FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION FROM TO
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__
Indicate by check mark whether the registrant is a small company (as defined in
Rule 12-b-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 November 3, 2005, there
were outstanding 2,741,168 shares of the issuer's only class of common stock.
Page 1
PART I - FINANCIAL INFORMATION Page Number
-----------
Item 1 - Financial Statements
-------
Condensed Balance Sheets 3
October 1, 2005 (Unaudited) and
January 1, 2005
Condensed Statements of Operations and
Retained Earnings 4
Thirteen Weeks Ended October 1, 2005,
(Unaudited) and October 2, 2004
Thirty-Nine Weeks Ended October 1,
2005 (Unaudited) and October 2, 2004
Statements of Cash Flows 5
Thirty-Nine Weeks Ended October 1,
2005 (Unaudited) and October 2, 2004
Notes to Condensed Financial Statements 6
- ---------------------------------------------------------
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
- ------------------------------------------------------------
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 - Unregistered Sales of Equity Securities and
Use of Proceeds 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 17
- ---------------------------------------------------------
SIGNATURES 17
EXHIBIT INDEX 18
EXHIBITS/CERTIFICATIONS 19-21
Page 2
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
October 1 January 1
(Unaudited) 2005
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 297,284 $ 316,745
Accounts receivable 3,225,598 3,064,365
Inventories 1,785,388 1,640,983
Prepaid expenses and other current assets 103,490 112,580
------------ -----------
Total Current Assets 5,411,760 5,134,673
------------ -----------
Equity Investment in Affiliate -0- 196,300
------------ -----------
Property, plant & equipment - at cost 29,778,232 29,848,475
Less: accumulated depreciation 24,598,213 23,724,193
------------ -----------
Property, Plant and Equipment- Net 5,180,019 6,124,282
------------ -----------
Other Assets 16,575 16,575
------------ -----------
Total Assets $10,608,354 $11,471,830
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,051,650 1,465,630
Accrued salaries and wages 172,370 89,847
Other liabilities and accrued expenses 154,967 120,137
---------- -----------
Total Current Liabilities 2,378,987 1,675,614
----------- -----------
Total Liabilities $ 2,378,987 $ 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 3,308,847 4,875,696
----------- -----------
Total Shareholders' Equity 8,229,367 9,796,216
----------- -----------
$10,608,354 $11,471,830
Total Liabilities and Shareholders' Equity =========== ===========
See notes to condensed financial statements.
Page 3
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------- -----------------------
Restated Restated
Oct. 1 Oct. 2 Oct. 1 Oct. 2
2005 2004 2005 2004
-------- -------- -------- ----------
Net Sales $5,769,161 $6,162,105 $19,486,380 $19,472,684
Costs and Expenses
Cost of Sales 5,810,051 6,118,987 19,397,540 18,815,596
----------- ----------- ------------ -----------
Gross Profit (Loss) $ (40,890) 43,118 88,840 657,088
Selling, General and
Administrative Expenses 565,039 532,202 1,743,551 1,731,390
Gain on disposal
of property 3,124 -0- 103,748 4,023
----------- ----------- ------------ ----------
Operating Loss (602,805) (489,084) (1,550,963) (1,070,279)
----------- ----------- ------------ -----------
Other Income
Interest Income 1,461 339 4,881 806
Other, net 305 30 791 28,772
----------- ----------- ------------ -----------
Total Other Income 1,766 369 5,672 29,578
----------- ----------- ------------ -----------
Other Expenses
Interest Expense -0- 303 244 1,046
Other Net -0- -0- -0- 12,580
----------- ----------- ------------ ----------
Total Other Expenses -0- 303 244 13,626
Loss before Benefit of Income
Taxes & Equity in Net
Loss of Affiliate (601,039) (489,018) (1,545,535) (1,054,327)
Income Tax Benefit -0- (76,000) -0- (394,000)
----------- ----------- ------------ -----------
Loss before Equity in Net
Loss of Affiliate (601,039) (413,018) (1,545,535) (660,327)
Equity in Net Earnings/
(Loss) of Affiliate -0- 91,288 (21,314) (206,892)
----------- ----------- ------------ -----------
Net Loss (601,039) (321,730) (1,566,849) (867,219)
Retained Earnings at Beginning
of Period 3,909,886 6,037,350 4,875,696 6,582,839
----------- ----------- ------------ -----------
Retained Earnings at End
of Period $3,308,847 $5,715,620 $ 3,308,847 $5,715,620
========== ========== =========== ==========
Basic and Diluted
Loss Per Share $ (0.22) $ (0.12) $ (0.57) $ (0.32)
========== ========== =========== ==========
Dividends Per Share of
Common Stock None None None None
========== ========== ========== ==========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168 2,741,168 2,741,168
========== ========== ========== ==========
See notes to condensed financial statements.
Page 4
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-Nine Weeks Ended
--------------------------
Restated
Oct. 1 Oct. 2
2005 2004
---- ----
Cash flows from operating activities:
Net Loss $(1,566,849) $ (867,219)
------------ -----------
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 1,237,123 1,357,112
Allowance for doubtful accounts 21,000 -0-
Allowance for mark-down inventory 50,585 49,000
Deferred income taxes -0- (394,000)
Equity in affiliate 21,314 356,880
Gain on disposal of property assets (103,748) (4,023)
Changes in assets and liabilities:
Accounts receivable (182,233) (1,451,299)
Inventories (194,990) (117,926)
Prepaid expenses and other
current assets 9,090 (57,139)
Accounts payable 586,020 1,098,853
Accrued salaries and wages 82,523 124,804
Other liabilities and accrued expenses 34,830 42,727
------------ ------------
Total Adjustments 1,561,514 1,004,989
------------ ------------
Net cash provided (used) by operating
activities (5,335) 137,770
------------ ------------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (293,454) (57,177)
Proceeds from liquidation of affiliate 174,985 -0-
Proceeds from sale of equipment 104,343 4,500
------------ ------------
Net cash (used) by investing activities (14,126) (52,677)
------------ ------------
Cash flows from financing activities:
Bank overdraft -0- -0-
Net payments to revolving credit line -0- (141,514)
------------ ------------
Net cash (used) by financing activities -0- (141,514)
------------ ------------
Net decrease in cash and cash equivalents $ (19,461) $ (56,421)
Cash and cash equivalents at
beginning of year 316,745 147,062
CASH AND CASH EQUIVALENTS AT END OF
THIRD QUARTER $ 297,284 $ 90,641
=========== ===========
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
thirty-nine weeks ended October 2, 2004. The changes are set forth below:
Quarter Ended October 2, 2004
-----------------------------
(In 000s except per share data)
As
Originally As
Reported Restated
---------- --------
Statement of Operations:
Net loss $ (299) $ (322)
Net loss per share $ (0.11) $ (0.12)
Thirty-Nine Weeks Ended October 2, 4004
---------------------------------------
(In 000s except per share data)
As
Originally As
Reported Restated
---------- --------
Statement of Operations:
Net loss $ (990) $ (867)
Net loss per share $ (0.36) $ (0.32)
Balance Sheet:
Deferred income tax asset $ 72 $ -0-
Total assets $13,014 $12,942
Deferred income tax liability $ 1,115 $ -0-
Total liabilities $ 3,421 $ 2,306
Total Shareholders' Equity $ 9,593 $10,636
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 thirty-nine week
period ended October 1, 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
thirty-nine weeks ended October 1, 2005, and October 2, 2004 was $200 and $1,000
respectively. The Company had no cash payments for income taxes the thirty-nine
weeks ending October 1, 2005 and October 2, 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
polyester, novelty, cotton, nylon 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:
October 1 January 1
2005 2005
---- ----
Due from factor on
regular factoring account $ -0- $2,192,000
Non-factored accounts
receivable 3,247,000 872,000
Allowance for doubtful accounts (21,000) -0-
---------- ---------
Total $3,226,000 $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:
October 1 January 1
2005 2005
---- ----
Finished & in process $ 910,000 $ 944,000
Raw materials 685,000 553,000
Dyes & chemicals 174,000 195,000
Other 115,000 99,000
Mark-down allowance (99,000) (150,000)
---------- ----------
Total $1,785,000 $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:
Oct. 1 Jan. 1
2005 2005
------ ------
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 1,183,000 873,000
Charitable contributions carryover 14,000 12,000
State tax credits 41,000 41,000
Bad debts 8,000 -0-
Inventory 37,000 52,000
---------- ---------
Total gross deferred tax assets $1,632,000 $1,327,000
Valuation Allowance (883,000) (301,000)
----------- ----------
Net deferred tax assets $ 749,000 $1,026,000
----------- ----------
Deferred tax liabilities:
Accelerated depreciation for tax purposes 749,000 1,026,000
----------- ----------
Net deferred tax asset/(liability) $ -0- $ -0-
=========== ===========
Thirty-Nine Weeks Ended
-----------------------
Restated
Oct. 1 Oct. 2
Income tax benefit 2005 2004
---- ------
consists of:
Deferred $ -0- $(271,000)
Federal -0- -0-
State -0- -0-
--------- ----------
$ -0- $(271,000)
========= ==========
The net operating loss carryforward from a prior year is $2,032,000 expiring
2020/2024. 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 October 1, 2005 and October 2, 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 two customers represented approximately 31% of total
accounts receivable. The customers represented approximately 32% 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 operations 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 distributions
through the third quarter of 2005. 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)
3rd Quarter Nine Months
----------- -----------
2005 2004 2005 2004
---- ---- ---- ----
Net Sales $ $ 361 $1,430
Gross Profit (Loss) (112) (285)
Loss from continuing operations (276) (446)
Loss from discontinued operations (85) -0- (367) -0-
Loss before taxes (276) (446)
Provision (credit) for income tax 21 (87) (2) (145)
------ ------ ------- -------
Net Loss $(106) $(189) $(365) $ (301)
====== ====== ======= =======
BALANCE SHEET
(In thousands of U.S. dollars)
(Unaudited)
September September
2005 2004
-------- --------
ASSETS
Current assets $246 $ 788
Non-current assets 48 468
------ ------
Total Assets $294 $1,256
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $181 $ 226
Non-current liabilities -0- -0-
------ ------
Total Liabilities $181 $ 226
Shareholders equity 113 1,030
------ ------
Total Liabilities &
Shareholders' Equity $294 $1,256
====== ======
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 three quarters of 2005.
NOTE 15 - EARNINGS PER SHARE
- ----------------------------
Earnings per share are based on the net income divided by the weighted average
number of common shares outstanding during the thirty-nine week periods ended
October 1, 2005, and October 2, 2004.
Page 10
BURKE MILLS, INC.
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.
Five of the Company's customers represent an aggregate of $2.9 million in
decreased sales compared to the three quarters of 2004. Two of the customers are
bankrupt, one has credit problems, and the other two have sales declines.
Although the Company has lost $2.9 million in sales from the above, sales for
the three quarters of 2005 are approximately the same as 2004. The Company
continues to diversify into other fibers and has added new customers.
In the first part of September the polyester yarn suppliers placed a surcharge
of approximately 12% on all polyester yarns. The surcharge was caused by
Hurricane Katrina's disruption of the oil refineries in the Gulf Coast area.
Chemicals used to produce the polymers are in short supply. It is not known when
the surcharge will be removed, or if all of the surcharge will be removed. The
Company has increased its price to its customers to offset the cost.
Fuel oil, natural gas, transportation, and any materials that are related to
petroleum have increased in price. The Company has also increased its prices to
the customer for these items. These price increases to the customers will place
them at a further disadvantage to imports.
During the third quarter the Company reduced personnel and other cost by
approximately $500,000 annually. These cost reductions will begin to show in the
fourth quarter.
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 Thirty-Nine Weeks
Ended Ended
-------------------- -------------------
Restated Restated
Oct. 1 Oct. 2 Oct. 1 Oct. 2
2005 2004 2005 2004
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 100.7 99.3 99.5 96.6
------ ------ ------ ------
Gross Profit (0.7) 0.7 0.5 3.4
Selling, General, Administrative
Expenses 9.7 8.6 8.4 8.9
------ ------ ------ ------
Operating Loss (10.4) (7.9) (7.9) (5.5)
Interest Expense 0.0 0.0 0.0 0.0
Other (Income) - net 0.0 0.0 0.0 0.1
------ ------ ------ ------
Loss before Income Taxes (10.4) (7.9) (7.9) (5.4)
Equity in Net Earnings (Loss)
of Affiliate 0.0 1.5 (0.1) (1.1)
Income Taxes (Credit) 0.0 (1.2) 0.0 (2.0)
------ ------ ------ ------
Net Loss (10.4)% (5.2)% (8.0)% (4.5)%
======= ======= ======= =======
Page 11
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED October 1, 2005
COMPARED TO THIRTEEN WEEKS ENDED October 2, 2004
Net Sales
- ---------
Net sales for the third quarter decreased by 6.4% to $5,769,000 compared to
$6,162,000 for the third quarter of 2004. Pounds shipped decreased by 12.8%.
Although pounds shipped declined by 12.8%, sales dollars were supported by price
increases and a decline in commission sales (the dyeing of yarn owned by the
customer).
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold decreased by $309,000 or 5.1%
Cost of materials used decreased by $112,000 or 3.1% primarily due to lower
sales volume. A change in sales mix and raw material price increases kept the
cost of material from dropping further.
Direct labor cost decreased by 12.2% primarily due to the 12.8% decrease in
volume shipped.
Overhead cost decreased by 6.7% primarily as a result of the following:
a. Production wages (non-direct) decreased by 14.9% as a result of
lower volume and a reduction in headcount.
b. Health claims decreased for the quarter by 36.2%. Although health
claims decreased for the quarter, for the nine months health
claims increased by 11.9%. It is impossible to predict the
frequency or severity of the employees' medical needs.
c. Depreciation decreased by 9.4% and should continue to be lower
unless the Company has large capital expenditures.
d. The above decreases in cost were somewhat offset by a 29.3%
increase in natural gas and fuel oil costs.
As a result of a decrease in sales of 6.4% and a decrease in cost of sales of
only 5.1%, the Company incurred a gross loss of .7% compared to a gross profit
of .7% in 2004.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general, and administrative expenses increased by $33,000 or 6.2%.
Although various expensed items increased or decreased, the major contributors
to the increase in costs were:
a. A payment of $20,000 to a lender to start their due diligence for
a credit line for the Company.
b. Accrued $40,000 for severance due to staff reductions.
c. Increase in travel of $20,000 which included trip to India to
source yarns.
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
third quarter of 2005 of $601,000 compared to a loss in 2004 of $489,000.
Page 12
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED October 1, 2005
COMPARED TO THIRTEEN WEEKS ENDED October 2, 2004
Equity in Net Loss of Affiliate
- -------------------------------
The Company's joint venture, Fytek, had a net loss of $106,000 on discontinued
operations. The Company's portion of the loss is $53,000, but was not recorded
as the investment in affiliate has a zero balance. The Company has received
$175,000 in the second quarter as a distribution of cash from the liquidation.
The joint venture has few remaining net assets and believes the final
liquidation will take place by year end. See note 13.
Provision (Credit) for Income Taxes
- ------------------------------------
There was no provision or credit provided for income taxes in the third quarter
compared to a credit of $76,000 in the third quarter of 2004. See Note 9.
THIRTY-NINE WEEKS ENDED OCTOBER 1, 5
COMPARED TO THIRTY-NINE WEEKS ENDED October 2, 2004
2005 Compared to 2004
Net Sales
- --------
Net sales for the nine months were basically equal. Pounds shipped decreased by
2.6%. Although sales were about equal for the nine months, only the first
quarter was a strong sales quarter. The second and third quarter sales were less
than 2004. The Company's customers continue to experience strong competition in
upholstery from imports.
Cost of Sales and Gross Margin
- ------------------------------
Cost of sales for the nine months increased by $582,000 or 3.1%.
Cost of materials used increased by 4.4% primarily as a result of price
increases on polyester yarns and sales mix.
Direct labor decreased by .4% primarily as a result of lower volume of pounds
shipped.
Overhead cost increased by 1.9% primarily due to the following:
a. Natural gas and fuel oil cost increased by 24.3%
b. Health claims increased by 11.9% primarily as a result of higher
claims in the first and second quarters of 2005. It is impossible
to predict the frequency or severity of the employees' medical
needs.
c. Repair and maintenance costs of machinery increased by 29.8% due
to some major repairs of dye machinery and the age of the
machinery.
The above items aggregated an increase of $287,000.
As a result of an increase of 3.1% in cost of sales, with sales remaining about
the same, the Company's gross margin decreased to .5% compared to 3.4% in 2004.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general, and administrative expenses increased by $12,000 or 0.7%. The
Company increased its allowance for doubtful accounts by $21,000.
Page 13
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTY-NINE WEEKS ENDED OCTOBER 1, 2005
COMPARED TO THIRTY-NINE WEEKS ENDED October 2, 2004
Selling, General and Administrative Expenses (continued)
- --------------------------------------------
In the fourth quarter the Company paid $20,000 to a potential lender to begin
its due diligence for a credit line for the Company. Also in the fourth quarter
an accrual was made for $40,000 for severance, as the Company reduced personnel.
Gain on 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.
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
nine months of 2005 of $1,545,000 compared to a loss in 2004 of $1,054,000.
Equity in Net Loss of Affiliate
- -------------------------------
The Company's joint venture, Fytek, had a net loss of $365,000 on discontinued
operations for the three quarters. The Company's portion is $182,500, but only
$21,000 was recorded as the investment in affiliate was reduced to zero. The
Company received $175,000 in the second quarter as a distribution of cash from
the liquidation. The joint venture has few remaining net assets and should be
liquidated by year end. See Note 13.
Provision (Credit) for Income Taxes
- ------------------------------------
There was no provision or credit provided for income taxes in the three quarters
of 2005 compared to a credit of $394,000 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.
Page 14
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates (continued)
- ------------------------------------------
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.
Liquidity and Capital Resources
- -------------------------------
The Company financed its operations and capital requirements in 2004 and the
three 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 $5,000. The funds used reflect the net loss and the increase in accounts
receivable and inventory.
Cash used by investing activities was $14,000. The Company used $293,000 for
capital expenditures versus $57,000 in the three 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 October 1, 2005, aggregated $3,033,000
representing a working capital ratio of 2.3 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
October 1, 2005:
Cash, cash equivalents and receivables........... $3,523,000
Current liabilities.............................. 2,379,000
---------
Excess of quick assets over current liabilities.. $1,144,000
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
Page 15
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements (continued)
- --------------------------
"expects", anticipates", "believes", "estimates", variations of such words and
other similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in, or implied by, such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's 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, of which the Company has none)
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 - 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.
No matter has been submitted to a vote of security holders during
the period covered by this report.
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: November 14, 2005 BURKE MILLS, INC.
By:/s/Humayun N. Shaikh
------------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive Officer)
Date: November 14, 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: November 14, 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: November 14, 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: November 14, 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: November 14, 2005 ---------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 21