<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 1, 1999
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
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BURKE INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3081144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2250 SOUTH TENTH STREET
SAN JOSE, CALIFORNIA 95112
(Address of Principal Executive Offices) (Zip Code)
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 October 15, 1999, the number of shares outstanding of the
Registrant's Common Stock was 3,894,500.
<PAGE>
BURKE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Part I Financial Information Page Number
- ------ --------------------- -----------
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the three and
nine months ended October 1, 1999 and October 2, 1998
(unaudited) 3
Condensed Consolidated Balance Sheets as of October 1, 1999
(unaudited) and January 1, 1999 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended October 1, 1999 and October 2, 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited)
6-7
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations 8-12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 13
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
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Nine Month Period Ended
-------------------------------------- ---------------------------------------
Oct. 1, 1999 Oct. 2, 1998 Oct. 1, 1999 Oct. 2, 1998
------------------- ------------------ ------------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales.............................. $ 26,833 $ 30,879 $ 83,894 $ 81,067
Costs and expenses:....................
Cost of sales..................... 19,918 21,606 60,593 57,238
Selling, general and
administrative.................... 4,637 4,274 13,335 11,238
Amortization of goodwill.......... 504 504 1,513 907
----------------- ---------------- ---------------- ----------------
Income from operations................. 1,774 4,495 8,453 11,684
Interest expense, net.................. 3,600 3,756 11,136 10,063
----------------- ---------------- ---------------- ----------------
Income (loss) before income tax
provision (benefit)............. (1,826) 739 (2,683) 1,621
Income tax provision (benefit)......... -- 296 (342) 648
----------------- ---------------- ---------------- ----------------
Net income (loss)...................... $ (1,826) $ 443 $ (2,341) $ 973
----------------- ---------------- ---------------- ----------------
----------------- ---------------- ---------------- ----------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 1, 1999
(Derived from
audited
Oct. 1, 1999 financial
(Unaudited) statements)
-------------- ---------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 200 $ 2,981
Trade accounts receivable, less allowance of
$778 in 1999 and $812 in 1998..................................... 14,693 13,109
Inventories......................................................... 14,923 14,574
Other current assets................................................ 4,597 5,013
-------------- ---------------
Total current assets.............................................. 34,413 35,677
-------------- ---------------
Property, plant and equipment.......................................... 35,759 33,679
Accumulated depreciation and amortization.............................. 13,846 12,300
-------------- ---------------
Net property, plant and equipment...................................... 21,913 21,379
Goodwill, net.......................................................... 28,223 29,735
Deferred financing costs, net.......................................... 5,924 6,542
Other assets........................................................... 637 612
-------------- ---------------
Total assets...................................................... $ 91,110 $ 93,945
-------------- ---------------
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses......................... $ 9,791 $ 6,934
Payable to shareholders............................................. 953 953
Other current liabilities........................................... 4,285 8,844
-------------- ---------------
Total current liabilities......................................... 15,029 16,731
Fixed - Rate Senior notes.............................................. 110,000 110,000
Floating - Rate Senior notes........................................... 30,000 30,000
Other noncurrent liabilities........................................... 5,344 4,526
Preferred stock, no par value; 50,000 shares authorized; 30,000
Series A Redeemable shares designated; 16,000 Series A shares
issued and outstanding; 5,000 Series B Redeemable shares designated;
2,000 Series B shares issued and outstanding (aggregate liquidation
and redemption preference $18,000).................................. 19,668 18,160
Shareholders' equity (deficit):
Convertible preferred stock, no par value: 3,000 Series C shares
designated, issued and outstanding (liquidation preference
$3,000)........................................................... 3,000 3,000
Class A common stock, no par value: Authorized shares-20,000,000
issued and outstanding shares--3,894,500 in 1999 and 3,857,000 in
1998.............................................................. 25,708 25,464
Accumulated deficit.................................................... (117,639) (113,936)
-------------- ---------------
Total shareholders' equity (deficit)................................ (88,931) (85,472)
-------------- ---------------
Total liabilities and shareholders' equity (deficit).............. $ 91,110 $ 93,945
-------------- ---------------
-------------- ---------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Nine Month Period
Ended
-------------------------------
Oct. 1, 1999 Oct. 2, 1998
-------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................ $ (2,341) $ 973
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization:
Property, plant and equipment...................................... 1,546 1,252
Goodwill........................................................... 1,513 907
Debt financing costs............................................... 618 547
Other adjustments to reconcile net income to net cash used
in operating activities............................................... (2,281) (1,647)
-------------- ---------------
Net cash (used in) provided by operating activities...................... (945) 2,032
INVESTING ACTIVITIES
Acquisition of Mercer Products Company, Inc. less cash of $34............ -- (38,440)
Purchases of property, plant and equipment............................... (2,080) (1,464)
-------------- ---------------
Net cash used in investing activities.................................... (2,080) (39,904)
FINANCING ACTIVITIES
Restricted cash.......................................................... -- 1,070
Payable to shareholders.................................................. -- (4,757)
Deferred financing costs................................................. -- (2,084)
Issuance of Floating Interest Rate Senior Notes.......................... -- 30,000
Issuance of Series C Convertible Preferred Stock......................... -- 3,000
Exercise of Stock Options................................................ 244 --
-------------- ---------------
Net cash provided by financing activities................................ 244 27,229
-------------- ---------------
Decrease in cash......................................................... (2,781) (10,643)
-------------- ---------------
Cash at beginning of period.............................................. 2,981 11,563
-------------- ---------------
Cash at end of period.................................................... $ 200 $ 920
-------------- ---------------
-------------- ---------------
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO 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 1, 1999 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 1, 1999.
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 1, 1999 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 presented here ended on October 2, 1998 and
October 1, 1999.
Certain reclassifications have been made in order to conform 1998 to
1999.
2. INVENTORIES
Inventories consist of the following at the period ended:
<TABLE>
<CAPTION>
October 1, 1999 January 1, 1999
--------------- ---------------
(In thousands)
---------------------------------
<S> <C> <C>
Raw materials................................................... $6,211 $5,123
Work-in-process................................................. 1,678 2,085
Finished goods.................................................. 7,034 7,366
--------------- ---------------
$14,923 $14,574
--------------- ---------------
--------------- ---------------
</TABLE>
3. SEGMENT INFORMATION
The Company has two reportable business segments: organic products and
silicone products. The organic products group produces and distributes rubber
and vinyl wall base, other floor covering accessory products, flexible membranes
and other organic rubber products. The silicone products group produces and
distributes precision silicone seals and other products used on civil and
military aircraft as well as high performance silicone truck and bus engine
hoses and other silicone rubber products.
6
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
ORGANIC PRODUCTS SILICONE PRODUCTS TOTAL
---------------- ---------------------- ---------
(Amounts in Thousands)
<S> <C> <C> <C>
THREE MONTH PERIOD ENDED OCTOBER 1, 1999
Revenues from external customers............ $17,499 $9,334 $26,833
Segment profit.............................. 3,407 (527) 2,880
THREE MONTH PERIOD ENDED OCTOBER 2, 1998
Revenues from external customers............ $18,649 $12,230 $30,879
Segment profit.............................. 3,810 1,668 5,478
NINE MONTH PERIOD ENDED OCTOBER 1, 1999
Revenues from external customers............ $48,657 $35,237 $83,894
Segment profit.............................. 8,992 2,310 11,302
NINE MONTH PERIOD ENDED OCTOBER 2, 1998
Revenues from external customers............ $42,464 $38,603 $81,067
Segment profit.............................. 7,502 6,288 13,790
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD FOR THE NINE MONTH PERIOD
ENDED ENDED
OCTOBER 1, 1999 OCTOBER 2 ,1998 OCTOBER 1, 1999 OCTOBER 2 ,1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PROFIT
Total profit for reportable segments........ $2,880 $5,478 $11,302 $13,790
Unallocated items:
Corporate general and administrative
expenses................................ 602 479 1,336 1,199
Amortization of goodwill related to the
acquisition of Mercer................... 504 504 1,513 907
Interest expense, net..................... 3,600 3,756 11,136 10,063
--------------- --------------- --------------- ---------------
Income (loss) before income taxes........... $(1,826) $ 739 $ (2,683) $1,621
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
4. BANK CREDIT FACILITY
As reported by the Company in its Annual Report on Form 10-K for the
fiscal year ended January 1, 1999 the Company's Credit Facility (defined below)
contains various financial covenants, including covenants requiring the
maintenance of fixed charge coverage. As of the quarter ended October 1, 1999,
the Company was not in compliance with certain of these covenants. The Company
recently obtained a waiver from the bank for violation of the covenants and the
covenants have been amended for future periods.
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 the
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 one industry segment, elastomer products,
and is organized into two business segments: silicone and organic products. The
Company's products are organized into three product groups: Aerospace and
Defense Products, which produces precision silicone seals and other products
used on civil and military aircraft; Flooring Products, which produces and
distributes rubber and vinyl cove base and other floor covering accessory
products; and Commercial Products, which produces various intermediate and
finished silicone and organic rubber products.
The following table sets forth certain statement of operations
information for the Company for the three and nine month periods ended October
1, 1999 compared to the same periods in 1998:
<TABLE>
<CAPTION>
Fiscal Third Quarter
-------------------------------------------------------------------
Percentage Percentage
1999 of Net Sales 1998 of Net Sales
-------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales:
Aerospace and Defense Products........ $5,223 19.5% $8,127 26.3%
Flooring Products..................... 12,709 47.4% 13,439 43.5%
Commercial Products.................... 8,901 33.1% 9,313 30.2%
------------- -------------- -------------- ---------------
Net sales.................................. 26,833 100.0% 30,879 100.0%
Cost of sales.............................. 19,918 74.2% 21,606 70.0%
------------- -------------- -------------- ---------------
Gross profit............................... 6,915 25.8% 9,273 30.0%
Selling, general and
administrative expenses.................. 4,637 17.3% 4,274 13.8%
Amortization of goodwill................... 504 1.9% 504 1.6%
------------- -------------- -------------- ---------------
Income from operations..................... 1,774 6.6% 4,495 14.6%
Interest expense........................... 3,600 13.4% 3,756 12.2%
------------- -------------- -------------- ---------------
Income (loss) before income tax provision
(benefit)................................ (1,826) (6.8)% 739 2.4%
Income tax provision (benefit) -- (0.0)% 296 1.0%
------------- -------------- -------------- ---------------
Net income (loss).......................... ($1,826) (6.8)% $443 1.4%
------------- -------------- -------------- ---------------
------------- -------------- -------------- ---------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Fiscal Nine Months
----------------------------------------------------------------------
Percentage Percentage
1999 of Net Sales 1998 of Net Sales
----------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales:
Aerospace and Defense Products........ $22,149 26.4% $26,097 32.2%
Flooring Products..................... 35,854 42.7% 30,505 37.6%
Commercial Products................... 25,891 30.9% 24,465 30.2%
------------------------------- --------------------------------
Net sales.................................. 83,894 100.0% 81,067 100.0%
Cost of sales.............................. 60,593 72.2% 57,238 70.6%
------------------------------- --------------------------------
Gross profit............................... 23,301 27.8% 23,829 29.4%
Selling, general and
administrative expenses.................. 13,335 15.9% 11,238 13.9%
Amortization of goodwill................... 1,513 1.8% 907 1.1%
------------------------------- --------------------------------
Income from operations..................... 8,453 10.1% 11,684 14.4%
Interest expense........................... 11,136 13.3% 10,063 12.4%
------------------------------- --------------------------------
Income (loss) before income tax provision
(benefit)................................ (2,683) (3.2)% 1,621 2.0%
Income tax provision (benefit)............. (342) (0.4)% 648 0.8%
------------------------------- --------------------------------
------------------------------- --------------------------------
Net income (loss).......................... ($2,341) (2.8)% $973 1.2%
------------------------------- --------------------------------
------------------------------- --------------------------------
</TABLE>
COMPARISON OF THE THREE MONTH PERIOD ENDED OCTOBER 1, 1999 VERSUS THE THREE
MONTH PERIOD ENDED OCTOBER 2, 1998
NET SALES. Total net sales decreased 13.1%, from $30.9 million in 1998
to $26.8 million in 1999. Aerospace and Defense Products sales decreased 35.7%,
from $8.1 million in 1998 to $5.2 million in 1999, due to decreases in demand
for civil aerospace products, and deferral of demand for military products.
Flooring Products sales decreased 5.4%, from $13.4 million in 1998 to $12.7
million in 1999, due to lower demand. Commercial Products sales decreased 4.4%,
from $9.3 million in 1998 to $8.9 million in 1999, due to lower demand for
organic membrane products.
COST OF SALES. Cost of sales decreased 7.8%, from $21.6 million in 1998
to $19.9 million in 1999. As a percentage of net sales, gross profit decreased
from 30.0% in 1998 to 25.8% in 1999. The decline in profitability was primarily
due to the decrease in sales volume of Aerospace and Defense Products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 8.5%, from $4.3 million in 1998 to $4.6
million in 1999. As a percentage of net sales, selling, general and
administrative expenses increased from 13.8% to 17.3% in 1999. The increase in
spending was due to costs associated with the implementation of a new
information system. The increase in spending as a percentage of net sales was
due to the decrease in net sales.
AMORTIZATION OF GOODWILL. Amortization of goodwill was unchanged, at
$0.5 million in 1998 and 1999.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations decreased 60.5%, from $4.5 million in 1998 to $1.8 million in 1999.
9
<PAGE>
INTEREST EXPENSE. Interest expense decreased 4.2%, from $3.8 million in
1998 to $3.6 million in 1999.
NET INCOME. As a result of the above factors, net income decreased from
$0.4 million in 1998 to a loss of $1.1 million in 1999.
COMPARISON OF THE NINE MONTH PERIOD ENDED OCTOBER 1, 1999 VERSUS THE NINE MONTH
PERIOD ENDED OCTOBER 2, 1998.
NET SALES. Total net sales increased 3.5%, from $81.1 million in 1998
to $83.9 million in 1999. Aerospace and Defense Products sales decreased 15.1%,
from $26.1 million in 1998 to $22.1 million in 1999, due to decreases in demand
for civil aerospace products, which were partially offset by increases in demand
for military products. Flooring Products sales increased 17.5%, from $30.5
million in 1998 to $35.9 million in 1999, due to the acquisition of Mercer.
Commercial Products sales increased 5.8%, from $24.5 million in 1998 to $25.9
million in 1999, because of increased demand for the Company's organic
custom-mixed products and volume associated with new silicone hose products
introduced late in the second quarter of 1998.
COST OF SALES. Cost of sales increased 5.9%, from $57.2 million in 1998
to $60.6 million in 1999. As a percentage of net sales, gross profit decreased
from 29.4% in 1998 to 27.8% in 1999. The decline in profitability was primarily
due to the decrease in sales volume of Aerospace and Defense Products in the
third quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 18.7%, from $11.2 million in 1998 to $13.3
million in 1999. As a percentage of net sales, selling, general and
administrative expenses increased from 13.9% to 15.9%. The increase in spending
was due to the acquisition of Mercer, and the costs associated with the
implementation of a new information system. The increase in percentage was also
due to the acquisition of Mercer, because Flooring Products have higher
distribution costs than the Company's other product groups.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased 66.8%,
from $0.9 million in 1998 to $1.5 million in 1999. The increase was due to the
acquisition of Mercer.
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations decreased 27.7%, from $11.7 million in 1998 to $8.5 million in 1999.
INTEREST EXPENSE. Interest expense increased 10.7%, from $10.1 million
in 1998 to $11.1 million in 1999. The increase was due to the issuance of the
Floating-Rate Notes on April 21, 1998.
NET INCOME. As a result of the above factors, net income decreased from
$1.0 million in 1998 to a loss of $1.6 million in 1999.
INCOME TAX PROVISION (BENEFIT)
For the three month period ended October 1, 1999, the Company did not
book a tax provision due to operating loss. For the six month period ended July
2, 1999 the Company recorded an income tax benefit of $0.3 million. The
effective tax rate for the three and nine month periods ended October 2, 1998
differs from the federal statutory rate primarily due to state income taxes (net
of federal benefit).
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. The Company's principal uses of cash are to finance working
capital and capital expenditures related to asset acquisitions and internal
growth.
CAPITAL REQUIREMENTS. The Company expects to spend approximately $2.5
million during 1999 on capital expenditures not directly related to
acquisitions. Cash flow from operations, to the extent available, may also be
used to fund a portion of any acquisition expenditures.
SOURCES OF CAPITAL. Under a Loan and Security Agreement with Bank of
America, as administrative agent, and other lending institutions party thereto,
the Company has a borrowing capacity of $25.0 million (the "Credit Facility").
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 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 ratios and tests and provides that a
change of control of the Company (as defined in the Credit Facility) will
constitute an event of default.
The Credit Facility contains a number of financial covenants that
require the Company to meet certain ratios and tests and also provides that a
change of control of the Company (as defined in the Credit Facility) will
constitute an event of default. As of the quarter ended October 1, 1999, the
Company was not in compliance with certain of these covenants. The Company
recently obtained a waiver from the bank for violations of the financial
covenants and the covenants have been amended for future periods.
The Company anticipates that its principal use of cash during 1999 will
be working capital requirements, capital expenditures and debt service
requirements. 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.
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
miscalculation 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 its assessments, the Company determined that it had to modify
or replace significant portions of its software and certain hardware so that
those systems will properly utilize dates beyond
11
<PAGE>
December 31, 1999. The Company believes that with modifications or replacements
of existing software and certain hardware, the Year 2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves the
following three phases: assessment, remediation, and testing. 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 100%
complete on the remediation phase, with the completion of software and hardware
replacement as of August 28, 1999. Completion of the testing phase for all
significant information technology systems was completed as of September 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 $2.8 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 has been 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 would 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 has sent 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 the 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 AND CONTINGENCY PLAN
Management believes it has mitigated the Year 2000 Issue and it has not
developed a contingency plan. However, it is possible that disruptions to the
economy resulting from the Year 2000 Issue could adversely affect the Company.
The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As reported by the Company in its Annual Report on Form 10-K for the
fiscal year ended January 1, 1999, the Company is exposed to market risks
related to fluctuations in interest rates on its $110 million aggregate
principal amount of fixed interest rate senior notes due 2007 ("Senior Notes")
and its $30 million aggregate principal amount of floating interest rate notes
due 2007 ("Floating-Rate Notes"). The Company does not currently use interest
rate swaps or other types of derivative financial instruments.
For fixed rate debt such as the Senior Notes, changes in interest rates
generally affect the fair value of the debt instrument. For variable rate debt
such as the Floating-Rate Notes, changes in interest rates generally do not
affect the fair value of the debt instrument, but do affect earnings and cash
flows. The Company does not have an obligation to repay its Senior Notes prior
to maturity in 2007 and, as a result, interest rate risk and changes in fair
value should not have a significant impact on the Company. Management believes
that the interest rate on the Senior Notes approximates the current rates
available for similar types of financing and as a result the carrying amount of
the Senior Notes approximates fair value. The carrying value of the
Floating-Rate Notes approximates fair value as the interest rate is variable and
resets frequently. The Floating-Rate Notes bear interest at a rate per annum
equal to LIBOR plus 400 basis points and each one percentage point increase in
interest rates would result in an increase in interest expense of $300,000 per
year.
Management does not believe that the future market rate risk related to
the Senior Notes and Floating-Rate Notes will have a material impact on the
Company's financial position, results of operations or liquidity.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Legal proceedings filed against the Company were reported in the
Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1999
and updated in the Company's Quarterly Report on Form 10-Q for the quarterly
period ended July 2, 1999.
ITEM 5. OTHER INFORMATION.
On November 1, 1999, Theodore M. Clark was appointed the company's new
President. Mr. Clark recently concluded a career spanning more than two decades
at PRC-Desoto, Inc., a wholly owned subsidiary of PPG Industries. As President
and Chief Executive Officer, Mr. Clark established PRC-DeSoto as the world's
largest manufacturer of aerospace sealants and coatings, as well as a leading
supplier of insulated glass sealants for construction applications.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
*3.1 Articles of Incorporation of the Company
*3.2 By-laws of the Company
27 Financial Data Schedule
</TABLE>
-----------------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form S-4, File No. 333-36675, and incorporated
herein by reference.
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the nine months
ended October 1, 1999.
14
<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Jose, State of California on the 15th day of November, 1999.
BURKE INDUSTRIES, INC.
By: /s/ DAVID E. WORTHINGTON
---------------------------------
David E. Worthington
Vice President-Finance
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-02-1999
<PERIOD-END> OCT-01-1999
<CASH> 200
<SECURITIES> 0
<RECEIVABLES> 15,471
<ALLOWANCES> 778
<INVENTORY> 14,923
<CURRENT-ASSETS> 34,413
<PP&E> 35,759
<DEPRECIATION> 13,846
<TOTAL-ASSETS> 91,110
<CURRENT-LIABILITIES> 15,029
<BONDS> 140,000
19,668
3,000
<COMMON> 25,708
<OTHER-SE> (117,639)
<TOTAL-LIABILITY-AND-EQUITY> 91,110
<SALES> 83,894
<TOTAL-REVENUES> 83,894
<CGS> 60,593
<TOTAL-COSTS> 60,593
<OTHER-EXPENSES> 14,690
<LOSS-PROVISION> 158
<INTEREST-EXPENSE> 11,136
<INCOME-PRETAX> (2,683)
<INCOME-TAX> (342)
<INCOME-CONTINUING> 8,453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,341)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
