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 28, 2003
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 resigrant (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___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
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 5, 2003, 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 28, 2003 and December 28, 2002 3
Condensed Statements of Operations and Retained Earnings:
Thirteen Weeks Ended June 28, 2003 and June 29, 2002 4
Twenty-six Weeks Ended June 28, 2003 and June 29, 2002 4
Statements of Cash Flows:
Twenty-six Weeks Ended June 28, 2003 and June 29, 2002 5
Notes to Condensed Financial Statements 6
- ---------------------------------------------------------
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
- ---------------------------------------------------------
Item 3 - Quantitative and Qualitative Disclosures About 18
Market Risk
- ---------------------------------------------------------
Item 4 - Controls and Procedures 18
- -------------------------------------------------------
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 2 - Changes in Securities and Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of Security 18-19
Holders
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
- ---------------------------------------------------------
SIGNATURES 19
EXHIBIT INDEX 20
EXHIBIT 31 CERTIFICATIONS 21-24
EXHIBIT 32 CERTIFICATIONS 25
Page 2
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
June 28, December 28,
2003 2002
(Unaudited) (Note A)
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 3,093,334 $ 4,191,173
Accounts receivable 2,514,771 2,269,089
Inventories 2,637,660 2,095,863
Prepaid expenses, taxes and other
current assets 513,784 114,000
----------- -----------
Total Current Assets 8,759,549 8,670,125
----------- -----------
Equity Investment in Affiliate 581,898 612,275
----------- -----------
Property, Plant and Equipment - at cost 31,030,173 31,161,672
Less: Accumulated depreciation 21,757,144 20,939,167
----------- -----------
Property, Plant and Equipment - Net 9,273,028 10,222,505
----------- -----------
Other Assets
Deferred income taxes 703,200 703,200
Deferred charges and other 16,575 16,575
----------- -----------
Total Other Assets 719,775 719,775
----------- -----------
Total Assets $19,334,250 $20,224,680
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,178,571 $ 1,178,571
Accounts payable 1,275,451 1,097,131
Accrued salaries, wages and vacation pay 181,350 100,848
Other liabilities and accrued expenses 199,980 105,595
Income taxes payable -0- -0-
----------- -----------
Total Current Liabilities 2,835,352 2,482,145
Long-term Debt 2,094,643 2,919,643
Deferred Income Taxes 1,735,400 1,735,400
----------- -----------
Total Liabilities 6,665,395 7,137,188
----------- -----------
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 7,748,335 8,166,972
----------- -----------
Total Shareholders' Equity 12,668,855 13,087,492
----------- -----------
Total Liabilities & Shareholders' Equity $19,334,250 $20,224,680
=========== ===========
Note A: The December 28, 2002, 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
-------------------- ------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
------ ------ ------ ------
Net Sales $5,829,522 $8,191,434 $12,449,516 $17,167,579
- --------- ----------- ----------- ----------- -----------
Cost and Expenses
Cost of Sales 5,798,502 7,610,232 11,918,436 15,529,482
Selling, General and
Administrative Expenses 544,533 618,435 1,183,576 1,317,171
Factor's Charges 34,802 33,742 58,793 69,224
----------- ----------- ----------- -----------
Total Costs and Expenses 6,377,837 8,262,409 13,160,805 16,915,877
----------- ----------- ----------- -----------
Operating Earnings/(Loss) (548,315) (70,975) (711,289) 251,702
----------- ----------- ----------- -----------
Other Income
Interest Income 9,701 14,109 16,868 23,550
Gain/(Loss) on Disposal
of Property (7,906) (2,216) (7,906) (1,891)
Other, net 82 125 84 522
----------- ----------- ----------- -----------
Total 1,877 12,018 9,046 22,181
----------- ----------- ----------- -----------
Other Expenses
Interest Expense 29,110 43,928 61,676 95,703
Other, net (16,800) (7,309) (33,600) (14,617)
----------- ----------- ----------- -----------
Total 12,310 36,619 28,076 81,086
----------- ----------- ----------- -----------
Income/(Loss) before Provision
for Income Taxes and Equity in
Net Earnings of Affiliate (558,748) (95,576) (730,319) 192,797
Provision (credit) for
Income Taxes (289,021) 121,600 (342,059) 121,600
---------- ---------- ---------- ---------
Net Income/(Loss) before Equity
in Net Earnings
of Affiliate (269,727) (217,176) (388,260) 71,197
Equity in Net Earnings (Loss)
of Affiliate (30,377) -0- (30,377) -0-
----------- --------- ---------- ----------
Net Income/(Loss) (300,104) (217,176) (418,637) 71,197
Retained Earnings at Beginning
of Period 8,048,438 8,774,126 8,166,972 8,485,753
---------- --------- ---------- ----------
Retained Earnings at End
of Period $7,748,335 $8,556,950 $7,748,335 $8,556,950
========== ========== ========== ==========
Earnings (Loss) Per Share $ (0.11) $ (.08) $ (0.15) $ .03
========== =========== ========== ==========
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
----------------------
June 28 June 29,
2003 2002
---- ----
Cash flows from operating activities:
Net Income (Loss) $ (418,637) $ 71,197
--------- ---------
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation 1,022,516 1,042,100
Equity in earnings of affiliate -0- -0-
Gain (loss) on disposal of
property assets 7,906 2,591
Provision for deferred income taxes -0- 106,000
Changes in assets and liabilities:
Accounts receivable (245,682) (437,406)
Inventories (541,797) (52,569)
Prepaid expenses, taxes and other
current assets (352,691) (93,599)
Other non-current assets (47,093) -0-
Accounts payable 178,320 393,944
Accrued salaries, wages & vacation pay 80,502 (116,367)
Other liabilities and accrued expenses 94,385 62,346
Income Taxes payable -0- 1,392
--------- ---------
Total Adjustments 196,366 908,432
--------- ---------
Net cash provided (used) by
operating activities (222,271) 979,629
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (80,945) (590,960)
Proceeds from sale of equipment -0- -0-
Investment in affiliate 30,377
--------- ---------
Net cash (used) by investing activities (50,568) (590,960)
--------- ---------
Cash flows from financing activities:
Principal payments of long-term debt (825,000) (625,001)
Proceeds from long-term bank note -0- -0-
--------- --------
Net cash (used) by financing activities (825,000) (625,001)
--------- --------
Net (decrease) in cash and cash
equivalents (1,097,839) (236,332)
Cash and cash equivalents at
beginning of year 4,191,173 4,144,340
--------- ---------
CASH AND EQUIVALENTS AT END OF
SECOND QUARTER $3,093,334 $3,908,008
========= =========
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 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 28, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 27, 2003. 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 28, 2002.
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 28, 2003 and June 29, 2002 was $62,000 and $96,000, respectively. The
company had no payments for income taxes the twenty-six weeks ending June 28,
2003, and June 29, 2002.
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. Related shipping and handling costs are included in cost of sales.
NOTE 4 - USE OF ESTIMATES
- -------------------------
The preparation of financial statements in conformity with U.S. 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:
June 28, December 28,
2003 2002
---- ----
Account current - Factor:
Due from Factor on regular
factoring account........ $1,799,169 $1,668,786
Non-factored accounts
receivable............... 715,602 600,302
--------- ----------
$2,514,771 $2,269,088
========== ==========
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows: June 28, December 28
2003 2002
---- ----
Finished and in process.... $1,468,025 $1,359,000
Raw materials.............. 898,144 445,000
Dyes and chemicals......... 187,771 203,000
Other...................... 83,720 89,000
--------- ---------
Total $2,637,660 $2,096,000
========== ==========
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 28, 2003 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 7
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.
As of the end of the Company's first fiscal quarter on March 29, 2003, the
Company was in violation of a covenant in the loan agreement with its bank with
respect to the required ratio of cash flow to debt service. The loan agreement
requires a ratio of 1.25 to 1. The Company's ratio on this date was 1.13 to 1.
The Company made a payment to the bank in reduction of principal in the amount
of $200,000, and the bank waived the covenant violation.
At the end of the Company's second fiscal quarter on June 28, 2003, the Company
was in violation of the same covenant in the loan agreement with its bank. The
Company's ratio on this date was 1.05 to 1. On August 8, 2003, the Company
repaid one of its loans with its bank in the amount of $1,336,000 and the bank
waived the covenant violation.
The Company's bank informed the Company that the bank assigned its loan to the
bank's special asset group. Although the consequences of this action are not at
this time totally clear, it may be necessary for the Company, among other
actions, to accelerate a number of its monthly installment payments to the bank
or to find a new lender. The Company continues to pursue its options in this
regard.
The annual principal maturities of long-term debt at June 28, 2003 are as
follows:
Current portion $ 750,000
2004/2005 $ 750,000
2005/2006 437,500
1,187,500
--------- ---------
$1,937,500
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 28, 2003 based on
the current amount owned are as follows:
Current Portion $ 428,571
2004/2005 $ 428,571
2005/2006 428,571
2006 50,001
907,143
------- ---------
$1,335,714
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 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 28 Dec. 28
2003 2002
---- ----
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 342,700 342,700
Charitable contributions carryover 11,500 11,500
--------- ---------
$ 703,200 $ 703,200
========== ==========
Deferred tax liabilities:
Accelerated depreciation for
tax purposes 1,725,000 1,725,000
Undistributed earnings of foreign
affiliate, net of tax credit 10,400 10,400
--------- ---------
$1,735,400 $1,735,400
========== ==========
Twenty-Six Weeks Ended
------------------------
June 28, June 29,
Provision (credit) for income taxes 2003 2002
---- ----
consists of:
Deferred ($277,629) $106,000
Federal -0- 1,900
State (64,430) 13,700
-------- ---------
($342,059) $121,600
========= =========
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 28, 2003 and June 29, 2002.
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 21st to the 30th of the following month. At June 28, 2003,
the Company had $1,799,000 due from its factor of which $1,542,427 matured on
July 24, 2003. Upon maturity, the funds are automatically transferred by the
factor to the Company's bank. One of the Company's customers accounts for more
than 10% of the Company's sales in 2002 and the second quarter of 2003.
NOTE 12 - COMMITMENTS
- ---------------------
a) 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.
b) 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. 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 $125,000. No allowance was recorded in the second quarter.
During the twenty-six weeks, the Company had purchases from Fytek of $553,600
compared to $698,000 in 2002. Burke Mills does not guarantee any debt for it's
joint venture, Fytek. Financial information for Fytek is as follows:
Page 10
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
STATEMENT OF INCOME
(In thousands of U.S. dollars) (Unaudited)
2nd Quarter Six Months
----------- -----------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $ 602 $1,097 $1,251 2,099
Gross Profit (67) 42 (35) 49
Income from continuing operations (96) 97 (57) 81
Income before taxes (96) 97 (57) 81
Provision for income tax 35 31 21 15
----- ------ ------ ------
Net Income $ (61) $ 66 $ (36) $ 66
====== ====== ====== ======
BALANCE SHEET
(In thousands of U.S. dollars)
June 28, June 29,
2003 2002
(Unaudited) (Unaudited)
------ ------
ASSETS
Current assets $2,168 $3,032
Non-current assets 188 198
------ ------
Total Assets $2,356 $3,230
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 526 $1,624
Non-current liabilities 55 -0-
----- -----
Total Liabilities $ 581 $1,624
Shareholders equity 1,775 1,606
----- -----
Total Liabilities & Shareholders' Equity $2,356 $3,230
====== ======
NOTE 14 - ACCOUNTING FOR POSSIBLE IMPAIRMENT OF LONG-LIVED ASSETS
- -----------------------------------------------------------------
In August 2001 the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This
statement retains the requirements of Statement 121 to (a) recognize an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows, and (b) measure an impairment loss
as the difference between the carrying amount and fair value of the asset. This
statement also established a single accounting model, based on that established
in Statement 121, for long-lived assets to be disposed of by sale. The Board
also decided to resolve significant implementation issues related to Statement
121 for "Long-Lived Assets to be Held and Used" and "Long-Lived Assets to be
Disposed of Other Than by Sale". The Company adopted Statement No. 144 in the
first quarter of 2002 and the Statement did not have any effect on the financial
statements for 2002 or for the twenty-six weeks ended June 28, 2003.
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 28, 2003, and June 29, 2002.
Page 11
BURKE MILLS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
2003 Compared to 2002
- ---------------------
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 28, June 29, June 28, June 29,
2003 2002 2003 2002
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 99.5 92.9 95.7 90.4
---- ---- ---- ----
Gross Profit 0.5 7.1 4.3 9.6
Selling, General, Administrative
and Factoring Costs 10.0 8.0 10.0 8.1
---- ---- ---- ----
Operating Earnings (Loss) (9.5) (0.9) (5.7) 1.5
Interest Expense 0.5 0.5 0.5 0.6
Other Income 0.3 (0.2) 0.3 (0.2)
---- ---- ---- ----
Income (Loss) before
Income Taxes (9.7) (1.2) (5.9) 1.1
Equity in Net Earnings (Loss)
of Affiliate (0.5) -- (0.2) --
Income Taxes (Credit) (5.0) 1.5 (2.7) 0.7
---- ---- ---- ----
Net Income (Loss) (5.2)% (2.7)% (3.4)% 0.4%
===== ===== ===== =====
THIRTEEN WEEKS ENDED JUNE 28, 2003
COMPARED TO THIRTEEN WEEKS ENDED June 29, 2002
Net Sales
- ---------
Net sales for the thirteen weeks ended June 28, 2003, decreased by 28.8% to
$5,830,000 compared to $8,191,000 for the second quarter of 2002. Pounds shipped
decreased by 33.1% compared to 2002 while the average sales price per pound
increased by 6.4%. The decrease in pounds shipped was due to a weak textile
economy. The increase in average sales prices is the result of sales mix.
Page 12
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
THIRTEEN WEEKS ENDED JUNE 28, 2003
COMPARED TO THIRTEEN WEEKS ENDED June 29, 2002
Cost of Sales and Gross Margin
- ------------------------------
Cost of sales for the second quarter decreased by $1,812,000 or 23.8% compared
to the second quarter of 2002.
Cost of material used decreased by 31.1% while direct labor decreased by 32.7%.
As a result of a 28.8% decrease in net sales and 23.8% decrease in cost of
sales, the Company's gross margin decreased to 0.5% compared to 7.1% in 2002.
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 2003
decreased by $73,900 or 11.9%. In the weak business environment, the company is
continuing to maintain a strong sales effort.
Factor's Charges
- ----------------
Factor's charges were .6% of sales as compared to .4% of sales in 2002. There
was no change in the Company's factoring agreement.
Interest Expense
- ----------------
Interest expense for the second quarter decreased by $14,800 or 33.7% primarily
due to lower existing interest rates and a lower average long-term debt.
Interest Income
- ---------------
Interest income for the second quarter of 2003 decreased by $4,400 primarily due
to lower interest rates earned and a lower average funds invested.
Gain (Loss) on Disposal of Equipment
- ------------------------------------
A net loss of $(7,900) was recorded on disposal of various pieces of obsolete
computer and plant equipment.
Equity in Net Earnings/(Loss) of Affiliate
- ------------------------------------------
The Company recorded a loss of $30,000 from Fytek, S.A. De C.V., its joint
venture in Mexico, compared to no income for the second quarter of 2002. The
Company's share of net earnings and losses is 49.8%. Fytek began operations in
the fourth quarter of 1997. Also see Note 13.
Page 13
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
THIRTEEN WEEKS ENDED JUNE 28, 2003
COMPARED TO THIRTEEN WEEKS ENDED June 29, 2002
Income (Loss) Before Provision for Income Taxes
- -----------------------------------------------
For the thirteen weeks ended June 28, 2003 the Company recorded a loss of
$559,000 before credit for taxes and loss from its Mexican affiliate compared to
a loss of $96,000 before taxes in 2002. As discussed above, the 2003 loss was
primarily due to a decrease in sales volume.
Provision (Credit) for Income Taxes
- ------------------------------------
Due to the loss before taxes, the Company recorded a credit of $289,000 for
taxes.
Page 14
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
TWENTY-SIX WEEKS ENDED JUNE 28, 2003 COMPARED TO
TWENTY-SIX WEEKS ENDED JUNE 29, 2002
2003 Compared to 2002
Net Sales
- ---------
Net sales for the twenty-six weeks ended June 28, 2003, decreased by 27.5% to
$12,450,000 compared to $17,168,000 for the similar period of 2002. Pounds
shipped decreased by 28.6% compared to 2002. The decrease in net sales is due to
the weak economy and lower customer demand. The Company has not lost any major
customers, but as a result of a weak textile economy and competition with
imports, the Company's customers have experienced a decrease in sales.
Cost of Sales and Gross Margin
- ------------------------------
Cost of sales decreased by 23.3% on a net sales decrease of 27.5% and a decrease
of 28.6% on pounds shipped.
Material costs decreased by 30.1% while labor decreased by 29.9%.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $134,000 or 10.1%.
Factor's Charges
- ----------------
Factor charges were 0.5% of net sales for the first six months of 2003 and 2002.
There was no change in the Company's factoring agreement.
Interest Expense
- ----------------
Interest expense decreased by $34,000 or 35.6% 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 $6,682 due to lower
interest rates earned and a lower average funds invested.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company recorded $30,000 loss and no income for the twenty-six week periods
of 2003 and 2002 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 49.8%. Fytek began operations in the fourth quarter of 1997. Also see
Note 13.
Income Before Provision for Income Taxes
- -----------------------------------------------
For the twenty-six weeks ended June 28, 2003, the Company recorded a loss on
operations of $761,000 compared to an income on operations of $193,000 in 2002.
Page 15
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
TWENTY-SIX WEEKS ENDED JUNE 28, 2003 COMPARED TO
TWENTY-SIX WEEKS ENDED JUNE 29, 2002
Provision (Credit) for Income Taxes
- -----------------------------------
The Company recorded a credit for taxes of $342,000 for the twenty-six weeks of
2003, compared to a provision of $122,000 in the 2002 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 28, 2003, the Company
had $1,799,000 due from its factor of which $1,542,000 matured on July 24, 2003.
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 under which the
Company was permitted to borrow up to $3,000,000 for the acquisition of
production machinery, and a $1,750,000 Letter of Credit facility. 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).
As of the end of the Company's first fiscal quarter on March 29, 2003, the
Company was in violation of a covenant in the loan agreement with its bank with
respect to the required ratio of cash flow to debt service. The loan agreement
requires a ratio of 1.25 to 1. The Company's ratio on this date was 1.13 to 1.
The Company made a payment to the bank in reduction of principal in the amount
of $200,000, and the bank waived the covenant violation.
At the end of the Company's second fiscal quarter on June 28, 2003, the Company
was in violation of the same covenant in the loan agreement with its bank. The
Company's ratio on this date was 1.05 to 1. On August 8, 2003, the Company
repaid one of its loans with its bank in the amount of $1,336,000 and the bank
waived the covenant violation.
The Company's bank informed the Company that the bank assigned its loan to the
bank's special asset group. Although the consequences of this action are not at
this time totally clear, it may be necessary for the Company, among other
actions, to accelerate a number of its monthly installment payments to the bank
or to find a new lender. The Company continues to pursue its options in this
regard.
The Company's working capital at June 28, 2003, aggregated $5,924,000
representing a working capital ratio of 3.1 to 1 compared with a working capital
of $6,188,000 at December 28, 2002, 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
June 28, 2003:
Cash, cash equivalents and receivables........... $5,608,000
Current liabilities.............................. 2,836,000
---------
Excess of quick assets over current liabilities.. $2,772,000
Page 16
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
TWENTY-SIX WEEKS ENDED JUNE 28, 2003 COMPARED TO
TWENTY-SIX WEEKS ENDED JUNE 29, 2002
Liquidity and Capital Resources (continued)
- -------------------------------------------------------------
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 2003, the Company acquired and made deposits on
new machinery and equipment of approximately $81,000 as set forth in the
accompanying Statement of Cash Flows. For the balance of 2003, the Company
anticipates the acquisition of machinery and equipment of approximately $669,000
which, together with the acquisitions and deposits on acquisitions incurred to
June 28, 2003, will aggregate an anticipated acquisition of new machinery of
approximately $750,000 in 2003. 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
28, 2003, to $3,093,000 from $4,191,000 at December 28, 2002. See accompanying
Statement of Cash Flows.
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.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company has not purchased any instruments or entered into any arrangements
resulting in market risk to the Company for trading purposes or for purposes
other than trading purposes. There have been no changes in interest rates in the
Company's long-term or current maturities of long-term debt that would have a
material impact on the financial position, results of operations or cash flows
of the Company during the twenty-six week period ended June 28, 2003.
Item 4 - Controls and Procedures
- ---------------------------------
Within the 90 days prior to the date of this report, the Company's chief
executive officer and chief financial officer with the participation of other
person's in the Company's management, carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedure. The term "disclosure controls and procedures" means the controls
and other procedures of the Company that are designed to insure that information
required to be disclosed by the Company in its reports to the Securities and
Exchange Commission ("SEC") is recorded, processed, summarized and reported,
within the time period specified in the rules and forms of the SEC. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to insure that information required to be disclosed by the Company in
the reports that it files or submits to the SEC under the Securities Exchange
Act of 1934 is accumulated and communicated to the Company's management,
including its chief executive officer and its chief financial officer as
appropriate, to allow timely decisions regarding required disclosure. Based upon
that evaluation, the chief executive officer and the chief financial officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the reports filed with
the SEC by the Company. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of such evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
During the thirteen weeks ended June 28, 2003, there has been no change in the
Company's internal control over financial reporting identified in connection
with the evaluation required by Exchange Act Rule 13a-15(d) that occurred during
said fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings. No report required.
Item 2 - Changes in Securities and Use of Proceeds. No report required.
Item 3 - Defaults Upon Senior Securities. No report required.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on May 20, 2003.
At the meeting all seven director nominees were elected.
Page 18
BURKE MILLS, INC.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders (continued)
(a) The following directors were elected for a one-year term by the
votes indicated:
Humayun N. Shaikh 2,471,768
Thomas I. Nail 2,514,338
Robert P. Huntley 2,516,538
William T. Dunn 2,516,038
Richard F. Byers 2,514,338
Robert T. King 2,516,038
Aehsun Shaikh 2,471,268
(b) There were no other matters presented for vote of stockholders.
Item 5 - Other Information. No report.
Item 6 - Exhibits and Reports on Form 8-K
(a) The exhibits required by Item 601 of Regulation SK are
attached to this report or incorporated by reference from prior filings.
(b) The Company filed a report on Form 8-K on May 15, 2003. Reported
was the Company's news release dated May 15, 2003 reporting operating results
for the first quarter of 2003 (the thirteen weeks ended March 29, 2003). The
report contained condensed statements of operations and retained earnings for
the first quarter of 2003 and the first quarter of 2002 and condensed balance
sheets at March 29, 2003 and December 28, 2002 (the Company's previous fiscal
year end).
BURKE MILLS, INC.
SIGNATURES
--------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 12, 2003 BURKE MILLS, INC.
By: s/Humayun N. Shaikh
----------------------
Humayun N. Shaikh
Chairman of the Board
(Principal Executive Officer)
Date: August 12, 2003 By: s/Thomas I. Nail
-----------------------
Thomas I. Nail
President and COO
(Principal Financial Officer)
Page 19
BURKE MILLS, INC.
EXHIBIT INDEX
Exhibit
Number Description
3-1 Articles of Incorporation - incorporated by reference as a
part of a registration statement on Form S-1 filed with
the Securities and Exchange Commission in 1969.
3-2 By-Laws - incorporated by reference as a part of a registration
statement on Form S-1 filed with the Securities and Exchange
Commission in 1969.
31 Certifications of the principal executive officer and
principal financial officer required by Exchange Act Rule
13a-14(a).
32 Certifications of principal executive officer and principal
financial officer required by Exchange Act Rule
13a-14(b) and title 18 United States Code, Section 1350.
Page 20
EXHIBIT 31
CERTIFICATIONS REQUIRED BY
EXCHANGE ACT RULE 13a-14(a)
I, Humayun N. Shaikh, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Burke Mills,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
Page 21
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: August 12, 2003
s/Humayun N. Shaikh
----------------------
Humayun N. Shaikh
Chairman and CEO
Page 22
I, Thomas I. Nail, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Burke Mills,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
Page 23
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: August 12, 2003
s/Thomas I. Nail
----------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 24
EXHIBIT 32
CERTIFICATIONS REQUIRED BY EXCHANGE ACT RULE 13a-14(b)
AND TITLE 18 UNITED STATES CODE, SECTION 1350
The undersigned Chief Executive Officer of Burke Mills, Inc., (the "Issuer")
hereby certifies that the foregoing periodic report containing financial
statements of the issuer fully complies with the requirements of sections 13(a)
and 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that
the information contained in the foregoing report fairly presents, in all
material respects, the financial condition and results of operations of the
issuer.
s/Humayun N. Shaikh
Date: August 12, 2003 ---------------------------------
Humayun N. Shaikh
Chairman and CEO
The undersigned Chief Financial Officer of Burke Mills, Inc., (the "Issuer")
hereby certifies that the foregoing periodic report containing financial
statements of the issuer fully complies with the requirements of sections 13(a)
and 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that
the information contained in the foregoing report fairly presents, in all
material respects, the financial condition and results of operations of the
issuer.
s/Thomas I. Nail
Date: August 12, 2003 ---------------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 25