-----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, Bd2VsDq+3QrLPQ0tkXr1AbwXvdXQ+bzFYXPiuRZug46KEw9kt4O6HNd03fz3f9iO W8JOnXjckQQFW6A1j6i1eA== 0001047469-98-031912.txt : 19980818 0001047469-98-031912.hdr.sgml : 19980818 ACCESSION NUMBER: 0001047469-98-031912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980703 FILED AS OF DATE: 19980817 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: 10-Q SEC ACT: SEC FILE NUMBER: 333-36675 FILM NUMBER: 98692929 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 10-Q 1 FORM 10Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED For the quarterly period ended July 3, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission file number 1-333-36675 --------------- BURKE INDUSTRIES, INC. (Exact name of Registrant as specified in its charter) California 94-3081144 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2250 South Tenth Street San Jose, California 95112 (Address of Principal Executive (Zip Code) Offices) Registrant's telephone number, including area code: (408) 297-3500 --------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ----- ---- As of August 14, 1998, the number of shares outstanding of the Registrant's Common Stock was 3,857,000. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BURKE INDUSTRIES, INC. QUARTERLY REPORT ON FORM 10-Q INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER - ------ --------------------- ----------- Item 1 Condensed Consolidated Financial Statements Condensed Consolidated Statements of Income for the three and six months ended July 3, 1998 and July 4, 1997 (unaudited) 3 Condensed Consolidated Balance Sheets as of July 3, 1998 (unaudited) and January 2, 1998 4 Condensed Consolidated Statements of Cash Flows for the six months ended July 3, 1998 and July 4, 1997 (unaudited) 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12
PART II OTHER INFORMATION - ------- ----------------- Item 1 Legal Proceedings 13 Item 2 Changes in Securities 13 Item 4 Submission of Matters to a Vote of Security 13 Holders Item 5 Other Information 14 Item 6 Exhibits and Reports on Form 8-K 14 Signature 15
Page 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS) (UNAUDITED)
For the Three Month Period For the Six Month Period Ended Ended ----------------------------------------------------------------------------- July 3, 1998 July 4, 1997 July 3, 1998 July 4, 1997 ----------------------------------------------------------------------------- Net sales .................................... $ 27,245 $ 22,887 $ 50,188 $ 46,011 Costs and expenses: Cost of sales ............................ 29,668 16,048 35,848 32,467 Selling, general and administrative ...... 3,501 2,925 6,748 6,098 Amortization of goodwill.................. 394 9 403 18 -------------- -------------- ----------------- --------------- Income from operations ....................... 3,682 3,905 7,189 7,428 Interest expense, net ........................ 3,520 515 6,307 1,013 -------------- -------------- ----------------- --------------- Income before income tax provision ........... 162 3,390 882 6,415 Income tax provision ......................... 65 1,356 352 2,565 -------------- -------------- ----------------- --------------- Net income ................................... $ 97 $ 2,034 $ 530 $ 3,850 -------------- -------------- ----------------- --------------- -------------- -------------- ----------------- ---------------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. Page 3 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
January 2, 1998 (Derived from July 3, 1998 audited financial (Unaudited) statements) ------------ ----------------- ASSETS Current assets: Cash and cash equivalents ........................................................ $ 2,430 $ 11,563 Restricted cash .................................................................. -- 1,070 Trade accounts receivable, less allowance of $846 as of 7/3/98 and $334 as of 1/2/98 ........................................ 15,684 11,186 Inventories ...................................................................... 14,790 11,187 Other current assets ............................................................. 4,292 5,540 ------------ --------------- Total current assets ........................................................... 37,196 40,546 ------------ --------------- Property, plant and equipment ...................................................... 31,096 25,556 Accumulated depreciation and amortization .......................................... 11,331 10,536 ------------ --------------- Net property, plant and equipment .................................................. 19,765 15,020 Goodwill, net ...................................................................... 30,743 1,465 Deferred financing costs, net ...................................................... 6,953 5,210 Other assets ....................................................................... 616 596 ------------ --------------- Total assets ................................................................... $ 95,273 $ 62,837 ------------ --------------- ------------ --------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable and accrued expenses ........................................ $ 7,500 $ 5,489 Payable to Shareholders ............................................................ 1,948 5,882 Other current liabilities .......................................................... 8,317 7,497 ------------ --------------- Total current liabilities .......................................................... 17,765 18,868 Senior notes ....................................................................... 140,000 110,000 Other noncurrent liabilities ....................................................... 4,320 4,311 Preferred stock, no par value; 50,000 shares authorized; 30,000 Redeemable Series A shares designated; 16,000 Redeemable Series A shares issued and outstanding; 5,000 Redeemable Series B shares designated; 2,000 Redeemable Series B shares issued and outstanding; (aggregate liquidation and redemption preference of $18,000) .............................. 17,154 16,148 Shareholders' equity (deficit): Convertible Preferred Stock, no par value: 3,000 Series C shares designated, issued and outstanding (liquidation preference $3,000).............. 3,000 -- Class A common stock, no par value: .............................................. Authorized shares - 20,000,000 ................................................. Issued and outstanding shares - 3,857,000 ...................................... 25,464 25,464 Accumulated deficit .............................................................. (112,430) (111,954) ------------ --------------- Total shareholders' equity (deficit) ............................................. (83,966) (86,490) ------------ --------------- Total liabilities and shareholders' equity (deficit) ........................... $ 95,273 $ 62,837 ------------ --------------- ------------ ---------------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. Page 4 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
For the Six Month Period Ended ---------------------------------- July 3, 1998 July 4, 1997 ------------------------------- (Unaudited) OPERATING ACTIVITIES Net Income ......................................................................... $ 530 $ 3,850 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization: Property, plant and equipment ................................................... 809 680 Goodwill ........................................................................ 403 18 Other adjustments to reconcile net income to net cash (used in) provided by operating activities: ............................................... 164 (4,696) ----------- ------------- Net cash (used in) provided by operating activities ................................ 1,906 (148) INVESTING ACTIVITIES Acquisition of Mercer Products Company, Inc. less cash of $34 ...................... (38,440) -- Purchases of property, plant and equipment ......................................... (651) (565) Note receivable from an affiliate of the principal shareholders .................... -- (189) ----------- ------------- Net cash used in investing activities .............................................. (39,091) (754) FINANCING ACTIVITIES Restricted cash .................................................................... 1,070 -- Borrowings of long-term debt ....................................................... -- 3,963 Repayments and settlement of long-term debt and capital lease obligations .......... -- (3,063) Payable to shareholders ............................................................ (3,934) -- Deferred financing costs ........................................................... (2,084) -- Issuance of Floating Interest Rate Senior Notes .................................... 30,000 -- Issuance of Series C Convertible Preferred Stock ................................... 3,000 -- Other financing activities ......................................................... -- 2 ----------- ------------- Net cash provided by financing activities .......................................... 28,052 902 ----------- ------------- Decrease in cash ................................................................... (9,133) -- Cash at beginning of period ........................................................ 11,563 -- ----------- ------------- Cash at end of period .............................................................. $ 2,430 $ -- ----------- ------------- ----------- -------------
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. Page 5 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements of the Company have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of January 2, 1998 was derived from audited financial statements. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1998. The financial information included herein reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim period. The results of operations for the six months ended July 3, 1998 are not necessarily indicative of the results to be expected for the full year. The Company uses a 52 to 53-week fiscal year ending on the Friday closest to December 31. The Company also follows a thirteen week quarterly cycle. The six-month periods ended on July 4, 1997 and July 3, 1998. As of January 1, 1998, the Company adopted Statement of Financial Accounting No. 130, "Reporting Comprehensive Income" (FAS 130) which establishes new rules for the reporting and display of comprehensive income and its components. The adoption of FAS 130 had no impact on the Company's net income or shareholders' equity. 2. INVENTORIES Inventories consist of the following:
July 3, 1998 January 2, 1998 -------------------------------- (In thousands) Raw materials $ 5,743 $ 4,626 Work-in-process 2,067 1,593 Finished goods 6,980 4,968 ------------ ----------- $ 14,790 $ 11,187 ------------ ----------- ------------ -----------
3. ACQUISITION OF MERCER PRODUCTS COMPANY, INC. On April 21, 1998, the Company acquired all of the issued and outstanding capital stock of Mercer Products Company, Inc. ("Mercer"), from Sovereign Specialty Chemicals, Inc., for an aggregate purchase price of $38,474,000 (including acquisition costs of $2,280,000). The acquisition was accounted for under the purchase method of accounting. Page 6 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values as follows:
(in thousands) Current assets: ............................................... $ 5,269 Plant and equipment ........................................... 4,903 Excess of purchase price over net assets acquired ............. 29,681 Accounts payable and accrued expenses ......................... (1,379) --------- Total purchase price ........................................ $ 38,474 --------- ---------
Financing for this acquisition and related expenses was provided, in large part, from the sale of $30 million principal amount of Floating Interest Rate Senior Notes Due 2007 ("Senior Notes"). The balance of the financing was provided with $3.0 million from the sale of 3,000 shares of the Company's 6% Series C Cumulative Convertible Preferred Stock and cash on hand. The Senior Notes mature on August 15, 2007, with interest on the notes payable semi-annually on February 15 and August 15, commencing August 15, 1998. The Senior Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Senior Notes are unconditionally guaranteed on a joint and several basis by each of the Company's subsidiaries, including Mercer. Upon a change of control of the Company, the Company will be required to make an offer to repurchase all outstanding Senior Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon at the date of repurchase. The Company also amended its existing bank credit facility to increase the revolving credit facility from $15 million to $25 million and revise certain of its restrictive covenants. The Series C Convertible Preferred Stock ranks junior to the Redeemable Preferred Stock and dividends accrue at an annual rate per share of 6% times the sum of $1,000 and accrued but unpaid dividends. Dividends are cumulative and are payable semi-annually in arrears on April 15 and October 15. The holders of Series C Convertible Preferred Stock are entitled to receive a stated liquidation value of $1,000 per share plus accrued but unpaid dividends in the event of any liquidation, dissolution or winding up of the Company. After payment of the liquidation preference, the holders of Series C Convertible Preferred Stock are not entitled to further participation in any distribution of assets of the Company. The holders of Series C Convertible Preferred Stock are not entitled to any voting rights; however, without the consent of 51% of the holders of Series C Convertible Preferred Stock, the Company may not adversely alter the rights and preferences of the Series C Convertible Preferred Stock. Upon the occurrence of a triggering event, holders of Series C Convertible Preferred Stock have the option to convert such shares into common stock at a conversion price of $10 per share, subject to anti-dilution provisions. A triggering event includes a change of control, an initial public offering, notice by the Company of an intent to redeem the Convertible Preferred Stock or the fifth anniversary of the issuance of the Convertible Preferred Stock. The Company may, at its option, redeem all or a portion of the Convertible Preferred Stock at a redemption value equal to the liquidation value plus accrued but unpaid dividends. Upon a change in control and subject to limitations under the Redeemable Preferred Stock and Senior Note agreements, the Page 7 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) holders of Convertible Preferred Stock may redeem such shares at a redemption value equal to the liquidation value plus accrued but unpaid dividends. Page 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This Report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company, with respect to future events and are subject to certain risks, uncertainties and assumptions, that could cause actual results to differ materially from those expressed in any forward-looking statement, including, without limitation: competition from other manufacturers in the Company's aerospace, flooring or commercial product lines, loss of key employees, general economic conditions and adverse factors impacting the aerospace industry such as changes in government procurement policies. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. RESULTS OF OPERATIONS The Company operates within two industry segments, organic rubber/vinyl products and silicone rubber products, and is organized into three product groups: (i) aerospace products, which produces precision silicone seals and other products used on commercial and military aircraft; (ii) flooring products, which produces and distributes rubber and vinyl cove base and other floor covering accessory products; and (iii) commercial products, which produces various intermediate and finished silicone and organic rubber products. The following table sets forth certain income statement information for the Company for the three and six month periods ended July 3, 1998 compared to the same periods in 1997:
FISCAL SECOND QUARTER ----------------------------------------------------------- PERCENTAGE OF PERCENTAGE OF 1998 NET SALES 1997 NET SALES ---------- --------------- --------- ---------------- (dollars in thousands) Net sales Aerospace products ...................... $ 8,419 30.9% $ 7,995 34.9% Flooring products ....................... 11,224 41.2 5,366 23.4 Commercial products ..................... 7,602 27.9 9,526 41.7 -------- ----- --------- ----- Net sales ................................... 27,245 100.0 22,887 100.0 Cost of sales ............................... 19,668 72.2 16,048 70.1 -------- ----- --------- ----- Gross profit ................................ 7,577 27.8 6,839 29.9 Selling, general and administrative expenses ................... 3,501 12.9 2,925 12.8 Amortization of goodwill .................... 394 1.4 9 0.0 -------- ----- --------- ----- Income from operations ...................... 3,682 13.5 3,905 17.1 Interest expense ............................ 3,520 12.9 515 2.3 -------- ----- --------- ----- Income before income tax provision ................................. 162 0.6 3,390 14.8 Income tax provision ........................ 65 0.2 1,356 5.9 -------- ----- --------- ----- Net income .................................. $ 97 0.4% $ 2,034 8.9% -------- ----- --------- -----
Page 9
FISCAL SECOND QUARTER ------------------------------------------------------------ PERCENTAGE OF PERCENTAGE OF 1998 NET SALES 1997 NET SALES ---------- --------------- --------- ---------------- (dollars in thousands) Net sales Aerospace products.................... $ 17,970 35.8% $ 15,906 34.6% Flooring products..................... 17,066 34.0 11,259 24.5 Commercial products................... 15,152 30.2 18,846 40.9 -------- ----- --------- ----- Net sales................................ 50,188 100.0 46,011 100.0 Cost of sales............................ 35,848 71.4 32,467 70.6 -------- ----- --------- ----- Gross profit............................. 14,340 28.6 13,544 29.4 Selling, general and administrative expenses................ 6,748 13.4 6,098 13.3 Amortization of goodwill................. 403 0.8 18 0.0 -------- ----- --------- ----- Income from operations................... 7,189 14.4 7,428 16.1 Interest expense......................... 6,307 12.6 1,013 2.2 -------- ----- --------- ----- Income before income tax provision.............................. 882 1.8 6,415 13.9 Income tax provision..................... 352 0.7 2,565 5.6 -------- ----- --------- ----- Net income............................... $ 530 1.1% $ 3,850 8.3% -------- ----- --------- -----
COMPARISON OF THE THREE MONTH PERIOD ENDED JULY 3, 1998 VERSUS THE THREE MONTH PERIOD ENDED JULY 4, 1997 NET SALES. Total net sales increased 19.0%, from $22.9 million in 1997 to $27.2 million in 1998. Aerospace Products sales grew 5.3%, reflecting the net effects of increased demand for military products, offset by reduced volume with Boeing. Flooring Products sales increased 109.2%, due primarily to the acquisition of Mercer (98.5%), and also due to volume which had been deferred from the first quarter as the result of weather-related delays in general construction activity on the west coast. Commercial Products sales decreased 20.2%, primarily because the second quarter of 1997 included a liner project order that favorably affected results for that period. COST OF SALES. Cost of sales increased 22.6%, from $16.0 million in 1997 to $19.7 million in 1998. As a percentage of net sales, gross profit decreased from 29.9% to 27.8%. The decrease in profit percentage was primarily due to temporary operating inefficiencies, both in connection with new product ramp-up in Commercial Products within the silicone products group, and also in connection with the silicone products' facility expansion which occured in July, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 19.7%, from $2.9 million in 1997 to $3.5 million in 1998. As a percentage of net sales, selling, general and administrative expenses increased from 12.8% to 12.9%. The increase was due to general cost increases. AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.4 million in 1998. The increase was due to the acquisition of Mercer. INCOME FROM OPERATIONS. As a result of the above factors, income from operations decreased 5.7%, from $3.9 million in 1997 to $3.7 million in 1998. INTEREST EXPENSE. Interest expense increased 583.5%, from $0.5 million in 1997 to $3.5 million in 1998. The increase was due to the issuance of Fixed-Rate Notes on August 20, 1997 and Floating-Rate Notes on April 21, 1998. Page 10 NET INCOME. As a result of the above factors, net income decreased 95.2%, from $2.0 million in 1997 to $0.1 million in 1998. COMPARISON OF THE SIX MONTH PERIOD ENDED JULY 3, 1998 VERSUS THE SIX MONTH PERIOD ENDED JULY 4, 1997 NET SALES. Total net sales increased 9.1%, from $46.0 million in 1997 to $50.2 million in 1998. Aerospace Products sales grew 13.0%, due primarily to increased demand for military products. Flooring Products sales increased 51.6%, due primarily to the acquisition of Mercer (46.9%). Commercial products sales decreased 19.6%, primarily because the first six months of 1997 included a liner project order that favorably affected results for that period. COST OF SALES. Cost of sales increased 10.4%, from $32.5 million in 1997 to $35.8 million in 1998. As a percentage of net sales, gross profit decreased from 29.4% to 28.6%. The decrease in profit percentage was primarily due to temporary operating inefficiencies, both in connection with new product ramp-up in Commercial Products within the silicone products group, and also in connection with the silicone products' facility expansion which occured in July, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 10.7%, from $6.1 million in 1997 to $6.7 million in 1998. As a percentage of net sales, selling, general and administrative expenses increased from 13.3% to 13.4%. The increase was due to general cost increases. AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.4 million in 1998. The increase was due to the acquisition of Mercer. INCOME FROM OPERATIONS. As a result of the above factors, income from operations decreased 3.2%, from $7.4 million in 1997 to $7.2 million in 1998. INTEREST EXPENSE. Interest expense increased 522.6%, from $1.0 million in 1997 to $6.3 million in 1998. The increase was due to the issuance of Fixed-Rate Notes on August 20, 1997 and Floating-Rate Notes on April 21, 1998. NET INCOME. As a result of the above factors, net income decreased 86.2%, from $3.9 million in 1997 to $0.5 million in 1998. Income Tax Provision For the three month and six month periods ended July 3, 1998, the Company recorded an income tax provision of 40.0%, which represents the effective tax rate projected for the full fiscal year 1998. This effective tax rate differs from the federal statutory rate primarily due to state income taxes (net of federal benefit) and is consistent with the effective tax rate for the three month and six month periods ended July 4, 1997. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW. The Company's principal uses of cash are to finance working capital and capital expenditures related to asset acquisitions and internal growth. CAPITAL REQUIREMENTS. On a consolidated basis, the Company expects to spend approximately $2.0 million during fiscal 1998 on capital expenditures not directly related to acquisitions. Cash flow from operations, to the extent available, may also be used to fund a portion of any acquisition expenditures. The Company actively seeks acquisition opportunities, and the Company intends to seek additional capital as necessary to fund potential acquisitions through one or more funding sources that may include borrowings under the existing or new credit facilities. Page 11 SOURCES OF CAPITAL. On April 21, 1998, the Company acquired all of the issued and outstanding capital stock of Mercer, from Sovereign Specialty Chemicals, Inc., for an aggregate purchase price of $38,474,000 (including acquisition costs of $2,280,000). Financing for this acquisition and related expenses was provided, in large part, from the sale of (the "Offering") $30 million principal amount of Floating Interest Rate Senior Notes Due 2007 ("Senior Notes"). The balance of the financing was provided with $3.0 million from the sale of 3,000 shares of the Company's 6% Series C Cumulative Convertible Preferred Stock and cash on hand. The Senior Notes mature on August 15, 2007, with interest on the notes payable semi-annually on February 15 and August 15, commencing August 15, 1998. The Senior Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Senior Notes are unconditionally guaranteed on a joint and several basis by each of the Company's subsidiaries, including Mercer. Upon a change of control of the Company, the Company will be required to make an offer to repurchase all outstanding Senior Notes at 101% of the aggregate principal amount thereof plus accrued and unpaid interest thereon at the date of repurchase. Contemporaneously with the acquisition of Mercer, the Company amended its existing Loan and Security Agreement, as amended from time to time, with NationsBank, N.A., as administrative agent, and other lending institutions party thereto (the "Credit Agreement") to, among other things, (i) increase the Company's borrowing capacity from $15.0 million to $25.0 million (as amended, the "Credit Facility") (ii) add Mercer as a Borrowing Subsidiary (as defined in the Credit Agreement), (iii) increase certain of the baskets contained in the restrictive covenants to reflect the increased size of the Company after the closing of the acquisition of Mercer (the "Mercer Acquisition") and (iv) waive any default or event of default that may otherwise result from the consummation of the Offering and the Mercer Acquisition. The Credit Facility matures in August 2002. Interest on loans under the Credit Facility bear interest at rates based upon either, at the Company's option, Eurodollar Rates plus a margin of 2.5% or upon the Prime Rate. Loans under the Credit Facility are secured by security interests in substantially all of the assets of the Company and are guaranteed by any and all current or future subsidiaries of the Company, which guarantees are secured by substantially all of the assets of such subsidiaries. The Credit Facility contains customary covenants restricting the Company's ability to, among other things, incur additional indebtedness, create liens or other encumbrances, pay dividends or make other restricted payments, make investments, loans and guarantees or sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. The Credit Facility also contains a number of financial covenants that will require the Company to meet certain financial ratios and tests and provide that a change of control of the Company (as defined in the Credit Facility) will constitute an event of default. The Company anticipates that its principal use of cash on a going forward basis will be working capital requirements, debt service requirements and capital expenditures as well as expenditures relating to new acquisitions and integrating such acquired businesses. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the Credit Facility, will be adequate to meet its anticipated requirements for the foreseeable future for working capital, capital expenditures and interest payments. Page 12 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. A lawsuit has been filed by a former shareholder against the Company and certain of its current and former officers and directors. The former shareholder is asserting various claims in connection with the Company's repurchase of such shareholder's shares prior to the time the Company entered into an Agreement and Plan of Merger pursuant to which the Company was recapitalized and all shares of the Company's common stock, other than those retained by certain members of management and certain other shareholders, were converted into the right to receive cash based upon a formula. The Company believes that such claims are without merit and intends to vigorously defend such action. A former employee of Mercer filed a lawsuit against Mercer and Sovereign Specialty Chemicals, L.P. ("Sovereign"), the former owner of Mercer. The former employee has made various claims for relief on the grounds that she was allegedly the victim of certain harassment, discrimination, retaliation and negligence. Pursuant to certain indemnification provisions contained in the Stock Purchase Agreement by and among the Company, Mercer and Sovereign, dated March 5, 1998, as amended by Amendment No. 1 to the Stock Purchase Agreement, dated April 21, 1998, Mercer has tendered its defense to Sovereign's counsel and Sovereign has agreed, through its counsel, to defend Mercer against the allegations asserted against Mercer by the former employee. Mercer denies the allegations made by the former employee and, through its joint counsel with Sovereign, intends vigorously to defend such claims. ITEM 2. CHANGES IN SECURITIES. In connection with the Offering in April 1998, pursuant to a consent solicitation (the "Consent Solicitation"), the Company obtained the consents (the "Consent") of holders of its outstanding 10% Senior Notes due 2007 (the "Existing Notes") to certain proposed amendments (the "Amendments") to the indenture pursuant to which the Existing Notes were issued between the Company and the United States Trust Company of New York (the "Existing Indenture") which, among other things, (i) permitted the issuance of the Senior Notes and permitted the incurrence of indebtedness represented by the Senior Notes, (ii) increased certain of the permitted indebtedness and permitted investment baskets contained in the indebtedness and restricted payment covenants in the Existing Indenture, (iii) modified the lien covenant to enhance the Company's ability to use existing assets as collateral for new financings and (iv) made certain other amendments of a non-substantive nature to the Existing Indenture. Pursuant to the Consent Solicitation, the Company made certain payments to holders thereof who properly furnished their Consents to the Amendments on a timely basis. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. As described in Item 2 above, in connection with the Offering, pursuant to the Consent Solicitation, the Company solicited the Consent of holders of its Existing Notes to the Amendments to the Existing Indenture. See Part II, Item 2. Page 13 ITEM 5. OTHER INFORMATION. Mercer was merged with and into the Company, effective August 12, 1998. The Company has qualified to do business in New Jersey and Florida, where Mercer has its business operations. The merger was undertaken for purely administrative reasons and Burke intends to continue to operate Mercer's business throughout the nation under the name Mercer Products Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule (b) REPORT ON FORM 8-K. The Registrant filed a Current Report on Form 8-K on May 5, 1998, including information related to Items 2 and 7. The Report included the following financial statements for 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; and (16) Notes to Financial Statements. Page 14 SIGNATURE 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, thereunto duly authorized. BURKE INDUSTRIES, INC. Dated: August 17, 1998 By: /s/ DAVID E. WORTHINGTON ------------------------------ David E. Worthington Vice President-Finance Page 15 EX-27 2 EXHIBIT 27
5 1,000 6-MOS JAN-01-1999 JAN-03-1998 JUL-03-1998 2,430 0 16,530 846 14,790 37,196 31,096 11,331 95,273 17,765 140,000 17,154 3,000 25,464 (112,430) 95,273 50,188 0 35,848 35,848 0 0 6,307 882 352 7,189 0 0 0 530 0 0
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