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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
For the quarterly period ended July 2, 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
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No .
--- ---
As of August 13, 1999, the number of shares outstanding of the
Registrant's Common Stock was 3,894,500.
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<PAGE>
BURKE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
- ------ --------------------- -----------
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the three and
six months ended July 2, 1999 and July 3, 1998 (unaudited) 3
Condensed Consolidated Balance Sheets as of July 2, 1999
(unaudited) and January 1, 1999 4
Condensed Consolidated Statements of Cash Flows for the six
months ended July 2, 1999 and July 3, 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>
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<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 Six Month Period Ended
-------------------------------------- ---------------------------------------
July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998
------------------- ------------------ ------------------- -------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales.............................. $ 28,427 $ 27,245 $ 57,061 $ 50,188
Costs and expenses:....................
Cost of sales..................... 20,245 19,452 40,675 35,632
Selling, general and
administrative.................... 4,181 3,717 8,698 6,964
Amortization of goodwill.......... 505 394 1,009 403
--------------- --------------- --------------- ---------------
Income from operations................. 3,496 3,682 6,679 7,189
Interest expense, net.................. 3,798 3,520 7,536 6,307
Income (loss) before income tax --------------- --------------- --------------- ---------------
provision (benefit)............... (302) 162 (857) 882
Income tax provision (benefit)......... (121) 65 (342) 352
--------------- --------------- --------------- ---------------
Net income (loss)...................... $ (181) $ 97 $ (515) $ 530
================ ================ ================ ================
</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
July 2, 1999 audited financial
(Unaudited) statements)
-------------- -----------------
(In thousands)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 979 $ 2,981
Trade accounts receivable, less allowance of
$879 in 1999 and $812 in 1998..................................... 14,946 13,109
Inventories......................................................... 15,383 14,574
Other current assets................................................ 5,068 5,013
------- --------
Total current assets.............................................. 36,376 35,677
------- --------
Property, plant and equipment.......................................... 35,179 33,679
Accumulated depreciation and amortization.............................. 13,339 12,300
------- --------
Net property, plant and equipment...................................... 21,840 21,379
Goodwill, net.......................................................... 28,726 29,735
Deferred financing costs, net.......................................... 6,130 6,542
Other assets........................................................... 642 612
------- --------
Total assets...................................................... $ 93,714 $ 93,945
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued expenses......................... $ 7,639 $ 6,934
Payable to shareholders............................................. 953 953
Other current liabilities........................................... 7,245 8,844
------ ------
Total current liabilities......................................... 15,837 16,731
Fixed - Rate Senior notes.............................................. 110,000 110,000
Floating - Rate Senior notes........................................... 30,000 30,000
Other noncurrent liabilities........................................... 5,462 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)........... 19,165 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.................................................... (115,458) (113,936)
--------- ---------
Total shareholders' equity (deficit)................................ (86,750) (85,472)
--------- ---------
Total liabilities and shareholders' equity (deficit).............. $ 93,714 $ 93,945
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are
an integral part of these statements.
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<PAGE>
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Month Period
Ended
-------------------------------
July 2, 1999 July 3, 1998
--------------- ---------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................... $ (515) $ 530
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization:
Property, plant and equipment...................................... 1,039 809
Goodwill........................................................... 1,009 403
Debt financing costs............................................... 412 341
Other adjustments to reconcile net income to net cash used
in operating activities............................................... (2,691) (177)
------------- ---------------
Net cash (used in) provided by operating activities...................... (746) 1,906
INVESTING ACTIVITIES
Acquisition of Mercer Products Company, Inc. less cash of $34............ -- (38,440)
Purchases of property, plant and equipment............................... (1,500) (651)
------------- ---------------
Net cash used in investing activities.................................... (1,500) (39,091)
FINANCING ACTIVITIES
Restricted cash.......................................................... -- 1,070
Payable to shareholders.................................................. -- (3,934)
Deferred financing costs................................................. -- (2,084)
Issuance of Floating Interest Rate Senior Notes.......................... -- 30,000
Issuance of Series C Convertible Preferred Stock......................... -- 3,000
Exercise of Stock Options................................................ 244 --
------------- ---------------
Net cash provided by financing activities................................ 244 28,052
------------- ---------------
Decrease in cash......................................................... (2,002) (9,133)
Cash at beginning of period.............................................. 2,981 11,563
------------- ---------------
Cash at end of period.................................................... $ 979 $ 2,430
============= ===============
</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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of the
Company have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The condensed
consolidated balance sheet as of January 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 six months ended July 2, 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 six-month periods presented here ended on July 3, 1998 and July 2,
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>
July 2, 1999 January 1, 1999
-------------- ----------------
(In thousands)
--------------------------------
<S> <C> <C>
Raw materials........................ $5,585 $5,123
Work-in-process...................... 1,646 2,085
Finished goods....................... 8,152 7,366
-------------- ----------------
$15,383 $14,574
============== ================
</TABLE>
4. 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
commercial and military aircraft as well as high performance silicone truck
and bus engine hoses and other silicone rubber products.
-6-
<PAGE>
<TABLE>
<CAPTION>
ORGANIC PRODUCTS SILICONE PRODUCTS TOTAL
---------------- ---------------------- -----------
(Amounts in Thousands)
<S> <C> <C> <C>
THREE MONTH PERIOD ENDED JULY 2, 1999
Revenues from external customers............ $16,165 $12,262 $28,427
Segment profit.............................. 3,051 1,206 4,257
THREE MONTH PERIOD ENDED JULY 3, 1998
Revenues from external customers............ $14,840 $12,405 $27,245
Segment profit.............................. 2,625 1,812 4,437
SIX MONTH PERIOD ENDED JULY 2, 1999
Revenues from external customers............ $31,158 $25,903 $57,061
Segment profit.............................. 5,585 2,837 8,422
SIX MONTH PERIOD ENDED JULY 3, 1998
Revenues from external customers............ $23,815 $26,373 $50,188
Segment profit.............................. 3,692 4,620 8,312
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD FOR THE SIX MONTH PERIOD
ENDED ENDED
JULY 2, 1999 JULY 3 ,1998 JULY 2, 1999 JULY 3, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PROFIT
Total profit for reportable segments........ $4,257 $4,437 $8,422 $8,312
Unallocated items:
Corporate general and administrative 256 371 734 739
expenses..................................
Amortization of goodwill related to the
acquisition of Mercer................... 505 384 1,009 384
Interest expense, net..................... 3,798 3,520 7,536 6,307
------------ ------------- ------------- ------------
Income (loss) before income taxes........... $(302) $162 $(857) $882
============ ============= ============= ============
</TABLE>
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<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 commercial 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 six month periods ended July 2,
1999 compared to the same period in 1998:
<TABLE>
<CAPTION>
Fiscal Second 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.......... $7,812 27.5% $8,419 30.9%
Flooring Products....................... 12,188 42.9% 11,224 41.2%
Commercial Products..................... 8,427 29.6% 7,602 27.9%
------------------------------ -------------------------------
Net sales.................................... 28,427 100.0% 27,245 100.0%
Cost of sales................................ 20,245 71.2% 19,452 71.4%
------------------------------ -------------------------------
Gross profit................................. 8,182 28.8% 7,793 28.6%
Selling, general and
administrative expenses.................... 4,181 14.7% 3,717 13.6%
Amortization of goodwill..................... 505 1.8% 394 1.4%
------------------------------ -------------------------------
Income from operations....................... 3,496 12.3% 3,682 13.6%
Interest expense............................. 3,798 13.4% 3,520 12.9%
------------------------------ -------------------------------
Income (loss) before income tax
provision (benefit)........................ (302) -1.1% 162 0.7%
Income tax provision (benefit)............... (121) -0.4% 65 0.2%
============================== ================================
Net income (loss)........................... ($181) -0.7% $97 0.5%
============================== ================================
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Six 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.......... $16,926 29.7% $17,970 35.8%
Flooring Products....................... 23,145 40.6% 17,066 34.0%
Commercial Products..................... 16,990 29.7% 15,152 30.2%
------------------------------ -------------------------------
Net sales.................................... 57,061 100.0% 50,188 100.0%
Cost of sales................................ 40,675 71.3% 35,632 71.0%
------------------------------ -------------------------------
Gross profit................................. 16,386 28.7% 14,556 29.0%
Selling, general and
administrative expenses.................... 8,698 15.2% 6,964 13.9%
Amortization of goodwill..................... 1,009 1.8% 403 0.8%
------------------------------ -------------------------------
Income from operations....................... 6,679 11.7% 7,189 14.3%
Interest expense............................. 7,536 13.2% 6,307 12.6%
------------------------------ -------------------------------
Income (loss) before income tax
provision (benefit)....................... (857) -1.5% 882 1.7%
Income tax provision (benefit).............. (342) -0.6% 352 0.7%
============================== ================================
Net income (loss)........................... ($515) -0.9% $530 1.0%
============================== ================================
</TABLE>
COMPARISON OF THE THREE MONTH PERIOD ENDED JULY 2, 1999 VERSUS THE THREE
MONTH PERIOD ENDED JULY 3, 1998
NET SALES. Total net sales increased 4.3%, from $27.2 million in
1998 to $28.4 million in 1999. Aerospace and Defense Products sales decreased
7.2%, from $8.4 million in 1998 to $7.8 million in 1999, due to decreases in
demand for commercial aerospace products, which were partially offset by
increases in demand for military products. Flooring Products sales increased
8.6%, from $11.2 million in 1998 to $12.2 million in 1999, due to the
acquisition of Mercer. Commercial Products sales increased 10.9%, from $7.6
million in 1998 to $8.4 million in 1999, because of strong 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 4.1%, from $19.5 million in
1998 to $20.2 million in 1999. As a percentage of net sales, gross profit
increased from 28.6% in 1998 to 28.8% in 1999. The change in profitability
represents the net of the negative effect of ongoing operating inefficiencies
in the Company's Southern California facilities, offset by the positive
effect of an increase in Flooring Products as a percentage of total sales.
Flooring Products have a higher gross margin and, as discussed below, higher
distribution costs than the Company's other product groups.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 12.5%, from $3.7 million in 1998 to $4.2
million in 1999. As a percentage of net sales, selling, general and
administrative expenses increased from 13.6% to 14.7% in 1999. The increase
in percentage was 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 28.2%
from $0.4 million in 1998 to $0.5 million in 1999. The increase was due to
the acquisition of Mercer.
-9-
<PAGE>
INCOME FROM OPERATIONS. As a result of the above factors, income from
operations decreased 5.1%, from $3.7 million in 1998 to $3.5 million in 1999.
INTEREST EXPENSE. Interest expense increased 7.9%, from $3.5 million
in 1998 to $3.8 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 $0.1 million in 1998 to a loss of $0.2 million for the same period in
1999.
COMPARISON OF THE SIX- MONTH PERIOD ENDED JULY 2, 1999 VERSUS THE SIX- MONTH
PERIOD ENDED JULY 3. 1998.
NET SALES. Total net sales increased 13.7%, from $50.2 million in
1998 to $57.1 million in 1999. Aerospace and Defense Products sales decreased
5.8%, from $18.0 million in 1998 to $16.9 million in 1999, due to decreases
in demand for commercial products, which were partially offset by increases
in demand for military products. Flooring Products sales increased 35.6%,
from $17.1 million in 1998 to $23.1 million in 1999, due to the acquisition
of Mercer. Commercial Products sales increased 12.1%, from $15.2 million in
1998 to $17.0 million in 1999, because of strong 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 14.2%, from $35.6 million in
1998 to $40.7 million in 1999. As a percentage of net sales, gross profit
decreased from 29.0% in 1998 to 28.7% in 1999. The change in profitability
represents the net of the negative effect of ongoing operating inefficiencies
in the Company's Southern California facilities, offset by the positive
effect of an increase in Flooring Products as a percentage of total sales.
Flooring Products have a higher gross margin and, as discussed below, higher
distribution costs than the Company's other product groups.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 24.9%, from $7.0 million in 1998 to $8.7
million in 1999. As a percentage of net sales, selling, general and
administrative expenses increased from 13.9% to 15.2%. The increase in
percentage was 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 from
$0.4 million in 1998 to $1.0 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 7.1%, from $7.2 million in 1998 to $6.7 million in
1999.
INTEREST EXPENSE. Interest expense increased 19.5%, from $6.3
million in 1998 to $7.5 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 $0.5 million in 1998 to a loss of $0.5 million for the same period in
1999.
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<PAGE>
INCOME TAX PROVISION (BENEFIT)
For the three and six month periods ended July 2, 1999, the Company
recorded an income tax benefit of 40.0%, which represents the effective tax
rate projected for the full fiscal year 1999. This effective tax rate differs
from the federal statutory rate primarily due to state income taxes (net of
federal benefit) and is consistent with the effective tax rate for the three
and six-month periods ended July 3, 1998.
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
NationsBank, N.A., 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 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.
-11-
<PAGE>
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 December 31, 1999.
The Company believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be mitigated. However,
if such modifications and replacements are not made, or are not timely
completed, the Year 2000 Issue could have a material impact on the operations
of the Company.
The Company's plan to resolve the Year 2000 Issue involves the
following three phases: assessment, remediation, and testing. 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 90%
complete on the remediation phase and expects to complete software and
hardware replacement no later than September 30, 1999. Completion of the
testing phase for all significant systems is expected by 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 $2.2 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
Management believes it has an effective program in place to resolve
the Year 2000 Issue in a timely manner. As noted above, the Company has not
yet completed all necessary phases of its Year 2000 program. In the event
that the Company does not complete any additional phases, the Company might
be unable to take customer orders, manufacture and ship products, invoice
customers or collect payments. In addition, disruptions in the economy
generally resulting from the Year 2000 Issue could also materially adversely
affect the Company. The amount of potential liability and lost revenue cannot
be reasonably estimated at this time.
CONTINGENCY PLANS
-12-
<PAGE>
The Company currently has no contingency plans in place in the event
it does not complete all phases of the Year 2000 program, as the program is
virtually complete.
-13-
<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.
-14-
<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. As reported in the Company's 10-K, on or about December 28, 1997, a
former employee filed a complaint in the California Superior Court for the
County of Santa Clara against the Company and certain of its current and
former officers and directors. On March 11, 1998, the plaintiff filed an
amended complaint against the same defendants. The former employee alleged
that he was induced to sell stock in the Company to the Company and/or to the
officer and director defendants through the use of allegedly false or
misleading statements. On October 5, 1998, defendants answered the complaint
and filed a cross-complaint against the plaintiff for breach of contract. On
or about May 14, 1999, the Company entered into a confidential settlement
agreement with the plaintiff pursuant to which the plaintiff agreed to
dismiss his claims without any admission of liability on the part of the
Company. Although the terms of the settlement are confidential, the
settlement agreement included no terms that have has, or will have in the
future, a material impact on the Company's business, financial condition or
results of operations.
ITEM 5. OTHER INFORMATION.
As noted in the Company's Form 10-Q for the quarterly period ended
April 2, 1999, Mr. Reed Wolthausen, a Director and Senior Vice President of
the company, resigned effective June 30, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
*3.1 Articles of Incorporation of the Company
*3.2 By-laws of the Company
27 Financial Data Schedule
------------------------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form S-4, File No. 333-36675, and incorporated herein
by reference.
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the six months
ended July 2, 1999.
-15-
<PAGE>
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 13th day of August, 1999.
BURKE INDUSTRIES, INC.
By: /S/ DAVID E. WORTHINGTON
------------------------
David E. Worthington
Vice President-Finance
-16-
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