UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year
Ended December 29, 2001
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
_________________ to _________________
Commission File No. 0-5680
BURKE MILLS, INC.
(Exact name of registrant as specified in its charter)
(I.R.S. Employer Identification No.) 56-0506342
State or other jurisdiction of incorporation or organization:
North Carolina
191 Sterling Street, NW
Valdese, North Carolina 28690
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
828-874-6341
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value (Stated Value of $0.66 Per Share)
(Title of Class)
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 if a disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant(computed by reference to the average bid and asked price on February
14, 2002)was $764,108.
The number of shares outstanding of the registrant's only class of common stock
as of March 1, 2002 is 2,741,168 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's proxy statement related to the annual meeting of
shareholders of the Company scheduled for May 21, 2002, which is to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report, are incorporated by reference in Part III of this
report.
Page 1 of 30
BURKE MILLS, INC.
PART I
ITEM 1 - BUSINESS
- ------------------
(a) General Development of Business - The Company's general development of
business consisted of improving operating performance in all areas of the
Company, maintaining sales in a down economy, and strengthening its balance
sheet.
During 2001, the Company experienced a very competitive market, a shrinking
customer base, an erosion in customer credit quality, and major increases in
natural gas cost, fuel oil cost and insurance cost.
The Company made major improvements in efficiencies and reduced labor and
overhead cost. On-time deliveries were improved and there was a major decrease
in inventory. As a result of the improvements, the Company experienced positive
earnings for the year and improved its balance sheet.
(b) Financial Information about Industry Segments - The Company had only one
industry segment during the fiscal year ended December 29, 2001.
(c) Narrative Description of Business - The Company is engaged in texturing,
winding, dyeing, processing and selling of filament, novelty and spun yarns,
and in the dyeing and processing of these yarns for others on a commission
basis.
The principal markets served by the Company are apparel, upholstery and
industrial uses through the knitting and weaving industry.
The Company's products are sold in highly competitive markets primarily
throughout the United States. Competitiveness of the Company's products is based
on price, service and product quality. Many of the Company's competitors are
divisions or segments of larger, diversified firms with greater financial
resources than those of the Company.
The methods of distribution of the Company's products consist of the efforts
of the Company's sales force which makes contact with existing and prospective
customers. The Company markets its products throughout the United States,
Caribbean Basin, Mexico and Canada, with the bulk of the business being
primarily in the eastern United States, through five salesmen employed directly
by the Company on salary and a number of commissioned sales agents working on
various accounts. The Company also markets its products in Mexico, Central
America and South America through its fifty-percent (50%) owned affiliate,
Fytek, S.A. de C.V.
The dollar amount of backlog of unshipped orders as of December 30, 2001
was $2,425,000 and as of December 31, 2000 was $2,641,000. Generally, all orders
in backlog at the end of a year are shipped the following year. The backlog has
been calculated by the Company's normal practice of including orders which are
deliverable over various periods and which may be changed or canceled in the
future.
The most important raw materials used by the Company are unprocessed raw
yarn, dyes and chemicals. The Company believes that its sources of supply for
these materials are adequate for its needs and that it is not substantially
dependent upon any one supplier.
With respect to the practices of the Company relating to working capital
items, the Company generally carries enough inventory for approximately 66 days.
On average, the Company turns its inventory approximately 4 to 6 times each
year. The Company meets its delivery schedules on a consistent on-time basis,
and has a ready supply of raw materials from suppliers. For the fiscal year
ended December 29, 2001, approximately 4% of the Company's sales were from
dyeing and processing of yarn for customers who supplied the yarn. The Company
does not allow customers to return merchandise except where the merchandise is
Page 2 of 30
BURKE MILLS, INC.PART I
ITEM 1 - BUSINESS (continued)
- ------------------------------
defective. The Company rarely extends payment terms to its customers beyond
sixty (60) days, and has experienced no significant problems in collecting its
accounts receivable. The Company believes that industry practices are very
similar to that of the Company in regard to these matters.
Substantially all of the Company's manufacturing operations run by electrical
energy purchased from local utility companies, and its premises are heated with
oil or gas. The Company has not experienced any shortages in electricity, oil or
gas during the fiscal year, and has made no other arrangements for alternate
sources of energy. While energy related difficulties are not expected to prevent
the Company from achieving desired production levels, energy shortages of
extended duration could have an adverse impact on operations.
The Company has established a recycling program for its major waste items:
yarn, cardboard, plastic tubes and cleaning fluid.
The Company has made various changes in its plant that regulates discharge
of materials into the environment. The Company believes its manufacturing
operations are in compliance with all presently applicable federal, state and
local legislative and administrative regulations concerning environmental
protection; and, although it cannot predict the effect that future changes in
such regulations may have, particularly as such changes may require capital
expenditures or affect earnings, it does not believe that any competitor subject
to the same or similar regulations will gain any significant and competitive
advantages as a result of any such changes. Compliance by the Company during the
fiscal year ended December 29, 2001 with federal, state and local environmental
protection laws had no material effect on capital expenditures, earnings, or the
competitive position of the Company.
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 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 is
moving toward a solution of natural attenuation. The cost of monitoring will be
approximately $31,000 per year.
On, February 20, 2002, the Company had 196 employees. The Company's yarn
division is its only division. During the fiscal year ended December 29, 2001,
sales to one customer, Quaker Fabric Corporation, exceeded ten percent of the
Company's revenue. The loss of this customer would have a material adverse
effect on the Company in the short run, but the Company believes that it would
be able to replace the business within a reasonable time.
The Company owns 49.8% of the stock and 50% of the voting control of Fytek,
S.A. de C.V. (Fytek), a Mexican corporation with its principal place of business
in Monterrey, Mexico. The other shareholders in Fytek are Fibras Quimicas, S.A.,
a Mexican Corporation, and Teijin, Inc., a Japanese company. The purpose of
Fytek is the manufacture and marketing of yarns. The Company acquires yarn from
Fytek and uses Fytek to market and distribute its dyed yarn in Mexico, Central
America and South America. Fytek began production in the fourth quarter of 1997.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales - Company sales to Brazil, Caribbean Basin, Canada and Mexico during 2001
accounted for approximately 8% of total net sales. During 2000 sales to these
countries accounted for approximately 7% of total net sales, and such sales
aggregated less than 5% in 1999.
Page 3 of 30
BURKE MILLS, INC.PART I
ITEM 2. PROPERTIES
- -------------------
The executive offices and manufacturing plant of the Company are located at
Valdese, North Carolina, which is 75 miles northwest of Charlotte, North
Carolina, and 60 miles east of Asheville, North Carolina. The main plant and
executive offices are located on an approximate nineteen-acre tract of land
owned by the Company. Seventeen acres of this tract are encumbered by a first
priority lien deed of trust held by First Union National Bank of North Carolina.
The Company also owns approximately 18 acres adjacent to the plant which is
undeveloped. The main plant building used by the Company contains approximately
309,000 square feet. The Company also owns an auxiliary building containing
36,600 square feet located adjacent to its main plant. This latter building is
currently used for warehousing yarn and as a distribution center.
The plant buildings are steel and brick structures protected by automatic
sprinkler systems. The various departments, with the exception of the production
dyehouse, are heated, cooled and humidified. The Company considers all its
properties and manufacturing equipment to be in a good state of repair, well
maintained and adequate for its present needs.
The Company utilizes substantially all of the space in its main plant for its
offices, machinery and equipment, storage and receiving areas. The Company
utilizes substantially all of the space in the auxiliary building for warehouse
and distribution purposes.
The approximate maximum capacity in pounds per year of the Company's
machinery and equipment, based upon operating the machinery and equipment seven
(7) days per week fifty (50) weeks per year, and the approximate percentage of
utilization thereof during the fiscal year ended December 29, 2001 are as
follows:
Pounds/Year 2001
Department Capacity Utilization
---------- -------- -----------
Winding Machines 21,218,000 55%
Texturing Machines 1,883,000 22%
Dyeing Equipment 23,111,000 61%
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not presently involved in any other than ordinary, routine
litigation incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- --------------------------------------------------------------
(a) The principal United States (or other) market on which the Company's
common stock is being traded is the Nasdaq over-the-counter market bulletin
board. The range of high and low bid quotations for the Company's common stock
for each quarterly period during the past two fiscal years ended December 31,
2001, and on the latest practicable date (as obtained from the NASDAQ Stock
Market, Inc., in Washington, DC) is as follows:
Page 4 of 30
BURKE MILLS, INC.PART I
Quarter Ending
2001 High Bid Low Bid
------------ -------- --------
March 31 $0.25 $0.125
June 30 $0.34 $0.05
September 30 $0.60 $0.25
December 31 $0.60 $0.41
Quarter Ending
2000 High Bid Low Bid
------------ -------- --------
March 31 $2.25 $1.625
June 30 $1.813 $1.313
September 30 $1.656 $1.125
December 31 $1.188 $.375
March 1, 2002 $0.45 $0.10
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
(b) As of February 20, 2002 there were 377 holders of the common stock of the
Company.
(c) The Company has declared no dividends on its common stock during the past
two fiscal years.
BURKE MILLS, INC.PART II
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following selected financial data set forth for the five years ended
December 29, 2001 have been derived from the audited financial statements of the
Company. The data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the audited
financial statements and related notes thereto and other financial information
included therein.
(in thousands except per share data)
Years Ended
----------------------------------------
Dec. 29 Dec. 30 Jan. 1 Jan. 2 Jan. 3
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA
Net Sales $37,194 $39,456 $42,840 $42,169 $41,156
Cost of Sales 33,711 37,123 38,779 37,825 36,765
------- ------- ------- ------- -------
Gross Profit $ 3,483 $ 2,333 $ 4,061 $ 4,344 $ 4,391
------- ------- ------- ------ ------
Income (loss) before income
taxes $ 487 $(1,390) $ (300) $ 1,087 $ 1,059
Income Taxes (credit) 172 (540) (98) 383 433
------- ------- ------- ------- -------
Net Income (loss) $ 315 $ (850) $ (202) $ 704 $ 626
======= ======= ======= ======= =======
Per Share (Note A)
Net income (loss) $ .11 $ (.31) $ (.07) $ .26 $ .23
======== ======= ======= ======= =======
Cash dividends declared
Per common share None None None None None
======= ======= ======= ======= =======
Weighted average number
of common shares outstanding 2,741 2,741 2,741 2,741 2,741
======= ======= ======= ======= =======
Page 5 of 30
BURKE MILLS, INC.PART II
ITEM 6. SELECTED FINANCIAL DATA (continued)
- --------------------------------
SELECTED CASH FLOW DATA
Capital expenditures $ 388 $ 631 $ 4,640 $ 2,162 $ 1,343
======= ======= ======= ======= =======
Depreciation $ 2,203 $ 2,332 $ 1,839 $ 1,744 $ 1,600
======= ======= ======= ======= =======
Cash provided by
operating activities $ 4,301 $ 1,386 $ 74 $ 1,926 $ 3,646
======= ======= ======= ======= =======
Dec. 29 Dec. 30 Jan. 1 Jan. 2 Jan. 3
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
SELECTED BALANCE SHEET DATA
Current assets $10,132 $ 9,161 $ 9,988 $11,213 $11,785
Current liabilities 3,322 3,503 4,381 3,383 3,378
------ ----- ----- ----- -----
Working capital $ 6,810 $ 5,658 $ 5,607 $ 7,830 $ 8,407
======= ======= ======= ======= ======
Current ratio 3.05 2.62 2.28 3.31 3.49
==== ==== ==== ==== ====
Total assets $22,803 $23,994 $25,995 $24,311 $24,348
======= ======= ======= ======= =======
Long-term debt $ 4,098 $ 5,241 $ 5,551 $ 4,563 $ 5,313
======= ======= ======= ======= =======
Deferred income taxes $ 1,977 $ 2,159 $ 2,122 $ 2,221 $ 2,218
======= ======= ======= ======= =======
Shareholders' equity $13,406 $13,091 $13,941 $14,144 $13,440
======= ======= ======= ======= =======
(A) Income per share has been computed based on the weighted average number of
common shares outstanding during each period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
The following table sets forth selected operating data of the Company as
percentages of net sales for the periods indicated.
Relationship to Total Revenue
For the Year Ended
------------------------------
Dec. 29 Dec. 30 Jan. 1
2001 2000 2000
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 90.6 94.0 90.5
Gross profit margin 9.4 6.0 9.5
------- ------- -------
Selling, general, administrative and
factoring expenses 7.4 8.2 9.8
------- ------- -------
Operating earnings/(loss) 2.0 (2.2) (0.3)
Other income 0.2 0.3 0.6
Other expenses (1.0) (1.9) (1.3)
------ ------ -------
Income (loss) before income taxes and
net equity in affiliates 1.2 (3.8) (1.0)
Income taxes (credit) 0.5 (1.3) (0.2)
------- ------- -------
0.7 (2.5) (0.8)
Equity in Net Earnings Of Affiliate 0.1 0.3 0.3
------- ------ -------
Net income (loss) 0.8% (2.2)% (0.5)%
======= ======= =======
Page 6 of 30
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 2001 Compared to 2000
- --------------------------------------------
Net Sales
- ----------
Net sales for 2001 decreased to $37.2 million from $39.5 million in 2000 or
5.8% The decline in sales was due to lower customer demand, primarily in the
first quarter of 2001.
Cost of Sales and Gross Margin
- -------------------------------
Cost of sales for 2001 decreased to $33.7 million compared to $37.1 million
in year 2000 or 9.2%.
Material cost decreased $1,039,000 or 4.5% primarily as a result of lower
sales. Material cost decreased 4.5% while net sales decreased by 5.8%
Direct labor decreased by 16.2%. The Company's direct labor decreased
primarily as a result of increased volume in direct yarns (there is no winding
process), more efficient utilization of labor, and lower sales volume.
Overhead cost decreased by 16.1%. Large reductions were realized in repairs
and maintenance ($335,000 or 41.0%), indirect labor ($321,000 or 15.9%),
professional services ($301,000 or 79.3%), and supplies ($142,000 or 50.1%).
Inasmuch as net sales decreased by 5.8% and cost of sales decreased by 9.2%,
the 2001 gross margin increased to 9.4%, compared to 6.0% in 2000.
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses for 2001 aggregated $2.6 million
as compared to $3.1 million in 2000.
Factor's Charges
- -----------------
Factor's charges as a percentage of sales were 0.4% for 2001 and 0.4% for
2000. There was no change in the factor's agreement.
Interest Expense
- -----------------
Interest expense decreased by $225,000 or 38.0% primarily due to lower
existing interest rates and a lower average long-term debt.
Interest Income
- ----------------
Interest income was approximately the same for 2001 and 2000.
Gain (Loss) on Disposal of Equipment
- ------------------------------------
The loss on disposal of equipment of $10,265 was primarily due to the
replacement of the telephone system.
Page 7 of 30
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations: 2001 Compared to 2000 (continued)
- --------------------------------------------------------
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company's Mexican joint venture, Fytek, contributed only $34,000 to the
Company's after income tax earnings in 2001 compared to earnings of $131,000 in
2000. The joint venture only began operations in November of 1997.
Fytek sales in 2001 was $5,383,000 with income before taxes of $101,000,
and after tax income of $68,000. The balance at the end of 2001 in Fytek's
stockholders equity was $1,609,000. For conservative purposes the Company is
taking a valuation reserve against the equity investment in Fytek.
(See Note 10.)
Provision for Income Taxes
- ---------------------------
Provision for income taxes for 2001 aggregated $172,000 compared to a tax
credit of $540,000 tax in 2000, which represents the tax rate difference
between the United States and Mexico as applied to the Company's share of
undistributed net earnings of affiliate.
Results of Operations 2000 Compared to 1999
- --------------------------------------------
Net Sales
- ----------
Net sales for 2000 decreased to $39.5 million from $42.8 million in 1999 or
7.9%. The decline in sales was primarily due to the loss of a program in the
third quarter in the automotive portion of the business, a decline in sewing
thread sales due to the loss of a distributor that went out of business, and a
general decline in the textile economy.
Cost of Sales and Gross Margin
- -------------------------------
Cost of sales for 2000 decreased to $37.1 million or 4.3% as compared to
$38.8 million in 1999.
Material cost decreased $1,320,000 or 5.4% primarily as a result of lower
sales. Material cost decreased only 5.4% while net sales decreased by 7.9% due
to increased cost of polyester yarns.
Direct labor decreased by 28.9%. The Company's direct labor decreased
primarily as a result of increased volume in direct yarns (there is no winding
process), more efficient utilization of labor, and lower sales volume.
Overhead cost decreased by 2.5%. Although the Company's overhead cost
decreased, depreciation cost in overhead increased by $493,000 or 26.8%
primarily due to the purchase of machinery.
Inasmuch as net sales decreased by 7.9% and cost of sales only decreased by
4.3%, the 2000 gross margin decreased to 6.0%, compared to 9.5% in 1999.
Page 8 of 30
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 2000 Compared to 1999 (continued)
- --------------------------------------------
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses for 2000 aggregated $3.1 million
as compared to $4.1 million in 1999. In 1999 the Company had a one time cost of
$1,186,000 related to the training and data conversion for its new ERP software.
Factor's Charges
- -----------------
Factor's charges as a percentage of sales were .4% for 2000 and 1999. There
was no change in the factor's agreement.
Interest Expense
- -----------------
Interest expense increased by $162,000 as a result of an increase in long
term debt.
Interest Income
- ----------------
Interest income was approximately the same for 2000 and 1999.
Gain on Disposal of Equipment
- -----------------------------
In 1999 the Company sold its friction texturing equipment, which had a gross
value of $1,342,000 and a net book value of $230,000 for $446,000 (also see
Note 16 Commitments), resulting in a gain on disposal of $216,000.
Also, the Company replaced dyeing equipment with a gross value of $86,000
and a net book value of $26,000, resulting in a loss on disposal of $26,000.
These were the major transactions that netted a gain on disposal of equipment
in 1999.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company's Mexican joint venture, Fytek, contributed earnings to the
Company of $131,000 in 2000 compared to $135,000 in 1999. The joint venture
only began operations in November of 1997.
Fytek had sales in 2000 of $8.5 million with income before taxes of
$890,000, and after tax income of $262,000. The balance at the end of 2000 in
Fytek's stockholders equity was $1,317,000. (See Note 10.)
Provision for Income Taxes
- ---------------------------
Provision for income taxes for 2000 was a credit of $540,000 compared to a
tax credit of $97,705 in 1999. The credit in the provision for income taxes was
primarily due to a loss in 2000. The provision for income taxes includes an
amount which represents the tax rate difference of approximately 1% between the
United States and Mexico as applied to the Company's share of undistributed net
earnings of affiliate.
Page 9 of 30
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 2001 - 1998 Sales Analysis
- -------------------------------------------------
The table below sets forth an analysis of sales volume for the period 1998
to 2001, inclusive. It discloses that full yarn sales prices decreased from a
high of $3.22 per pound in 1998 to $2.73 in 2001. Unit prices for commission
sales have varied based on mix and market conditions.
The decrease in full yarn average sales prices is a result of a shift from
vertical dyeing and winding yarn on cones to horizontal dyeing and direct
shipping which began in 1996, and competitive pressure on pricing. The Company
expects in the future a larger portion of its sales will be from direct shipping
of yarn.
% of Sales $
% of Pounds of Per
Net Sales Yarn Sold Pound
--------- --------- -----
2001:
Yarn sales 97% 97% $2.73
Commission sales 3 3 3.47
---- ----
Total 100% 100%
==== ====
2000:
Yarn sales 96% 93% $3.01
Commission sales 4 7 1.55
---- ----
Total 100% 100%
==== ====
1999:
Yarn sales 95% 92% $3.13
Commission sales 5 8 1.94
---- ----
Total 100% 100%
==== ====
1998:
Yarn sales 95% 91% $3.22
Commission sales 5 9 1.82
---- ----
Total 100% 100%
==== ====
Liquidity and Capital Resources
- -------------------------------
The Company sells a substantial portion of its accounts receivable to a
commercial factor so that the factor assumes the credit risk for these accounts
and effects the collection of the receivables. At December 29, 2001, the Company
had $2,070,000 due from its factor which matured on January 18, 2002. The
Company has the right to borrow up to 90% of the face amount of each account
sold to the factor.
The Company has an equipment line of credit from its bank and under which
the Company may borrow up to $3,000,000 for the acquisition of production
machinery. The Company borrowed $3,000,000 from the Line of Credit and converted
the Line of Credit to long-term debt on February 29, 2000 (see Note 7).
Page 10 of 30
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------
The Company had inventories of $3,220,194 as of December 29, 2001. The
Company's average inventories aggregated approximately $4,081,331 for 2001,
representing approximately 66 days inventory on hand. The Company's inventories
turn approximately 4 to 6 times each year.
The Company's working capital at December 29, 2001 increased by approximately
$1,152,000, primarily as a result of an increase of $2,839,000 in cash and cash
equivalents offset by a reduction in inventories of $1,414,000. The working
capital of the Company and its line of credit with its bank are deemed adequate
for the operational needs of the Company. The following table sets forth the
Company's working capital and working capital ratios as of the close of the last
three years:
2001 2000 1999
---- ---- ----
Working Capital $6,810,000 $5,658,000 $5,607,000
Working Capital Ratio 3.05 to 1 2.62 to 1 2.28 to 1
As a measure of current liquidity, the Company's quick position (cash, cash
equivalents and receivables over current liabilities) discloses the following at
December 29, 2001 and December 30, 2000:
December 29 December 30
2001 2000
---- ----
Cash, cash equivalents
and receivables $6,816,000 $4,393,000
Current liabilities 3,322,000 3,503,000
--------- ---------
Excess of quick assets
over current liabilities $3,494,000 $ 890,000
========== ==========
The aggregate long-term debt at December 29, 2001 and December 30, 2000 was
$5,276,785 and $6,419,642 respectively. In order to finance the acquisition of
new property, plant and equipment of $6,372,000 in 1995, and $4,640,000 in 1999,
the Company incurred a long-term debt of $6,000,000 in 1996, $2,000,000 in 1999,
and $1,000,000 in 2000 as more fully described in Note 7 of Notes to Financial
Statements. Pursuant to an agreement with its bank, the obligation had no
principal maturities until February 1998. Thereafter, principal payments of
$62,500 are payable monthly for ninety-six (96) consecutive months. The
$3,000,000 obligation principal maturities began February 24, 2000, and is
payable at $35,714 monthly for eighty-four (84) consecutive months.
During 2001, the Company acquired and made deposits on new machinery and
equipment of approximately $300,000 as set forth in the accompanying statement
of cash flows. The Company financed its capital from cash provided from
operations and bank financing.
The Company's long-term debt to equity ratios aggregated 30.6% at December
29, 2001, 40.0% at December 30, 2000, and 39.8% at January 1, 2000.
Planned capital budget expenditures are estimated at $1,200,000 for 2002. The
Company plans to finance its capital needs from cash provided from operations
and bank financing.
Page 11 of 30
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Environmental Matters
- ----------------------
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 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 identified remediation issues and is
moving toward a solution of natural attenuation. The cost of monitoring will be
approximately $31,000 per year.
Inflation
- ----------
Operation results for the Company were affected in 2000 by inflation of
polyester yarn prices, but no further price increases of this type occurred in
2001. Also, natural gas costs rose in 2000 but slightly decreased in the third
quarter of 2001. A tax revaluation by the local county management of all county
properties resulted in a higher tax being assessed for the company, rising
approximately 8% from 2000.
The Company is experiencing increased costs for property and liability
insurance and in officer and director insurance as a result of inflationary
insurance markets, which were also negatively impacted from the events of
September 11, 2001.
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
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 judgement 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
Page 12 of 30
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Forward Looking Statements (continued)
- ---------------------------
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.
7A. 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.
Page 13 of 30
BURKE MILLS, INC.
PART II
305 Madison Avenue 72 Essex Street
New York, NY 10165 Lodi, NJ 07644
(212) 972-9600 (201)368-9300
FAX: (212) 972-9605 FAX: (201)368-9069
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
Independent Auditors' Report
----------------------------
To the Board of Directors of
Burke Mills, Inc.
We have audited the accompanying balance sheets of Burke Mills Inc. as
of December 29, 2001, and December 30, 2000, and the related statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 29, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Burke Mills, Inc. as of
December 29, 2001 and December 30, 2000, and the results of its operations and
its cash flows for each of the three years in the period ended December 29,
2001, in conformity with U.S. generally accepted accounting principles.
Cole, Samsel & Bernstein LLC
Certified Public Accountants
Lodi, New Jersey
January 26, 2002
Page 14 of 30
BURKE MILLS, INC.
PART II
BALANCE SHEET
December 29 December 30
2001 2000
---- ----
ASSETS
Current Assets
Cash and cash equivalents $4,144,340 $ 1,305,362
Accounts receivable 2,671,324 3,088,069
Inventories 3,220,194 4,633,978
Prepaid expenses, taxes, and other
current assets 96,087 133,711
---------- ----------
Total Current Assets 10,131,945 9,161,120
========== ==========
Equity Investment in Affiliate 620,592 586,728
---------- ----------
Property, plant & equipment - at cost 30,962,533 31,314,896
Less: accumulated depreciation 19,564,639 18,018,018
---------- ----------
Property, Plant and Equipment- Net 11,397,894 13,296,878
---------- ----------
Other Assets
Deferred income taxes 606,800 933,000
Deferred charges and other 45,769 16,575
---------- ----------
Total Other Assets 652,569 949,575
---------- ----------
$22,803,000 $23,994,301
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,178,571 $ 1,178,571
Accounts payable 1,720,067 1,897,308
Accrued salaries and wages 253,582 220,063
Other liabilities and accrued expenses 168,790 207,300
Income taxes payable 503 -
-------------------- ---------- ----------
Total Current Liabilities 3,321,513 3,503,242
Long-Term Debt 4,098,214 5,241,071
Deferred Income Taxes 1,977,000 2,158,500
---------- ----------
Total Liabilities 9,396,727 10,902,813
---------- ----------
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 8,485,753 8,170,968
---------- ----------
Total Shareholders' Equity 13,406,273 13,091,488
---------- ----------
$22,803,000 $23,994,301
=========== ===========
See notes to financial statements.
Page 15 of 30
BURKE MILLS, INC.
PART II
STATEMENTS OF OPERATIONS
Years Ended
----------------------------------------
December 29 December 30 January 1
2001 2000 2000
---- ---- ----
Net Sales $37,194,240 $39,456,009 $42,839,759
----------- ----------- -----------
Costs and Expenses
Cost of Sales $33,711,559 $37,122,514 $38,778,823
Selling, general and
administrative expenses 2,593,320 3,067,594 4,062,367
Factor's charges 155,843 155,151 155,334
----------- ----------- -----------
Total Costs and Expenses 36,460,722 40,345,259 42,996,524
----------- ----------- -----------
Operating Earnings (Loss) 733,518 (889,250) (156,765)
----------- ----------- -----------
Other Income
Interest income 73,801 74,531 75,998
Gain on disposal of
property assets (10,265) 22,051 190,397
Other, net 42,853 23,058 11,815
----------- ----------- -----------
Total Other Income 106,389 119,640 278,210
----------- ----------- -----------
Other Expenses
Interest expense 367,250 592,280 430,443
Loss on disposal of
property assets - - -
Other, net 19,787 158,707 126,127
----------- ----------- -----------
Total Other Expenses 387,037 750,987 556,570
----------- ----------- -----------
Income (Loss) Before Provision (credit)
for income taxes and equity in
net earnings of affiliate 452,870 (1,520,597) (435,125)
Provision (Credit)
for Income Taxes 171,949 (539,578) (97,705)
----------- ----------- -----------
Income (Loss) Before Equity in
Net Earnings of Affiliate 280,921 (981,019) (337,420)
Equity in Net Earnings of
Affiliate 33,864 131,000 135,000
----------- ----------- -----------
Net Income (Loss) $ 314,785 $ (850,019) $ (202,420)
============ ============ ===========
Net Earnings (Loss) per share $ .11 $ (.31) $ (.07)
============ ============ ===========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168 2,741,168
=========== =========== ===========
See notes to financial statements.
Page 16 of 30
BURKE MILLS, INC.
PART II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED December 29, 2001
Common Stock
No Par Value
Stated Value
$.66 Per Share
5,000,000 Shares
AUTHORIZED
Total
Shares Paid-In Retained Shareholders
Issued Amount Capital Earnings Equity
------ ------ ------- -------- ------
Balance at Jan. 2,
1999 2,741,168 $1,809,171 $3,111,349 $9,223,407 $14,143,927
Net Income (loss) for
the year ended
Jan. 1, 2000 - - - ($202,420) ($202,420)
--------- ---------- ---------- ---------- ----------
Balance at Jan. 1,
2000 2,741,168 $1,809,171 $3,111,349 $9,020,987 $13,941,507
Net Income (loss)
for the year ended
Dec. 30, 2000 - - - (850,019) (850,019)
---------- ---------- ---------- ---------- ----------
Balance at Dec. 30,
2000 2,741,168 $1,809,171 $3,111,349 $8,170,968 $13,091,488
Net Income
for the year ended - - - 314,785 314,785
Dec. 29, 2001 ---------- ---------- ---------- ---------- ----------
Balance at $2,741,168 $1,809,171 $3,111,349 $8,485,753 $13,406,273
Dec. 29, 2001 ========== ========== ========== ========== ===========
See notes to financial statements.
Page 17 of 30
BURKE MILLS, INC.
PART II
STATEMENTS OF CASH FLOWS
Years Ended
-----------------------------------
December 29 December 30 January 1
2001 2000 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 314,785 $ (850,019) $ (202,420)
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,203,324 2,331,632 1,838,995
(Gain) loss on sales of plant & equipment
including loss on disposals 15,179 (22,051) (190,397)
Deferred income taxes 144,700 (539,578) (106,758)
Equity in net earnings of affiliate (33,864) (131,000) (135,000)
Changes in assets and liabilities:
Accounts receivable 416,745 707,450 (335,212)
Inventories 1,413,784 428,316 (1,356,445)
Prepaid expenses, taxes & other
current assets 37,624 404,269 (224,108)
Other non-current assets (29,194) 101,527 48,975
Accounts payable (177,241) (1,031,909) 625,341
Accrued salaries & wages 33,520 19,152 40,049
Other liabilities and accrued expenses (38,510) (32,137) 102,341
Income taxes payable 503 -0- (31,600)
---------- --------- ---------
Total adjustments 3,986,570 2,235,671 276,181
---------- --------- ---------
Net cash provided by operating activities 4,301,355 1,385,652 73,761
---------- --------- ---------
Cash flows from investing activities:
Acquisition of property, plant
and equipment (387,520) (631,445) (4,640,380)
Proceeds from sales of plant
and equipment 68,000 101,500 524,693
Investment in affiliate -0- -0- -0-
---------- ---------- ----------
Net cash (used) by investing activities (319,520) (529,945) (4,115,687)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term bank note -0- 1,000,000 2,000,000
Principal payments of long-term debt (1,142,857) (1,142,858) (750,000)
---------- ----------- ----------
Net cash provided (used) by financing
activities (1,142,857) (142,858) 1,250,000
---------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents 2,838,978 712,849 (2,791,926)
Cash & cash equivalents at beginning
of year 1,305,362 592,513 3,384,439
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $4,144,340 $1,305,362 $ 592,513
========== ========== ==========
See notes to financial statements.
Page 18 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
Accounting period - The Company's fiscal year is the 52 or 53 week period
ending the Saturday nearest to December 31. Fiscal years 2001, 2000, and 1999
ended on December 29, December 30, and January 1, respectively. The three
fiscal years consisted of 52 weeks.
Revenue recognition - Revenues from sales are recognized at the time
shipments are made to the customer.
Statement of cash flows - For the purposes of the statements of cash flows,
the Company considers cash and cash equivalents to include cash on hand,
deposits in banks, interest bearing demand matured funds on deposit with factor,
and all highly liquid debt instruments with a maturity of three months or less
when purchased.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market. Cost elements included in work-in-process and finished
goods inventories are raw materials, direct labor and manufacturing overhead.
Market is considered to be net realizable value.
Property, plant and equipment - Property, plant and equipment are stated at
cost.
Depreciation and amortization of the property accounts are provided over
the estimated useful lives of the assets. For financial reporting purposes,
depreciation on plant and equipment is provided primarily at straight-line
rates. For income tax purposes, depreciation has been provided at straight-line
rates for all property, plant and equipment acquired prior to 1981 and the
accelerated and modified accelerated cost recovery system for property assets
acquired subsequent to December 31, 1980. The estimated useful lives used for
computing depreciation for financial reporting purposes are generally:
Buildings and improvements 5 - 45 years
Plant machinery and equipment 5 - 17 years
Office equipment 5 - 10 years
Automotive equipment 3 - 5 years
Computer equipment 3 - 5 years
Earnings per share - Earnings per share are based on the net income divided
by the weighted average number of common shares outstanding during the
respective periods.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE
- ----------------------------------------
The Company is engaged in texturing, winding, dyeing, processing and selling
of filament, novelty and spun yarns and in the dyeing and processing of these
yarns for others on a commission basis.
With respect to its operations, the Company's products and its services for
others on a commission basis are sold and/or performed for customers primarily
located in the territorial limits of the United States.
Page 19 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE (continued)
- ----------------------------------------------------
The Company had foreign sales as follows:
Country 2001 2000 1999
------- ---- ---- ----
Mexico .62% .82% .2%
Canada 3.60% 4.8% 4.3%
Brazil .0% .0% .3%
Honduras 2.11% .74% .0%
Nicaragua .0% .09% .0%
Barbados 1.81% .07% .0%
---- ---- ----
Total.......... 8.14% 6.52% 4.8%
Other than sales as shown above, the Company had no other sales in foreign
markets during the three year period ended December 29, 2001. For the three year
period ended December 29, 2001, the Company has operated within a single
industry segment with classes of similar products. The principal markets served
by the Company are upholstery and industrial uses through the knitting and
weaving industry.
In connection with sales to major customers, no customers have exceeded 10%
of the Company's sales during each of the three years ended December 29, 2001.
One customer has exceeded 10% in 2000 and 2001. For the purpose of this
determination, sales to groups of companies under common control have been
combined and accounted for as sales to individual companies. The following table
gives information with respect to these customers:
% of
2001 Amount Net Sales
---- ------ ---------
Customer 1 $ * --
Customer 2 -0- --
Customer 3 11,200,000 30.1
% of
2000 Amount Net Sales
---- ------ ---------
Customer 1 $5,608,000 14.2
Customer 2 * --
Customer 3 5,541,000 14.0
% of
1999 Amount Net Sales
---- ------ ---------
Customer 1 $8,012,000 18.7
Customer 2 5,089,000 11.9
Customer 3 * --
*Less than 10%
Page 20 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - ACCOUNTS RECEIVABLE
- --------------------------------
Accounts receivable comprise the following:
December 29 December 30
2001 2000
---- ----
Due from factor on
regular factoring account $2,070,000 $2,152,000
Non-factored accounts
receivable 601,000 936,000
---------- ---------
Total $2,671,000 $3,088,000
========== ==========
Pursuant to a factoring agreement, the Company sells substantial portions
of its accounts receivable to a commercial factor without recourse, up to
maximum credit limits established by the factor for individual accounts. The
factor assumes the credit risks for these accounts and effects the collection of
the receivables. Amounts invoiced to customers on accounts receivable factored
in excess of the established maximum credit limits are sold to the factor with
recourse in the event of nonpayment by customers.
The Company pays a service charge to its factor to cover credit checking,
assumption of credit risk, record keeping and similar services. In addition, if
the Company takes advances from its factor prior to the average maturity of the
receivables sold (as defined), it is required to pay interest to the factor on
these advances. The Company incurred no interest costs during 2001 and 2000,
inasmuch as it borrowed no funds from its factor during these years.
The Company's factor is collateralized by the accounts receivable sold to
the factor, and the factor has filed a UCC-1 to evidence ownership of the
receivables and to separate the receivables from the Company's creditors. No
interest in inventory, other than returned goods, has been granted to the factor
under the factoring contract.
On April 1, 2002, the Company will begin using the credit insurance of the
Export-Import Bank of the United States on qualified export sales. Annual
exposure will be limited to $15,000 in total on these export sales.
NOTE 4 - INVENTORIES
- -----------------------
Inventories are summarized as follows:
December 29, December 30,
2001 2000
---- ----
Finished & in process $2,263,000 $3,103,000
Raw materials 635,000 1,136,000
Dyes & chemicals 208,000 277,000
Other 114,000 118,000
---------- ----------
Total $3,220,000 $4,634,000
========== ==========
Page 21 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
- ------------------------------------------
Major classifications of property, plant and equipment are as follows:
December 29, 2001 December 30, 2000
------------------ ----------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
Land $ 156,425 $ -- $ 156,425 $ --
Land improvements 182,913 100,972 182,913 94,653
Building & improvements 6,385,441 4,691,487 6,382,541 4,539,462
Plant machinery &
equipment 22,577,821 13,525,915 22,960,405 12,344,171
Office equipment 1,476,498 1,114,440 1,466,535 928,629
Automotive equipment 183,435 131,824 166,077 111,103
--------- ---------- ---------- ----------
Total $30,962,533 $19,564,638 $31,314,896 $18,018,018
=========== =========== =========== ===========
NOTE 6 - LINE OF CREDIT LOAN
- --------------------------------
Pursuant to a loan agreement dated March 29, 1996, and a second amendment
dated January 20, 2000, the Company secured an Equipment Loan facility of
$3,000,000. The Equipment Loan shall be evidenced by the Equipment Note, and
shall bear interest at a rate that varies with the LIBOR rate. The Equipment
Note would be payable in 84 installments. The Company has borrowed $3,000,000
under this line of credit. Also under the Company's factoring arrangement, the
Company may borrow from the factor up to 90% of the face amount of each account
sold to the factor. During 2001 the Company had no borrowings from its factor.
NOTE 7 - LONG-TERM DEBT
- -----------------------
On March 29, 1996, the Company entered into a loan agreement with its bank
providing for a term loan of $6,000,000. The term loan refinanced the two
formerly existing term loans, and accordingly, all term obligations were
consolidated into the one $6,000,000 obligation. This new loan is secured by:
(1) a first Deed of Trust on property and buildings located at the
Company's manufacturing sites in North Carolina, (2) a first lien position
on the new equipment and machinery installed at these manufacturing sites and
(3) a first lien position on the existing machinery and equipment located at
the Company's manufacturing sites.
Under the term loan agreement, interest only was payable monthly until
February 1998. Thereafter, principal maturities are payable in the amount of
$62,500 per month for ninety-six (96) consecutive months plus interest at the
floating LIBOR rate plus 1.90%.
Among other things, covenants include a debt service coverage ratio, a limit
on annual property asset acquisitions exclusive of property acquired with the
loan proceeds under this new loan agreement, the retirement or acquisition of
the Company's capital stock in excess of a stated amount, the maintenance of
a minimum tangible net worth which shall increase by a stated amount annually,
a minimum quick ratio, and a maximum debt to tangible net worth ratio.
Page 22 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT (continued)
- -----------------------------------
The annual principal maturities of long-term debt at December 29, 2001 are
as follows:
Current portion $ 750,000
2003 $ 750,000
2004 750,000
2005 750,000
Thereafter 62,500 2,312,500
--------- ---------
$3,062,500
Under the loan agreement, the Equipment Line of Credit was converted to a
$3,000,000 long-term note payable in 84 installments of $35,714 plus interest at
the floating LIBOR rate plus 1.90%. The Company converted the Line of Credit and
began installments on February 29, 2000.
The annual principal maturities of this long-term debt at December 29, 2001
based on the current amount owned are as follows:
Current Portion $ 428,571
2003 $ 428,571
2004 428,571
2005 428,571
Thereafter 500,001 1,785,714
------- ---------
$2,214,285
NOTE 8 - OTHER LIABILITIES AND ACCRUED EXPENSES
- ----------------------------------------------
Other liabilities and accrued expenses consist of the following:
December 29 December 30
2001 2000
---- ----
Employee insurance $ 70,000 $170,000
Payroll taxes payable 70,000 19,000
Other 29,000 18,000
-------- --------
Total $169,000 $207,000
======== ========
NOTE 9 - INCOME TAXES
- ----------------------
The Company uses the liability method as required by FASB Statement 109
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws.
Page 23 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (contd.)
- ----------------------
The items that comprise deferred tax assets and liabilities are as follows:
Dec. 29 Dec. 30
2001 2000
---- ----
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating carryover 247,600 570,000
Inventory capitalization -- 5,500
Charitable contributions carryover 10,200 8,500
--------- ---------
$ 606,800 $ 933,000
========== ==========
Deferred tax liabilities:
Accelerated depreciation for
tax purposes $1,972,300 $2,154,100
Undistributed earnings of foreign
affiliate, net of tax credit 4,700 4,400
Other - -
--------- ---------
$1,977,000 $2,158,500
========== ==========
Provision for taxes consist of:
Dec. 29 Dec. 30 Jan. 1
2001 2000 2000
---- ---- ----
Current:
Federal $ - $ - $ -
State - - -
Deferred 171,949 (539,578) (97,705)
------- -------- -------
Total $ 171,949 $(539,578) $(97,705)
========= ========= =========
The provision for income taxes on historical income differs from the amounts
computed by applying the applicable Federal statutory rates, due to the
following:
Years Ended
-----------------------------------------
December 29 December 30 January 1
2001 2000 2000
---- ---- ----
Income (loss) before income taxes
(credit) $ 452,870 $(1,520,597) $(435,125)
Federal income taxes 34% 34% 34%
-------- ---------- ---------
Computed taxes (credit) at maximum
statutory tax rate 154,000 (517,003) (147,943)
State income taxes (credit), net of
Federal income tax benefits -- (23,885) (15,260)
Total adjustment for foreign
affiliate earnings 17,949 1,310 66,130
Prior year tax examination and
other -- -- (632)
--------- --------- ---------
Provision for income taxes $ 171,949 $ (539,578) $ (97,705)
========= ========= =========
The net operating loss carryforward is $569,000 expiring 2020. The tax
effect at the maximum tax rate would be $194,000.
The Company has paid and has set forth $349,000 for alternative minimum taxes
paid, which may only be used to offset normal income taxes that may be incurred
in future years.
Page 24 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS
- -------------------------------------------------------------------
The Company owns 49.8% of Fytek, S.A. de C.V. (Fytek), a Mexican corporation.
Fytek began operation in the fourth quarter of 1997. The Company accounts for
the ownership using the equity method. During 2001, the Company had purchases
from Fytek in the amount of $1,325,000 compared to $1,869,000 in 2000. Burke
Mills has not guaranteed any debt for its joint venture, Fytek. Fytek's
financial information is as follows:
Statement of Income
(In thousands of U.S. Dollars)
December 31
2001 2000
------ ------
(Restated figures)
Net Sales $5,383 $8,508
Gross Profit 497 1,419
Income from continuing operations 129 862
Income before income taxes 101 890
Income taxes (33) (307)
------ ------
Net income $ 68 $ 583
======= =======
Balance Sheet
(In thousands of U.S. Dollars)
December 31
2001 2000
------ ------
(Restated figures)
Current assets $3,137 $4,175
Non-current 166 166
------ ------
Total assets $3,303 $4,341
====== ======
Current liabilities $1,694 $2,882
Non-current liabilities -0- -0-
------ ------
Total liabilities $1,694 $2,882
Stockholder's equity 1,609 1,459
------ ------
Total liabilities and stockholder's equity $3,303 $4,341
====== ======
NOTE 11 - STATEMENTS OF CASH FLOWS
- ----------------------------------
FASB No. 95 requires that the following supplemental disclosures to the
statements of cash flows be provided in related disclosures. Cash paid for
interest was $367,000 in 2001, $590,000 in 2000, and $446,000 in 1999. The
Company had $12,000 cash payments during 2001 compared to no cash payments
during 2000 for income taxes and received $23,000 for a refund in 2000
compared to $65,055 paid in 1999.
NOTE 12 - RENTAL EXPENSES AND LEASE COMMITMENTS
- -----------------------------------------------
Rental expenses under all lease commitments for the three fiscal years ended
December 29, 2001, aggregated $40,000, $45,000, and $48,000 respectively.
Page 25 of 30
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - RENTAL EXPENSES AND LEASE COMMITMENTS (continued)
- -----------------------------------------------
Minimum commitments under terms of all non-cancelable leases, which consist
only of leased equipment, are as follows as of December 29, 2001:
2002 $40,410
2003 40,410
2004 40,410
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
(in thousands of dollars except for per share amounts)
QUARTER
------------------------------------
2001 First Second Third Fourth
---- ----- ------ ------ ------
Net sales $ 9,428 $10,372 $ 9,255 $ 8,139
Cost of sales 8,827 9,251 8,447 7,186
Gross profit 601 1,121 808 953
Net income (loss) (113) 220 85 123
Net income (loss) per common share (.04) .08 .03 .04
2000 First Second Third Fourth
---- ----- ------ ------ ------
Net sales $11,058 $10,457 $ 9,279 $ 8,662
Cost of sales 10,361 9,681 8,958 8,123
Gross profit 697 776 321 539
Net income (loss) (186) (68) (247) (349)
Net income (loss) per common share $ (.07) $ (.02) $ (.09) $ (.13)
1999 First Second Third Fourth
---- ----- ------ ------ ------
Net sales $ 9,996 $10,796 $11,625 $10,423
Cost of sales 8,719 9,782 10,106 10,172
Gross profit 1,277 1,014 1,519 251
Net income (loss) 106 60 28 (396)
Net income (loss) per common share $ .04 $ .02 $ .01 $ (.14)
NOTE 14 - 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 in 2001, 2000,
or 1999.
NOTE 15 - CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of occasional temporary cash investments and
amounts due from the factor on receivables sold to the factor on a non-recourse
Page 26 of
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - CONCENTRATIONS OF CREDIT RISK (continued)
- ----------------------------------------
basis. The receivables sold to the factor during a month generally have a
maturity date on the 21st to the 30th of the following month. At December 29,
2001, the Company had $2,070,000 due from its factor which matured on
January 18, 2002. Upon maturity, the funds are automatically transferred by the
factor to the Company's bank.
NOTE 16 - OTHER COMMITMENTS
- ------------------------------
a) The Company entered into a supply agreement, dated November 23, 1996,
with its joint venture company, Fytek, S.A. de C.V. to purchase twisted yarns.
The Company agrees to purchase approximately $1,800,000 of twisted yarn annually
for the five years beginning November 1997.
b) 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 exceeds 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 POY prices increase or decrease by 5% or
more.
c) 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 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 is
moving toward a solution of natural attenuation. The cost of monitoring will be
approximately $31,000 per year.
d) The Company committed to purchase $281,000 of machinery from Rieter ICBT
in 2001, and the equipment was delivered January 30, 2002. A 10% down payment of
$28,000 was made in 2001. $225,000 is payable 30 days after delivery, and the
remaining balance of $28,000 is payable after successful commissioning.
NOTE 17 - RECLASSIFICATIONS
- ---------------------------
The deferred income tax assets for January 1, 2000, have been reclassified
from current assets to non-current assets to conform to presentations utilized
in the December 30, 2000 balance sheet.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------------------------
There have been no changes in nor disagreements with accountants on
accounting and financial disclosure during the Company's two most recent fiscal
years or during any subsequent interim period. The current accounting firm for
the Company, Cole, Samsel & Bernstein LLC of New York, New York, and Lodi, New
Jersey, has served as accountants for the Company during the last two fiscal
years.
Page 27 of 30
BURKE MILLS, INC.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------
The information required for Part III of this report (Items 10-13) is
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A for the annual meeting of shareholders
scheduled for May 21, 2002, involving the election of directors, which is
expected to be filed not later than 120 days after the end of the fiscal year
covered by this report.
BURKE MILLS, INC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------
(a) The following documents are filed as a part of this report.
(a) 1. Report of Independent Certified Public Accountants.
---------------------------------------------------
The following financial statements of Burke Mills, Inc. and the related
auditors' report required to be included in Part II Item 8, are listed below:
Independent auditors' report
Balance sheets
December 29, 2001
December 30, 2000
Statements of operations
Year ended December 29, 2001
Year ended December 30, 2000
Year ended January 1, 2000
Statements of changes in shareholders' equity
Year ended December 29, 2001
Year ended December 30, 2000
Year ended January 1, 2000
Statements of cash flows
Year ended December 29, 2001
Year ended December 30, 2000
Year ended January 1, 2000
Notes to financial statements
Page 28 of 30
BURKE MILLS, INC.
Financial statement schedules have been omitted since the required
information is not present in amounts sufficient to require submission of the
schedules, or because the required information is included in the financial
statements or the notes thereto.
(a) 2. The exhibits required by Item 601 of Regulation S-K and paragraph
(c) of Item 14 are the articles of incorporation and by-laws of the Company
which are incorporated herein by reference from the Amendment on Form 8K to the
annual report on Form 10-K of the Company for the fiscal year ended January 2,
1982 previously filed with the Commission.
(b) During the last quarter of the period covered by this report no report
on Form 8-K was filed.
(c) See sub-Item (a)2 above.
(d) Exhibit 99 Audited Financial Statement referred to in Note 10 of
Financial Statements.
Page 29 of 30
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 23, 2002 BURKE MILLS, INC.
By: Humayun N. Shaikh /s
----------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive Officer)
By: Ronald D. Nicholson /s
-----------------------
Ronald D. Nicholson
Vice President, Finance
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Date: April 23, 2002 By: Humayun N. Shaikh /s
---------------------------
Humayun N. Shaikh, Director
Date: April 23, 2002 By: Thomas I. Nail /s
---------------------------
Thomas I. Nail, Director
Date: April 23, 2002 By: Richard F. Byers /s
---------------------------
Richard F. Byers, Director
Date: April 23, 2002 By: William T. Dunn /s
---------------------------
William T. Dunn, Director
Date: April 23, 2002 By: Robert P. Huntley /s
---------------------------
Robert P. Huntley, Director
Date: April 23, 2002 By: Robert T. King /s
---------------------------
Robert T. King, Director
Page 30 of 30
EX-99
AUDITED FINANCIAL STATEMENTS OF AFFILIATE (49.9%)
FYTEK, S.A. DE C.V.
(a Mexican corporation)
FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
CONTENTS
Page
Report of independent accountants 1
Financial statements:
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6-13
- ---------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Monterrey, N. L., February 26, 2002
To the Stockholders of Fytek, S. A. de C. V. We have audited the accompanying
balance sheets of Fytek, S. A. de C. V. as of December 31, 2001 and 2000, and
the related statements of income, of changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and that they were prepared in
accordance with generally accepted accounting principles. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, after the restatement described in Note 10, the aforementioned
financial statements present fairly, in all material respects, the financial
position of Fytek, S. A. de C. V. at December 31, 2001 and 2000, and the results
of its operations, the changes in its stockholders' equity and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Alejandro Moreno A.
Pricewaterhouse Coopers
Page 1 of 13 (EX-99)
FYTEK, S. A. DE C. V.
BALANCE SHEETS
Thousands of U.S. dollars
December 31
-----------
2001 2000
------ ------
(Restated
Assets: figures)
Cash and cash equivalents $ 325 $ 23
Accounts receivable 1,959 2,770
Burke Mills, Inc. (Stockholder) 89 356
Inventories 764 1,026
------ ------
Total current assets 3,137 4,175
Machinery and equipment 166 166
------ ------
Total assets $3,303 $4,341
====== ======
Liabilities:
Suppliers $ 515 $ 673
Related parties payable 894 1,960
Deferred income tax 143 149
Sundry creditors and accrued expenses 142 100
------ ------
Total current liabilities 1,694 2,882
------ ------
Stockholders' equity:
Capital stock 307 307
Retained earnings 1,078 1,010
Cumulative translation adjustment 224 142
------ ------
Total stockholders' equity 1,609 1,459
------ ------
Total liabilities and stockholders' equity $3,303 $4,341
====== ======
The accompanying notes are an integral part of these financial statements.
Page 2 of 13 (EX-99)
FYTEK, S. A. DE C. V.
STATEMENTS OF INCOME
Thousands of U.S. dollars
Years Ended
-----------
December 31
2001 2000
------ ------
(Restated
figures)
Net sales $5,383 $8,508
Cost of sales (4,886) (7,089)
------ ------
Gross margin 497 1,419
Selling, general and administrative expenses (368) (557)
------ ------
Operating income 129 862
------ ------
Interest income 2 7
Interest expense (10) (16)
Exchange (loss) gain, net (25) 25
------ ------
(33) 16
------ ------
96 878
Other income, net 5 12
------ ------
Income before income tax 101 890
Income taxes, net (33) (307)
------ ------
Net income $ 68 $ 583
====== ======
The accompanying notes are an integral part of these financial statements.
Page 3 of 13 (EX-99)
FYTEK, S. A. DE C. V.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Thousands of U.S. dollars
Cumulative Cumulative
Capital Retained translation comprehensive
stock earnings adj. Total income
----- -------- --------- ----- ------
Balances at December 31,
1999 $307 $427 $21 $755 $448
(Restated figures)
Net income 583 583
Foreign currency translation
adjustment 121 121
Comprehensive income 704
----- ----- ----- ----- -----
Balances at December 31,
2000: $307 $1,010 $142 $1,459 $1,152
(Restated figures)
Net income 68 68
Foreign currency translation
adjustment 82 82
Comprehensive income 150
----- ----- ----- ----- -----
Balances at December 31,
2001: $307 $1,078 $224 $1,609 $1,302
==== ====== ==== ====== ======
The accompanying notes are an integral part of these financial statements.
Page 4 of 13 (EX-99)
FYTEK, S. A. DE C. V.
STATEMENTS OF CASH FLOWS
Thousands of U.S. dollars
Years ended
-----------
December 31
2001 2000
----- -----
(Restated
figures)
Net income $ 68 $583
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Allowance for doubtful accounts 16 5
Depreciation 8 4
Deferred income taxes (6) 95
Changes in operating assets and liabilities:
Accounts receivable 913 (295)
Inventories 306 (60)
Related parties, net (861) (251)
Suppliers (186) (453)
Sundry creditors and accrued expenses 36 (322)
------ ------
Net cash provided by (used in) operating
activities 294 (694)
------ ------
Cash flow from investing activities:
- ------------------------------------
Acquisition of machinery and equipment -- (27)
------ ------
Cash used in investing activities -- (27)
------ ------
Effect of exchange rate changes on
cash and cash equivalents 8 144
------ ------
Increase (decrease) in cash
and cash equivalents 302 (577)
Cash and cash equivalents at
beginning of the year 23 600
------ ------
Cash and cash equivalents at end of the year $325 $ 23
====== =======
The accompanying notes are an integral part of these financial statements.
Page 5 of 13 (EX-99)
FYTEK, S. A. DE C. V.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
(Thousands of U.S. dollars, except exchange rates)
NOTE 1 - INCORPORATION AND DESCRIPTION OF BUSINESS
- --------------------------------------------------
Fytek, S. A. de C. V. (the "Company") is a company incorporated under the laws
of Mexico. The Company is primarily engaged in manufacturing chemical fibers.
For purposes of its operations the Company leases machinery and equipment from
related parties (see Note 7). The Company has no employees and technical and
administrative services are provided to it by a related party. The Company is
owned 50.01% by Akra Teijin, S. A. de C. V. and 49.99% by Burke Mills, Inc.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (US
GAAP).
Following is a summary of the most significant accounting policies:
a. Basis of presentation
---------------------
The records of the Company are maintained in Mexican pesos ("Ps." or
"pesos"). The accompanying financial statements were derived from the
Company's financial statements under accounting principles generally
accepted in Mexico ("Mexican GAAP").The financial statements under Mexican
GAAP constitute a suitable basis for adjustment and translation/
remeasurement into US dollars for purposes of expressing them in
conformity with accounting principles generally accepted in the United
States of America.
Certain reclassifications have been made to the prior year amounts to
conform to the current year presentation.
b. Foreign currency transactions and translation
---------------------------------------------
The Company's functional currency is the Mexican peso (Ps). Through
December 31, 1998 Mexico was considered a hyperinflationary economy,
therefore, the Company used the historical method of translation under
SFAS 52. Under this method, non-monetary assets or liabilities originally
denominated in pesos are translated into U.S. dollars using the historical
exchange rate at the date of the transaction. Stockholders' equity is also
translated at historical rates.
Income statement components are generally translated at average rates;
however, depreciation and amortization charges are translated at historical
rates based on the dollars basis of the respective assets. The resulting
translation effects are recognized in the statement of income.
An economy is considered to be hyperinflationary when the cumulative
inflation for the previous three years exceeds 100%, however, effective
January 1, 1999, Mexico is no longer considered a hyperinflationary
economy. Therefore, the Company used the current method to translate its
peso denominated financial statements to US dollars, and applied the
provisions of EITF 92-4, "Accounting for a Change in Functional Currency
When an Economy Ceases to be Considered Highly Inflationary" and EITF 92-8,
"Accounting for the Income Tax Effects under SFAS109 of a Change in
Functional Currency When an Economy Ceases to be Considered Highly
Inflationary" to account for the change in functional currency.
Page 6 of 13 (EX-99)
Using the remeasurement method monetary assets and liabilities denominated
in pesos are translated into U.S. dollars using current or period end
exchange rates. The difference between the exchange rate at the date of the
transaction and the exchange rate on the settlement date or balance sheet
date if not settled, is included in the results of operations as a foreign
exchange gain or loss. Non-monetary assets or liabilities, originally
denominated in Ps are translated into U.S. dollars using historical
exchange rates at the date of the transactions. Capital stock transactions
are also translated at historical exchange rates.
The current method requires the translation of all assets and liabilities
using the current year end exchange rate. Capital stock continues to be
translated at historical exchange rates and income statement components are
translated at average rates. The effect of the difference between the
exchange rate at the beginning and the end of the reporting periods is
reflected as a component of other comprehensive income within stockholders'
equity.
Provided below is a summary of the year end and average exchange rates
experienced during 2001 and 2000.
Ps per $
--------
At December 31, 2001 Year end 9.1423
Year ended December 31, 2001 Average 9.3409
At December 31, 2000 Year end 9.5997
Year ended December 31, 2000 Average 9.4470
c. Cash and cash equivalents
-------------------------
Cash and cash equivalents are stated at cost, which approximates the fair
value. The Company considers all highly and temporary cash investments with
original maturities of three months or less to be cash equivalents.
d. Inventories and cost of sales (Note 4)
--------------------------------------
Inventories are stated at the lower of average cost or market.
e. Machinery, equipment and depreciation (Note 5)
----------------------------------------------
Machinery and equipment are stated at acquisition cost, and depreciated
using the straight-line method over the estimated useful lives, at an
annual rate of 3.3% (2.5% in 2000).
f. Long lived assets
-----------------
The Company evaluates potential impairment loss relating to long-lived
assets by assessing whether the unamortized carrying amount can be
recovered over the remaining life of the assets through undiscounted future
expected cash flows generated by the assets and without interest charges.
If the sum of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset. Assets to be
disposed of are recorded at the lower of carrying amount or fair value less
cost to sell. Testing whether an asset is impaired and for measuring the
impairment loss is performed for assets groupings at the lowest level for
which there are identifiable cash flows that are largely independent of the
cash flows generated by other asset groups.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
Page 7 of 13 (EX-99)
g. Income tax
----------
The Company accounts for income taxes under the liability method in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes".
This statement requires an asset and liability approach for financial
accounting and reporting for income tax under the following basic
principles: (a) a current tax liability or asset is recognized for the
estimated taxes payable or refundable on tax returns for the current year,
(b) a deferred tax liability or asset is recognized for the estimated
future tax effects attributable to temporary differences, (c) the
measurement of current and deferred tax liabilities and assets is based on
provisions of the enacted tax law and the effects of future changes in tax
laws or rates are not anticipated, and (d) the measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits for
which available evidence indicates that it is more likely than not that
they will not be realized. Under this method, deferred tax is recognized
with respect to all temporary differences.
The temporary differences under FAS No. 109 are determined based on the
difference between the tax-basis amount of the asset or liability and the
related historical amount reported in the financial statements.
h. Revenue recognition
-------------------
The Company recognizes revenue when merchandise is delivered to customers
and accepted. The allowance for returns and doubtful accounts is sufficient
to cover any possible loss.
i. Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
j. Comprehensive income
--------------------
Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.
k. Concentration of credit risk
----------------------------
The Company's financial statements do not include any financial instruments
that represent a significant concentration of credit risk. Cash in banks
are held by U. S. and Mexican financial institution are denominated in
pesos and U. S. dollars.
Page 8 of 13 (EX-99)
NOTE 3 - ACCOUNTS RECEIVABLE
- ----------------------------
At December 31, this caption comprised the following:
2001 2000
------ ------
Politel, S. A. de C. V. $ 275 $ 412
Vicza, S. A. de C. V. 202 33
Nova Distex, S. A. de C. V. 186 239
Fariel, S. A. de C. V. 182 226
Diltex, S. A. de C. V. 122 33
Bermatex, Inc. 2 552
Other customers 640 925
Other accounts receivable 441 421
------ ------
2,050 2,841
Allowance for doubtful accounts (91) (71)
------ ------
$1,959 $2,770
====== ======
NOTE 4 - INVENTORIES
- --------------------
At December 31, this caption comprised the following:
2001 2000
------ ------
Finished products $ 784 $ 845
Work in process 285 340
Spare parts and others 69 66
------ ------
1,138 1,251
Less - Allowance for slow-moving inventories 374 225
------ ------
$ 764 $1,026
====== =======
NOTE 5 - MACHINERY AND EQUIPMENT
- --------------------------------
At December 31, this caption comprised the following:
2001 2000
------ -----
Machinery and equipment $ 170 $ 164
Computer equipment 7 6
Construction in progress 1 --
------ -----
178 170
Less - Accumulated depreciation 12 4
------ -----
$ 166 $ 166
====== ======
NOTE 6 - STOCKHOLDERS' EQUITY
- -----------------------------
As of December 31, 2001 and 2000 capital stock is variable with a fixed minimum
of $6 and an unlimited maximum. At December 31, 2001 and 2000, the subscribed
and paid-in nominal capital stock of $307, was represented by 24,450 Series "B"
common, nominative shares of one hundred nominal pesos par value each.
Dividends paid from retained earnings which have not previously been taxed are
subject to an income tax payable by the Company, which may be credited against
the Company's taxable income in the three following years.
Page 9 of 13 (EX-99)
NOTE 7 - INCOME TAX
- -------------------
The components of income tax benefit (expense) for the years ended December 31,
are as follows:
2000
2001 (Restated figures)
------ -----
Current income tax expense $ (39) $(212)
Deferred income tax benefit (expense) 6 (95)
------ ------
$ (33) $(307)
====== ======
The primary components of the deferred tax assets (liabilities) at December 31,
are as follows:
2000
2001 (Restated figures)
------ -----
Inventory $(268) $(359)
Machinery and equipment -- 2
Allowance for doubtful accounts 32 25
Accrued expenses 93 183
------ -----
Net deferred income tax liability $(143) $(149)
====== ======
The following is a reconciliation of the statutory income tax rate to the
effective income tax rate for the years ended December 31.
2001 2000
------ -----
(Restated figures)
Income tax computed at statutory tax
rate (35%) $ (35) $ (312)
Non-deductible items (1) ---
Other permanent differences 5 ---
Inflationary components and translation
adjustments (2) 5
------ ------
Income tax expense $ (33) $ (307)
====== ======
Subsequent event
- ----------------
In accordance with the amendments to the Mexican Income Tax Law effective
January 1, 2002, income tax rate will be reduced by a 1% on an annual basis
reaching a 32% rate in the year 2005. This change will give rise to a decrease
of approximately $12 in the amount for deferred income tax payable recorded at
December 31, 2001. Such amount will be credited to 2002 income.
NOTE 8 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES
- --------------------------------------------------------
Accounts payable with related parties at December 31, are as follows:
2001 2000
----- -----
Fibras Quimicas, S. A. de C.V. $ 894 $1,785
Nylon de Mexico, S. A. de C. V. --- 175
------ ------
$ 894 $1,960
Page 10 of 13 (EX-99)
Administrative and technical services:
- --------------------------------------
During the years ended December 31, 2001 and 2000 the Company accrued $1,336
and $1,407, respectively for administrative and technical services due to
Fibras Quimicas, S. A. de C. V., an affiliated company of one of the
shareholders.
Operating lease:
- ----------------
In November 1996, the Company entered into a five year lease agreements for
buildings, machinery and equipment from one of its stockholders (Burke Mills)
and an affiliated company (Fibras Quimicas, S. A. de C. V.), under
non-cancellable operating lease agreements. These agreements expired in
November 2001; however, Management is currently negotiating their renewals.
During the years ended December 31, 2001 and 2000, the Company paid rentals of
$537, and $549, respectively, under the terms of these agreements.
Purchase and supply agreements:
- -------------------------------
In 1996, the Company entered into a five year supply agreement with Burke Mills,
Inc. to supply approximately $1,800, annually of polyester twisted yarn,
beginning November 1997. During the years ended December 31, 2001 and 2000 the
Company supplied $1,272 and $2,084, respectively, of polyester twisted yarn to
Burke Mills Inc. At December 31, 2001 and 2000, the balances shown in the
balance sheet correspond to these transactions.
In 1996, the Company entered into a five year supply agreement with Fibras
Quimicas, S. A. de C. V. (affiliated company) to purchase approximately $3,500,
annually of polyester natural yarn, beginning in November 1997. During the
years ended December 31, 2001 and 2000 the Company acquired $1,837 and $4,945,
respectively, of polyester natural yarn under the terms of this agreement.
During 2001 and 2000, the Company purchased raw materials from Nylon de Mexico,
S. A. de C. V., subsidiary of a previous shareholder, for $917 and $1,082,
respectively.
NOTE 9 - NEW PRONOUNCEMENTS
- ---------------------------
During June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, "Deferral of the Effective Date of SFAS No. 133", which defers the
effective date of SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), to fiscal years beginning after June 15, 2000. SFAS
133 establishes a new model for the accounting for derivatives and hedging
activities and supersedes and amends a number of existing standards. Upon SFAS
133's initial application, all derivatives are required to be recognized in the
statement of financial position as either assets or liabilities and measured at
fair value. In addition, all hedging relationships must be designated,
reassessed and documented pursuant to the provisions of SFAS 133.
The Company adopted SFAS 133, as amended, on January 1, 2001 for U.S. GAAP
purposes. The adoption of SFAS 133 on January 1, 2001 did not have an impact on
the Company's financial statements.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 140")
which supersedes APB Opinion No. 16, "Business Combinations" and amends or
supersedes a number of related interpretations of APB 16. The statement is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method that are
completed after June 30, 2001. SFAS 141 addresses financial accounting and
reporting for business combinations, eliminates the pooling-of-interests method
of accounting for business combinations, and prescribes the initial recognition
and measurement of goodwill and other intangible assets, accounting for negative
goodwill and the required disclosures in respects of business combinations.
Management plans to adopt the provisions of SFAS 141 for any business
combination accounted for by the purchase method that is completed after June
30, 2001.
Page 11 of 13 (EX-99)
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142") which supersedes APB Opinion No. 17, "Intangible Assets".
SFAS 142 addresses how intangible assets that are acquired individually or with
a group of other assets (but not those acquired in a business acquisition)
should be accounted for in financial statements upon their acquisition. SFAS 142
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. SFAS 142 is required to be applied at the
beginning of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date.
Management is currently evaluating the impact that the adoption of SFAS 142 will
have on its consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 requires the recognition of a liability for
the legal obligations associated with the retirement of a tangible long-lived
asset that results from the acquisition, construction and (or) normal operation
of the asset. The liability is recognized at fair value in the period in which
it is incurred if a reasonable estimate of fair value can be made. A
corresponding asset retirement cost is added to the carrying value of the
long-lived asset and is depreciated to expense using a systematic and accretion
and accumulated depreciation, respectively, from the time period when the asset
retirement obligation would have originally been recognized had this statement
been in effect to the date of initial adoption. The cumulative effect of initial
adoption of SFAS 143 is recorded as a change in accounting principle. Management
is currently evaluating the impact that the adoption of SFAS 143 will have on
the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". SFAS 144 retains the fundamental provisions
of SFAS 121 for recognition and measurement of the impairment of long-lived
assets to be held and used, but resolves a number of implementation issues and
establishes a single accounting model for assets to be disposed of. SFAS 144
also retains the requirements to report discontinued operations separately from
continuing operations and extends that reporting to a component of an entity
that either has been disposed of by sale, abandonment or distribution to owners
or is classified as held for sale. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001
and their interim periods. The provisions of SFAS 144 for long-lived assets to
be disposed of by sale or otherwise are effective for disposal activities
initiated after the effective date of SFAS 144 or after its initial application.
Management is currently evaluating the impact that the adoption of SFAS 144 will
have on the consolidated financial statements.
NOTE 10 - RESTATEMENT OF PRIOR YEAR INCOME TAX AMOUNTS
- ------------------------------------------------------
The deferred tax liability as of December 31, 2000 has been restated due to the
previous omission of a taxable temporary difference related to certain accruals
and provisions established in 2000, which under Mexican tax law, are deductible
when paid. The decrease in the net deferred tax liability and resulting decrease
in the deferred income tax provision related to the above amounted to US$142. In
addition, the income tax provision for the year ended December 31, 2000 has also
been reduced since the original tax provision for that year reflected a charge
related to additional taxes paid in 1999 for the amendment of tax returns for
the years ended December 31, 1998 and 1997. Such amounts, totaling approximately
US$179, should have been reflected in periods prior to 2000.
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Consequently, the tax provisions for the year ended December 31, 2000 before and
after the restatement are as follows:
Tax provision As originally reported As restated
- ------------- ---------------------- ------------
Current $(410) $ (212)
Deferred (218) (95)
------ ------
Total $(628) $ (307)
====== ======
The deferred tax liability as of December 31, 2000 before and after the
restatement is as follows:
As originally reported As restated
------------------------ ------------
Net deferred tax liability $291 $149
==== ====
Net income for the year ended December 31, 2000 is as follows:
As originally reported As restated
------------------------ ------------
Net income $262 $583
==== ====
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