FORM 10Q
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 SEPTEMBER 30, 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. (checkone):
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 November 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
September 30, 2006 (Unaudited) and
December 31, 2005
Condensed Statements of Operations and
Retained Earnings 4
Thirteen Weeks and Thirty-nine Weeks
Ended September 30, 2006 (Unaudited)
and October 1, 2005
Statements of Cash Flows 5
Thirty-nine Weeks Ended September 30, 2006
(Unaudited) and October 1, 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 17
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
September 30,
2006 December 31,
(Unaudited) 2005
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 101,111 $ 425,812
Accounts receivable 3,324,341 2,568,838
Inventories 1,881,328 1,684,132
Prepaid expenses and other current assets 82,487 49,413
----------- -----------
Total Current Assets 5,389,267 4,728,195
----------- -----------
Property, plant & equipment - at cost 28,176,089 28,085,778
Less: accumulated depreciation 24,486,262 23,326,789
----------- -----------
Property, plant and equipment- net 3,689,827 4,758,989
----------- -----------
Other Assets 16,575 16,575
----------- -----------
Total Assets $ 9,095,669 $ 9,503,759
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 2,088,339 $ 1,434,169
Short-term debt 233,339 -0-
Accrued salaries and wages 131,615 69,272
Other liabilities and accrued expenses 168,497 126,303
----------- -----------
Total Liabilities $ 2,621,790 $ 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 1,553,359 2,953,495
----------- -----------
Total Shareholders' Equity 6,473,879 7,874,015
----------- -----------
Total Liabilities & Shareholders' Equity $ 9,095,669 $ 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 Thirty-Nine Weeks Ended
---------------------- ------------------------
Sept. 30 Oct. 1 Sept. 30 Oct. 1
2006 2005 2006 2005
--------- ---------- ----------- -----------
Net Sales $5,913,287 $5,769,161 $18,469,016 $19,486,380
Costs and Expenses
Cost of Sales 5,980,653 5,810,051 18,341,915 19,397,540
----------- ----------- ------------ -----------
Gross Profit (Loss) (67,366) (40,890) 127,101 88,840
Selling, General and
Administrative Expenses 467,303 565,039 1,517,996 1,743,551
Gain/(Loss) on disposal
of property (1,157) 3,124 (7,026) 103,748
----------- ----------- ------------ -----------
Operating Loss (535,826) (602,805) (1,397,921) (1,550,963)
----------- ----------- ------------ -----------
Other Income
Interest Income 652 1,461 3,877 4,881
Other, net 1,353 305 1,956 791
----------- ----------- ------------ -----------
Total Other Income 2,005 1,766 5,833 5,672
----------- ----------- ------------ -----------
Other Expenses
Interest Expense 4,352 -0- 8,048 244
----------- ----------- ------------ -----------
Loss before Benefit of Income
Taxes & Equity in Net Loss
of Affiliate (538,173) (601,039) (1,400,136) (1,545,535)
----------- ----------- ------------ -----------
Loss before Equity in Net
Loss of Affiliate (538,173) (601,039) (1,400,136) (1,545,535)
Equity in Net Earnings/
(Loss) of Affiliate -0- -0- -0- (21,314)
----------- ----------- ------------ -----------
Net Loss (538,173) (601,039) (1,400,136) (1,566,849)
Retained Earnings at
Beginning of Period 2,091,532 3,909,886 2,953,495 4,875,696
----------- ----------- ------------ -----------
Retained Earnings at
End of Period $1,553,359 $3,308,847 $ 1,553,359 $ 3,308,847
========== ========== =========== ===========
Basic and Diluted
Loss Per Share $ (0.20) $ (0.22) $ (0.51) $ (0.57)
========== ========== =========== ===========
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)
Thirty-Nine Weeks Ended
--------------------------
Sept. 30 Oct. 1
2006 2005
---- ----
Cash flows from operating activities:
Net Loss $(1,400,136) $(1,566,849)
------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 1,198,888 1,237,123
Allowance for bad debts 16,747 21,000
Allowance for mark-down inventory (14,969) 50,585
Equity in affiliate -0- 21,314
(Gain)/Loss on disposal of
property assets 7,026 (103,748)
Changes in assets and liabilities:
Accounts receivable (772,250) (182,233)
Inventories (182,227) (194,990)
Prepaid expenses and other
current assets (33,074) 9,090
Accounts payable 654,169 586,020
Accrued salaries and wages 62,343 82,523
Other liabilities and accrued expenses 42,194 34,830
------------ ------------
Total adjustments 978,847 1,561,514
------------ ------------
Net cash used by operating activities (421,289) (5,335)
------------ ------------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (136,751) (293,454)
Proceeds from liquidation of affiliate -0- 174,985
Proceeds from sale of equipment -0- 104,343
------------ ------------
Net cash used by investing activities (136,751) (14,126)
------------ ------------
Cash flows from financing activities:
Net borrowings on revolving credit line 233,339 -0-
------------ ------------
Net cash provided by financing
activities 233,339 -0-
------------ ------------
Net decrease in cash and cash equivalents $ (324,701) $ (19,461)
Cash and cash equivalents at beginning
of year 425,812 316,745
------------ ------------
Cash and cash equivalents at end of
third quarter $ 101,111 $ 297,284
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
Page 5
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all necessary adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the thirty-nine week period ended September 30, 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 Burke Mills, Inc.'s (the "Company")
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 thirty-nine weeks ended September
30, 2006 and October 1, 2005 was approximately $8,000 and $200 respectively. The
Company had no cash payments for income taxes during the thirty-nine weeks ended
September 30, 2006 and October 1, 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. Costs related to the selling process,
accounting, information services, and corporate offices are included in this
category.
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:
Sept. 30,
2006 December 31,
(Unaudited) 2005
----------- -----------
Accounts receivable $3,344,000 $2,572,000
Allowance for doubtful accounts (20,000) (3,000)
---------- ----------
Total $3,324,000 $2,569,000
========== ==========
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows:
Sept. 30,
2006 December 31,
(Unaudited) 2005
---------- -----------
Finished & in process $ 876,000 $ 853,000
Raw materials 705,000 614,000
Dyes & chemicals 228,000 165,000
Other 81,000 76,000
Mark-down allowance (9,000) (24,000)
---------- ----------
Total $1,881,000 $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 $233,000 under its line of credit at September 30, 2006,
and the unused line of credit was approximately $3,300,000.
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:
September 30,
2006 December 31,
(Unaudited) 2005
------------ -----------
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 1,210,000 1,284,000
Charitable contributions carryover 13,000 13,000
State tax credits 41,000 41,000
Bad debts 8,000 1,000
Inventory 6,000 14,000
---------- ----------
Total gross deferred tax assets 1,627,000 1,702,000
Valuation Allowance (1,194,000) (1,020,000)
---------- ----------
Net deferred tax assets $ 433,000 $ 682,000
---------- ----------
Deferred tax liabilities:
Accelerated depreciation for tax purposes 433,000 682,000
---------- ----------
Net deferred tax liability $ -0- $ -0-
========== ==========
The net operating loss carryforward from 2005 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 September 30, 2006 and October 1, 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 two customers represented approximately 33% 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 which 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 approximately $457,000 of natural gas over a six-month period beginning
July 2006. This commitment for gas will provide most of the Company's gas needs
for the six 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 first quarter of 2007. 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)
3rd Quarter Nine Months
---------------- ----------------
2006 2005 2006 2005
---- ---- ---- ----
Income/(loss) from discontinued
operations $17 $ (85) $89 $(367)
Income/(loss) before taxes 17 (85) 89 (367)
Provision (credit) for
income tax 3 21 34 (2)
--- ----- --- -----
Net income/(loss) $14 $(106) $55 $(365)
=== ===== === =====
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)
September September
2006 2005
(Unaudited) (Unaudited)
--------- ---------
ASSETS
Current assets $74 $246
Non-current assets -0- 48
--- ----
Total Assets $74 $294
=== ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 2 $181
Non-current liabilities -0- -0-
--- ----
Total Liabilities 2 181
Shareholders equity 72 113
--- ----
Total Liabilities & Shareholders' Equity $74 $294
=== ====
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 thirty-nine week periods ended
September 30, 2006, and October 1, 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 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 for the third quarter represented approximately
27% of pounds shipped versus approximately 2% for the third quarter 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)
- -----------------------------
In the third quarter the Company incurred excessive overtime due to a sales mix
that required increased drying cycles. Additional dryers were purchased in
September and the excessive overtime should be eliminated in the fourth quarter.
In September of 2006 one of the Company's small competitors ceased operations,
and the Company should gain some additional customers.
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 Thirty-Nine Weeks
Ended Ended
------------------ ------------------
Sept. 30 Oct. 1 Sept. 30 Oct. 1
2006 2005 2006 2005
-------- ------ -------- ------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 101.1 100.7 99.3 99.5
------- ------ ------- ------
Gross Profit (Loss) (1.1) (0.7) 0.7 0.5
Selling, General, and
Administrative Costs 7.9 9.8 8.2 8.9
Gain on disposal of
property assets 0.0 0.1 0.0 0.5
------- ------ ------- ------
Operating Loss (9.0) (10.4) (7.6) (8.0)
Interest Expense 0.1 0.0 0.0 0.0
------- ------ ------- ------
Loss before income taxes (9.1) (10.4) (7.6) (8.0)
Equity in Net Loss of
Affiliate 0.0 0.0 0.0 (0.1)
------- ------ ------- ------
Net Loss (9.1)% (10.4)% (7.6)% (7.9)%
======= ====== ======= ======
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2006
COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 1, 2005
Net Sales
- ---------
Net sales for the third quarter of 2006 increased by 2.5% to $5,913,000 compared
to $5,769,000 for the third quarter of 2005. Pounds shipped increased by 16.8%.
In the third quarter the Company's sales mix changed significantly. Commission
sales (the dyeing and processing of customer owned yarn) was approximately 27%
of pounds shipped compared to only 2% in the third 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 and third quarters 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 SEPTEMBER 30, 2006
COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 1, 2005
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold increased by $171,000 or 2.9%.
Cost of materials decreased by $222,000 or 6.3% to $3,281,000 from $3,503,000 in
2005 primarily due to a change in sales mix which resulted in a greater portion
of commission sales.
Direct labor cost increased by $43,000 as a result of excessive overtime due to
the sales mix and an increase in pounds shipped of 16.8%.
Overhead cost increased by $255,000 or 12.5% primarily as a result of the
following:
a. Fuel oil and natural gas cost increased by $51,000 or
22.1%. The increase was primarily due to increased pounds
shipped of 16.8% and price increases. The Company can use
either natural gas or fuel oil, and will use the lower cost
fuel. These costs are difficult to predict because of the
problems in the oil producing countries.
b. Electricity increased by $65,000 or 27.5% primarily due to
a change in product mix that requires longer drying cycles
and an increase in pounds shipped.
c. Health care claims increased by $52,000 or 41.6%. It is
impossible to predict the frequency or severity of employees'
medical needs.
d. Manufacturing wages (non-direct) increased by $80,000 due to
excessive overtime caused by the sales mix which required
longer drying cycles. The Company purchased additional dryers
in September which should eliminate the excessive overtime.
As a result of an increase in sales of 2.5% and an increase in cost of sales of
2.9%, the Company's gross loss decreased to 11.1% for the third quarter of 2005.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $98,000 or 17.3%
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 third 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.
Provision (Credit) for Income Taxes
- -----------------------------------
There was no provision or credit provided for income taxes for the third
quarter. See Note 8.
Page 12
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006 COMPARED TO
THIRTY-NINE WEEKS ENDED OCTOBER 1, 2005
Net Sales
- ---------
Net sales for the first nine months of 2006 decreased by 5.2% to $18,469,000
compared to $19,486,000 for 2005. The Company's full yarn sales have declined by
$2,284,000 during the nine months while its commission sales (the dyeing of
yarns owned by the customer) have increased by $1,261,000.
The Company gained significant commission sales during the second quarter and
continued in the third quarter as the older full yarn customers' sales have
declined.
Cost of Sales and Gross Margin
- ------------------------------
Cost of goods sold decreased by $1,056,000 or 5.4%.
Cost of materials decreased by $1,408,000 or 11.8% to $10,504,000 from
$11,912,000 in 2005 primarily due to a decrease in net sales of 5.2% and a
change in sales mix to a greater portion of commission sales.
Direct labor cost increased by $30,000 or 3.4% as a result of the sales mix.
Overhead cost increased by $357,000 or 5.5% primarily as a result of the
following:
a. Fuel oil and natural gas cost increased by $243,000 or
32.7%. The Company can use either natural gas or fuel
oil, and will use the lower cost fuel. These costs are
difficult to predict because of the problems in the oil
producing countries.
b. Electricity increased by $148,000 or 22.8% primarily due to
a change in product mix that requires longer drying cycles.
c. Repair and maintenance cost increased by $69,000 or 18.2%.
This cost has increased as the Company's machinery has
gotten older.
The above cost increases were somewhat offset by a $94,000 or 18.3% decrease in
employee health claims.
As a result of a decrease in sales of 5.2% and a decrease in cost of sales of
5.4%, the Company's gross margin increased to 0.7% compared to 0.5% in 2005.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $226,000 or 12.9%
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 nine 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 nine
months of 2006 the Company recorded a loss of $7,000 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
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006 COMPARED TO
THIRTY-NINE WEEKS ENDED OCTOBER 1, 2005
Equity in Net Loss of Affiliate
- -------------------------------
In the first nine 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 nine 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 nine
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
September 30, 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 $421,000. 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 yarns, which should be reduced in the fourth quarter.
The Company used $137,000 to purchase capital assets. Planned capital
expenditures for the year 2006 are $150,000.
The Company had debt under its credit line of $233,000 primarily due to the
increase in inventory, accounts receivables, and net loss.
The Company's working capital at September 30, 2006, aggregated $2,767,000
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
September 30, 2006:
Cash, cash equivalents and receivables........... $3,425,000
Current liabilities.............................. 2,622,000
----------
Excess of quick assets over current liabilities.. $ 803,000
==========
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
Page 15
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements (continued)
- --------------------------------------
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes; such as, changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company has not purchased any instruments or entered into any arrangements
resulting in market risk to the Company for trading purposes or for purposes
other than trading purposes.
Item 4 - Controls and Procedures
- --------------------------------
As of the end of the fiscal quarter covered by this report, the Company's
management, with the participation of the Company's chief executive officer and
chief financial officer, carried out an evaluation of the effectiveness of the
Company's disclosure controls and procedures. 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 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. No report
required.
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: November 10, 2006 By:/s/Humayun N. Shaikh
------------------------
Humayun N. Shaikh
Chairman of the Board and CEO
(Principal Executive Officer)
Date: November 10, 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 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: November 10, 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: November 10, 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: November 10, 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: November 10, 2006 /s/Thomas I. Nail
---------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 21