-----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, LUo+njiSEvnNeoinhgsB0yxzx1KjyKzVUXumotiZ1KICV+aN5gSpDLLsyIiHsA40 Zm62GcyeeIWPNl+I5QPQZQ== 0001047469-98-040887.txt : 19981118 0001047469-98-040887.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-040887 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981002 FILED AS OF DATE: 19981113 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: 98749690 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 10-Q 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 October 2, 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 November 13, 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 PAGE PART I FINANCIAL INFORMATION NUMBER Item 1 Condensed Consolidated Financial Statements Condensed Consolidated Statements of Operations for the three and nine months ended October 2, 1998 and October 3, 1997 (unaudited) 3 Condensed Consolidated Balance Sheets as of October 2, 1998 (unaudited) and January 2, 1998 4 Condensed Consolidated Statements of Cash Flows for the nine months ended October 2, 1998 and October 3, 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 14 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 OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
For the Three Month Period Ended For the Nine Month Period Ended -------------------------------------- ------------------------------------- October 2, 1998 October 3, 1997 October 2, 1998 October 3, 1997 ------------------ ------------------- ------------------ ------------------ Net sales........................ $ 30,879 $ 22,774 $ 81,067 $ 68,785 Costs and expenses: Cost of sales............... 21,977 15,956 57,825 48,423 Selling, general and administrative.............. 3,903 3,422 10,651 9,520 Amortization of goodwill.... 504 16 907 34 Transaction expenses........ -- 1,174 -- 1,174 Stock option purchase....... -- 14,105 -- 14,105 ---------------- ---------------- ---------------- ---------------- Income (loss) from operations.................. 4,495 (11,899) 11,684 (4,471) Interest expense, net............ 3,756 1,612 10,063 2,625 ---------------- ---------------- ---------------- ---------------- Income (loss) before income tax provision (benefit)................... 739 (13,511) 1,621 (7,096) Income tax provision (benefit)................... 296 (5,120) 648 (2,555) ---------------- ---------------- ---------------- ---------------- Net income (loss)................ $ 443 $ (8,391) $ 973 $ (4,541) ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
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 audited October 2, 1998 financial (Unaudited) statements) --------------- -------------- ASSETS Current assets: Cash and cash equivalents........................................... $ 920 $ 11,563 Restricted cash..................................................... -- 1,070 Trade accounts receivable, less allowance of $870 as of 10/2/98 and $334 as of 1/2/98.......................... 15,353 11,186 Inventories......................................................... 15,231 11,187 Other current assets................................................ 4,486 5,540 --------- --------- Total current assets.............................................. 35,990 40,546 --------- --------- Property, plant and equipment.......................................... 31,923 25,556 Accumulated depreciation and amortization.............................. 11,788 10,536 --------- --------- Net property, plant and equipment...................................... 20,135 15,020 Goodwill, net.......................................................... 30,239 1,465 Deferred financing costs, net.......................................... 6,747 5,210 Other assets........................................................... 616 596 --------- --------- Total assets...................................................... $ 93,727 $ 62,837 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Trade accounts payable and accrued expenses............................ $ 8,472 $ 5,489 Payable to Shareholders................................................ 1,125 5,882 Other current liabilities.............................................. 6,171 7,497 --------- --------- Total current liabilities.............................................. 15,768 18,868 Fixed-Rate Senior Notes................................................ 110,000 110,000 Floating-Rate Senior Notes............................................. 30,000 -- Other noncurrent liabilities........................................... 4,328 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)........ 17,657 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................................................. (112,490) (111,954) --------- --------- Total shareholders' equity (deficit)................................ (84,026) (86,490) --------- --------- Total liabilities and shareholders' equity (deficit).............. $ 93,727 $ 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 Nine Month Period Ended --------------------------------- October 2, 1998 October 3, 1997 ---------------------------------- (Unaudited) OPERATING ACTIVITIES Net Income (loss)........................................................ $ 973 $ (4,541) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization: Property, plant and equipment...................................... 1,252 1,025 Debt financing costs............................................... 547 66 Goodwill........................................................... 907 34 Other.............................................................. -- 147 Other adjustments to reconcile net income to net cash (used in) provided by operating activities:.................................. (1,647) (8,451) -------- --------- Net cash (used in) provided by operating activities...................... 2,032 (11,720) INVESTING ACTIVITIES Acquisition of Mercer Products Company, Inc. less cash of $34............ (38,440) -- Purchases of property, plant and equipment............................... (1,464) (727) Note receivable from an affiliate of the principal shareholders.......... -- 4,306 -------- --------- Net cash (used in) provided by investing activities...................... (39,904) 3,579 FINANCING ACTIVITIES Checks outstanding in excess of funds deposited.......................... -- (828) Restricted cash.......................................................... 1,070 -- Repayments and settlement of long-term debt and capital lease obligations -- (18,869) Payable to shareholders.................................................. (4,757) 5,882 Deferred financing costs................................................. (2,084) (4,943) Issuance of Floating Interest Rate Senior Notes.......................... 30,000 -- Issuance of Series C Convertible Preferred Stock......................... 3,000 -- Proceeds from sales of shares through employee stock plans............... -- 10 Repayment of subordinated debt........................................... -- (1,750) Net recapitalization consideration....................................... -- (107,310) Issuance of senior notes................................................. -- 110,000 Issuance of preferred stock, net of issuance costs....................... -- 17,895 Issuance of common stock, net of issuance costs.......................... -- 18,724 -------- --------- Net cash provided by financing activities................................ 27,229 18,811 -------- --------- (Decrease) Increase in cash.............................................. (10,643) 10,670 Cash at beginning of period.............................................. 11,563 -- -------- --------- Cash at end of period.................................................... $920 $10,670 -------- --------- -------- ---------
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 nine months ended October 2, 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 nine-month periods ended on October 3, 1997 and October 2, 1998. 2. INVENTORIES Inventories consist of the following:
October 2, 1998 January 2, 1998 ---------------------------------- (In thousands) Raw materials $ 6,177 $ 4,626 Work-in-process 2,137 1,593 Finished goods 6,917 4,968 ------------------ --------------- $ 15,231 $ 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 (the "Floating-Rate 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 Floating-Rate 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 Floating-Rate Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Floating-Rate 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 Floating-Rate 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 Floating-Rate Note and Fixed-Rate Note (defined below) agreements, the holders of Convertible Preferred Stock may redeem such shares at a redemption value equal to the liquidation value plus accrued but unpaid dividends. Page 7 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 nine month periods ended October 2, 1998 compared to the same periods in 1997:
FISCAL THIRD QUARTER --------------------------------------------------------- PERCENTAGE OF PERCENTAGE OF 1998 NET SALES 1997 NET SALES ---------- ------------ ---------- ------------- (dollars in thousands) Net sales: Aerospace Products............. $ 8,127 26.3% $7,481 32.8% Flooring Products.............. 13,439 43.5 6,627 29.1 Commercial Products............ 9,313 30.2 8,666 38.1 --------- ---- ------- ---- Net sales........................... 30,879 100.0 22,774 100.0 Cost of sales....................... 21,977 71.2 15,956 70.1 --------- ---- ------- ---- Gross profit........................ 8,902 28.8 6,818 29.9 Selling, general and administrative expenses........... 3,903 12.6 3,422 15.0 Transaction expenses................ 1,174 5.2 Stock option purchase............... 14,105 61.9 Amortization of goodwill............ 504 1.6 16 0.1 --------- ---- ------- ---- Income (loss) from operations....... 4,495 14.6 (11,899) (52.3) Interest expense.................... 3,756 12.2 1,612 7.1 --------- ---- ------- ---- Income before income tax provision (benefit)......................... 739 2.4 (13,511) (59.4) Income tax provision (benefit)...... 296 1.0 (5,120) (22.5) --------- ---- ------- ---- Net income (loss)................... $ 443 1.4% ($8,391) (36.9)% --------- ---- ------- ---- --------- ---- ------- ----
Page 8
FISCAL NINE MONTHS -------------------------------------------------------------------- PERCENTAGE OF PERCENTAGE OF 1998 NET SALES 1997 NET SALES --------- --------------- --------- --------------- (dollars in thousands) Net sales: Aerospace Products............. $ 26,097 32.2% $23,387 34.0% Flooring Products.............. 30,505 37.6 17,886 26.0 Commercial Products............ 24,465 30.2 27,512 40.0 --------- ---- ------- ---- Net sales........................... 81,067 100.0 68,785 100.0 Cost of sales....................... 57,825 71.3 48,423 70.4 --------- ---- ------- ---- Gross profit........................ 23,242 28.7 20,362 29.6 Selling, general and administrative expenses........... 10,651 13.1 9,520 13.8 Transaction expenses................ 1,174 1.7 Stock option purchase............... 14,105 20.5 Amortization of goodwill............ 907 1.1 34 0.0 Income (loss) from operations....... 11,684 14.5 (4,471) (6.4) Interest expense.................... 10,063 12.4 2,625 3.8 --------- ------ ------- ---- Income before income tax provision (benefit)......................... 1,621 2.1 (7,096) (10.2) Income tax provision (benefit)...... 648 0.8 (2,555) (3.7) --------- ---- ------- ---- Net income (loss)................... $ 973 1.3% ($4,541) (6.5)% --------- ---- ------- ----
COMPARISON OF THE THREE MONTH PERIOD ENDED OCTOBER 2, 1998 VERSUS THE THREE MONTH PERIOD ENDED OCTOBER 3, 1997 NET SALES. Total net sales increased 35.6%, from $22.8 million in 1997 to $30.9 million in 1998. Aerospace Products sales grew 8.6%, reflecting increased demand for military products. Flooring Products sales increased 102.8%, due to the acquisition of Mercer. Commercial Products sales increased 7.5% because of strong demand for the company's roofing products and volume associated with new silicone hose products introduced late in the second quarter of 1998. COST OF SALES. Cost of sales increased 37.7%, from $16.0 million in 1997 to $22.0 million in 1998. As a percentage of net sales, gross profit decreased from 29.9% to 28.8%. The decrease in profit percentage was primarily due to temporary operating inefficiencies, both in connection with new product ramp-up and the July 1998 silicone products facility expansion. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 14.1%, from $3.4 million in 1997 to $3.9 million in 1998. As a percentage of net sales, selling, general and administrative expenses decreased from 15.0% to 12.6%. The decrease in percentage was due to improved operating leverage, primarily as the result of the acquisition of Mercer. TRANSACTION EXPENSES AND STOCK OPTION purchase. Transaction expenses and stock option purchase were one-time expenses associated with the leveraged recapitalization in August, 1997. AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.5 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 increased from a loss of $11.9 million in 1997 to income of $4.5 million in 1998. INTEREST EXPENSE. Interest expense increased 133.0%, from $1.6 million in 1997 to $3.8 million in 1998. The increase was due to the issuance of $110.0 million principal amount of 10% Fixed Interest Rate Notes due 2007 (the "Fixed-Rate Notes") on August 20, 1997 and the Floating-Rate Notes on April 21, 1998. Page 9 NET INCOME. As a result of the above factors, net income increased from a loss of $8.4 million in 1997 to net income of $0.4 million in 1998. COMPARISON OF THE NINE MONTH PERIOD ENDED OCTOBER 2, 1998 VERSUS THE NINE MONTH PERIOD ENDED OCTOBER 3, 1997 NET SALES. Total net sales increased 17.9%, from $68.8 million in 1997 to $81.1 million in 1998. Aerospace Products sales grew 11.6%, due primarily to increased demand for military products. Flooring Products sales increased 70.6%, due primarily to the acquisition of Mercer. Commercial Products sales decreased 11.1%, primarily because the first six months of 1997 included a liner project order that favorably affected results for that period, partially offset by volume associated with new products introduced late in the second quarter of 1998 by the silicone hose portion of this product group. COST OF SALES. Cost of sales increased 19.4%, from $48.4 million in 1997 to $57.8 million in 1998. As a percentage of net sales, gross profit decreased from 29.6% to 28.7%. The decrease in profit percentage was primarily due to temporary operating inefficiencies, both in connection with new product ramp-up, and also in connection with the silicone products' facility expansion which occurred in July, 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 11.9%, from $9.5 million in 1997 to $10.7 million in 1998. As a percentage of net sales, selling, general and administrative expenses decreased from 13.8% to 13.1%. The decrease in percentage was due to improved operating leverage, primarily as the result of the acquisition of Mercer. TRANSACTION EXPENSES AND STOCK OPTION PURCHASE. Transaction expenses and stock option purchase were one-time expenses associated with the leveraged recapitalization in August, 1997. AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.9 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 increased from a loss of $4.5 million in 1997 to income of $11.7 million in 1998. INTEREST EXPENSE. Interest expense increased 283.4%, from $2.6 million in 1997 to $10.1 million in 1998. The increase was due to the issuance of the Fixed-Rate Notes on August 20, 1997 and the Floating-Rate Notes on April 21, 1998. NET INCOME. As a result of the above factors, net income increased from a loss of $4.5 million in 1997 to income of $1.0 million in 1998. INCOME TAX PROVISION For the three month and nine month periods ended October 2, 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). For the nine months ended October 3, 1997, the Company recorded an income tax benefit of 36% which differs from the federal statutory rate primarily due to state income taxes (net of federal benefit). 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. Page 10 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 information technology systems or acquisitions. Approximately $1.5 million was spent through the first nine months of 1998. Cash flow from operations, to the extent available, may also be used to fund a portion of any acquisition expenditures. 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 (the "Floating-Rate 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 Floating-Rate 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 Floating-Rate Notes bear interest at a rate per annum equal to LIBOR plus 400 basis points, with the interest rate reset semiannually. The Floating-Rate 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 Floating-Rate 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. 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 11 YEAR 2000 ISSUE GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS The year 2000 issue ("Year 2000 Issue") is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Company has determined that it will be required to modify or replace significant portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not timely completed, the Year 2000 Issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 Issue involves the following three phases: assessment, remediation, and testing. To date, the Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000 Issue. The completed assessment indicated that most of the Company's significant information technology systems could be affected, particularly the general ledger, billing, and inventory systems. That assessment also indicated that software and hardware (embedded chips) used in production and manufacturing systems do not represent significant risks. The Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's products. STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT With respect to its information technology, the Company is 25% complete on the remediation phase and expects to complete software and hardware replacement no later than May 31, 1999. Completion of the testing phase for all significant systems is expected by June 30, 1999. The Company is utilizing both internal and external resources to replace and test the software and hardware for resolution of the Year 2000 Issue. In conjunction with the Company's current $2.0 million information technology systems re-engineering effort, approximately 50% of the total cost is estimated to be related to the Year 2000 project. Most of the cost of the new system is expected to be funded through a lease. NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR 2000 ISSUE The Company has no significant systems which interface directly with third party vendors. To date, the Company is not aware of any external agent with a Year 2000 Issue that would materially impact the Company's results of operations, liquidity, or capital resources. The Company plans to send out questionnaires to external agents during the first quarter of 1999 in an effort to verify the external agents' Year 2000 readiness. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. RISKS Management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of its Year 2000 program. In the event that the Company does not complete any additional phases, the Company might be unable to take customer orders, manufacture and ship products, invoice customers or collect payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could also Page 12 materially adversely affect the Company. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. CONTINGENCY PLANS The Company currently has no contingency plans in place in the event it does not complete all phases of the Year 2000 program. The Company plans to evaluate the status of completion in the first quarter of 1999 and determine whether such a plan is necessary. Page 13 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Legal proceedings filed against the Company were reported in the Company's report on Form 10-Q for the quarterly period ended July 3, 1998. 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 ----------- ----------- *3.1 Articles of Incorporation of the Company *3.2 By-laws of the Company **10.20 Stock Purchase Agreement between the Company, Mercer Products Company, Inc. and Sovereign Specialty Chemicals, Inc., dated March 5, 1998 27 Financial Data Schedule * Previously filed as an exhibit to the Company's Registration Statement on Form S-4, File No. 333-36675, and incorporated herein by reference. ** Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended January 2, 1998 and incorporated herein by reference. (b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K during the three months ended October 2, 1998. 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: November 13, 1998 By: /s/ DAVID E. WORTHINGTON ------------------------ David E. Worthington Vice President-Finance Page 15 EX-27 2 EXHIBIT 27
5 1,000 U.S. DOLLARS 9-MOS JAN-01-1999 JAN-03-1998 OCT-02-1998 1 920 0 16,223 870 15,231 35,990 31,923 11,788 93,727 15,768 140,000 17,657 3,000 25,464 (112,490) 93,727 81,067 0 57,825 57,825 0 0 10,063 1,621 648 11,684 0 0 0 973 0 0
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