writing by either (a) personal delivery to and receipted for by the addressee or by (b) telecopy or registered or certified mail which shall be addressed, in the case of the Company, to 2250 South Tenth Street, San Jose, California 95112, facsimile (408) 995-5163, attention of Chief Executive Officer, with a copy to J.F. Lehman Equity Investors I, L.P., 450 Park Avenue, New York, New York 10022, facsimile (212) 634-1155, attention of Mr. Donald Glickman, and in the case of Holders, to the address or addresses thereof appearing on the books of the Company or of the transfer agent and registrar for the Registrable Shares. All such notices and communications shall be deemed to have been duly given and effective: when delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; and when receipt acknowledged, if telecopied. 12. ARBITRATION. Any controversy, dispute or claim arising out of, in connection with or in relation to the interpretation, performance or breach of this Agreement shall be determined, at the request of any party, by arbitration in a city mutually agreeable to the parties to such controversy, dispute or claim, or, failing such agreement, in New York, New York, before and in accordance with the then-existing Rules for Commercial Arbitration of the American Arbitration Association, and any judgment or award rendered by the arbitrator will be final, binding and unappealable and judgment may be entered by any state or Federal court having jurisdiction thereof. The pre-trial discovery procedures of the Federal Rules of Civil Procedure shall apply to any arbitration under this Section 12. Any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 12 shall be determined by the arbitrator. The arbitrator shall be a retired or former United States District Judge or other person acceptable to each of the parties, provided such individual has substantial professional experience with regard to corporate or partnership legal matters. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. 13. SEVERABILITY. If any provision of this Agreement or any portion thereof is finally determined to be unlawful or unenforceable, such provision or portion thereof shall be deemed to be severed from this Agreement. Every other provision, and any portion of such an invalidated provision that is not invalidated by such a determination, shall remain in full force and effect. 14. AMENDMENTS, WAIVERS. This Agreement may not be amended, modified or supplemented and no waivers of or consents to departures from the provisions hereof may be given unless consented to in writing by the Company and the Holders of at least 66 2/3% of the Registrable Shares. 12 15. ATTORNEYS' FEES. In any action or proceeding brought to enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the successful party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 16. ENTIRE AGREEMENT. This Agreement contains the entire agreement among the parties hereto with respect to the transactions contemplated herein and understandings among the parties relating to the subject matter hereof. Any and all previous agreements and understandings between or among the parties hereto regarding the subject matter hereof are, whether written or oral, superseded by this Agreement. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. 18. CAPTIONS. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. 19. LIMITATION OF LIABILITY OF SHAREHOLDERS AND OFFICERS OF COMPANY. ANY OBLIGATION OR LIABILITY WHATSOEVER OF THE COMPANY WHICH MAY ARISE AT ANY TIME UNDER THIS AGREEMENT OR ANY OBLIGATION OR LIABILITY WHICH MAY BE INCURRED BY IT PURSUANT TO ANY INSTRUMENT, TRANSACTION OR UNDERTAKING CONTEMPLATED HEREBY SHALL BE SATISFIED OUT OF THE COMPANY'S ASSETS ONLY. NO SUCH OBLIGATION OR LIABILITY SHALL BE PERSONALLY BINDING UPON, NOR SHALL RESORT FOR THE ENFORCEMENT THEREOF BE HAD TO, THE PROPERTY OF ANY OF THE COMPANY'S SHAREHOLDERS (SOLELY AS A RESULT OF THEIR STATUS AS SHAREHOLDERS), DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, REGARDLESS OF WHETHER SUCH OBLIGATION OR LIABILITY IS IN THE NATURE OF CONTRACT, TORT OR OTHERWISE. NOTWITHSTANDING THE FOREGOING, THIS SECTION 19 13 SHALL NOT IN ANY WAY AFFECT OR LIMIT ANY RIGHTS OR OBLIGATIONS OF THE COMPANY OR ANY HOLDER UNDER THIS AGREEMENT. 20. GOVERNING LAW. This Agreement is made pursuant to and shall be construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective authorized officers as of the date aforesaid. BURKE INDUSTRIES, INC. By: /s/ DONALD GLICKMAN ------------------------ Name: Donald Glickman Title: Assistant Vice President THE SHAREHOLDERS: /s/ TIMOTHY E. HOWARD -------------------------- Timothy E. Howard /s/ DANIEL P. FLAMEN -------------------------- Daniel P. Flamen /s/ ROCCO C. GENOVESE -------------------------- Rocco C. Genovese /s/ REED C. WOLTHAUSEN -------------------------- Reed C. Wolthausen /s/ ROBERT F. PITMAN -------------------------- Robert F. Pitman /s/ DAVID E. WORTHINGTON -------------------------- David E. Worthington /s/ ANNE G. HOWE -------------------------- Anne G. Howe 14 /s/ ROBERT G. ENGLE -------------------------- Robert G. Engle /s/ CRAIG A. CARNES -------------------------- Craig A. Carnes /s/ ROBERT P. HARRISON -------------------------- Robert P. Harrison /s/ HISHAM ALAMEDDINE -------------------------- Hisham Alameddine /s/ RONALD A. STIEBEN -------------------------- Ronald A. Stieben 15 EX-23.2 5 EX-23.2 CONSENT OF ERNST & YOUNG EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts," "Summary Historical Consolidated Financial Data," and "Selected Historical Consolidated Financial Data" and to the use of our reports dated March 7, 1997, except for note 10, as to which the date is August 20, 1997, in Amendment No. 2 to the Registration Statement (Form S-4 No. 333-36675) and related Prospectus of Burke Industries, Inc. for the registration of $110,000,000 aggregate principal amount of its 10% Senior Notes due 2007. /S/ ERNST & YOUNG LLP
San Jose, California December 3, 1997 EX-25.1 6 EX-25.1 FORM T-1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE --------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ______ --------------------- UNITED STATES TRUST COMPANY OF NEW YORK (Exact name of trustee as specified in its charter) NEW YORK 13-3818954 (Jurisdiction of incorporation (I.R.S. Employer if not a U.S. national bank) Identification No.) 114 WEST 47TH STREET NEW YORK, NEW YORK 10036-1532 (Address of principal (Zip Code) executive offices) NONE (Name, address and telephone number of agent for service) --------------------- BURKE INDUSTRIES, INC. (Exact name of obligor as specified in its charter) CALIFORNIA 94-3081144 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2250 SOUTH TENTH STREET SAN JOSE, CALIFORNIA 95112 (Address of principal executive offices) (Zip Code) 10% SENIOR NOTE DUE 2007 (Title of the Indenture securities) GENERAL 1. General Information Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of New York (2nd District), New York, New York (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Washington, D.C. New York State Banking Department, Albany, New York (b) Whether it is authorized to exercise corporate trust powers. The trustee is authorized to exercise corporate trust powers. 2. Affiliations with the Obligor If the obligor is an affiliate of the trustee, describe each such affiliation. None 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15: The obligor is currently not in default under any of its outstanding securities for which United States Trusts Company of New York is Trustee. Accordingly, responses to Items, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required under General Instruction B. 16. List of Exhibits T-1.1 - Organization Certificate, as amended, issued by the State of New York Banking Department to transact business as a Trust Company, is incorporated by reference to Exhibit T-1.1 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.2 - Included in Exhibit T-1.1. T.1.3 - Included in Exhibit T-1.1. T-1.4 - The By-Laws of United States Trust Company of New York, as amended, is incorporated by reference to Exhibit T-1.4 to Form T-1 filed on September 15, 1995 with the Commission pursuant to the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990 (Registration No. 33-97056). T-1.6 - The consent of the trustee required by Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990. T-1.7 - A copy of the latest report of condition of the trustee pursuant to law or the requirements of its supervising or examining authority. NOTE As of December 4, 1997, the trustee had 2,999,020 shares of Common Stock outstanding, all of which are owned by its parent company, U.S. Trust Corporation. The term "trustee" in Item 2, refers to each of United States Trust Company of New York and its parent company, U.S. Trust Corporation. In answering Item 2 in this statement of eligibility as to matters peculiarly within the knowledge of the obligor or its directors, the trustee has relied upon information furnished to it by the obligor and will rely on information to be furnished by the obligor and the trustee disclaims responsibility for the accuracy or completeness of such information. --------------------- Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, United States Trust Company of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 4th day of December 1997. UNITED STATES TRUST COMPANY OF NEW YORK, Trustee By: ------------------------- Louis P. Young Vice President 2 The consent of the trustee required by Section 321(b) of the Act. United States Trust Company of New York 114 West 47th Street New York, NY 10036 December 4, 1997 Securities and Exchange Commission 450 5th Street, N.W. Washington, DC 20549 Gentlemen: Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, and subject to the limitations set forth therein, United States Trust Company of New York ("U.S. Trust") hereby consents that reports of examinations of U.S. Trust by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. Very truly yours, UNITED STATES TRUST COMPANY OF NEW YORK By: ------------------------------- /S/Gerard F. Ganey Senior Vice President EXHIBIT T-1.7 UNITED STATES TRUST COMPANY OF NEW YORK CONSOLIDATED STATEMENT OF CONDITION SEPTEMBER 30, 1997 (IN THOUSANDS) ASSETS: Cash and Due from Banks . . . . . . . . . . . . . . . . . . $ 116,582 Short-Term Investments. . . . . . . . . . . . . . . . . . . 183,652 Securities, Available for Sale. . . . . . . . . . . . . . . 691,965 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,669,611 Less: Allowance for Credit Losses. . . . . . . . . . . . . 16,067 ------------ Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . 1,653,544 Premises and Equipment. . . . . . . . . . . . . . . . . . . 61,796 Other Assets. . . . . . . . . . . . . . . . . . . . . . . . 125,121 ------------ Total Assets. . . . . . . . . . . . . . . . . . . . . . . . $ 2,832,660 ------------ ------------ LIABILITIES: Deposits: Non-Interest Bearing. . . . . . . . . . . . . . . . . . . . $ 541,619 Interest Bearing. . . . . . . . . . . . . . . . . . . . . . 1,617,028 ------------ Total Deposits. . . . . . . . . . . . . . . . . . . . . . . 2,158,647 Short-Term Credit Facilities. . . . . . . . . . . . . . . . 365,235 Accounts Payable and Accrued Liabilities. . . . . . . . . . 141,793 ------------ Total Liabilities . . . . . . . . . . . . . . . . . . . . . $ 2,665,675 ------------ ------------ STOCKHOLDER'S EQUITY: Common Stock. . . . . . . . . . . . . . . . . . . . . . . . 14,995 Capital Surplus . . . . . . . . . . . . . . . . . . . . . . 49,542 Retained Earnings . . . . . . . . . . . . . . . . . . . . . 99,601 Unrealized Gains (Losses) on Securities Available for Sale, Net of Taxes. . . . . . . . . . . . . . . . . . . . . 2,847 ------------ Total Stockholder's Equity. . . . . . . . . . . . . . . . . 166,985 ------------ Total Liabilities and Stockholder's Equity. . . . . . . . . $ 2,832,660 ------------ ------------ I, Richard E. Brinkman, Senior Vice President & Comptroller of the named bank do hereby declare that this Statement of Condition has been prepared in conformance with the instructions issued by the appropriate regulatory authority and is true to the best of my knowledge and belief. Richard E. Brinkman, SVP & Controller November 18, 1997 EX-99.1 7 EX-99.1 LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL BURKE INDUSTRIES, INC. OFFER TO EXCHANGE 10% SENIOR NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 10% SENIOR NOTES DUE 2007 PURSUANT TO THE PROSPECTUS, DATED DECEMBER 5, 1997. - -------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON JANUARY 23, 1998 UNLESS EXTENDED (THE "EXPIRATION DATE"). - -------------------------------------------------------------------------------- MAIL DELIVERY TO: United States Trust Company of New York, EXCHANGE AGENT BY MAIL: United States Trust Company of New York P.O. Box 844, Cooper Station New York, NY 10276-0841 Attention: Corporate Trust Services BY HAND: BY OVERNIGHT DELIVERY: United States Trust Company of New York United States Trust Company of New York 111 Broadway, Lower Level 770 Broadway, 13th Floor New York, NY 10006 New York, NY 10003 Attention: Corporate Trust Services Attention: Corporate Trust Services
- -------------------------------------------------------------------------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. - -------------------------------------------------------------------------------- NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY The undersigned acknowledges that he or she has received and reviewed the Prospectus, dated December 5, 1997 (the "Prospectus"), of Burke Industries, Inc., a Delaware corporation (the "Company"), and this Letter of Transmittal (the "Letter"), which together constitute the Company's offer (the "Exchange Offer") to exchange an aggregate principal amount of up to $110 million of its 10% Senior Notes due 2007 (the "New Notes") of the Company for a like principal amount of the issued and outstanding 10% Senior Notes due 2007 (the "Old Notes") of the Company from the holders (the "Holders") thereof. Capitalized terms used but not defined herein have the meanings given to them in the Exchange Offer. For each Old Note accepted for exchange, the Holder of such Old Note will receive a New Note having a principal amount equal to that of the surrendered Old Note. No interest will be payable on the Old Notes on the date of the exchange for the New Notes and Old Notes accepted for exchange will cease to accrue interest from and after the consummation of the Exchange Offer; therefore no interest will be paid thereon to the Holders at such time. Each New Note will bear interest at 10% per annum and will be payable in cash semiannually in arrears on each February 15 and August 15, commencing on February 15, 1998. Holders of Old Notes accepted for exchange will be deemed to have waived the right to receive any other payment of interest on the Old Notes. The Company reserves the right, at any time or from time to time, to extend the Exchange Offer at its discretion, in which event the term "Expiration Date" shall mean the latest time and date to which the Exchange Offer is extended. The Company shall notify the Holders of the Old Notes of any extension by means of a press release or other public announcement prior to 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. This Letter is to be completed by a Holder of Old Notes either if certificates are to be forwarded herewith or if a tender of certificates for Old Notes, if available, is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer--Procedures for Tendering Old Notes" section of the Prospectus. Holders of Old Notes whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, may tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. List below the Old Notes to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Old Notes should be listed on a separate signed schedule affixed hereto.
- ---------------------------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES - ---------------------------------------------------------------------------------------------------- NAME AND ADDRESS OF REGISTERED HOLDER AS IT APPEARS CERTIFICATE NUMBER(S) OF PRINCIPAL AMOUNT OF OLD ON THE 10% SENIOR NOTES DUE 2007 OLD NOTES TRANSMITTED* NOTES TRANSMITTED** - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
* Need not be completed if Old Notes are being tendered by book-entry transfer. ** Unless otherwise indicated in this column, a Holder will be deemed to have tendered ALL of the Old Notes represented by the Old Notes indicated in column 2. See Instruction 2. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. See Instruction 1. - -------------------------------------------------------------------------------- / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ______________________________________________ Account Number ______________ Transaction Code Number ______________ / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) ___________________________________________ Window Ticket Number (if any) _____________________________________________ Date of Execution of Notice of Guaranteed Delivery ________________________ Name of Institution which guaranteed delivery _____________________________ - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: Account Number ______________ Transaction Code Number ______________ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. NAME: _____________________________________________________________________ ADDRESS: __________________________________________________________________ __________________________________________________________________ - -------------------------------------------------------------------------------- PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Company the aggregate principal amount of Old Notes indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Notes tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all right, title and interest in and to such Old Notes as are being tendered hereby. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Company will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Company. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as its agent and attorney-in-fact with full power of substitution, for purposes of delivering this Letter and the Old Notes to the Company. The Power of Attorney granted in this paragraph shall be deemed irrevocable from and after the Expiration Date and coupled with an interest. The undersigned hereby further represents that any New Notes acquired in exchange for Old Notes tendered hereby will have been acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the undersigned, that neither the Holder of such Old Notes nor any such other person is participating, intends to participate or has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder of such Old Notes nor any such other person is an "affiliate," of the Company, as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"). The undersigned also acknowledges that this Exchange Offer is being made in reliance on an interpretation by the staff of the Securities and Exchange Commission (the "SEC") set forth in no-action letters to third parties, based on which the Company believes that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by any Holder thereof (other than any such Holder 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 New Notes are acquired in the ordinary course of such Holder's business and such Holder has no arrangement with any person to participate in the distribution of such New Notes. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for in exchange for Old Notes, it represents that the Old Notes to be exchanged for New Notes were acquired by it as a result of market-making activities or other trading activities, and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned acknowledges that in reliance on an interpretation by the staff of the SEC, a broker-dealer may fulfill his prospectus delivery requirements with respect to the New Notes (other than a resale of an unsold allotment from the original sale of the Old Notes) with the Prospectus which constitutes part of this Exchange Offer. The undersigned will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal Rights" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Notes, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Notes (and, if applicable, substitute certificates representing Old Notes for any Old Notes not exchanged) to the undersigned at the address shown above in the box entitled "Description of Old Notes." - -------------------------------------------------------------------------------- THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD NOTES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AS SET FORTH IN SUCH BOX ABOVE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be issued in the name of and sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above, or if Old Notes delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book-Entry Transfer Facility other than the account indicated above. Issue: New Notes and/or Old Notes to: Name(s): ___________________________________________________________________ (PLEASE TYPE OR PRINT) __________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ ____________________________________________________________________________ Employer Identification # or Social Security Number: _______________________ / / Credit unexchanged Old Notes delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. ____________________________________________________________________________ (BOOK-ENTRY TRANSFER FACILITY ACCOUNT NUMBER, IF APPLICABLE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 3 AND 4) To be completed ONLY if certificates for Old Notes not exchanged and/or New Notes are to be sent to someone other than the person or persons whose signature(s) appear(s) on this Letter above or to such person or persons at an address other than shown in the box entitled "Description of Old Notes" on this Letter above. Mail: New Notes and/or Old Notes to: Name(s): ___________________________________________________________________ (PLEASE TYPE OR PRINT) __________________________________________________________________________ (PLEASE TYPE OR PRINT) Address: ___________________________________________________________________ ____________________________________________________________________________ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE CERTIFICATES FOR OLD NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. - -------------------------------------------------------------------------------- PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. - -------------------------------------------------------------------------------- PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) Dated: ___________________________________________ _______________________________ _______________________________ SIGNATURE(S) OF OWNER DATE Area code and Telephone Number _____________________________________________ If a Holder is tendering any Old Notes, this Letter must be signed by the registered Holder(s) as the name(s) appear(s) on the certificate(s) for the Old Notes or by any person(s) authorized to become registered Holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s) ____________________________________________________________________ ____________________________________________________________________________ (PLEASE TYPE OR PRINT) Capacity: __________________________________________________________________ Address: ___________________________________________________________________ ____________________________________________________________________________ (INCLUDING ZIP CODE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3) SIGNATURE(S) GUARANTEED BY AN ELIGIBLE INSTITUTION: (AUTHORIZED SIGNATURE) ______________________________________________________ (TITLE) ______________________________________________________ (NAME AND FIRM) Dated: ___________________________________________ - -------------------------------------------------------------------------------- INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER OF 10% SENIOR NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 10% SENIOR NOTES DUE 2007 OF BURKE INDUSTRIES, INC. 1. DELIVERY OF THIS LETTER AND NOTES; GUARANTEED DELIVERY PROCEDURES: This letter is to be completed by noteholders either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer--Procedures for Tendering Old Notes" section of the Prospectus. Certificates for all physically tendered Old Notes, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed letter (or manually signed facsimile hereof) and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering Holder must comply with the guaranteed delivery procedures set forth below. Old Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. Noteholders whose certificates for Old Notes are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Notes pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made by or through an Eligible Institution and a Notice of Guaranteed Delivery must be signed by such Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must receive from the Holder and the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery), substantially in the form provided by the Company, setting forth the name and address of the Holder of Old Notes, the certificate number or numbers of the tendered Old Notes, and the principal amount of Old Notes tendered, 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) the certificates for all physically tendered Old Notes, in proper form for transfer, or Book-Entry Confirmation, as the case may be, and all other documents required by this Letter, must be received by the Exchange Agent within four (4) business days after the Expiration Date. The method of delivery of this Letter, the Old Notes and all other required documents is at the election and risk of the tendering Holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. 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 that the Holder use an overnight or hand delivery service. In all cases, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer" section of the Prospectus. 2. PARTIAL TENDERS (NOT APPLICABLE TO NOTEHOLDERS WHO TENDER BY BOOK-ENTRY TRANSFER): If less than all of the Old Notes evidenced by a submitted certificate are to be tendered, the tendering Holder(s) should fill in the aggregate principal amount of Old Notes to be tendered in the box above entitled "Description of Old Notes--Principal Amount of Old Notes Transmitted." Holders whose Old Notes are not tendered or are tendered but not accepted in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and preferences and subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the Holders will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders to provide for the registration under the Securities Act of the Old Notes held by them. ALL OF THE OLD NOTES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED. 3. SIGNATURES ON THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES: If this Letter is signed by the registered Holder of the Old Notes tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Notes are owned of record by two or more joint owners, all such owners must sign this Letter. If any tendered Old Notes are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered Holder or Holders of the Old Notes specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Notes are to be issued, or any untendered Old Notes are to be reissued, to a person other than the registered Holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter is signed by a person other than the registered Holder or Holders of any certificate(s) specified herein, such certificate(s) must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name or names of the registered Holder or Holders appear(s) on the certificate(s) and signatures on such certificate(s) must be guaranteed by an Eligible Institution. If this Letter or any certificates or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Company, proper evidence satisfactory to the Company of their authority to so act must be submitted. ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE INSTITUTION"). SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED HOLDER OF OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) TENDERED WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS," ON THIS LETTER, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS: Tendering Holders of Old Notes should indicate in the applicable box the name and address to which New Notes issued pursuant to the Exchange Offer and/or Old Notes not exchanged are to be sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. Noteholders tendering Old Notes by book-entry transfer may request that Old Notes not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such noteholder may designate hereon. If no such instructions are given, such Old Notes not exchanged will be returned to the name or address of the person signing this Letter. 5. TRANSFER TAXES: The Company will pay all transfer taxes, if any, applicable to the transfer of Old Notes to it or its order pursuant to the Exchange Offer. If however, certificates representing New Notes and/or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Old Notes to the Company or its order pursuant to the Exchange Offer, the amount of any such transfer taxes (whether imposed on the registered Holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted herewith, the amount of such transfer taxes will be billed directly to such tendering Holder. EXCEPT AS PROVIDED IN THIS INSTRUCTION 5, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD NOTES SPECIFIED IN THIS LETTER. 6. WAIVER OF CONDITIONS: The Company reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 7. NO CONDITIONAL TENDERS: No alternative, conditional, irregular or contingent tenders will be accepted. All tendering Holders of Old Notes, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Old Notes for exchange. Neither the Company, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Notes nor shall any of them incur any liability for failure to give any such notice. 8. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES: Any Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 9. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES: Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter, may be directed to the Exchange Agent, at the address indicated above. IMPORTANT TAX INFORMATION Under current Federal income tax law, any Holder whose tendered Old Notes are accepted for payment generally is required to provide the Exchange Agent (as agent for the payer) with his or her correct taxpayer identification number ("TIN") on Substitute Form W-9 below. If such Holder of Old Notes is an individual, the TIN is his or her social security number. If the Exchange Agent is not provided with the correct TIN, the Holder of Old Notes may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such Holders of Old Notes with respect to New Notes may be subject to backup withholding. Certain Holders of Old Notes (including, among others, all corporations and certain foreign individuals) may not be subject to these backup withholding and reporting requirements. Exempt Holders of Old Notes should indicate their exempt status on Substitute Form W-9. In order for a foreign individual to qualify as an exempt recipient, that Holder of Old Notes must submit a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to his or her exempt status. Such statements can be obtained from the Exchange Agent. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute W-9 for additional instructions. If backup withholding applies, the Exchange Agent is required to withhold 31 percent of any such payments made to the Holder of Old Notes. Backup withholding is not an additional tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a Holder of Old Notes with respect to Old Notes exchanged pursuant to the Exchange Offer, each Holder of Old Notes is required to notify the Exchange Agent of his, her or its correct TIN by completing the Substitute Form W-9 below certifying the TIN provided on such form is correct (or that such Holder of Old Notes is awaiting a TIN) and that (1) such Holder of Old Notes has not been notified by the Internal Revenue Service that he, she or it is subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified such Holder of Old Notes that he, she or it is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE EXCHANGE AGENT The Holder of Old Notes is required to give the Exchange Agent the social security number or employer identification number of the record owner of the Old Notes. If the Old Notes are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidelines on which number to report. PAYER'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK, N.A. AS EXCHANGE AGENT - --------------------------------------------------------------------------------------------------- SUBSTITUTE Part 1: PLEASE PROVIDE YOUR TIN Social Security Number FORM W-9 IN THE BOX AT RIGHT AND CERTIFY OR ------------------ Department of the Treasury BY SIGNING AND DATING BELOW Employer Identification Number Internal Revenue Service ----------------------------------------------------------------- Part 2: Certification--Under penalties of perjury, I certify that: (1) The number shown on this form is my current taxpayer identification number (or I am waiting for a number to be issued to me) and (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding, (b) I have not been notified by Payer's Request for Taxpayer the Internal Revenue Service (the "IRS") that I am subject to Identification Number (TIN) backup withholding as a result of a failure to report all interest or dividends or (c) the IRS has notified me that I am no longer subject to backup withholding. ----------------------------------------------------------------- Part 3: Awaiting TIN / / - --------------------------------------------------------------------------------------------------- CERTIFICATE INSTRUCTIONS--You must cross out Item (2) above if you have been notified by the IRS that you are currently subject to backup withholding because of under-reporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out such Item (2)
SIGNATURE: ____________________________________ DATE: ______________ - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31 PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER, PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE W-9" FOR ADDITIONAL DETAILS NOTE: YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Officer or (b) I intend to mail or deliver such an application in the near future. I understand that if I do not provide a taxpayer identification number within sixty (60) days, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number. SIGNATURE: ____________________________________ DATE: ______________ - -------------------------------------------------------------------------------- EX-99.2 8 EX-99.2 NOTICE OF GUARANTEED DELIVERY NOTICE OF GUARANTEED DELIVERY OFFER FOR OUTSTANDING 10% SENIOR NOTES DUE 2007 IN EXCHANGE FOR 10% SENIOR NOTES DUE 2007 OF BURKE INDUSTRIES, INC. This form or one substantially equivalent to it must be used to exchange the Burke Industries, Inc. 10% Senior Notes Due 2007 (the "Old Notes") if certificates for the Old Notes are not immediately available or if time will not permit the Letter of Transmittal or other required documents to reach the United States Trust Company of New York, N.A. (the "Exchange Agent") prior to 5:00 p.m. New York time on January 23, 1998, at which time the right to exchange the Old Notes terminates. This form must be delivered by hand, mail, telegram or facsimile transmission to the Exchange Agent as follows: MAIL DELIVERY TO: United States Trust Company of New York, EXCHANGE AGENT By Mail: United States Trust Company of New York P.O. Box 844, Cooper Station New York, NY 10276-0841 Attention: Corporate Trust Services
By Hand: By Overnight Delivery: United States Trust Company of New York United States Trust Company of New York 111 Broadway, Lower Level 770 Broadway, 13th Floor New York, NY 10006 New York, NY 10003 Attention: Corporate Trust Services Attention: Corporate Trust Services
- -------------------------------------------------------------------------------- DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN THOSE SHOWN ABOVE DOES NOT CONSTITUTE VALID DELIVERY. UNDER THE TERMS OF THIS DOCUMENT, THE OLD NOTES, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL MUST BE DELIVERED TO THE EXCHANGE AGENT WITHIN FOUR BUSINESS DAYS AFTER THE DATE OF DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. - -------------------------------------------------------------------------------- Ladies and Gentlemen: The undersigned hereby tenders the principal amount of Old Notes indicated below, upon the terms and subject to the conditions contained in the Registration Statement on Form S-4 filed by Burke Industries, Inc., a California corporation, with the Securities and Exchange Commission (the "Registration Statement") and the accompanying Prospectus dated December 5, 1997 included therein (the "Prospectus"), receipt of which is hereby acknowledged: DESCRIPTION OF SECURITIES TENDERED
- -------------------------------------------------------------------------------------------- PLEASE FILL IN YOUR NAME(S) EXACTLY AS IT APPEARS ON YOUR NOTE(S) PLEASE FILL IN AND YOUR PRESENT ADDRESS NUMBERS AND AMOUNTS - -------------------------------------------------------------------------------------------- NOTE PRINCIPAL NAME(S): NUMBER(S) AMOUNT -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- ADDRESS(ES): -------------------------------------- -------------------------------------- -------------------------------------- -------------------------------------- TOTALS - --------------------------------------------------------------------------------------------
Signatures (all registered holders must sign): Address: - ---------------------------------------- ---------------------------------------- - ---------------------------------------- ---------------------------------------- (Please Type or Print) Area Code and Daytime Telephone Number: ( ) - -----------------------------------------
2 THE FOLLOWING GUARANTEE MUST BE COMPLETED GUARANTEE The undersigned, a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office, branch or agency in the United States, hereby guarantees to deliver to the Exchange Agent at the address set forth above, Old Note certificates surrendered for exchange hereby in proper form for transfer, together with a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal, within four (4) business days after the date of delivery of this Notice of Guaranteed Delivery.
Dated: , 199 Name of Firm: ----------------------------- Sign Here: -------------------------------- (Authorized Signature) Name: ------------------------------------ (Please type or print) ------------------------------------------ (Area code and Telephone Number) Address: ---------------------------------- ------------------------------------------ ------------------------------------------ (Zip Code)
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. OLD NOTES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. 3 -----END PRIVACY-ENHANCED MESSAGE-----