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 28, 2002
[ ]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
Form 10-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 as of
the last business day of the registrant's most recently completed second fiscal
quarter) was $1,458,751.
The number of shares outstanding of the registrant's only class of common stock
as of March 3, 2003 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 20, 2003, 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 33
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 2002, the Company experienced a very weak textile economy causing a very
competitive market, a shrinking customer base, and an erosion in customer credit
quality. The Company's customers were affected by the weak economy and also by
competition from imports.
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 improved its balance
sheet and is poised for any market recovery.
(b) Financial Information about Industry Segments - The Company had only one
industry segment during the fiscal year ended December 28, 2002.
(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 28, 2002 was
$1,017,000 and as of December 30, 2001 was $2,425,000. 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 58 days. On
average, the Company turns its inventory approximately 5 to 7 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 28, 2002, approximately 3% 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 defective.
Page 2 of 33
BURKE MILLS, INC.PART I
ITEM 1 - BUSINESS (continued)
- ------------------------------
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 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 28, 2002 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 report 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, 2003, the Company had 167 employees. The Company's yarn
division is its only division. During the fiscal year ended December 28, 2002,
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 Fytek markets and distributes yarn in Mexico, Central America and South
America. Fytek began production in the fourth quarter of 1997.
(d) Financial Information about Geographic Areas. For each of the last three
fiscal years of the Company, revenues of the Company from external customers is
as follows:
Page 3 of 33
BURKE MILLS, INC.PART I
Country of Domicile 2002 2001 2000
Mexico $567,000 $ 231,000 $ 322,000
Canada 66,000 1,340,000 1,896,000
Honduras 221,000 786,000 294,000
Nicaragua -0- -0- 37,000
Barbados 140,000 673,000 29,000
---------- ------------ ----------
Total.......... $994,000 $3,030,000 $2,578,000
The basis for attributing revenues from external customers to individual
countries is payment by country of domicile on invoices from the Company. The
Company does not have any long-lived assets, long-term customer relationships
with a financial institution, mortgage and other servicing rights, deferred
policy acquisition costs or deferred tax assets located in any foreign country.
The Company does not deem material any risks attendant to foreign operations
through its investment in Fytek due to the minimal amount of revenue produced
for the Company by Fytek.
(e) Available Information. No report required.
(f) Reports to Securities Holders. No report required.
(g) Enforceability of Civil Liabilities Against Foreign Persons.
No report required.
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 28, 2002 are as
follows:
Pounds/Year 2002
Department Capacity Utilization
---------- -------- -----------
Winding Machines 16,934,000 21%
Texturing Machines 1,152,050 27%
Dyeing Equipment 25,800,000 41%
Page 4 of 33
BURKE MILLS, INC.PART I
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not presently involved in any legal proceedings 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.
PART II
-----
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- --------------------------------------------------------------
(a) The principal United States (or other) market in 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, 2002, and
on the latest practicable date (as obtained from Commodity Systems, Inc.) is as
follows:
Quarter Ending
2002 High Bid Low Bid
------------ -------- --------
March 31 $0.92 $0.40
June 30 $1.62 $0.51
September 30 $1.30 $1.15
December 31 $1.40 $0.64
Quarter Ending
2001 High Bid Low Bid
------------ -------- --------
March 31 $0.25 $0.13
June 30 $0.34 $0.05
September 30 $0.60 $0.25
December 31 $0.60 $0.41
February 28, 2003 $0.61 $0.61
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 March 5, 2003 there were 369 holders of record of the common stock of
the Company.
(c) The Company has declared no dividends on its common stock during the past
two fiscal years.
(d) Securities Authorized For Issuance Under Equity Compensation Plans. No
equities securities of the Company are authorized for issuance under equity
compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following selected financial data set forth for the five fiscal years ended
December 28, 2002 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.
Page 5 of 33
BURKE MILLS, INC.
PART II
ITEM 6. SELECTED FINANCIAL DATA (continued)
- --------------------------------
(in thousands except per share data)
Years Ended
----------------------------------------
Dec. 28 Dec. 29 Dec. 30 Jan. 1 Jan. 2
2002 2001 2000 2000 1999
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA
Net Sales $29,990 $37,194 $39,456 $42,840 $42,169
Cost of Sales 27,968 33,711 37,123 38,779 37,825
------- ------- ------- ------- -------
Gross Profit $ 2,022 $ 3,483 $ 2,333 $ 4,061 $ 4,344
------- ------- ------- ------ ------
Income (loss) before income
taxes $ (641) $ 487 $(1,390) $ (300) $ 1,087
Income Taxes (credit) (322) 172 (540) (98) 383
------- ------- ------- ------- -------
Net Income (loss) $ (319) $ 315 $ (850) $ (202) $ 704
======= ======= ======= ======= =======
Per Share (Note A)
Net income (loss) $ (.12) $ .11 $ (.31) $ (.07) $ .26
======== ======= ======= ======= =======
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
======= ======= ======= ======= =======
SELECTED CASH FLOW DATA
Capital expenditures $ 888 $ 388 $ 631 $ 4,640 $ 2,162
======= ======= ======= ======= =======
Depreciation $ 2,055 $ 2,203 $ 2,332 $ 1,839 $ 1,744
======= ======= ======= ======= =======
Cash provided by
operating activities $ 2,110 $ 4,301 $ 1,386 $ 74 $ 1,926
======= ======= ======= ======= =======
SELECTED BALANCE SHEET DATA
Current assets $ 8,670 $10,132 $ 9,161 $ 9,988 $11,213
Current liabilities 2,482 3,322 3,503 4,381 3,383
------ ----- ----- ----- -----
Working capital $ 6,188 $ 6,810 $ 5,658 $ 5,607 $ 7,830
======= ======= ======= ======= ======
Current ratio 3.49 3.05 2.62 2.28 3.31
==== ==== ==== ==== ====
Total assets $20,225 $22,803 $23,994 $25,995 $24,311
======= ======= ======= ======= =======
Long-term debt $ 2,920 $ 4,098 $ 5,241 $ 5,551 $ 4,563
======= ======= ======= ======= =======
Deferred income taxes $ 1,735 $ 1,977 $ 2,159 $ 2,122 $ 2,221
======= ======= ======= ======= =======
Shareholders' equity $13,088 $13,406 $13,091 $13,941 $14,144
======= ======= ======= ======= =======
(A) Income per share has been computed based on the weighted average number of
common shares outstanding during each period.
Page 6 of 33
BURKE MILLS, INC.
PART II
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. 28 Dec. 29 Dec. 30
2002 2001 2000
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 93.3 90.6 94.0
Gross profit margin 6.7 9.4 6.0
------- ------- -------
Selling, general, administrative and
factoring expenses 8.6 7.4 8.2
------- ------- -------
Operating earnings/(loss) (1.8) 2.0 (2.2)
Other income 0.3 0.2 0.3
Other expenses (0.6) (1.0) (1.9)
------ ------ -------
Income (loss) before income taxes and
net equity in affiliates (2.1) 1.2 (3.8)
Income taxes (credit) (1.1) 0.5 (1.3)
------- ------- -------
(1.0) 0.7 (2.5)
Equity in Net Earnings Of Affiliate 0.1 0.1 0.3
------- ------ -------
Net income (loss) (1.1) 0.8% (2.2)%
======= ======= =======
Results of Operations: 2002 Compared to 2001
- --------------------------------------------
Net Sales
- ----------
Net sales for 2002 decreased to $29.9 million from $37.2 million in 2001 or
19.4%. The decline in sales was due to lower customer demand, primarily in the
third and fourth quarters of 2002. The Company has not lost any major customers,
but as a result of a weak textile economy and competition with imports, the
Company's customers have experienced a decrease in sales.
Cost of Sales and Gross Margin
- -------------------------------
Cost of sales for 2002 decreased to $27.9 million compared to $33.7 million in
2001 or 17.0%.
Material cost decreased $4,182,000 or 19% primarily as a result of lower sales.
Material cost decreased 19% while net sales decreased by 19.4%.
Direct labor decreased by 30.8%. 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 9.2%. Large reductions were realized in repairs and
maintenance ($162,113 or 33.2%), indirect labor ($30,287 or 35.7%).
Inasmuch as net sales decreased by 19.4% and cost of sales decreased by 17.0%,
the 2002 gross margin decreased to 6.7%, compared to 9.4% in 2001.
Page 7 of 33
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Results of Operations: 2002 Compared to 2001 (continued)
- --------------------------------------------
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses for 2002 aggregated $2.5 million as
compared to $2.6 million in 2001.
Factor's Charges
- -----------------
Factor's charges as a percentage of sales were 0.4% for 2002 and 0.4% for 2001.
There was no change in the factor's agreement.
Interest Expense
- -----------------
Interest expense decreased by $189,300 or 51.6% primarily due to lower existing
interest rates and a lower average long-term debt.
Interest Income
- ----------------
Interest income decreased by $25,423 or 34.4% primarily due to lower existing
rates.
Other Net Income
- ----------------
Other net income increased $13,670 from 2001 due to an increase in leases and
rents.
Gain (Loss) on Disposal of Equipment
- ------------------------------------
The loss on disposal of equipment of $5,144 was primarily due to the retirement
of the outdated computer equipment.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company's Mexican joint venture, Fytek, recorded a loss of ($8,300) after
valuation reserve, compared to earnings of $34,000 in 2001. The joint venture
only began operations in November of 1997.
Fytek sales in 2002 was $3,827,000 with income before taxes of $306,000, and
after tax income of $228,000. The balance at the end of 2002 in Fytek's
stockholders equity was $1,797,000 compared to $1,753,000 at the end of 2001.
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 2002 aggregated a tax credit of $322,400 compared
to a tax provision of $172,000 in 2001. Tax credit for 2002 arose from a pre-tax
loss of $633,000.
Page 8 of 33
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
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 primarily 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 9 of 33
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 $1,753,000. 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 in 2000 based on the loss before income taxes for that fiscal year.
Results of Operations 2002 - 1999 Sales Analysis
- -------------------------------------------------
The table below sets forth an analysis of sales volume for the period 1999 to
2002, inclusive. It discloses that full yarn sales prices decreased from a high
of $3.13 per pound in 1999 to $2.67 in 2002. 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
dyeing and winding yarn on cones to dyeing and direct shipping which began in
1996, and competitive pressure on pricing.
% of Sales $
% of Pounds of Per
Net Sales Yarn Sold Pound
2002:
Yarn sales 97% 97% $2.67
Commission sales 3% 3% 2.60
---- ----
Total 100% 100%
==== ====
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%
==== ====
Page 10 of 33
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
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 28, 2002, the Company
had $1,669,000 due from its factor which matures on January 21, 2003. 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).
The Company had inventories of $2,096,000 as of December 28, 2002. The Company's
average inventories aggregated approximately $2,925,000 for 2002, representing
approximately 58 days inventory on hand. The Company's inventories turn
approximately 5 to 7 times each year.
The Company's working capital at December 28, 2002 decreased by approximately
$462,000 primarily as a result of a reduction in inventories of $1,124,000. 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:
2002 2001 2000
---- ---- ----
Working Capital $6,187,981 $6,810,000 $5,658,000
Working Capital Ratio 3.49 to 1 3.05 to 1 2.62 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 28, 2002 and December 29, 2001:
December 28 December 29
2002 2001
---- ----
Cash, cash equivalents
and receivables $6,460,000 $6,816,000
Current liabilities 2,482,000 3,322,000
--------- ---------
Excess of quick assets
over current liabilities $3,978,000 $3,494,000
========== ==========
The aggregate long-term debt at December 28, 2002 and December 29, 2001 was
$4,098,000 and $5,277,000 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 2002, the Company acquired and made deposits on new machinery and
equipment of approximately $888,000 as set forth in the accompanying statement
of cash flows. The Company financed its capital from cash provided from
operations and bank financing.
Page 11 of 33
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's long-term debt to equity ratios aggregated 22.3% at December 28,
2002, 30.6% at December 29, 2001, and 40.0% at December 30, 2000.
Planned capital budget expenditures are estimated at $700,000 for 2003. The
Company plans to finance its capital needs from cash provided from operations
and bank financing.
Contractual Obligations
- -----------------------
The following is a summary of the Company's known contractual obligations as of
the latest fiscal year end on December 28, 2002.
Payments due by period
----------------------------------------------
Less More
than 1 1-3 3-5 than 5
Total year years years years
----- ------ ------ ----- -----
Contractual Obligations
Long-Term Debt
Obligations $4,098,000 $1,179,000 $2,848,000 $ 71,000 $ -0-
Operating Lease
Obligations $ 48,586 $ 24,293 $ 24,293 $ $
Purchase Obligations $ 3,450 $ 3,450 $ $ $
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 has 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.
Page 12 of 33
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Inflation (continued)
- ----------
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
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
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 33
BURKE MILLS, INC.
PART II
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
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
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 28, 2002, and December 29, 2001, and the related statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 28, 2002. 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 28, 2002 and December 29, 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 28,
2002, in conformity with U.S. generally accepted accounting principles.
Cole, Samsel & Bernstein LLC
Certified Public Accountants
Lodi, New Jersey
January 24, 2003
Page 14 of 33
BURKE MILLS, INC.
PART II
BALANCE SHEET
December 28 December 29
2002 2001
---- ----
ASSETS
Current Assets
Cash and cash equivalents $4,191,173 $4,144,340
Accounts receivable 2,269,089 2,671,324
Inventories 2,095,863 3,220,194
Prepaid expenses, taxes, and other
current assets 114,000 96,087
---------- ----------
Total Current Assets 8,670,125 10,131,945
========== ==========
Equity Investment in Affiliate 612,275 620,592
---------- ----------
Property, plant & equipment - at cost 31,161,672 30,962,533
Less: accumulated depreciation 20,939,167 19,564,639
---------- ----------
Property, Plant and Equipment- Net 10,222,505 11,397,894
---------- ----------
Other Assets
Deferred income taxes 703,200 606,800
Deferred charges and other 16,575 45,769
---------- ----------
Total Other Assets 719,775 652,569
---------- ----------
$20,224,680 $22,803,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $1,178,571 $ 1,178,571
Accounts payable 1,097,131 1,720,067
Accrued salaries and wages 100,848 253,582
Other liabilities and accrued expenses 105,595 168,790
Income taxes payable -0- 503
---------- ----------
Total Current Liabilities 2,482,145 3,321,513
Long-Term Debt 2,919,643 4,098,214
Deferred Income Taxes 1,735,400 1,977,000
---------- ----------
Total Liabilities 7,137,188 9,396,727
---------- ----------
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 8,166,972 8,485,753
---------- ----------
Total Shareholders' Equity 13,087,492 13,406,273
---------- ----------
$20,224,680 $22,803,000
=========== ===========
See notes to financial statements.
Page 15 of 33
BURKE MILLS, INC.
PART II
STATEMENTS OF OPERATIONS
Years Ended
----------------------------------------
December 28 December 29 December 30
2002 2001 2000
---- ---- ----
Net Sales $29,989,912 $37,194,240 $39,456,009
----------- ----------- -----------
Costs and Expenses
Cost of Sales $27,967,612 $33,711,559 $37,122,514
Selling, general and
administrative expenses 2,454,973 2,593,320 3,067,594
Factor's charges 122,032 155,843 155,151
----------- ----------- -----------
Total Costs and Expenses 30,544,617 36,460,722 40,345,259
----------- ----------- -----------
Operating Earnings (Loss) (554,705) 733,518 (889,250)
----------- ----------- -----------
Other Income
Interest income 48,378 73,801 74,531
Gain on disposal of
property assets (5,144) (10,265) 22,051
Other, net 56,523 42,853 23,058
----------- ----------- -----------
Total Other Income 99,757 106,389 119,640
----------- ----------- -----------
Other Expenses
Interest expense 177,916 367,250 592,280
Loss on disposal of
property assets - - -
Other, net - 19,787 158,707
----------- ----------- -----------
Total Other Expenses 177,916 387,037 750,987
----------- ----------- -----------
Income (Loss) Before Provision (credit)
for income taxes and equity in
net earnings of affiliate (632,864) 452,870 (1,520,597)
Provision (Credit)
for Income Taxes (322,400) 171,949 (539,578)
----------- ----------- -----------
Income (Loss) Before Equity in
Net Earnings of Affiliate (310,464) 280,921 (981,019)
Equity in Net Earnings of
Affiliate (8,317) 33,864 131,000
----------- ---------- -----------
Net Income (Loss) $ (318,781) $ 314,785 $ (850,019)
============ ========== ===========
Net Earnings (Loss) per share $ (.12) $ .11 $ (.31)
============ ============ ===========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168 2,741,168
=========== =========== ===========
See notes to financial statements.
Page 16 of 33
BURKE MILLS, INC.
PART II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED December 28, 2002
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. 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
Net Income
for the year ended - - - $ (318,781) $ (318,781)
Dec. 28, 2002 ---------- ---------- ---------- ---------- ----------
Balance at
Dec. 28, 2002 $2,741,168 $1,809,171 $3,111,349 $8,166,972 $13,087,492
========== ========== ========== ========== ===========
See notes to financial statements.
Page 17 of 33
BURKE MILLS, INC.
PART II
STATEMENTS OF CASH FLOWS
Years Ended
-----------------------------------
Dec. 28 Dec. 29 Dec. 30
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (318,781) $ 314,785 $ (850,019)
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,055,226 2,203,324 2,331,632
(Gain) loss on sales of plant & equipment
including loss on disposals 5,143 15,179 (22,051)
Deferred income taxes (338,000) 144,700 (539,578)
Equity in net earnings of affiliate 8,317 (33,864) (131,000)
Changes in assets and liabilities:
Accounts receivable 402,235 416,745 707,450
Inventories 1,124,331 1,413,784 428,316
Prepaid expenses, taxes & other
current asset (17,913) 37,624 404,269
Other non-current assets 29,194 (29,194) 101,527
Accounts payable (622,936) (177,241) (1,031,909)
Accrued salaries & wages (152,734) 33,520 19,152
Other liabilities and accrued expenses (63,699) (38,510) (32,137)
Income taxes payable -0- 503 -0-
---------- --------- ---------
Total adjustments 2,429,164 3,986,570 2,235,671
---------- --------- ---------
Net cash provided by operating activities 2,110,383 4,301,355 1,385,652
---------- --------- ---------
Cash flows from investing activities:
Acquisition of property, plant
and equipment (887,679) (387,520) (631,445)
Proceeds from sales of plant
and equipment 2,700 68,000 101,500
Investment in affiliate -0- -0- -0-
---------- ---------- ----------
Net cash (used) by investing activities (884,979) (319,520) (529,945)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term bank note -0- -0- 1,000,000
Principal payments of long-term debt (1,178,571) (1,142,857) (1,142,858)
----------- ----------- -----------
Net cash provided (used) by financing
activities (1,178,571) (1,142,857) (142,858)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 46,833 2,838,978 712,849
Cash & cash equivalents at beginning
of year 4,144,340 1,305,362 592,513
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $4,191,173 $4,144,340 $1,305,362
========== ========== ==========
See notes to financial statements.
Page 18 of 33
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 2002, 2001, and 2000 ended on
December 28, December 29, and December 30, 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. Related shipping and handling costs are included in
cost of sales.
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, twisting, 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 33
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE (continued)
- ----------------------------------------------------
The Company had foreign sales as follows:
Country 2002 2001 2000
------- ---- ---- ----
Mexico 1.89% .62% .82%
Canada .22% 3.60% 4.8%
Honduras .74% 2.11% .74%
Nicaragua .0% .0% .09%
Barbados .47% 1.81% .07%
---- ---- ----
Total.......... 3.32% 8.14% 6.52%
Other than sales as shown above, the Company had no other sales in foreign
markets during the three year period ended December 28, 2002. For the three year
period ended December 28, 2002, 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, one customer exceeded 10% of the
Company's sales during each of the three years ended December 29, 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
2002 Amount Net Sales
---- ------ ---------
Customer 1 $ * --
Customer 2 * --
Customer 3 10,729,000 35.8%
% of
2001 Amount Net Sales
---- ------ ---------
Customer 1 $ * --
Customer 2 * --
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
*Less than 10%
Page 20 of 33
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - ACCOUNTS RECEIVABLE
- --------------------------------
Accounts receivable comprise the following:
December 28 December 29
2002 2001
---- ----
Due from factor on
regular factoring account $1,669,000 $2,070,000
Non-factored accounts
receivable 600,000 601,000
---------- ---------
Total $2,269,000 $2,671,000
========== ==========
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 2002 and 2001,
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 began 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 28, December 29,
2002 2001
---- ----
Finished & in process $1,359,000 $2,263,000
Raw materials 445,000 635,000
Dyes & chemicals 203,000 208,000
Other 89,000 114,000
---------- ----------
Total $2,096,000 $3,220,000
========== ==========
Page 21 of 33
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 28, 2002 December 29, 2001
------------------ ----------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
Land $ 156,425 $ -- $ 156,425 $ --
Land improvements 182,913 107,291 182,913 100,972
Building & improvements 6,385,441 4,839,589 6,385,441 4,691,487
Plant machinery &
equipment 23,300,323 15,111,127 22,577,821 13,525,915
Office equipment 955,624 769,285 1,476,498 1,114,440
Automotive equipment 180,946 111,875 183,435 131,824
--------- ---------- ---------- ----------
Total $31,161,672 $20,939,167 $30,962,533 $19,564,638
=========== =========== =========== ===========
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 2002 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 33
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 28, 2002 are
as follows:
Current portion $ 750,000
2004 $ 750,000
2005 750,000
Thereafter 62,500 1,562,500
--------- ---------
$2,312,500
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 28, 2002
based on the current amount owned are as follows:
Current Portion $ 428,571
2004 $ 428,571
2005 428,571
2006 428,571
Thereafter 71,430 1,357,143
------- ---------
$1,785,714
NOTE 8 - OTHER LIABILITIES AND ACCRUED EXPENSES
- ----------------------------------------------
Other liabilities and accrued expenses consist of the following:
December 28 December 29
2002 2001
---- ----
Employee insurance $ 70,000 $ 70,000
Payroll taxes payable 4,000 70,000
Other 32,000 29,000
-------- --------
Total $106,000 $169,000
========= ========
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 33
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. 28 Dec. 29
2002 2001
---- ----
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 342,700 247,600
Charitable contributions carryover 11,500 10,200
--------- ---------
$ 703,200 $ 606,800
========== ==========
Deferred tax liabilities:
Accelerated depreciation for
tax purposes 1,725,000 $1,972,300
Undistributed earnings of foreign
affiliate, net of tax credit 10,400 4,700
--------- ---------
$1,735,400 $1,977,000
========== ==========
Provision for taxes consist of:
Dec. 28 Dec. 29 Dec.30
2002 2001 2000
---- ---- ----
Current:
Federal $ - $ - $ -
State - - -
Deferred (322,400) 171,949 (539,578)
------- -------- -------
Total $(322,400) $171,949 $(539,578)
========= ========= =========
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 28 December 29 December 30
2002 2001 2000
---- ---- ----
Income (loss) before income taxes
(credit) $(641,180) $ 452,870 $(1,520,597)
Federal income taxes 34% 34% 34%
-------- ---------- ---------
Computed taxes (credit) at maximum
statutory tax (218,001) 154,000 (517,003)
State income taxes (credit), net of
Federal income tax benefits (50,886) -- (23,885)
Total adjustment for foreign
affiliate earnings -0- 17,949 1,310
Adjustment for deferred income taxes (53,513)
Prior year tax examination and other -- -- --
--------- --------- ---------
Provision for income taxes $ (322,400) $ 171,949 $ (539,578)
========= ========= =========
The net operating loss carryforward is $889,000 expiring 2019-2022. The tax
effect at the maximum tax rate would be $302,300.
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 33
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. Due to the Mexican economy, sales are
down. Since repatriation of cash is not expected from the joint venture, the
Company believes it is prudent to record a valuation allowance for Fytek. This
allowance amounts to $113,400 year-to-date 2002. The Company had purchases from
Fytek of $1,357,212 compared to $1,325,000 in 2001. Burke Mills does not
guarantee any debt for it's joint venture, Fytek. Financial information for
Fytek is as follows:
Statement of Income
(In thousands of U.S. Dollars)
December 31
---------------
2002 2001
---- ----
Net Sales $3,827 $5,383
Gross Profit 680 497
Income from operating income 208 129
Income before income taxes 306 101
Income taxes (78) (33)
---- ----
Net income $ 228 $ 68
===== =====
Balance Sheet
(In thousands of U.S. Dollars)
December 31
---------------
2002 2001
---- ----
Current assets $2,448 $3,137
Non-current 139 167
---- ----
Total assets $2,587 $3,304
====== ======
Current liabilities $ 788 $1,551
Non-current liabilities 2 -0-
------ ------
Total liabilities $ 790 $1,551
Stockholder's equity 1,797 1,753
------ ------
Total liabilities and stockholder's equity $2,587 $3,304
====== ======
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 $178,000 in 2002, $367,000 in 2001, and $592,000 in 2000. The
Company had no cash payments for income taxes in 2002 compared to $12,000 cash
payments during 2001, and no cash payments during 2000 for income taxes. The
company received $23,000 for a refund in 2000.
NOTE 12 - RENTAL EXPENSES AND LEASE COMMITMENTS
- -----------------------------------------------
Rental expenses under all lease commitments for the three fiscal years ended
December 28, 2002, aggregated $53,000, $40,000, and $45,000, respectively.
Page 25 of 33
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 28, 2002:
2003 $24,293
2004 $24,293
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
(in thousands of dollars except for per share amounts)
QUARTER
------------------------------------
2002 First Second Third Fourth
---- ----- ------ ------ ------
Net sales $ 8,976 $ 8,191 $ 6,997 $ 5,825
Cost of sales 7,919 7,610 6,710 5,728
Gross profit 1,057 581 287 97
Net income (loss) 288 (217) (138) (252)
Net income (loss) per common share $ .11 $ (.08) $ (.05) $ (.09)
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)
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 2002, 2001,
or 2000.
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 33
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 28,
2002, the Company had $1,669,000 due from its factor which matures on January
21, 2003. Upon maturity, the funds are automatically transferred by the factor
to the Company's bank.
NOTE 16 - OTHER COMMITMENTS
- ------------------------------
a) The Company and Titan Textile Company, Inc., signed an agreement which became
effective April 1, 1999, whereby the Company sold its friction texturing
equipment to Titan and in turn will purchase textured yarns from Titan. The
agreement states that the Company will purchase 70,000 pounds per week as long
as the Company has a requirement for textured yarns. When the Company's
requirements 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.
b) During 1996 in connection with a bank loan to the Company secured by real
estate, the Company had a Phase I Environmental Site Assessment conducted on its
property. The assessment indicated the presence of a contaminant in the
groundwater under the Company's property. The contaminant was a solvent used by
the Company in the past but no longer used. The contamination was report 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.
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.
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 20, 2003, 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.
Page 27 of 33
BURKE MILLS, INC.
PART III
ITEM 14. CONTROLS AND PROCEDURES
- ----------------------------------
Within the 90 days prior to the date of this report, the Company's chief
executive officer and chief financial officer with the participation of other
person's in the Company's management, carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedure. The term "disclosure controls and procedures" means the controls
and other procedures of the Company that are designed to insure that information
required to be disclosed by the Company in its reports to the Securities and
Exchange Commission ("SEC") is recorded, processed, summarized and reported,
within the time period specified in the rules and forms of the SEC. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to insure that information required to be disclosed by the Company in
the reports that it files or submits to the SEC under the Securities Exchange
Act of 1934 is accumulated and communicated to the Company's management,
including its chief executive officer and its chief financial officer as
appropriate, to allow timely decisions regarding required disclosure. Based upon
that evaluation, the chief executive officer and the chief financial officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the reports filed with
the SEC by the Company. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of such evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
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 28, 2002
December 29, 2001
Statements of operations
Year ended December 28, 2002
Year ended December 29, 2001
Year ended December 30, 2000
Statements of changes in shareholders' equity
Year ended December 28, 2002
Year ended December 29, 2001
Year ended December 30, 2000
Statements of cash flows
Year ended December 28, 2002
Year ended December 29, 2001
Year ended December 30, 2000
Notes to financial statements
Page 28 of 33
BURKE MILLS, INC.
PART IV
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.
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:March 27, 2003 BURKE MILLS, INC.
By: s/ Humayun N. Shaikh
----------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive Officer)
Date: March 27, 2003 By: s/ Thomas I. Nail
-----------------------
Thomas I. Nail
President and COO
(Principal Financial Officer)
Page 29 of 33
BURKE MILLS, INC.
SIGNATURES
----------
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: March 27, 2003 By: s/Humayun N. Shaikh
---------------------------
Humayun N. Shaikh, Director
Date: March 27, 2003 By: s/Thomas I. Nail
---------------------------
Thomas I. Nail, Director
Date: March 27, 2003 By: s/Richard F. Byers
---------------------------
Richard F. Byers, Director
Date: March 27, 2003 By: s/William T. Dunn
---------------------------
William T. Dunn, Director
Date: March 27, 2003 By: s/Robert P. Huntley
---------------------------
Robert P. Huntley, Director
Date: March 27, 2003 By: s/Robert T. King
---------------------------
Robert T. King, Director
Date: March 27, 2003 By: s/Aehsun Shaikh
---------------------------
Aehsun Shaikh, Director
Page 30 of 33
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Humayun N. Shaikh, certify that:
1. I have reviewed this annual report on Form 10-K of Burke Mills, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
s/ Humayun N. Shaikh
Date: March 27, 2003 ---------------------------
Humayun N. Shaikh
Chairman and CEO
(Principal Executive Officer)
Page 31 of 33
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
--------------------------------------------
I, Thomas I. Nail, certify that:
1. I have reviewed this annual report on Form 10-K of Burke Mills, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
s/ Thomas I. Nail
Date: March 27, 2003 ---------------------------
Thomas I. Nail
President and COO
(Principal Financial Officer)
Page 32 of 33
CERTIFICATION PURSUANT TO ss. 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Chief Executive Officer of Burke Mills, Inc., (the "Issuer")
hereby certifies that the foregoing periodic report containing financial
statements of the issuer fully complies with the requirements of sections 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that
the information contained in the foregoing report fairly presents, in all
material respects, the financial condition and results of operations of the
issuer.
s/ Humayun N. Shaikh
Date: March 27, 2003 ---------------------------
Humayun N. Shaikh
Chairman and CEO
CERTIFICATION PURSUANT TO ss. 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned Chief Financial Officer of Burke Mills, Inc., (the "Issuer")
hereby certifies that the foregoing periodic report containing financial
statements of the issuer fully complies with the requirements of sections 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that
the information contained in the foregoing report fairly presents, in all
material respects, the financial condition and results of operations of the
issuer.
s/ Thomas I. Nail
Date: March 27, 2003 ---------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 33 of 33
FYTEK, S. A. DE C. V.
-----------------------
(a Mexican corporation)
FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CONTENTS
Page
Report of independent accountants 1
Financial statements:
Balance sheets 2
Statements of income 3
Statements of changes in stockholders' equity 3
Statements of cash flows 4
Notes to financial statements 4
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------
Monterrey, N. L., March 13, 2003
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, 2002 and 2001, 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 the aforementioned financial statements, after the restatement
described in Note 10, present fairly, in all material respects, the financial
position of Fytek, S. A. de C. V. at December 31, 2002 and 2001, 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.
s/Alejandro Moreno A.
Alejandro Moreno A.
Pricewaterhouse Coopers
Page 1 of 11 (EX-99)
FYTEK, S. A. DE C. V.
BALANCE SHEETS
Thousands of U.S. dollars
December 31,
---------------
2002 2001
---- ----
Assets:
Cash and cash equivalents $ 623 $ 325
Accounts receivable, net (Note 3) 1,095 1,959
Burke Mills, Inc. (Stockholder) 147 89
Inventories, net (Note 4) 583 764
------- ------
Total current assets 2,448 3,137
Deferred income tax asset 1
Machinery and equipment, net (Note 7) 139 166
------- -------
Total assets $2,587 $3,304
======== =======
Current liabilities:
Suppliers $ 274 $ 515
Payable to related parties (Note 8) 385 894
Deferred income tax liability (Note 7) 61
Sundry creditors and accrued expenses 68 142
------- ------
Total current liabilities 788 1,551
Long-term liabilities:
Deferred income tax 2
------- ------
Total liabilities 790 1,551
------- ------
Stockholders' equity:
Capital stock 307 307
Retained earnings 1,450 1,222
Cumulative translation adjustment 40 224
------ -----
Total stockholders' equity 1,797 1,753
----- -----
Total liabilities and stockholders' equity $2,587 $3,304
======= =======
The accompanying notes are an integral part of these financial statements.
Page 2 of 11 (EX-99)
FYTEK, S. A. DE C. V.
STATEMENTS OF INCOME
Thousands of U.S. dollars
Years ended
December 31,
---------------
2002 2001
---- ----
Net sales $3,827 $5,383
Cost of sales (3,147) (4,886)
------- -------
Gross margin 680 497
Selling, general and administrative
expenses (472) (368)
------- -------
Operating income 208 129
------- -------
Interest income 2 2
Interest expense (1) (10)
Exchange gain (loss), net 84 (25)
------ ------
85 (33)
------ ------
293 96
Other income, net 13 5
------ ------
Income before income tax 306 101
Income taxes, net (Note 7) (78) (33)
------ ------
Net income $228 $ 68
====== =======
The accompanying notes are an integral part of these financial statements.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Thousands of U.S. dollars
Cumulative Cumulative
Capital Retained translation comprehensive
Stock Earnings adjustment Total income
------- -------- ---------- ------- --------------
Balances at
December 31, 2000 $307 $1,154 $ 142 $1,603 $1,152
Net income 68 68 68
Foreign currency translation
adjustment 82 82 82
-------
Comprehensive income 150
------- ------- ------- ------- -------
Balances at
December 31, 2001 307 1,222 224 1,753 1,302
Net income 228 228 228
Foreign currency translation
adjustment (184) (184) (184)
-------
Comprehensive income 44
------- ------- ------- ------- -------
Balances at
December 31, 2002 $307 $1,450 $ 40 $1,797 $1,346
======= ======= ======= ====== =======
The accompanying notes are an integral part of these financial statements.
Page 3 of 11 (EX-99)
FYTEK, S. A. DE C. V.
STATEMENTS OF CASH FLOWS
Thousands of U.S. dollars
Years ended
December 31,
--------------
2002 2001
---- ----
Net income $ 228 $ 68
Adjustments to reconcile net income to net
cash provided by operating activities:
Allowance for doubtful accounts 120 16
Depreciation 8 8
Deferred income taxes (Note 7) 64 (6)
Changes in operating assets and liabilities:
Accounts receivable 290 913
Inventories 101 306
Related parties, net (508) (861)
Suppliers (196) (186)
Sundry creditors and accrued expenses 195 36
------ ------
Net cash provided by operating activities 302 294
------ ------
Effect of exchange rate changes on
cash and cash equivalents (4) 8
------ ------
Increase in cash and cash equivalents 298 302
Cash and cash equivalents at
beginning of the year 325 23
------ ------
Cash and cash equivalents at end of the year $ 623 $ 325
====== ======
Income tax paid $ 39 $ 212
Interest paid $ 1 $ 10
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
(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 8). 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).
Page 4 of 11 (EX-99)
FYTEK, S. A. DE C. V.
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
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).
The current method requires the translation of all assets and liabilities
using the current year end exchange rate. Capital stock are 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 2002 and 2001.
Ps per $
------
At December 31, 2002 Year end 10.3125
Year ended December 31, 2002 Average 9.6607
At December 31, 2001 Year end 9.1423
Year ended December 31, 2001 Average 9.3409
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 4% (3.3% in 2001).
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
Page 5 of 11 (EX-99)
FYTEK, S. A. DE C. V.
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.
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 6 of 11 (EX-99)
FYTEK, S. A. DE C. V.
NOTE 3 - ACCOUNTS RECEIVABLE
- -----------------------------
At December 31, this caption comprised the following:
2002 2001
---- ----
Politel, S. A. de C. V. $ 108 $ 275
Vicza, S. A. de C. V. 221 202
Nova Distex, S. A. de C. V. 21 186
Fariel, S. A. de C. V. 260 182
Diltex, S. A. de C. V. 97 122
Bermatex, Inc. 2
Other customers 557 640
Other accounts receivable 42 441
----- -----
1,306 2,050
Allowance for doubtful accounts 211 91
----- -----
$1,095 $1,959
======= =======
NOTE 4 - INVENTORIES
- --------------------
At December 31, this caption comprised the following:
2002 2001
---- ----
Finished products $ 537 $ 784
Work in process 181 285
Spare parts and others 69
---- ----
718 1,138
Less - Allowance for slow-moving inventories 135 374
---- -----
$ 583 $ 764
====== ======
NOTE 5 - MACHINERY AND EQUIPMENT
- --------------------------------
At December 31, this caption comprised the following:
2002 2001
---- ----
Machinery and equipment $152 $170
Computer equipment 7 7
Construction in progress 1
---- ----
159 178
Less - Accumulated depreciation 20 12
---- ----
$139 $166
===== =====
NOTE 6 - STOCKHOLDERS' EQUITY
- -----------------------------
As of December 31, 2002 and 2001 capital stock is variable with a fixed minimum
of $6 and an unlimited maximum. At December 31, 2002 and 2001, the subscribed
and paid-in nominal capital stock of $307, was represented by 24,450 Series "B"
common, nominative shares of one hundred nominal pesos par value each.
Dividends paid from retained earnings which have not previously been taxed are
subject to an income tax payable by the Company, which may be credited against
the Company's taxable income in the three following years.
Page 7 of 11 (EX-99)
FYTEK, S. A. DE C. V.
NOTE 7 - INCOME TAX
- --------------------
The components of income tax benefit (expense) for the years ended December 31,
are as follows:
2002 2001
---- ----
Current income tax expense ($ 14) ($ 39)
Deferred income tax (expense) benefit (64) 6
------ -----
($ 78) ($ 33)
====== ======
The primary components of the deferred tax asset and liability at December 31,
are as follows:
2002 2001
---- ----
Inventory ($187) ($268)
Machinery and equipment (2)
Allowance for doubtful accounts 102 33
Accrued expenses and provision 24 36
------ ------
Net deferred income tax (liability) asset ($63) $ 1
====== ======
Net current deferred income tax asset $ 1
=====
Net current deferred income tax liability ($61)
======
Net non-current deferred income tax liability ($ 2)
======
The following is a reconciliation of the statutory income tax rate to the
effective income tax rate for the years ended December 31.
2002 2001
----- -----
Income tax computed at statutory tax
rate (35%) ($107) ($ 35)
------ ------
Permanent differences:
Non-deductible items (1) (1)
Other permanent differences 5
Inflationary and translation adjustments 26 (2)
------ ------
(82) (33)
Effect of reduction on income tax
statutory rate 4
------ ------
Income tax expense ($ 78) ($ 33)
======= =======
Page 8 of 11 (EX-99)
FYTEK, S. A. DE C. V.
NOTE 8 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES
- --------------------------------------------------------
Accounts payable with related parties at December 31, are as follows:
2002 2001
---- ----
Fibras Quimicas, S. A. de C. V. $385 $894
===== =====
The financial statements include the following significant transactions with
related parties:
2002 2001
---- ----
Sale of finished products $1,500 $1,389
Purchase of raw and other materials (1,787) (2,908)
Administrative and technical services:
- ----------------------------------------
During the years ended December 31, 2002 and 2001 the Company accrued $1,079 and
$1,336, 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, during 2002 the Company kept paying rentals under the same terms.
During the years ended December 31, 2002 and 2001, the Company paid rentals of
$549, and $537, 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. This agreement expired in November 2001; however,
during 2002 the Company kept supplying polyester twisted yarn under the same
terms. During the years ended December 31, 2002 and 2001 the Company supplied
$1,317 and $1,272, respectively, of polyester twisted yarn to Burke Mills Inc.
At December 31, 2002 and 2001, 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. (an affiliated company) to purchase approximately
$3,500, annually of polyester natural yarn, beginning in November 1997. This
agreement expired in November 2001; however, during 2002 the Company kept
supplying polyester natural yarn under the same terms. During the years ended
December 31, 2002 and 2001 the Company acquired $1,144 and $1,837 respectively,
of polyester natural yarn under the terms of this agreement.
During 2002 and 2001, the Company purchased raw materials from Nylon de Mexico,
S. A. de C. V., subsidiary of a previous shareholder, for $591 and $917
respectively.
Page 9 of 11 (EX-99)
FYTEK, S. A. DE C. V.
Adjustment to related parties liabilities
- ------------------------------------------
During 2002, the Company entered into a negotiation of its commercial
liabilities accrued as the end of preceding years with related parties. The
Company reached an agreement about the balances with related parties and
adjusted its liabilities as of December 31, 2002 and recorded a gain of $ 411
($267 net of taxes), which is presented net of cost of sales. See deferred tax
effect in note 10.
NOTE 9 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
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. The
adoption of SFAS 141 did not have a material effect on the financial statements.
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. The
adoption of SFAS 142 did not have a material effect on the 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 rational
method over its useful life. SFAS 143 is effective for fiscal year beginning
after June 15, 2002. Upon initial adoption, a liability is recognized for
existing asset retirement obligations and the associated asset retirement cost
is capitalized as an increase to the carrying value of the asset. The recognized
liability and asset are adjusted for cumulative 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 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 Impairnment 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
Page 10 of 11 (EX-99)
FYTEK, S. A. DE C. V.
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.
The adoption of SFAS 144 did not have a material effect on the financial
statements.
NOTE 10 - RESTATEMENT OF PRIOR YEAR INCOME TAX AMOUNTS
- ------------------------------------------------------
The deferred tax asset and liability as of December 31, 2000 and 2001 have been
restated due to the previous omission of a taxable temporary difference related
to certain accruals established in 1998, which under Mexican tax law, are
deductible when paid.
The retained earnings and deferred tax asset and liability as of December 31,
2000 and 2001 before and after the restatement are as follows:
2001
------------------------------
Reported as
originally As restated
----------- -----------
Retained earnings $1,078 $1,222
===== =====
Net deferred tax (liability) asset ($ 143) $ 1
====== =====
2000
------------------------------
Retained earnings $1,010 $1,154
====== ======
Net deferred tax liability ($ 149) ($ 5)
======== ======
Page 11 of 11 (EX-99)