Microsoft Word 11.0.5604;Commission File Number 0-5680
BURKE MILLS, INC.
IRS EMPLOYER IDENTIFICATION (56-0506342)
NORTH CAROLINA
191 Sterling Street, N.W.
Valdese, North Carolina 28690
(828) 874-6341
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
ATTENTION: Messrs. Milwood Hobbs, Michael Moran
REF: SUPPLEMENTAL INFORMATION PER SEC LETTER OF JULY 2005
BURKE MILLS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2005
FILED APRIL 1, 2005
FORM 10-QSB FOR THE FISCAL QUARTER ENDED APRIL 2, 2005
FILED MAY 13, 2005
Dear Sirs:
The following supplemental information is being provided to you as follow up to
your July 2005 letter from Michael Moran, Accounting Branch Chief and my
telephone conversation with Milwood Hobbs. For greater clarification, our
comments follow each item in your letter and are noted as "Burke's Response" and
"Revised Disclosure Will Be As Follows". Additionally, a company acknowledgement
statement is attached (Attachment A) per your guidelines.
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2005
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Operations
Results of Operations: 2004 Compared to 2003
Net Sales, page 9
1. We note that your fiscal year ended January 1, 2005 included 52 weeks whereas
your fiscal year ended January 3, 2004 included an extra week of sales, or 53
weeks. We also note your explanation of the change in net sales in fiscal 2004
did not include a discussion that there was one less week of sales in fiscal
2004, which could represent a major component of the business reasons for the
overall change between periods. In circumstances where there is more than one
business reason for the change, please quantify the incremental impact of each
individual business reason that caused the change during the year. Please
provide us and disclose a revised explanation for the change in net sales during
fiscal 2004 using all of the significant business reasons that caused the
overall change. Refer to Item 303(a)(3) of Regulation S-K.
Burke's Response:
-----------------
The extra week for fiscal year ended January 3, 2004 had only $35,000 in
sales. Christmas and New Year's holidays fell during mid-week causing low
demand. The extra week was not a material factor for sales.
The extra week occurs every four years. In the future, if there is no
effect, we will so state.
2. You disclose that sales from new customers approximated $1.7 million
which was offset by a decline in sales to existing customers due to
competitive and credit reasons. Please disclose if you expect the decline
in sales to existing customers is a trend that you expect to affect
future periods. Refer to Item 303(a)(3) of Regulation S-K.
Burke's Response:
-----------------
Competition from imports and its affect on the decline of textiles has
been well publicized, and we did not think additional comment was
necessary.
Revised Disclosure Will Be As Follows:
--------------------------------------
The Company believes there will be continued decline in sales if imports
of our customers' products continue to increase.
Cost of Sales and Gross Margin, page 9
3. You disclose several cost categories where you experienced an increase
during fiscal 2004. Please disclose if any of these changes represent a
trend that you expect to continue affecting future periods. See Item
303(a)(3) of Regulation S-K.
Burke's Response:
-----------------
Change disclosure to be more precise.
Revised Disclosure Will Be As Follows:
--------------------------------------
Overhead expenses decreased by .7% as compared to 2003. Health claims
increased by 23% as a result of a few employees with severe medical
problems. It is impossible to predict the frequency or severity of the
employees' medical needs.
Electricity cost increased by 4% as a result of a rate increase of
approximately 5%. Repair and maintenance cost increased by 12% and could
continue to increase as the machines age.
Depreciation expense decreased by 12% and should continue to decrease
unless the company makes large capital expenditures.
Selling, General and Administrative Expenses, page 9
4. Please tell us and revise your disclosures to provide a business reason
for the change between periods in selling, general and administrative
expenses. Refer to Item 303(a)(3) of Regulation S-K.
Page 2 of 7
Burke's Response:
-----------------
The major reason for the decrease in expense was due to the company
changing factors in 2003. There were initial set-up charges with the
factor which did not recur in 2004. Also during 2004, as the factor began
to reduce credit lines on major customers and decline approvals, the
company brought more of the accounts receivable in-house, reducing the
factoring charge. This, of course, led to the decision to leave the
factor and bring the accounts receivable in-house.
Revised Disclosure Will Be As Follows:
--------------------------------------
Selling, general and administrative expenses decreased by 2%. In 2003 the
company changed factors and had initial set-up fees which did not recur
in 2004. Also, as the factor declined approval on customers, the company
brought more accounts receivable in-house, reducing the factoring fee. In
2004 the company had $109,000 in factoring fees. After the first quarter
of 2005, the factoring fees will be eliminated as the company will move
all accounts receivable in-house. Existing staff will be used to manage
the in-house receivable with a savings of almost all the factoring cost.
Liquidity and Capital Resources, page 13
5. Please disclose the information relating to your off-balance sheet
arrangements in the manner required by Item 303(a)(4) of Regulation S-K.
Burke's Response:
-----------------
There were no off-balance sheet arrangements other than reported on Note
13 and under contractual obligations.
6. You disclose here and in your quarterly report for the period ended
April 2, 2005 management's decision to discontinue in the first quarter
of 2005 the factoring arrangement and manage in-house the collection of
your accounts receivable. Please tell us and disclose the impact you
believe this will have on your liquidity and related cash flows. In
this regard, we note from your disclosure here and in your quarterly
report that you are still in the process of securing a line of credit.
Refer to Item 303(a)(1) of Regulation S-K.
Burke's Response:
-----------------
The company believes there will be no impact on cash flow from accounts
receivable caused by the move in-house. The company's staff has assisted
the factor for years in the collection effort and knows our customers
very well. The company will gain a savings of approximately $109,000 from
reduction of factor charges.
Although the company has not used its credit line included in the
factoring agreement in over a year, the company believes that a credit
line is necessary for letters of credit and for cash needs for increases
in inventory and accounts receivable if sales were to increase. The
company has a terms sheet from CIT and will be negotiating an agreement
in the third quarter.
Revised Disclosure Will Be As Follows:
--------------------------------------
The company believes there will be no impact on cash flow from the
collections of accounts receivable. The company staff has assisted in the
collections in prior years and knows the customers very well.
Page 3 of 7
The company has not used its credit line in over a year. It believes a
line of credit is necessary for letters of credit and for cash needs for
increases in inventory and accounts receivable if sales increase. The
company is in the process of securing a line of credit.
Item 8 - Financial Statements and Supplementary Data
Notes to Financial Statements
Note 1 - Significant Accounting Policies, page 22
General
7. Please tell us and disclose the types of amounts you include in the cost
of sales and the selling, general and administrative expense line items.
Please tell us whether you include inbound freight charges, purchasing
and receiving costs, inspection costs, warehousing costs, internal
transfer costs, and the other costs of your distribution network in the
cost of sales line item. If you currently exclude a portion of these
costs from cost of sales, please disclose:
o In a footnote the line items that these costs are included
in and the amounts included in each line item for each
period presented, and
o In management's discussion and analysis that your gross
margins may not be comparable to those of other entities,
since some entities include all of the costs related to
their distribution network in cost of sales and others may
exclude a portion of them from gross margin, including them
instead in line items such as selling, general and
administrative expenses.
Burke's Response:
-----------------
Cost of sales includes inbound freight, receiving cost, inspection,
purchasing, planning all manufacturing cost, quality control cost,
warehousing of raw, in-process and finished goods, outbound freight cost,
and internal transfer cost.
Selling, general and administrative expenses include cost related to the
selling process, accounting, information services, and corporate office
except VP of Manufacturing.
Revised Disclosure Will Be As Follows:
--------------------------------------
Cost of Sales. All manufacturing, quality control, inbound freight,
receiving, inspection, purchasing, planning, warehousing of raw, in-
process and finished inventory, outbound freight and internal transfer
costs are included in the cost of sales.
Selling, general and administrative. Includes cost related to the selling
process, accounting, information services, and corporate offices.
Revenue Recognition, page 22
8. You disclose that revenues are recognized at the time of shipment. Please
tell us and revise your disclosures to include whether your stated
shipping terms are FOB shipping point pursuant to your sales
Page 4 of 7
agreements with customers. Please also tell us and disclose when title
passes to the customer and explain to us your return policy. If your
sales agreements do not specify when title passes, please explain to us
why revenue recognition is appropriate upon shipment rather than upon
delivery to and acceptance by the customer. Refer to SAB 104.
Burke's Response:
-----------------
The company's shipping terms are FOB Burke Mills, Inc. with the customer
paying the freight. Title passes to the customer when freight lines
receive the shipment. The product is made-to-order specific to each
customer and shipped by customer release or delivery date on the purchase
order. The customer has control over when the product is shipped. The
company accepts returns for quality problems only. The company reviews
returns received after the end of the quarter and adjusts the quarterly
sales for the return before the quarterly result are filed.
Revised Disclosure Will Be As Follows:
--------------------------------------
Revenue recognition. Sales terms are FOB Burke Mills, Inc. Revenues
are recognized at the time of shipment.
Accounts Receivable, page 22
- ----------------------------
9. Please disclose your accounting policy relating to providing a allowance
for doubtful accounts receivable.
Burke's Response:
-----------------
In the last four years the company has written off $3,500 in bad debts.
The company policy is to review each account and establish an allowance
as needed. In the first quarter of 2005 the policy was revised to add any
amounts past due 30 days into the allowance.
Revised Disclosure Will Be As Follows:
--------------------------------------
Allowance for doubtful accounts receivable - The allowance consist of
amounts past due 30 days plus any accounts management believes are
doubtful.
Part IV
10. We note your disclosure in the first paragraph on page 35 regarding
financial schedules. Please tell us and revise your disclosures to
include Schedule II - Valuation and Qualifying Accounts disclosing all
reserves recorded, including the amount of allowance for doubtful
accounts receivable, for all periods presented. See Rules 5-04(c) and
12-09 of Regulation S-X.
Burke's Response:
-----------------
The company had no allowance for doubtful accounts for the periods
covered. The company has written off only $3,500 in bad debt over the
last four years.
Page 5 of 7
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED
DECEMBER 28, 2002, JANUARY 3, 2004, AND JANUARY 1, 2005
Net
Balance At Provisions Deductions Balance
Beginning Charged To From At End
Descriptions Of Period Expense Allowances Of Period
- ------------------------ --------- ---------- ---------- ---------
Yr Ended: Dec. 28, 2002
Valuation allowance
for deferred tax
assets $ -0- $ -0- $ -0- $ -0-
Yr Ended: Jan. 3, 2004
Valuation allowance
for deferred tax
assets $ -0- $ -0- $ -0- $ -0
Yr Ended: Jan. 1, 2005
Valuation allowance
for deferred tax
assets $ -0- $301,000 $ -0- $301,000
By:
/s/Humayun N. Shaikh Date: August 9, 2005
- --------------------
Humayun N. Shaikh
Chairman and CEO
/s/Thomas I. Nail Date: August 9, 2005
- -----------------
Thomas I. Nail
President and CFO
Page 6 of 7
ATTACHMENT A
BURKE MILLS, INC.
STATEMENT OF COMPLIANCE TO SEC FILINGS
AS REQUIRED UNDER THE SECURITIES ACT OF 1934
Burke Mills, Inc. acknowledges that it is responsible for the adequacy and
accuracy of disclosures in SEC filings, and further to ensure that filings
include all information required under the Securities Act of 1934 to provide all
information investors require for an informed investment decision.
Additionally, staff comments or changes to disclosures in response to staff
comments do not foreclose the SEC from taking any action with respect to
filings. And summarily, Burke Mills Inc. may not assert staff comments as a
defense in any proceeding initiated the SEC or any person under the federal
securities laws of the United States.
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