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 March 29, 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 May 2, 2003, there were
outstanding 2,741,168 shares of the issuer's only class of common stock.
Page 1 of 20
BURKE MILLS, INC.
INDEX
PART I - FINANCIAL INFORMATION Page Number
-----------
Item 1 - Financial Statements
-------
Condensed Balance Sheets
March 29, 2003 and December 28, 2002 3
Condensed Statements of Operations and
Retained Earnings
Thirteen Weeks Ended March 29, 2003
and March 30, 2002 4
Statements of Cash Flows
Thirteen Weeks Ended March 29, 2003
and March 30, 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 15
Market Risk
- ---------------------------------------------------------
Item 4 - Controls and Procedures 15
- -------------------------------------------------------
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities and Use of Proceeds 16
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission of Matters to a Vote of Security 16
Holders
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
- ---------------------------------------------------------
SIGNATURES and CERTIFICATIONS 16-18
EXHIBIT INDEX 19
EXHIBIT 20
Page 2 of 20
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
March 29, December 28,
2003 2002
(Unaudited) (Note A)
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 3,780,006 $ 4,191,173
Accounts receivable 2,737,609 2,269,089
Inventories 2,806,445 2,095,863
Prepaid expenses, taxes and other
current assets 240,576 114,000
----------- -----------
Total Current Assets 9,564,636 8,670,125
----------- -----------
Equity Investment in Affiliate 612,275 612,275
----------- -----------
Property, Plant and Equipment - at cost 31,222,608 31,161,672
Less: Accumulated depreciation 21,451,096 20,939,167
----------- -----------
Property, Plant and Equipment - Net 9,771,512 10,222,505
----------- -----------
Other Assets
Deferred income taxes 703,200 703,200
Deferred charges and other 58,744 16,575
----------- -----------
Total Other Assets 761,944 719,775
----------- -----------
Total Assets $20,710,367 $20,224,680
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,178,571 $ 1,178,571
Accounts payable 1,823,478 1,097,131
Accrued salaries, wages and vacation pay 174,491 100,848
Other liabilities and accrued expenses 204,469 105,595
Income taxes payable -0- -0-
----------- -----------
Total Current Liabilities 3,381,009 2,482,145
Long-term Debt 2,625,000 2,919,643
Deferred Income Taxes 1,735,400 1,735,400
----------- -----------
Total Liabilities 7,741,409 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 8,048,438 8,166,972
----------- -----------
Total Shareholders' Equity 12,968,958 13,087,492
----------- -----------
Total Liabilities & Shareholders' Equity $20,710,367 $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 of 20
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended
--------------------
March 29, March 30,
2003 2002
---- ----
Net Sales $6,619,994 $8,976,145
---------- ----------
Costs and Expenses
Cost of Sales 6,119,934 7,919,250
Selling, General and
Administrative Expenses 639,043 698,736
Factor's Charges 23,991 35,482
---------- ----------
Total Costs and Expenses $6,782,968 8,653,468
---------- ----------
Operating Earnings (Loss) (162,974) 322,677
---------- ----------
Other Income
Interest Income 7,167 9,441
Gain on Disposal of Property Assets -0- 325
Other, net 16,802 397
---------- ----------
Total 23,969 10,163
---------- ----------
Other Expenses
Interest Expense 32,566 51,775
Other, net -0- (7,308)
---------- ----------
Total Other Expenses 32,566 44,467
---------- ----------
Income (Loss) before Income Taxes and Equity
in Net Earnings of Affiliate (171,571) 288,373
Provision (Credit) for Income Taxes 53,038 -0-
---------- ----------
Income (Loss) before Equity in Net Earnings
of Affiliate (118,533) 288,373
Equity in Net Earnings of Affiliate -0- -0-
---------- ----------
Net Income (Loss) (118,533) 288,373
Retained Earnings at Beginning of Period 8,166,972 8,485,753
---------- ----------
Retained Earnings at End of Period $8,048,438 $8,774,126
========== ==========
Earnings (Loss) Per Share $ (0.04) $ 0.11
========== ==========
Dividends Per Share of Common Stock None None
=========== ===========
Weighted Average Common Shares Outstanding 2,741,168 2,741,168
=========== ===========
See notes to condensed financial statements.
Page 4 of 20
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen Weeks Ended
-----------------------
March 29, March 30,
2003 2002
--------- ---------
Cash flows from operating activities
Net Income (Loss) $ (118,533) $ 288,373
---------- ----------
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Depreciation $ 511,929 $ 520,778
(Gain) on Sale of plant and equipment,
including loss on disposal -0- 375
Equity in earnings of affiliate -0- -0-
Deferred income taxes -0- (93,500)
Changes in assets and liabilities:
Accounts receivable (468,520) (1,126,530)
Inventories (710,582) 208,249
Prepaid expenses, taxes & other
current assets (126,576) (118,408)
Other non-current assets (42,170) -0-
Accounts payable 726,347 754,333
Accrued salaries, wages & vacation pay 73,643 (75,247)
Other liabilities and accrued expenses 98,874 41,720
Income taxes payable -0- 93,491
--------- ---------
Total Adjustments 62,945 205,261
--------- ---------
Net cash provided (used) by operating activities (55,588) 493,634
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (60,936) (459,469)
Proceeds from sale of plant & equipment -0- -0-
Investment in affiliate -0- -0-
--------- ---------
Net cash (used) by investing activities (60,936) (459,469)
--------- ---------
Cash flows from financing activities:
Principal payments of long-term debt (294,643) (330,358)
Proceeds from long-term bank note -0- -0-
--------- --------
Net cash (used) by financing activities (294,643) (330,358)
--------- --------
Net (decrease) in cash and cash equivalents (411,167) (296,193)
Cash and cash equivalents at beginning of year 4,191,173 4,144,340
--------- ----------
CASH AND EQUIVALENTS AT END OF FIRST QUARTER $3,780,006 $3,848,147
========== ==========
See notes to condensed financial statements
Page 5 of 20
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 thirteen-week period ended March 29, 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 for the thirteen weeks
ended March 29, 2003 and March 30, 2002 was $32,000, and $52,000 respectively.
The Company had no cash payments for the thirteen weeks ending March 29, 2003
and March 30, 2002 for income taxes.
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.
NOTE 5 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable are comprised of the following:
March 29, December 28,
2003 2002
---- ----
Account current - Factor:
Due from Factor on regular
factoring account........ $1,957,620 $1,668,786
Non-factored accounts
receivable............... 779,988 600,302
--------- ----------
$2,737,608 $2,269,088
========== ==========
Page 6 of 20
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows:
March 29, December 28,
2003 2002
---- ----
Finished and in process.... $1,577,000 $1,359,000
Raw materials.............. 940,000 445,000
Dyes and chemicals......... 203,000 203,000
Other...................... 86,000 89,000
--------- ---------
Total $2,806,000 $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 March 29, 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%.
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 has discussed with its bank a waiver of this violation or amendment
of the requirement in the loan agreement. Discussions continue with the bank.
The Company's bank has informed the Company that the bank has assigned its loan
to the bank's special asset group. Although the consequences of this action are
Page 7 of 20
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 8 - LONG-TERM DEBT (continued)
- -----------------------------------
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 is evaluating its options at this time.
The annual principal maturities of long-term debt at March 29, 2003 are as
follows:
Current portion $ 750,000
2004/2005 $750,000
2005/2006 625,000
1,375,000
--------- ---------
$2,125,000
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 March 29, 2003 based
on the current amount owned are as follows:
Current Portion $ 428,571
2004/2005 $ 428,571
2005/2006 428,571
2006/2007 392,858
1,250,000
------- ---------
$1,678,571
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:
March 29 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
========== ==========
Page 8 of 20
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 9 - INCOME TAXES (continued)
- ---------------------
Thirteen Weeks Ended
--------------------
March 29, March 30,
Provision (credit) for income taxes 2003 2002
---- ----
consists of:
Deferred $ ---
Federal 49,400 ---
State 3,700 ---
--------- -------
$ 53,100 $ ---
========= ========
The net operating loss carryforward from a prior year is $889,000 expiring
2019/2022. The tax effect at the maximum tax rate is $302,300. The Company has
paid and has set forth $349,000 for alternative minimum taxes paid, which may
only be used to offset normal income taxes that may be incurred in future years.
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 March 29, 2003 and March 30, 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 March 29, 2003,
the Company had $1,958,000 due from its factor of which $1,616,000,000 matured
on April 16, 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 first 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.
Page 9 of 20
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
NOTE 12 - COMMITMENTS (continued)
- ---------------------
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 report to the
North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving toward a solution of natural attenuation. The cost of monitoring will be
approximately $31,000 per year.
NOTE 13 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS
- ----------------------------------------------------------------
The company owns 49.8% of Fytek, S.A. de C.V. (Fytek), a Mexican corporation.
Fytek began operation in the fourth quarter of 1997. The company accounts for
the ownership using the equity method. Due to the Mexican economy, sales are
down. Accounts receivable are also declining. Since repatriation of cash is not
expected from the joint venture, the Company believes it is prudent to record a
valuation allowance for Fytek. This allowance amounts to $125,700. $12,300 was
recorded in the first quarter. During the thirteen weeks, the Company had
purchases from Fytek of $243,000 compared to $332,000 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)
1st Quarter
-----------
2003 2002
---- ----
Net Sales $ 649 $1,002
Gross Profit 32 7
Income from continuing
operations 37 (16)
Income before taxes 37 (16)
Provision (credit) for income tax 12 (16)
------- -------
Net Income $ 25 $ (-0-)
======= ========
Page 10 of 20
BURKE MILLS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)(Continued)
BALANCE SHEET
(In thousands of U.S. dollars)
March 31, March 31,
2003 2002
(Unaudited) (Unaudited)
----------- -----------
ASSETS
Current assets $2,269 $3,155
Non-current assets 187 181
------- -------
Total Assets $2,456 $3,336
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 607 $1,667
Non-current liabilities 55 -0-
------- -------
Total Liabilities $ 662 $1,667
Shareholders equity $1,794 $1,669
------- -------
Total Liabilities & Shareholders' Equity $2,456 $3,336
======= =======
NOTE 14 - ACCOUNTING FOR POSSIBLE IMPAIRMENT OF LONG-LIVED ASSETS
- -----------------------------------------------------------------
In 1995 the Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement No. 121 in the first quarter of 1996 and such adoption did not have
any effect on the financial statements for 2002 or for the thirteen weeks ended
March 29, 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 thirteen week periods ended March
29, 2003, and March 30, 2002.
Page 11 of 20
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 Ended
----------------------
March 29, March 30,
2003 2002
------ ------
Net Sales 100.0% 100.0%
Cost of Sales 92.4 88.2
------ ------
Gross Profit 7.6 11.8
Selling, General, Administrative
and Factoring Costs 10.1 8.2
------ ------
Operating Earnings (Loss) (2.5) 3.6
Interest Expense (0.5) 0.6
Other (Income) - net 0.4 (0.2)
------ ------
Income (Loss) before Income Taxes (2.6) 3.2
Equity in Net Earnings (Loss) of Affiliate -0- -0-
Income Taxes (Credit) 0.8 -0-
------ ------
Net Income (Loss) (1.8) 3.2%
====== ======
Page 12 of 20
BURKE MILLS INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
THIRTEEN WEEKS ENDED March 29, 2003
COMPARED TO THIRTEEN WEEKS ENDED March 30, 2002
Net Sales
- ---------
Net sales for the thirteen weeks ended March 29, 2003 decreased by 26.3% to
$6,619,000 compared to $8,976,000 for the first quarter of 2002. Pounds shipped
decreased by 24.3% compared to 2002, while average sales prices decreased by
2.5%. 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 first quarter decreased by $1,799,000 or 22.7% compared to
the first quarter of 2002. The company was able to reduce material cost by
29.2%, direct labor cost by 27.2%, and overhead cost by 15.6%. Although total
cost of sales decreased as a result of lower volume and cost savings, fuel oil,
natural gas, health claims, and repairs increased in the aggregate by $222,000.
As a result of a decrease in sales by 26.3% and a decrease in cost of sales by
only 22.7%, the Company experienced a decline in gross margin to 7.6% versus
11.8% in the first quarter of 2002.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general, and administrative expenses for the first quarter of 2003
decreased by $59,700 or 8.5%. In the weak business environment, the company is
continuing to maintain a strong sales effort.
Factor's Charges
- ----------------
Factor's charges were .4% of net sales compared to .4% in 2002. There was no
change in the Company's factoring agreement.
Interest Expense
- ----------------
Interest expense for the first quarter decreased $19,200 or 37.1% primarily due
to a lower average long-term debt.
Interest Income
- ---------------
Interest income for the first quarter of 2003 decreased as a result of lower
interest rates earned.
Equity in Net Earnings (Loss) of Affiliate
- ------------------------------------------
The Company recorded a gain of $12,300 from Fytek, S.A. De C.V., its joint
venture in Mexico, compared to no gain for the first quarter of 2002. Year to
date income of $12,300 was offset by a valuation allowance of $12,300. 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
- -----------------------------------------------
For the thirteen weeks ended March 29, 2003 the Company recorded a loss of
$(118,533). As discussed above, the loss was primarily due to a decrease in
sales volume.
Page 13 of 20
BURKE MILLS INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Provision (Credit) for Income Taxes
- -----------------------------------
Due to the loss before taxes, the Company recorded a credit of $53,000 for
taxes.
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 March 29, 2003, the Company
had $1,958,000 due from its factor of which $1,616,000 matured on April 16,
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 has discussed with its bank a waiver of this violation or amendment
of the requirement in the loan agreement. Discussions continue with the bank.
The Company's bank has informed the Company that the bank has 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 is evaluating its options at this time.
The Company's working capital at March 29, 2003, aggregated $6,184,000
representing a working capital ratio of 2.8 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
March 29, 2003:
Cash, cash equivalents and receivables........... $6,518,000
Current liabilities.............................. 3,381,000
---------
Excess of quick assets over current liabilities.. $3,137,000
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 thirteen weeks of 2003, the Company acquired and made deposits on new
machinery and equipment of approximately $61,000 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 $689,000
which, together with the acquisitions and deposits on acquisitions incurred to
March 29, 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 thirteen weeks ended March
29, 2003, to $3,780,000 from $4,191,000 at December 28, 2002. See accompanying
Statement of Cash Flow.
Page 14 of 20
BURKE MILLS INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(continued)
Forward Looking Statements
- --------------------------
Certain statements in this Management's Discussion and Analysis of Financial
condition and Results of Operations, and other sections of this report, contain
forward-looking statements within the meaning of federal securities laws about
the Company's financial condition and results of operations that are based on
management's current expectations, beliefs, assumptions, estimates and
projections about the markets in which the Company operates. Words such as
"expects", "anticipates", "believes", "estimates", variations of such words and
other similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in, or implied by, such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgement only as of the date hereof. The
Company undertakes no obligations to update publicly any of these
forward-looking statements to reflect new information, future events or
otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward-looking statements include, but
are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and financial viability of significant customers, technological
advancements, employee relations, changes in construction spending and capital
equipment expenditures (including those related to unforeseen acquisition
opportunities), the timely completion of construction and expansion projects
planned or in process, continued availability of financial resources through
financing arrangements and operations, negotiations of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies, policies and legislation, and proceeds received from
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes; such as, changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
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.
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
Page 15 of 20
BURKE MILLS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Item 4 - Controls and Procedures (continued)
- ---------------------------------
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.
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) Reports on Form 8-K - No report on Form 8-K has been filed during
the thirteen weeks March 29, 2003.
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: May 8, 2003 BURKE MILLS, INC.
By: s/
----------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive Officer)
Date: May 8, 2003 By: s/
-----------------------
Thomas I. Nail
President and COO
(Principal Financial Officer)
Page 16 of 20
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
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 quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
s/
May 8, 2003 ----------------------
Date Humayun N. Shaikh
Chairman and CEO
(Principal Executive Officer)
Page 17 of 20
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
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 quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
s/
May 8, 2003 ----------------------
Date Thomas I. Nail
President and COO
(Principal Financial Officer)
Page 18 of 20
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.
99-1 Certifications of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 19 of 20
EXHIBIT 99-1
CERTIFICATION PURSUANT TOss.906 OF THE SARBANES-OXLEY ACT OF 2002
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)
or 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/
Date: May 8, 2003 ----------------------
Humayun N. Shaikh
Chairman and CEO
CERTIFICATION PURSUANT TOss.906 OF THE SARBANES-OXLEY ACT OF 2002
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)
or 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/
Date: May 8, 2003 ----------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 20 of 20