<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED
For the quarterly period ended October 2, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ------------
COMMISSION FILE NUMBER 1-333-36675
-------------
BURKE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3081144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2250 SOUTH TENTH STREET
SAN JOSE, CALIFORNIA 95112
(Address of Principal Executive (Zip Code)
Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 297-3500
-------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No .
---- ----
As of November 13, 1998, the number of shares outstanding of the
Registrant's Common Stock was 3,857,000.
<PAGE>
BURKE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION NUMBER
Item 1 Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations for
the three and nine months ended October 2, 1998 and
October 3, 1997 (unaudited) 3
Condensed Consolidated Balance Sheets as of
October 2, 1998 (unaudited) and January 2, 1998 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended October 2, 1998 and
October 3, 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
(unaudited) 6-8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signature 15
Page 2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Nine Month Period Ended
-------------------------------------- -------------------------------------
October 2, 1998 October 3, 1997 October 2, 1998 October 3, 1997
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales........................ $ 30,879 $ 22,774 $ 81,067 $ 68,785
Costs and expenses:
Cost of sales............... 21,977 15,956 57,825 48,423
Selling, general and
administrative.............. 3,903 3,422 10,651 9,520
Amortization of goodwill.... 504 16 907 34
Transaction expenses........ -- 1,174 -- 1,174
Stock option purchase....... -- 14,105 -- 14,105
---------------- ---------------- ---------------- ----------------
Income (loss) from
operations.................. 4,495 (11,899) 11,684 (4,471)
Interest expense, net............ 3,756 1,612 10,063 2,625
---------------- ---------------- ---------------- ----------------
Income (loss) before
income tax provision
(benefit)................... 739 (13,511) 1,621 (7,096)
Income tax provision
(benefit)................... 296 (5,120) 648 (2,555)
---------------- ---------------- ---------------- ----------------
Net income (loss)................ $ 443 $ (8,391) $ 973 $ (4,541)
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</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
audited
October 2, 1998 financial
(Unaudited) statements)
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 920 $ 11,563
Restricted cash..................................................... -- 1,070
Trade accounts receivable, less allowance of
$870 as of 10/2/98 and $334 as of 1/2/98.......................... 15,353 11,186
Inventories......................................................... 15,231 11,187
Other current assets................................................ 4,486 5,540
--------- ---------
Total current assets.............................................. 35,990 40,546
--------- ---------
Property, plant and equipment.......................................... 31,923 25,556
Accumulated depreciation and amortization.............................. 11,788 10,536
--------- ---------
Net property, plant and equipment...................................... 20,135 15,020
Goodwill, net.......................................................... 30,239 1,465
Deferred financing costs, net.......................................... 6,747 5,210
Other assets........................................................... 616 596
--------- ---------
Total assets...................................................... $ 93,727 $ 62,837
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses............................ $ 8,472 $ 5,489
Payable to Shareholders................................................ 1,125 5,882
Other current liabilities.............................................. 6,171 7,497
--------- ---------
Total current liabilities.............................................. 15,768 18,868
Fixed-Rate Senior Notes................................................ 110,000 110,000
Floating-Rate Senior Notes............................................. 30,000 --
Other noncurrent liabilities........................................... 4,328 4,311
Preferred stock, no par value; 50,000 shares authorized;
30,000 Redeemable Series A shares designated;
16,000 Redeemable Series A shares issued and outstanding;
5,000 Redeemable Series B shares designated;
2,000 Redeemable Series B shares issued and outstanding;
(aggregate liquidation and redemption preference of $18,000)........ 17,657 16,148
Shareholders' equity (deficit):
Convertible Preferred Stock, no par value: 3,000 Series C shares
designated, issued and outstanding (liquidation preference $3,000) 3,000 --
Class A common stock, no par value:.................................
Authorized shares - 20,000,000....................................
Issued and outstanding shares - 3,857,000......................... 25,464 25,464
Accumulated deficit................................................. (112,490) (111,954)
--------- ---------
Total shareholders' equity (deficit)................................ (84,026) (86,490)
--------- ---------
Total liabilities and shareholders' equity (deficit).............. $ 93,727 $ 62,837
--------- ---------
--------- ---------
</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 Nine Month Period Ended
---------------------------------
October 2, 1998 October 3, 1997
----------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss)........................................................ $ 973 $ (4,541)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization:
Property, plant and equipment...................................... 1,252 1,025
Debt financing costs............................................... 547 66
Goodwill........................................................... 907 34
Other.............................................................. -- 147
Other adjustments to reconcile net income to net cash (used in)
provided by operating activities:.................................. (1,647) (8,451)
-------- ---------
Net cash (used in) provided by operating activities...................... 2,032 (11,720)
INVESTING ACTIVITIES
Acquisition of Mercer Products Company, Inc. less cash of $34............ (38,440) --
Purchases of property, plant and equipment............................... (1,464) (727)
Note receivable from an affiliate of the principal shareholders.......... -- 4,306
-------- ---------
Net cash (used in) provided by investing activities...................... (39,904) 3,579
FINANCING ACTIVITIES
Checks outstanding in excess of funds deposited.......................... -- (828)
Restricted cash.......................................................... 1,070 --
Repayments and settlement of long-term debt and capital lease obligations -- (18,869)
Payable to shareholders.................................................. (4,757) 5,882
Deferred financing costs................................................. (2,084) (4,943)
Issuance of Floating Interest Rate Senior Notes.......................... 30,000 --
Issuance of Series C Convertible Preferred Stock......................... 3,000 --
Proceeds from sales of shares through employee stock plans............... -- 10
Repayment of subordinated debt........................................... -- (1,750)
Net recapitalization consideration....................................... -- (107,310)
Issuance of senior notes................................................. -- 110,000
Issuance of preferred stock, net of issuance costs....................... -- 17,895
Issuance of common stock, net of issuance costs.......................... -- 18,724
-------- ---------
Net cash provided by financing activities................................ 27,229 18,811
-------- ---------
(Decrease) Increase in cash.............................................. (10,643) 10,670
Cash at beginning of period.............................................. 11,563 --
-------- ---------
Cash at end of period.................................................... $920 $10,670
-------- ---------
-------- ---------
</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 nine months ended October 2, 1998
are not necessarily indicative of the results to be expected for the full
year.
The Company uses a 52 to 53-week fiscal year ending on the Friday
closest to December 31. The Company also follows a thirteen week quarterly
cycle. The nine-month periods ended on October 3, 1997 and October 2, 1998.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 2, 1998 January 2, 1998
----------------------------------
(In thousands)
<S> <C> <C>
Raw materials $ 6,177 $ 4,626
Work-in-process 2,137 1,593
Finished goods 6,917 4,968
------------------ ---------------
$ 15,231 $ 11,187
------------------ ---------------
------------------ ---------------
</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 (the "Floating-Rate Notes"). The balance
of the financing was provided with $3.0 million from the sale of 3,000 shares
of the Company's 6% Series C Cumulative Convertible Preferred Stock and cash
on hand.
The Floating-Rate Notes mature on August 15, 2007, with interest on
the notes payable semi-annually on February 15 and August 15, commencing
August 15, 1998. The Floating-Rate Notes bear interest at a rate per annum
equal to LIBOR plus 400 basis points, with the interest rate reset
semiannually. The Floating-Rate Notes are unconditionally guaranteed on a
joint and several basis by each of the Company's subsidiaries, including
Mercer. Upon a change of control of the Company, the Company will be required
to make an offer to repurchase all outstanding Floating-Rate Notes at 101% of
the aggregate principal amount thereof plus accrued and unpaid interest
thereon at the date of repurchase.
The Company also amended its existing bank credit facility to
increase the revolving credit facility from $15 million to $25 million and
revise certain of its restrictive covenants.
The Series C Convertible Preferred Stock ranks junior to the
Redeemable Preferred Stock and dividends accrue at an annual rate per share
of 6% times the sum of $1,000 and accrued but unpaid dividends. Dividends are
cumulative and are payable semi-annually in arrears on April 15 and October
15. The holders of Series C Convertible Preferred Stock are entitled to
receive a stated liquidation value of $1,000 per share plus accrued but
unpaid dividends in the event of any liquidation, dissolution or winding up
of the Company. After payment of the liquidation preference, the holders of
Series C Convertible Preferred Stock are not entitled to further
participation in any distribution of assets of the Company. The holders of
Series C Convertible Preferred Stock are not entitled to any voting rights;
however, without the consent of 51% of the holders of Series C Convertible
Preferred Stock, the Company may not adversely alter the rights and
preferences of the Series C Convertible Preferred Stock.
Upon the occurrence of a triggering event, holders of Series C
Convertible Preferred Stock have the option to convert such shares into
common stock at a conversion price of $10 per share, subject to anti-dilution
provisions. A triggering event includes a change of control, an initial
public offering, notice by the Company of an intent to redeem the Convertible
Preferred Stock or the fifth anniversary of the issuance of the Convertible
Preferred Stock.
The Company may, at its option, redeem all or a portion of the
Convertible Preferred Stock at a redemption value equal to the liquidation
value plus accrued but unpaid dividends. Upon a change in control and subject
to limitations under the Redeemable Preferred Stock and Floating-Rate Note
and Fixed-Rate Note (defined below) agreements, the holders of Convertible
Preferred Stock may redeem such shares at a redemption value equal to the
liquidation value plus accrued but unpaid dividends.
Page 7
<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 nine month periods ended October 2, 1998
compared to the same periods in 1997:
<TABLE>
<CAPTION>
FISCAL THIRD QUARTER
---------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
1998 NET SALES 1997 NET SALES
---------- ------------ ---------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales:
Aerospace Products............. $ 8,127 26.3% $7,481 32.8%
Flooring Products.............. 13,439 43.5 6,627 29.1
Commercial Products............ 9,313 30.2 8,666 38.1
--------- ---- ------- ----
Net sales........................... 30,879 100.0 22,774 100.0
Cost of sales....................... 21,977 71.2 15,956 70.1
--------- ---- ------- ----
Gross profit........................ 8,902 28.8 6,818 29.9
Selling, general and
administrative expenses........... 3,903 12.6 3,422 15.0
Transaction expenses................ 1,174 5.2
Stock option purchase............... 14,105 61.9
Amortization of goodwill............ 504 1.6 16 0.1
--------- ---- ------- ----
Income (loss) from operations....... 4,495 14.6 (11,899) (52.3)
Interest expense.................... 3,756 12.2 1,612 7.1
--------- ---- ------- ----
Income before income tax provision
(benefit)......................... 739 2.4 (13,511) (59.4)
Income tax provision (benefit)...... 296 1.0 (5,120) (22.5)
--------- ---- ------- ----
Net income (loss)................... $ 443 1.4% ($8,391) (36.9)%
--------- ---- ------- ----
--------- ---- ------- ----
</TABLE>
Page 8
<PAGE>
<TABLE>
<CAPTION>
FISCAL NINE MONTHS
--------------------------------------------------------------------
PERCENTAGE OF PERCENTAGE OF
1998 NET SALES 1997 NET SALES
--------- --------------- --------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales:
Aerospace Products............. $ 26,097 32.2% $23,387 34.0%
Flooring Products.............. 30,505 37.6 17,886 26.0
Commercial Products............ 24,465 30.2 27,512 40.0
--------- ---- ------- ----
Net sales........................... 81,067 100.0 68,785 100.0
Cost of sales....................... 57,825 71.3 48,423 70.4
--------- ---- ------- ----
Gross profit........................ 23,242 28.7 20,362 29.6
Selling, general and
administrative expenses........... 10,651 13.1 9,520 13.8
Transaction expenses................ 1,174 1.7
Stock option purchase............... 14,105 20.5
Amortization of goodwill............ 907 1.1 34 0.0
Income (loss) from operations....... 11,684 14.5 (4,471) (6.4)
Interest expense.................... 10,063 12.4 2,625 3.8
--------- ------ ------- ----
Income before income tax provision
(benefit)......................... 1,621 2.1 (7,096) (10.2)
Income tax provision (benefit)...... 648 0.8 (2,555) (3.7)
--------- ---- ------- ----
Net income (loss)................... $ 973 1.3% ($4,541) (6.5)%
--------- ---- ------- ----
</TABLE>
COMPARISON OF THE THREE MONTH PERIOD ENDED OCTOBER 2, 1998 VERSUS THE THREE
MONTH PERIOD ENDED OCTOBER 3, 1997
NET SALES. Total net sales increased 35.6%, from $22.8 million in
1997 to $30.9 million in 1998. Aerospace Products sales grew 8.6%, reflecting
increased demand for military products. Flooring Products sales increased
102.8%, due to the acquisition of Mercer. Commercial Products sales increased
7.5% because of strong demand for the company's roofing products and volume
associated with new silicone hose products introduced late in the second
quarter of 1998.
COST OF SALES. Cost of sales increased 37.7%, from $16.0 million in
1997 to $22.0 million in 1998. As a percentage of net sales, gross profit
decreased from 29.9% to 28.8%. The decrease in profit percentage was
primarily due to temporary operating inefficiencies, both in connection with
new product ramp-up and the July 1998 silicone products facility expansion.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 14.1%, from $3.4 million in 1997 to $3.9
million in 1998. As a percentage of net sales, selling, general and
administrative expenses decreased from 15.0% to 12.6%. The decrease in
percentage was due to improved operating leverage, primarily as the result of
the acquisition of Mercer.
TRANSACTION EXPENSES AND STOCK OPTION purchase. Transaction expenses
and stock option purchase were one-time expenses associated with the
leveraged recapitalization in August, 1997.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.5
million in 1998. The increase was due to the acquisition of Mercer.
INCOME FROM OPERATIONS. As a result of the above factors, income
from operations increased from a loss of $11.9 million in 1997 to income of
$4.5 million in 1998.
INTEREST EXPENSE. Interest expense increased 133.0%, from $1.6
million in 1997 to $3.8 million in 1998. The increase was due to the issuance
of $110.0 million principal amount of 10% Fixed Interest Rate Notes due 2007
(the "Fixed-Rate Notes") on August 20, 1997 and the Floating-Rate Notes on
April 21, 1998.
Page 9
<PAGE>
NET INCOME. As a result of the above factors, net income
increased from a loss of $8.4 million in 1997 to net income of $0.4 million
in 1998.
COMPARISON OF THE NINE MONTH PERIOD ENDED OCTOBER 2, 1998 VERSUS
THE NINE MONTH PERIOD ENDED OCTOBER 3, 1997
NET SALES. Total net sales increased 17.9%, from $68.8 million in
1997 to $81.1 million in 1998. Aerospace Products sales grew 11.6%, due
primarily to increased demand for military products. Flooring Products sales
increased 70.6%, due primarily to the acquisition of Mercer. Commercial
Products sales decreased 11.1%, primarily because the first six months of
1997 included a liner project order that favorably affected results for that
period, partially offset by volume associated with new products introduced
late in the second quarter of 1998 by the silicone hose portion of this
product group.
COST OF SALES. Cost of sales increased 19.4%, from $48.4 million in
1997 to $57.8 million in 1998. As a percentage of net sales, gross profit
decreased from 29.6% to 28.7%. The decrease in profit percentage was
primarily due to temporary operating inefficiencies, both in connection with
new product ramp-up, and also in connection with the silicone products'
facility expansion which occurred in July, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 11.9%, from $9.5 million in 1997 to $10.7
million in 1998. As a percentage of net sales, selling, general and
administrative expenses decreased from 13.8% to 13.1%. The decrease in
percentage was due to improved operating leverage, primarily as the result of
the acquisition of Mercer.
TRANSACTION EXPENSES AND STOCK OPTION PURCHASE. Transaction expenses
and stock option purchase were one-time expenses associated with the
leveraged recapitalization in August, 1997.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased to $0.9
million in 1998. The increase was due to the acquisition of Mercer.
INCOME FROM OPERATIONS. As a result of the above factors, income
from operations increased from a loss of $4.5 million in 1997 to income of
$11.7 million in 1998.
INTEREST EXPENSE. Interest expense increased 283.4%, from $2.6
million in 1997 to $10.1 million in 1998. The increase was due to the
issuance of the Fixed-Rate Notes on August 20, 1997 and the Floating-Rate
Notes on April 21, 1998.
NET INCOME. As a result of the above factors, net income
increased from a loss of $4.5 million in 1997 to income of $1.0 million in
1998.
INCOME TAX PROVISION
For the three month and nine month periods ended October 2, 1998,
the Company recorded an income tax provision of 40.0%, which represents the
effective tax rate projected for the full fiscal year 1998. This effective
tax rate differs from the federal statutory rate primarily due to state
income taxes (net of federal benefit). For the nine months ended October 3,
1997, the Company recorded an income tax benefit of 36% which differs from
the federal statutory rate primarily due to state income taxes (net of
federal benefit).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. The Company's principal uses of cash are to finance working
capital and capital expenditures related to asset acquisitions and internal
growth.
Page 10
<PAGE>
CAPITAL REQUIREMENTS. On a consolidated basis, the Company expects
to spend approximately $2.0 million during fiscal 1998 on capital
expenditures not directly related to information technology systems or
acquisitions. Approximately $1.5 million was spent through the first nine
months of 1998. Cash flow from operations, to the extent available, may also
be used to fund a portion of any acquisition expenditures.
SOURCES OF CAPITAL. On April 21, 1998, the Company acquired all of
the issued and outstanding capital stock of Mercer, from Sovereign Specialty
Chemicals, Inc., for an aggregate purchase price of $38,474,000 (including
acquisition costs of $2,280,000).
Financing for this acquisition and related expenses was provided, in
large part, from the sale of (the "Offering") $30 million principal amount of
Floating Interest Rate Senior Notes Due 2007 (the "Floating-Rate Notes"). The
balance of the financing was provided with $3.0 million from the sale of
3,000 shares of the Company's 6% Series C Cumulative Convertible Preferred
Stock and cash on hand.
The Floating-Rate Notes mature on August 15, 2007, with interest on
the notes payable semi-annually on February 15 and August 15, commencing
August 15, 1998. The Floating-Rate Notes bear interest at a rate per annum
equal to LIBOR plus 400 basis points, with the interest rate reset
semiannually. The Floating-Rate Notes are unconditionally guaranteed on a
joint and several basis by each of the Company's subsidiaries, including
Mercer. Upon a change of control of the Company, the Company will be required
to make an offer to repurchase all outstanding Floating-Rate Notes at 101% of
the aggregate principal amount thereof plus accrued and unpaid interest
thereon at the date of repurchase.
Contemporaneously with the acquisition of Mercer, the Company
amended its existing Loan and Security Agreement, as amended from time to
time, with NationsBank, N.A., as administrative agent, and other lending
institutions party thereto (the "Credit Agreement") to, among other things,
(i) increase the Company's borrowing capacity from $15.0 million to $25.0
million (as amended, the "Credit Facility") (ii) add Mercer as a Borrowing
Subsidiary (as defined in the Credit Agreement), (iii) increase certain of
the baskets contained in the restrictive covenants to reflect the increased
size of the Company after the closing of the acquisition of Mercer (the
"Mercer Acquisition") and (iv) waive any default or event of default that may
otherwise result from the consummation of the Offering and the Mercer
Acquisition.
The Credit Facility matures in August 2002. Interest on loans under
the Credit Facility bear interest at rates based upon either, at the
Company's option, Eurodollar Rates plus a margin of 2.5% or upon the Prime
Rate. Loans under the Credit Facility are secured by security interests in
substantially all of the assets of the Company and are guaranteed by any and
all current or future subsidiaries of the Company, which guarantees are
secured by substantially all of the assets of such subsidiaries. The Credit
Facility contains customary covenants restricting the Company's ability to,
among other things, incur additional indebtedness, create liens or other
encumbrances, pay dividends or make other restricted payments, make
investments, loans and guarantees or sell or otherwise dispose of a
substantial portion of assets to, or merge or consolidate with, another
entity. The Credit Facility also contains a number of financial covenants
that will require the Company to meet certain financial ratios and tests and
provide that a change of control of the Company (as defined in the Credit
Facility) will constitute an event of default.
The Company anticipates that its principal use of cash on a going
forward basis will be working capital requirements, debt service requirements
and capital expenditures. Based upon current and anticipated levels of
operations, the Company believes that its cash flow from operations, together
with amounts available under the Credit Facility, will be adequate to meet
its anticipated requirements for the foreseeable future for working capital,
capital expenditures and interest payments.
Page 11
<PAGE>
YEAR 2000 ISSUE
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND
EFFECTS OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The year 2000 issue ("Year 2000 Issue") is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
Based on recent assessments, the Company has determined that it will
be required to modify or replace significant portions of its software and
certain hardware so that those systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications or
replacements of existing software and certain hardware, the Year 2000 Issue
can be mitigated. However, if such modifications and replacements are not
made, or are not timely completed, the Year 2000 Issue could have a material
impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following three phases: assessment, remediation, and testing. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000 Issue. The completed assessment
indicated that most of the Company's significant information technology
systems could be affected, particularly the general ledger, billing, and
inventory systems. That assessment also indicated that software and hardware
(embedded chips) used in production and manufacturing systems do not
represent significant risks. The Company does not believe that the Year 2000
presents a material exposure as it relates to the Company's products.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT
With respect to its information technology, the Company is 25%
complete on the remediation phase and expects to complete software and
hardware replacement no later than May 31, 1999. Completion of the testing
phase for all significant systems is expected by June 30, 1999.
The Company is utilizing both internal and external resources to
replace and test the software and hardware for resolution of the Year 2000
Issue. In conjunction with the Company's current $2.0 million information
technology systems re-engineering effort, approximately 50% of the total cost
is estimated to be related to the Year 2000 project. Most of the cost of the
new system is expected to be funded through a lease.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE
TO THE YEAR 2000 ISSUE
The Company has no significant systems which interface directly with
third party vendors. To date, the Company is not aware of any external agent
with a Year 2000 Issue that would materially impact the Company's results of
operations, liquidity, or capital resources. The Company plans to send out
questionnaires to external agents during the first quarter of 1999 in an
effort to verify the external agents' Year 2000 readiness. However, the
Company has no means of ensuring that external agents will be Year 2000
ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact the Company.
The effect of non-compliance by external agents is not determinable.
RISKS
Management believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, the Company has not
yet completed all necessary phases of its Year 2000 program. In the event
that the Company does not complete any additional phases, the Company might
be unable to take customer orders, manufacture and ship products, invoice
customers or collect payments. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also
Page 12
<PAGE>
materially adversely affect the Company. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time.
CONTINGENCY PLANS
The Company currently has no contingency plans in place in the event
it does not complete all phases of the Year 2000 program. The Company plans
to evaluate the status of completion in the first quarter of 1999 and
determine whether such a plan is necessary.
Page 13
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Legal proceedings filed against the Company were reported in the
Company's report on Form 10-Q for the quarterly period ended July 3, 1998.
ITEM 5. OTHER INFORMATION.
Mercer was merged with and into the Company, effective August 12, 1998.
The Company has qualified to do business in New Jersey and Florida, where Mercer
has its business operations. The merger was undertaken for purely administrative
reasons and Burke intends to continue to operate Mercer's business throughout
the nation under the name Mercer Products Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
*3.1 Articles of Incorporation of the Company
*3.2 By-laws of the Company
**10.20 Stock Purchase Agreement between the Company,
Mercer Products Company, Inc. and
Sovereign Specialty Chemicals, Inc.,
dated March 5, 1998
27 Financial Data Schedule
* Previously filed as an exhibit to the Company's Registration
Statement on Form S-4, File No. 333-36675, and incorporated
herein by reference.
** Previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the year ended January 2, 1998 and
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months
ended October 2, 1998.
Page 14
<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: November 13, 1998 By: /s/ DAVID E. WORTHINGTON
------------------------
David E. Worthington
Vice President-Finance
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> OCT-02-1998
<EXCHANGE-RATE> 1
<CASH> 920
<SECURITIES> 0
<RECEIVABLES> 16,223
<ALLOWANCES> 870
<INVENTORY> 15,231
<CURRENT-ASSETS> 35,990
<PP&E> 31,923
<DEPRECIATION> 11,788
<TOTAL-ASSETS> 93,727
<CURRENT-LIABILITIES> 15,768
<BONDS> 140,000
17,657
3,000
<COMMON> 25,464
<OTHER-SE> (112,490)
<TOTAL-LIABILITY-AND-EQUITY> 93,727
<SALES> 81,067
<TOTAL-REVENUES> 0
<CGS> 57,825
<TOTAL-COSTS> 57,825
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,063
<INCOME-PRETAX> 1,621
<INCOME-TAX> 648
<INCOME-CONTINUING> 11,684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 973
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
