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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 2, 2005
[ ] 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 2, 2005 and January 1, 2005
Condensed Statements of Operations and
Retained Earnings 4
Thirteen Weeks and Twenty-Six Weeks
Ended July 2, 2005 and July 3, 2004
Statements of Cash Flows 5
Twenty-Six Weeks Ended July 2, 2005
and July 3, 2004
Notes to Condensed Financial Statements 6-11
- ---------------------------------------------------------
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
- ---------------------------------------------------------
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 16
- ---------------------------------------------------------
Item 4 - Controls and Procedures 16
- -------------------------------------------------------
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities and Use of Proceeds, Use
of Proceeds and Issuer Purchases of Equity Securities 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security
Holders 17
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. ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
July 2 January 1
(Unaudited) 2005
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 187,561 $ 316,745
Accounts receivable 3,507,788 3,064,365
Inventories 1,577,258 1,640,983
Prepaid expenses and other current assets 145,785 112,580
----------- -----------
Total Current Assets 5,418,392 5,134,673
----------- -----------
Equity Investment in Affiliate -0- 196,300
----------- -----------
Property, plant & equipment - at cost 29,738,403 29,848,475
Less: accumulated depreciation 24,249,693 23,724,193
----------- -----------
Property, Plant and Equipment- Net 5,488,710 6,124,282
----------- -----------
Other Assets 16,575 16,575
----------- -----------
Total Assets $10,923,677 $11,471,830
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,744,847 $ 1,465,630
Accrued salaries and wages 169,558 89,847
Other liabilities and accrued expenses 178,866 120,137
----------- -----------
Total Current Liabilities 2,093,271 1,675,614
----------- -----------
Total Liabilities $ 2,093,271 $ 1,675,614
----------- -----------
Commitments and contingencies
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 3,909,886 4,875,696
----------- -----------
Total Shareholders' Equity 8,830,406 9,796,216
----------- -----------
$10,923,677 $11,471,830
=========== ===========
See notes to condensed financial statements.
Page 3
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Twenty-six Weeks Ended
----------------------- -----------------------
Restated Restated
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
------ ------ ------ ------
Net Sales $6,579,173 $6,709,965 $13,717,219 $13,310,580
---------- ---------- ----------- -----------
Cost and Expenses
Cost of Sales 6,698,318 6,295,499 13,585,730 12,696,609
----------- ----------- ----------- -----------
Gross Profit (Loss) (119,145) 414,466 131,489 613,971
Selling, General and
Administrative Expenses 561,511 559,897 1,180,272 1,199,188
Gain on disposal of
property assets -0- 4,023 100,625 4,023
----------- ----------- ----------- ------------
Operating Loss (680,656) (141,408) (948,158) (581,194)
----------- ----------- ------------ ------------
Other Income
Interest Income 1,010 292 3,420 467
Miscellaneous 309 28,662 486 16,161
----------- ----------- ----------- -----------
Total 1,319 28,954 3,906 16,628
----------- ----------- ----------- -----------
Other Expenses
Interest Expense -0- 191 244 743
----------- ----------- ----------- -----------
Loss before Provision for
Income Taxes and Equity in
Net Earnings of Affiliate (679,337) (112,645) (944,496) (565,309)
Provision (Credit) for
Income Taxes -0- (29,000) -0- (318,000)
----------- ----------- ----------- ------------
Loss before Equity in Net
Earnings of Affiliate (679,337) (83,645) (944,496) (247,309)
Equity in Net Income
(Loss) of Affiliate 20,186 -0- (21,314) (298,180)
----------- ----------- ------------ -----------
Net Loss (659,151) (83,645) (965,810) (545,489)
Retained Earnings at
Beginning of Period 4,569,037 6,120,995 4,875,696 6,582,839
----------- ----------- ----------- -----------
Retained Earnings at End
of Period $3,909,886 $6,037,350 $ 3,909,886 $6,037,350
========== ========== =========== ==========
Loss Per Share $ (0.24) $ (0.03) $ (0.35) $ (0.20)
========== =========== ========== ==========
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
----------------------
Restated
July 2 July 3,
2005 2004
---- ----
Cash flows from operating activities:
Net Loss $ (965,810) $ (545,489)
--------- ---------
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation 835,410 914,768
Allowance for doubtful accounts 20,500 -0-
Allowance for mark-down inventory (64,000) 27,000
Deferred income tax -0- (318,000)
Equity in affiliate 21,314 298,180
(Gain) Loss on disposal of
property assets (100,625) (4,023)
Changes in assets and liabilities:
Accounts receivable (463,923) (1,601,200)
Inventories 127,846 (119,649)
Prepaid expenses, taxes and other
current assets (33,205) (69,458)
Other non-current assets -0- -0-
Accounts payable 279,217 1,227,700
Accrued salaries & wages 79,711 110,163
Other liabilities and accrued expenses 58,729 48,491
---------- ----------
Total Adjustments 760,853 513,972
---------- ----------
Net cash used by operating activities (204,957) (31,517)
---------- ----------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (199,837) (33,333)
Proceeds from liquidation of
affiliate 174,985 -0-
Proceeds from sale of equipment 100,625 4,500
---------- ----------
Net cash provided (used) by
investing activities 75,773 (28,833)
---------- ----------
Cash flows from financing activities:
Bank overdraft -0- 54,802
Net payments to revolving credit line -0- (141,514)
---------- ----------
Net cash used by financing activities -0- (86,712)
---------- ----------
Net decrease in cash and cash equivalents (129,184) (147,062)
Cash and cash equivalents at
beginning of year 316,745 147,062
---------- ----------
CASH AND EQUIVALENTS AT END OF
SECOND QUARTER $ 187,561 $ -0-
========== ==========
See notes to condensed financial statements
Page 5
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
As previously reported by the Company on Form 10K dated January 1, 2005, the
Company restated its previously issued financial statement for the quarter and
twenty-six weeks ended July 3, 2004. The changes are set forth below:
Quarter Ended July 3, 2004
----------------------------
(In 000s except per share data)
As
Originally As
Reported Restated
---------- --------
Statement of Operations:
Net loss $ (29) $ (84)
Net loss per share $ (0.01) $ (0.03)
Twenty-Six Weeks Ended July 3, 2004
-----------------------------------
(In 000s except per share data)
As
Originally As
Reported Restated
---------- --------
Statement of Operations:
Net loss $ (691) $ (545)
Net loss per share $ (0.25) $ (0.20)
Balance Sheet:
Deferred income tax asset $ 62 $ -0-
Total assets $13,576 $13,514
Deferred income tax liability $ 1,204 $ 76
Total liabilities $ 3,684 $ 2,556
Total Shareholders' Equity $ 9,892 $10,958
Also see the Company's 10K for year ended January 1, 2005.
NOTE 2 - 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 2, 2005 are not necessarily indicative of the results that may
be expected for the year ended December 31, 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 1, 2005.
NOTE 3 - CASH AND CASH EQUIVALENTS
- ----------------------------------
For the purposes of the statements of cash flows, the Company considers cash on
hand, deposits in banks, interest bearing demand matured funds, 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 2, 2005,
and July 3, 2004 was $200 and $700 respectively. The Company had no cash
payments for income taxes the twenty-six weeks ending July 2, 2005 and July 3,
2004.
Page 6
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - OPERATIONS OF THE COMPANY
- ----------------------------------
The Company is engaged in dyeing, texturing, winding, processing and selling of
filament, novelty, cotton 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. Revenue Recognition. Sales terms are FOB Burke
Mills, Inc. Revenues are recognized at the time of shipment.
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.
NOTE 5 - 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,
provision for bad debts, and the investment value of affiliates.
NOTE 6 - ACCOUNTS RECEIVABLE
- -----------------------------
Accounts receivable are comprised of the following:
July 2 January 1
2005 2005
---- ----
Due from factor on
regular factoring account $ -0- $2,192,000
Non-factored accounts
receivable 3,529,000 872,000
Allowance for doubtful accounts (21,000) -0-
---------- ---------
Total $3,508,000 $3,064,000
========== ==========
During the first quarter of 2005, the Company moved its accounts receivable
in-house, eliminating its factoring arrangement.
NOTE 7 - INVENTORIES
- --------------------
Inventories are summarized as follows:
July 2 January 1
2005 2005
---- ----
Finished & in process $ 819,000 $ 944,000
Raw materials 600,000 553,000
Dyes & chemicals 179,000 195,000
Other 65,000 99,000
Mark-down allowance (86,000) (150,000)
---------- -----------
Total $1,577,000 $1,641,000
Page 7
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 - LINE OF CREDIT
- ------------------------
During the first quarter of 2005, the Company moved its accounts receivable
in-house, eliminating its factoring arrangement.
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.
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 2 Jan. 1
2005 2005
---- --------
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 1,035,000 873,000
Charitable contributions carryover 13,000 12,000
State tax credits 41,000 41,000
Bad debts 8,000 -0-
Inventory 30,000 52,000
---------- ---------
Total gross deferred tax assets $1,476,000 $1,327,000
Valuation Allowance (649,000) (301,000)
---------- ----------
Net deferred tax assets $ 827,000 $1,026,000
---------- ----------
Deferred tax liabilities:
Accelerated depreciation for tax purposes 827,000 1,026,000
---------- ----------
Net deferred tax asset/(liability) $ -0- $ -0-
=========== ===========
Twenty-Six Weeks Ended
----------------------
July 3
July 2 2004
2005 (Restated)
Income tax benefit ---- ----
consists of:
Deferred $ -0- $(318,000)
Federal -0- -0-
State -0- -0-
--------- -------
$ -0- $(318,000)
========= ==========
The net operating loss carryforward from a prior year is $2,197,000 expiring
2022/2023. The tax effect at the maximum tax rate is $747,000. 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.
Page 8
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 2, 2005 and July 3, 2004.
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
accounts receivable.
At the end of the quarter one customer represented approximately 28% of total
accounts receivable. The customer represented approximately 18% at the year
ended January 1, 2005.
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 exceed 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 is no longer used. The contamination was reported to
the North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and
continues to move toward a solution of natural attenuation. The cost of
monitoring is 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 operated on a scaled down basis through mid-August
2004. The company has received approximately $325,000 in cash distribution
through the second quarter of 2005. An additional cash distribution up to
$50,000 could be received depending on how well the remaining assets are
liquidated. Burke Mills does not guarantee any debt for its joint venture.
Financial information for Fytek is as follows:
Page 9
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS (continued)
- ----------------------------------------------------------------
STATEMENT OF INCOME
(In thousands of U.S. dollars)
(Unaudited)
2nd Quarter Six Months
----------- -----------
2005 2004 2005 2004
---- ---- ---- ----
Net Sales $ -0- $ 508 $ 13 $1,068
Gross Profit (93) (91) (165) (173)
Income from continuing operations (184) (65) (282) (170)
Income before taxes (184) (65) (282) (170)
Provision (credit) for
income tax (8) (23) (23) (58)
----- ------ ----- ------
Net Income $(176) $ (42) $(259) $ (112)
====== ====== ======= =======
BALANCE SHEET
(In thousands of U.S. dollars)
June June
2005 2004
(Unaudited) (Unaudited)
------ ------
ASSETS
Current assets $ 315 $1,909
Non-current assets 48 231
----- ------
Total Assets $ 363 $2,140
===== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 147 $ 642
Non-current liabilities -0- -0-
----- ------
Total Liabilities $ 147 $ 642
Shareholders equity 216 1,498
Total Liabilities & Shareholders' Equity $ 363 $2,140
===== ======
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 2004 the Company wrote off equipment with a net book value of $198,000.
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 were no write offs necessary in the
first two quarters of 2005.
Page 10
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 2, 2005, and July 3, 2004.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
- -----------------
The Company's major market is supplying packaged dyed yarn for home, contract,
automotive upholstery, and home furnishings. The Company's production is on a
make-to-order basis.
The Company's customers continue to experience extreme competition from imports
that has caused their requirements for dyed yarns to decline. Expansion into
other fibers has helped gain new customers and offset the decline in demand from
older customers. Fifty-four new customers were added in the two quarters of
2005.
During 2004 there were price increases of approximately 17% on polyester yarns,
and in the first quarter of 2005 another 9% increase. These increases were
passed on in the prices to customers.
As discussed in previous filings, the Company continues to experience increased
costs for employee health cost, fuel oil, and natural gas.
In the second quarter of 2005, the Company received approximately $175,000 as
proceeds for liquidation of its joint venture Fytek.
Results of Operations - 2005 Compared to 2004
- ---------------------------------------------
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:
Thirteen Weeks Twenty-six Weeks
Ended Ended
-------------------- -------------------
Restated Restated
July 2, July 3, July 2, July 3,
2005 2004 2005 2004
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 101.8 93.8 99.0 95.4
----- ----- ----- -----
Gross Profit (Loss) (1.8) 6.2 1.0 4.6
Selling, General, and
Administrative Costs 8.5 8.3 7.9 9.0
----- ----- ----- -----
Operating Loss (10.3) (2.1) (6.9) (4.4)
Interest Expense 0.0 0.0 0.0 0.0
Net Other 0.0 0.4 0.0 0.1
----- ----- ------ -----
Loss before income taxes (10.3) (1.7) (6.9) (4.3)
Equity in Net Income (Loss) of
Affiliate 0.3 0.0 (0.1) (2.2)
Income Taxes (Credit) 0.0 (0.4) 0.0 (2.4)
----- ----- ------ -----
Net Loss (10.0)% (1.3)% (7.0)% (4.1)%
====== ===== ====== =====
Page 11
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
THIRTEEN WEEKS ENDED July 2, 2005
COMPARED TO THIRTEEN WEEKS ENDED July 3, 2004
Net Sales
- ---------
Net sales for the second quarter of 2005 decreased by 2% to $6,579,000 compared
to $6,710,000 for the second quarter of 2004. Pounds shipped decreased by 2%.
There were two factors that had a negative impact on sales, and one factor with
a positive impact on sales. There was a decline in customer demand in the second
quarter and a weak sales mix that contributed to lower sales. Price increases
since the second quarter of 2004 offset the weaker sales mix.
Cost of Goods Sold and Gross Margin
- -----------------------------------
Cost of sales increased in the second quarter of 2005 by $403,000 or 6.4%.
Cost of materials used increased by 6.4% primarily due to the price increases
received on polyester yarn and a weaker sales mix.
Direct labor cost increased by 1.5%, primarily due to the sales mix.
Overhead cost increased by 7.7%, primarily as a result of the following:
o Health claims increased by 92.1% 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.
o Natural gas and fuel oil cost increased by 30% primarily due to
increased price. This cost will fluctuate with the price of oil.
o Repair and maintenance cost of machinery increased by 74.7% due to
some major repairs to dye machinery and age of the machinery.
The above items had an aggregate increase of $232,000 for the quarter.
As a result of a decrease in sales of 2% and an increase in cost of sales of
6.4%, the company's gross margin decreased to a loss of 1.8%, compared to a
margin of 6.2% in 2004.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses remained approximately the same
with only a .3% or $2,000 increase. Although total expenses remained
approximately the same, factor charges were reduced by $30,000 due to moving the
accounts receivable in-house. An increase in health claims was the major item
that offset the savings in factor charges.
Loss Before Provision for Taxes and Equity in Loss of Affiliate
- ---------------------------------------------------------------
For the reasons stated in the foregoing, the company experienced a loss in the
second quarter of 2005 of $679,000 compared to a loss in 2004 of $113,000.
Equity in Net Loss of Affiliate
- -------------------------------
The company's joint venture, Fytek, had a net loss of $176,000 on discontinued
operations for the second quarter. The company's portion of the loss is $88,000.
The company received $175,000 as a distribution of cash from the liquidation.
The joint venture has a few remaining assets, and the company believes it could
receive up to $50,000 additional cash distribution.
Page 12
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
THIRTEEN WEEKS ENDED July 2, 2005
COMPARED TO THIRTEEN WEEKS ENDED July 3, 2004
Provision (Credit) for Income Taxes
- -------------------------------------
There was no provision or credit provided for income taxes in the second quarter
compared to a credit of $29,000 in the second quarter of 2004. See Note 9.
TWENTY-SIX WEEKS ENDED July 2, 2005 COMPARED TO
TWENTY-SIX WEEKS ENDED July 3, 2004
2005 Compared to 2004
Net Sales
- ---------
Net sales for the first six months of 2005 increased by 3.1% to $13,717,000
compared to $13,311,000 for 2004 while pounds shipped increased by 2.2%. The
increase in sales came in the first quarter and was primarily due to new
customers and price increases.
Cost of Goods Sold and Gross Margin
- -----------------------------------
Cost of sales increased for the six months by $889,000 or 7.0%.
Cost of materials increased by 7.9% primarily due to price increases on
polyester yarn and a weak sales mix.
Direct labor increased by 5.7% primarily due to increased volume and sales mix.
Overhead cost increased by 6.4% as a result of the following:
o Health claims increased by 46.7% 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.
o Natural gas and fuel oil cost increased by 22.1% primarily due to
increased prices. This cost will fluctuate with the price of oil.
o Repair and maintenance cost of machinery increased by 38.1% due to
some major repairs to dye machinery and age of the machinery.
The above items had an aggregate increase of $293,000 for the twenty-six weeks.
As a result of an increase in sales of 3.1% and an increase in cost of sales of
7.0%, the company's gross margin decreased to 1.0% compared to 4.6% in 2004.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by 1.6% or $19,000.
Factor's charges were eliminated due to moving the accounts receivable in-house
in the first quarter. Accounting fees connected to the company's joint venture
Fytek were eliminated as a result of its closing. Offsetting the above savings
were an increase in allowance for doubtful accounts and an increase in employee
health claims.
Gain in Disposal of Assets
- --------------------------
The company sold some of its fully depreciated machinery located at its joint
venture in Mexico. The remaining machines will be sold and/or abandoned.
Page 13
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED July 2, 2005 COMPARED TO
TWENTY-SIX WEEKS ENDED July 3, 2004
Loss Before Provision for Income Taxes and Equity in Loss of Affiliate
- ----------------------------------------------------------------------
For the reasons stated in the foregoing, the company experienced a loss for the
six months of 2005 of $945,000 compared to a loss in 2004 of $565,000.
Equity in Net Loss of Affiliate
- -------------------------------
The company's joint venture, Fytek, had a net loss of $259,000 on discontinued
operations for the two quarters. The company's portion of the loss is $129,500.
The company received $175,000 as a distribution of cash from the liquidation.
The joint venture has a few remaining assets, and the company believes it could
receive up to $50,000 additional cash distribution.
Provision (Credit) for Income Taxes
- -------------------------------------
There was no provision or credit provided for income taxes in the two quarters
compared to a credit of $318,000 in 2004. 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 records charges for impairment of its Investment in Affiliate when
necessary. The charges for impairment are based on assumptions made by
management of the net realizable value of the affiliate.
The Company reviews it accounts receivable and when necessary establishes an
allowance for bad debts. The allowance is established based on customer payment
trends, customer financial statements, industry trends, and discussion with the
Company's sales personnel.
Page 14
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The Company financed its operations and capital requirements in 2004 and the two
quarters of 2005 through its funds generated from operations.
The Company's ability to generate cash from operating activity is subject to the
level of net sales. As discussed earlier, the Company has expanded into other
fibers and added customers.
As set forth in the Statement of Cash Flows, funds used by operating activities
were $205,000. The funds used reflect the net loss and the increase in accounts
receivable.
Cash provided by investing activities was $76,000. The Company used $200,000 for
capital expenditures versus $33,000 in the two quarters of 2004. Planned capital
expenditures for the year 2005 are $300,000. The sale of Company owned machinery
located at Fytek provided $100,000 and proceeds from the liquidation of Fytek
provided $175,000.
During the first quarter of 2005, the Company moved its accounts receivable
in-house, eliminating its factoring agreement. 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 with the collections
effort and knows the customers very well. The company will gain a savings of
approximately $109,000 from the elimination of the 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. Although the company is trying to secure a
line of credit, in light of the company's recent performance and the tightening
of lending practices in the textile industry, there is no assurance that it will
be able to secure a line of credit with a lender or that it would be able to
secure a line of credit with reasonable terms.
The Company's working capital at July 2, 2005, aggregated $3,325,000
representing a working capital ratio of 2.6 to 1 compared to a working capital
at January 1, 2005 of $3,459,000 and representing a ratio of 3.1 to 1.
As a measure of current liquidity, the Company's quick position (cash, cash
equivalents and receivables over current liabilities) disclosed the following at
July 2, 2005:
Cash, cash equivalents and receivables........... $3,695,000
Current liabilities.............................. 2,093,000
---------
Excess of quick assets over current liabilities.. $1,602,000
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
Page 15
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements (continued)
- --------------------------
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 procedures as defined in SEC Rule 13a-15(e).
Based upon that evaluation, the Company's chief executive officer and chief
financial officer concluded that the Company's disclosure controls and
procedures are effective. During the fiscal quarter covered by this report,
there has been no significant change in the Company's internal controls or in
other factors that could significantly affect such internal controls.
Page 16
BURKE MILLS, INC. PART II - OTHER INFORMATION
Item 1 - Legal Proceedings. No report required.
Item 2 - Unregistered Sales of Equity 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. Matters were
submitted to a vote of security holders of the Company at the Company's annual
meeting of shareholders held May 17, 2005. 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 2,519,538 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 2,506,063 13,475
Thomas I. Nail 2,501,663 17,875
Robert P. Huntley 2,507,463 12,075
William T. Dunn 2,509,063 10,475
Robert T. King 2,501,663 10,475
Richard F. Byers 2,509,063 17,875
Aehsun Shaikh 2,501,663 17,875
Item 5 - Other Information. No report required.
Item 6 - Exhibits.
(a) The exhibits required by Item 601 of Regulation SK are specified on
the Exhibit Index and are attached to this report or incorporated by reference
from prior filings.
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 16, 2005 BURKE MILLS, INC.
By: /s/Humayun N. Shaikh
------------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive Officer)
Date: August 16, 2005 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) 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
(c) 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 16, 2005 ---------------------------
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) 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
(c) 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 16, 2005 ---------------------------
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 16, 2005 ---------------------------
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 16, 2005 ---------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 21