-
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 September 27, 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 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___
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 October 31, 2003, there
were outstanding 2,741,168 shares of the issuer's only class of common stock.
Page 1
PART 1 - FINANCIAL INFORMATION Page Number
-----------
Item 1 - Financial Statements
- ----------------------------
Condensed Balance Sheets:
September 27, 2003 and December 28, 2002 3
Condensed Statements of Operations and Retained Earnings:
Thirteen Weeks Ended September 27, 2003 and
September 28, 2002 4
Thirty-nine Weeks Ended September 27, 2003 and
September 28, 2002 4
Statements of Cash Flows:
Thirty-nine Weeks Ended September 27, 2003 and
September 28, 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
Market Risk 17
- ---------------------------------------------------------
Item 4 - Controls and Procedures 17-18
- -------------------------------------------------------
Part II - OTHER INFORMATION 18
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
Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
- ---------------------------------------------------------
SIGNATURES 19
EXHIBIT INDEX 20
EXHIBIT 31 CERTIFICATIONS 21-24
EXHIBIT 32 CERTIFICATIONS 25
Page 2
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
September 27, December 28,
2003 2002
(Unaudited) (Note A)
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $2,186,068 $4,191,173
Accounts receivable 2,713,455 2,269,089
Inventories 2,266,598 2,095,863
Prepaid expenses and other
current assets 139,534 114,000
----------- -----------
Total Current Assets 7,305,655 8,670,125
----------- -----------
Equity Investment in Affiliate 568,452 612,275
----------- -----------
Property, Plant and Equipment - at cost 31,030,007 31,161,672
Less: Accumulated depreciation 22,227,420 20,939,167
----------- -----------
Property, Plant and Equipment - Net 8,802,587 10,222,505
----------- -----------
Other Assets
Deferred income taxes 703,200 703,200
Deferred charges and other 16,575 16,575
Estimated Tax Recovery 358,375 -0-
----------- -----------
Total Other Assets 1,078,150 719,775
----------- -----------
Total Assets $17,754,844 $20,224,680
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $1,200,000 $ 1,178,571
Accounts payable 1,470,840 1,097,131
Accrued salaries, wages and vacation pay 161,280 100,848
Other liabilities and accrued expenses 225,632 105,595
Income taxes payable -0- -0-
----------- -----------
Total Current Liabilities 3,057,752 2,482,145
Long-term Debt 475,000 2,919,643
Deferred Income Taxes 1,735,400 1,735,400
----------- -----------
Total Liabilities 5,268,152 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 7,566,172 8,166,972
----------- -----------
Total Shareholders' Equity 12,486,692 13,087,492
----------- -----------
Total Liabilities & Shareholders' Equity $17,754,844 $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 Thirty-Nine Weeks Ended
---------------------- -----------------------
Sept. 27 Sept. 28 Sept. 27 Sept. 28
2003 2002 2003 2002
-------- -------- -------- --------
Net Sales $6,536,838 $6,997,121 $18,986,354 $24,164,701
- --------- ---------- ---------- ----------- -----------
Costs and Expenses
Cost of Sales 6,195,712 6,709,894 18,114,149 22,239,375
Selling, General and
Administrative Expenses 482,721 588,282 1,669,900 1,905,453
Factor's Charges 33,664 28,818 88,855 98,043
-------- -------- ---------- ----------
Total Costs and Expenses 6,712,099 7,326,994 19,872,904 24,242,871
---------- ---------- ---------- -----------
Operating Earnings/(Loss) (175,261) (329,873) (886,550) (78,170)
--------- -------- --------- --------
Other Income
Interest Income 5,558 13,148 22,426 36,698
Gain (loss) on disposal of
property -0- (4,502) (7,906) (4,393)
Other, net 355 22,710 439 35,849
------- ------- ------- -------
Total 5,913 31,356 14,959 68,154
------- ------- ------- -------
Other Expenses
Interest Expense 17,994 43,844 79,670 139,547
Other, net (16,800) -0- (50,400) -0-
------- ------- ------- -------
Total Other Expenses 1,194 43,844 29,270 139,547
------- ------- ------- -------
Income/(loss) before Provision
for Income Taxes & Equity in
Earnings of Affiliate (170,542) (342,361) (900,861) (149,563)
Provision/(credit) for Income
Taxes (1,824) (213,005) (343,883) (91,406)
------- ------- ------- -------
Net Income/(Loss) before Equity
in Net Earnings of Affiliate (168,718) (129,356) (556,978) (58,157)
Equity in Net Earnings (Losses)
of Affiliate (13,446) (8,317) (43,823) (8,317)
------- ------- ------- -------
Net Income (Loss) (182,164) (137,673) (600,801) (66,474)
Retained Earnings at Beginning
of Period 7,748,335 8,556,950 8,166,972 8,485,753
--------- --------- --------- ----------
Retained Earnings at End
of Period $7,566,172 $8,419,278 $7,566,172 $8,419,278
========== ========== ========== ==========
Earnings (Loss) Per Share $ (0.07) $ (.05) $ (0.22) $ (.02)
========== ========== ========== ==========
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)
Thirty-Nine Weeks Ended
----------------------
Sept. 27, Sept. 28,
2003 2002
---- ----
Cash flows from operating activities:
Net Income (Loss) $ (600,801) $ (66,474)
----------- ----------
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation 1,519,099 1,543,713
Equity in earnings of affiliate -0- 8,317
Gain (loss) on disposal of property
assets 7,906 4,392
Provision for deferred income taxes -0- 106,000
Changes in assets and liabilities:
Accounts receivable (444,365) (402,579)
Inventories (170,735) 541,987
Prepaid expenses and other
current assets (25,534) (238,359)
Other non-current assets (358,375) (9,731)
Accounts payable 373,709 (419,896)
Income taxes payable -0- (503)
Accrued salaries, wages and
vacation pay 60,432 (102,337)
Other liabilities and accrued expenses 120,037 (13,016)
--------- ---------
Total Adjustments 1,082,174 1,017,988
--------- ---------
Net cash provided by operating activities 481,373 951,514
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (107,087) (821,097)
Proceeds from sale of equipment -0- 2,700
Investment in affiliate 43,823 -0-
--------- ---------
Net cash (used) by investing activities (63,264) (818,397)
--------- ---------
Cash flows from financing activities:
Principal payments of long-term debt (2,423,214) (883,928)
Proceeds from long-term bank note -0- -0-
--------- ---------
Net cash (used) by financing activities (2,423,214) (883,928)
--------- ---------
Net increase (decrease) in cash and
cash equivalents (2,005,105) (750,811)
Cash and cash equivalents at
beginning of year 4,191,173 4,144,340
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF
THIRD QUARTER $2,186,068 $3,393,529
========== ==========
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 thirty-nine week period ended September 27,
2003 are not necessarily indicative of the results that may be expected for the
year ended January 3, 2004. 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 for the thirty-nine weeks ended September 27, 2003 and September 28,
2002 was $80,000 and $140,000, respectively. The Company had no cash payments
for income taxes for the thirty-nine weeks ended September 27, 2003, versus cash
payments of $14,200 for the thirty-nine weeks ending September 28, 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 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
(continued) (Unaudited)
NOTE 5 - ACCOUNTS RECEIVABLE
- -----------------------------
Accounts receivable are comprised of the following:
September 27, December 28,
2003 2002
---- ----
Account current - Factor:
Due from Factor on regular
factoring account........ $2,072,718 $1,668,786
Non-factored accounts
receivable............... 640,736 600,302
--------- ----------
$2,713,454 $2,269,088
========== ==========
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows:
September 27, December 28
2003 2002
---- ----
Finished and in process.... $1,348,000 $1,359,000
Raw materials.............. 619,000 445,000
Dyes and chemicals......... 195,000 203,000
Other...................... 104,000 89,000
--------- ---------
Total $2,266,000 $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 September 27, 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.
Page 7
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued) (Unaudited)
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.
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
used surplus cash to fully pay the $1.3 million balance remaining on its $3
million equipment loan.
On August 15, 2003, the $6 million term loan was restructured to increase
principal installments to $100,000 per month, to reduce interest rates to LIBOR
plus 1.65%, and to reduce the cash flow covenant to a .90 to 1.00 ratio.
The annual principal maturities of long-term debt at September 23, 2003 are as
follows:
Current portion $1,200,000
2004/2005 475,000
----------
Total $1,675,000
In the fourth quarter of 2003, the Company will change lenders. The new lender
will provide factoring of accounts receivables, cash management, transfer agent
services, and a line of credit. The Company will use its cash and a loan from
the new lender to pay its long-term debt.
Under the new agreement the Company may borrow from the factor up to 90% of the
amount of each account sold to the factor, plus 40% of eligible inventory or
$1,000,000 whichever is smaller. Interest rates on the outstanding loan balance
is LIBOR plus 2.50%.
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.
Page 8
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued) (Unaudited)
NOTE 9 - INCOME TAXES (continued)
- ---------------------
The items which comprise deferred tax assets and liabilities are as follows:
Sept. 27 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
========== ==========
Thirty-Nine Weeks Ended
-----------------------
Sept. 27, Sept. 28,
Provision (credit) for income taxes 2003 2002
---- ----
consists of:
Deferred $(279,452) $ 106,000
Federal (173,855)
State (64,431) (23,550)
--------- ----------
$(343,883) $ (91,405)
========== ==========
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 September 27, 2003 and September 28, 2002.
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 September 27,
2003, the Company had $2,073,000 due from its factor of which $1,945,000 matures
on October 30, 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 third quarter of 2003.
Page 9
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued) (Unaudited)
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 $134,000. No allowance was recorded in the third quarter.
During the thirty-nine weeks, the Company had purchases from Fytek of $574,800
compared to $1,025,000 in 2002. 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)
3rd Quarter Nine Months
----------- ----------
2003 2002 2003 2002
---- ---- ---- ----
Net Sales $ 575 $ 993 $1,826 $3,092
Gross Profit (Loss) (71) (56) (105) (7)
Income (Loss) from continuing
operations (42) (32) (100) 49
Income (Loss) before taxes (42) (32) (100) 49
Provision/credit for income tax (15) (16) (37) 0
------- ------ ------- -------
Net Income (Loss) $ (27) $ (16) $ (63) $ 49
======= ====== ======= =======
Page 10
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued) (Unaudited)
NOTE 13 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS (continued)
- ----------------------------------------------------------------
BALANCE SHEET
(In thousands of U.S. dollars)
September September 28,
2003 2002
------ ------
ASSETS
Current assets $2,128 $2,820
Non-current assets 215 196
------ ------
Total Assets 2,343 $3,016
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities 611 1,417
Non-current liabilities 41 0
----- -----
Total Liabilities 652 1,417
Shareholders equity 1,691 1,599
----- -----
Total Liabilities & Shareholders' Equity $2,343 $3,016
====== ======
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 thirty-nine weeks ended September 27, 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 thirty-nine week periods ended
September 27, 2003, and September 28, 2002.
Page 11
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(continued) (Unaudited)
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 Thirty-Nine Weeks
Ended Ended
-------------------- -------------------
Sept. 27 Sept. 28 Sept. 27 Sept. 28
2003 2002 2003 2002
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 94.8 95.9 95.4 92.0
------ ------ ------ ------
Gross Profit 5.2 4.1 4.6 8.0
Selling, General, Administrative
and Factoring Costs 7.8 8.8 9.3 8.3
----- ----- ----- -----
Operating Earnings (Loss) (2.6) (4.7) (4.7) (0.3)
Interest Expense 0.2 0.6 0.4 0.6
Other (Income) - net (0.2) (0.4) (0.2) (0.3)
----- ----- ----- -----
Income (Loss) before
Income Taxes (2.6) (4.9) (4.9) (0.6)
Equity in Net Earnings (Loss)
of Affiliate (0.2) (0.1) (0.1) 0.0
Income Taxes (Credit) 0.0 3.0 1.8 (0.3)
----- ----- ----- -----
Net Income (Loss) (2.8)% (2.0)% (3.2)% (0.3)%
===== ===== ===== =====
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2003
COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002
Net Sales
- ---------
Net sales for the thirteen week period decreased by 6.6% to $6,537,000 compared
to $6,997,000 in 2002. Pounds shipped decreased by 0.5%, while average sales
prices decreased by 6.1%. Average sales prices decreased as a result of a very
competitive business environment and sales mix. 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 for the third quarter decreased by $514,000 or 7.7% compared to
the third quarter of 2002.
Page 12
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2003
COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 28, 2003.
Cost of Sales and Gross Margin (continued)
- ------------------------------
Cost of material used decreased by 11.4% while direct labor decreased by 6.8%.
As a result of a 6.6% decrease in net sales and 7.7% decrease in cost of sales,
the Company's gross margin increased to 5.2% compared to 4.1% in 2002.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general, and administrative expenses decreased by $105,600 or 17.9%
compared to the third quarter of 2002. In the weak business environment, the
Company is maintaining a strong sales effort.
Factor's Charges
- ----------------
Factor's charges were .5% of sales compared to .4% of sales in the third quarter
of 2002. There has been no change in the Company's factoring agreement.
Interest Expense
- ----------------
Interest expense for the third quarter decreased by $25,800 or 58.9% primarily
due to lower existing interest rates and a lower average long-term debt.
Interest Income
- ----------------
Interest income decreased by $7,600 primarily due to lower average funds
invested.
Gain (Loss) on Disposal of Equipment
- ------------------------------------
No equipment was disposed of during the third quarter.
Equity in Net Earnings/(Loss) of Affiliate
- ------------------------------------------
The Company recorded a $14,000 loss from Fytek, S.A. De C.V., its joint venture
in Mexico, compared to a loss of $8,000 for the third 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.
Income (Loss) before Provision for Income Taxes and Equity in Earnings
of Affiliate
- -----------------------------------------------------------------------
For the thirteen weeks ended September 27, 2003 the Company recorded a loss of
$171,000 before credit for taxes and loss from its Mexican affiliate compared to
a loss of $342,000 in 2002. As discussed above, the 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 $1,800 for taxes.
Page 13
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003
COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002.
2003 Compared to 2002
Net Sales
- -------- Net sales for the thirty-nine week period decreased by 21.4% to
18,986,000 compared to $24,165,000 in 2002. Pounds shipped decreased by 20.5%,
while average sales prices decreased by 1.2%. Average sales prices decreased as
a result of a very competitive business environment and sales mix. 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 for the thirty-nine weeks decreased by $4,125,000 or 18.6%
compared to 2002. As a result of a decrease in sales by 21.4% and decrease in
cost of sales by only 18.6%, the Company experienced a decline in gross margin
to 4.6% versus 8.0% in 2002.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general, and administrative expenses decreased by $205,000 or 11.8%
compared to 2002. In the weak business environment, the Company is maintaining a
strong sales effort.
Factor's Charges
- ----------------
Factor's charges were .5% of sales compared to .4% of sales in 2002. There has
been no change in the Company's factoring agreement.
Interest Expense
- ----------------
Interest expense for the third quarter decreased by $59,800 or 42.9% primarily
due to lower existing interest rates and a lower average long-term debt.
Interest Income
- ----------------
Interest income decreased by $14,200 primarily due to lower interest rates
earned and a lower average funds invested.
Equity in Net Earnings (Losses) of Affiliate and Equity in Earnings of Affiliate
- ---------------------------------------------------------------------------
The Company recorded a $31,000 loss compared to a loss of $8,000 for the
thirty-nine week periods of 2003 and 2002 respectively as earnings from Fytek,
S.A. De C.V., its joint venture in Mexico. 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 (Loss) before Provision (Credit) for Income Taxes and Equity in
Earnings (Loss) in Affiliate
- -----------------------------------------------------------------------
For the thirty-nine weeks ended September 27, 2003 the Company recorded a net
loss of $900,900 compared to loss of $149,600 for the same period 2002. As
discussed above, the loss was primarily due to the weak economy and lower
Page 14
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003
COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002.
Income (Loss) before Provision (Credit) for Income Taxes and Equity in
Earnings (Loss) in Affiliate (continued)
- -----------------------------------------------------------------------
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.
Provision (Credit) for Income Taxes
- ------------------------------------
The Company recorded a credit for taxes of $344,000 for the thirty-nine weeks of
2003, compared to a credit of $91,000 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 September 27, 2003, the
Company had $2,073,000 due from its factor of which $1,945,000 matured on
October 30, 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
used surplus cash to fully pay the $1.3 million balance remaining on its $3
million equipment loan.
On August 15, 2003, the $6 million term loan was restructured to increase
principal installments to $100,000 per month, to reduce interest rates to LIBOR
plus 1.65%, and to reduce the cash flow covenant to a .90 to 1.00 ratio. The
annual principal maturities of long-term debt at September 23, 2003 are as
follows:
Current portion $1,200,000
2004/2005 475,000
----------
Total $1,675,000
In the fourth quarter of 2003, the Company will change lenders. The new lender
will provide factoring of accounts receivables, cash management, transfer agent
services, and a line of credit. The Company will use its cash and a loan from
the new lender to pay its long-term debt.
Page 15
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003
COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002.
Liquidity and Capital Resources (continued)
- -------------------------------------------
Under the new agreement the Company may borrow from the factor up to 90% of the
amount of each account sold to the factor, plus 40% of eligible inventory or
$1,000,000 whichever is smaller. Interest rates on the outstanding loan balance
is LIBOR + 2.50%.
The Company's working capital at September 27, 2003, aggregated $4,248,000
representing a working capital ratio of 2.4 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
September 27, 2003:
Cash, cash equivalents and receivables........... $4,899,000
Current liabilities.............................. 3,058,000
---------
Excess of quick assets over current liabilities.. $1,841,000
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 thirty-nine weeks of 2003, the Company acquired and made deposits on
new machinery and equipment of approximately $107,000 as set forth in the
accompanying Statement of Cash Flows. For the balance of 2003, the Company does
not anticipate any major acquisition of machinery and equipment. The Company
plans to finance its capital from cash provided from operations and bank
financing.
The Company's cash and equivalents decreased for the thirty-nine weeks ended
September 27, 2003, to $2,186,000 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.
Page 16
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003
COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002.
Forward Looking Statements (continued)
- -------------------------- 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.
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 thirty-nine week period ended September 27, 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
Page 17
BURKE MILLS, INC.
Item 4 - Controls and Procedures (continued)
- ---------------------------------
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 September 27, 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.
BURKE MILLS, INC.
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. No matter has been
submitted to a vote of security holders during the period covered by this
report.
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 August 14, 2003.
Reported was the Company's news release dated August 14, 2003 reporting
operating results for the second quarter of 2003 (the thirteen weeks ended June
28, 2003). The report contained condensed statements of operations and retained
earnings for the second quarter of 2003 and the second quarter of 2002 and
condensed balance sheets at June 28, 2003 and December 28, 2002 (the Company's
previous fiscal year end).
Page 18
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: November 10, 2003 BURKE MILLS, INC.
By: s/Humayun N. Shaikh
----------------------
Humayun N. Shaikh
Chairman of the Board
(Principal Executive Officer)
Date: November 10, 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: November 10, 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: November 10, 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: November 10, 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: November 10, 2003 --------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 25