UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 29, 2002
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)
IRS EMPLOYER IDENTIFICATION (56-0506342)
NORTH CAROLINA
(State or other jurisdiction of incorporation or organization]
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 8, 2002, there
were outstanding 2,741,168 shares of the issuer's only class of common stock.
Page 1
BURKE MILLS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION Page Number
-----------
Item 1 - Financial Statements
- -----------------------------
Condensed Balance Sheets:
June 29, 2002, and December 29, 2001 3
Condensed Statements of Operations and Retained Earnings:
Thirteen Weeks Ended June 29, 2002 and June 30, 2001 5
Twenty-six Weeks Ended June 29, 2002 and June 30, 2001 5
Statements of Cash Flows:
Twenty-six Weeks Ended June 29, 2002 and June 30, 2001 6
Notes to Condensed Financial Statements 7
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations 13
- ---------------------------------------------------------
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
- -----------------------------------------------
SIGNATURES 19
Page 2
BURKE MILLS, INC.CONDENSED BALANCE SHEETS
June 29 December 29
2002 2001
(Unaudited) (Note A)
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 3,908,008 $ 4,144,340
Accounts receivable 3,108,730 2,671,324
Inventories 3,272,763 3,220,194
Prepaid expenses, taxes and other
current assets 189,686 96,087
----------- -----------
Total Current Assets 10,479,187 10,131,945
----------- -----------
Equity Investment in Affiliate 620,592 620,592
----------- -----------
Property, Plant and Equipment - at cost 30,989,365 30,962,533
Less: Accumulated depreciation 20,045,201 19,564,639
----------- -----------
Property, Plant and Equipment - Net 10,944,164 11,397,894
----------- -----------
Other Assets
Deferred income taxes 370,600 606,800
Other 45,769 45,769
----------- -----------
Total Other Assets 416,369 652,569
----------- -----------
Total Assets $22,460,312 $22,803,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,178,571 $ 1,178,571
Accounts payable 2,114,011 1,720,067
Accrued salaries, wages and vacation pay 137,215 253,582
Other liabilities and accrued expenses 231,136 168,790
Income taxes payable 1,895 503
----------- -----------
Total Current Liabilities 3,662,828 3,321,513
Long-term Debt 3,473,214 4,098,214
Deferred Income Taxes 1,846,800 1,977,000
----------- -----------
Total Liabilities 8,982,842 9,396,727
----------- -----------
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 8,556,950 8,485,753
----------- -----------
Total Shareholders' Equity 13,477,470 13,406,273
----------- -----------
Total Liabilities & Shareholders' Equity $22,460,312 $22,803,000
=========== ===========
Page 3
Note A: The December 29, 2001, 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 4
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------ ------ ------ ------
Net Sales $8,191,434 $10,372,331 $17,167,579 $19,800,605
- --------- ----------- ----------- ----------- -----------
Cost and Expenses
Cost of Sales 7,610,232 9,250,925 15,529,482 18,077,967
Selling, General and
Administrative Expenses 618,435 621,842 1,317,171 1,302,492
Factor's Charges 33,742 43,881 69,224 82,574
----------- ----------- ----------- ----------
Total Costs and Expenses 8,262,409 9,916,648 16,915,877 19,463,033
----------- ----------- ----------- ----------
Operating Earnings/(Loss) (70,975) 455,683 251,702 337,572
----------- ----------- ----------- ----------
Other Income
Interest Income 14,109 19,004 23,550 39,961
Gain/(Loss) on Disposal
of Property (2,216) (2,275) (1,891) (2,275)
Other, net 125 1,137 522 2,320
----------- ----------- ----------- ----------
Total 12,018 17,866 22,181 40,006
----------- ----------- ----------- ----------
Other Expenses
Interest Expense 43,928 100,158 95,703 223,439
Other, net (7,309) 17,201 (14,617) 34,403
----------- ----------- ----------- ----------
Total 36,619 117,359 81,086 257,842
----------- ----------- ----------- ----------
Income/(Loss) before Provision
for Income Taxes and Equity in
Net Earnings of Affiliate (95,576) 356,190 192,797 119,736
Provision for Income Taxes 121,600 146,286 121,600 50,987
---------- ---------- ---------- ----------
Net Income/(Loss) before Equity
in Net Earnings
of Affiliate (217,176) 209,904 71,197 68,749
Equity in Net Earnings of
Affiliate -0- 10,309 -0- 38,499
----------- --------- ---------- ----------
Net Income/(Loss) (217,176) 220,213 71,197 107,248
Retained Earnings at Beginning
of Period 8,774,126 8,058,003 8,485,753 8,170,968
---------- --------- ---------- ----------
Retained Earnings at End
of Period $8,556,950 $8,278,216 $8,556,950 $8,278,216
========== ========== ========== ==========
Earnings (Loss) Per Share $ (.08) $ .08 $ .03 $ .04
========== =========== ========== ==========
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 5
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
----------------------
June 29 June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net Income $ 71,197 $ 107,248
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,042,100 1,161,284
Equity in earnings of affiliate -0- (38,499)
Gain (loss) on disposal of
property assets 2,591 2,275
Provision for deferred income taxes 106,000 25,135
Changes in assets and liabilities:
Accounts receivable (437,406) (1,725,562)
Inventories (52,569) 759,755
Prepaid expenses, taxes and other
current assets (93,599) 14,542
Other non-current assets -0- -0-
Accounts payable 393,944 559,302
Accrued salaries, wages & vacation pay (116,367) 49,242
Other liabilities and accrued expenses 62,346 195,073
Income Taxes payable 1,392 -0-
------ --------
Total Adjustments 908,432 1,002,547
--------- ---------
Net cash provided by operating activities 979,629 1,109,795
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (590,960) (75,434)
Proceeds from sale of equipment -0- 68,000
------ -------
Net cash (used) by investing activities (590,960) (7,434)
---------- ----------
Cash flows from financing activities:
Principal payments of long-term debt (625,001) (589,286)
Proceeds from long-term bank note -0- -0-
--------- ---------
Net cash (used) by financing activities (625,001) (589,286)
---------- ----------
Net increase (decrease) in cash and cash
equivalents (236,332) 513,075
Cash and cash equivalents at
beginning of year 4,144,340 1,305,362
--------- ---------
CASH AND EQUIVALENTS AT END OF
SECOND QUARTER $3,908,008 $1,818,437
========== ==========
See notes to condensed financial statements
Page 6
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 twenty-six week period ended June 29, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 28, 2002. 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 December 29, 2001.
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 the twenty-six weeks ended June 29, 2002 and June 30, 2001 was $96,000
and $223,000, respectively. The company had no cash payments for income taxes
the twenty-six weeks ending June 29, 2002, and June 30, 2001.
NOTE 3 - OPERATIONS OF THE COMPANY
- ----------------------------------
The Company is engaged in 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.
Revenues from sales are recognized at the time shipments are made to the
customer.
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 7
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 5 - ACCOUNTS RECEIVABLE
- -----------------------------
Accounts receivable are comprised of the following:
June 29, December 29,
2002 2001
---- ----
Account current - Factor:
Due from Factor on regular
factoring account........ $2,465,000 $2,070,000
Non-factored accounts
receivable............... 644,000 601,000
---------- ----------
$3,109,000 $2,671,000
========== ==========
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows:
June 29, December 29,
2002 2001
---- ----
Finished & in process $2,010,000 $2,263,000
Raw materials 931,000 635,000
Dyes & chemicals 232,000 208,000
Other 100,000 114,000
---------- ---------
Total $3,273,000 $3,220,000
========== ==========
NOTE 7 - LINE OF CREDIT
- ------------------------
Pursuant to a loan agreement dated March 29, 1996, and a second amendment dated
January 20, 2000, the Company secured an Equipment Loan facility of $3,000,000.
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. The Company has borrowed $3,000,000 under this line
of credit. 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 June 29, 2002 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 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.
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%.
Page 8
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 8 - LONG-TERM DEBT (cont.)
- -------------------------------
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 June 29, 2002 are as
follows:
Current portion $ 750,000
2003/2004 $ 750,000
2004/2005 750,000
2005/2006 437,500 1,937,500
--------- ---------
$2,687,500
Under the loan agreement, the Equipment Line of Credit was converted to a
$3,000,000 long-term note payable in 84 installments of $35,714, plus interest
at the floating LIBOR rate plus 1.9%. The Company converted the Line of Credit
and began installments on February 29, 2000.
The annual principal maturities of this long-term debt at June 29, 2002 based on
the current amount owned are as follows:
Current Portion $ 428,571
2003/2004 $ 428,571
2004/2005 428,571
2005/2006 428,571
Thereafter 250,001 1,535,714
------- ---------
$1,964,285
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:
June 29, December 29,
2002 2001
---- ----
Deferred Tax Assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating carry forward 11,400 247,600
Charitable contributions
carryover 10,200 10,200
--------- ---------
$ 370,600 $ 606,800
========= =========
Deferred Tax Liabilities:
Accelerated depreciation
for tax purposes $1,842,100 $1,972,300
Undistributed earnings of foreign
affiliate, net of tax credit 4,700 4,700
--------- ---------
$1,846,800 $1,977,000
========== ==========
Page 9
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 9 - INCOME TAXES (continued)
- ---------------------
Twenty-Six Weeks Ended
--------------------
June 29, June 30,
Provision (credit) for income taxes 2002 2001
---- ----
consists of:
Deferred $ 106,000 $ 50,987
Federal 1,900 ---
State 13,700 ---
--------- ---------
$ 121,600 $ 50,987
========= =========
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 June 29, 2002, and June 30, 2001.
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 21st to the 30th of the following month. At June 29, 2002
the Company had $2,465,000 due from its factor of which $2,101,000 matured on
July 18, 2002. Upon maturity, the funds are automatically transferred by the
factor to the Company's bank.
On July 1, 2002, the Company will begin using the credit insurance of the
Export-Import Bank of the United States on qualified export sales. Annual
exposure will be limited to $15,000 in total on these export sales.
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 and Titan Textile Company, Inc., signed an agreement which became
effective April 1, 1999, whereby the Company sold its friction texturing
equipment to Titan and in turn will 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.
Page 10
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 12 - COMMITMENTS (continued)
- ---------------------
c) 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 cost of monitoring will be
approximately $31,000 per year.
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.
Fytek began operation in the fourth quarter of 1997. The company accounts for
the ownership using the equity method. Due to the Mexican economy, sales are
down. Accounts receivable are also declining. Since repatriation of cash is not
expected from the joint venture, the Company believes it is prudent to record a
valuation allowance for Fytek. This allowance amounts to $33,000 for the
year-to-date, all recorded in the second quarter, and a cumulative effect of
$179,000. Through the second quarter, the Company had purchases from Fytek of
$698,000 compared to $1,053,000 in 2001. Burke Mills does not guarantee any debt
for it's joint venture, Fytek. Financial information for Fytek is as follows:
STATEMENT OF INCOME
(In thousands of U.S. dollars)
(Unaudited)
2nd Quarter Six Months
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $1,097 $1,454 $2,099 $2,911
Gross Profit 42 62 49 156
Income from continuing
operations 97 31 81 117
Income before taxes 97 31 81 117
Provision for income tax 31 11 15 40
----- ------ ----- -----
Net Income $ 66 $ 20 $ 66 $ 77
====== ====== ====== ======
Page 11
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 13 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS (continued)
- ----------------------------------------------------------------
Fytek Financial Information Continued:
BALANCE SHEET
(In thousands of U.S. dollars)
June 29, December 31,
2002 2001
------- -------
ASSETS
Current assets $3,032 $3,137
Non-current assets 198 166
------ ------
Total Assets $3,230 $3,303
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities 1,624 1,694
Non-current liabilities -0- -0-
------ ------
Total Liabilities 1,624 1,694
Shareholders equity 1,606 1,609
------ ------
Total Liabilities & Shareholders' Equity $3,230 $3,303
====== ======
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 effect on the financial statements for 2002 or for the twenty-six weeks
ended June 29, 2002.
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 twenty-six week periods ended
June 29, 2002, and June 30, 2001.
Page 12
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
2002 Compared to 2001
- ---------------------
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
-------------------- -------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 92.9 89.2 90.4 91.3
---- ---- ---- ----
Gross Profit 7.1 10.8 9.6 8.7
Selling, General, Administrative
and Factoring Costs 8.0 6.4 8.1 7.0
---- ---- ---- ----
Operating Earnings (Loss) (0.9) 4.4 1.5 1.7
Interest Expense 0.5 1.0 0.6 1.1
Other Expense (0.2) -- (0.2) --
---- ---- ---- ----
Income (Loss) before
Income Taxes (1.2) 3.4 1.1 0.6
Equity in Net Earnings
of Affiliate -- 0.1 -- 0.2
Income Taxes (Credit) 1.5 1.4 0.7 0.3
---- ---- ---- ----
Net Income (Loss) (2.7)% 2.1% 0.4% 0.5%
===== ===== ===== =====
THIRTEEN WEEKS ENDED JUNE 29,2002
COMPARED TO THIRTEEN WEEKS ENDED June 30, 2001
Net Sales
- ---------
Net sales for the thirteen weeks ended June 29, 2002, decreased by 21.0% to
$8,191,000 compared to $10,372,000 for the second quarter of 2001. Pounds
shipped decreased by 13.0% compared to 2001 while the average sales price per
pound decreased by 9.2%. The decrease in pounds shipped was due to a weak
textile economy. Yarn sales decreased by 16.0% or 1,480,000, commission sales
decreased by 39.4% or $113,000, and thread sales decreased by 69.1% or $588,000.
The decrease in average sales prices is the result of sales mix and competitive
pricing pressures, also caused by a weak textile economy.
Cost of Sales and Gross Margin
- ------------------------------
Cost of sales for the second quarter decreased by $1,641,000 or 17.7%.
Cost of material used decreased by 20.8%, while direct labor and overhead
decreased by 26.8% and 6.7% respectively.
Page 13
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Cost of Sales and Gross Margin (continued)
- ------------------------------
As a result of a 21.0% decrease in net sales and a 17.7% decrease in cost of
sales, the Company's gross margin decreased to 7.1% compared to 10.8% in 2001.
Price increases on some raw materials were not passed along in higher prices to
the customer.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling general and administrative expenses for the second quarter of 2002
decreased by $3,000 or 0.5%.
Factor's Charges
- ----------------
Factor's charges were .4% of sales as compared to .4% of sales in 2001. There
was no change in the Company's factoring agreement.
Interest Expense
- ----------------
Interest expense for the second quarter decreased by $56,000 or 56.1% primarily
due to lower existing interest rates and a lower average long-term debt.
Interest Income
- ---------------
Interest income for the second quarter of 2002 decreased by $5,000 primarily due
to lower interest rates earned. Cash has been moved to a higher earnings account
going forward.
Gain (Loss) on Disposal of Equipment
- ------------------------------------
A net loss of $2,000 was recorded on various pieces of obsolete computer
equipment.
Equity in Net Earnings of Affiliate
- ------------------------------------------
The Company recorded no income from Fytek, S.A. De C.V., its joint venture in
Mexico, compared to an income of $10,000 for the second quarter of 2001. The
original income of $33,000 was offset by a valuation allowance of the same
amount. The Company's share of net earnings and losses is 50%. Fytek began
operations in the fourth quarter of 1997. Also see Note 13.
Income Before Provision for Income Taxes
- -----------------------------------------------
For the thirteen weeks ended June 29, 2002 the Company recorded a net loss of
$96,000 before provision for taxes and income from its Mexican affiliate
compared to an income before taxes and income from its Mexican affiliate of
$356,000 in 2001.
Provision for Income Taxes
- ------------------------------------
The Company recorded a provision for income taxes of $122,000 for the second
quarter of 2002, compared to a provision of $146,000 in 2001.
Page 14
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
TWENTY-SIX WEEKS ENDED JUNE 29, 2002 COMPARED TO
TWENTY-SIX WEEKS ENDED JUNE 30, 2001
2002 Compared to 2001
Net Sales
- ---------
Net sales for the twenty-six weeks ended June 29, 2002, decreased by 13.3% to
$17,168,000 compared to $19,801,000 for the similar period of 2001. Pounds
shipped decreased by 6.7% compared to 2001. The decrease in net sales is due to
lower customer demand primarily recorded in the second quarter of 2002.
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold decreased by 14.1% on a net sales decrease of 13.3% and a
decrease of 6.7% on pounds shipped.
Material costs decreased by 14% while labor and overhead decreased by 26% and
10% respectively. The net result of cost dropping to a greater extent than sales
was an improvement in the Company's gross profit percentage to 9.6% compared to
8.7% for the first six months of 2001.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses increased by $15,000 or 1.2%.
Factor's Charges
- ----------------
Factor charges were 0.4% of net sales for the first six months of 2002 and 2001.
There was no change in the Company's factoring agreement.
Interest Expense
- ----------------
Interest expense decreased by $128,000 or 57.2% for the twenty-six week period
primarily due to lower existing interest rates and a lower average long-term
debt.
Interest Income
- ---------------
Interest income for the twenty-six week period decreased by $16,000 due to lower
interest rates earned.
Gain (Loss) on Disposal of Equipment
- ------------------------------------
A net loss of $2,000 was recorded on various pieces of obsolete computer
equipment.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company recorded no income and $38,000 for the twenty-six week periods of
2002 and 2001 respectively as earnings from Fytek, S.A. De C.V., its joint
venture in Mexico. The original income of $33,000 for 2002 was offset by a
valuation allowance of the same amount. The Company's share of net earnings and
losses is 50%. Fytek began operations in the fourth quarter of 1997. Also see
note 13.
Page 15
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Income Before Provision for Income Taxes
- -----------------------------------------------
For the twenty-six weeks ended June 29, 2002, the Company recorded an income on
operations of $193,000 compared to an income of $120,000 in 2001.
Provision (Credit) for Income Taxes
- -----------------------------------
The Company recorded a provision for taxes of $122,000 for the twenty-six weeks
of 2002, compared to a provision of $51,000 in the 2001 year period.
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 June 29, 2002, the Company
had $2,465,000 due from its factor of which $2,101,000 matured on July 18, 2002.
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 $3,000,000 for the acquisition of production machinery.
The Company borrowed $3,000,000 from the Line of Credit and converted the Line
of Credit to long-term debt on February 29, 2000 (see Note 8).
The Company's working capital at June 29, 2002, aggregated $6,816,000
representing a working capital ratio of 2.9 to 1 compared with a working capital
of $6,810,000 at December 29, 2001, and a working capital ratio of 3.1 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
June 29, 2002:
Cash, cash equivalents and receivables........... $7,017,000
Current liabilities.............................. 3,663,000
---------
Excess of quick assets to current liabilities... $3,354,000
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.
During the twenty-six weeks of 2002, the Company acquired and made deposits on
new machinery and equipment of approximately $590,000 as set forth in the
accompanying Statement of Cash Flows. For the balance of 2002, the Company
anticipates the acquisition of machinery and equipment of approximately $410,000
which, together with the acquisitions and deposits on acquisitions incurred to
June 29, 2002, will aggregate an anticipated acquisition of new machinery of
approximately $1,000,000 in 2002. 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 June
29, 2002, to $3,908,000 from $4,144,000 at December 29, 2001. See accompanying
Statement of Cash Flows.
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 Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on May 21, 2002.
At the meeting all seven director nominees were elected.
(a) The following directors were elected for a one-year term by
the votes indicated:
Humayun N. Shaikh 2,074,677
Thomas I. Nail 2,074,677
Robert P. Huntley 2,075,277
William T. Dunn 2,075,277
Richard F. Byers 2,072,677
Robert T. King 2,072,877
Aehsun Shaikh 2,072,877
(b) There were no other matters presented for vote of stockholders.
Item 6 - Exhibits and Reports on 8-K
(a) Reports on Form 8-K - No report on Form 8-K has been filed during
the thirteen weeks ended June 29, 2002.
Page 18
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.
----------------------------------------------------
We, the undersigned chief executive officer and chief financial officer of the
registrant hereby certify that this report fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
information contained in this periodic report fairly presents, in all material
respects, the financial condition and results of operations of the issuer.
BURKE MILLS, INC.
(Registrant)
By: Ronald D. Nicholson /s
Date: August 12, 2002 ________________________
Ronald D. Nicholson
(VP, Finance)
(Principal Financial Officer)
By: Humayun N. Shaikh /s
Date: August 12, 2002 _________________________
(CEO)
Page 19