<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
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
<PAGE>
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
<PAGE>
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Mercer Products Company, Inc.:
We have audited the accompanying balance sheet of Mercer Products Company,
Inc. (a wholly owned subsidiary of Laporte plc) as of December 31, 1996, and the
related statements of earnings and retained earnings and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercer Products Company,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Orlando, Florida
January 31, 1997
4
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $ 24,558
Cost of sales...................................................................... 17,668
---------
Gross profit................................................................... 6,890
Selling, general and administrative expenses....................................... 4,668
---------
Operating income............................................................... 2,222
Interest expense................................................................... 964
---------
Earnings before income taxes................................................... 1,258
Income taxes....................................................................... 675
---------
Net earnings................................................................... 583
Retained earnings at December 31, 1995............................................. 8,715
Dividends paid..................................................................... (60)
---------
Retained earnings at December 31, 1996............................................. $ 9,238
---------
---------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash............................................................................. $ 392
Accounts receivable:
Trade, less allowance for doubtful accounts of $130............................ 2,929
Affiliates..................................................................... 93
Inventories, net................................................................. 2,407
Prepaid expenses and other assets................................................ 48
Deferred income taxes............................................................ 105
---------
Total current assets......................................................... 5,974
Property and equipment, net........................................................ 3,578
Goodwill, net of accumulated amortization.......................................... 7,243
Deferred income taxes.............................................................. 423
---------
Total assets................................................................. $ 17,218
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable:
Trade.......................................................................... $ 991
Affiliates..................................................................... 1,219
Accrued expenses................................................................. 499
Income taxes payable............................................................. 616
---------
Total current liabilities.................................................... 3,325
Loan due to affiliated company..................................................... 4,655
---------
Total liabilities............................................................ 7,980
Stockholder's equity:
Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and
outstanding.................................................................... --
Retained earnings................................................................ 9,238
---------
Total liabilities and stockholder's equity................................... $ 17,218
---------
---------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net earnings...................................................................... $ 583
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization................................................... 953
Deferred income taxes........................................................... 151
Cash provided by (used for) changes in:
Accounts receivable........................................................... (49)
Inventories................................................................... 330
Prepaid expenses and other current assets..................................... 123
Income taxes.................................................................. 402
Accounts payable and accrued expenses......................................... 328
---------
Net cash provided by operating activities................................... 2,821
---------
Cash flows from investing activities:
Additions to property and equipment............................................... (367)
---------
Net cash used for investing activities...................................... (367)
---------
Cash flows from financing activities:
Repayments of intercompany loan................................................... (2,308)
Dividends paid.................................................................... (60)
---------
Net cash provided by financing activities................................... (2,368)
---------
Net increase in cash........................................................ 86
Cash at beginning of year........................................................... 306
---------
Cash at end of year................................................................. $ 392
---------
---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest........................................................................ $ 946
---------
---------
Income taxes.................................................................... $ 98
---------
---------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Mercer Products Company, Inc. (the "Company") has been in business for
39 years in Eustis, Florida. The Company is a manufacturer of extruded
plastic products and sells mainly to wholesale distributors. The major
product line is carpet and stairway moldings and trim for the construction
industry.
(b) INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined on the first-in, first-out basis. Obsolescence is identified
through quarterly inventory counts and any items appearing on more than two
consecutive counts are reviewed and, if necessary, prepared for re-grinding.
(c) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. The Company provides for depreciation and amortization on
the straight-line method over the estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building............................................. 50
Machinery and equipment.............................. 7-10
Furniture and fixtures............................... 3-5
Leasehold improvements............................... 15
</TABLE>
(d) GOODWILL
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited, which is 15 years. Accumulated
amortization of goodwill and covenants not to compete at December 31, 1996
was approximately $6,200. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average
cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
(e) INCOME TAXES
The Company is included within the consolidated Federal income tax
return of Laporte Inc. in the United States. Income tax expense is
calculated using the enacted rates in the United States as if the Company
had been an independent entity.
8
<PAGE>
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
<PAGE>
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:
<TABLE>
<S> <C>
Raw materials..................................... $ 585
Finished goods.................................... 1,822
---------
$ 2,407
---------
---------
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
<TABLE>
<S> <C>
Land.............................................. $ 223
Buildings......................................... 2,484
Machinery and equipment........................... 2,898
Leasehold improvements............................ 20
Furniture and fixtures............................ 339
Construction in progress.......................... 59
---------
6,023
Less accumulated depreciation and amortization.... (2,445)
---------
$ 3,578
---------
---------
</TABLE>
(4) LEASES
The Company is obligated under various noncancelable operating leases for
buildings, machinery and equipment, and automobiles, which expire on various
dates through 2000. Rent expense for operating leases was $509 for the year
ended December 31, 1996. Future minimum annual lease payments under operating
leases are as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING DECEMBER 31, LEASES
---------------------------------------------- ---------------
<S> <C>
1997.......................................... $ 358
1998.......................................... 358
1999.......................................... 348
2000.......................................... 334
------
Total minimum lease payments................ $ 1,398
------
------
</TABLE>
(5) RELATED PARTY TRANSACTIONS
The Company entered into transactions in the ordinary course of business
with the parent company and affiliates.
10
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
Federal..................... $ 462 $ 135 $ 597
State....................... 62 16 78
----- ----- ---------
$ 524 $ 151 $ 675
----- ----- ---------
----- ----- ---------
</TABLE>
The actual income tax expense for the year ended December 31, 1996 differs
from the expected income tax expense computed by applying the federal statutory
rate of 34% to earnings before income taxes as follows:
<TABLE>
<S> <C>
Expected tax expense.................................... $ 427
Goodwill and other nondeductible items.................. 196
State income taxes, net of federal income tax benefit... 52
---------
$ 675
---------
---------
</TABLE>
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the deferred
tax assets and liabilities and their approximate tax effects are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Reserves and allowances.............................. $ 105
Goodwill............................................. 652
---------
Total deferred tax assets.............................. 757
---------
Deferred tax liability:
Depreciation......................................... 229
---------
Total deferred tax liability....................... 229
---------
Net deferred tax liability......................... $ 528
---------
---------
</TABLE>
(7) EMPLOYEE BENEFIT PLANS
The Company sponsors two defined-contribution plans (an IRS qualifying
401(k) plan and a money purchase pension plan). Participation in these plans is
available to all salaried and hourly employees of the Company. Participating
employees contribute to the 401(k) plan based on a percentage of their
compensation. A percentage of employee contributions are matched by the Company.
The Company further contributes an amount based on a percentage of employee's
pay to the money purchase pension plan. The costs of these plans amounted to
approximately $176 for 1996.
12
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Mercer Products Company, Inc.
We have audited the accompanying balance sheet of Mercer Products Company,
Inc. as of August 4, 1997 (wholly-owned subsidiary of Laporte plc), and the
related statements of operations and retained earnings and cash flows for the
period from January 1, 1997 to August 4, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercer Products Company,
Inc. as of August 4, 1997, and the results of its operations and its cash flows
for the period from January 1, 1997 to August 4, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
November 21, 1997
13
<PAGE>
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Assets
Current assets:
Cash............................................................................. $ 63
Trade accounts receivable, less allowance for doubtful accounts of $200.......... 2,747
Inventories...................................................................... 3,456
Prepaid expenses and other current assets........................................ 187
Deferred income taxes............................................................ 273
---------
Total current assets............................................................... 6,726
Property, plant, and equipment, net................................................ 3,408
Goodwill, net...................................................................... 6,834
---------
Total assets....................................................................... $ 16,968
---------
---------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................................. $ 2,181
Accrued expenses................................................................. 485
Income taxes payable............................................................. 267
---------
Total current liabilities.......................................................... 2,933
Long-term payable--Parent and affiliated companies................................. 4,777
Deferred income taxes.............................................................. 88
Stockholders' equity:
Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and
outstanding --
Retained earnings................................................................ 9,170
---------
Total stockholders' equity....................................................... 9,170
---------
Total liabilities and stockholders' equity......................................... $ 16,968
---------
---------
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Net sales.......................................................................... $ 14,954
Cost of goods sold................................................................. 9,578
---------
Gross profit....................................................................... 5,376
Selling, general, and administrative expenses...................................... 2,328
Management fees.................................................................... 167
Amortization of goodwill........................................................... 409
---------
Operating income................................................................... 2,472
Interest expense................................................................... 544
---------
Income before income taxes......................................................... 1,928
Income tax expense................................................................. 771
---------
Net income......................................................................... 1,157
Retained earnings at December 31, 1996............................................. 9,238
Dividends paid..................................................................... (1,225)
---------
Retained earnings at August 4, 1997................................................ $ 9,170
---------
---------
</TABLE>
See accompanying notes to financial statements
15
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income......................................................................... $ 1,157
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.................................................... 565
Deferred income taxes............................................................ 458
Loss on disposal of property, plant, and equipment............................... 74
Changes in operating assets and liabilities:
Trade accounts receivable...................................................... 182
Inventories.................................................................... (1,019)
Prepaid expenses and other current assets...................................... (138)
Accounts payable............................................................... 1,109
Accrued expenses............................................................... (5)
Income taxes payable........................................................... 267
---------
Net cash provided by operating activities.......................................... 2,650
INVESTING ACTIVITIES
Capital expenditures............................................................... (60)
---------
Net cash used in investing activities.............................................. (60)
FINANCING ACTIVITIES
Payments on long-term liabilities due to parent and affiliated companies, net...... (1,694)
Dividends paid..................................................................... (1,225)
---------
Net cash used in financing activities.............................................. (2,919)
---------
Net decrease in cash............................................................... (329)
Cash at beginning of period........................................................ 392
---------
Cash at end of period.............................................................. $ 63
---------
---------
Supplemental cash flow information:
Cash paid for interest........................................................... $ 454
Cash paid for income taxes....................................................... 778
</TABLE>
See accompanying notes to financial statements
16
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mercer Products Company, Inc. (the Company) is a wholly owned subsidiary of
Laporte plc. The Company is primarily a producer of rubber and vinyl products
for sale to wholesale distributors, mainly in the construction, industrial, and
flooring industry. The Company sells domestically to customers throughout the
United States. A significant portion of the Company's sales are to customers in
the construction, industrial, and flooring industry, and as such the company is
affected by the well-being of that industry. The Company does not require
collateral, and all their accounts receivable are unsecured; and while they
believe their trade receivables will be collected, the Company anticipates that
in the event of default they will follow normal collection procedures. Overall,
credit risk related to the Company is limited due to a large number of customers
in differing industries and geographic areas.
Effective August 5, 1997, the Company was purchased by Sovereign Specialty
Chemicals, Inc.
INVENTORIES
Inventories are stated at the lower of cost, using the first in, first out
method, or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost.
Depreciation on property, plant, and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. The
following table summarizes the estimated useful lives of the Company's property,
plant, and equipment:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building................................................. 40
Machinery and equipment.................................. 15
</TABLE>
GOODWILL
Goodwill, which represents the excess of purchase price 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
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the Company's balance sheet for cash, trade
accounts receivable due from affiliated companies, accounts payable, accrued
expenses, due to affiliated companies and other liabilities approximate their
fair value because of the short-term maturity of these instruments.
It is not practical to determine the fair value of long-term payable--parent
and affiliated companies because such amounts, bearing interest during the
period from January 1, 1997 to August 4, 1997, of 9%, have no stated maturity
which makes it difficult to estimate fair value with precision.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts which are
from its domestic and international customers. To minimize this risk, ongoing
credit evaluations of customers' financial condition are performed, although
collateral is not required. In addition, the Company maintains an allowance for
potential credit losses.
2. INVENTORIES
The components of inventories at August 4, 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Finished goods....................................... $ 2,526
Raw materials........................................ 930
---------
Total inventories.................................... $ 3,456
---------
---------
</TABLE>
18
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
3. PROPERTY, PLANT, AND EQUIPMENT
At August 4, 1997, property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Land.................................................. $ 223
Buildings............................................. 2,568
Machinery and equipment............................... 3,062
---------
5,853
Less: Accumulated depreciation........................ (2,445)
---------
Property, plant, and equipment, net................... $ 3,408
---------
---------
</TABLE>
4. OPERATING LEASES
The Company is a 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:
<TABLE>
<CAPTION>
<S> <C>
Remainder of 1997..................................... $ 253
1998.................................................. 598
1999.................................................. 573
2000.................................................. 379
2001.................................................. 251
Later years........................................... 130
---------
Total minimum lease payments.......................... $ 2,184
---------
---------
</TABLE>
5. INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
<S> <C>
U.S. federal.......................................... $ 250
State................................................. 63
Deferred.............................................. 458
-----
$ 771
-----
-----
</TABLE>
19
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 4,
1997, are presented below:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts....................... $ 80
Inventory capitalization.............................. 9
Accrued compensation, vacation, and bonus accrual..... 184
-----
Total deferred tax assets............................... 273
Deferred tax liabilities:
Accelerated depreciation.............................. (88)
-----
Net deferred tax asset.................................. $ 185
-----
-----
</TABLE>
6. RELATED PARTY TRANSACTIONS
The company entered into transactions in the ordinary course of business
with the parent company and affiliates. The following table summarized the
company's most significant related party transactions for the period from
January 1, 1997 to August 4, 1997:
<TABLE>
<CAPTION>
<S> <C>
Purchases of raw materials (a).......................... $ 2,925
Management fees (b)..................................... 167
Interest (c)............................................ 544
</TABLE>
(a) Mercer Products Company, Inc. purchases raw materials from
AlphaGary Corporation, an affiliated company, for use in
production. The terms of the purchases were terms similar to
the terms Mercer Products Company, Inc. would have obtained
from a third party.
(b) Laporte plc and Laporte Inc. provided services to the Company
including general management, treasury, tax, financial audit,
financial reporting, insurance and legal services. The Company
has been charged for such services through corporate
allocations. These expenses were allocated to the Company for
the period from January 1, 1997 through August 4, 1997, based
on estimates of anticipated allocable costs incurred, less
amounts charged as direct costs or expense rather than by
allocation. Management believes that the allocation methods
used on common expenses were reasonable, produce materially
accurate results, and are indicative of the expenses that
would have been incurred had the Company been operated as a
stand-alone business.
(c) These financial statements include an allocation of the debt
incurred by Laporte plc when it originally acquired the
company. Accordingly, interest expense at a rate of 9% for the
period from January 1, 1997 to August 4, 1997, associated with
such debt has been reflected in these financial statements in
addition to interest on funding balances as shown in Note 1.
20
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
7. EMPLOYEE BENEFIT PLANS
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
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Mercer Products Company, Inc.
We have audited the accompanying balance sheet of Mercer Products Company,
Inc. as of December 31, 1997, and the related statements of operations,
stockholder's equity, and cash flows for the period from August 5, 1997 (date of
acquisition by Sovereign Specialty Chemicals, Inc.) to December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mercer Products Company,
Inc. as of December 31, 1997 and the results of its operations and its cash
flows for the period from August 5, 1997 to December 31, 1997, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
February 20, 1998
Except for Note 11, as to which the date
is March 5, 1998
22
<PAGE>
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash................................................................................................. $ 501
Trade accounts receivable, less allowance for doubtful accounts of $170.............................. 2,305
Due from affiliated companies........................................................................ 815
Inventories.......................................................................................... 2,920
Prepaid expenses and other current assets............................................................ 211
Deferred income taxes................................................................................ 9
---------
Total current assets................................................................................... 6,761
Property, plant, and equipment, net.................................................................... 4,952
Goodwill, net.......................................................................................... 24,809
Deferred financing costs, net.......................................................................... 1,842
---------
Total assets........................................................................................... $ 38,364
---------
---------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................................................................... $ 1,276
Accrued expenses..................................................................................... 806
---------
Total current liabilities.............................................................................. 2,082
Long-term debt--Parent Company......................................................................... 30,000
Deferred income taxes.................................................................................. 175
Stockholders' equity:
Common stock, $0.1 par value, 1,000 shares authorized, 10 shares issued and outstanding.............. --
Additional paid-in capital........................................................................... 6,105
Retained earnings.................................................................................... 2
---------
Total stockholder's equity............................................................................. 6,107
---------
Total liabilities and stockholder's equity............................................................. $ 38,364
---------
---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF OPERATIONS
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
Net sales........................................................................... $ 9,945
Cost of goods sold.................................................................. 6,921
---------
Gross profit........................................................................ 3,024
Selling, general, and administrative expenses....................................... 1,478
Amortization of goodwill............................................................ 421
---------
Operating income.................................................................... 1,125
Interest expense.................................................................... 1,117
---------
Income before income taxes.......................................................... 8
Income taxes........................................................................ 6
---------
Net income.......................................................................... $ 2
---------
---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at August 5, 1997 (Date of Acquisition)................... $ -- $ 6,105 $ -- $ 6,105
Net income for the period from August 5, 1997 to December 31,
1997............................................................ -- -- 2 2
----- ----------- ----- ------
Balance at December 31, 1997...................................... $ -- $ 6,105 $ 2 $ 6,107
----- ----------- ----- ------
----- ----------- ----- ------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
25
<PAGE>
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
<S> <C>
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
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
26
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mercer Products Company, Inc. (the Company) is a wholly-owned subsidiary of
Sovereign Specialty Chemicals, Inc. (Sovereign or the Parent Company). Effective
August 5, 1997, Sovereign acquired the Company from Laporte plc (Laporte). The
Company was purchased along with two affiliated companies (affiliated
wholly-owned subsidiaries of Laporte). The total purchase price of the
acquisitions was $133.7 million, including $2 million in acquisition costs. The
purchase price allocated to the Company, based on its estimated fair value was
approximately $35.8 million. The acquisition was accounted for as a purchase.
The Company is primarily a producer of rubber and vinyl products for sale to
wholesale distributors, mainly in the construction, industrial, and flooring
industry. The Company sells domestically to customers throughout the United
States. A significant portion of the Company's sales are to customers in the
construction, industrial, and flooring industry, and as such the company is
affected by the well-being of that industry. The Company does not require
collateral and all their accounts receivable are unsecured; and while they
believe their trade receivables will be collected, the Company anticipates that
in the event of default they will follow normal collection procedures. Overall,
credit risk related to the Company is limited due to a large number of customers
in differing industries and geographic areas.
INVENTORIES
Inventories are stated at the lower of cost, using the first in, first out
method, or market.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost.
Depreciation on property, plant, and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. The
following table summarizes the estimated useful lives of the Company's property,
plant, and equipment:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building........................................ 39
Machinery and equipment......................... 3-10
</TABLE>
GOODWILL
Goodwill, which represents the excess of purchase price allocated to the
Company over fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, which is 25 years. Accumulated
amortization of goodwill at December 31, 1997, was $421. The Company assesses
the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
27
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Finished goods............................... $ 2,126
Raw materials................................ 794
---------
Total inventories............................ $ 2,920
---------
---------
</TABLE>
28
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Land......................................... $ 223
Buildings.................................... 2,059
Machinery and equipment...................... 2,835
---------
5,117
Less: Accumulated depreciation............... 165
---------
Property, plant, and equipment, net.......... $ 4,952
---------
---------
</TABLE>
4. ACCRUED EXPENSES
At December 31, 1997, accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Interest..................................... $ 358
Compensation................................. 190
Other........................................ 258
---------
$ 806
---------
---------
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
1998......................................... $ 598
1999......................................... 573
2000......................................... 379
2001......................................... 251
2002......................................... 56
Later years.................................. 74
---------
Total minimum lease payments................. $ 1,931
---------
---------
</TABLE>
29
<PAGE>
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal..................................... $ (124)
State....................................... (36)
Deferred.................................... 166
---------
$ 6
---------
---------
</TABLE>
The current tax benefits are reflected in the balance sheet as due from
affiliated companies as the benefits will be used by the Parent Company in its
consolidated tax returns.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997, are presented below:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Inventory capitalization................... $ 9
---------
Total deferred tax assets.................... 9
Deferred tax liabilities:
Accelerated depreciation................... (69)
Amortization of goodwill................... (106)
---------
Total deferred tax liabilities............... (175)
---------
Net deferred tax liability................... $ (166)
---------
---------
</TABLE>
7. LONG-TERM DEBT--PARENT COMPANY
In connection with the purchase of the Company by Sovereign, $30 million in
debt was pushed down to the Company and is reflected as a long-term obligation
to Sovereign. The debt bears interest at 8.25%. In addition, the Company has
recorded $1,955 in deferred financing costs.
8. CORPORATE ALLOCATION OF EXPENSES
Since its acquisition by Sovereign, the Company has operated as a
stand-alone entity. As such, for the period from August 5, 1997 to December 31,
1997, expenses have been paid directly by the Company and no allocation of
Corporate expenses were made by Sovereign. Management believes that the costs
reflected by the Company for the period ended December 31, 1997, are indicative
of the expenses that would have been incurred had the Company been a stand-alone
entity.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined-contribution plan (an IRS qualified 401(k)
plan). Participation in this plan is available to all salaried and hourly
employees of the Company. Participating employees contribute to the 401(k) plan
based on a percentage of their compensation which are matched, based on a
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
<PAGE>
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
<PAGE>
(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
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF FISCAL YEAR 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------- PRO FORMA PRO FORMA
BURKE MERCER ADJUSTMENTS (1) COMBINED
--------- --------- --------------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 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
--------- --------- --------------- -----------
--------- --------- --------------- -----------
</TABLE>
The accompanying notes to the unaudited pro forma combined
balance sheet are an integral part of this statement.
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(1) For purposes of preparing the Unaudited Pro Forma Combined Balance Sheet,
Mercer's assets and liabilities acquired or assumed have been recorded at
their estimated fair values. A final determination of the required purchase
price accounting adjustments and of the fair value of the assets acquired or
assumed has not yet been made. Accordingly, the purchase accounting
adjustments made in connection with the development of the unaudited pro
forma financial information reflect the Company's best estimate based upon
currently available information. Based upon Mercer's December 31, 1997
balance sheet, the purchase price allocation would be:
<TABLE>
<CAPTION>
<S> <C>
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
---------
---------
</TABLE>
(2) Reflects the issuance of $30,000 of Senior Notes, the issuance of 3,000
shares of Convertible Preferred Stock, the use of $6,500 of Burke's cash to
pay a portion of the Mercer Acquisition consideration and the capitalization
of $3,000 of deferred financing costs; also reflects the elimination of
$1,842 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
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FISCAL YEAR 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
RELATED TO
PRIOR
RECAPITAL- PRO FORMA TRANSACTIONS PRO FORMA
BURKE IZATION BURKE MERCER ADJUSTMENTS COMBINED
--------- -------------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................... $ 90,228 $ -- $ 90,228 $ 24,899 $ -- $ 115,127
Cost of sales....................... 62,917 -- 62,917 16,499 (600)(4) 78,995
179(5)
--------- -------------- ----------- --------- ------------- -----------
Gross profit........................ 27,311 -- 27,311 8,400 421 36,132
Selling, general and administrative
expenses.......................... 12,238 (279)(1) 11,959 4,803 1,070(5) 17,665
(167)(6)
Transaction expenses................ 1,321 (1,321)(2)
Stock option purchase............... 14,105 (14,105)(2) -- -- -- --
--------- -------------- ----------- --------- ------------- -----------
Income (loss) from operations....... (353) 15,705 15,352 3,597 (482) 18,467
Interest expense.................... 5,408 5,592(3) 11,000 1,661 1,505(7) 14,166
--------- -------------- ----------- --------- ------------- -----------
Income (loss) before income taxes... (5,761) 10,113 4,352 1,936 (1,987) 4,301
Income taxes........................ (1,818) 3,602(8) 1,784 777 (798)(8) 1,763
--------- -------------- ----------- --------- ------------- -----------
Net (loss) income................... $ (3,943) $ 6,511 $ 2,568 $ 1,159 $ (1,189) $ 2,538
--------- -------------- ----------- --------- ------------- -----------
--------- -------------- ----------- --------- ------------- -----------
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
</TABLE>
The accompanying notes to the unaudited pro forma combined statement of income
are an integral part of this statement.
35
<PAGE>
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:
<TABLE>
<S> <C>
Interest expense on the Existing Notes............................. $ 11,000
Amortization of debt issuance costs (10 years)..................... 500
Less interest income............................................... (500)
Less historical net interest of existing debt refinanced........... (5,408)
---------
Incremental interest expense....................................... $ 5,592
---------
---------
</TABLE>
TRANSACTIONS ADJUSTMENTS
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:
<TABLE>
<S> <C>
Interest on the Senior Notes....................................... $ 2,850
Amortization of debt issuance costs (9 1/2 years).................. 316
Less historical interest expense on Mercer's debt not assumed...... (1,661)
---------
Incremental interest expense....................................... $ 1,505
---------
---------
</TABLE>
Each incremental 25 basis point increase or decrease in the assumed interest
rate of the Senior Notes would increase or decrease annual interest expense
on the Senior Notes by $75.
(8) Reflects the income tax (benefit) provision arising from the pro forma
adjustments discussed above based on the Company's pro forma estimated
effective tax rate of 41.0% for the twelve months ended January 2, 1998.
36
<PAGE>
(c) EXHIBITS
The following exhibits are filed with this report on Form 8-K:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
*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.
</TABLE>
- --------------------------------
* Incorporated by reference from Burke's Annual Report on Form 10-K for the
fiscal year ended January 2, 1998.
37
<PAGE>
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
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
*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.
</TABLE>
- --------------------------------
* Incorporated by reference from Burke's Annual Report on Form 10-K for the
fiscal year ended January 2, 1998.
39
<PAGE>
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE>
<CAPTION>
Fiscal Fiscal
Year 1997 Year 1996
<S> <C> <C>
<PAGE>
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%
</TABLE>
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
<PAGE>
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>
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
