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 JULY 1, 2006
[ ] 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check
one):
Large accelerated filer Accelerated filer Non-accelerated filer X
------ ------ ------
Indicate by check mark whether the registrant is a shell 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 August 3, 2006 there were
2,741,168 outstanding shares of the issuer's only class of common stock.
Page 1
TABLE OF CONTENTS
Page Number
-----------
PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets 3
July 1, 2006 (Unaudited) and
December 31, 2005
Condensed Statements of Operations and
Retained Earnings 4
Thirteen Weeks and Twenty-Six Weeks
Ended July 1, 2006 (Unaudited)
and July 2, 2005
Statements of Cash Flows 5
Twenty-Six Weeks Ended July 1, 2006
(Unaudited) and July 2, 2005
Notes to Condensed Financial Statements 6
- ---------------------------------------------------------
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
- ---------------------------------------------------------
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 1A - Risk Factors 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
(Unaudited)
July 1, December 31,
2006 2005
----------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 238,397 $ 425,812
Accounts receivable 3,239,282 2,568,838
Inventories 2,168,811 1,684,132
Prepaid expenses and other current assets 101,140 49,413
----------- -----------
Total Current Assets 5,747,630 4,728,195
----------- -----------
Property, plant & equipment - at cost 28,134,493 28,085,778
Less: accumulated depreciation 24,128,335 23,326,789
----------- -----------
Property, plant and equipment- net 4,006,158 4,758,989
----------- -----------
Other Assets 16,575 16,575
----------- -----------
Total Assets $ 9,770,363 $ 9,503,759
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,112,068 $ 1,434,169
Short-term debt 290,048 -0-
Accrued salaries and wages 154,093 69,272
Other liabilities and accrued expenses 202,102 126,303
----------- -----------
Total Liabilities $ 2,758,311 $ 1,629,744
----------- -----------
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 2,091,532 2,953,495
----------- -----------
Total Shareholders' Equity 7,012,052 7,874,015
----------- -----------
Total Liabilities & Shareholders' Equity $ 9,770,363 $ 9,503,759
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
Page 3
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------- -----------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
----------- ----------- ------------ ------------
Net Sales $ 6,186,983 $ 6,579,173 $ 12,555,729 $ 13,717,219
----------- ----------- ------------ ------------
Cost and Expenses
Cost of Sales 6,040,724 6,698,318 12,361,262 13,585,730
----------- ----------- ------------ ------------
Gross Profit (Loss) 146,259 (119,145) 194,467 131,489
Selling, General and
Administrative Expenses 532,509 561,511 1,050,692 1,180,272
Gain/(loss) on disposal
of property assets -0- -0- (5,868) 100,625
----------- ----------- ------------ ------------
Operating Loss (386,250) (680,656) 862,093) (948,158)
----------- ----------- ------------ ------------
Other Income
Interest Income 1,632 1,010 3,224 3,420
Miscellaneous 57 309 602 486
----------- ----------- ------------ ------------
Total 1,689 1,319 3,826 3,906
----------- ----------- ------------ ------------
Other Expenses
Interest Expense 2,554 -0- 3,696 244
----------- ----------- ------------ ------------
Loss before Provision for
Income Taxes and Equity in
Net Earnings of Affiliate (387,115) (679,337) (861,963) (944,496)
----------- ----------- ------------ ------------
Loss before Equity in Net
Earnings of Affiliate (387,115) (679,337) (861,963) (944,496)
Equity in Net Income
(Loss) of Affiliate -0- 20,186 -0- (21,314)
----------- ----------- ------------ ------------
Net Loss (387,115) (659,151) (861,963) (965,810)
Retained Earnings at
Beginning of Period $ 2,478,647 $ 4,569,037 $ 2,953,495 $ 4,875,696
----------- ----------- ------------ ------------
Retained Earnings at End
of Period $ 2,091,532 $ 3,909,886 $ 2,091,532 $ 3,909,886
=========== =========== ============ ============
Loss Per Share $ (0.14) $ (0.24) $ (0.31) $ (0.35)
=========== =========== ============ ============
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
=========== =========== ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
Page 4
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six Weeks Ended
----------------------
July 1, July 2,
2006 2005
--------- ---------
Cash flows from operating activities:
Net loss $(861,963) $(965,810)
--------- ---------
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation 807,271 835,410
Allowance for bad debts 6,747 20,500
Allowance for mark-down inventory (5,669) (64,000)
Equity in affiliate -0- 21,314
Loss/(gain) Loss on disposal of
property assets 5,868 (100,625)
Changes in assets and liabilities:
Accounts receivable (677,191) (463,923)
Inventories (479,010) 127,725
Prepaid expenses, taxes and other
current assets (51,727) (33,205)
Accounts payable 677,899 279,217
Accrued salaries & wages 84,821 79,711
Other liabilities and accrued expenses 75,799 58,729
--------- ---------
Total Adjustments 444,808 760,853
--------- ---------
Net cash used by operating activities (417,155) (204,957)
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (60,308) (199,837)
Proceeds from liquidation of
affiliate -0- 174,985
Proceeds from sale of equipment -0- 100,625
--------- ---------
Net cash provided (used) by
investing activities (60,308) 75,773
--------- ---------
Cash flows from financing activities:
Net payments to revolving credit line 290,048 -0-
--------- ---------
Net cash provided by financing activities 290,048 -0-
--------- ---------
Net decrease in cash and cash equivalents (187,415) (129,184)
Cash and cash equivalents at
beginning of year 425,812 316,745
--------- ---------
CASH AND EQUIVALENTS AT END OF
SECOND QUARTER $ 238,397 $ 187,561
========= =========
The accompanying notes are an integral part of these condensed financial
statements.
Page 5
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIALSTATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all necessary adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the twenty-six week period ended July 1, 2006 are not
necessarily indicative of the results that may be expected for the year ending
December 30, 2006. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2005.
NOTE 2 - 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 1, 2006
and July 2, 2005 was approximately $3,700 and $200 respectively. The Company had
no cash payments for income taxes during the twenty-six weeks ended July 1, 2006
and July 2, 2005.
NOTE 3 - OPERATIONS OF THE COMPANY
- ----------------------------------
The Company is engaged in dyeing, texturing, winding, processing and selling of
polyester, novelty, cotton, nylon, rayon 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 4 - USE OF ESTIMATES
- -------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. Significant
estimates are the liability for self-funded health claims, inventory markdowns,
and the provision for bad debts.
Page 6
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable are comprised of the following:
July 1, December 31,
2006 2005
(Unaudited)
----------- -----------
Accounts receivable $3,249,000 $2,572,000
Allowance for doubtful accounts (10,000) (3,000)
----------- -----------
Total
$3,239,000 $2,569,000
=========== ===========
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows:
July 1, December 31,
2006 2005
(Unaudited)
----------- -----------
Finished & in process $1,029,000 $ 853,000
Raw materials 880,000 614,000
Dyes & chemicals 204,000 165,000
Other 74,000 76,000
Mark-down allowance (18,000) (24,000)
----------- -----------
Total $2,169,000 $1,684,000
=========== ===========
NOTE 7 - LINE OF CREDIT
- -----------------------
The Company has entered into an Accounts Receivable Inventory Financing
Agreement (the "Financing Agreement") with The CIT Group/ Commercial Services,
Inc. ("CIT"). In addition, the Company signed a Letter of Credit Agreement (the
"LOC Agreement") with CIT. Under the terms of the Financing Agreement, CIT may,
at its sole discretion, advance up to $5,000,000 to the Company as follows: (a)
revolving credit advances in amounts up to 85 percent of the net amount of
eligible accounts receivable; (b) revolving credit advances in amounts up to 60
percent of the value of eligible inventory. Advances against eligible inventory
will not exceed the lesser of $2,000,000 or the advances made by CIT against
accounts receivable.
With regard to the LOC Agreement, the Financing Agreement provides that CIT will
assist the Company in opening letters of credit or guarantee the payment and
performance of such letters of credit up to an aggregate face amount not
exceeding $500,000 at any one time outstanding.
The Company has granted to CIT a security interest in its accounts receivable;
monies, securities and other property held in transit to CIT; present and future
deposits held by CIT; all rights of the Company in future accounts receivable;
the Company's inventory; the Company's equipment (defined to be all machinery,
equipment, rolling stock, furnishings and fixtures and all additions,
substitutions or employments thereof); all proceeds and products of any defined
collateral; and other customary definitions of collateral related to accounts
receivable, inventory and equipment.
The Company is obligated to pay interest to CIT on the average of net balances
owed monthly at one percent above the prime rate announced by JP Morgan Chase
Bank in New York, NY. Interest is calculated on a 360 day year. In addition, the
Company paid CIT an initial facility fee of $25,000 and will pay CIT $1,000 per
month as a "collateral management fee."
Page 7
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - LINE OF CREDIT (continued)
- -----------------------------------
The Company had debt of $290,000 under its line of credit at July 1, 2006, and
the unused line of credit was approximately $3,800,000.
NOTE 8 - 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 1, December 31,
2006 2005
(Unaudited)
----------- ------------
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 1,074,000 1,284,000
Charitable contributions carryover 13,000 13,000
State tax credits 41,000 41,000
Bad debts 4,000 1,000
Inventory 10,000 14,000
---------- ----------
Total gross deferred tax assets 1,491,000 1,702,000
Valuation Allowance (980,000) (1,020,000)
---------- ----------
Net deferred tax assets $ 511,000 $ 682,000
---------- ----------
Deferred tax liabilities:
Accelerated depreciation for tax purposes 511,000 682,000
---------- ----------
Net deferred tax liability $ -0- $ -0-
========== ==========
The net operating loss carryforward from the prior year is approximately
$3,186,000 which expires in various amounts starting 2020/2024.
NOTE 9 - 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 1, 2006 and July 2, 2005.
NOTE 10 - 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 new customer represented approximately 10% of
total accounts receivable. All other customers were below 9%.
Page 8
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 - 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 $11,000 per year.
c) The Company has contracted with Hess Corporation to purchase natural gas
and provide uninterrupted gas service. Through Hess the Company has committed to
purchase $691,000 of natural gas over a nine-month period beginning July 2006.
This commitment for gas will provide most of the Company's gas needs for the
nine month period. The Company will continue to purchase natural gas for future
months as the gas prices reach certain target prices.
NOTE 12 - 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. The Company believes Fytek will be completely
liquidated in the third quarter of 2006. Burke Mills does not guarantee any debt
for its joint venture. Financial information for Fytek is as follows:
STATEMENT OF INCOME
(In thousands of U.S. dollars)
(Unaudited)
2nd Quarter Six Months
--------------- -------------
2006 2005 2006 2005
---- ----- ---- -----
Income/(loss) from discontinued
operations $146 $(184) $72 $(282)
Income/(loss) before taxes 146 (184) 72 (282)
Provision (credit) for
income tax 52 (8) 31 (23)
---- ----- --- -----
Net income/(loss) $ 94 $(176) $41 $(259)
==== ===== === =====
Page 9
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS (continued)
- ----------------------------------------------------------------------------
BALANCE SHEET
(In thousands of U.S. dollars)
June June
2006 2005
(Unaudited) (Unaudited)
--------- ---------
ASSETS
Current assets $ 70 $ 315
Non-current assets -0- 48
--- ----
Total Assets $ 70 $ 363
=== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 11 $ 147
Non-current liabilities -0- -0-
--- ----
Total Liabilities $ 11 $ 147
Shareholders equity 59 216
--- ----
Total Liabilities & Shareholders' Equity $ 70 $ 363
=== ====
NOTE 13 - 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.
NOTE 14 - 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 1, 2006, and July 2, 2005.
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 to knitters and
weavers for apparel, home furnishings, home upholstery, automotive upholstery,
contract upholstery and some specialty products.
The Company continues to add customers, and older customer's sales continue to
decline. During the second quarter the Company added commission (the dyeing and
processing of customer owned yarns) customers and changed the sales mix
significantly. Commission sales represented approximately 25% of pounds shipped
versus approximately 5% for the second quarter and all of 2005. The average
sales price for commission sales will be lower as there is no yarn cost in the
price. An advantage of processing on a commission basis is that the Company does
not tie up cash in raw yarn inventory.
Page 10
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY (continued)
- -----------------------------
Going into the third quarter, polyester yarn prices will increase in July and
August. Although the percent of increase will be different depending on the yarn
count, both increases will be approximately three percent. These increases will
be passed to the Company's customers further weakening their ability to compete
with imports.
As discussed in previous filings, the Company continues to experience increased
cost for energy. The Company has contracted with Hess Corporation to assist with
energy purchases. The Company believes that Hess will help by purchasing more
effectively and having better predictability of prices.
The City of Valdese has announced a water rate increase of 5%, which was
effective July 1, 2006.
Results of Operations - 2006 Compared to 2005
- ---------------------------------------------
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
------------------ ------------------
July 1, July 2, July 1, July 2,
2006 2005 2006 2005
------ ------ ------ ------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 97.6 101.8 98.5 99.0
------ ------ ------ ------
Gross Profit (Loss) 2.4 (1.8) 1.5 1.0
Selling, General, and
Administrative Costs 8.6 8.5 8.4 8.6
Gain (loss) on disposal of
property assets 0.0 0.0 0.0 0.7
------ ------ ------ ------
Operating Loss (6.2) (10.3) (6.9) (6.9)
Interest Expense 0.1 0.0 0.0 0.0
------ ------ ------ ------
Loss before income taxes (6.3) (10.3) (6.9) (6.9)
Equity in Net Income (Loss) of
Affiliate 0.0 0.3 0.0 (0.1)
------ ------ ------ ------
Net Loss (6.3)% (10.0)% (6.9)% (7.0)%
====== ====== ====== ======
THIRTEEN WEEKS ENDED July 1, 2006
COMPARED TO THIRTEEN WEEKS ENDED July 2, 2005
Net Sales
- ---------
Net sales for the second quarter of 2006 decreased by 6.0% to $6,187,000
compared to $6,579,000 for the second quarter of 2005. Pounds shipped decreased
by 5.6%. The Company's sales mix changed significantly in the second quarter.
Commission sales (the dyeing and processing of customer owned yarn) was
approximately 25% of pounds shipped compared to only 5% in the second quarter of
2005. Commission sales have a lower average sales price, as there is no yarn
cost in the price. Sales prices of regular yarn sales were somewhat supported by
price increases in the first quarter of 2006 and the fourth quarter of 2005.
Page 11
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED July 1, 2006
COMPARED TO THIRTEEN WEEKS ENDED July 2, 2005
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold decreased by $658,000 or 9.8%.
Cost of materials decreased by $593,000 or 14.4% primarily due to a decrease in
net sales of 5.6% and a change in sales mix to a greater portion of commission
sales.
Direct labor cost increased by $25,000 as a result of the sales mix and an
increase in finished inventory.
Overhead cost increased by $88,000 or 3.9% primarily as a result of the
following:
a. Fuel oil and natural gas cost increased by $67,000 or 26.6%. The Company
can use either natural gas or fuel oil, and will use the lower cost fuel.
These costs are predicted to increase because of the problems in the oil
producing countries and a forecasted bad hurricane season.
b. Electricity increased by $58,000 or 27.1% primarily due to a change in
product mix that requires longer drying cycles.
c. Repair and maintenance cost increased by $32,000 or 22.1%. This cost has
increased as the Company's machinery has gotten older.
The above cost increases were somewhat offset by a $96,000 or 27.0% decrease in
employee health claims.
As a result of a decrease in sales of 5.6% and a decrease in cost of sales of
9.8%, the Company's gross margin increased to 2.4% income compared to a 1.8%
loss in 2005.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $29,000 or 5.2%
primarily due to the results of cost cutting measures put in place in the fourth
quarter of 2005.
Equity in Net Gain of Affiliate
- -------------------------------
In the second quarter of 2006 the Company did not record a gain or loss for its
joint venture Fytek as the investment in affiliate had been reduced to a zero
balance in 2005. In the second quarter of 2005, the Company recorded a gain of
$20,000.
Provision (Credit) for Income Taxes
- ------------------------------------
There was no provision or credit provided for income taxes for the second
quarter. See Note 8.
Page 12
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED July 1, 2006 COMPARED TO
TWENTY-SIX WEEKS ENDED July 2, 2005
Net Sales
- ---------
Net sales for the first six months of 2006 decreased by 8.5% to $12,556,000
compared to $13,717,000 for 2005. Pounds shipped decreased by 10.6%. Although
pounds shipped declined by 10.6%, sales dollars were somewhat supported by price
increases in the first quarter of 2006 and the fourth quarter of 2005.
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold decreased by $1,224,000 or 9.1%.
Cost of materials decreased by $1,186,000 or 14.1% primarily due to a decrease
in net sales of 8.5% and a change in sales mix to a greater portion of
commission sales.
Direct labor cost increased by $14,000 as a result of the decrease in sales.
Overhead cost increased by $102,000 or 2.3% primarily as a result of the
following:
a. Fuel oil and natural gas cost increased by $192,000 or 37.4%. The
Company can use either natural gas or fuel oil, and will use the lower cost
fuel. These costs are predicted to increase because of the problems in the
oil producing countries and a forecasted bad hurricane season.
b. Electricity increased by $82,000 or 20.1% primarily due to a change in
product mix that requires longer drying cycles.
c. Repair and maintenance cost increased by $63,000 or 23.0%. This cost has
increased as the Company's machinery has gotten older.
The above cost increases were somewhat offset by a $146,000 or 37.3% decrease in
employee health claims and $76,000 or 5.3% decrease in production wages
(non-direct).
As a result of a decrease in sales of 8.5% and a decrease in cost of sales of
9.0%, the Company's gross margin increased to 1.6% compared to 1.0% in 2005.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $130,000 or 11.0%
primarily due to the results of cost cutting measures put in place in the fourth
quarter of 2005.
Gain/Loss in Disposal of Assets
- -------------------------------
In the first six months of 2005 the Company recorded a gain of $101,000 on the
sale of machinery located at its joint venture in Mexico. In the first six
months of 2006 the Company recorded a loss of $6,000 on disposal of machinery
located in the U.S.
Page 13
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TWENTY-SIX WEEKS ENDED July 1, 2006 COMPARED TO
TWENTY-SIX WEEKS ENDED July 2, 2005
Equity in Net Loss of Affiliate
- -------------------------------
In the first six months of 2006 the Company did not record a gain or loss for
its joint venture Fytek as the investment in affiliate had been reduced to a
zero balance in 2005. In the first six months of 2005 the Company recorded a
loss of $21,000.
Provision (Credit) for Income Taxes
- ------------------------------------
There was no provision or credit provided for income taxes for the first six
months of 2006. See Note 8.
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 a valuation allowance to reduce its deferred tax assets to
the amount that it estimates is more likely than not to be realized. As of July
1, 2006, and December 31, 2005, the Company recorded a valuation allowance that
reduced its deferred tax assets to zero.
Liquidity and Capital Resources
- -------------------------------
The Company financed its operations and capital requirements through its funds
generated from operations and its line of credit.
The Company's ability to generate cash from operation activity is subject to the
level of net sales. As discussed in previous filings, the Company has expanded
into other fibers and added customers.
Page 14
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
- -------------------------------------------
As set forth in the Statement of Cash Flows, funds used by operating activities
were $417,000. The funds used reflect the net loss, and an increase in accounts
receivables and inventories. These funds used were somewhat offset by an
increase in accounts payable. The Company's inventory increased mainly due to a
build up of imported cotton yarns, which will be reduced in the third quarter.
The Company used $60,000 to purchase capital assets. Planned capital
expenditures for the year 2006 are $150,000.
The Company had debt under its credit line of $290,000 primarily due to the
increase in inventory.
The Company's working capital at July 1, 2006, aggregated $2,989,000
representing a working capital ratio of 2.1 to 1 compared to a working capital
at December 31, 2005 of approximately $3,098,000 and representing a ratio of 2.9
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 1, 2006:
Cash, cash equivalents and receivables........... $3,478,000
Current liabilities.............................. 2,758,000
----------
Excess of quick assets over current liabilities... $ 720,000
==========
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", and 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
Page 15
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements (continued)
- --------------------------------------
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. 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 ensure 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 1A- Risk Factors. 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 16, 2006. 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 2,473,122 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 2,472,872 2,250
Thomas I. Nail 2,474,572 550
Robert P. Huntley 2,472,972 2,150
William T. Dunn 2,464,072 11,050
Robert T. King 2,474,572 550
Richard F. Byers 2,474,572 550
Aehsun Shaikh 2,472,947 2,175
Item 5 - Other Information. No report required.
Item 6 - Exhibits.
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.
BURKE MILLS, INC.
Date: August, 2006 By:/s/Humayun N. Shaikh
------------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive Officer)
Date: August, 2006 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:
1. I have reviewed this quarterly report on Form 10-Q of Burke Mills, Inc.;
2. 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;
3. 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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-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
5. 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.
Date: August, 2006 /s/Humayun N. Shaikh
---------------------------
Humayun N. Shaikh
Chairman and CEO
(Principal Executive Officer)
Page 19
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Thomas I. Nail, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Burke Mills, Inc.;
2. Based on my knowledge, this 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;
3. 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;
4. 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
5. 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.
Date: August, 2006 /s/Thomas I. Nail
---------------------------
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.
Date: August, 2006 /s/Humayun N. Shaikh
---------------------------
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.
Date: August, 2006 /s/Thomas I. Nail
---------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 21