UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 3, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 August 6, 1999, there
were outstanding 2,741,168 shares of the issuer's only class of common stock.
Page 1 of
BURKE MILLS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION Page Number
Item 1 - Financial Statements
- -----------------------------
Condensed Balance Sheets:
July 3, 1999, and January 2, 1999 3
Condensed Statements of Operations and Retained Earnings:
Thirteen Weeks Ended July 3, 1999 and July 4, 1998
Twenty-six Weeks Ended July 3, 1999 and July 4, 1998 4
Statements of Cash Flows:
Twenty-six Weeks Ended July 3, 1999 and July 4, 1998 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 4 - Submission of Matters to a Vote by Security Holders 18
- ------------------------------------------------------------
Item 6 - Exhibits and Reports on Form 8-K 18
Item 6(a)- Exhibit 27 - Financial Data Schedule 19
-----------------------------------------------
SIGNATURES 20
Page 2
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
July 3, January 2,
1999 1999
(Unaudited) (Note A)
----------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 757,704 $ 3,384,439
Accounts receivable 5,201,386 3,460,307
Inventories 4,620,730 3,705,849
Prepaid expenses, taxes and other
current assets 682,173 313,872
Deferred income taxes 291,300 349,000
--------- ----------
Total Current Assets $11,553,293 $11,213,467
----------- -----------
Equity Investment in Affiliate 505,523 405,623
------- -------
Property, Plant and Equipment - at cost 30,378,583 28,478,700
Less: Accumulated depreciation 15,383,426 15,869,275
----------- ----------
Property, Plant and Equipment - Net 14,995,157 12,609,425
----------- ----------
Other Assets
Deferred Charges & Other Non Current 348,352 167,077
------- -------
Total Assets $27,402,325 $24,395,592
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 750,000 $ 750,000
Accounts payable 5,096,247 2,303,876
Accrued salaries, wages and vacation pay 461,972 160,862
Other liabilities and accrued expenses 362,787 137,096
Income taxes payable 43,761 31,600
---------- ----------
Total Current Liabilities $ 6,714,767 $ 3,383,434
Long-term Debt 4,187,500 4,562,500
Deferred Income Taxes 2,105,600 2,220,836
---------- ----------
Total Liabilities $13,007,867 $10,166,770
----------- -----------
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 9,473,938 9,308,302
--------- ---------
Total Shareholders' Equity 14,394,458 14,228,822
---------- ----------
Total Liabilities & Shareholders' Equity $27,402,325 $24,395,592
=========== ===========
Note A: The January 2, 1999, 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.
Page 3
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
July 3, July 4, July 3, July 4,
1999 1998 1999 1998
Net Sales $10,795,724 $10,022,705 $20,791,693 $20,672,108
- --------- ----------- ----------- ----------- -----------
Cost and Expenses
Cost of Sales 9,782,323 9,055,455 18,501,492 18,443,356
Selling, General and
Administrative Expenses 1,233,259 702,261 2,108,960 1,399,694
Factor's Charges 35,125 44,200 72,702 91,571
------ ------ ------ ------
Total Costs and Expenses 11,050,707 9,801,916 20,683,154 19,934,621
---------- ---------- ---------- ----------
Operating Earnings/(Loss) (254,983) 220,789 108,539 737,487
-------- ------- ------- -------
Other Income
Interest Income 19,346 47,554 48,988 95,016
Gain on Disposal of Property 214,269 --- 224,740 ---
Other, net 1,919 --- 2,629 ---
------- ------- ------- -------
Total 235,534 47,554 276,357 95,016
Other Expenses
Interest Expense 98,560 118,738 205,668 238,377
Other, net 31,478 30,433 62,954 60,821
------- ------- ------- -------
Total 130,038 149,171 268,622 299,198
------- ------- ------- -------
Income/(Loss) before Provision
for Income Taxes and Equity
in Net Earnings of Affiliate (149,487) 119,172 116,274 533,305
Provision/(Credit) for
Income Taxes (50,462) 57,289 50,538 218,789
------- ------- ------- -------
Net Income/(Loss) before Equity
in Net Earnings of Affiliate (99,025) 61,883 65,736 314,516
Equity in Net Earnings of
Affiliate 158,900 146,400 99,900 200,600
------- ------- ------ -------
Net Income 59,875 208,283 165,636 515,116
Retained Earnings at Beginning
of Period $9,414,063 $8,825,891 $9,308,302 $8,519,058
---------- ---------- ---------- ----------
Retained Earnings at End
of Period $9,473,938 $9,034,174 $9,473,938 $9,034,174
========== ========== ========== ==========
Earnings Per Share $ .02 $ .08 $ .06 $ .19
========== ========== ========== ==========
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.
Page 4
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
----------------------
July 3, July 4,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 165,636 $ 515,116
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 957,080 803,796
Equity in earnings of affiliate (99,900) (200,600)
Gain on disposal of property assets (224,740) 0
Provision for deferred income taxes (57,536) 159,800
Changes in assets and liabilities:
Accounts receivable (1,741,079) (452,928)
Inventories (914,881) (568,307)
Prepaid expenses, taxes and other
current assets (368,301) (172,461)
Other non-current assets (181,275) 15,645
Accounts payable 2,792,371 396,422
Accrued salaries, wages and vacation pay 301,110 53,793
Other liabilities and accrued expenses 237,851 (111,353)
------- --------
Total Adjustments 700,700 (76,193)
-------- --------
Net cash provided by operating activities 866,336 438,923
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (3,642,764) (556,733)
Proceeds from sale of equipment 524,693 0
--------- ---------
Net cash (used) by investing activities (3,118,071) (556,733)
--------- ---------
Cash flows from financing activities:
Principal payments of long-term debt (375,000) (312,500)
--------- ---------
Net cash used by financing activities (375,000) (312,500)
--------- ---------
Net increase (decrease) in cash and
cash equivalents (2,626,735) (430,310)
Cash and cash equivalents at
beginning of year 3,384,439 4,306,540
--------- ---------
CASH AND EQUIVALENTS AT END OF
SECOND QUARTER $ 757,704 $3,876,230
========== ==========
See notes to condensed financial statements
Page 5
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 financia
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 twenty-six week period ended July 3, 1999
are not necessarily indicative of the results that may be expected for the year
ended January 1, 2000. 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 2, 1999.
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 twenty-six weeks ended July 3, 1999 and July 4, 1998 was
$212,000 and $240,000, respectively. Income taxes paid during the twenty-six
weeks period ended July 3, 1999 and July 4, 1998 were $40,698 and $25,000
respectively.
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.
Page 6
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
July 3, January 2,
1999 1999
---- ----
Account current - Factor:
Due from Factor on regular
factoring account........ $3,574,000 $2,864,000
Non-factored accounts
receivable............... 1,627,000 596,000
--------- ----------
$5,201,000 $3,460,000
========== ==========
NOTE 6 - INVENTORIES
Inventories are summarized as follows:
July 3, January 2,
1999 1999
---- ----
Finished and in process.... $2,314,000 $2,409,000
Raw materials.............. 1,727,000 728,000
Dyes and chemicals......... 441,000 413,000
Other...................... 139,000 156,000
--------- ---------
$4,621,000 $3,706,000
========== ==========
NOTE 7 - LINE OF CREDIT
- -----------------------
Pursuant to a loan agreement dated March 29, 1996, and amended October 12, 1998,
the Company secured an Equipment Loan facility of $2,000,000 and a $1,250,000
Letter of Credit facility. The Equipment Loan shall be evidenced by the
Equipment Note, and shall bear interest at a rate that varies with the LIBOR
rate. The Equipment Note would be payable in 84 installments. At July 3,1999,
the Company had no borrowings under this line of credit.
The Company plans to draw the entire $2,000,000 between July and December 31,
1999 to finance equipment purchases.
Also under the Company's factoring arrangement, the Company may borrow from the
factor up to 90% of the face amount of each account sold to the factor. As of
July 3, 1999, the Company had no borrowings from its factor.
NOTE 8 - LONG-TERM DEBT
- -----------------------
On March 29, 1996, the Company entered into a loan agreement with its bank
providing for a term loan of $6,000,000. The new term loan refinanced the 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.
Page 7
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 8 - LONG-TERM DEBT (cont.)
- -------------------------------
Under the 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 (96) consecutive months plus interest at the floating LIBOR
rate plus 1.90%.
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 July 3, 1999 are as
follows:
Current portion $ 750,000
2000/2001 750,000
2001/2002 750,000
2002/2003 750,000
2003/2004 750,000
Thereafter 1,187,500 4,187,500
--------- ---------
$4,937,500
Page 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 reportin
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:
July 3, January 2,
1999 1999
---- ----
Deferred Tax Assets:
Alternative minimum taxes paid $ 291,300 $ 349,000
========== ===========
Deferred Tax Liabilities:
Accelerated depreciation
for tax purposes $2,087,900 $2,202,300
Undistributed earnings of foreign
affiliate, net of tax credit 17,700 12,700
Other --- 5,836
--------- ---------
$2,105,600 $2,220,836
========== ==========
Twenty-Six Weeks Ended
--------------------
July 3, July 4,
Provision for income taxes 1999 1998
---- ----
consists of:
Deferred $ (57,536) $ 159,800
Federal 99,063 18,300
State 9,011 40,689
--------- ----------
$ 55,538 $ 218,789
========= ==========
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 period
ended July 3, 1999 and July 4, 1998.
Page 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 occasional temporary cash investments 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 30th of the following month. At July 3, 1999,
the Company had $3,574,000 due from its factor of which $1,712,000 matured on
July 20, 1999. Upon maturity, the funds are automatically transferred by the
factor to the Company's bank.
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 and Titan Textile Company, Inc., signed an agreement which became
effective April 1, 1999, whereby the Company will sell its friction texturing
equipment to Titan and in turn purchase textured yarns from Titan. The agreement
states that the Company will purchase 70,000 pounds per week as long as the
Company has a requirement for textured yarns. When the Company's requirements
exceeds 140,000 pounds per week, the Company will purchase at least 50% of its
requirements from Titan. The textured yarn pricing structure will be reviewed
every six months and when POY prices increase or decrease by 5% or more.
d) The Company was committed to a remaining balance on an outstanding
irrevocable import Letter of Credit for machinery purchases on July 3, 1999 in
the amount of $345,000. The Letter of Credit will be funded on January 3, 2000.
e) During 1996 in connection with a bank loan to the Company secured by real
estate, the Company had a Phase I Environmental Site Assessment conducted on its
property. The assessment indicated the presence of a contaminant in the
groundwater under the Company's property. The contaminant was a solvent used by
the Company in the past but no longer used. The contamination was reported to
the North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving toward a solution of natural attenuation. The Company believes it has
made an adequate provision to earnings in 1997 to cover any future cost. No
provision was made in 1998 or 1999. This situation will have no material impact
on the capital expenditures, earnings or competitive position of the Company.
Page 10
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 13 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS
- ----------------------------------------------------------------
The company owns 49.8% of Fytek, S.A. de C.V. (Fytek), a Mexican corporation.
The company accounts for the ownership using the equity method. During the
twenty-six weeks, the Company had purchases from Fytek of $832,000 compared to
$831,000 in 1998. The Company has a receivable with Fytek of $123,000 for
equipment sold and leased to Fytek of which $58,000 will be paid in July. The
Company owes Fytek $77,000 for the purchase of twisted yarns.
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 No. 121 in the first quarter of 1996 and such adoption did not have
any material effect on the financial statements for 1998 or for the twenty-six
weeks ended July 3, 1999.
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 twenty-six week
periods ended July 3, 1999, and July 4, 1998.
Page 11
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
1999 Compared to 1998
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 Twenty-six Weeks
Ended Ended
-------------------- -------------------
July 3, July 4, July 3, July 3,
1999 1998 1999 1998
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 90.6 90.4 89.0 89.2
---- ---- ---- ----
Gross Profit 9.4 9.6 11.0 10.8
Selling, General, Administrative
and Factoring Costs 11.7 7.4 10.5 7.2
---- ---- ---- ----
Operating Earnings (Loss) (2.3) 2.2 .5 3.6
Interest Expense .9 1.2 1.0 1.2
Other (Income) - net (1.9) (1.2) (1.0) (.2)
---- ---- ---- ----
Income (Loss) before
Income Taxes (1.3) 2.2 .5 2.6
Equity in Net Earnings
of Affiliate 1.4 .5 .5 1.0
Income Taxes Provision (Credit) (.5) .6 .2 1.0
Net Income .6% 2.1% .8% 2.5%
====== ====== ====== ======
THIRTEEN WEEKS ENDED JULY 3, 1999
COMPARED TO THIRTEEN WEEKS ENDED JULY 4, 1998
Net Sales
- ---------
Net sales for the thirteen weeks ended July 3, 1999, increased by 7.7% to
$10,796,000 compared to $10,023,000 for the similar period of 1998. The increase
in sales was primarily due to new products introduced in 1998 and one additional
shipping week as compared to 1998.
Cost of Sales and Gross Margin
- ------------------------------
Cost of sales for the thirteen weeks of 1999 increased by 8.0% on a sales
increase of 7.7%. The increase was primarily due to one additional production
week in the second quarter of 1999 and an increase in overtime pay caused by the
start of the company's new ERP system.
As a result of an increase in sales of 7.7% and an increase in cost of sales of
8.0%, gross margins decreased to 9.4% compared to 9.6% in 1998.
Page 12
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general, and administrative expenses for the second quarter of 1999
increased to $1,233,000 compared to $702,261 in 1998. The increase is primarily
due to the cost of $362,000 related to training, data conversion and start up of
the Company's new ERP software.
Factor's Charges
- ----------------
Factor's charges decreased to .3% as compared to .4% of sales in 1998. The
percent of sales factored decreased during the quarter.
Interest Expense
- ----------------
Interest expense decreased by $20,000 as compared to 1998. The Company's average
long-term debt was lower as a result of principal payments.
Interest Income
- ---------------
Interest income for the second quarter of 1999 decreased due to a decrease in
average funds invested.
Gain on Disposal of Equipment
- -----------------------------
During the second quarter the Company sold its friction texturing equipment,
which had a gross value of $1,342,000 and a net book value of $230,000 for
$446,000 (also see Note 12 Commitments), resulting in a gain on disposal of
$216,000.
Also, the Company replaced dyeing equipment with a gross value of $86,000 and a
net book value of $26,000, resulting in a loss on disposal of $26,000.
These were the major transactions which netted a gain on disposal of equipment.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company recorded $159,000 as earnings from 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 thirteen weeks ended July 3, 1999 income before provision for income
taxes decreased primarily as a result of higher cost of sales and cost related
to the Company's new software.
Provision for Income Taxes
- --------------------------
The Company recorded credit for income taxes of $50,000 for the second quarter
of 1999, compared to a provision of $57,000 in 1998.
Page 13
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
TWENTY-SIX WEEKS ENDED JULY 3, 1999 COMPARED TO
TWENTY-SIX WEEKS ENDED JULY 4, 1998
1999 Compared to 1998
Net Sales
- ---------
Net sales for the twenty-six weeks ended July 3, 1999, increased by $120,000, or
.6%. The Company's first quarter sales declined by 6.1% as a result of a weak
market, but the second quarter sales increased by 7.7% as the result of
increased sales of new products introduced in 1998 and an additional shipping
week during the quarter.
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold increased by .3% on a sales increase of .6%. The Company has
been able to lower material cost, but labor cost increased in the second quarter
as a result of installing a new ERP software. As a result of an increase in net
sales of .6% and an increase in cost of sales of .3%, the Company's gross margin
improved to 11.0%, compared to 10.8% in 1998.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased by $709,000 or 50.7%
primarily as a result of $540,000 of cost related to the implementation of the
Company's new ERP software.
Factor's Charges
- ----------------
Factor charges for the twenty-six week period decreased as a percentage of sales
to .3%, compared to .4% in 1998. The percentage of factored sales decreased in
1999.
Interest Expense
- ----------------
Interest expense for the twenty-six week period decreased by $33,000 or 13.7%.
The Company's average debt was lower during the period as a result of principal
payments.
Interest Income
- ---------------
Interest income for the twenty-six week period decreased due to a decrease in
average funds invested.
Gain on Disposal of Equipment
- -----------------------------
During the twenty-six week period the Company sold its friction texturing
equipment, which had a gross value of $1,342,000 and a net book value of
$230,000 for $446,000 (also see Note 12 Commitments), resulting in a gain on
disposal of $216,000.
Also, the Company replaced dyeing equipment with a gross value of $86,000 and a
net book value of $26,000, resulting in a loss on disposal of $26,000.
These were the major transactions which netted a gain on disposal of equipment.
Page 14
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company recorded $99,900 as earnings from 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 twenty-six weeks ended July 3, 1999, income before provision for income
taxes decreased primarily as a result of cost associated with the implementation
of the Company's new ERP software.
Provision for Income Taxes
- --------------------------
The Company recorded a provision for taxes of $50,000 for the twenty-six weeks
of 1999, compared to $219,000 for 1998.
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. As of April 3, 1999, the Company
had $3,574,000 due from its factor of which $1,712,000 matured on July 20, 1999.
The Company has the right to borrow up to 90% of the face amount of each account
sold to the factor.
The Company has an equipment line of credit from its bank and under which the
Company may borrow up to $2,000,000 for the acquisition of production machinery.
The amounts borrowed under the credit line would be converted to a note payable
in eighty-four (84) equal monthly installments plus accrued interest.
The Company's working capital at July 3, 1999, aggregated $4,954,000
representing a working capital ratio of 1.7 to 1 compared with a working capital
of $7,830,000 at January 2, 1999, and a working capital ratio of 3.3 to 1.
The Company's working capital ratio decreased as a result of an increase in
accounts payable for equipment purchases. The Company has open Letters of Credit
for $1,974,000 which are payable between October 8, 1999, and December 21, 1999.
The Company will use its $2,000,000 equipment line of credit to fund the Letter
of Credit requirement. There was no borrowing under the equipment line of credit
at July 3, 1999, but the line will be fully utilized in the second half of 1999.
As a measure of current liquidity, the Company's quick position (cash, cash
equivalents and receivables over current liabilities) discloses the following at
April 3, 1999:
Cash, cash equivalents and receivables........... $5,959,000
Current liabilities.............................. 6,715,000
---------
Deficit of quick assets to current liabilities... $ (756,000)
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.
Page 15
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources (Continued)
- -------------------------------------------
The results of operations of the Company for the periods discussed have not been
significantly affected by inflation.
During the twenty-six weeks of 1999, the Company acquired and made deposits on
new machinery and equipment of approximately $3,643,000 as set forth in the
accompanying statement of cash flows. For the balance of 1999, the Company
anticipates the acquisition of machinery and equipment of approximately $357,000
which, together with the acquisitions and deposits on acquisitions incurred to
July 3, 1999, will aggregate an anticipated acquisition of new machinery of
approximately $4,000,000 in 1999. The Company plans to finance its capital from
cash provided from operations and bank financing.
The Company's cash and equivalents decreased for the twenty-six weeks ended July
3, 1999, to $758,000 from $3,384,000 at January 2, 1999, primarily from
increases in accounts receivable and inventory aggregating $2,656,000,
acquisitions of equipment and deposits of $3,643,000 and payments of long-term
debt of $187,500, offset partially by increased accounts payable of $2,792,000.
Year 2000 Compliance
- --------------------
On May 29, 1999, the Company began using a new fully integrated system that
replaced its manufacturing and accounting software. The new software was
installed to improve the Company information efficiencies and bring the Company
into compliance for all critical applications affected by the year 2000.
The Company's critical applications including order entry, inventory, production
tracking, production planning, shipping, invoicing, and all accounting functions
are year 2000 compliant. The effect on earnings for the first two quarters of
1999 is $600,000 for training and data conversion. The Company estimates another
$200,000 will be spent in the second half of 1999 for report modifications,
additional training, and enhancements.
The cost to bring the existing software into compliance for year 2000 is not
known as the Company planned to replace the software.
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 has alternate or
substitute sources for major raw material, gas, and fuel oil.
The Company believes the worst case scenario would occur if the Company's
electrical utilities were interrupted. The Company has no alternate source or
substitute for electricity, and any interruption would materially affect the
Company.
Page 16
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Continued)
Forward Looking Statements
- --------------------------
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, and other sections of this report, contain
forward-looking statements within the meaning of federal securities laws about
the Company's financial condition and results of operations that are based on
management's current expectations, beliefs, assumptions, estimates and
projections about the markets in which the Company operates. Words such as
"expects", "anticipates", "believes", "estimates", variations of such words and
other similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in, or implied by, such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgement only as of the date hereof. The
Company undertakes no obligations to update publicly any of these
forward-looking statements to reflect new information, future events or
otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward-looking statements include, but
are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and financial viability of significant customers, technological
advancements, employee relations, changes in construction spending and capital
equipment expenditures (including those related to unforeseen acquisition
opportunities), the timely completion of construction and expansion projects
planned or in process, continued availability of financial resources through
financing arrangements and operations, negotiations of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies, policies and legislation, and proceeds received from
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes; such as, changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
Page 17
BURKE MILLS, INC.
PART II - OTHER INFORMATION
Item 4 - Submission of Matter to a Vote of Security Holders
The Company's annual meeting of stockholders was held on May 19, 1999. At the
meeting, all five director nominees were elected.
(a) The following directors were elected for a
one-year term by the votes indicated:
Humayun N. Shaikh 2,316,544
Charles P. McCamy 2,319,144
Ahmed H. Shaikh 2,308,201
Robert P. Huntley 2,319,144
William T. Dunn 2,319,144
(b) There were no other matters presented for vote of stockholders.
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 July 3, 1999.
Page 18
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 TWENTY-SIX WEEKS ENDED JULY 4, 1998
ITEM NUMBER ITEM DESCRIPTION AMOUNT
5-02(1) Cash and cash items $ 757,704
5-02(2) Marketable securities 0
5-02(3)(a)(1) Notes and accounts receivable - trade 5,201,386
5-02(4) Allowances for doubtful accounts 0
5-02(6) Inventory 4,620,730
5-02(9) Total current assets 11,553,293
5-02(13) Property, plant and equipment 30,378,583
5-02(14) Accumulated depreciation 15,383,426
5-02(18) Total assets 27,402,325
5-02(21) Total current liabilities 6,714,767
5-02(22) Bonds, mortgages and similar debt 4,187,500
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 12,585,287
5-02(32) Total liabilities and stockholders
equity 27,402,325
5-03(b)1(a) Net sales of tangible products 20,791,693
5-03(b)1 Total revenues 20,791,693
5-03(b)2(a) Cost of tangible goods sold 18,501,492
5-03(b)2 Total costs and expenses applicable
to sales and revenues 18,501,492
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 205,668
5-03(b)(10) Income before taxes and other items 216,174
5-03(b)(11) Income tax expense 50,538
5-03(b)(14) Income/loss continuing operations 165,636
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 165,636
5-03(b)(20) Earnings per share - primary $.06
5-03(b)(20) Earnings per share - fully diluted $.06
Page 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)
August 16, 1999 By: Charles P. McCamy /s
Date: ______________________ ________________________
Charles P. McCamy
(President)
August 16, 1999 By: Thomas I. Nail /s
Date: ______________________ _________________________
Thomas I. Nail
(Vice President Finance)
(Principal Accounting Officer)
(Principal Financial Officer)
Page 20