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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)
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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
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
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
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
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
---------
---------
See accompanying notes to financial statements.
5
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
ASSETS
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
---------
---------
See accompanying notes to financial statements.
6
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
Cash flows from operating activities:
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
---------
---------
See accompanying notes to financial statements.
7
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:
YEARS
-----
Building............................................. 50
Machinery and equipment.............................. 7-10
Furniture and fixtures............................... 3-5
Leasehold improvements............................... 15
(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
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
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:
Raw materials..................................... $ 585
Finished goods.................................... 1,822
---------
$ 2,407
---------
---------
(3) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 consists of the following:
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
---------
---------
(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:
OPERATING
YEAR ENDING DECEMBER 31, LEASES
---------------------------------------------- ---------------
1997.......................................... $ 358
1998.......................................... 358
1999.......................................... 348
2000.......................................... 334
------
Total minimum lease payments................ $ 1,398
------
------
(5) RELATED PARTY TRANSACTIONS
The Company entered into transactions in the ordinary course of business
with the parent company and affiliates.
10
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
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:
CURRENT DEFERRED TOTAL
----------- ----------- ---------
Federal..................... $ 462 $ 135 $ 597
State....................... 62 16 78
----- ----- ---------
$ 524 $ 151 $ 675
----- ----- ---------
----- ----- ---------
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:
Expected tax expense.................................... $ 427
Goodwill and other nondeductible items.................. 196
State income taxes, net of federal income tax benefit... 52
---------
$ 675
---------
---------
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:
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
---------
---------
(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
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
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
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
---------
---------
See accompanying notes to financial statements.
14
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
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
---------
---------
See accompanying notes to financial statements
15
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1997 TO AUGUST 4, 1997
(DOLLARS IN THOUSANDS)
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
See accompanying notes to financial statements
16
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:
YEARS
-----
Building................................................. 40
Machinery and equipment.................................. 15
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
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:
Finished goods....................................... $ 2,526
Raw materials........................................ 930
---------
Total inventories.................................... $ 3,456
---------
---------
18
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:
Land.................................................. $ 223
Buildings............................................. 2,568
Machinery and equipment............................... 3,062
---------
5,853
Less: Accumulated depreciation........................ (2,445)
---------
Property, plant, and equipment, net................... $ 3,408
---------
---------
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:
Remainder of 1997..................................... $ 253
1998.................................................. 598
1999.................................................. 573
2000.................................................. 379
2001.................................................. 251
Later years........................................... 130
---------
Total minimum lease payments.......................... $ 2,184
---------
---------
5. INCOME TAXES
Income tax expense consists of:
U.S. federal.......................................... $ 250
State................................................. 63
Deferred.............................................. 458
-----
$ 771
-----
-----
19
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:
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
-----
-----
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:
Purchases of raw materials (a).......................... $ 2,925
Management fees (b)..................................... 167
Interest (c)............................................ 544
(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
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
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
MERCER PRODUCTS COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ASSETS
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
---------
---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF OPERATIONS
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
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
---------
---------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ----------- ----------- -------------
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
----- ----------- ----- ------
----- ----------- ----- ------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
25
MERCER PRODUCTS COMPANY, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM AUGUST 5, 1997 (DATE OF
ACQUISITION) TO DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
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
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
26
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:
YEARS
-----
Building........................................ 39
Machinery and equipment......................... 3-10
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
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:
Finished goods............................... $ 2,126
Raw materials................................ 794
---------
Total inventories............................ $ 2,920
---------
---------
28
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:
Land......................................... $ 223
Buildings.................................... 2,059
Machinery and equipment...................... 2,835
---------
5,117
Less: Accumulated depreciation............... 165
---------
Property, plant, and equipment, net.......... $ 4,952
---------
---------
4. ACCRUED EXPENSES
At December 31, 1997, accrued expenses are summarized as follows:
Interest..................................... $ 358
Compensation................................. 190
Other........................................ 258
---------
$ 806
---------
---------
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:
1998......................................... $ 598
1999......................................... 573
2000......................................... 379
2001......................................... 251
2002......................................... 56
Later years.................................. 74
---------
Total minimum lease payments................. $ 1,931
---------
---------
29
MERCER PRODUCTS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
Income tax expense (benefit) consists of:
Current:
Federal..................................... $ (124)
State....................................... (36)
Deferred.................................... 166
---------
$ 6
---------
---------
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:
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)
---------
---------
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
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
(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
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF FISCAL YEAR 1997
(DOLLARS IN THOUSANDS)
HISTORICAL
-------------------- PRO FORMA PRO FORMA
BURKE MERCER ADJUSTMENTS (1) COMBINED
--------- --------- --------------- -----------
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
--------- --------- --------------- -----------
--------- --------- --------------- -----------
The accompanying notes to the unaudited pro forma combined
balance sheet are an integral part of this statement.
33
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:
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
---------
---------
(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
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FISCAL YEAR 1997
(DOLLARS IN THOUSANDS)
ADJUSTMENTS
RELATED TO
PRIOR
RECAPITAL- PRO FORMA TRANSACTIONS PRO FORMA
BURKE IZATION BURKE MERCER ADJUSTMENTS COMBINED
--------- -------------- ----------- --------- ------------- -----------
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
The accompanying notes to the unaudited pro forma combined statement of income
are an integral part of this statement.
35
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:
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
---------
---------
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:
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
---------
---------
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
(c) EXHIBITS
The following exhibits are filed with this report on Form 8-K:
Exhibit No. Description
----------- -----------
*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.
- --------------------------------
* Incorporated by reference from Burke's Annual Report on Form 10-K for the
fiscal year ended January 2, 1998.
37
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
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
*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.
- --------------------------------
* Incorporated by reference from Burke's Annual Report on Form 10-K for the
fiscal year ended January 2, 1998.
39