UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998
Commission File Number 0-5680
BURKE MILLS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0506342
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
191 Sterling Street, N.W.
Valdese, North Carolina 28690
(Address of principal executive offices) (Zip Code)
(828) 874-6341
(Registrant's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if
changed since last report)
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 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
_____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of November
3, 1998, there were outstanding 2,741,168 shares of the issuer's only class
of common stock.
Page 1 of 20
BURKE MILLS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION Page Number
Item 1 - Financial Statements
Condensed Balance Sheets
October 3, 1998 and January 3, 1998 3
Condensed Statements of Operations and
Retained Earnings
Thirteen Weeks Ended October 3, 1998 and
September 27, 1997 4
Thirty-nine weeks Ended October 3, 1998 and
September 27, 1997
Statements of Cash Flows
Thirty-nine Weeks Ended October 3, 1998 and
September 27, 1997 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Part II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 18
Item 6(a)- Exhibit 27 - Financial Data Schedule 19
SIGNATURES 20
2
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
October 3, January 3,
1998 1998
(Unaudited) ( Note A)
ASSETS
Current Assets
Cash and cash equivalents $ 3,090,252 $ 4,306,540
Accounts receivable 5,325,826 3,771,301
Inventories 4,586,246 3,006,298
Prepaid expenses and other current
assets 203,567 38,832
Deferred income taxes 254,600 661,700
Total Current Assets 13,460,491 11,784,671
Equity Investment in Affiliate 379,828 177,728
Property, Plant and Equipment - at cost 27,394,774 26,350,679
Less: Accumulated depreciation 15,374,199 14,158,330
Property, Plant and Equipment - Net 12,020,575 12,192,349
Other Assets
Deferred Charges 161,562 193,316
$26,022,456 $24,348,064
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 750,000 $ 687,500
Accounts payable 3,292,302 2,081,237
Accrued salaries, wages and vacation pay 375,649 191,128
Other liabilities and accrued expenses 282,162 417,821
Total Current Liabilities 4,700,113 3,377,686
Long-term Debt 4,750,000 5,312,500
Deferred Income Taxes 2,223,500 2,218,300
Total Liabilities 11,673,613 10,908,486
Shareholders' Equity
Common stock, no par value
(stated value, $.66)
Authorized - 5,000,000 shares
Issued and outstanding -
2,741,168 shares 1,809,171 1,809,171
Paid-in capital 3,111,349 3,111,349
Retained earnings 9,428,323 8,519,058
Total Shareholders' Equity 14,348,843 13,439,578
$26,022,456 $24,348,064
Note A: The January 3, 1998 Condensed Balance Sheet has been derived from
the audited financial statements at that date but does not include all
of the information and footnotes required for generally accepted
accounting principles for complete financial statements.
See notes to condensed financial statements
3
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Thirty-nine Weeks Ended
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
Net Sales $11,509,188 $ 9,873,517 $32,181,297 $30,375,453
Cost and Expenses
Cost of Sales 9,976,035 8,797,137 28,419,391 27,251,215
Selling, General and
Administrative Expenses 737,008 571,465 2,136,703 1,808,122
Factor's Charges 46,447 44,907 138,017 135,214
Total Costs and Expenses 10,759,490 9,413,509 30,694,111 29,194,551
Operating Earnings 749,698 460,008 1,487,186 1,180,902
Other Income
Interest Income 41,886 37,573 136,902 100,293
Other, net -- 2,186 -- 3,296
Total 41,886 39,759 136,902 103,589
Other Expenses
Interest Expense 114,445 122,572 352,822 370,000
Loss on Disposal of Property 1,237 -- 1,237 4,243
Other, net 30,753 -- 91,575 --
Total 146,435 122,572 445,634 374,243
Income before Provision for Income
Taxes and Equity in Net
Earnings of Affiliate 645,149 377,195 1,178,454 910,248
Provision for Income Taxes 252,500 147,539 471,289 356,043
Net Income before Equity in Net
Earnings of Affiliate 392,649 229,656 707,165 554,205
Equity in Net Earnings of
Affiliate 1,500 -- 202,100 --
Net Income 394,149 229,656 909,265 554,205
Retained Earnings at Beginning
of Period 9,034,174 8,217,503 8,519,058 7,892,954
Retained Earnings at End
of Period $ 9,428,323 $ 8,447,159 $ 9,428,323 $ 8,447,159
Earnings Per Share $ .14 $ .08 $ .33 $ .20
Dividends Per Share of Common
Stock None None None None
Weighted Average Common Shares
Outstanding 2,741,168 2,741,168 2,741,168 2,741,168
See notes to condensed financial statements.
4
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine Weeks Ended
October 3, September 27,
1998 1997
Cash flows from operating activities:
Net income $ 909,265 $ 554,205
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,220,817 1,167,322
Equity in earnings of affiliate (202,100) --
Loss on disposal of property assets 1,237 4,243
Provision for deferred income taxes 412,300 356,044
Changes in assets and liabilities:
Accounts receivable (1,554,525) (599,373)
Inventories (1,579,948) 193,823
Prepaid expenses, taxes and other
current assets (164,735) (9,530)
Prepaid and refundable income taxes -- 9,340
Other non-current assets 31,754 (145,772)
Accounts payable 1,211,065 494,570
Accrued salaries, wages and vacation pay 184,521 83,967
Other liabilities and accrued expenses (135,659) 57,091
Total Adjustments (575,273) 1,611,725
Net cash provided by operating activities 333,992 2,165,930
Cash flows from investing activities:
Acquisition of property, plant and
equipment (1,050,280) (777,628)
Investment & advances -
affiliated company -- (151,500)
Net cash (used) by investing activities (1,050,280) (929,128)
Cash flows from financing activities:
Principal payments of long-term debt (500,000) --
Net cash used by financing activities (500,000) --
Net increase (decrease) in cash and
cash equivalents (1,216,288) 1,236,802
Cash and cash equivalents at
beginning of year 4,306,540 2,157,428
CASH AND EQUIVALENTS AT END OF PERIOD 3,090,252 $3,394,230
See notes to condensed financial statements
5
Page>
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all necessary
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the thirty-nine
week period ended October 3, 1998 are not necessarily indicative of the
results that may be expected for the year ended January 2, 1999. For further
information, refer to the financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended January 3,
1998.
NOTE 2 - STATEMENTS OF CASH FLOWS
For the purposes of the statements of cash flows, the Company
considers cash on hand, deposits in banks, interest bearing demand matured
funds on deposit with factor, and all highly liquid debt instruments with a
maturity of three months or less when purchased as cash and cash equivalents.
FASB No. 95 requires that the following supplemental disclosures to
the statements of cash flows be provided in related disclosures. Cash paid for
interest for the thirty-nine weeks ended October 3, 1998 and September 27,
1997 was $358,000 and $370,000, respectively. Income taxes paid during the
thirty-nine week period ended October 3, 1998 were $25,000 and no taxes were
paid during the thirty-nine week period ended September 27, 1997.
NOTE 3 - OPERATIONS OF THE COMPANY
The Company is engaged in twisting, texturing, winding, dyeing,
processing and selling of filament, novelty and spun yarns, and in the dyeing
and processing of these yarns for others on a commission basis.
The Company's fiscal year is the 52 or 53 week period ending on the
Saturday nearest to December 31. Its fiscal quarters also end on the Saturday
nearest to the end of the calendar quarter.
NOTE 4 - USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
6
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
October 3, January 3,
1998 1998
Account current - Factor:
Due from Factor on regular
factoring account........ $4,601,000 $3,328,000
Non-factored accounts
receivable............... 725,000 443,000
$5,326,000 $3,771,000
NOTE 6 - INVENTORIES
Inventories are summarized as follows:
October 3, January 3,
1998 1998
Finished and in process.... $2,713,000 $1,813,000
Raw Materials.............. 1,284,000 716,000
Dyes and Chemicals......... 454,000 337,000
Other...................... 135,000 140,000
$4,586,000 $3,006,000
NOTE 7 - LINE OF CREDIT
Pursuant to a loan agreement dated March 29, 1996, the Company
secured a line of credit facility from its bank wherein it may borrow, repay
and reborrow amounts from the line of credit facility for short-term working
capital needs. The aggregate principal amount outstanding at any time under
this loan my not exceed the lesser of $2,000,000 and the borrowing base (as
defined). Interest on this loan facility is at a rate that varies with the
Libor Rate and is payable on the last day of each month. The line of credit
loan matures annually on April 30 and may be renewed at the sole discretion of
the bank. There were no outstanding loans under this agreement as of October
3, 1998 or September 27, 1997.
7
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 8 - LONG-TERM DEBT
On March 29, 1996, the Company entered into a new loan agreement with
its bank providing for a term loan of $6,000,000 and, as discussed in Note 7
above, a line of credit facility of $2,000,000 for ongoing, short-term working
capital needs. The new term loan refinanced two formerly existing term loans,
and accordingly, all term obligations were consolidated into the one
$6,000,000 obligation. This new loan is secured by (1) a first Deed of Trust
on property and buildings located at the Company's manufacturing sites in
North Carolina, (2) a first lien position on the new equipment and machinery
installed at these manufacturing sites and (3) a first lien position on the
existing machinery and equipment located at the Company's manufacturing sites.
Under the new term loan agreement, interest only was payable monthly
until February, 1998. Thereafter, principal maturities are payable in the
amount of $62,500 per month for ninety-six consecutive months plus interest at
the fixed rate of 8.06%. In order to effect this fixed interest rate hedge,
the bank converted its interest rate cap into a fixed rate loan by entering
into a fixed rate hedge contract with the Company. Under this fixed rate hedge
contract, the Company will pay the bank 8.06% for the term of the contract.
The floating rate (LIBOR plus 1.9%) that the Company will pay the bank will be
equal to the floating rate that the bank's capital markets will pay to the
Company. Whether LIBOR rates rise or fall over the life of the loan agreement,
the Company will continue to pay the bank a fixed rate of 8.06% for the life
of the contract, thereby creating a fixed rate loan.
Among other things, covenants include a debt service coverage ratio,
a limit on annual property asset acquisitions exclusive of property acquired
with the loan proceeds under this new loan agreement, the retirement or
acquisition of the Company's capital stock in excess of a stated amount, the
maintenance of a minimum tangible net worth which shall increase by a stated
amount annually, a minimum quick ratio, and a maximum debt to tangible net
worth ratio.
The annual principal maturities of long-term debt at October 3, 1998
are as follows:
Current portion $ 750,000
1999/2000 750,000
2000/2001 750,000
2001/2002 750,000
2002/2003 750,000
Thereafter 1,750,000 4,750,000
$5,500,000
8
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 9 - INCOME TAXES
The Company uses the liability method as required by FASB statement
109 "Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws.
The items which comprise deferred tax assets and liabilities are as
follows:
October 3, January 3,
1998 1998
Deferred Tax Assets:
Alternative minimum taxes paid $ 214,400 $ 608,825
Net Operating loss carryforward -- 12,190
Inventory capitalization 28,600 18,700
Business Credits 11,600 11,585
Contributions carryforward -- 10,400
$ 254,600 $ 661,700
Deferred Tax Liabilities:
Accelerated depreciation
for tax purposes $2,223,500 $2,218,300
Provision for income Thirty-nine Weeks Ended
taxes consists of: October 3, September 27,
1998 1997
Deferred Federal and State $ 412,300 $ 356,043
Current Federal 18,300 --
Current State 40,689 --
$ 471,289 $ 356,043
NOTE 10 - EMPLOYEE BENEFIT PLAN
The Company is a participating employer in the Burke Mills, Inc.
Savings and Retirement Plan and Trust that has been qualified under Section
401(k) of the Internal Revenue Code. This plan allows eligible employees to
contribute a salary reduction amount of not less than 1% nor greater than 25%
of the employee's salary but not to exceed dollar limits set by law. The
employer may make a discretionary contribution for each employee out of
current net profits or accumulated net profits in an amount the employer may
from time to time deem advisable. No provision was made for a discretionary
contribution for the periods ended October 3, 1998 and September 27, 1997.
9
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 11 - CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of funds on deposit with the
Company's factor and amounts due from the factor on receivables sold to the
factor on a non-recourse basis. The receivables sold to the factor during a
month generally have a maturity date on the 20th to the 25th of the following
month, at which time the amount due the Company by the factor is transferred
to matured funds on deposit with First Union National Bank. Matured funds of
$3,636,000 will be transferred to First Union National Bank on October 26,
1998. The Company utilizes its matured funds and loans that may be due to its
bank arising from its Line of Credit facility on a continuous basis to
replenish its cash in the bank for the payment of materials, labor, and
overhead.
NOTE 12 - COMMITMENTS
(a) The Company entered into a supply agreement, dated November 23,
1996, with its joint venture company, Fytek, S.A. De C.V. to purchase twisted
yarns. The Company agrees to purchase approximately $1,800,000 of twisted yarn
annually for the five years beginning November 1997.
(b) The Company entered into a supply agreement, dated November 19,
1996, with Fibras Quimicas, S.A. to purchase yarn. The Company agrees to
purchase yarn based on the schedule below, beginning February 1, 1997, for a
five-year period.
Year 1 Approximately $2,600,000
Year 2 Approximately $6,400,000
Year 3 Approximately $7,100,000
Year 4 Approximately $7,700,000
Year 5 Approximately $7,700,000
(c) The Company entered into a contract on November 5, 1998 with
Osprey Systems, Inc. to purchase and install Enterprise Resource Planning
software. The software will replace various custom manufacturing applications
and the accounting software, giving the Company a fully integrated software
solution. Currently the Company's manufacturing applications are not fully
integrated and there is no integration between manufacturing and accounting.
It is believed that the new software will better handle growing demands from
customers for information, improve the order to cash cycle, and solve any year
2000 problems.
The project is estimated to be completed in July 1999.
The cost of the project to include software, hardware, implementation and
training will be approximately $900,000 paid over seven months beginning in
November 1998. The Company will expense approximately $600,000 of the project,
$200,000 in 1998 and $400,000 in 1999.
10
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(Continued)
NOTE 13 - RELATED PARTY DISCLOSURES
For the three quarters of 1998, the Company purchased $80,335 of
yarns from Nafees Cotton Mills, Ltd. The Company paid for the yarn purchased
by wire transfer 30 days after the bill of lading date.
Humayun N. Shaikh, Chairman and C.E.O. of the Company, is
also director of Nafees Cotton Mills, Ltd.
Ahmed H. Shaikh, Director of the Company, is C.E.O. of
Nafees Cotton Mills, Ltd.
NOTE 14 - ACCOUNTING FOR POSSIBLE IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, the Financial Accounting Standards Board issued Statement
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996 and such adoption
did not have any effect on the financial statements for 1997 or for the
thirty-nine weeks ended October 3, 1998.
NOTE 15 - EARNINGS PER SHARE
Earnings per share are based on the net income divided by the
weighted average number of common shares outstanding during the thirteen and
thirty-nine week periods ended October 3, 1998 and September 27, 1997.
11
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
1998 Compared to 1997
The following discussion should be read in conjunction with the
information set forth under the Financial Statements and Notes thereto included
elsewhere in the 10-Q.
RESULTS OF OPERATIONS
The following table sets forth operating data of the Company as a
percentage of net sales for the periods indicated below:
Thirteen Weeks Thirty-nine Weeks
Ended Ended
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
1998 1997 1998 1997
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 86.6 89.1 88.3 89.7
Gross Profit 13.4 10.9 11.7 10.3
Selling, General, Administrative
and Factoring Costs 6.8 6.2 7.1 6.4
Operating Earnings 6.6 4.7 4.6 3.9
Interest Expense 1.0 1.3 1.1 1.2
Other (Income) - net 0.0 (0.4) (0.8) (0.3)
Income before Income Taxes 5.6 3.8 4.3 3.0
Income Taxes 2.2 1.5 1.5 1.2
Net Income 3.4% 2.3% 2.8% 1.8%
THIRTEEN WEEKS ENDED OCTOBER 3, 1998
COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997
Net Sales
Net sales for the thirteen weeks ended October 3, 1998 (the third fiscal
quarter), were $11,509,000, representing a 16.6% increase compared to the third
quarter 1997 sales of $9,874,000. Pounds shipped increased by 16.9% compared to
the third quarter of 1997. While sales dollars increased, the full yarn pounds
shipped also increased by 15.7% and the commission pounds shipped increased by
40.7%.
12
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Cost of Sales and Gross Margin
Cost of sales for the thirteen weeks of 1998 increased by 13.4% with a
sales increase of 16.6%. The third quarter of 1998 has one more shipping and
production week as compared to the third quarter of 1997. The Company's
traditional vacation week at the 4th of July occurred in the second quarter as
opposed to the third quarter in 1997.
As a result of an increase in sales of 16.6% and an increase in cost of
sales of 13.4%, gross margins increased to 13.4% of sales compared to 10.9% in
1997.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses for the third quarter of 1998
increased by $166,000 or 29.0% compared to 1997. Increases in compensation,
professional services and travel were the major contributors to the increase.
Factor's Charges
Factor's charges for the third quarter of 1998 and 1997 were 0.4% of sales.
Interest Expense
Interest expenses for the third quarter of 1998 decreased by $8,000
compared to 1997 due to a lower average long-term debt.
Interest Income
Interest income for the third quarter of 1998 increased due to an increase
in funds invested. The Company's cash flow improved and resulted in an increase
in cash available to invest.
Equity in Net Earnings of Affiliate
The Company recorded $1,500 as equity in net earnings of Fytek, S.A. De
C.V., its joint venture in Mexico. The Company's share of net earnings and
losses is 50%. Fytek began operations in the fourth quarter of 1997.
13
<Page)
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Income before Provision for Income Taxes
For the thirteen weeks ended October 3, 1998, income before provision for
income taxes increased primarily as a result of increased net sales and an
increase in gross margin.
Provision for Income Taxes
The Company recorded provision for income taxes of $253,000 for the third
quarter of 1998 compared to $148,000 for 1997. Provision for taxes on domestic
income was 39% for 1998 and 1997.
THIRTY-NINE WEEKS ENDED OCTOBER 3, 1998 COMPARED TO
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997
1998 Compared to 1997
Net Sales
Net sales for the thirty-nine weeks ended October 3, 1998 increased by
$1,806,000, or 5.9% to an aggregate of $32,181,000, compared to $30,375,000 in
1997. Total pounds shipped for the 1998 period increased by 5.1%.
Cost of Sales and Gross Margin
Cost of sales for the thirty-nine weeks ended October 3, 1998 increased by
4.3% on a sales increase of 5.9%.
As a result of an increase in sales of 5.9% and an increase in cost of
sales by 4.3%, gross margins improved from 10.3% in 1997 to 11.7% and gross
profit dollars improved by 20.4%, as compared to the like period of 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the thirty-nine weeks
increased $329,000, or 18.1%. The increase is primarily due to increases in
compensation and travel expenses.
14
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Interest Expense
Interest expense for the thirty-nine weeks of 1998 decreased by $17,000
compared to 1997 due to lower average long-term debt.
Interest Income
Interest income for the thirty-nine weeks increased by $37,000 as compared
to 1997. The increase was due to an increase in funds invested.
Equity in Net Earnings of Affiliate
The Company recorded $202,100 as equity in net earnings of Fytek, S.A. De
C.V., its joint venture in Mexico. The Company's share of net earnings and
losses is 50%. Fytek began operations in the fourth quarter of 1997.
Income before Provision for Income Taxes
For the thirty-nine weeks ended October 3, 1998, income before provision
for income taxes increased to $1,381,000 which includes $202,000 in earnings of
affiliate, compared to $910,000 in 1997, primarily as a result of increased
sales and higher gross margins.
Provision for Income Taxes
For the thirty-nine weeks ended October 3, 1998 and September 27, 1997,
the Company made provision for income taxes of $471,000 and $356,000
respectively, based on pre-tax income for 1998 of $1,381,000 and 1997 of
$910,000. Income taxes as percentage of pre-tax domestic income aggregated 40%
and 39% for the 1998 and 1997 periods, respectively.
Subsequent Matters
Although the Company had a strong third quarter, it can not predict how
the Asian economic problems will affect sales and earnings in the future.
15
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
The Company sells a substantial portion of its accounts receivable to a
commercial factor so that the factor assumes the credit risk for these accounts
and effects the collection of the receivables. The Company may borrow from First
Union National Bank based on a $2,000,000 line of credit from the recent
long-term loan agreement which borrowings are secured by the outstanding credit
balance at the factor. As of October 3, 1998, the Company had $4,601,000 due
from the factor with a net of $3,636,000 to mature on October 26, 1998.
The Company entered into a new loan agreement effective March 29, 1996
providing for a term loan of $6,000,000 and a working capital facility of
$2,000,000. Under the provisions of the loan agreement, the Company may borrow
up to $2,000,000 for seasonal working capital requirements using the credit
balance due from the factor as security.
The Company's working capital at October 3, 1998 aggregated $8,760,000
representing a working capital ratio of 2.9 to 1 compared with a working capital
of $8,400,000 at January 3, 1998 and a working capital ratio of 3.5 to 1.
As a measure of current liquidity, the Company's quick position (cash,
cash equivalents and receivables over current liabilities) discloses the
following at October 3, 1998:
Cash, cash equivalents and receivables............$8,416,000
Current liabilities...............................$4,700,000
Excess of quick assets over current liabilities...$3,716,000
The Company believes that its cash, cash equivalents and receivables, and
its factoring and credit arrangements will be sufficient to finance its
operations for the next 12 months.
The results of operations of the Company for the periods discussed have not
been significantly affected by inflation.
During the thirty-nine weeks of 1998, the Company acquired and made
deposits on new machinery and equipment of approximately $1,050,000 as set forth
in the accompanying statement of cash flows. For the balance of 1998, the
Company anticipates the acquisition of machinery and equipment of approximately
$1,000,000 which, together with the acquisitions and deposits on acquisitions
incurred to October 3, 1998, will aggregate an anticipated acquisition of new
machinery of approximately $2,000,000 in 1998. The Company plans to finance its
capital from cash provided from operations and bank financing.
16
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources (Continued)
The Company has assessed its systems and determined the areas that are
non-compliant. The Company is replacin its manufacturing software and accounting
software with a fully integrated solution. It is estimated that the software
will be installed and running by July 1999 and will solve any non-compliant
problems. The installation is coincidental to the year 2000 problem as the
Company had plans to upgrade its existing software to improve information
efficiencies.
The Company has initiated discussions with its significant suppliers, large
customers and financial institutions to ensure that those parties have
appropriate plans to remedy Year 2000 issues where their systems interface with
the Company's systems or otherwise impact its operations. The Company will
assess the extent to which its operations are vulnerable should those
organizations fail to remedy properly their computer systems. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's systems and operations rely will be converted on a timely basis and
will not have a material effect on the Company.
The Company entered into a contract on November 5, 1998 with Osprey
Systems, Inc. to purchase and install Enterprise Resource Planning software. The
software will replace various custom manufacturing applications and the
accounting software, giving the Company a fully integrated software solution.
Currently the Company's manufacturing applications are not fully integrated and
there is no integration between manufacturing and accounting. It is believed
that the new software will better handle growing demands from customers for
information, improve the order to cash cycle, and solve any year 2000 problems.
The project is estimated to be completed in July 1999.
The cost of the project to include software, hardware, implementation and
training will be approximately $900,000 paid over seven months beginning in
November 1998. The Company will expense approximately $600,000 of the project,
$200,000 in 1998 and $400,000 in 1999.
18
BURKE MILLS, INC.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on 8-K
(a) Exhibits - Financial Data Schedule
(b) Reports on Form 8-K - No report on Form 8-K has been filed
during the thirteen weeks ended October 3, 1998.
BURKE MILLS, INC.
Financial Data Schedule
Pursuant to Item 601(c) of Regulation S-K
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS INCLUDED IN THE QUARTERLY REPORT
ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 3, 1998
ITEM NUMBER ITEM DESCRIPTION AMOUNT
5-02(1) Cash and cash items $3,090,252
5-02(2) Marketable securities 0
5-02(3)(a)(1) Notes and accounts receivable - trade 5,325,826
5-02(4) Allowances for doubtful accounts 0
5-02(6) Inventory 4,586,246
5-02(9) Total current assets 13,460,491
5-02(13) Property, plant and equipment 27,394,774
5-02(14) Accumulated depreciation 15,374,199
5-02(18) Total assets 26,022,456
5-02(21) Total current liabilities 4,700,113
5-02(22) Bonds, mortgages and similar debt 4,750,000
5-02(28) Preferred stock- mandatory redemption 0
5-02(29) Preferred stock-no mandatory redemption 0
5-02(30) Common stock 1,809,171
5-02(31) Other stockholders' equity 12,539,672
5-02(32) Total liabilities and stockholders'
equity 26,022,456
5-03(b)1(a) Net sales of tangible products 32,181,297
5-03(b)1 Total revenues 32,181,297
5-03(b)2(a) Cost of tangible goods sold 28,419,391
5-03(b)2 Total costs and expenses applicable
to sales and revenues 28,419,391
5-03(b)3 Other costs and expenses 0
5-03(b)5 Provision for doubtful accounts
and notes 0
5-03(b)(8) Interest and amortization of debt
discount 352,822
5-03(b)(10) Income before taxes and other items 1,380,554
5-03(b)(11) Income tax expense 471,289
5-03(b)(14) Income/loss continuing operations 909,265
5-03(b)(15) Discontinued operations 0
5-03(b)(17) Extraordinary items 0
5-03(b)(18) Cumulative effect - changes in
accounting principles 0
5-03(b)(19) Net income or loss 909,265
5-03(b)(20) Earnings per share - primary $.33
5-03(b)(20) Earnings per share - fully diluted $.33
19
Burke Mills, Inc.
SIGNATURES
Pursuant to the requirements 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.
Burke Mills, Inc.
(Registrant)
/s
Date: November 16, 1998 Charles P. McCamy
(President)
Date: November 16, 1998 /s
Thomas I. Nail
(Vice President Finance)
(Principal Accounting Officer)
(Principal Financial Officer)
20