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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 March 31, 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
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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.)
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
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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 May 12, 2000, the number of shares outstanding of the
Registrant's Common Stock was 3,894,500.
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BURKE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and April 2, 1999 (unaudited) 3
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and April 2, 1999
(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 8-10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 11
PART II OTHER INFORMATION
Item 5 Other Information 12
Item 6 Exhibits and Reports on Form 8-K 12
Signature 13
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
For the Three Month Period
Ended
--------------------------------------
March 31, April 2,
2000 1999
--------------------------------------
(Unaudited)
Net sales.................................................. $ 27,654 $ 28,828
Costs and expenses:........................................
Cost of sales......................................... 19,859 20,430
Selling, general and administrative................... 5,135 4,711
Amortization of goodwill.............................. 504 504
-------------------- -------------------
Income from operations..................................... 2,156 3,183
Interest expense, net...................................... 3,921 3,738
-------------------- -------------------
Income (loss) before income tax............................ (1,765) (555)
Income tax................................................. -- (221)
-------------------- -------------------
Net loss................................................... $ (1,765) $ (334)
==================== ===================
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
------------- December 31,
March 31, 1999
------------- (Derived from audited
2000 financial statements)
(Unaudited) ----------------------
--------------
ASSETS (In Thousands)
Current Assets:
Cash and cash equivalents............................................... $ 171 $ 348
Trade accounts receivable, less allowance of $738 in 2000 and $658 15,154 13,627
in 1999
Inventories............................................................. 15,458 15,585
Prepaid expenses and other current assets............................... 973 1,510
Deferred income tax assets.............................................. 503 503
-------- -------
Total current assets.................................................. 32,259 31,573
Property, Plant and Equipment:
Land and improvements................................................... 2,107 2,107
Buildings and improvements.............................................. 11,210 11,210
Equipment............................................................... 19,506 19,543
Leasehold improvements.................................................. 1,040 1,040
Assets under capital leases............................................. 1,589 1,589
-------- -------
35,452 35,489
Accumulated depreciation and amortization............................... 15,061 14,464
-------- -------
20,391 21,025
Construction in process................................................. 585 419
-------- -------
Total property, plant and equipment................................... 20,976 21,444
Other Assets:
Prepaid pension cost....................................................... 442 442
Goodwill, net.............................................................. 27,214 27,718
Deferred financing costs, net.............................................. 5,513 5,718
Other assets............................................................... 135 139
-------- -------
Total other assets.................................................... 33,304 34,017
-------- -------
Total assets.................................................... $ 86,539 $ 87,034
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Revolving line of credit................................................ $ 6,547 $--
Trade accounts payable and accrued expenses............................. 6,398 8,174
Accrued compensation and related liabilities............................ 1,848 1,743
Accrued interest........................................................ 2,028 5,528
Payable to shareholders................................................. 785 785
Capital lease obligations............................................... 514 514
Income taxes payable.................................................... 501 481
-------- -------
Total current liabilities............................................. 18,621 17,225
Senior notes............................................................... 110,000 110,000
Floating notes............................................................. 30,000 30,000
Capital lease obligations, non-current 544 669
Other non-current liabilities.............................................. 443 444
Deferred income tax liabilities 2,388 2,388
Preferred stock, no par value; 50,000 shares authorized; 30,000 Series A
Redeemable shares designated; 18,611 Series A shares issued and outstanding;
5,000 Series B Redeemable shares designated; 2,326 Series B shares issued
and outstanding (aggregate liquidation and redemption preference $18,000) 21,039 20,536
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 2000 and 1999. 25,708 25,708
Accumulated deficit......................................................... (125,204) (122,936)
-------- -------
Total shareholders' equity (deficit)..................................... (96,496) (94,228)
-------- -------
Total liabilities and shareholders' equity (deficit)................... $ 86,539 $ 87,034
======== =======
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)
For the Three Month Period
Ended
-------------------------------
March 31, 2000 April 2,
1999
------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income............................................................... $ (1,765) $ (334)
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization:
Property, plant and equipment...................................... 597 527
Goodwill........................................................... 504 504
Debt financing costs............................................... 205 206
Other adjustments to reconcile net income to net cash used
in operating activities............................................... (6,136) (2,744)
------------- --------------
Net cash used in operating activities.................................... (6,595) (1,841)
INVESTING ACTIVITIES
Purchases of property, plant and equipment............................... (129) (764)
------------- --------------
Net cash used in investing activities.................................... (129) (764)
FINANCING ACTIVITIES
Short term borrowings under revolving line of credit..................... 6,547 --
------------- --------------
Net cash provided by financing activities................................ 6,547 --
------------- --------------
Decrease in cash......................................................... (177) (2,605)
Cash at beginning of period.............................................. 348 2,981
------------- --------------
Cash at end of period.................................................... $ 171 $ 376
============= ==============
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 months ended March 31, 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 three-month periods ended on March 31, 2000 and April 2, 1999.
2. INVENTORIES
Inventories consist of the following at the period ended:
March 31, December 31,
2000 1999
------------- --------------
(In thousands)
--------------------------------
Raw materials................................................... $5,663 $5,540
Work-in-process................................................. 2,727 1,861
Finished goods.................................................. 7,068 8,184
------------- --------------
$15,458 $15,585
============= ==============
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
commercial and military aircraft as well as high performance silicone truck
and bus engine hoses and other silicone rubber products.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
6
BURKE INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTH PERIOD ENDED MARCH 31, 2000 Organic Products Silicone Products Total
-------------------- ---------------------- --------------------
(Amounts in Thousands)
Revenues from external customers............ $15,268 $12,386 $27,654
Segment profit.............................. 2,279 1,304 3,583
PROFIT
Total profit for reportable segments........ $3,583
Unallocated items:
Corporate general and administrative
expenses................................ 923
Amortization of goodwill related to the
acquisition of Mercer................... 504
Interest expense, net..................... 3,921
--------------------
Income before income taxes.................. $(1,765)
====================
THREE MONTH PERIOD ENDED APRIL 2, 1999 Organic Products Silicone Products Total
-------------------- ---------------------- --------------------
(Amounts in Thousands)
Revenues from external customers............ $15,187 $13,641 $28,828
Segment profit.............................. 2,534 1,631 4,165
PROFIT
Total profit for reportable segments........ $4,165
Unallocated items:
Corporate general and administrative
expenses................................ 478
Amortization of goodwill related to the
acquisition of Mercer................... 504
Interest expense, net..................... 3,738
--------------------
Income before income taxes.................. $(555)
====================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
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: 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 income statement information
for the Company for the three month period ended March 31, 2000 compared to
the three month period ended April 2, 1999:
Fiscal First Quarter
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March 31, Percentage April 2, Percentage
2000 of Net Sales 1999 of Net Sales
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(dollars in thousands)
Net sales:
Aerospace and Defense Products......... $7,630 27.6% $9,114 31.6%
Flooring Products...................... 11,494 41.6% 11,151 38.7%
Commercial Products.................... 8,530 30.8% 8,563 29.7%
------------------------------ -------------------------------
Net sales................................... 27,654 100.0% 28,828 100.0%
Cost of sales............................... 19,859 71.8% 20,430 70.9%
------------------------------ -------------------------------
Gross profit................................ 7,795 28.2% 8,398 29.1%
Selling, general and
administrative expenses................... 5,135 18.6% 4,711 16.3%
Amortization of goodwill.................... 504 1.8% 504 1.7%
------------------------------ -------------------------------
Income from operations...................... 2,156 7.8% 3,183 11.1%
Interest expense............................ 3,921 14.2% 3,738 13.1%
------------------------------ -------------------------------
Loss before income tax benefit............. (1,765) -6.4% (555) -2.0%
Income tax benefit.......................... -- -- (221) -0.8%
------------------------------ -------------------------------
Net loss................................... ($1,765) -6.4% ($334) -1.2%
============================== ===============================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
8
NET SALES. Total net sales decreased 4.1%, from $28.8 million for
the three month period ended April 2, 1999 to $27.7 million for the same
period in 2000. Aerospace and Defense Products sales decreased 16.3%, from
$9.1 million for the three month period ended April 2, 1999 to $7.6 million
for the same period in 2000, due to decreases in demand for commercial
products, which were partially offset by increases in demand for military
products. Flooring Products net sales increased 3.1%, from $11.2 million for
the three month period ended April 2, 1999 to $11.5 million for the same
period in 2000, due to higher demand for vinyl flooring and cove base
products. Commercial Products sales decreased 0.4%, from $8.6 million for the
three month period ended April 2, 1999 to $8.5 million for the same period in
2000. The small decrease in sales as compared to the prior year was the
result of slow demand for the Company's organic roofing products, which was
offset by stronger demand for the Company's commercial silicone hose and
specialty products.
COST OF SALES. Cost of sales decreased 2.8%, from $20.4 million for
the three-month period ended April 2, 1999 to $19.9 million for the same
period in 2000, due to the decrease in net sales. As a percentage of net
sales, gross profit decreased from 29.1% for the three-month period ended
April 2, 1999 to 28.2% for the same period in 2000. The year on year
reduction in net sales of aerospace and defense products, which have a high
proportion of fixed operating expenses, was the primary cause of the decrease
in gross profit percent. This impact was partially offset by an improved
sales mix resulting from the increase in net sales of higher margin flooring
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 9.0%, from $4.7 million for the three
month period ended April 2, 1999 to $5.1 million for the same period in 2000.
As a percentage of net sales, selling, general and administrative expenses
increased from 16.3% for the three month period ended April 2, 1999 to 18.6%
for the same period in 2000. The increase in expenses was due to increased
shipping and warehousing costs and one-time costs associated with the recent
management reorganization within the Company.
AMORTIZATION OF GOODWILL. Amortization of goodwill was $0.5 million
for the three month period ended March 31, 2000, which was unchanged from the
same period in 1999.
INCOME FROM OPERATIONS. As a result of the above factors, income
from operations decreased 32.3%, from $3.2 million for the three-month period
ended April 2, 1999 to $2.2 million for the same period in 2000.
INTEREST EXPENSE. Interest expense increased from $3.7 million for
the three-month period ended April 2, 1999 to $3.9 million for the same
period in 1999. The increase is due to the debt service associated with the
Company's use of its Revolving Credit Facility during the quarter, and the
interest expense associated with the capital lease for the Company's new
computer system which was entered into in March of 1999.
NET INCOME. As a result of the above factors, net loss increased
from $0.3 million for the three-month period ended April 2, 1999 to a loss of
$1.8 million for the same period in 2000.
INCOME TAX PROVISION (BENEFIT)
For the three-month period ended March 31, 2000, the Company did not
record an income tax provision due to operating losses.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
9
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
$2.0 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 $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 options, Eurodollar Rates plus a margin of 2.5% or upon the
Prime Rate. Loans under the Credit Facility are secured by security interests
in substantially all of the assets of the Company and are guaranteed by any
and all current or future subsidiaries of the Company, which guarantees are
secured by substantially all of the assets of such subsidiaries. The Credit
Facility contains customary covenants restricting the Company's ability to,
among other things, incur additional indebtedness, create liens or other
encumbrances, pay dividends or make other restricted payments, make
investments, loans and guarantees or sell or otherwise dispose of a
substantial portion of assets to, or merge or consolidate with, another
entity. The Credit Facility also contains a number of financial covenants
that will require the Company to meet certain ratios and tests and provide
that a change of control of the Company (as defined in the Credit Facility)
will constitute an event of default.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
10
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.
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.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
11
PART II OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Effective March 1, 2000, Stephen G. Geane became the Company's Chief
Financial Officer. Mr. Geane replaced David Worthington, Vice President --
Finance, who resigned effective March 31, 2000.
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)
10.1 Letter Agreement, dated February 4, 2000, by and between Burke Industries,
Inc. and Theodore M. Clarke, amending Mr. Clarke's employment agreement
dated as of September 16, 1999. (2)
10.2 Employment Agreement effective as of March 29, 2000, by and between Stephen
G. Geane and Burke Industries, Inc.
10.3 Employment Agreement effective as of March 22, 2000, by and between Elliot
S. Stein and Burke Industries, Inc.
27 Financial Data Schedule
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(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.
(2) Incorporated by reference to the Company's annual report on
Form 10-K, File No. 333-36675, as filed with the Securities
and Exchange Commission on March 30, 2000.
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the three months
ended March 31, 2000.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
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 12th day of May, 2000.
BURKE INDUSTRIES, INC.
By: /s/ Stephen G. Geane
------------------------
Stephen G. Geane
Chief Financial Officer
13