=============================================================================== 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 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 ----------------- 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 August 13, 1999, 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 PAGE NUMBER - ------ --------------------- ----------- 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 -2- 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 For the Six Month Period Ended -------------------------------------- --------------------------------------- July 2, 1999 July 3, 1998 July 2, 1999 July 3, 1998 ------------------- ------------------ ------------------- ------------------- (Unaudited) 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 ================ ================ ================ ================ 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 January 1, 1999 (Derived from July 2, 1999 audited financial (Unaudited) statements) -------------- ----------------- (In thousands) ASSETS 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 ========= ========= 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 Six Month Period Ended ------------------------------- July 2, 1999 July 3, 1998 --------------- --------------- (Unaudited) 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 ============= =============== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements. -5- 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: July 2, 1999 January 1, 1999 -------------- ---------------- (In thousands) -------------------------------- Raw materials........................ $5,585 $5,123 Work-in-process...................... 1,646 2,085 Finished goods....................... 8,152 7,366 -------------- ---------------- $15,383 $14,574 ============== ================ 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- ORGANIC PRODUCTS SILICONE PRODUCTS TOTAL ---------------- ---------------------- ----------- (Amounts in Thousands) 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 FOR THE THREE MONTH PERIOD FOR THE SIX MONTH PERIOD ENDED ENDED JULY 2, 1999 JULY 3 ,1998 JULY 2, 1999 JULY 3, 1998 ------------ ------------ ------------ ------------ 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 ============ ============= ============= ============ -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 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: Fiscal Second Quarter --------------------------------------------------------------------- Percentage Percentage 1999 of Net Sales 1998 of Net Sales --------------------------------------------------------------------- --------------------------------------------------------------------- (dollars in thousands) 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% ============================== ================================ -8- Fiscal Six Months --------------------------------------------------------------------- Percentage Percentage 1999 of Net Sales 1998 of Net Sales --------------------------------------------------------------------- --------------------------------------------------------------------- (dollars in thousands) 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% ============================== ================================ 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- 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. -10- 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- 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- 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- 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- 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- 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-