-----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, MJWvR6VYryt8Eb2Ch1U4yj7FS8rbZSLtT2EEUEhllk7X/gX6pGte5Utj/VTCl0dY 5K6gVXpWQreBWkTcbCNdQQ== 0001047469-98-018219.txt : 19980506 0001047469-98-018219.hdr.sgml : 19980506 ACCESSION NUMBER: 0001047469-98-018219 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980421 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980505 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: 8-K SEC ACT: SEC FILE NUMBER: 333-36675 FILM NUMBER: 98610566 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 8-K 1 8-K - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 21, 1998 BURKE INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 1-13432 94-3081144 (State or Other Jurisdiction of (Commission File Number) (IRS Employer Incorporation Identification No.) 2250 South Tenth Street 95112 San Jose, California (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (408) 297-3500 None (Former Name or Former Address, if Changed Since Last Report) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On April 21, 1998, Burke Industries, Inc., a California corporation ("Burke"), acquired all of the issued and outstanding capital stock of Mercer Products Company, Inc., a New Jersey corporation ("Mercer"), from Sovereign Specialty Chemicals, Inc., a Delaware corporation ("Sovereign"), for an aggregate purchase price of $35,750,000, subject to working capital adjustments (the "Mercer Acquisition") pursuant to a Stock Purchase Agreement, dated March 5, 1998, among Burke, Sovereign and Mercer (the "Purchase Agreement). Financing for the Mercer Acquisition and related expenses was provided, in large part, from the sale (the "Offering") of $30 million principal amount of Floating Interest Rate Senior Notes Due 2007 (the "Senior Notes") pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"). The balance of the financing was provided with approximately $6.5 million of cash on hand and $3.0 million from the sale of 3,000 shares of Burke's 6% Series C Cumulative Convertible Preferred Stock, on a pro rata basis, to the existing shareholders of Burke. The Senior Notes mature on August 15, 2007, with interest on the notes payable semi-annually on February 15 and August 15, commencing August 15, 1998. The Senior Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Senior Notes are unconditionally guaranteed on a joint and several basis by each of Burke's subsidiaries, including Mercer. Upon a change of control of Burke, Burke will be required to make an offer to repurchase all outstanding Senior Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon at the date of repurchase. Burke has agreed to file and use its best efforts to have declared effective, under the Securities Act, a registration statement relating to an exchange of the unregistered Senior Notes for substantially identical senior notes which have been registered under the Securities Act. Burke also amended the terms of the indenture relating to its outstanding 10% Senior Notes due 2007 (the "Existing Notes") to, among other things, permit the issuance of the Senior Notes pursuant to that certain First Supplemental Indenture, dated as of April 21, 1998, among Burke, the subsidiary guarantors named therein and United States Trust Company of New York. Founded in 1958, and headquartered in Eustis, Florida, Mercer is a leading manufacturer of extruded plastic and vinyl products such as vinyl and rubber cove base, transitional and finish mouldings, corners, stair treads and other accessories. Mercer also sells a range of related adhesive products. Mercer's product and distribution lines complement Burke's flooring products business. While Burke is a dominant producer of rubber cove base and floor covering accessories in the western United States, Mercer is a leading supplier to the vinyl cove base and moulding products markets and has a particularly strong presence in the eastern United States. 2 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED Financial Statements of Mercer (1) Report of KPMG Peat Marwick LLP Independent Auditors. (2) Statement of Earnings and Retained Earnings for the year ended December 31, 1996. (3) Balance Sheet at December 31, 1996. (4) Statement of Cash Flows for the fiscal year ended December 31, 1996. (5) Notes to Financial Statements. (6) Report of Ernst & Young LLP, Independent Auditors -- January 1, 1997 to August 4, 1997. (7) Balance Sheet at August 4, 1997. (8) Statement of Operations and Retained Earnings for the period from January 1, 1997 to August 4, 1997. (9) Statement of Cash Flows for the period from January 1, 1997 to August 4, 1997. (10) Notes to Financial Statements. (11) Report of Ernst & Young LLP, Independent Auditors -- August 5, 1997 to December 31, 1997. (12) Balance Sheet at December 31, 1997. (13) Statement of Operations for the period from August 5, 1997 to December 31, 1997. (14) Statement of Stockholder's Equity for the period from August 5, 1997 to December 31, 1997. (15) Statement of Cash Flows for the period from August 5, 1997 to December 31, 1997. (16) Notes to Financial Statements. 3 REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS The Board of Directors Mercer Products Company, Inc.: We have audited the accompanying balance sheet of Mercer Products Company, Inc. (a wholly owned subsidiary of Laporte plc) as of December 31, 1996, and the related statements of earnings and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mercer Products Company, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orlando, Florida January 31, 1997 4 MERCER PRODUCTS COMPANY, INC. STATEMENT OF EARNINGS AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) Net sales.......................................................................... $ 24,558 Cost of sales...................................................................... 17,668 --------- Gross profit................................................................... 6,890 Selling, general and administrative expenses....................................... 4,668 --------- Operating income............................................................... 2,222 Interest expense................................................................... 964 --------- Earnings before income taxes................................................... 1,258 Income taxes....................................................................... 675 --------- Net earnings................................................................... 583 Retained earnings at December 31, 1995............................................. 8,715 Dividends paid..................................................................... (60) --------- Retained earnings at December 31, 1996............................................. $ 9,238 --------- ---------
See accompanying notes to financial statements. 5 MERCER PRODUCTS COMPANY, INC. BALANCE SHEET DECEMBER 31, 1996 (IN THOUSANDS)
ASSETS Current assets: Cash............................................................................. $ 392 Accounts receivable: Trade, less allowance for doubtful accounts of $130............................ 2,929 Affiliates..................................................................... 93 Inventories, net................................................................. 2,407 Prepaid expenses and other assets................................................ 48 Deferred income taxes............................................................ 105 --------- Total current assets......................................................... 5,974 Property and equipment, net........................................................ 3,578 Goodwill, net of accumulated amortization.......................................... 7,243 Deferred income taxes.............................................................. 423 --------- Total assets................................................................. $ 17,218 --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable: Trade.......................................................................... $ 991 Affiliates..................................................................... 1,219 Accrued expenses................................................................. 499 Income taxes payable............................................................. 616 --------- Total current liabilities.................................................... 3,325 Loan due to affiliated company..................................................... 4,655 --------- Total liabilities............................................................ 7,980 Stockholder's equity: Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding.................................................................... -- Retained earnings................................................................ 9,238 --------- Total liabilities and stockholder's equity................................... $ 17,218 --------- ---------
See accompanying notes to financial statements. 6 MERCER PRODUCTS COMPANY, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
Cash flows from operating activities: Net earnings...................................................................... $ 583 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................................................... 953 Deferred income taxes........................................................... 151 Cash provided by (used for) changes in: Accounts receivable........................................................... (49) Inventories................................................................... 330 Prepaid expenses and other current assets..................................... 123 Income taxes.................................................................. 402 Accounts payable and accrued expenses......................................... 328 --------- Net cash provided by operating activities................................... 2,821 --------- Cash flows from investing activities: Additions to property and equipment............................................... (367) --------- Net cash used for investing activities...................................... (367) --------- Cash flows from financing activities: Repayments of intercompany loan................................................... (2,308) Dividends paid.................................................................... (60) --------- Net cash provided by financing activities................................... (2,368) --------- Net increase in cash........................................................ 86 Cash at beginning of year........................................................... 306 --------- Cash at end of year................................................................. $ 392 --------- --------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest........................................................................ $ 946 --------- --------- Income taxes.................................................................... $ 98 --------- ---------
See accompanying notes to financial statements. 7 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 (IN THOUSANDS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) ORGANIZATION Mercer Products Company, Inc. (the "Company") has been in business for 39 years in Eustis, Florida. The Company is a manufacturer of extruded plastic products and sells mainly to wholesale distributors. The major product line is carpet and stairway moldings and trim for the construction industry. (b) INVENTORIES Inventories are stated at the lower of cost or market, with cost being determined on the first-in, first-out basis. Obsolescence is identified through quarterly inventory counts and any items appearing on more than two consecutive counts are reviewed and, if necessary, prepared for re-grinding. (c) PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. The Company provides for depreciation and amortization on the straight-line method over the estimated useful lives as follows:
YEARS ----- Building............................................. 50 Machinery and equipment.............................. 7-10 Furniture and fixtures............................... 3-5 Leasehold improvements............................... 15
(d) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, which is 15 years. Accumulated amortization of goodwill and covenants not to compete at December 31, 1996 was approximately $6,200. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (e) INCOME TAXES The Company is included within the consolidated Federal income tax return of Laporte Inc. in the United States. Income tax expense is calculated using the enacted rates in the United States as if the Company had been an independent entity. 8 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. (f) USE OF ESTIMATES The preparation of these financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (g) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the Company's balance sheet for cash, trade accounts receivable, due from affiliated companies, accounts payable, accrued expenses, due to affiliated companies and other liabilities approximate their fair value because of the short-term maturity of these instruments. It is not practical to determine the fair value of long-term payable to parent and affiliated companies because such amounts, bearing interest during the period from January 1, 1996 to December 31, 1996, have no stated maturity which makes it difficult to estimate fair value with precision. (h) CONCENTRATION OF CREDIT RISK The Company manufactures extruded plastic and vinyl products and markets these products to wholesale, specialty, full line, and supply flooring distributors and select national and export accounts. As a result, the Company grants unsecured credit to customers who deal primarily in the industry. Such risk is limited due to the large number of customers, generally short payment terms, and their dispersion across geographic areas. However, economic factors affecting the industry would have a direct impact on the Company and its exposure to credit risk. One customer accounted for approximately 10% of the Company's sales during 1996, and no account receivable from any customer exceeded 10% of the Company's accounts receivable balance at December 31, 1996. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers and general economic conditions. Consequently, an adverse change in these factors would affect the Company's estimate of bad debts. 9 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (2) INVENTORIES A summary of inventories at December 31, 1996 is as follows: Raw materials..................................... $ 585 Finished goods.................................... 1,822 --------- $ 2,407 --------- ---------
(3) PROPERTY AND EQUIPMENT Property and equipment at December 31, 1996 consists of the following: Land.............................................. $ 223 Buildings......................................... 2,484 Machinery and equipment........................... 2,898 Leasehold improvements............................ 20 Furniture and fixtures............................ 339 Construction in progress.......................... 59 --------- 6,023 Less accumulated depreciation and amortization.... (2,445) --------- $ 3,578 --------- ---------
(4) LEASES The Company is obligated under various noncancelable operating leases for buildings, machinery and equipment, and automobiles, which expire on various dates through 2000. Rent expense for operating leases was $509 for the year ended December 31, 1996. Future minimum annual lease payments under operating leases are as follows:
OPERATING YEAR ENDING DECEMBER 31, LEASES ---------------------------------------------- --------------- 1997.......................................... $ 358 1998.......................................... 358 1999.......................................... 348 2000.......................................... 334 ------ Total minimum lease payments................ $ 1,398 ------ ------
(5) RELATED PARTY TRANSACTIONS The Company entered into transactions in the ordinary course of business with the parent company and affiliates. 10 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (5) RELATED PARTY TRANSACTIONS (CONTINUED) (a) PURCHASES OF RAW MATERIALS Approximately 75% of the raw materials purchased during 1996 were from an affiliated company. Management considers that the terms for purchase were similar to the terms the Company would have obtained from a third party. (b) MANAGEMENT FEES Expenses of $255 that were incurred during the year related to services provided by Laporte plc to the Company. These services included general management, treasury, tax, financial audit, financial reporting, insurance and legal services. The Company has been charged for such services through corporate allocations. These expenses were allocated to the Company based on estimates of anticipated allocable costs incurred, less amounts charged as direct costs or expense rather than by allocation. Management believes that the allocation methods used on common expenses were reasonable, produce materially accurate results, and are indicative of the expenses that would have been incurred had the Company been operated as a stand-alone business. (c) INTEREST EXPENSE These financial statements include an allocation of the debt incurred by Laporte plc when it originally acquired the Company. Accordingly, interest expense at a rate of approximately 9% for 1996 associated with such debt has been reflected in these financial statements. (d) DUE FROM AFFILIATES Due from affiliates at December 31, 1996 amounts to $93. These receivables are noninterest bearing and represent amounts due from other subsidiaries of the parent. (e) DUE TO AFFILIATES Due to affiliates at December 31, 1996 amounts to $1,219. A total of $649 of this balance relates to raw materials purchased from AlphaGary Corporation for use in the Company's operations. The remaining balance relates to interest payable to the parent for the note outstanding. The payables are noninterest bearing. (f) NOTES PAYABLE TO PARENT These financial statements include an allocation of the debt incurred by Laporte plc when it originally acquired the Company. At December 31, 1996, the balance on the loan, net of a receivable from Laporte plc, was $4,655. 11 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 (IN THOUSANDS) (6) INCOME TAXES Income tax expense for the year ended December 31, 1996 consists of:
CURRENT DEFERRED TOTAL ----------- ----------- --------- Federal..................... $ 462 $ 135 $ 597 State....................... 62 16 78 ----- ----- --------- $ 524 $ 151 $ 675 ----- ----- --------- ----- ----- ---------
The actual income tax expense for the year ended December 31, 1996 differs from the expected income tax expense computed by applying the federal statutory rate of 34% to earnings before income taxes as follows: Expected tax expense.................................... $ 427 Goodwill and other nondeductible items.................. 196 State income taxes, net of federal income tax benefit... 52 --------- $ 675 --------- ---------
The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to the deferred tax assets and liabilities and their approximate tax effects are as follows: Deferred tax assets: Reserves and allowances.............................. $ 105 Goodwill............................................. 652 --------- Total deferred tax assets.............................. 757 --------- Deferred tax liability: Depreciation......................................... 229 --------- Total deferred tax liability....................... 229 --------- Net deferred tax liability......................... $ 528 --------- ---------
(7) EMPLOYEE BENEFIT PLANS The Company sponsors two defined-contribution plans (an IRS qualifying 401(k) plan and a money purchase pension plan). Participation in these plans is available to all salaried and hourly employees of the Company. Participating employees contribute to the 401(k) plan based on a percentage of their compensation. A percentage of employee contributions are matched by the Company. The Company further contributes an amount based on a percentage of employee's pay to the money purchase pension plan. The costs of these plans amounted to approximately $176 for 1996. 12 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Mercer Products Company, Inc. We have audited the accompanying balance sheet of Mercer Products Company, Inc. as of August 4, 1997 (wholly-owned subsidiary of Laporte plc), and the related statements of operations and retained earnings and cash flows for the period from January 1, 1997 to August 4, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mercer Products Company, Inc. as of August 4, 1997, and the results of its operations and its cash flows for the period from January 1, 1997 to August 4, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois November 21, 1997 13 MERCER PRODUCTS COMPANY, INC. BALANCE SHEET AUGUST 4, 1997 (DOLLARS IN THOUSANDS) Assets Current assets: Cash............................................................................. $ 63 Trade accounts receivable, less allowance for doubtful accounts of $200.......... 2,747 Inventories...................................................................... 3,456 Prepaid expenses and other current assets........................................ 187 Deferred income taxes............................................................ 273 --------- Total current assets............................................................... 6,726 Property, plant, and equipment, net................................................ 3,408 Goodwill, net...................................................................... 6,834 --------- Total assets....................................................................... $ 16,968 --------- --------- Liabilities and stockholders' equity Current liabilities: Accounts payable................................................................. $ 2,181 Accrued expenses................................................................. 485 Income taxes payable............................................................. 267 --------- Total current liabilities.......................................................... 2,933 Long-term payable--Parent and affiliated companies................................. 4,777 Deferred income taxes.............................................................. 88 Stockholders' equity: Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding -- Retained earnings................................................................ 9,170 --------- Total stockholders' equity....................................................... 9,170 --------- Total liabilities and stockholders' equity......................................... $ 16,968 --------- ---------
See accompanying notes to financial statements. 14 MERCER PRODUCTS COMPANY, INC. STATEMENT OF OPERATIONS AND RETAINED EARNINGS PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) Net sales.......................................................................... $ 14,954 Cost of goods sold................................................................. 9,578 --------- Gross profit....................................................................... 5,376 Selling, general, and administrative expenses...................................... 2,328 Management fees.................................................................... 167 Amortization of goodwill........................................................... 409 --------- Operating income................................................................... 2,472 Interest expense................................................................... 544 --------- Income before income taxes......................................................... 1,928 Income tax expense................................................................. 771 --------- Net income......................................................................... 1,157 Retained earnings at December 31, 1996............................................. 9,238 Dividends paid..................................................................... (1,225) --------- Retained earnings at August 4, 1997................................................ $ 9,170 --------- ---------
See accompanying notes to financial statements 15 MERCER PRODUCTS COMPANY, INC. STATEMENT OF CASH FLOWS PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income......................................................................... $ 1,157 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization.................................................... 565 Deferred income taxes............................................................ 458 Loss on disposal of property, plant, and equipment............................... 74 Changes in operating assets and liabilities: Trade accounts receivable...................................................... 182 Inventories.................................................................... (1,019) Prepaid expenses and other current assets...................................... (138) Accounts payable............................................................... 1,109 Accrued expenses............................................................... (5) Income taxes payable........................................................... 267 --------- Net cash provided by operating activities.......................................... 2,650 INVESTING ACTIVITIES Capital expenditures............................................................... (60) --------- Net cash used in investing activities.............................................. (60) FINANCING ACTIVITIES Payments on long-term liabilities due to parent and affiliated companies, net...... (1,694) Dividends paid..................................................................... (1,225) --------- Net cash used in financing activities.............................................. (2,919) --------- Net decrease in cash............................................................... (329) Cash at beginning of period........................................................ 392 --------- Cash at end of period.............................................................. $ 63 --------- --------- Supplemental cash flow information: Cash paid for interest........................................................... $ 454 Cash paid for income taxes....................................................... 778
See accompanying notes to financial statements 16 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mercer Products Company, Inc. (the Company) is a wholly owned subsidiary of Laporte plc. The Company is primarily a producer of rubber and vinyl products for sale to wholesale distributors, mainly in the construction, industrial, and flooring industry. The Company sells domestically to customers throughout the United States. A significant portion of the Company's sales are to customers in the construction, industrial, and flooring industry, and as such the company is affected by the well-being of that industry. The Company does not require collateral, and all their accounts receivable are unsecured; and while they believe their trade receivables will be collected, the Company anticipates that in the event of default they will follow normal collection procedures. Overall, credit risk related to the Company is limited due to a large number of customers in differing industries and geographic areas. Effective August 5, 1997, the Company was purchased by Sovereign Specialty Chemicals, Inc. INVENTORIES Inventories are stated at the lower of cost, using the first in, first out method, or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The following table summarizes the estimated useful lives of the Company's property, plant, and equipment:
YEARS ----- Building................................................. 40 Machinery and equipment.................................. 15
GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, which is 15 years. Accumulated amortization of goodwill at August 4, 1997, was $6,689. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. INCOME TAXES The Company is included within the consolidated federal income tax return of Laporte plc in the United States. For the purposes of these financial statements income tax expense is calculated, using the enacted rates in the United States as if the Company had been an independent entity. 17 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the Company's balance sheet for cash, trade accounts receivable due from affiliated companies, accounts payable, accrued expenses, due to affiliated companies and other liabilities approximate their fair value because of the short-term maturity of these instruments. It is not practical to determine the fair value of long-term payable--parent and affiliated companies because such amounts, bearing interest during the period from January 1, 1997 to August 4, 1997, of 9%, have no stated maturity which makes it difficult to estimate fair value with precision. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts which are from its domestic and international customers. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed, although collateral is not required. In addition, the Company maintains an allowance for potential credit losses. 2. INVENTORIES The components of inventories at August 4, 1997, are as follows:
Finished goods....................................... $ 2,526 Raw materials........................................ 930 --------- Total inventories.................................... $ 3,456 --------- ---------
18 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 3. PROPERTY, PLANT, AND EQUIPMENT At August 4, 1997, property, plant, and equipment are summarized as follows:
Land.................................................. $ 223 Buildings............................................. 2,568 Machinery and equipment............................... 3,062 --------- 5,853 Less: Accumulated depreciation........................ (2,445) --------- Property, plant, and equipment, net................... $ 3,408 --------- ---------
4. OPERATING LEASES The Company is a leasee under several noncancelable operating leases for buildings and machinery and equipment, which expire on various dates through 2004. Rent expense was $110 for the period from January 1, 1997 through August 4, 1997. Future minimum annual lease payments under operating leases are as follows:
Remainder of 1997..................................... $ 253 1998.................................................. 598 1999.................................................. 573 2000.................................................. 379 2001.................................................. 251 Later years........................................... 130 --------- Total minimum lease payments.......................... $ 2,184 --------- ---------
5. INCOME TAXES Income tax expense consists of:
U.S. federal.......................................... $ 250 State................................................. 63 Deferred.............................................. 458 ----- $ 771 ----- -----
19 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 5. INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at August 4, 1997, are presented below:
Deferred tax assets: Allowance for doubtful accounts....................... $ 80 Inventory capitalization.............................. 9 Accrued compensation, vacation, and bonus accrual..... 184 ----- Total deferred tax assets............................... 273 Deferred tax liabilities: Accelerated depreciation.............................. (88) ----- Net deferred tax asset.................................. $ 185 ----- -----
6. RELATED PARTY TRANSACTIONS The company entered into transactions in the ordinary course of business with the parent company and affiliates. The following table summarized the company's most significant related party transactions for the period from January 1, 1997 to August 4, 1997:
Purchases of raw materials (a).......................... $ 2,925 Management fees (b)..................................... 167 Interest (c)............................................ 544
(a) Mercer Products Company, Inc. purchases raw materials from AlphaGary Corporation, an affiliated company, for use in production. The terms of the purchases were terms similar to the terms Mercer Products Company, Inc. would have obtained from a third party. (b) Laporte plc and Laporte Inc. provided services to the Company including general management, treasury, tax, financial audit, financial reporting, insurance and legal services. The Company has been charged for such services through corporate allocations. These expenses were allocated to the Company for the period from January 1, 1997 through August 4, 1997, based on estimates of anticipated allocable costs incurred, less amounts charged as direct costs or expense rather than by allocation. Management believes that the allocation methods used on common expenses were reasonable, produce materially accurate results, and are indicative of the expenses that would have been incurred had the Company been operated as a stand-alone business. (c) These financial statements include an allocation of the debt incurred by Laporte plc when it originally acquired the company. Accordingly, interest expense at a rate of 9% for the period from January 1, 1997 to August 4, 1997, associated with such debt has been reflected in these financial statements in addition to interest on funding balances as shown in Note 1. 20 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997 (DOLLARS IN THOUSANDS) 7. EMPLOYEE BENEFIT PLANS The Company sponsors two defined-contribution plans (an IRS qualified 401(k) plan and a money purchase pension plan). Participation in these plans is available to all salaried and hourly employees of the Company. Participating employees contribute to the 401(k) plan based on a percentage of their compensation which are matched, based on a percentage of employee contributions by the Company. The Company further contributes an amount based on a percentage of employee's pay to the money purchase pension plan. The Company recorded expense for approximately $358 for the period from January 1, 1997 to August 4, 1997. 8. CONCENTRATIONS OF CREDIT RISK One customer accounted for 10% of the Company's sales during the period from January 1, 1997 to August 4, 1997, and no accounts receivable from any customer exceeded 10% of the Company's gross accounts receivable balance at August 4, 1997. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debt. The Company relies on several vendors to supply raw materials needed for its products. Although there are a limited number of manufacturers capable of supplying these needs, the Company believes that other suppliers could provide for the Company's needs in comparable terms. Abrupt changes in the supply flow could, however, cause a delay in manufacturing and possible inability to meet sales commitments on schedule and a possible loss of sales, which would affect operating results adversely. 21 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors Mercer Products Company, Inc. We have audited the accompanying balance sheet of Mercer Products Company, Inc. as of December 31, 1997, and the related statements of operations, stockholder's equity, and cash flows for the period from August 5, 1997 (date of acquisition by Sovereign Specialty Chemicals, Inc.) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mercer Products Company, Inc. as of December 31, 1997 and the results of its operations and its cash flows for the period from August 5, 1997 to December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Chicago, Illinois February 20, 1998 Except for Note 11, as to which the date is March 5, 1998 22 MERCER PRODUCTS COMPANY, INC. BALANCE SHEET DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
ASSETS Current assets: Cash................................................................................................. $ 501 Trade accounts receivable, less allowance for doubtful accounts of $170.............................. 2,305 Due from affiliated companies........................................................................ 815 Inventories.......................................................................................... 2,920 Prepaid expenses and other current assets............................................................ 211 Deferred income taxes................................................................................ 9 --------- Total current assets................................................................................... 6,761 Property, plant, and equipment, net.................................................................... 4,952 Goodwill, net.......................................................................................... 24,809 Deferred financing costs, net.......................................................................... 1,842 --------- Total assets........................................................................................... $ 38,364 --------- --------- LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable..................................................................................... $ 1,276 Accrued expenses..................................................................................... 806 --------- Total current liabilities.............................................................................. 2,082 Long-term debt--Parent Company......................................................................... 30,000 Deferred income taxes.................................................................................. 175 Stockholders' equity: Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding.............. -- Additional paid-in capital........................................................................... 6,105 Retained earnings.................................................................................... 2 --------- Total stockholder's equity............................................................................. 6,107 --------- Total liabilities and stockholder's equity............................................................. $ 38,364 --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 23 MERCER PRODUCTS COMPANY, INC. STATEMENT OF OPERATIONS PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
Net sales........................................................................... $ 9,945 Cost of goods sold.................................................................. 6,921 --------- Gross profit........................................................................ 3,024 Selling, general, and administrative expenses....................................... 1,478 Amortization of goodwill............................................................ 421 --------- Operating income.................................................................... 1,125 Interest expense.................................................................... 1,117 --------- Income before income taxes.......................................................... 8 Income taxes........................................................................ 6 --------- Net income.......................................................................... $ 2 --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 24 MERCER PRODUCTS COMPANY, INC. STATEMENT OF STOCKHOLDER'S EQUITY PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
ADDITIONAL COMMON PAID-IN RETAINED STOCKHOLDER'S STOCK CAPITAL EARNINGS EQUITY ----------- ----------- ----------- ------------- Balance at August 5, 1997 (Date of Acquisition)................... $ -- $ 6,105 $ -- $ 6,105 Net income for the period from August 5, 1997 to December 31, 1997............................................................ -- -- 2 2 ----- ----------- ----- ------ Balance at December 31, 1997...................................... $ -- $ 6,105 $ 2 $ 6,107 ----- ----------- ----- ------ ----- ----------- ----- ------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 25 MERCER PRODUCTS COMPANY, INC. STATEMENT OF CASH FLOWS PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES Net loss............................................................................. $ 2 Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization...................................................... 586 Amortization of deferred financing costs........................................... 113 Deferred income taxes.............................................................. 166 Changes in operating assets and liabilities: Trade accounts receivable........................................................ 442 Due from affiliated companies.................................................... (815) Inventories...................................................................... 423 Prepaid expenses and other current assets........................................ (176) Accounts payable................................................................. (792) Accrued expenses................................................................. 526 --------- Net cash provided by operating activities............................................ 475 INVESTING ACTIVITIES Capital expenditures................................................................. (37) --------- Net cash used in investing activities................................................ (37) --------- Net increase in cash................................................................. 438 Cash at beginning of period.......................................................... 63 --------- Cash at end of period................................................................ $ 501 --------- --------- Supplemental cash flow information: Cash paid for interest............................................................. $ 646
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 26 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS PERIOD FROM AUGUST 5, 1997 (DATE OF ACQUISITION) TO DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mercer Products Company, Inc. (the Company) is a wholly-owned subsidiary of Sovereign Specialty Chemicals, Inc. (Sovereign or the Parent Company). Effective August 5, 1997, Sovereign acquired the Company from Laporte plc (Laporte). The Company was purchased along with two affiliated companies (affiliated wholly-owned subsidiaries of Laporte). The total purchase price of the acquisitions was $133.7 million, including $2 million in acquisition costs. The purchase price allocated to the Company, based on its estimated fair value was approximately $35.8 million. The acquisition was accounted for as a purchase. The Company is primarily a producer of rubber and vinyl products for sale to wholesale distributors, mainly in the construction, industrial, and flooring industry. The Company sells domestically to customers throughout the United States. A significant portion of the Company's sales are to customers in the construction, industrial, and flooring industry, and as such the company is affected by the well-being of that industry. The Company does not require collateral and all their accounts receivable are unsecured; and while they believe their trade receivables will be collected, the Company anticipates that in the event of default they will follow normal collection procedures. Overall, credit risk related to the Company is limited due to a large number of customers in differing industries and geographic areas. INVENTORIES Inventories are stated at the lower of cost, using the first in, first out method, or market. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost. Depreciation on property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The following table summarizes the estimated useful lives of the Company's property, plant, and equipment:
YEARS ----- Building........................................ 39 Machinery and equipment......................... 3-10
GOODWILL Goodwill, which represents the excess of purchase price allocated to the Company over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, which is 25 years. Accumulated amortization of goodwill at December 31, 1997, was $421. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. 27 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED FINANCING COSTS Deferred financing costs are being amortized using the straight-line method over the term of the related debt of 7 years. Accumulated amortization was $113, at December 31, 1997. INCOME TAXES The Company will be included in the consolidated federal income tax return of Sovereign Specialty Chemicals, Inc. For the purposes of these financial statements, income tax expense has been calculated as if the Company had been an independent entity. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the Company's balance sheet for cash, trade accounts receivable, due from affiliated companies, accounts payable, accrued expenses, due to affiliated companies and other liabilities approximate their fair value because of the short-term maturity of these instruments. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts which are from its domestic and international customers. To minimize this risk, ongoing credit evaluations of customers' financial condition are performed, although collateral is not required. In addition, the Company maintains an allowance for potential credit losses. 2. INVENTORIES The components of inventories at December 31, 1997, are as follows:
Finished goods............................... $ 2,126 Raw materials................................ 794 --------- Total inventories............................ $ 2,920 --------- ---------
28 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 3. PROPERTY, PLANT, AND EQUIPMENT At December 31, 1997, property, plant, and equipment are summarized as follows:
Land......................................... $ 223 Buildings.................................... 2,059 Machinery and equipment...................... 2,835 --------- 5,117 Less: Accumulated depreciation............... 165 --------- Property, plant, and equipment, net.......... $ 4,952 --------- ---------
4. ACCRUED EXPENSES At December 31, 1997, accrued expenses are summarized as follows:
Interest..................................... $ 358 Compensation................................. 190 Other........................................ 258 --------- $ 806 --------- ---------
5. OPERATING LEASES The Company is a leasee under several noncancelable operating leases for buildings and machinery and equipment, which expire on various dates through 2004. Rent expense was $103 for the period from August 5, 1997 to December 31, 1997. Future minimum annual lease payments under operating leases are as follows:
1998......................................... $ 598 1999......................................... 573 2000......................................... 379 2001......................................... 251 2002......................................... 56 Later years.................................. 74 --------- Total minimum lease payments................. $ 1,931 --------- ---------
29 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. INCOME TAXES Income tax expense (benefit) consists of:
Current: Federal..................................... $ (124) State....................................... (36) Deferred.................................... 166 --------- $ 6 --------- ---------
The current tax benefits are reflected in the balance sheet as due from affiliated companies as the benefits will be used by the Parent Company in its consolidated tax returns. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997, are presented below:
Deferred tax assets: Inventory capitalization................... $ 9 --------- Total deferred tax assets.................... 9 Deferred tax liabilities: Accelerated depreciation................... (69) Amortization of goodwill................... (106) --------- Total deferred tax liabilities............... (175) --------- Net deferred tax liability................... $ (166) --------- ---------
7. LONG-TERM DEBT--PARENT COMPANY In connection with the purchase of the Company by Sovereign, $30 million in debt was pushed down to the Company and is reflected as a long-term obligation to Sovereign. The debt bears interest at 8.25%. In addition, the Company has recorded $1,955 in deferred financing costs. 8. CORPORATE ALLOCATION OF EXPENSES Since its acquisition by Sovereign, the Company has operated as a stand-alone entity. As such, for the period from August 5, 1997 to December 31, 1997, expenses have been paid directly by the Company and no allocation of Corporate expenses were made by Sovereign. Management believes that the costs reflected by the Company for the period ended December 31, 1997, are indicative of the expenses that would have been incurred had the Company been a stand-alone entity. 9. EMPLOYEE BENEFIT PLANS The Company sponsors a defined-contribution plan (an IRS qualified 401(k) plan). Participation in this plan is available to all salaried and hourly employees of the Company. Participating employees contribute to the 401(k) plan based on a percentage of their compensation which are matched, based on a percentage of employee contributions by the Company. The Company recorded expense for approximately $48 for the period from August 5, 1997 to December 31, 1997. 30 MERCER PRODUCTS COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 10. RISK OF CREDIT CONCENTRATIONS One customer accounted for 10% of the Company's sales during the period from August 5, 1997 to December 31, 1997, and no accounts receivable from any customer exceeded 10% of the Company's gross accounts receivable balance at December 31, 1997. The Company estimates an allowance for doubtful accounts based on the credit worthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. The Company relies on several vendors to supply raw materials needed for its products. Although there are a limited number of manufacturers capable of supplying these needs, the Company believes that other suppliers could provide for the Company's needs in comparable terms. Abrupt changes in the supply flow could, however, cause a delay in manufacturing and possible inability to meet sales commitments on schedule and a possible loss of sales, which would affect operating results adversely. 11. SUBSEQUENT EVENT On March 5, 1998, Sovereign entered into a stock purchase agreement (the Agreement) for the sale of the Company to Burke Industries, Inc. The purchase price of the sale as stated in the Agreement is approximately $35.8 million and includes potential adjustments to the price based upon working capital measurements. Closing of the sale is anticipated to be prior to April 30, 1998. 31 (b) PRO FORMA FINANCIAL INFORMATION Combined Pro Forma Financial Statements (1) Unaudited Pro Forma Combined Balance Sheet. (2) Unaudited Pro Forma Combined Statement of Income. UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Combined Financial Statements (as defined below) of the Company are based on the audited financial statements of the Company and Mercer appearing elsewhere in this Current Report on Form 8-K, or incorporated herein by reference, as adjusted to illustrate the estimated effects of the Offering, the related financing transactions, the Mercer Acquisition and the prior recapitalization of the Company (the "Prior Recapitalization," and, collectively, with the Offering, the related financing transactions and the Mercer Acquisition, 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 Combined Financial Statements and accompanying notes should be read in conjunction with the historical financial statements of the Company and Mercer and other financial information pertaining to the Company and Mercer appearing elsewhere in this Current Report on Form 8-K, or incorporated herein by reference. The Unaudited Pro Forma Combined Financial Statements have been prepared to give effect to the Transactions, as if such transactions had occurred on January 4, 1997 for the statement of income for the year ended January 2, 1998 (the "Unaudited Pro Forma Combined Income Statement") and on January 2, 1998 for the balance sheet (the "Unaudited Pro Forma Combined Balance Sheet," which together with the Unaudited Pro Forma Combined Statement of Income comprise the "Unaudited Pro Forma Combined Financial Statements"). The pro forma adjustments relating to the allocation of the purchase price of Mercer represent the Company's preliminary determinations of the purchase accounting and other adjustments and are based upon available information and certain assumptions the Company considers reasonable under the circumstances. Final amounts could differ from those set forth therein. The Mercer Acquisition will be treated as a purchase for financial accounting purposes. The Unaudited Pro Forma Combined Financial Statements do not purport to be indicative of what the Company's financial position or results of operation would actually have been had the Transactions been completed on such date or at the beginning of the periods indicated or to project the Company's results of operations for any future date. 32 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF FISCAL YEAR 1997 (DOLLARS IN THOUSANDS)
HISTORICAL -------------------- PRO FORMA PRO FORMA BURKE MERCER ADJUSTMENTS (1) COMBINED --------- --------- --------------- ----------- ASSETS Current assets: Cash and cash equivalents..................................... $ 11,563 $ 501 $ (7,001)(2) $ 5,063 Restricted cash............................................... 1,070 -- -- 1,070 Trade accounts receivable..................................... 11,186 2,305 -- 13,491 Due from affiliated companies................................. -- 815 (815)(3) -- Inventories................................................... 11,187 2,920 -- 14,107 Prepaid expenses and other current assets..................... 1,056 211 (180)(3) 1,087 Deferred income tax assets.................................... 2,845 9 (9)(3) 2,845 Refundable income taxes....................................... 1,639 -- -- 1,639 --------- --------- --------------- ----------- Total current assets........................................ 40,546 6,761 (8,005) 39,302 Property, plant and equipment................................... 15,020 4,952 (135)(3) 19,837 Prepaid pension costs........................................... 501 -- -- 501 Deferred financing costs, net................................... 5,210 1,842 1,158(2) 8,210 Goodwill, net................................................... 1,465 24,809 3,700(4) 29,974 Other assets................................................ 95 -- -- 95 --------- --------- --------------- ----------- Total assets................................................ $ 62,837 $ 38,364 $ (3,282) $ 97,919 --------- --------- --------------- ----------- --------- --------- --------------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable and accrued expenses................... $ 5,489 $ 2,082 $ -- $ 7,571 Accrued compensation and related liabilities.................. 2,086 -- -- 2,086 Accrued interest.............................................. 4,347 -- -- 4,347 Payable to shareholders....................................... 5,882 -- -- 5,882 Income taxes payable.......................................... 1,064 -- -- 1,064 --------- --------- --------------- ----------- Total current liabilities................................... 18,868 2,082 -- 20,950 Existing Notes.................................................. 110,000 -- -- 110,000 Long-term debt due to Sovereign................................. -- 30,000 (30,000)(3) -- Senior Notes.................................................... -- -- 30,000(2) 30,000 Other noncurrent liabilities.................................... 420 -- -- 420 Deferred income tax liabilities................................. 3,891 175 (175)(3) 3,891 Redeemable Preferred Stock, no par value; 30,000 Redeemable Series A shares designated; 16,000 Series A shares issued and outstanding; 5,000 Series B shares designated; 2,000 Redeemable Series B shares issued and outstanding............. 16,148 -- -- 16,148 Shareholders' equity (deficit): Convertible Preferred Stock; 3,000 shares authorized; no shares issued and outstanding; 3,000 shares issued on a pro forma basis................................................. -- -- 3,000(2) 3,000 Class A common stock, no par value; 20,000,000 shares authorized; 3,857,000 issued and outstanding................ 25,464 -- -- 25,464 Additional paid-in capital.................................... -- 6,105 (6,105)(3) -- Accumulated deficit........................................... (111,954) 2 (2)(3) (111,954) --------- --------- --------------- ----------- Total shareholders' equity (deficit)........................ (86,490) 6,107 (3,107) (83,490) --------- --------- --------------- ----------- Total liabilities and shareholders' equity (deficit)........ $ 62,837 $ 38,364 $ (3,282) $ 97,919 --------- --------- --------------- ----------- --------- --------- --------------- -----------
The accompanying notes to the unaudited pro forma combined balance sheet are an integral part of this statement. 33 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (DOLLARS IN THOUSANDS) (1) For purposes of preparing the Unaudited Pro Forma Combined Balance Sheet, Mercer's assets and liabilities acquired or assumed have been recorded at their estimated fair values. A final determination of the required purchase price accounting adjustments and of the fair value of the assets acquired or assumed has not yet been made. Accordingly, the purchase accounting adjustments made in connection with the development of the unaudited pro forma financial information reflect the Company's best estimate based upon currently available information. Based upon Mercer's December 31, 1997 balance sheet, the purchase price allocation would be:
Current assets..................................................................... $ 5,256 Plant and equipment................................................................ 4,817 Excess purchase price over net assets acquired..................................... 28,509 Accounts payable and accrued expenses.............................................. (2,082) --------- Total purchase price............................................................... 36,500 Mercer Acquisition expenses........................................................ (750) --------- Mercer Acquisition consideration................................................... $ 35,750 --------- ---------
(2) Reflects the issuance of $30,000 of Senior Notes, the issuance of 3,000 shares of Convertible Preferred Stock, the use of $6,500 of Burke's cash to pay a portion of the Mercer Acquisition consideration and the capitalization of $3,000 of deferred financing costs; also reflects the elimination of $1,842 in deferred financing costs previously capitalized by Mercer and $501 in cash not contractually acquired in the Mercer Acquisition. (3) Reflects assets and liabilities, including certain property, plant and equipment, not contractually acquired or assumed from Sovereign in the Mercer Acquisition. (4) Reflects the recording of goodwill under the purchase accounting method. Under the Stock Purchase Agreement, Burke and Sovereign have agreed to make elections under Section 338(g) and Section 338(h)(10) of the Internal Revenue Code and any state, local and foreign counterparts with respect to Mercer. 34 UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FISCAL YEAR 1997 (DOLLARS IN THOUSANDS)
ADJUSTMENTS RELATED TO PRIOR RECAPITAL- PRO FORMA TRANSACTIONS PRO FORMA BURKE IZATION BURKE MERCER ADJUSTMENTS COMBINED --------- -------------- ----------- --------- ------------- ----------- Net sales........................... $ 90,228 $ -- $ 90,228 $ 24,899 $ -- $ 115,127 Cost of sales....................... 62,917 -- 62,917 16,499 (600)(4) 78,995 179(5) --------- -------------- ----------- --------- ------------- ----------- Gross profit........................ 27,311 -- 27,311 8,400 421 36,132 Selling, general and administrative expenses.......................... 12,238 (279)(1) 11,959 4,803 1,070(5) 17,665 (167)(6) Transaction expenses................ 1,321 (1,321)(2) Stock option purchase............... 14,105 (14,105)(2) -- -- -- -- --------- -------------- ----------- --------- ------------- ----------- Income (loss) from operations....... (353) 15,705 15,352 3,597 (482) 18,467 Interest expense.................... 5,408 5,592(3) 11,000 1,661 1,505(7) 14,166 --------- -------------- ----------- --------- ------------- ----------- Income (loss) before income taxes... (5,761) 10,113 4,352 1,936 (1,987) 4,301 Income taxes........................ (1,818) 3,602(8) 1,784 777 (798)(8) 1,763 --------- -------------- ----------- --------- ------------- ----------- Net (loss) income................... $ (3,943) $ 6,511 $ 2,568 $ 1,159 $ (1,189) $ 2,538 --------- -------------- ----------- --------- ------------- ----------- --------- -------------- ----------- --------- ------------- ----------- OTHER DATA: Depreciation and Amortization....... $ 1,499 $ -- $ 1,499 $ 1,151 $ 1,249 $ 3,899 EBITDA.............................. 1,146 15,705 16,851 4,748 767 22,366
The accompanying notes to the unaudited pro forma combined statement of income are an integral part of this statement. 35 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME (DOLLARS IN THOUSANDS) PRIOR RECAPITALIZATION ADJUSTMENTS The pro forma financial data for Burke (excluding the Mercer Acquisition) have been derived from the Company's historical financial statements for the year ended January 2, 1998 as if the Prior Recapitalization occurred on January 4, 1997. The Prior Recapitalization has been accounted for as a recapitalization that has no impact on the historical basis of assets and liabilities. (1) Reflects the elimination of management fees paid to a director and to an affiliate of the prior principal shareholders of the Company prior to August 1997. (2) Includes the elimination of $14,105 representing the Company's cost to purchase options issued and outstanding under the Company's stock option plan in connection with the Prior Recapitalization. Also reflects the elimination of expenses of $1,321 incurred in connection with the Prior Recapitalization. (3) Reflects a full year of interest on the Existing Notes net of interest on prior debt repaid as follows: Interest expense on the Existing Notes............................. $ 11,000 Amortization of debt issuance costs (10 years)..................... 500 Less interest income............................................... (500) Less historical net interest of existing debt refinanced........... (5,408) --------- Incremental interest expense....................................... $ 5,592 --------- ---------
TRANSACTIONS ADJUSTMENTS The following adjustments reflect the Transactions, including the Offering, as applied to the Company's pro forma results and Mercer's actual results as if the Transactions took place on January 4, 1997. (4) Reflects raw material cost savings of $600 primarily due to the shifting of raw material purchases away from Mercer's former affiliate and to lower cost, non-affiliated suppliers. (5) Adjustment to cost of sales reflects additional depreciation expense of $179 while adjustment to selling, general and administrative expenses reflects additional amortization expense of $1,070 calculated on a straight line basis over 15 years of the excess of purchase price over net assets acquired in the Mercer Acquisition, net of Mercer's prior amortization expense. (6) Reflects the elimination of management fees paid to a former controlling shareholder of Mercer. (7) Reflects interest on the Senior Notes, net of interest on Mercer's debt not assumed: Interest on the Senior Notes....................................... $ 2,850 Amortization of debt issuance costs (9 1/2 years).................. 316 Less historical interest expense on Mercer's debt not assumed...... (1,661) --------- Incremental interest expense....................................... $ 1,505 --------- ---------
Each incremental 25 basis point increase or decrease in the assumed interest rate of the Senior Notes would increase or decrease annual interest expense on the Senior Notes by $75. (8) Reflects the income tax (benefit) provision arising from the pro forma adjustments discussed above based on the Company's pro forma estimated effective tax rate of 41.0% for the twelve months ended January 2, 1998. 36 (c) EXHIBITS The following exhibits are filed with this report on Form 8-K:
Exhibit No. Description ----------- ----------- *10 Stock Purchase Agreement, dated as of March 5, 1998, among Burke, Sovereign and Mercer. *4.1 Indenture, dated as of April 20, 1998, among Burke, the subsidiary guarantors named therein and United States Trust Company of New York. 4.2 First Supplemental Indenture, dated as of April 21, 1998, among Burke, the subsidiary guarantors named therein and United States Trust Company of New York. 4.3 Certificate of Determination of Preferences of Series C 6% Cumulative Convertible Preferred Stock. 99.1 Press Release of Burke, dated March 16, 1998. 99.2 Press Release of Burke, dated March 31, 1998.
- -------------------------------- * Incorporated by reference from Burke's Annual Report on Form 10-K for the fiscal year ended January 2, 1998. 37 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: May , 1998 BURKE INDUSTRIES, INC. By: /s/ DAVID E. WORTHINGTON ------------------------------------ David E. Worthington Vice President - Finance 38 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- *10 Stock Purchase Agreement, dated as of March 5, 1998, among Burke, Sovereign and Mercer. *4.1 Indenture, dated as of April 20, 1998, among Burke, the subsidiary guarantors named therein and United States Trust Company of New York. 4.2 First Supplemental Indenture, dated as of April 21, 1998, among Burke, the subsidiary guarantors named therein and United States Trust Company of New York. 4.3 Certificate of Determination of Preferences of Series C 6% Cumulative Convertible Preferred Stock. 99.1 Press Release of Burke, dated March 16, 1998. 99.2 Press Release of Burke, dated March 31, 1998.
- -------------------------------- * Incorporated by reference from Burke's Annual Report on Form 10-K for the fiscal year ended January 2, 1998. 39 EX-4.2 2 EXHIBIT 4.2 - -------------------------------------------------------------------------------- BURKE INDUSTRIES, INC. Issuer, THE SUBSIDIARY GUARANTORS NAMED HEREIN Subsidiary Guarantors and UNITED STATES TRUST COMPANY OF NEW YORK Trustee FIRST SUPPLEMENTAL INDENTURE Dated as of April 21, 1998 $110,000,000 10% Senior Notes Due 2007 - -------------------------------------------------------------------------------- FIRST SUPPLEMENTAL INDENTURE, dated as of April 21, 1998, by and between Burke Industries, Inc., a California corporation (the "Company"), the Subsidiary Guarantors (as defined in the Indenture), Mercer Products Company, Inc., a New Jersey corporation ("Mercer") and United States Trust Company of New York, a New York Banking corporation, as Trustee (the "Trustee") RECITALS OF THE COMPANY WHEREAS, the Company and the existing Subsidiary Guarantors have heretofore executed and delivered to the Trustee that certain Indenture, dated as of August 20, 1997 (the "Original Indenture", and as amended hereby, the "Indenture"), by and among the Company, the existing Subsidiary Guarantors and the Trustee pursuant to which $110,000,000 of the 10% Senior Notes due 2007 of the Company were issued (capitalized terms used herein and not defined herein have the meanings given to such terms in the Original Indenture); WHEREAS, Section 902 of the Indenture provides that the Company, the existing Subsidiary Guarantors and the Trustee may, from time to time, with the consent of the Holders of not less than a majority in aggregate Outstanding principal amount of the Notes, enter into one or more supplemental indentures to provide for, among other things, the amendments to the Indenture set forth below (the "Amendments"); WHEREAS, the Company has solicited the consent of the Holders of the Notes to the Amendments pursuant to that certain Consent Solicitation Statement dated March 30, 1998; WHEREAS, Holders of at least a majority in aggregate principal amount of the Outstanding Notes have consented to the Amendments; WHEREAS, on March 5, 1998, the Company entered into a Stock Purchase Agreement among the Company, Mercer Products Company, Inc. ("Mercer") and Sovereign Specialty Chemicals, Inc. pursuant to which the Company will, simultaneously with the execution of this First Supplemental Indenture, acquire all of the outstanding capital stock of Mercer; WHEREAS, pursuant to Section 1310 of the Indenture the Company must provide to the Trustee, on the date that any Person becomes a Restricted Subsidiary, a supplemental indenture in accordance with the terms of Section 1310 of the Indenture; WHEREAS, Mercer desires to guarantee the obligations of the Company under the Indenture in accordance with the terms thereof; WHEREAS, the Company, Mercer and the existing Subsidiary Guarantors have been duly authorized by each of their respective Board of Directors to enter into, execute and deliver this First Supplemental Indenture; WHEREAS, the Company and the existing Subsidiary Guarantors have complied with all conditions contained in the Indenture with respect to the Amendments; and 2 NOW THEREFORE, for and in consideration of the premises and covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Trustee agree as follows: ARTICLE ONE AMENDMENTS The following sections of the Indenture are hereby modified as follows: SECTION 1. Section 101 of the Indenture is hereby amended by adding the following definitions: "Additional New Notes" means up to $20.0 million in aggregate principal amount of New Notes having identical terms to the New Notes that, subject to compliance with Article 10 of the New Indenture, may be issued after the New Closing Date pursuant to the New Indenture. "Mercer Acquisition" means the acquisition by the Company of all of the outstanding capital stock of Mercer Products Company, Inc. pursuant to a Stock Purchase Agreement dated March 5, 1998 among the Company, Mercer and Sovereign Specialty Chemicals, Inc. "New Closing Date" means the date on which the New Notes are originally issued under the New Indenture. "New Indenture" means the indenture entered into on the New Closing Date pursuant to which the New Notes are issued, as it may be supplemented or amended from time to time. "New Notes" means Floating Interest Rate Senior Notes due August 15, 2007 to be issued in connection with the Mercer Acquisition and shall include (i) any notes having substantially identical terms issued in exchange for such New Notes or any Additional New Notes pursuant to a registration rights agreement and (ii) any Additional New Notes that may be issued pursuant to the New Indenture. "New Notes Guarantee" means any guarantee of the New Notes issued by a Restricted Subsidiary of the Company pursuant to the New Indenture. "Recapitalization" means the August 20, 1997 acquisition by J.F. Lehman Equity Investors I., L.P. of a controlling interest in the Company through a recapitalization of the outstanding securities of the Company. "Series C Preferred Stock" means the Convertible Preferred Stock of the Company issued on the New Closing Date. 3 SECTION 2. Restated Definition of Certain Defined Terms. 1. Clause (j) of the definition of Permitted Investments contained in Section 101 is hereby deleted in its entirety and replaced with the following language: (j) other Investments in any Person, a majority of the equity ownership and Voting Stock of which is owned, directly or indirectly, by the Company and/or one or more of the Subsidiaries of the Company, that do not exceed $7.5 million in the aggregate at any time outstanding. 2. The definition of Series A Preferred Stock contained in Section 101 is hereby deleted in its entirety and replaced with the following language: "Series A Preferred Stock" means, collectively, the Series A Cumulative Redeemable Preferred Stock of the Company, no par value and the Series B Cumulative Redeemable Preferred Stock of the Company, no par value, in each case issued on the Closing Date. SECTION 3. Section 1010 of the Indenture is hereby amended as follows: 1. Clause (i) of the definition of Permitted Indebtedness contained in Section 1010 is hereby amended by deleting the figure $15 million appearing therein and substituting therefor the figure $25.0 million. 2. Clause (iv) of the definition of Permitted Indebtedness contained in Section 1010 is hereby deleted in its entirety and replaced with the following language: (iv) Indebtedness represented by (i) the Notes (other than the Additional Notes), (ii) the Note Guarantees (including any Note Guarantees issued pursuant to Section 1021 of this Indenture), (iii) the New Notes (other than any Additional New Notes) and (iv) the New Notes Guarantees (including any New Notes Guarantees issued pursuant to Section 1021 of the New Indenture); 3. Clause (vii) of the definition of Permitted Indebtedness contained in Section 1010 is hereby amended by deleting the figure $7,500,000 appearing therein and substituting therefor the figure $10.0 million. 4. Clause (viii) of Section 1010 is hereby amended by deleting the figure $10 million appearing therein and substituting therefor the figure $15.0 million. 4 SECTION 4. Section 1011 of the Indenture is hereby amended by adding the following language to the beginning of the paragraph beginning with "Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may take the following actions ..." For purposes of this "Limitation on Restricted Payments" covenant, the accrual of dividends on the Series C Preferred Stock shall not be treated as a Restricted Payment. SECTION 5. Section 1013 of the Indenture is hereby amended by deleting clause (F) thereof in its entirety and replacing it with the following language: (F) the payment of all fees and expenses related to the Recapitalization, the offering of the New Notes and the Mercer Acquisition; and SECTION 6. Section 1014 of the Indenture is hereby amended as follows: 1. Clause (ii) of the definition of Permitted Liens contained in Section 1014 is hereby deleted in its entirety and replaced with the following language: (ii) Liens on property or assets of the Company or any Restricted Subsidiary securing Indebtedness under the Bank Credit Agreement or one or more other credit facilities in a principal amount not to exceed the aggregate principal amount of the outstanding Indebtedness permitted by clauses (i) and (viii) of the definition of "Permitted Indebtedness; 2. Clause (iv) of the definition of Permitted Liens contained in Section 1014 is hereby deleted in its entirety and replaced with the following language: (iv) Liens securing (a) the Notes or any Note Guarantee or (b) any New Notes or any New Notes Guarantees, provided that both the Notes or any related Note Guarantee and the New Notes or any related New Notes Guarantee are secured equally and ratably with the obligation or liability secured by such Lien; SECTION 7. Clause (c) of Section 1016 of the Indenture is hereby deleted in its entirety and replaced with the following language: 5 (c) When the aggregate amount of Excess Proceeds exceeds $5 million, the Company shall, within 30 days thereafter, make an offer (an "Excess Proceeds Offer") to purchase from all holders of Notes and New Notes, PRO RATA in proportion to the respective principal amounts outstanding of the Notes and New Notes, the maximum principal amount (expressed as a multiple of $1,000) of Notes and New Notes that may be purchased out of the Excess Proceeds, at a purchase price in cash equal to 100% of the principal amount thereof, plus accrued interest, if any, and Liquidated Damages, if any, to the date such offer to purchase is consummated. To the extent that the aggregate principal amount of Notes and New 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 New Notes validly tendered and not withdrawn by holders thereof exceeds the Excess Proceeds, the Notes and New Notes to be purchased shall be selected on a PRO RATA basis. Upon completion of such offer to purchase, the amount of Excess Proceeds shall be reset to zero. ARTICLE TWO ADDITIONAL NOTE GUARANTEE SECTION 1. Simultaneously with the execution of this First Supplemental Indenture, pursuant to Section 1310 of the Indenture Mercer shall issue a Note Guarantee in the form attached hereto as Exhibit 1, and thereafter, Mercer shall be deemed to be a "Subsidiary Guarantor" under and as defined in the Indenture. ARTICLE THREE MISCELLANEOUS SECTION 1. Except as expressly supplemented by this First Supplemental Indenture, the Indenture and the Notes issued thereunder are in all respects ratified and confirmed and all of the rights, remedies, terms, conditions, covenants and agreements of the Indenture and Notes issued thereunder shall remain in full force and effect. SECTION 2. This First Supplemental Indenture is executed as and shall constitute an indenture supplemental to the Indenture and shall be construed in connection with and as part of the Indenture. This First Supplemental Indenture shall be governed by and construed in accordance with the laws of the jurisdiction that governs the Indenture and its construction. SECTION 3. This First Supplemental Indenture may be executed in any number of counterparts, each of which shall be deemed to be an original for all purposes; but such counterparts shall together be deemed to constitute but one and the same instrument. 6 SECTION 4. Any and all notices, requests, certificates and other instrument executed and delivered after the execution and delivery of this First Supplemental Indenture may refer to the Indenture without making specific reference to this First Supplemental Indenture, but nevertheless all such references shall include this First Supplemental Indenture unless the context otherwise requires. SECTION 5. This First Supplemental Indenture shall be deemed to have become effective upon the date first above written. SECTION 6. In the event of a conflict between the terms of this First Supplemental Indenture and the Indenture, this First Supplemental Indenture shall control. 7 IN WITNESS WHEREOF, the parties have caused this First Supplemental Indenture to be duly executed, and their respective corporate seals, if any, to be hereunto affixed and attested, all as of the day and year first above written. BURKE INDUSTRIES, INC. By: /s/ Keith Oster Attest: /s/ Louis Mintz ----------------------- ------------------------------ Name: Keith Oster Name: Louis Mintz Title: Secretary Title: Assistant Secretary UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By: ----------------------- Name: Title: BURKE FLOORING PRODUCTS, INC. BURKE CUSTOM PROCESSING, INC. BURKE RUBBER COMPANY, INC. Each an existing Subsidiary Guarantor By: /s/ Keith Oster Attest: /s/ Louis Mintz ----------------------- ------------------------------ Name: Keith Oster Name: Louis Mintz Title: Vice President Title: Assistant Secretary MERCER PRODUCTS COMPANY, INC. By: /s/ Keith Oster Attest: /s/ Louis Mintz ----------------------- ------------------------------ Name: Keith Oster Name: Louis Mintz Title: Vice President Title: Assistant Secretary 8 EX-4.3 3 EXHIBIT 4.3 CERTIFICATE OF DETERMINATION OF PREFERENCES OF SERIES C 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK OF BURKE INDUSTRIES, INC. The undersigned, Rocco C. Genovese and Keith Oster, do hereby certify that: 1. They are the President and the Secretary, respectively, of Burke Industries, Inc., a California corporation (the "Corporation"). 2. Pursuant to authority given by the Corporation's Amended and Restated Articles of Incorporation and by Section 202(e) of the California Corporations Code, the Board of Directors of the Corporation, by unanimous written consent, adopted the following resolution: WHEREAS, the rights and privileges applicable to the Series C 6% Cumulative Convertible Preferred Stock (the "Series C Preferred Stock"), including the provisions relating to the convertibility of Series C Preferred Stock into shares of the Corporation's Common Stock, no par value (the "Common Stock"), are specified in the following Certificate of Determination of Series C 6% Cumulative Convertible Preferred Stock of Burke Industries, Inc. (the "Certificate of Determination"); NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority presently granted to and vested in the Board of Directors of this Corporation under the provisions of the Amended and Restated Articles of Incorporation of the Corporation and pursuant to the provisions of Section 401 of the General Corporation Law of the State of California, this Board of Directors hereby creates a series of Preferred Stock to consist of 3,000 shares, and hereby fixes the powers, preferences, relative participating, voting, optional and other special rights, and the qualifications, limitations and restrictions thereof, of Series C Preferred Stock which have not heretofore been set forth in the Amended and Restated Articles of Incorporation in accordance with the terms of the Certificate of Determination attached hereto as EXHIBIT A. 3. The authorized number of shares of Preferred Stock, no par value, of the Corporation is 50,000. The number of shares constituting this Series C Preferred Stock is 3,000, none of which shares has been issued. IN WITNESS WHEREOF, the undersigned officers hereby execute this Certificate and declare, under penalty of perjury under the laws of the State of California, that the statements set forth in this Certificate are true and correct of their own knowledge. Executed at San Jose, California on April 21, 1998. /s/ Rocco C. Genovese ----------------------------------------- Rocco C. Genovese, President /s/ Keith Oster ----------------------------------------- Keith Oster, Secretary EXHIBIT A CERTIFICATE OF DETERMINATION OF SERIES C 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK OF BURKE INDUSTRIES, INC. _____________________________ Pursuant to Section 401 of the General Corporation Law of the State of California _____________________________ FIRST: The Amended and Restated Articles of Incorporation of the Corporation authorizes the issuance of up to 50,000 shares of Preferred Stock, no par value per share (the "Preferred Stock"), and further authorizes the Board of Directors of the Corporation to fix by resolution or resolutions the designations and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding). SECOND: On April 2, 1998, the Board of Directors of the Corporation adopted the following resolution authorizing the creation and issuance of a series of said Preferred Stock to be known as Series C 6% Cumulative Convertible Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation in accordance with the provisions of its Amended and Restated Articles of Incorporation, a series of Preferred Stock of the Corporation be, and it hereby is, created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof are as set forth in this Certificate of Determination as follows: 1. DESIGNATION AND AMOUNT. The shares of such series of Preferred Stock shall be designated as "Series C 6% Cumulative Convertible Preferred Stock" (the "Series C Preferred Stock"), and the number of shares constituting such series shall be 3,000. The initial liquidation preference of the Series C Preferred Stock shall be $1,000 per share (the "Stated Liquidation Value"). 2. RANK. The Series C Preferred Stock shall, with respect to rights on bankruptcy, liquidation, winding up, dissolution and dividends, rank (i) junior to the Series A 11.5% Redeemable Preferred Stock of the Corporation, (ii) junior to the Series B 11.5% Redeemable EXHIBIT A Preferred Stock of the Corporation (together with the Series A 11.5% Redeemable Preferred Stock, the "Redeemable Preferred Stock") and (iii) senior to the Corporation's Common Stock, no par value per share (the "Common Stock"), and to all other classes and series of stock of the Corporation now or hereafter authorized, issued or outstanding, other than any class or series of stock of the Company expressly designated as being on a parity with ("Parity Securities") or senior to the Series C Preferred Stock. Such other classes or series of stock of the Corporation not expressly designated as being on a parity with or senior to the Series C Preferred Stock are referred to hereafter as "Junior Securities." The rights of holders of shares of the Series C Preferred Stock are subordinate to the rights of the Corporation's general creditors, including the holders of the Corporation's (x) 10% Senior Notes due 2007 and (y) the Floating Interest Rate Senior Notes due 2007. 3. DIVIDENDS. (a) The holders of shares of the Series C Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, dividends payable semi-annually in arrears on April 15 and October 15 of each year (each such date, a "Dividend Payment Date"), except that if any Dividend Payment Date is not a Business Day (as defined below), then such semi-annual dividend shall be payable on the next succeeding Business Day and such next succeeding Business Day will be the Dividend Payment Date. Dividends shall be payable to holders of the Series C Preferred Stock at the annual rate of 6% times the sum of (i) the Stated Liquidation Value and (ii) accrued but unpaid dividends as of the immediately preceding Dividend Payment Date. Dividends shall be payable in cash only to holders of record at the close of business on the date specified by the Board of Directors at the time such dividend is declared (the "Record Date"). Any such Record Date shall be not less than 10 days and not more than 60 days prior to the relevant Dividend Payment Date. All dividends paid with respect to shares of the Series C Preferred Stock shall be paid PRO RATA to the holders entitled thereto. (b) Dividends on the Series C Preferred Stock shall accrue and be cumulative on a semi-annual basis (whether or not declared and whether or not funds are legally available for the payment thereof) from the Issue Date (as defined below). The semi-annual dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. (c) So long as any shares of the Series C Preferred Stock are outstanding, the Corporation shall not, without the prior consent of the holders of at least fifty-one percent (51%) of the shares of outstanding Series C Preferred Stock, (i) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Junior Securities (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); (ii) permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase or redeem any Junior Securities; (iii) declare, pay or set apart for payment, or permit any corporation or other entity directly or indirectly controlled by the Corporation to declare, pay or set apart for payment, any dividend or make any distribution or payment on any Junior Securities or Parity Securities, whether directly or indirectly and whether in cash, obligations or shares of the Corporation or 2 EXHIBIT A other property (other than dividends or distributions payable in additional shares of Junior Securities to holders of Junior Securities); or (iv) make any payment on account of, or set apart for payment money for a sinking or other similar fund for, the purchase, redemption or retirement of, any Parity Securities, whether directly or indirectly, and whether in cash, obligations, shares of the Corporation or other property (other than payments solely of Junior Securities), and shall not permit any corporation or other entity directly or indirectly controlled by the Corporation to purchase or redeem any Parity Securities, unless prior to or at the time of such payment or setting apart for payment, the Corporation shall have repurchased, redeemed or retired shares of the Series C Preferred Stock on a PRO RATA basis, in proportion to the respective Liquidation Preferences (as defined in the Amended and Restated Articles of Incorporation or applicable Certificate of Determination) of the Series C Preferred Stock and the Parity Securities as to which such sinking fund or similar fund payment, or such purchase, redemption or retirement, is being effected. (d) Notwithstanding anything contained herein to the contrary, no dividends on shares of Series C Preferred Stock shall be authorized or declared by the Board of Directors of the Corporation or paid or set apart for payment by the Corporation at such time as the terms and provisions of any agreement of the Corporation, including any agreement relating to its indebtedness, prohibits such authorization, declaration, payment or setting apart for payment or provides that such authorization, declaration, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or to the extent such declaration or payment shall be restricted or prohibited by law. 4. LIQUIDATION PREFERENCE. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders an amount in cash equal to 100% of the Stated Liquidation Value for each share outstanding, plus an amount in cash equal to all accrued but unpaid dividends thereon (whether or not declared) as provided in Section 3(b) above, without interest, to the date of liquidation, dissolution or winding up (such amount the "Liquidation Preference"), before any payment shall be made or any assets distributed to the holders of any of the Junior Securities. If the assets of the Corporation are not sufficient to pay in full the Liquidation Preference payable to the holders of outstanding shares of the Series C Preferred Stock and any Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the amounts to which the holders of outstanding shares of Series C Preferred Stock and the holders of outstanding shares of such Parity Securities are entitled were paid in full. (b) For the purposes of this Section 4, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation nor the consolidation or merger of the Corporation with any one or more other corporations shall be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Corporation, unless such voluntary sale, 3 EXHIBIT A conveyance, exchange or transfer shall be in connection with a plan of liquidation, dissolution or winding up of the Corporation. 5. REDEMPTION. (a) OPTIONAL REDEMPTION. The Corporation may, at its option, redeem at any time, out of funds legally available therefor, in the manner provided in Section 6 hereof, all or any portion of the shares of the Series C Preferred Stock, at a redemption price per share equal to 100% of the Liquidation Preference thereof on the date of redemption, including dividends accrued through the Dividend Payment Date immediately preceding the redemption date, though not including any dividends for any period after such Dividend Payment Date; PROVIDED, HOWEVER, that any such optional redemption by the Corporation shall be on a PRO RATA basis and for whole shares of the Series C Preferred Stock; PROVIDED, FURTHER, HOWEVER, that the Corporation may redeem fractional shares of Series C Preferred Stock pursuant to this Section 5(a) in the event that after such redemption a holder of Series C Preferred Stock would be left with less than one full share of Series C Preferred Stock. (b) REDEMPTION UPON CHANGE OF CONTROL. Upon the occurrence of a Change of Control (as defined below), the Series C Preferred Stock shall be redeemable at the option of the holders thereof, in whole or in part, at a redemption price per share equal to 100% of the Liquidation Preference on the date of redemption, including dividends accrued through the Dividend Payment Date immediately preceding the redemption date, though not including any dividends for any period after such Dividend Payment Date; PROVIDED, HOWEVER, that the Corporation will not be obligated to redeem, and will not redeem or call for redemption, any Series C Preferred Stock upon a Change of Control until it has repurchased or redeemed such of the Corporation's (x) $110,000,000 original principal amount of 10% Senior Notes Due 2007, (y) the $30,000,000 original principal amount of Floating Interest Rate Senior Notes due 2007 (collectively, the "Notes") and (z) the Redeemable Preferred Stock then outstanding, in each case as it is required to repurchase or has called for redemption in connection with such Change of Control pursuant to the terms of the indentures among the Corporation, certain of its subsidiaries and U.S. Trust Company of New York, N.A. governing the terms of the Notes, and the Corporation's Amended and Restated Articles of Incorporation. Subject to the foregoing proviso, the Corporation shall redeem, out of funds legally available therefor, the number of shares specified in the holders' notices of election to redeem pursuant to Section 6(b) hereof on the date fixed for redemption. 6. PROCEDURE FOR REDEMPTION. (a) In the event that the Corporation shall redeem shares of Series C Preferred Stock pursuant to Section 5(a) hereof, notice of such redemption shall be mailed by first-class mail, postage prepaid, and mailed not less than 30 days nor more than 60 days prior to the redemption date to the holders of record of the shares to be redeemed at their respective addresses as they shall appear in the records of the Corporation; PROVIDED, HOWEVER, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceeding for the redemption of any shares so to be redeemed except as to the holder to whom the Corporation 4 EXHIBIT A has failed to give such notice or except as to the holder to whom notice was defective. Each such notice shall state: (i) the redemption date; (ii) the number of shares of Series C Preferred Stock to be redeemed and, if less than all the shares held by such holders are to be redeemed, the number of such shares to be redeemed from such holders; (iii) the redemption price and form of consideration; (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on such redemption date. Any redemption of less than all the shares of Series C Preferred Stock pursuant to Section 5(a) shall be made on a PRO RATA basis to all holders of Series C Preferred Stock. (b) If a Change of Control should occur, then, subject to Section 5(b) above, within 30 days of the occurrence of such Change of Control, the Corporation shall give written notice by first-class mail, postage prepaid, to each holder of Series C Preferred Stock at its address as it appears in the records of the Corporation, which notice shall set forth (in addition to the information required by the next succeeding paragraph): (i) each holder's right to require the Corporation to redeem shares of Series C Preferred Stock held by such holder as a result of such Change of Control; (ii) the redemption price; (iii) the redemption date (which date shall be no earlier than 30 days and no later than 60 days from the date the notice in respect of such Change of Control is mailed); (iv) the procedures to be followed by such holder in exercising its right of redemption, including the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (v) that dividends on the shares to be redeemed will cease to accrue on the redemption date. In the event a holder of shares of Series C Preferred Stock shall elect to require the Corporation to redeem any or all of such shares of Series C Preferred Stock, such holder shall deliver, within 20 days of the mailing to it of the Corporation's notice described in this Section 6(b), a written notice stating such holder's election and specifying the number of shares to be redeemed pursuant to Section 5(b) hereof. (c) Notice by the Corporation having been mailed as provided in Section 6(a) hereof, or notice of election having been mailed by the holders as provided in Section 6(b) hereof, and provided that on or before the applicable redemption date funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the PRO RATA benefit of the holders of the shares of Series C Preferred Stock so called for or entitled to redemption, so as to be and to continue to be available therefor, then, from and after the redemption date, dividends on the shares of Series C Preferred Stock so called for or entitled to redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series C Preferred Stock, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive the applicable redemption price and any accrued and unpaid dividends from the Corporation to the date of redemption) shall cease, unless the Corporation defaults in the payment of the redemption price, in which case all rights of the holders of Series C Preferred Stock shall continue until the redemption price is paid. Upon surrender of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors of the Corporation shall so require and a notice by the Corporation shall so state), such shares shall be redeemed by the Corporation at the applicable redemption price as aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the 5 EXHIBIT A unredeemed shares without cost to the holder thereof. Any funds set aside in trust for the holders of Series C Preferred Stock pursuant to this Section 6(c) which remain unclaimed on the second anniversary of the applicable redemption date shall be released or repaid to the Company, after which the holders of shares called for redemption shall be entitled to receive payment of the redemption price only from the Corporation. 7. REACQUIRED SHARES. Shares of Series C Preferred Stock that have been issued and reacquired in any manner, including shares reacquired by redemption or shares converted into Common Stock pursuant to Section 9 below, shall (upon compliance with any applicable provisions of the laws of the State of California) have the status of authorized and unissued shares of the class of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock other than the Series C Preferred Stock. 8. VOTING RIGHTS. Except as specifically provided in this Section 8 and except for any additional voting rights provided by law, the holders of Series C Preferred Stock shall have no voting rights. The Amended and Restated Articles of Incorporation of the Corporation shall not be amended in any manner that would adversely alter or change the powers, preferences or special rights of the Series C Preferred Stock as set forth herein without the affirmative vote of the holders of at least fifty-one percent (51%) of the outstanding shares of Series C Preferred Stock. 9. CONVERSION RIGHTS. The rights of the holders of shares of Series C Preferred Stock to convert such shares into shares of Common Stock (the "Conversion Rights"), and the terms and conditions of such conversion, shall be as follows: (a) RIGHT TO CONVERT. (i) At any time following a Triggering Event (as defined below), each holder of shares of the Series C Preferred Stock shall have the right and option to convert all, but not less than all, of such shares into that number of fully paid and nonassessable shares of Common Stock determined in accordance with the provisions of this Section 9. In order to convert shares of the Series C Preferred Stock into shares of Common Stock, the holder thereof shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or to the transfer agent for the Series C Preferred Stock or the Common Stock, together with written notice to the Corporation stating that he, she or it elects to convert the same and setting forth the name or names in which he, she or it wishes the certificate or certificates for Common Stock to be issued (the "Conversion Notice"). Any holder that does not timely deliver such Conversion Notice and timely surrender such certificate or certificates shall be deemed to have waived his, her or its right to conversion, and such shares shall be subject to the Corporation's right of redemption pursuant to Section 5(a) above. (ii) The Corporation shall, as soon as practicable after the surrender of the certificate or certificates evidencing shares of Series C Preferred Stock for conversion at the office of the Corporation or the transfer agent for the Series C Preferred Stock or the Common Stock, issue to each holder of such shares, or such holder's nominee or nominees, a certificate or certificates evidencing the number of shares of Common Stock to which such holder shall be 6 EXHIBIT A entitled. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series C Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the recordholder or holders of such shares of Common Stock at such date and shall, with respect to such shares, have only those rights of a holder of Common Stock of the Corporation. (b) CONVERSION OF PREFERRED STOCK. Each share of Series C Preferred Stock shall be convertible into the number of shares of Common Stock which results from dividing the Stated Liquidation Value (without any adjustment for the accrued but unpaid dividends thereon) by the Conversion Price per share in effect at the time of conversion PROVIDED, HOWEVER, that any fractional number of shares of Common Stock shall be rounded up to the next whole share. Upon conversion of the Series C Preferred Stock, holders of shares of Series C Preferred Stock shall not be entitled to receive any accrued but unpaid dividends as of the conversion date. (c) CONVERSION PRICE. The conversion price of each share of Series C Preferred Stock shall initially be $10.00 (the "Conversion Price"), and shall be subject to adjustment from time to time as provided herein. (d) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If outstanding shares of the Common Stock of the Corporation shall be subdivided into a greater number of shares, or a dividend in Common Stock or other securities of the Corporation convertible into or exchangeable for Common Stock (in which latter event the number of shares of Common Stock issuable upon the conversion or exchange of such securities shall be deemed to have been distributed), shall be paid in respect of the Common Stock of the Corporation, the Conversion Price for each share of Series C Preferred Stock in effect immediately prior to such subdivision or at the record date of such dividend shall, simultaneously with the effectiveness of such subdivision or immediately after the record date of such dividend, be proportionately reduced, and conversely, if outstanding shares of the Common Stock of the Corporation shall be combined into a smaller number of shares, the Conversion Price for each share of Series C Preferred Stock in effect immediately prior to such combination shall simultaneously with the effectiveness of such combination, be proportionately increased. Notwithstanding the foregoing, no adjustment of the Conversion Price for the Series C Preferred Stock shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; PROVIDED, HOWEVER, that any adjustments which by reason of this subparagraph (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this subparagraph (9)(d) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Any adjustment to the Conversion Price under this Section 9(d) shall become effective at the close of business on the date the subdivision, dividend, or combination referred to herein becomes effective. (e) REORGANIZATIONS, MERGERS AND CONSOLIDATIONS. In the event of any capital reorganization, or the consolidation or merger of the Corporation with or into another entity (collectively referred to hereinafter as "Reorganizations"), unless the Corporation exercises its right to redeem the Series C Preferred Stock pursuant to Section 5(a) above, the holders of the 7 EXHIBIT A Series C Preferred Stock shall thereafter be entitled to receive upon conversion of the Series C Preferred Stock the kind and number of shares of Common Stock or other securities or property (including cash) of the Corporation (or other corporation resulting from such consolidation or surviving such merger or to which such properties and assets shall have been sold or otherwise disposed to), that the holders would have been entitled to receive had such holders converted their Series C Preferred Stock immediately prior to such Reorganization. In case of conervsion any such case appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Series C Preferred Stock, to the end that the provisions set forth herein (including the specified changes and other adjustments to the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares, other securities or property thereafter receivable upon conversion of the Series C Preferred Stock. The provisions of this Section 9(e) shall similarly apply to successive Reorganizations. Any agreement entered into by the Corporation relating to any Reorganization shall make appropriate provision for the conversions described herein. (f) CONVERSION PRICE ADJUSTMENT CERTIFICATE. Whenever the Conversion Price is adjusted as herein provided, the Corporation shall promptly file with the Secretary or transfer agent an officer's certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error. Promptly after delivery of such certificate, the Corporation shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date of such adjustment and shall mail such notice of such adjustment of the Conversion Price to the holder of each share of Series C Preferred Stock at such holder's last address as shown on the stock records of the Corporation. (g) TRIGGERING EVENTS. A Triggering Event shall mean (i) a Change of Control, (ii) an initial public offering of any class of equity securities of the Corporation pursuant to the Securities Act of 1933, as amended, (iii) the delivery of a notice of redemption pursuant to Section 6(a) above and (iv) the fifth anniversary of the Issue Date. 10. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series C Preferred Stock, such numbers of its shares of Common Stock as shall from time to time be sufficient to effect a conversion of all outstanding shares of the Series C Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all the outstanding shares of the Series C Preferred Stock, the Corporation shall promptly seek such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. In the event of the consolidation or merger of the Corporation with another corporation where the Corporation is not the surviving corporation, effective provisions shall be made in the articles or certificate of incorporation, merger or consolidation, or otherwise of the surviving corporation so that such corporation will at all times reserve and keep available a sufficient number of shares of Common Stock or other securities or property to 8 EXHIBIT A provide for the conversion of the Series C Preferred Stock in accordance with the provisions of this Section 10. 11. NOTICES. All notices referred to herein, except as otherwise expressly provided, shall be made by registered or certified mail, return receipt requested, postage prepaid and shall be deemed to have been given when so mailed to the holder at the address for such holder maintained by the Corporation. 12. REMEDIES. Any holder of Series C Preferred Stock may proceed to protect and enforce his, her or its rights and the rights of other holders by any available remedy by proceeding at law or in equity to protect and enforce any such rights, whether for the specific enforcement of any provision in this Certificate of Determination or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. 13. DEFINITIONS. For the purposes of this Certificate of Determination, the following terms shall have the meanings indicated: "Affiliate" shall mean, with respect to any specified person, (a) any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person or (b) any other person that owns, directly or indirectly, 10% or more of such specified person's capital stock or any executive officer or director of any such specified person or other person or, with respect to any natural person, any person having a relationship with such person by blood, marriage or adoption not more remote than first cousin. For the purposes of this definition, "control," when used with respect to any specified person, means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Beneficial Owner" shall have the meaning ascribed to such term or the term "beneficial ownership" in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as amended, except that a person shall be deemed have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition. "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. "Change of Control" shall mean such time after the Issue Date as either: (i) prior to the initial public offering by the Corporation of any class of its Common Stock, the consummation of any transaction the result of which is that the Principals and their Related Parties become the Beneficial Owners, in the aggregate, of less than 50% of the Common Stock of the Corporation; 9 EXHIBIT A (ii) after the initial public offering by the Corporation of any class of its Common Stock, any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than the Principals and their Related Parties, becomes, directly or indirectly, the Beneficial Owner, by way of merger, consolidation or otherwise, of 35% or more of the Common Stock of the Corporation and such person is or becomes, directly or indirectly, the Beneficial Owner of a greater percentage of the voting power of the Common Stock of the Corporation, calculated on a fully diluted basis, than the percentage Beneficially Owned by the Principals and their Related Parties; or (iii) the Corporation effects the sale, lease or transfer of all or substantially all of the assets of the Corporation to any person or group. "Issue Date" shall mean the date on which the Corporation issues $30 million principal amount of its Floating Interest Rate Senior Notes due 2007 as described in the Company's Preliminary Offering Memorandum, dated March 30, 1998. "Junior Securities" shall have the meaning set forth in Section 2 hereof. "Liquidation Preference" shall have the meaning set forth in Section 4 hereof. "Parity Securities" shall have the meaning set forth in Section 2 hereof. "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. "Principals" shall mean (i) J.F. Lehman & Company ("Lehman"), (ii) each Affiliate of Lehman as of the Issue Date, (iii) J.F. Lehman Equity Investors I, L.P. and (iv) each officer or employee (including their respective immediate family members) of Lehman as of the Issue Date. "Related Party" shall mean with respect to any Principal (A) any controlling shareholder or 80% (or more) owned subsidiary of such Principal or (B) any trust, corporation, partnership or other entity, the beneficiaries, shareholders, partners, owners or Persons beneficially holding an 80% or more controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). 10 EX-99.1 4 EXHIBIT 99.1 Page 3 5TH STORY of Level 1 printed in FULL format. Copyright 1998 PR Newswire Association, Inc. PR Newswire March 16, 1998, Monday SECTION: Financial News DISTRIBUTION: TO BUSINESS EDITOR LENGTH: 615 words HEADLINE: Burke Industries Announces Acquisition of Mercer Products And Fiscal 1997 Results DATELINE: SAN JOSE, Calif., March 16 BODY: Burke Industries, Inc., a portfolio company of J.F. Lehman & Company, has announced that it has agreed to purchase Mercer Products Company, Inc. from Sovereign Specialty Chemicals, Inc. Mercer Products Company is a leading manufacturer of vinyl flooring accessories with revenue of $24.9 million in 1997. Mercer is located in Eustis, Florida with distribution centers in South Kearny, New Jersey and Rancho Cucamonga, CA. Burke intends to fund the acquisition in part through the incurrance of additional indebtedness. Consummation of the transaction is subject to certain conditions, including approval under the Hart-Scott-Rodino Act. "We are excited to welcome Mercer's employees and customers into the Burke family," said Rocky Genovese, president and CEO of Burke Industries. "Mercer's reputation for quality and strength in the vinyl flooring accessories market certainly complements our rubber flooring accessories business. Together, we will create an alliance beneficial to all Burke and Mercer customers." Burke also announced its audited financial results for 1997, EBITDA, excluding certain charges related to the August 1997 recapitalization, was $16.8 million on sales of $90.2 million, representing increases of 36% and 25% over the 1996 results, which were $12.4 million and $72.5 million, respectively. "We're pleased with the growth in profitability and improvement in margins," said Genovese. Despite these results, financial performance for 1997 was affected by delayed orders for stealth products, primarily in connection with the B-2 bomber program. Burke Industries is a leading manufacturer of silicone and organic rubber-based products, including floor covering accessories, aircraft seals, precision hose, and single-ply membranes. BURKE INDUSTRIES, INC. AUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Fiscal Year 1997 Year 1996 Page 4 PR Newswire, March 16, 1998 Net Sales $90,228 $72,466 Cost of Sales 62,917 49,689 Gross profit 27,311 22,777 30.3% 31.4% Selling, general and administrative expenses 13,559 11,610 Stock option purchase 14,105 Income (loss) from operations (353) 11,167 Interest expense, net 5,408 2,668 Income (loss) before income tax provision and discontinued operation (5,761) 8,499 Income tax provision (1,818) 3,466 Income (loss) from continuing operations before discontinued operation (83,943) $5,033 Depreciation and amortization $1,499 $1,419 EBITDA $16,851 $12,378 EBITDA margin 18.7% 17.1%
Note: EBITDA excludes charges related to the August, 1997 recapitalization of $14,105 for stock option charge in 1997 and $1,600 and (208) in 1997 and 1996 for transaction expenses and management fee changes. SOURCE Burke Industries, Inc. CONTACT: Rocky Genovese or David Worthington, both for Burke Industries, 408-297-3500 LANGUAGE: ENGLISH LN-SUBJ: MERGERS & ACQUISITIONS (90%); CHEMICALS (88%); MANUFACTURING (88%); FINANCIAL RESULTS (67%); LOAD-DATE: March 17, 1998 EX-99.2 5 EXHIBIT 99.2 Page 3 3RD STORY of Level 1 printed in FULL format. Copyright 1998 PR Newswire Association, Inc. PR Newswire March 31, 1998, Tuesday SECTION: Financial News DISTRIBUTION: TO BUSINESS EDITOR LENGTH: 520 words HEADLINE: Burke Industries Announces Consent Solicitation For 10% Senior Notes Due 2007 DATELINE: SAN JOSE, Calif., March 30 BODY: Burke Industries, Inc., a portfolio company of J.F. Lehman & Company, today announced the commencement of a consent solicitation relating to its $110,000,000 aggregate principal amount of 10% Senior Notes Due 2007 (the "10% Notes"). Burke is soliciting consents to certain amendments to the Indenture pursuant to which the 10% Notes were issued. The consent solicitation is conditioned upon, among other things, the receipt of consents from holders of at least a majority in aggregate principal amount of all outstanding 10% Notes. The fee to be paid for each consent properly delivered prior to the expiration of the consent solicitation is $3.75 in cash for each $1,000 principal amount of 10% Notes. The consent solicitation will be open until 5:00 p.m., New York City time, on April 10, 1998, unless terminated or extended by the Company in its sole discretion. The principal purpose of the consent solicitation is to permit Burke to issue and sell up to $30.0 million of additional debt in connection with the previously-announced acquisition of Mercer Products Company, Inc., a leading manufacturer of vinyl flooring accessories. The closing of the acquisition of Mercer Products is not conditioned on the successful consummation of the consent solicitation as Burke has received a commitment for alternative bank financing from NationsBank, N.A. that provides adequate funds to enable Burke to consummate the acquisition. For a complete statement of the terms and conditions of the consent solicitation, holders of the 10% Notes should refer to the Consent Solicitation Statement dated March 30, 1998. NationsBanc Montgomery Securities LLC is serving as Solicitation Agent in connection with the consent solicitation. Questions regarding the terms of the consent solicitation may be directed to the Solicitation Agent at 888-292-0070 (Attention: Liability Management Group). D.F. King & Co. is serving as Information Agent in connection with the consent solicitation. Questions regarding the delivery procedures for the consents and requests for additional copies of the Consent Solicitation Statement and related documents may be directed to the Information Agent at 800-859-8508. Page 4 PR Newswire, March 31, 1998 Burke Industries is a leading manufacturer of silicone and organic rubber-based products, including floor covering accessories, aircraft seals, precision hose, and single-ply membranes. This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, the securities referenced above in any jurisdiction, in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. The securities referenced above will not be registered under the Securities Act of 1933 and, unless so registered, may not be offered or sold except pursuant to an exemption from or in a transaction not subject to the registration requirements of the Securities Act and any applicable state securities laws. SOURCE Burke Industries, Inc. CONTACT: David E. Worthington, Vice President - Finance, Burke Industries, Inc., 408-291-8326 LANGUAGE: ENGLISH LN-SUBJ: MANUFACTURING (67%); LOAD-DATE: April 1, 1998 -----END PRIVACY-ENHANCED MESSAGE-----