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 September 29, 2007
[ ] 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 __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 5, 2007 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 29, 2007 (Unaudited) and
December 30, 2006
Condensed Statements of Operations and 4
Retained Earnings(Deficit)
Thirteen Weeks and Thirty-Nine Weeks
Ended Sept 29, 2007 and Sept 30, 2006
Statements of Cash Flows 5
Thirty-Nine Weeks Ended Sept 29, 2007
and Sept 30, 2006
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 15
- ---------------------------------------------------------
Item 4 - Controls and Procedures 15
- ---------------------------------------------------------
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
CERTIFICATIONS 19-21
Page 2
BURKE MILLS, INC.
CONDENSED BALANCE SHEETS
September 29
2007 December 30,
(Unaudited) 2006
----------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 124,240 $ 55,816
Accounts receivable 2,760,695 2,727,461
Inventories 1,375,079 1,543,272
Prepaid expenses and other current assets 82,793 30,371
----------- -----------
Total Current Assets 4,342,807 4,356,920
----------- -----------
Property, plant & equipment - at cost 28,080,235 28,041,676
Less: accumulated depreciation 25,822,061 24,741,391
----------- -----------
Property, plant and equipment- net 2,258,174 3,300,285
----------- -----------
Other Assets - 0 - 16,575
----------- -----------
Total Assets $ 6,600,981 $ 7,673,780
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,598,811 $ 1,218,199
Line of Credit 514,965 258,274
Accrued salaries and wages 103,719 67,317
Other liabilities and accrued expenses 95,179 132,778
----------- -----------
Total Liabilities $ 2,312,674 $ 1,676,568
----------- -----------
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/(Deficit) (632,213) 1,076,692
----------- -----------
Total Shareholders' Equity 4,288,307 5,997,212
----------- -----------
Total Liabilities & Shareholders' Equity $ 6,600,981 $ 7,673,780
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
Page 3
BURKE MILLS, INC.
CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS(DEFICIT)
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
----------------------- -----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2007 2006 2007 2006
--------- --------- -------- --------
Net Sales $4,846,359 $5,913,287 $15,249,765 $18,469,016
----------- ----------- ------------ ------------
Cost of Sales 4,662,154 5,980,653 15,458,379 18,341,915
----------- ----------- ------------ ------------
Gross (loss)/profit 184,205 (67,366) (208,614) 127,101
Selling, general and
administrative expenses 309,448 467,303 1,460,507 1,517,996
Gain(Loss) on disposal of
property assets 2,859 (1,157) 2,859 (7,026)
----------- ----------- ------------ ------------
Operating loss (122,384) (535,826) (1,666,262) (1,397,921)
----------- ----------- ------------ ------------
Other Income
Interest Income 1,590 652 4,957 3,877
Other, net 8,771 1,353 9,729 1,956
----------- ----------- ----------- ------------
Total other income 10,361 2,005 14,686 5,833
----------- ----------- ----------- ------------
Other Expenses
Interest Expense 28,888 4,352 57,329 8,048
----------- ----------- ----------- ------------
Total other expense 28,888 4,352 57,329 8,048
----------- ----------- ----------- ------------
Net loss (140,911) (538,173) (1,708,905) (1,400,136)
Retained earnings/(deficit)
at beginning of period $ (491,302) $2,091,532 $ 1,076,692 $ 2,953,495
----------- ----------- ------------ ------------
Retained earnings/(deficit)
at end of period $ (632,213) $1,553,359 $ (632,213) $ 1,553,359
=========== =========== ============ ============
Basic and Diluted
net loss per share $ (0.05) $ (0.20) $ (0.62) $ (0.51)
=========== =========== ============ ============
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. 29 Sept. 30
2007 2006
---------- ----------
Cash flows from operating activities
Net loss $(1,708,905) $(1,400,136)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 1,120,001 1,198,888
Allowance for bad debts 170,000 16,747
Allowance for mark-down inventory 81,000 (14,969)
(Gain)/loss on disposal of property assets (2,859) 7,026
Changes in assets and liabilities:
Accounts receivable (203,234) (772,250)
Inventories 87,193 (182,227)
Prepaid expenses & other
current assets (52,423) (33,074)
Other non-current assets 16,575 -0-
Accounts payable 380,612 654,169
Accrued salaries & wages 36,402 62,343
Other liabilities and accrued expenses (37,599) 42,194
---------- -----------
Total Adjustments 1,595,668 978,847
---------- -----------
Net cash used in operating activities (113,237) (421,289)
---------- -----------
Cash flows used in investing activities:
Acquisition of property, plant and
equipment (77,889) (136,751)
Proceeds from sales of plant and equipment 2,859 -0-
---------- -----------
Net cash used in investing activities (75,030) (136,751)
---------- -----------
Cash flows from financing activities:
Net advances on line of credit 256,691 233,339
---------- -----------
Net cash provided by financing activities 256,691 233,339
---------- -----------
Net increase (decrease) in cash and
cash equivalents 68,424 (324,701)
Cash and cash equivalents at beginning of year 55,816 425,812
---------- -----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 124,240 $ 101,111
========== ===========
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 of Burke Mills, Inc.
(the "Company") 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 29, 2007 are not necessarily indicative of the results
that may be expected for the year ending December 29, 2007. 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 30, 2006.
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
29, 2007 and September 30, 2006 was approximately $57,000 and $8,000
respectively. The Company had no cash payments for income taxes during the
thirty-nine weeks ended September 29, 2007 and September 30, 2006.
NOTE 3 - OPERATIONS OF THE COMPANY
- ----------------------------------
The Company has experienced substantial operating losses over the last several
years, has a retained earnings deficit as of the end of the third quarter of
this year, and has been required to use a substantial amount of existing cash
resources to fund its operations. The Company has taken significant steps to
reduce its operating expenses. Reductions and retirement in management and staff
personnel, layoffs of line workers, and other salary reductions have been
effected which management expects will save the Company approximately $84,000
each month. Management of the Company believes that existing cash and cash
equivalents will be sufficient to fund operations of the Company for at least 12
months from the date of this report.
Management continues to work to increase sales with new customer relationships
and expanded relationships with existing customers and to continue cost
reductions.
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.
Page 6
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 - OPERATIONS OF THE COMPANY (continued)
- ----------------------------------
Selling, general and administrative. These expenses include costs 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.
NOTE 5 - ACCOUNTS RECEIVABLE
- -----------------------------
Accounts receivable are comprised of the following:
September 29 December 30
2007 2006
----------- -----------
Accounts receivable $2,961,000 $2,757,000
Allowance for doubtful accounts (200,000) (30,000)
----------- -----------
Total $2,761,000 $2,727,000
=========== ===========
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows:
September 29 December 30
2007 2006
----------- -----------
Finished & in process $ 729,000 $ 703,000
Raw materials 434,000 541,000
Dyes & chemicals 221,000 208,000
Other 81,000 100,000
Mark-down allowance (90,000) (9,000)
----------- -----------
Total $1,375,000 $1,543,000
=========== ===========
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 and 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.
Page 7
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 replacements 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."
The Company had debt under its line of credit at September 29, 2007 of $515,000
and the unused line of credit was approximately $2,397,000.
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 29 December 30
2007 2006
--------- ---------
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 1,996,000 1,701,000
Charitable contributions carryover 1,000 1,000
State tax credits 41,000 41,000
Bad debts 77,000 12,000
Inventory 36,000 5,000
---------- ----------
Total gross deferred tax assets 2,500,000 2,109,000
Valuation Allowance (2,446,000) (1,751,000)
---------- ----------
Net deferred tax assets $ 54,000 $ 358,000
---------- ----------
Deferred tax liabilities:
Accelerated depreciation for tax purposes 54,000 358,000
---------- ----------
Net deferred tax liability $ -0- $ -0-
========== ==========
The net operating loss carryforward from the prior year is approximately
$4,196,000 which expires in various amounts starting 2022-2025.
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 29, 2007 and September 30, 2006.
Page 8
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 third quarter, two customers represented approximately 19% of
total accounts receivable. Two customers also represented approximately 25% of
total accounts receivable at the year ended December 30, 2006.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
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.
SELF-INSURANCE - The Company provides health benefits to its employees under a
self-insured health plan. Claims are paid by the Company up to an individual and
an aggregated limit of $55,000 and approximately $959,000 respectively. Claims
in excess of these limits are covered by a third-party insurance contract.
Expenses are recorded on a monthly basis for actual claims experience.
NOTE 12 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS
- ----------------------------------------------------------------
The Company and its joint venture partner, 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. In 2005 and 2006, the Company and its joint
venture partner continued liquidation of Fytek. The Company received
approximately $325,000 of cash distributions through year end 2005. In the
fourth quarter of 2006, the Company sold its shares in Fytek to Akra for
$15,000. Akra will maintain the financial records of Fytek for five years, as
required by Mexican tax laws.
The Company paid its Chairman and Chief Executive Officer, who is also the
Company's majority shareholder, a base salary of $105,000 and $157,500 for the
nine months ended September 29, 2007 and September 30, 2006 respectively. The
Company also reimbursed this officer for a portion of his office and travel
expense. These payments totaled approximately $37,000 and $33,000, for the nine
months ended September 29, 2007 and September 30, 2006, respectively.
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 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 loss divided by the weighted average
number of common shares outstanding during the thirty-nine week periods ended
September 29, 2007 and September 30, 2006.
Page 9
BURKE MILLS, INC.
Item 1. NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In June 2006, the FASB issued Interpretation No.48, "Accounting for Uncertainty
in Income Taxes' (FIN 48) which clarifies the accounting for uncertainty in
incomes taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." This interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. Any resulting cumulative effect of applying the provisions of FIN 48
upon adoption will be reported as an adjustment to beginning retained earnings
in the period of adoption. The Interpretation is effective for fiscal years
beginning after December 15, 2006. The adoption of this standard on December 31,
2006 did not have a material effect on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair
value measurements. The Statement applies under other accounting pronouncements
that require or permit fair value measurements and does not require any new fair
value measurements. The Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157
is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", (SFAS No. 159) which gives
companies the option to measure eligible financial assets, financial liabilities
and firm commitments at fair value (i.e., the fair value option), on an
instrument-by-instrument basis, that are otherwise not permitted to be accounted
for at fair value under other accounting standards. The election to use the fair
value option is available when an entity first recognizes a financial asset or
financial liability or upon entering into a firm commitment. Subsequent changes
in fair value must be recorded in earnings. SFAS No. 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
The Company is in the process of evaluation the impacts, if any, of adopting
this pronouncement.
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
- -----------------
The Company's net results in the third quarter of 2007 shows a vast improvement
over the third quarter of 2006 and the first and second quarter of 2007. At the
end of the second quarter significant actions were taken to reduce labor and
utility costs. Labor costs were reduced by layoffs and retirements and the work
schedules were changed to reduce utility costs.
The Company lost a major customer on July 2, 2007, when Quaker Fabrics, Inc.
announced it had suspended operations and would probably liquidate. Quaker filed
for Chapter 11 bankruptcy on August 16, 2007. Company management has been
informed that Quaker's assets are in the process of being sold to a third party.
Sales to Quaker in the first two quarters of 2007 aggregated were $656,000.
Page 10
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY (continued)
- -----------------
The Company believes that it has not lost market share but that domestic demand
has been declining for years due to imports of finished textile products.
The Company continues to diversify into other fibers and to develop products for
domestic markets that it is not participating in currently.
Results of Operations - 2007 Compared to 2006
- ---------------------------------------------
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. 29, Sept. 30 Sept. 29, Sept. 30
2007 2006 2007 2006
----- ----- ----- -----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 96.2 101.1 101.4 99.3
------ ------ ------ ------
Gross Profit (Loss) 3.8 (1.1) (1.4) 0.7
Selling, General, and
Administrative Costs 6.4 7.9 9.6 8.3
------ ------ ------ ------
Operating Loss (2.6) (9.0) (11.0) (7.6)
Net Other (0.3) 0.1 (0.2) 0.0
------ ------ ------ ------
Net Loss (2.9)% (9.1)% (11.2)% (7.6)%
====== ====== ====== ======
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2007
COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 30, 2006
Net Sales
- ---------
Net sales for the third quarter decreased by 18% to $4,846,000 compared to
$5,913,000 for the third quarter of 2006. The loss of Quaker had an adverse
affect on sales in the third quarter of the year.
Cost of Sales and Gross Margin
- ------------------------------
Since the Company began diversifying into other fibers, its non-polyester volume
has increased. These fibers have a longer dyeing and drying cycle time and
require winding after dyeing.
Small lot orders have increased, while orders for larger lots have declined. The
Company's small dye machines are at capacity while the larger dye machines are
under utilized.
Page 11
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2007
COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 30, 2006
Cost of Sales and Gross Margin (continued)
- ------------------------------
Cost of goods sold decreased by $1,319,000 or 22.1%.
Cost of materials decreased by $760,000 or 23.2%, as a result of lower sales and
a change in sales mix.
Direct labor cost decreased by $122,000 or 39.9% as a result of lower sales, a
change in work schedules and layoffs.
Overhead cost decreased by $370,000 or 16.1% as a result of following:
Manufacturing wages (non-direct) decreased by $109,000 or 15.9% primarily as a
result of retirements and layoffs.
Employee health cost decreased by $50,000 or 28.2% as a result of lower
utilization. The company cannot predict the frequency or severity of employees'
medical needs.
Electricity cost decreased by $54,000 or 17.7% as a result of lower utilization.
On July 1, 2007 Duke Energy increased its rates by 12% or the decrease in the
company's electric cost would have been greater.
Natural gas cost decreased by $49,000 or 17.6%. The company's usage dropped by
22% as the cost per dekatherm increased.
Water cost decreased by $21,000 or 14.9% primarily as a result of lower usage.
The Town of Valdese increased water rates by 5% on July 1, 2007 or the decrease
would have been greater.
As a result of a decrease in sales of 18% and a decrease in cost of sales of
22.1%, the Company experienced a gross profit of 3.8% compared to a gross loss
of 1.1% in 2006.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $158,000 or 33.8%
primarily as a result of the cost saving progress which reduced salaries by
$84,000.
Provision (Credit) for Income Taxes
- ------------------------------------
There was no provision or credit provided for income taxes for the 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 29, 2007 COMPARED TO
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006
Net Sales
- ---------
Net sales for the nine months decreased by 17.4% to $15,250,000 compared to net
sales of $18,469,000 in 2006. Pounds shipped decreased by 18.2% for the period.
The average price per pound has increased as the company increased prices to
offset fiber price increases it received from its vendors.
Cost of Sales and Gross Margin
- ------------------------------
Since the Company began diversifying into other fibers, its non-polyester volume
has increased. These fibers have a longer dyeing and drying cycle time and
require winding after dyeing.
Small lot orders have increased, while orders for larger lots have declined. The
Company's small dye machines are at capacity while the larger dye machines are
under utilized.
Cost of goods sold decreased by $2,884,000 or 15.7%.
Cost of materials decreased by $2,304,000 or 21.9%, as a result of lower sales
and a change in sales mix.
Direct labor cost decreased by $140,000 or 15.5% as a result of lower sales
volume.
Overhead cost decreased by $504,000 or 7.3% primarily as a result of lower sales
volume and the cost savings programs put in place during the third quarter. Most
of the decrease came in the third quarter as discussed earlier.
As a result of a decrease in net sales of 17.4% and a decrease in cost of sales
of 15.7%, the Company experienced a gross loss of 1.4%.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased by $57,000 or 3.8% mostly
due to the cost saving programs put in place during the third quarter. The
allowance for bad debts was increased in the second quarter by $170,000 for
Quaker Fabrics.
Provision (Credit) for Income Taxes
- ------------------------------------
There was no provision or credit provided for income taxes for the first nine
months of 2007. 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.
Page 13
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2007
COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006
Critical Accounting Policies and Estimates (continued)
- ------------------------------------------
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 and a current analysis 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 29, 2007 and December 30, 2006, the Company recorded a valuation
allowance that reduced its net deferred tax assets to zero.
Liquidity and Capital Resources
- -------------------------------
In the first nine months of 2007 and 2006, the Company financed its operations
with funds generated from operations and its line of credit.
The Company's ability to generate cash from operating activities is subject to
the level of net sales. As discussed earlier, the Company continues to expand
into other fibers.
As set forth in the Statement of Cash Flows, funds used in operating activities
were approximately $113,000. The funds used reflect the net loss and the
increase in accounts receivable.
The Company has used approximately $78,000 for capital expenditures in the first
three quarters of 2007 compared to $137,000 in 2006. Planned capital
expenditures for 2007 are approximately $100,000.
The Company's line of credit provided approximately $257,000 for the nine months
of 2007. The Company had debt under its line of credit of $515,000 and
availability of $2,397,000 at September 29, 2007.
The Company's working capital decreased by $650,000 primarily as a result of the
net loss.
September 29 December 30
2007 2006
----------- ------------
Working Capital $2,030,000 $2,680,000
Working Capital Ratio 1.88 to 1 2.60 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 29, 2007:
September 29, 2007
--------------
Cash, cash equivalents and receivables........... $2,885,000
Current liabilities.............................. 2,313,000
----------
Excess of quick assets over current liabilities... $ 572,000
==========
Quick Ratio 1.25 to 1
Page 14
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2007 COMPARED TO
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2006
Forward Looking Statements
- --------------------------
Certain statements in this Management's Discussion and Analysis of Financial
condition and Results of Operations, and other sections of this report, contain
forward-looking statements within the meaning of federal securities laws about
the Company's financial condition and results of operations that are based on
management's current expectations, beliefs, assumptions, estimates and
projections about the markets in which the Company operates. Words such as
"expects", anticipates", "believes", "estimates", variations of such words and
other similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in, or implied by, such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof. The
Company undertakes no obligations to update publicly any of these
forward-looking statements to reflect new information, future events or
otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward-looking statements include, but
are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and financial viability of significant customers, technological
advancements, employee relations, changes in construction spending and capital
equipment expenditures (including those related to unforeseen acquisition
opportunities), the timely completion of construction and expansion projects
planned or in process, continued availability of financial resources through
financing arrangements and operations, negotiations of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies, policies and legislation, and proceeds received from
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes; such as, changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company has not purchased any instruments or entered into any arrangements
resulting in market risk to the Company for trading purposes or for purposes
other than trading purposes.
Item 4 - Controls and Procedures
- ---------------------------------
As of the end of the fiscal quarter covered by this report, the Company's
management, with the participation of the Company's chief executive officer and
chief financial officer, carried out an evaluation of the effectiveness of the
Company's disclosure controls and procedures. The term "disclosure controls and
procedures" means the controls and other procedures of the Company that are
designed to insure that information required to be disclosed by the Company in
its reports to the Securities and Exchange Commission ("SEC") is recorded,
processed, summarized and reported, within the time period specified in the
rules and forms of the SEC. Disclosure controls and procedures include, without
limitation, controls and procedures designed to insure that information required
to be disclosed by the Company in the reports that it files or submits to the
SEC under the Securities Exchange Act of 1934 is accumulated and communicated to
the Company's management, including its chief executive officer and its chief
financial officer as appropriate, to allow timely decisions regarding required
disclosure.
Page 15
BURKE MILLS, INC.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 4 - Controls and Procedures (Continued)
- ---------------------------------
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.
(a) The exhibits required by Item 601 of Regulation SK are specified on the
Exhibit Index and are attached to this report or incorporated by reference from
prior filings.
BURKE MILLS, INC.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BURKE MILLS, INC.
Date: November 9, 2007 By:/s/Humayun N. Shaikh
------------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive Officer)
Date: November 9, 2007 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: November 9, 2007 /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 9, 2007 /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 9, 2007 /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 9, 2007 /s/Thomas I. Nail
---------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 21