10-Q 1 a2030474z10-q.txt FORM 10-Q ================================================================================ 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 September 29, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- COMMISSION FILE NUMBER 1-333-36675 --------------- BURKE INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 94-3081144 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 13767 FREEWAY DRIVE SANTA FE SPRINGS, CALIFORNIA 90670 (Address of Principal Executive Offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 221-0923 ----------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . As of November 20, 2000, the number of shares outstanding of the Registrant's Common Stock was 3,894,500. ================================================================================ BURKE INDUSTRIES, INC. QUARTERLY REPORT ON FORM 10-Q INDEX

PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 3 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 4 BURKE INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. 5 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 December 31, 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 December 31, 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 three and nine months ended September 29, 2000 are not necessarily indicative of the results to be expected for the full year. Certain prior year reclassifications have been made in order to conform to current year presentation. The Company uses a 52 to 53-week fiscal year ending on the Friday closest to December 31. The Company also follows a thirteen-week quarterly cycle. The nine-month periods ended on September 29, 2000 and October 1, 1999. 2. INVENTORIES Inventories consist of the following at the period ended:

3. SEGMENT INFORMATION The Company has two reportable business segments: BurkeMercer (organic products) and Engineered Polymers (silicone products). The BurkeMercer division produces and distributes rubber and vinyl wall base, other floor covering accessory products, flexible membranes and other organic rubber products. The Engineered Polymers division 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 BURKE INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. BANK CREDIT FACILITY The Company's Credit Facility contains various financial covenants. At September 29, 2000, the Company was not in compliance with certain of these covenants and the Company has an outstanding balance under the Credit Facility of $8.7 million. The Company obtained a waiver from the bank for violation of the covenants and the covenants have been amended for future periods. 7 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: BurkeMercer and Engineered Polymers. 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 income statement information for the Company for the three month period ended September 29, 2000 compared to the three month period ended October 1, 1999:

COMPARISON OF THE THREE-MONTH PERIOD ENDED SEPTEMBER 29, 2000 VERSUS THE THREE-MONTH PERIOD ENDED OCTOBER 1, 1999. NET SALES. Total net sales decreased 0.7%, from $26.8 million for the three-month period ended October 1, 1999 to $26.6 million for the same period in 2000. Aerospace and Defense Products sales increased 12.2% from $5.2 million for the three-month period ended October 1, 1999 to $5.9 million for the same period in 2000, due to an increase in demand for commercial and military products during the third quarter. Flooring Products net sales decreased 1.7% from $12.7 million for the three-month period ended October 1, 1999 to $12.5 million for the same period in 2000, due to lower demand for rubber flooring and cove base products. Commercial Products sales decreased 6.9%, from $8.9 million for the three-month period ended October 1, 1999 to $8.3 million for the same period in 2000. The decrease in sales as compared to the prior year was primarily due to lower demand for commercial rubber specialty products. COST OF SALES. Cost of sales decreased 1.8%, from $19.9 million for the three-month period ended October 1, 1999 to $19.6 million for the same period in 2000. The decrease in cost of sales was primarily due to the reduction in sales and decreased manufacturing expenses, offset by a $0.4 million warranty provision for potential product quality issues on a defense program. As a percentage of net sales, gross profit increased from 25.8% for the three-month period ended October 1, 1999 to 26.6% for the same period in 2000 due to the reduction in manufacturing expenses and improved average sales prices. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 36.3%, from $4.6 million for the three-month period ended October 1, 1999 to $6.3 million for the same period in 2000. As a percentage of net sales, selling, general and administrative expenses increased from 17.3% for the three-month period ended October 1, 1999 to 23.7% for the same period in 2000. The increase in expenses was due to increased shipping and warehousing costs in the Flooring 9 Products segment, expenses associated with a corporate initiative to improve the performance of the Company's information technology system, professional fees incurred for a study to identify state tax credits available to the Company, and costs related to management changes within the Company during the third quarter. AMORTIZATION OF GOODWILL. Amortization of goodwill was $0.5 million for the three-month period ended September 29, 2000, which was unchanged from the same period in 1999. INCOME FROM OPERATIONS. As a result of the above factors, income from operations decreased from $1.8 million for the three-month period ended October 1, 1999 to $0.2 million for the same period in 2000. INTEREST EXPENSE. Interest expense increased slightly from $3.6 million for the three-month period ended October 1, 1999 to $3.7 million for the same period in 2000. The increase is due to the Company's use of its Credit Facility during the quarter. INCOME TAX PROVISION (BENEFIT). The Company has filed for a tax refund of $144,000 from the state of California as a result of the Company's San Jose production facility being located within an enterprise zone. In addition to the refunds currently available to the Company, the Company has additional tax credit carry-forwards totaling $1.0 million, which may be available to offset future tax obligations. NET LOSS. As a result of the above factors, net loss increased from $1.8 million for the three-month period ended October 1, 1999 to a loss of $3.3 million for the same period in 2000. COMPARISON OF THE NINE-MONTH PERIOD ENDED SEPTEMBER 29, 2000 VERSUS THE NINE-MONTH PERIOD ENDED OCTOBER 1, 1999. NET SALES. Total net sales decreased 2.9%, from $83.9 million for the nine-month period ended October 1, 1999 to $81.5 million for the same period in 2000. Aerospace and Defense Products sales decreased 9.5%, from $22.1 million for the nine-month period ended October 1, 1999 to $20.0 million for the same period in 2000. Demand for commercial and military products during the first six months of the year was lower than the same period in the prior year. However, the backlog of Aerospace and Defense Products has increased 8.8% during the year to $14.7 million at September 29, 2000 compared to $13.5 million at December 31, 1999. Flooring Products net sales increased 0.3%, from $35.9 million for the nine-month period ended October 1, 1999 to $36.0 million for the same period in 2000, due to marginally higher demand for vinyl flooring and cove base products. Commercial Products sales decreased 1.6%, from $25.9 million for the nine-month period ended October 1, 1999 to $25.5 million for the same period in 2000. The decrease in sales as compared to the prior year was primarily due to lower demand for the Company's commercial rubber specialty products, offset somewhat by slightly higher demand for its commercial silicone products. COST OF SALES. Cost of sales decreased 3.6%, from $60.6 million for the nine-month period ended October 1, 1999 to $58.4 million for the same period in 2000, due primarily to the decrease in net sales and reductions in manufacturing expenses. As a percentage of net sales, gross profit increased from 27.8% for the nine-month period ended October 1, 1999 to 28.3% for the same period in 2000 due to an improved sales mix, improved average sales prices and decreased manufacturing expenses in the nine month period. 10 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 24.8%, from $13.3 million for the nine-month period ended October 1, 1999 to $16.6 million for the same period in 2000. As a percentage of net sales, selling, general and administrative expenses increased from 15.9% for the nine-month period ended October 1, 1999 to 20.4% for the same period in 2000. The increase in expenses was due to increased shipping and warehousing costs in the Flooring Products segment, costs associated with several management changes within the Company this year, and a corporate initiative to improve the performance of the Company's information technology system. AMORTIZATION OF GOODWILL. Amortization of goodwill was $1.5 million for the nine-month period ended September 29, 2000, which was unchanged from the same period in 1999. INCOME FROM OPERATIONS. As a result of the above factors, income from operations decreased 41.8%, from $8.5 million for the nine-month period ended October 1, 1999 to $4.9 million for the same period in 2000. INTEREST EXPENSE. Interest expense increased from $11.1 million for the nine-month period ended October 1, 1999 to $11.6 million for the same period in 2000. The increase is due to the debt service associated with the Company's use of its Credit Facility during the year, and the interest expense associated with the capital lease for the Company's new computer system, which was entered into in March of 1999. INCOME TAX BENEFIT. The Company has filed for a tax refund of $144,000 from the state of California as a result of the Company's San Jose production facility being located within an enterprise zone. In addition to the refunds currently available to the Company, the Company has additional tax credit carry-forwards totaling $1.0 million, which may be available to offset future tax obligations. NET LOSS. As a result of the above factors, net loss increased from $2.3 million for the nine-month period ended October 1, 1999 to a loss of $6.5 million for the same period in 2000. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW. The Company's principal uses of cash are to finance working capital, capital expenditures for property, plant and equipment, internal growth and debt service. CAPITAL REQUIREMENTS. The Company expects to spend approximately $1.6 million during 2000 on capital expenditures not directly related to acquisitions. Cash flow from operations, to the extent available, may also be used to fund a portion of any acquisition expenditures. The Company anticipates that its principal use of cash during 2000 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 (described below), will be adequate to meet its anticipated requirements for the foreseeable future for working capital, capital expenditures and interest payments. 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 $20.0 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 options, Eurodollar Rates plus a margin of 3.0% or upon the Prime Rate plus a margin of 0.5%. 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 11 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 provide that a change of control of the Company (as defined in the Credit Facility) will constitute an event of default. 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 December 31, 1999, the Company is exposed to market risks related to fluctuations in interest rates on its Senior and Floating-Rate Notes. The Company does not currently use interest rate swaps or other types of derivative financial instruments. 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. PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. EXHIBIT NO. DESCRIPTION 3.1 Amended and Restated Articles of Incorporation of the Company (1) 3.2 By-laws of the Company (1) 27 Financial Data Schedule ---------------------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-4, File No. 333-36675, as filed with the Securities and Exchange Commission on September 29, 1997, as amended. (b) REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the nine months ended September 29, 2000. 12 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 Santa Fe Springs, State of California on the 20th day of November, 2000. BURKE INDUSTRIES, INC. By: /s/ STEPHEN G. GEANE -------------------- Stephen G. Geane Chief Financial Officer 13

BURKE INDUSTRIES INC /CA/ 10-Q