<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
For the quarterly period ended July 3, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-333-36675
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BURKE INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
California 94-3081144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2250 South Tenth Street
San Jose, California 95112
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (408) 297-3500
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No .
----- ----
As of August 14, 1998, the number of shares outstanding of the
Registrant's Common Stock was 3,857,000.
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<PAGE>
BURKE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
- ------ --------------------- -----------
<S> <C> <C>
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Income for
the three and six months ended July 3, 1998
and July 4, 1997 (unaudited) 3
Condensed Consolidated Balance Sheets as of
July 3, 1998 (unaudited) and January 2, 1998 4
Condensed Consolidated Statements of Cash Flows
for the six months ended July 3, 1998 and
July 4, 1997 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
</TABLE>
<TABLE>
<CAPTION>
PART II OTHER INFORMATION
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<S> <C>
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 4 Submission of Matters to a Vote of Security 13
Holders
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signature 15
</TABLE>
Page 2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month Period For the Six Month Period
Ended Ended
-----------------------------------------------------------------------------
July 3, 1998 July 4, 1997 July 3, 1998 July 4, 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales .................................... $ 27,245 $ 22,887 $ 50,188 $ 46,011
Costs and expenses:
Cost of sales ............................ 29,668 16,048 35,848 32,467
Selling, general and administrative ...... 3,501 2,925 6,748 6,098
Amortization of goodwill.................. 394 9 403 18
-------------- -------------- ----------------- ---------------
Income from operations ....................... 3,682 3,905 7,189 7,428
Interest expense, net ........................ 3,520 515 6,307 1,013
-------------- -------------- ----------------- ---------------
Income before income tax provision ........... 162 3,390 882 6,415
Income tax provision ......................... 65 1,356 352 2,565
-------------- -------------- ----------------- ---------------
Net income ................................... $ 97 $ 2,034 $ 530 $ 3,850
-------------- -------------- ----------------- ---------------
-------------- -------------- ----------------- ---------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
Page 3
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
January 2, 1998
(Derived from
July 3, 1998 audited financial
(Unaudited) statements)
------------ -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................................ $ 2,430 $ 11,563
Restricted cash .................................................................. -- 1,070
Trade accounts receivable, less allowance of
$846 as of 7/3/98 and $334 as of 1/2/98 ........................................ 15,684 11,186
Inventories ...................................................................... 14,790 11,187
Other current assets ............................................................. 4,292 5,540
------------ ---------------
Total current assets ........................................................... 37,196 40,546
------------ ---------------
Property, plant and equipment ...................................................... 31,096 25,556
Accumulated depreciation and amortization .......................................... 11,331 10,536
------------ ---------------
Net property, plant and equipment .................................................. 19,765 15,020
Goodwill, net ...................................................................... 30,743 1,465
Deferred financing costs, net ...................................................... 6,953 5,210
Other assets ....................................................................... 616 596
------------ ---------------
Total assets ................................................................... $ 95,273 $ 62,837
------------ ---------------
------------ ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses ........................................ $ 7,500 $ 5,489
Payable to Shareholders ............................................................ 1,948 5,882
Other current liabilities .......................................................... 8,317 7,497
------------ ---------------
Total current liabilities .......................................................... 17,765 18,868
Senior notes ....................................................................... 140,000 110,000
Other noncurrent liabilities ....................................................... 4,320 4,311
Preferred stock, no par value; 50,000 shares authorized;
30,000 Redeemable Series A shares designated;
16,000 Redeemable Series A shares issued and outstanding;
5,000 Redeemable Series B shares designated;
2,000 Redeemable Series B shares issued and outstanding; (aggregate
liquidation and redemption preference of $18,000) .............................. 17,154 16,148
Shareholders' equity (deficit):
Convertible Preferred Stock, no par value: 3,000 Series C shares
designated, issued and outstanding (liquidation preference $3,000).............. 3,000 --
Class A common stock, no par value: ..............................................
Authorized shares - 20,000,000 .................................................
Issued and outstanding shares - 3,857,000 ...................................... 25,464 25,464
Accumulated deficit .............................................................. (112,430) (111,954)
------------ ---------------
Total shareholders' equity (deficit) ............................................. (83,966) (86,490)
------------ ---------------
Total liabilities and shareholders' equity (deficit) ........................... $ 95,273 $ 62,837
------------ ---------------
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</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
Page 4
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Month Period Ended
----------------------------------
July 3, 1998 July 4, 1997
-------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income ......................................................................... $ 530 $ 3,850
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization:
Property, plant and equipment ................................................... 809 680
Goodwill ........................................................................ 403 18
Other adjustments to reconcile net income to net cash (used in)
provided by operating activities: ............................................... 164 (4,696)
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Net cash (used in) provided by operating activities ................................ 1,906 (148)
INVESTING ACTIVITIES
Acquisition of Mercer Products Company, Inc. less cash of $34 ...................... (38,440) --
Purchases of property, plant and equipment ......................................... (651) (565)
Note receivable from an affiliate of the principal shareholders .................... -- (189)
----------- -------------
Net cash used in investing activities .............................................. (39,091) (754)
FINANCING ACTIVITIES
Restricted cash .................................................................... 1,070 --
Borrowings of long-term debt ....................................................... -- 3,963
Repayments and settlement of long-term debt and capital lease obligations .......... -- (3,063)
Payable to shareholders ............................................................ (3,934) --
Deferred financing costs ........................................................... (2,084) --
Issuance of Floating Interest Rate Senior Notes .................................... 30,000 --
Issuance of Series C Convertible Preferred Stock ................................... 3,000 --
Other financing activities ......................................................... -- 2
----------- -------------
Net cash provided by financing activities .......................................... 28,052 902
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Decrease in cash ................................................................... (9,133) --
Cash at beginning of period ........................................................ 11,563 --
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Cash at end of period .............................................................. $ 2,430 $ --
----------- -------------
----------- -------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
Page 5
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the
Company have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The condensed
consolidated balance sheet as of January 2, 1998 was derived from audited
financial statements. The accompanying condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended January 2, 1998.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period. The results of operations for the six months ended July 3, 1998 are
not necessarily indicative of the results to be expected for the full year.
The Company uses a 52 to 53-week fiscal year ending on the Friday
closest to December 31. The Company also follows a thirteen week quarterly
cycle. The six-month periods ended on July 4, 1997 and July 3, 1998.
As of January 1, 1998, the Company adopted Statement of Financial
Accounting No. 130, "Reporting Comprehensive Income" (FAS 130) which
establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of FAS 130 had no impact on the Company's
net income or shareholders' equity.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
July 3, 1998 January 2, 1998
--------------------------------
(In thousands)
<S> <C> <C>
Raw materials $ 5,743 $ 4,626
Work-in-process 2,067 1,593
Finished goods 6,980 4,968
------------ -----------
$ 14,790 $ 11,187
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</TABLE>
3. ACQUISITION OF MERCER PRODUCTS COMPANY, INC.
On April 21, 1998, the Company acquired all of the issued and
outstanding capital stock of Mercer Products Company, Inc. ("Mercer"), from
Sovereign Specialty Chemicals, Inc., for an aggregate purchase price of
$38,474,000 (including acquisition costs of $2,280,000). The acquisition was
accounted for under the purchase method of accounting.
Page 6
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The total purchase price was allocated to the assets acquired and
liabilities assumed based on their estimated fair values as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current assets: ............................................... $ 5,269
Plant and equipment ........................................... 4,903
Excess of purchase price over net assets acquired ............. 29,681
Accounts payable and accrued expenses ......................... (1,379)
---------
Total purchase price ........................................ $ 38,474
---------
---------
</TABLE>
Financing for this acquisition and related expenses was provided, in
large part, from the sale of $30 million principal amount of Floating
Interest Rate Senior Notes Due 2007 ("Senior Notes"). The balance of the
financing was provided with $3.0 million from the sale of 3,000 shares of the
Company's 6% Series C Cumulative Convertible Preferred Stock and cash on hand.
The Senior Notes mature on August 15, 2007, with interest on the
notes payable semi-annually on February 15 and August 15, commencing August
15, 1998. The Senior Notes bear interest at a rate per annum equal to LIBOR
plus 400 basis points, with the interest rate reset semiannually. The Senior
Notes are unconditionally guaranteed on a joint and several basis by each of
the Company's subsidiaries, including Mercer. Upon a change of control of
the Company, the Company will be required to make an offer to repurchase all
outstanding Senior Notes at 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon at the date of repurchase.
The Company also amended its existing bank credit facility to
increase the revolving credit facility from $15 million to $25 million and
revise certain of its restrictive covenants.
The Series C Convertible Preferred Stock ranks junior to the
Redeemable Preferred Stock and dividends accrue at an annual rate per share
of 6% times the sum of $1,000 and accrued but unpaid dividends. Dividends
are cumulative and are payable semi-annually in arrears on April 15 and
October 15. The holders of Series C Convertible Preferred Stock are entitled
to receive a stated liquidation value of $1,000 per share plus accrued but
unpaid dividends in the event of any liquidation, dissolution or winding up
of the Company. After payment of the liquidation preference, the holders of
Series C Convertible Preferred Stock are not entitled to further
participation in any distribution of assets of the Company. The holders of
Series C Convertible Preferred Stock are not entitled to any voting rights;
however, without the consent of 51% of the holders of Series C Convertible
Preferred Stock, the Company may not adversely alter the rights and
preferences of the Series C Convertible Preferred Stock.
Upon the occurrence of a triggering event, holders of Series C
Convertible Preferred Stock have the option to convert such shares into
common stock at a conversion price of $10 per share, subject to anti-dilution
provisions. A triggering event includes a change of control, an initial
public offering, notice by the Company of an intent to redeem the Convertible
Preferred Stock or the fifth anniversary of the issuance of the Convertible
Preferred Stock.
The Company may, at its option, redeem all or a portion of the
Convertible Preferred Stock at a redemption value equal to the liquidation
value plus accrued but unpaid dividends. Upon a change in control and
subject to limitations under the Redeemable Preferred Stock and Senior Note
agreements, the
Page 7
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
holders of Convertible Preferred Stock may redeem such shares at a redemption
value equal to the liquidation value plus accrued but unpaid dividends.
Page 8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Unaudited Condensed Consolidated Financial Statements and Notes
thereto included elsewhere in this Quarterly Report on Form 10-Q.
This Report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of
management as well as assumptions made by and information currently available
to management. The words "anticipates," "believes," "estimates," "expects,"
"plans," "intends" and similar expressions, as they relate to the Company or
its management, are intended to identify forward-looking statements. Such
statements reflect the current views of the Company, with respect to future
events and are subject to certain risks, uncertainties and assumptions, that
could cause actual results to differ materially from those expressed in any
forward-looking statement, including, without limitation: competition from
other manufacturers in the Company's aerospace, flooring or commercial
product lines, loss of key employees, general economic conditions and adverse
factors impacting the aerospace industry such as changes in government
procurement policies. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements.
RESULTS OF OPERATIONS
The Company operates within two industry segments, organic
rubber/vinyl products and silicone rubber products, and is organized into
three product groups: (i) aerospace products, which produces precision
silicone seals and other products used on commercial and military aircraft;
(ii) flooring products, which produces and distributes rubber and vinyl cove
base and other floor covering accessory products; and (iii) commercial
products, which produces various intermediate and finished silicone and
organic rubber products.
The following table sets forth certain income statement information
for the Company for the three and six month periods ended July 3, 1998
compared to the same periods in 1997:
<TABLE>
<CAPTION>
FISCAL SECOND QUARTER
-----------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
1998 NET SALES 1997 NET SALES
---------- --------------- --------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales
Aerospace products ...................... $ 8,419 30.9% $ 7,995 34.9%
Flooring products ....................... 11,224 41.2 5,366 23.4
Commercial products ..................... 7,602 27.9 9,526 41.7
-------- ----- --------- -----
Net sales ................................... 27,245 100.0 22,887 100.0
Cost of sales ............................... 19,668 72.2 16,048 70.1
-------- ----- --------- -----
Gross profit ................................ 7,577 27.8 6,839 29.9
Selling, general and
administrative expenses ................... 3,501 12.9 2,925 12.8
Amortization of goodwill .................... 394 1.4 9 0.0
-------- ----- --------- -----
Income from operations ...................... 3,682 13.5 3,905 17.1
Interest expense ............................ 3,520 12.9 515 2.3
-------- ----- --------- -----
Income before income tax
provision ................................. 162 0.6 3,390 14.8
Income tax provision ........................ 65 0.2 1,356 5.9
-------- ----- --------- -----
Net income .................................. $ 97 0.4% $ 2,034 8.9%
-------- ----- --------- -----
</TABLE>
Page 9
<PAGE>
<TABLE>
<CAPTION>
FISCAL SECOND QUARTER
------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
1998 NET SALES 1997 NET SALES
---------- --------------- --------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales
Aerospace products.................... $ 17,970 35.8% $ 15,906 34.6%
Flooring products..................... 17,066 34.0 11,259 24.5
Commercial products................... 15,152 30.2 18,846 40.9
-------- ----- --------- -----
Net sales................................ 50,188 100.0 46,011 100.0
Cost of sales............................ 35,848 71.4 32,467 70.6
-------- ----- --------- -----
Gross profit............................. 14,340 28.6 13,544 29.4
Selling, general and
administrative expenses................ 6,748 13.4 6,098 13.3
Amortization of goodwill................. 403 0.8 18 0.0
-------- ----- --------- -----
Income from operations................... 7,189 14.4 7,428 16.1
Interest expense......................... 6,307 12.6 1,013 2.2
-------- ----- --------- -----
Income before income tax
provision.............................. 882 1.8 6,415 13.9
Income tax provision..................... 352 0.7 2,565 5.6
-------- ----- --------- -----
Net income............................... $ 530 1.1% $ 3,850 8.3%
-------- ----- --------- -----
</TABLE>
COMPARISON OF THE THREE MONTH PERIOD ENDED JULY 3, 1998 VERSUS THE THREE
MONTH PERIOD ENDED JULY 4, 1997
NET SALES. Total net sales increased 19.0%, from $22.9 million in
1997 to $27.2 million in 1998. Aerospace Products sales grew 5.3%,
reflecting the net effects of increased demand for military products, offset
by reduced volume with Boeing. Flooring Products sales increased 109.2%, due
primarily to the acquisition of Mercer (98.5%), and also due to volume which
had been deferred from the first quarter as the result of weather-related
delays in general construction activity on the west coast. Commercial
Products sales decreased 20.2%, primarily because the second quarter of 1997
included a liner project order that favorably affected results for that
period.
COST OF SALES. Cost of sales increased 22.6%, from $16.0 million in
1997 to $19.7 million in 1998. As a percentage of net sales, gross profit
decreased from 29.9% to 27.8%. The decrease in profit percentage was
primarily due to temporary operating inefficiencies, both in connection with
new product ramp-up in Commercial Products within the silicone products
group, and also in connection with the silicone products' facility expansion
which occured in July, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 19.7%, from $2.9 million in 1997 to $3.5
million in 1998. As a percentage of net sales, selling, general and
administrative expenses increased from 12.8% to 12.9%. The increase was due
to general cost increases.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.4
million in 1998. The increase was due to the acquisition of Mercer.
INCOME FROM OPERATIONS. As a result of the above factors, income
from operations decreased 5.7%, from $3.9 million in 1997 to $3.7 million in
1998.
INTEREST EXPENSE. Interest expense increased 583.5%, from $0.5
million in 1997 to $3.5 million in 1998. The increase was due to the
issuance of Fixed-Rate Notes on August 20, 1997 and Floating-Rate Notes on
April 21, 1998.
Page 10
<PAGE>
NET INCOME. As a result of the above factors, net income decreased
95.2%, from $2.0 million in 1997 to $0.1 million in 1998.
COMPARISON OF THE SIX MONTH PERIOD ENDED JULY 3, 1998 VERSUS THE SIX MONTH
PERIOD ENDED JULY 4, 1997
NET SALES. Total net sales increased 9.1%, from $46.0 million in
1997 to $50.2 million in 1998. Aerospace Products sales grew 13.0%, due
primarily to increased demand for military products. Flooring Products sales
increased 51.6%, due primarily to the acquisition of Mercer (46.9%).
Commercial products sales decreased 19.6%, primarily because the first six
months of 1997 included a liner project order that favorably affected results
for that period.
COST OF SALES. Cost of sales increased 10.4%, from $32.5 million in
1997 to $35.8 million in 1998. As a percentage of net sales, gross profit
decreased from 29.4% to 28.6%. The decrease in profit percentage was
primarily due to temporary operating inefficiencies, both in connection with
new product ramp-up in Commercial Products within the silicone products
group, and also in connection with the silicone products' facility expansion
which occured in July, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 10.7%, from $6.1 million in 1997 to $6.7
million in 1998. As a percentage of net sales, selling, general and
administrative expenses increased from 13.3% to 13.4%. The increase was due
to general cost increases.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.4
million in 1998. The increase was due to the acquisition of Mercer.
INCOME FROM OPERATIONS. As a result of the above factors, income
from operations decreased 3.2%, from $7.4 million in 1997 to $7.2 million in
1998.
INTEREST EXPENSE. Interest expense increased 522.6%, from $1.0
million in 1997 to $6.3 million in 1998. The increase was due to the
issuance of Fixed-Rate Notes on August 20, 1997 and Floating-Rate Notes on
April 21, 1998.
NET INCOME. As a result of the above factors, net income decreased
86.2%, from $3.9 million in 1997 to $0.5 million in 1998.
Income Tax Provision
For the three month and six month periods ended July 3, 1998, the
Company recorded an income tax provision of 40.0%, which represents the
effective tax rate projected for the full fiscal year 1998. This effective
tax rate differs from the federal statutory rate primarily due to state
income taxes (net of federal benefit) and is consistent with the effective
tax rate for the three month and six month periods ended July 4, 1997.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. The Company's principal uses of cash are to finance
working capital and capital expenditures related to asset acquisitions and
internal growth.
CAPITAL REQUIREMENTS. On a consolidated basis, the Company expects
to spend approximately $2.0 million during fiscal 1998 on capital
expenditures not directly related to acquisitions. Cash flow from
operations, to the extent available, may also be used to fund a portion of
any acquisition expenditures. The Company actively seeks acquisition
opportunities, and the Company intends to seek additional capital as
necessary to fund potential acquisitions through one or more funding sources
that may include borrowings under the existing or new credit facilities.
Page 11
<PAGE>
SOURCES OF CAPITAL. On April 21, 1998, the Company acquired all of
the issued and outstanding capital stock of Mercer, from Sovereign Specialty
Chemicals, Inc., for an aggregate purchase price of $38,474,000 (including
acquisition costs of $2,280,000).
Financing for this acquisition and related expenses was provided, in
large part, from the sale of (the "Offering") $30 million principal amount of
Floating Interest Rate Senior Notes Due 2007 ("Senior Notes"). The balance
of the financing was provided with $3.0 million from the sale of 3,000 shares
of the Company's 6% Series C Cumulative Convertible Preferred Stock and cash
on hand.
The Senior Notes mature on August 15, 2007, with interest on the
notes payable semi-annually on February 15 and August 15, commencing August
15, 1998. The Senior Notes bear interest at a rate per annum equal to LIBOR
plus 400 basis points, with the interest rate reset semiannually. The Senior
Notes are unconditionally guaranteed on a joint and several basis by each of
the Company's subsidiaries, including Mercer. Upon a change of control of
the Company, the Company will be required to make an offer to repurchase all
outstanding Senior Notes at 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon at the date of repurchase.
Contemporaneously with the acquisition of Mercer, the Company amended
its existing Loan and Security Agreement, as amended from time to time, with
NationsBank, N.A., as administrative agent, and other lending institutions
party thereto (the "Credit Agreement") to, among other things, (i) increase
the Company's borrowing capacity from $15.0 million to $25.0 million (as
amended, the "Credit Facility") (ii) add Mercer as a Borrowing Subsidiary (as
defined in the Credit Agreement), (iii) increase certain of the baskets
contained in the restrictive covenants to reflect the increased size of the
Company after the closing of the acquisition of Mercer (the "Mercer
Acquisition") and (iv) waive any default or event of default that may
otherwise result from the consummation of the Offering and the Mercer
Acquisition.
The Credit Facility matures in August 2002. Interest on loans under
the Credit Facility bear interest at rates based upon either, at the
Company's option, Eurodollar Rates plus a margin of 2.5% or upon the Prime
Rate. Loans under the Credit Facility are secured by security interests in
substantially all of the assets of the Company and are guaranteed by any and
all current or future subsidiaries of the Company, which guarantees are
secured by substantially all of the assets of such subsidiaries. The Credit
Facility contains customary covenants restricting the Company's ability to,
among other things, incur additional indebtedness, create liens or other
encumbrances, pay dividends or make other restricted payments, make
investments, loans and guarantees or sell or otherwise dispose of a
substantial portion of assets to, or merge or consolidate with, another
entity. The Credit Facility also contains a number of financial covenants
that will require the Company to meet certain financial ratios and tests and
provide that a change of control of the Company (as defined in the Credit
Facility) will constitute an event of default.
The Company anticipates that its principal use of cash on a going
forward basis will be working capital requirements, debt service requirements
and capital expenditures as well as expenditures relating to new acquisitions
and integrating such acquired businesses. Based upon current and anticipated
levels of operations, the Company believes that its cash flow from
operations, together with amounts available under the Credit Facility, will
be adequate to meet its anticipated requirements for the foreseeable future
for working capital, capital expenditures and interest payments.
Page 12
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
A lawsuit has been filed by a former shareholder against the
Company and certain of its current and former officers and directors.
The former shareholder is asserting various claims in connection
with the Company's repurchase of such shareholder's shares prior to
the time the Company entered into an Agreement and Plan of Merger
pursuant to which the Company was recapitalized and all shares of the
Company's common stock, other than those retained by certain members
of management and certain other shareholders, were converted into the
right to receive cash based upon a formula. The Company believes
that such claims are without merit and intends to vigorously defend
such action.
A former employee of Mercer filed a lawsuit against Mercer and
Sovereign Specialty Chemicals, L.P. ("Sovereign"), the former owner
of Mercer. The former employee has made various claims for relief on
the grounds that she was allegedly the victim of certain harassment,
discrimination, retaliation and negligence. Pursuant to certain
indemnification provisions contained in the Stock Purchase Agreement
by and among the Company, Mercer and Sovereign, dated March 5, 1998,
as amended by Amendment No. 1 to the Stock Purchase Agreement, dated
April 21, 1998, Mercer has tendered its defense to Sovereign's
counsel and Sovereign has agreed, through its counsel, to defend
Mercer against the allegations asserted against Mercer by the former
employee. Mercer denies the allegations made by the former employee
and, through its joint counsel with Sovereign, intends vigorously to
defend such claims.
ITEM 2. CHANGES IN SECURITIES.
In connection with the Offering in April 1998, pursuant to a
consent solicitation (the "Consent Solicitation"), the Company
obtained the consents (the "Consent") of holders of its outstanding
10% Senior Notes due 2007 (the "Existing Notes") to certain proposed
amendments (the "Amendments") to the indenture pursuant to which the
Existing Notes were issued between the Company and the United States
Trust Company of New York (the "Existing Indenture") which, among
other things, (i) permitted the issuance of the Senior Notes and
permitted the incurrence of indebtedness represented by the Senior
Notes, (ii) increased certain of the permitted indebtedness and
permitted investment baskets contained in the indebtedness and
restricted payment covenants in the Existing Indenture, (iii)
modified the lien covenant to enhance the Company's ability to use
existing assets as collateral for new financings and (iv) made
certain other amendments of a non-substantive nature to the Existing
Indenture. Pursuant to the Consent Solicitation, the Company made
certain payments to holders thereof who properly furnished their
Consents to the Amendments on a timely basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
As described in Item 2 above, in connection with the Offering,
pursuant to the Consent Solicitation, the Company solicited the
Consent of holders of its Existing Notes to the Amendments to the
Existing Indenture. See Part II, Item 2.
Page 13
<PAGE>
ITEM 5. OTHER INFORMATION.
Mercer was merged with and into the Company, effective August
12, 1998. The Company has qualified to do business in New Jersey and
Florida, where Mercer has its business operations. The merger was
undertaken for purely administrative reasons and Burke intends to
continue to operate Mercer's business throughout the nation under the
name Mercer Products Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
(b) REPORT ON FORM 8-K. The Registrant filed a Current Report on
Form 8-K on May 5, 1998, including information related to Items 2 and
7. The Report included the following financial statements for
Mercer: (1) Report of KPMG Peat Marwick LLP Independent Auditors; (2)
Statement of Earnings and Retained Earnings for the year ended
December 31, 1996; (3) Balance Sheet at December 31, 1996; (4)
Statement of Cash Flows for the fiscal year ended December 31, 1996;
(5) Notes to Financial Statements; (6) Report of Ernst & Young LLP,
Independent Auditors --January 1, 1997 to August 4, 1997; (7) Balance
Sheet at August 4, 1997; (8) Statement of Operations and Retained
Earnings for the period from January 1, 1997 to August 4, 1997; (9)
Statement of Cash Flows for the period from January 1, 1997 to August
4, 1997; (10) Notes to Financial Statements; (11) Report of Ernst &
Young LLP, Independent Auditors -- August 5, 1997 to December 31,
1997; (12) Balance Sheet at December 31, 1997; (13) Statement of
Operations for the period from August 5, 1997 to December 31, 1997;
(14) Statement of Stockholder's Equity for the period from August 5,
1997 to December 31, 1997; (15) Statement of Cash Flows for the
period from August 5, 1997 to December 31, 1997; and (16) Notes to
Financial Statements.
Page 14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BURKE INDUSTRIES, INC.
Dated: August 17, 1998 By: /s/ DAVID E. WORTHINGTON
------------------------------
David E. Worthington
Vice President-Finance
Page 15
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