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 July 3, 2004 [ ] 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 August 3, 2004, there were outstanding 2,741,168 shares of the issuer's only class of common stock. Page 1 BURKE MILLS, INC. INDEX PART I - FINANCIAL INFORMATION Page Number ----------- Item 1 - Financial Statements ------- Condensed Balance Sheets 3 July 3, 2004 (Unaudited) and January 3, 2004 Condensed Statements of Operations and Retained Earnings 4 Twenty-Six Weeks Ended July 3, 2004 (Unaudited) and June 28, 2003 Statements of Cash Flows 5 Twenty-Six Weeks Ended July 3, 2004 (Unaudited) and June 28, 2003 Notes to Condensed Financial Statements 6 - --------------------------------------------------------- Item 2 - Management's Discussion and Analysis of 11 Financial Condition and Results of Operations - --------------------------------------------------------- Item 3 - Quantitative and Qualitative Disclosures About 16 Market Risk - --------------------------------------------------------- Item 4 - Controls and Procedures 16 - ------------------------------------------------------- Part II - OTHER INFORMATION Item 1 - Legal Proceedings 17 Item 2 - Changes in Securities, Use 17 of Proceeds and Issuer Purchases of Equity Securities Item 3 - Defaults Upon Senior Securities 17 Item 4 - Submission of Matters to a Vote of Security 17 Holders Item 5 - Other Information 17 Item 6 - Exhibits and Reports on Form 8-K 17 - --------------------------------------------------------- SIGNATURES 17 EXHIBIT INDEX 18 EXHIBITS/CERTIFICATIONS 19-21 Page 2 BURKE MILLS, INC.PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS July 3 January 3 2004 2004 (Unaudited) ----------- ----------- ASSETS Current Assets Cash and cash equivalents $ -0- $ 147,062 Accounts receivable 3,966,484 2,365,284 Inventories 1,973,126 1,880,477 Prepaid expenses and other current assets 122,091 52,633 ---------- ---------- Total Current Assets 6,061,701 4,445,456 ========== ========== Equity Investment in Affiliate 255,000 553,180 --------- ---------- Property, plant & equipment - at cost 30,543,721 30,513,251 Less: accumulated depreciation 23,362,814 22,450,432 ---------- ---------- Property, Plant and Equipment- Net 7,180,907 8,062,819 ---------- ---------- Other Assets Deferred income taxes 62,000 60,000 Other 16,575 16,575 ---------- ---------- 78,575 76,575 ---------- ---------- Total Assets $13,576,183 $13,138,030 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Bank overdraft $ 54,802 $ -0- Short-term debt - revolving bank line -0- 141,514 Accounts payable 2,099,395 871,695 Accrued salaries and wages 164,213 54,050 Other liabilities and accrued expenses 161,903 113,412 ---------- ---------- Total Current Liabilities 2,480,313 1,180,671 Deferred Income Taxes 1,204,000 1,374,000 ---------- ---------- Total Liabilities 3,684,313 2,554,671 ---------- ---------- Commitments 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 4,971,350 5,662,839 ---------- ---------- Total Shareholders' Equity 9,891,870 10,583,359 ---------- ---------- Total Liabilities & Shareholder's Equity $13,576,183 $13,138,030 =========== =========== See notes to financial statements. Page 3 BURKE MILLS, INC. CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) Thirteen Weeks Ended Twenty-six Weeks Ended ----------------------- ----------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ------ ------ ------ ------ Net Sales $6,709,965 $5,829,522 $13,310,580 $12,449,516 ----------- ----------- ----------- ----------- Cost and Expenses Cost of Sales 6,295,499 5,798,502 12,696,609 11,918,436 ----------- ----------- ----------- ----------- Gross Profit 414,466 31,020 613,971 531,080 Selling, General and Administrative Expenses 559,897 579,335 1,192,907 1,242,369 Gain (loss) on disposal of property assets (4,023) 7,906 (4,023) 7,906 ----------- ---------- ----------- ----------- Operating Loss (141,408) (556,221) (574,913) (719,195) ----------- ----------- ----------- ---------- Other Income Interest Income 292 9,701 467 16,868 Miscellaneous 28,662 16,882 16,161 33,684 ----------- ----------- ----------- ----------- Total 28,954 26,583 16,628 50,552 ----------- ----------- ----------- ----------- Other Expenses Interest Expense 191 29,110 743 61,676 ----------- ----------- ----------- ----------- Loss before Provision for Income Taxes and Equity in Net Earnings of Affiliate (112,645) (558,748) (559,028) (730,319) Provision (Credit) for Income Taxes (84,000) 289,021 (165,719) (342,059) ---------- ---------- ------------ -------- Loss before Equity in Net Net Earnings of Affiliate (28,645) (269,727) (393,309) (388,260) Equity in Net Loss of Affiliate -0- (30,377) (298,180) (30,377) ----------- --------- ----------- --------- Net Loss (28,645) (300,104) (691,489) (418,637) Retained Earnings at Beginning of Period 4,999,995 8,048,438 5,662,839 8,166,972 ---------- --------- ----------- ---------- Retained Earnings at End of Period $4,971,350 $7,748,335 $4,971,350 $7,748,335 ========== ========== ========== ========== Loss Per Share $ (0.01) $ (0.11) $ (0.25) $ (0.15) ========== =========== ========== ========== Dividends Per Share of Common Stock None None None None ========== ========== ========== ========== Weighted Average Common Shares Outstanding 2,741,168 2,741,168 2,741,168 2,741,168 ========= ========= ========= ========= See notes to condensed financial statements. Page 4 BURKE MILLS, INC. STATEMENTS OF CASH FLOWS (Unaudited) Twenty-six Weeks Ended ---------------------- July 3, June 28, 2004 2003 ---- ---- Cash flows from operating activities: Net Loss $ (691,489) $ (418,637) --------- --------- Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation 914,768 1,022,516 Allowance for mark-down inventory 27,000 -0- Deferred income tax (172,000) -0- Equity in affiliate 298,180 30,377 Gain (loss) on disposal of property assets (4,023) 7,906 Changes in assets and liabilities: Accounts receivable (1,601,200) (245,682) Inventories (119,649) (541,797) Prepaid expenses, taxes and other current assets (69,458) (352,691) Other non-current assets -0- (47,093) Accounts payable 1,227,700 178,320 Accrued salaries & wages 110,163 80,502 Other liabilities and accrued expenses 48,491 94,385 --------- --------- Total Adjustments 659,972 226,743 --------- --------- Net cash used by operating activities (31,517) (191,894) --------- --------- Cash flows from investing activities: Acquisition of property, plant and Equipment (33,333) (80,945) Proceeds from sale of equipment 4,500 -0- --------- --------- Net cash used by investing activities (28,833) (80,945) --------- --------- Cash flows from financing activities: Bank overdraft 54,802 -0- Net payments to revolving credit line (141,514) -0- Principal payments of long-term debt -0- (825,000) --------- --------- Net cash used by financing activities (86,712) (825,000) --------- --------- Net decrease in cash and cash equivalents (147,062) (1,097,839) Cash and cash equivalents at beginning of year 147,062 4,191,173 --------- --------- CASH AND EQUIVALENTS AT END OF SECOND QUARTER $ -0- $3,093,334 ========= ========== 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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all necessary adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the twenty-six week period ended July 3, 2004 are not necessarily indicative of the results that may be expected for the year ended January 1, 2005. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended January 3, 2004. NOTE 2 - STATEMENTS OF CASH FLOWS - --------------------------------- For the purposes of the statements of cash flows, the Company considers cash on hand, deposits in banks, interest bearing demand matured funds on deposit with factor, and all highly liquid debt instruments with a maturity of three months or less when purchased as cash and cash equivalents. FASB No. 95 requires that the following supplemental disclosures to the statements of cash flows be provided in related disclosures. Cash paid for interest for the twenty-six weeks ended July 3, 2004 and June 28, 2003 was $13,000 and $62,000 respectively. The Company had no cash payments for the twenty-six weeks ending July 3, 2004 and June 28, 2003 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Significant estimates are the liability for self-funded health claims, inventory markdowns, and the investment value of affiliates. NOTE 5 - ACCOUNTS RECEIVABLE - ----------------------------- Accounts receivable are comprised of the following: July 3, January 3, 2004 2004 ---- ---- Account current - Factor: Due from Factor on regular factoring account $2,877,000 $1,520,000 Non-factored accounts receivable 1,089,000 845,000 --------- ---------- $3,966,000 $2,365,000 ========== ========== Page 6 BURKE MILLS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued) NOTE 5 - ACCOUNTS RECEIVABLE (continued) - ---------------------------------------- Pursuant to a factoring agreement, the Company sells substantial portions of its accounts receivable to a commercial factor without recourse, up to maximum credit limits established by the factor for individual accounts. The factor assumes the credit risks for these accounts and effects the collection of the receivables. Amounts invoiced to customers on accounts receivable factored in excess of the established maximum credit limits are sold to the factor with recourse in the event of nonpayment by customers. The Company had accounts receivables of $158,000 at July 3, 2004 that had been sold to the factor with recourse. At January 3, 2004 there was $232,000 sold to the factor with recourse. The Company pays a service charge to its factor to cover credit checking, assumption of credit risk, record keeping and similar services. In addition, if the Company takes advances from its factor prior to the collection of the receivables sold (as defined), it is required to pay interest to the factor on these advances. The Company incurred only $200 in interest costs during the second quarter of 2004. The Company's factor is collateralized by the accounts receivable sold to the factor, and the factor has filed an UCC-1 to evidence ownership of the receivables and to separate the receivables from the Company's creditors. NOTE 6 - INVENTORIES - -------------------- Inventories are summarized as follows: July 3, January 3, 2004 2004 ---- ---- Finished & in process $ 916,000 $1,123,000 Raw materials 785,000 473,000 Dyes & chemicals 198,000 194,000 Other 74,000 90,000 ---------- ---------- Total $1,973,000 $1,880,000 ========== ========== NOTE 7 - LINE OF CREDIT - ------------------------ The Company has a revolving credit agreement with its factor. Under the agreement the Company can borrow up to 80% of the face amountof each account sold to the factor. The borrowing rate is LIBOR plus 2.5%. The average borrowing rate for the second quarter was 3.825%. At the end of the quarter, there was no debt under the line of credit. The Company classified the revolving debt as a current liability on its balance sheet. NOTE 8 - LONG-TERM DEBT - ----------------------- In the fourth quarter of 2003, the Company paid off its long-term debt. The Company used its cash and a revolving loan (see Note 7). Page 7 BURKE MILLS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued) NOTE 9 - INCOME TAXES - --------------------- The Company uses the liability method as required by FASB statement 109 "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws. The items that comprise deferred tax assets and liabilities are as follows: July 3, Jan. 3 2004 2004 ---- ---- Deferred tax assets: Alternative minimum taxes paid $ 349,000 $ 349,000 Net operating loss carryover 676,000 530,000 Charitable contributions carryover 12,000 12,000 State Tax Credits 41,000 41,000 Other 3,000 3,000 Inventory 47,000 45,000 --------- --------- Sub-Total 1,128,000 980,000 Valuation Allowance (1,066,000) (920,000) ---------- --------- Total $ 62,000 $ 60,000 ========== ========== Deferred tax liabilities: Accelerated depreciation for tax purposes $1,204,000 $1,374,000 Other -0- -0- ---------- ---------- $1,204,000 $1,374,000 ========== ========== Twenty-Six Weeks Ended ----------------------- July 3 June 28 Income tax benefit 2004 2003 ---- ---- consists of: Deferred ($172,000) ($277,629) Federal -0- -0- State 6,281 (64,430) -------- --------- ($165,719) ($342,059) ========== ========== 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 July 3, 2004 and June 28, 2003. Page 8 BURKE MILLS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued) NOTE 11 - CONCENTRATIONS OF CREDIT RISK - --------------------------------------- Financial instruments that potentially subject the Company to concentration of credit risk consist principally of occasional temporary cash investments and amounts due from the factor on receivables sold to the factor on a non-recourse basis. The receivables sold to the factor during a month generally mature over the next 60 days. At July 3, 2004 the Company had $2,877,000 due from its factor of which $158,000 are with recourse. Upon maturity, the funds are automatically transferred by the factor to the Company's bank. 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 yarn 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 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. The Company and its joint venture partner, Teijin/Akra, voted on March 26, 2004 to close their joint venture, Fytek. The joint venture will operate on a scaled down basis through mid-August 2004. The Company estimates that it will receive $255,000 cash distribution after liquidation. In the first quarter the Company wrote down the investment in affiliate by $298,000 based on its estimate. A major portion of the estimate is based on employee severance pay. Severance pay can be reduced if the joint venture partner can absorb Fytek employees into its operations. Fytek will begin paying severance in the third quarter. The Company did not change its estimate for the value of its investment in affiliate in the second quarter, but will adjust the value in the third quarter when there is better information. During the twenty-six weeks ended July 3, 2004, the Company had purchases from Fytek of $643,000 compared to $554,000 during the same quarter in 2003. The increase in purchases is due to a buildup of inventory at the Company for a transition to a domestic supplier and production start-up at the Company. Burke Mills does not guarantee any debt for its joint venture, Fytek. Financial information for Fytek is as follows: Page 9 BURKE MILLS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued) NOTE 13 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS (continued) - ---------------------------------------------------------------- STATEMENT OF INCOME (In thousands of U.S. dollars) (Unaudited) 2nd Quarter Six Months ----------- ----------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Sales $ 508 $ 602 $1,068 $1,251 Gross Profit (91) (67) (173) (35) Income from continuing operations (64) (96) (170) (57) Income before taxes (64) (96) (170) (57) Provision for income tax 23 35 58 21 ----- ------ ------ ------ Net Income $ (42) $ (61) $ (112) $ (36) ====== ====== ======= ======= BALANCE SHEET (In thousands of U.S. dollars) June 28, 2004 2003 (Unaudited) (Unaudited) ------ ------ ASSETS Current assets $1,909 $2,168 Non-current assets 231 188 ------ ------ Total Assets $2,140 $2,356 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 642 $ 526 Non-current liabilities -0- 55 ----- ------ Total Liabilities $ 642 $ 581 Shareholders equity 1,498 1,775 ----- ----- Total Liabilities & Shareholders' Equity $2,140 $2,356 ===== ====== NOTE 14 - ACCOUNTING FOR POSSIBLE IMPAIRMENT OF LONG-LIVED ASSETS - ----------------------------------------------------------------- Long-lived assets are evaluated for impairment when events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of these assets and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. In 2003 the Company wrote off equipment with a net book value of $268,000. With the decrease in sales volume and no anticipated business increase in products that will run on the machinery, the machinery was written off as a non-performing asset. No salvage value has been assigned to the machinery, as the Company has no potential buyer. There have been no write offs necessary in 2004. Page 10 BURKE MILLS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)(Continued) NOTE 15 - EARNINGS PER SHARE - ---------------------------- Earnings per share are based on the net income divided by the weighted average number of common shares outstanding during the twenty-six week periods ended July 3, 2004, and June 28, 2003. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXECUTIVE SUMMARY - ----------------- The Company's major market is packaged dyed yarns for home, contract, automotive upholstery, and home furnishings. Although the Company continues to experience imports of finished products that compete with its customers' products and an excess capacity in the industry for packaged dyed yarns, sales for the second quarter of 2004 increased by $880,000 or 15.1% as compared to the second quarter of 2003. The increase in sales is primarily due to diversification into fibers other than polyester and to business from new customers. Although the Company's sales increased in the second quarter, there is no guarantee that sales for the third quarter will improve. The Company has experienced a decline in sales to some of its oldest customers as they compete with imports. The quality of credit, in general, has also eroded. A factor that has affected the efficiency of the Company is the erratic order rate. The Company's production is on a make to order basis. The erratic order rate has caused the Company at times to work over-time to meet customer delivery requirements, and at other times to work short weeks for lack of orders. In the second quarter the Company received price increases on its major raw material, polyester yarns. The Company believes that it has offset the price increases on polyester by increasing prices to its customers. As discussed in previous filings, the Company and its joint venture partner, Teijin/Akra, voted on March 26, 2004, to close their joint venture, Fytek. Fytek will operate on a scaled down basis through mid-August. The Company adjusted the value of its investment in affiliate in the first quarter and will not make further adjustments until the third quarter when better information is available. Yarns from Fytek sold to the Company will be produced by the Company and purchased domestically (also see Note 13). At the end of the second quarter the Company continues to have no long-term or revolving debt and has a quick ratio of 1.60. Results of Operations - --------------------- 2004 Compared to 2003 - --------------------- 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. The following table sets forth operating data of the Company as a percentage of net sales for the periods indicated below: Page 11 BURKE MILLS, INC. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations - --------------------- 2004 Compared to 2003 - --------------------- Thirteen Weeks Twenty-six Weeks Ended Ended -------------------- ------------------- July 3, June 28, July 3, June 28, 2004 2003 2004 2003 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 93.8 99.5 95.4 95.7 ---- ---- ---- ---- Gross Profit 6.2 0.5 4.6 4.3 Selling, General, and Administrative Costs 8.3 10.0 (8.9) 10.1 ---- ---- ---- ---- Operating Loss (2.1) (9.5) (4.3) (5.7) Interest Expense 0.0 0.5 0.0 0.5 Net Other 0.4 0.3 0.1 0.3 ---- ---- ---- ---- Loss before income taxes (1.7) (9.7) (4.2) (5.9) Equity in Net Loss of Affiliate 0.0 (0.5) (2.2) (0.2) Income Taxes (Credit) (1.2) (5.0) (1.2) (2.7) ---- ---- ---- ---- Net Loss (0.5)% (5.1)% (5.2)% (3.4)% ===== ===== ===== ===== THIRTEEN WEEKS ENDED July 3, 2004 COMPARED TO THIRTEEN WEEKS ENDED June 28, 2003 Net Sales - --------- Net sales for the second quarter of 2004 increased by 15.1% to $6,710,000 compared to $5,830,000 for the second quarter of 2003. Pounds shipped increased by 21.7%. The primary reason for the increase in sales was new customers and diversification to fibers other than polyester. Cost of Sales and Gross Margin - ------------------------------ Cost of sales increased in the second quarter of 2004 by $497,000 or 8.6% compared to the second quarter of 2003. Cost of materials used increased by 13.0% primarily due to the increase in sales volume. Direct labor increased by 14.0% primarily due to the increase in sales volume. Overhead cost increased by only $4,000 or 0.2%. Depreciation cost decreased by $60,000 for the quarter. Gross margins improved for the quarter as a result of a 15.1% increase in sales and only an 8.6% increase in cost of sales. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general, and administrative expenses decreased by $19,000 or 3.4% compared to second quarter of 2003. Page 12 BURKE MILLS, INC. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) THIRTEEN WEEKS ENDED July 3, 2004 COMPARED TO THIRTEEN WEEKS ENDED June 28, 2003 (continued) Interest Expense - ---------------- Interest expense was $200 for the second quarter of 2004 compared to $29,000 in second quarter of 2003. The Company paid off its long-term debt in the fourth quarter of 2003 and used its revolving credit line sparingly in the second quarter of 2004. Loss Before Provision for Taxes and Equity in Loss of Affiliate - --------------------------------------------------------------- For the second quarter 2004 the Company loss decreased to $113,000 versus $559,000 in 2003. The improvement was primarily due to increased sales volume. Equity in Net Loss of Affiliate - ------------------------------- The Company and its joint venture partner, Teijin/Akra, voted on March 26, 2004 to close their joint venture, Fytek. The Company wrote down the value of its investment in the first quarter based on an estimated liquidation value. The Company did not make any adjustment to the value in the second quarter, but will review the value in the third quarter when better information is available. Also see Note 13. Credit for Income Taxes - -------------------------- A credit of $84,000 was provided for the loss before taxes of $113,000. Also see Note 9. TWENTY-SIX WEEKS ENDED July 3, 2004 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28, 2003 2004 Compared to 2003 Net Sales - --------- Net sales for the first six months of 2004 increased by 6.9% to $13,311,000 compared to $12,450,000 for the six months of 2003, while pounds shipped increased by 9.0%. The increase in sales was primarily due to new customers and diversification to fibers other than polyester. Cost of Sales and Gross Margin - ------------------------------ Cost of sales increased for the six month period by $778,000 or 6.5% compared to the six months of 2003. Cost of materials used increased by 9.6%. The increase is primarily due to an increase in sales volume, sales mix, and higher reworks in the first quarter. Direct labor cost increased by 7.0% primarily due to an increase in sales volume. Overhead cost decreased by $43,000 or 1%. Depreciation cost decreased by $104,000. As a result of an increase in sales of 6.9% and an increase in cost of sales of only 6.4%, the Company's gross margin improved. Selling, General and Administrative Expenses - -------------------------------------------- Selling, general and administrative expenses decreased by $49,000 or 4.1%. Page 13 BURKE MILLS, INC. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) TWENTY-SIX WEEKS ENDED July 3, 2004 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28, 2003 (continued) Interest Expense - ---------------- Interest was $13,000 for the first six months of 2004 compared to $62,000 for 2003. The Company paid off its long-term debt in the fourth quarter of 2003 and used its revolving credit line sparingly in the first six months of 2004. Loss Before Provision for Income Taxes and Equity in Loss of Affiliate - ---------------------------------------------------------------------- Loss for the six months of 2004 decreased to $559,000 versus $730,000 in 2003. The improvement was primarily due to increased sales volume. Equity in Net Earnings of Affiliate - ----------------------------------- The Company and its joint venture partner, Teijin/Akra, voted on March 26, 2004 to close their joint venture, Fytek. The Company wrote down the value of its investment in Fytek by $298,000 in the first quarter of 2004. The Company did not make any adjustment to the value in the second quarter, but will review the value in the third quarter when better information is available. Also see Note 13. Credit for Income Taxes - ----------------------- A net credit of $166,000 was provided for the loss before taxes of $559,000. Also see note 9. Critical Accounting Policies and Estimates - ------------------------------------------ The preparation of financial statements, in accordance with accounting principles generally accepted in the United States, requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses recognized and incurred during the reporting period then ended. In addition, estimates affect the determination of contingent assets and liabilities and their related disclosure. The Company bases its estimates on a number of factors, including historical information and other assumptions that it believes are reasonable under the circumstances. Actual results may differ from these estimates in the event there are changes in related conditions or assumptions. The development and selection of the disclosed estimates have been discussed with the Audit Committee of the Board of Directors. The following accounting policies are deemed to be critical, as they require accounting estimates to be made based upon matters that are highly uncertain at the time such estimates are made. The Company is self-funded for its employee health claims. The health claims are paid by the Company after review by the Company's third party administrator. The Company's liability for health claims includes claims that the Company estimates have been incurred, but not yet presented to the administrator. A historical basis is used to establish the amount. The Company reviews its inventory and when necessary establishes a markdown allowance for obsolete and slow moving items. The markdown allowance is determined by aging the inventory, reviewing the inventory with the salesmen, and determining a salvage value. The Company recorded a charge for impairment for Investment in Affiliate. The charge for impairment was based on assumptions made by management of the realizable value of the affiliate's assets less the affiliates liabilities compared to the value on the company's balance sheet. Page 14 BURKE MILLS, INC. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) TWENTY-SIX WEEKS ENDED July 3, 2004 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28, 2003 (continued) Liquidity and Capital Resources - ------------------------------- The Company has a line of credit with its factor for accounts receivable. 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. At July 3, 2004 the Company had $2,877,000 due from its factor which should be collected over the next 60 days. The Company has the right to borrow up to 80% of the face amount of each account sold to the factor. At July 3, 2004 the Company had no borrowing under the credit line. The unused line of credit was approximately $2,175,000. The Company's working capital at July 3, 2004, aggregated $3,581,000 representing a working capital ratio of 2.4 to 1 compared to a working capital of $3,265,000 at January 3, 2004, and representing a working capital ratio of 3.76 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 July 3, 2004: Cash, cash equivalents and receivables........... $3,966,000 Current liabilities.............................. 2,480,000 --------- Excess of quick assets over current liabilities.. $1,486,000 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 first six months of 2004, the Company acquired new machinery and equipment of approximately $33,000 as set forth in the accompanying Statement of Cash Flows. For the balance of 2004, the Company anticipates the acquisition of machinery and equipment of approximately $67,000 which together with the acquisitions and deposits on acquisitions incurred to July 3, 2004 will aggregate an anticipated acquisition of new machinery of approximately $100,000 in 2004. The Company plans to finance its capital from cash provided from operations and bank financing. The Company's cash and equivalents decreased for the six months ended July 3, 2004 to zero from $147,000 at January 3, 2004. See accompanying Statement of Cash Flow. 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 Page 15 BURKE MILLS, INC. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) TWENTY-SIX WEEKS ENDED July 3, 2004 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 28, 2003 (continued) Forward Looking Statements (continued) - ----------------------------------------- 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 judgment 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 - --------------------------------- As of the end of the fiscal quarter covered by this report, the Company's management, with the participation of the Company's chief executive officer and chief financial officer, carried out an evaluation of the effectiveness 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 Company's management, with the participation of the Company's chief executive officer and 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 has been no significant change in the Company's internal controls over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 16 BURKE MILLS, INC. PART II - OTHER INFORMATION Item 1 - Legal Proceedings. No report required. Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. No report required. Item 3 - Defaults Upon Senior Securities. No report required. Item 4 - Submission of Matters to a Vote of Security Holders. Matters were submitted to a vote of security holders of the Company at the Company's annual meeting of shareholders held May 18, 2004. Proxies for such meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934; there was no solicitation in opposition to management's nominees listed in the proxy statement; and, all of such nominees were elected. The matters voted upon were (a) election of chairman and secretary of the meeting and waiver of the reading of the minutes of the previous shareholders meeting; and 2,453,817 proxy votes were cast in favor thereof; (b) election of directors. The voting for directors was as follows: Director Votes For Votes Withheld Humayun N. Shaikh 2,401,797 52,020 Thomas I. Nail 2,403,397 50,420 Robert P. Huntley 2,405,397 48,420 William T. Dunn 2,405,372 48,445 Robert T. King 2,405,397 48,420 Richard F. Byers 2,403,397 50,420 Aehsun Shaikh 2,401,797 52,020 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) On May 19, 2004 the Company filed a report on Form 8-K dated May 19, 2004 attaching its news release announcing the Company's first quarter 2004 results. The press release contained condensed statements of operations for such quarter and same quarter in 2003 and condensed balance sheets for April 3, 2004 and January 3, 2004. BURKE MILLS, INC. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 17, 2004 BURKE MILLS, INC. By: s/Humayun N. Shaikh ---------------------- Humayun N. Shaikh, Chairman of the Board (Principal Executive Officer) Date: August 17, 2004 By: s/Thomas I. Nail ----------------------- Thomas I. Nail President and COO (Principal Financial Officer) Page 17 EXHIBIT INDEX Exhibit Number Description 3(i) 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(ii) 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 Rule 13a-14(a) Certifications 32 Section 1350 Certifications Page 18 EXHIBIT 31 RULE 13(a)-14(a) CERTIFICATIONS CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Humayun N. Shaikh, certify that: I have reviewed this quarterly report on Form 10-Q of Burke Mills, Inc.; 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; 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; 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-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 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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 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 (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. s/Humayun N. Shaikh Date: August 17, 2004 --------------------------- Humayun N. Shaikh Chairman and CEO (Principal Executive Officer) Page 19 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER I, Thomas I. Nail, certify that: I have reviewed this quarterly report on Form 10-Q of Burke Mills, Inc.; 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; 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; 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 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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 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 (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. s/Thomas I. Nail Date: August 17, 2004 --------------------------- Thomas I. Nail President and COO (Principal Financial Officer) Page 20 EXHIBIT 32 SECTION 1350 CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S. 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) 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/Humayun N. Shaikh Date: August 17, 2004 --------------------------- Humayun N. Shaikh Chairman and CEO CERTIFICATION PURSUANT TO 18 U.S. CODE SECTION 1350 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/Thomas I. Nail Date: August 17, 2004 --------------------------- Thomas I. Nail President and COO (Chief Financial Officer) Page 21