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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended
January 1, 2005
[ ]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
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.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_ ---
The aggregate market value of the voting common stock (the registrant has no
non-voting equity) held by non-affiliates of the registrant (computed by
reference to the average bid and asked price as of the last business day of the
registrant's most recently completed second fiscal quarter) was $1,724,948.
The number of shares outstanding of the registrant's only class of common stock
as of March 4, 2005 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 17, 2005, 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
TABLE OF CONTENTS
Page Number
-----------
Item 1 - Business . . . . . . . . . . . . . . . . . . . . 3
Item 2 - Properties . . . . . . . . . . . . . . . . . . . 5
Item 3 - Legal Proceedings. . . . . . . . . . . . . . . . 6
Item 4 - Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . 6
Item 5 - Market for the Registrant's Common Equity, Related
Stockholder Matters, and Issuer Purchases of
Equity Securities. . . . . . . . . . . . . . . . 6
Item 6 - Selected Financial Data. . . . . . . . . . . . . 6
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . 8
Item 7A- Quantitative and Qualitative Disclosures about
Market Risk. . . . . . . . . . . . . . . . . . . 16
Item 8 - Financial Statements and Supplementary Data
(Report of Independent Registered Public
Accounting Firm) . . . . . . . . . . . . . . . . 16
Financial Statements
Condensed Balance Sheets . . . . . . . . . . 18
January 1, 2005 and January 3, 2004
Condensed Statements of Operations . . . . . 19
January 1, 2005, January 3, 2004,
and December 28, 2002
Statements of Changes in Shareholders' Equity 20
Statements of Cash Flows . . . . . . . . . . 21
January 1, 2005, January 3, 2004,
and December 28, 2002
Notes to Condensed Financial Statements . . . . . . . . . 22
Item 9 - Changes in Disagreements with Accountants
Accounting and Financial Disclosure . . . . . . 31
Item 9A - Controls and Procedures . . . . . . . . . . . . 33
Item 9B - Other Information . . . . . . . . . . . . . . . 33
Item 15 - Exhibits and Financial Statement Schedules. . . 35
Signatures. . . . . . . . . . . . . . . . . . . . . . . . 35-36
Exhibit Table . . . . . . . . . . . . . . . . . . . . . . 37
Exhibit 14 Code of Ethics . . . . . . . . . . . . . . . . 38
Certifications. . . . . . . . . . . . . . . . . . . . . . 39-41
Page 2
BURKE MILLS INC.
PART I
ITEM 1 - BUSINESS
- ------------------
(a) General Development of Business - During 2004 the Company's general
development of business consisted of expanding its product line into other
fibers, closing its joint venture, Fytek, improving operating performance, and
strengthening its balance sheet.
During 2004, the Company continued to experience a very weak textile
economy causing a very competitive market, a shrinking potential 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.
(b) Financial Information about Industry Segments - The Company had only
one industry segment during the fiscal year ended January 1, 2005.
(c) Narrative Description of Business - The Company is engaged in
texturing, winding, dyeing, processing and selling of cotton, 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, home
furnishings 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 dollar amount of backlog of unshipped orders as of January 1, 2005 was
$2,090,000 and as of January 3, 2004 was $1,519,000. 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 48 days.
On average, the Company turns its inventory approximately 6 to 8 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 January 1, 2005 approximately 7% of the Company's sales were from dyeing
and processing of yarn for customers who supplied the yarn. The Company does not
allow customers to return merchandise except where the merchandise is
Page 3
BURKE MILLS, INC. PART I
ITEM 1 - BUSINESS (continued)
- ------------------------------
defective. The Company rarely extends payment terms to its customers beyond
sixty (60) days and has experienced no significant problems in collecting its
accounts receivable. The Company believes that industry practices are very
similar to that of the Company in regard to these matters.
Substantially all of the Company's manufacturing operations are run by
electrical energy purchased from local utility companies, and fuel oil or
natural gas are used to heat the premises and fuel the boilers. 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 January 1, 2005 with
federal, state and local environmental protection laws had no material effect on
capital expenditures, earnings, or the competitive position of the Company.
During 1996 in connection with a bank loan to the Company secured by real
estate, the Company had a Phase I Environmental Site Assessment conducted on its
property. The assessment indicated the presence of a contaminant in the
groundwater under the Company's property. The contaminant was a solvent used by
the Company in the past but no longer used. The contamination was reported to
the North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and
continues to move toward a solution of natural attenuation. The cost of
monitoring is approximately $31,000 per year.
On January 30, 2005, the Company had 165 employees. The Company's yarn
division is its only division. During the fiscal year ended January 1, 2005
sales to two customers, Quaker Fabric Corporation and Culp Weaving, exceeded ten
percent of the Company's revenue. Quaker Fabric Corporation was 20.7% of total
revenues in 2004, 25.5% in 2003, and 35.8% in 2002. Culp Weaving was 11.8% of
total revenues in 2004, 9.7% in 2003, and 3.2% in 2002. The loss of either
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 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. The Company and its joint
venture partner, Teijin/Akra, voted on March 26, 2004 to close their joint
venture, Fytek. The joint venture operated on a scaled down basis through
mid-August 2004. Company estimates that it will receive approximately $196,000
cash distribution after liquidation in addition to a $150,000 disbursement
received in September 2004.
During 2004 the Company had purchases from Fytek of $800,000 compared to
$882,000 in 2003.
Page 4
BURKE MILLS, INC. PART I
(d) Financial Information about Geographic Areas. For each of the last
three fiscal years of the Company, revenues of the Company from customers
outside the U.S. are as follows:
Country of Domicile 2004 2003 2002
Mexico $ 67,000 $ 272,000 $ 567,000
Canada 15,000 -0- 66,000
Honduras 406,000 980,000 221,000
Barbados -0- -0- 140,000
Turkey 1,000 -0- -0-
Hong Kong 33,000 -0- -0-
---------- ----------- -----------
Total.......... $ 522,000 $1,252,000 $ 994,000
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.
(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. 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 January 1, 2005 are as follows:
Pounds/Year 2004
Department Capacity Utilization
---------- -------- -----------
Winding Machines 21,155,000 9%
Texturing Machines 816,000 19%
Dyeing Equipment 25,800,000 36%
Page 5
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, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------------------------------------
(a) The principal United States (or other) market in which the Company's
common stock is being traded is the over-the-counter market. The stock is quoted
in the Nasdaq Over-The-Counter Bulletin Board quotations system under the symbol
BMLS.OB. The range of high and low bid quotations for the Company's common stock
for each quarterly period during the past two years ended December 31, 2004, and
on the latest practicable date (as obtained from Commodity Systems, Inc.) is as
follows:
Quarter Ending
2004 High Bid Low Bid
------------ -------- --------
March 31 $1.29 $1.01
June 30 $1.60 $1.06
September 30 $1.50 $1.26
December 31 $1.50 $1.10
Quarter Ending
2003 High Bid Low Bid
------------ -------- --------
March 31 $0.85 $0.61
June 30 $1.48 $0.70
September 30 $1.20 $0.76
December 31 $1.20 $0.85
February 17, 2005 $1.18 $1.18
Such over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
(b) As of February 7, 2005 there were 352 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 last five fiscal years
of the Company 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 6
BURKE MILLS, INC. PART II
ITEM 6. SELECTED FINANCIAL DATA (continued)
- -------------------------------------------
(In thousands except per share data)
Years Ended
----------------------------------------
Restated
Jan. 1 Jan. 3 Dec. 28 Dec. 29 Dec. 30
2005 2004(B) 2002 2001 2000
---- -------- ---- ---- ----
SELECTED INCOME STATEMENT DATA
Net Sales $25,134 $24,815 $29,990 $37,194 $39,456
Cost of Sales 24,546 24,237 27,968 33,711 37,123
------- ------- ------- ------- -------
Gross Profit $ 588 $ 578 $ 2,022 $ 3,483 $ 2,333
------- ------- ------- ------ -------
Income (loss) before income
taxes $(2,106) $(2,222) $ (641) $ 487 $(1,390)
Income Taxes (credit) (399) (638) (322) 172 (540)
------- ------- ------- ------- -------
Net Income (loss) $(1,707) $(1,584) $ (319) $ 315 $ (850)
======= ======= ======= ====== =======
Per Share (Note A)
Net income (loss) $ (.62) $ (.58) $ (.12) $ .11 $ (.31)
======= ======= ======= ====== =======
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 $ 72 $ 127 $ 888 $ 388 $ 631
====== ====== ====== ====== ======
Depreciation $ 1,779 $ 2,010 $ 2,055 $ 2,203 $ 2,332
====== ====== ====== ====== ======
SELECTED BALANCE SHEET DATA
Current assets $ 5,135 $ 4,445 $ 8,670 $10,132 $ 9,161
Current liabilities 1,676 1,181 2,482 3,322 3,503
------ ----- ----- ----- -----
Working capital $ 3,459 $ 3,264 $ 6,188 $ 6,810 $ 5,658
======= ======= ======= ======= =======
Current ratio 3.06 3.76 3.49 3.05 2.62
==== ==== ==== ==== ====
Total assets $11,472 $13,078 $20,225 $22,803 $23,994
======= ======= ======= ======= =======
Long-term debt $ -0- $ -0- $ 2,920 $ 4,098 $ 5,241
======= ======= ======= ======= =======
Net deferred tax liability $ -0- $ 394 $ 1,735 $ 1,977 $ 2,159
======= ======= ======= ======= =======
Shareholders' equity $ 9,796 $11,503 $13,088 $13,406 $13,091
======= ======= ======= ======= =======
(A) Income per share has been computed based on the weighted average number of
common shares outstanding during each period.
(B) The Company has restated its previously issued financial statement for the
year ended January 3, 2004. For the fiscal year ended January 3, 2004, the
Company calculated the valuation allowance (mark-down) based upon the gross
value of deferred tax assets which was $980,000. The Company has concluded that
this calculation should be restated to calculate the valuation allowance based
on the difference between deferred tax assets and deferred tax liabilities.
Deferred tax liabilities exceeded deferred tax assets by $394,000 during the
fiscal year ended January 3, 2004. The effect of the change was to reduce the
Company's total assets as of January 3, 2004 by $60,000, decrease total
liabilities by $980,000, increase total shareholder's equity by $920,000 and
decrease by $920,000 the Company's net loss for the fiscal year ended January 3,
2004. See Note 2.
Page 7
BURKE MILLS, INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------
The Company has restated its previously issued financial statement for the year
ended January 3, 2004. For the fiscal year ended January 3, 2004, the Company
calculated the valuation allowance (mark-down) based upon the gross value of
deferred tax assets which was $980,000. The Company has concluded that this
calculation should be restated to calculate the valuation allowance based on the
difference between deferred tax assets and deferred tax liabilities. Deferred
tax liabilities exceeded deferred tax assets by $394,000 during the fiscal year
ended January 3, 2004. The effect of the change was to reduce the Company's
total assets as of January 3, 2004 by $60,000, decrease total liabilities by
$980,000, increase total shareholder's equity by $920,000 and decrease by
$920,000 the Company's net loss for the fiscal year ended January 3, 2004. See
Note 2.
EXECUTIVE SUMMARY
- -----------------
The Company's major market is supplying packaged dyed yarn for home, contract
automotive upholstery and home furnishings. The Company's production is on a
make-to-order basis.
Until 2004 the Company specialized in dyeing of textured and spun polyester. A
decision was made to expand into other fibers, and as a result of that decision,
the Company was able to improve sales slightly over 2003.
The Company has not experienced any major bad debt write offs, but the credit
qualities of its customers continue to erode. The Company has had one major
customer to close operations. This customer accounted for $691,000 in sales in
2004 and $944,000 in 2003. Another major customer is experiencing credit
difficulty, and the Company has begun to move away from selling this customer.
This customer accounted for $551,000 in sales for 2004 and $905,000 in 2003.
Also, the Company's factor has become more conservative in approving customer
credit, and the Company is taking more accounts receivable at its risk.
Subsequently, the Company will move its accounts receivable in-house during the
first quarter of 2005, eliminating its factoring arrangement.
During 2004 there were four price increases on polyester yarns which aggregated
to approximately a 17% increase. The Company was able to pass the increases to
its customers. There is another price increase of approximately 9% announced for
the first quarter of 2005. The Company believes it will be very difficult to
pass this increase to its customers.
As discussed in previous filings, the Company continues to experience increased
costs for employee health cost, all insurance, fuel oil and natural gas. None of
these cost increases have been passed along in pricing to customers.
The Company and its joint venture partner, Teijin/Akra, voted on March 26, 2004
to close their joint venture, Fytek. The joint venture operated on a scaled down
basis through mid-August of 2004. The Company estimates that it will receive
approximately $196,000 cash distribution after liquidation in addition to a
$150,000 disbursement received in September 2004. To replace the yarn purchased
from Fytek, some machinery has been moved back to Valdese, NC, for production,
and a domestic supplier is also being used. The machinery remaining at Fytek is
fully depreciated and will be sold and/or abandoned. During the first quarter of
2005 there is $85,000 in commitments to purchase some of the machinery.
At year end the Company had no long-term debt or revolving debt, and has a quick
ratio of 2.02.
Page 8
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
------------------------------
Restated
Jan. 1 Jan. 3 Dec. 28
2005 2004 2002
---- -------- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 97.7 97.7 93.3
------- ------- -------
Gross profit margin 2.3 2.3 6.7
Selling, general, administrative 10.0 10.8 8.6
------- ------- -------
Operating loss (7.7) (8.5) (1.8)
Other income 0.1 0.4 0.3
Other expenses 0.0 (0.6) (0.6)
------ ------ -------
Loss before income taxes and
net equity in affiliates (7.6) (8.8) (2.1)
Income taxes (credit) (1.6) (2.6) (1.1)
------- ------- -------
(6.0) (6.2) (1.0)
Equity (Loss) in Net Earnings
Of Affiliate (0.8) (0.2) 0.1
------- ------ -------
Net Loss (6.8)% (6.4)% (1.1)%
======= ======= =======
Results of Operations: 2004 Compared to 2003
--------------------------------------------
Net Sales
- ----------
Net sales for 2004 increased to $25.1 million from $24.8 million in 2003 or
1.3%. During the year the Company expanded into other fibers and added
customers. New customers accounted for approximately $1.7 million in sales, with
most of these sales occurring after the first quarter. The increase in new
customer sales was partially offset by a decline in sales to existing customers,
who are experiencing competition from imports and credit problems.
Cost of Sales and Gross Margin
- -------------------------------
Total cost of sales increased by $309,000 or 1% compared to 2003.
Material cost increased by 2% mainly as a result of increased sales, price
increases, and sales mix.
Direct labor increased by 4% as a result of increased sales and erratic order
flow.
Overhead expense decreased by .7% compared to 2003. Health claims increased by
23%, electricity cost increased by 4%. Repair and maintenance cost increased by
12%, and water increased by 11%. Depreciation expense decreased by 12%.
Selling, General and Administrative Expenses
- -------------------------------------------
Selling, general and administrative expenses decreased by 2%.
Page 9
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Results of Operations: 2004 Compared to 2003 (continued)
- ---------------------------------------------------------
Loss on Disposal of Property Assets
- -----------------------------------
In 2004 the Company wrote off equipment as non-performing assets with a net book
value of $198,000. Sales volume related to the equipment decreased, and the
Company will not pursue volume for the machinery in the future.
Equity in Net Loss of Affiliate
- -------------------------------
The Company and its joint venture partner, Teijin/Akra, voted on March 26, 2004
to close their joint venture, Fytek. In the third quarter the Company received a
partial distribution of $150,000 from Fytek. The Company estimates that the
remaining disbursements from Fytek could be approximately $196,000. Therefore,
the Company has written down its Fytek investment by $207,000 to reflect the
estimate. Fytek is in the process of liquidating its assets and collecting the
accounts receivable. It could be into the first quarter of 2005 before all
assets are liquidated and accounts receivable are collected. The Company
believes its estimate for the final distribution is fair based on its current
knowledge of the facts. The final disbursement could vary from this estimate.
Credit for Income Taxes
- ----------------------
The Company recorded a credit of $399,000 for income taxes on a net loss before
taxes of $2,107,000. This compares to a net credit of $638,000 in 2003 as
restated for a net loss before taxes of $2,223,000. See Note 9 - Income Taxes.
Critical Accounting Policies and Estimates
- ------------------------------------------
The preparation of financial statements, in accordance with accounting
principles generally accepted in the United States, requires management to make
assumptions and estimates that affect the reported amounts of assets and
liabilities as of the balance sheet date and revenues and expenses recognized
and incurred during the reporting period then ended. In addition, estimates
affect the determination of contingent assets and liabilities and their related
disclosure. The Company bases its estimates on a number of factors, including
historical information and other assumptions that it believes are reasonable
under the circumstances. Actual results may differ from these estimates in the
event there are changes in related conditions or assumptions. The development
and selection of the disclosed estimates have been discussed with the Audit
Committee of the Board of Directors. The following accounting policies are
deemed to be critical, as they require accounting estimates to be made based
upon matters that are highly uncertain at the time such estimates are made.
The Company is self-funded for its employee health claims. The health claims are
paid by the Company after review by the Company's third party administrator. The
Company's liability for health claims includes claims that the Company estimates
have been incurred, but not yet presented to the administrator. A historical
basis is used to establish the amount.
The Company reviews its inventory and when necessary records the impairment in
the carrying value of obsolete and slow moving items. The impairment is
determined by aging the inventory, reviewing the inventory with the salesmen,
and determining a salvage value.
The Company reviews its net deferred tax asset and when necessary records a
valuation allowance to adjust the asset to an amount believed realizable.
Consideration is given to estimated future taxable income, expiration of
operating loss carryforwards, and expiration of tax credits to determine the
amount of the valuation allowance.
Page 10
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Recent Accounting Pronouncements
- --------------------------------
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP FAS No.
109-1"), "Application of FASB Statement No. 109, `Accounting for Income Taxes,'
to the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004." The American Jobs Creation Act of 2004 introduces a
special tax deduction of up to 9.0 percent when fully phased in, of the lesser
of "qualified production activities income" or taxable income. FSP FAS 109-1
clarifies that this tax deduction should be accounted for as a special tax
deduction in accordance with SFAS No. 109. Although FSP FAS No. 109-1 was
effective upon issuance, we are still evaluating the impact FSP FAS No. 109-1
will have on our financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", an amendment
of Accounting Research Bulletin No. 43, Chapter 4. SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not believe
adoption of SFAS No. 151 will have a material effect on our financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," provided an exception to its basic measurement
principle (fair value) for exchanges of similar productive assets. Under APB
Opinion No. 29, an exchange of a productive asset for a similar productive asset
was based on the recorded amount of the asset relinquished. SFAS No. 153
eliminates this exception and replaces it with an exception of exchanges of
nonmonetary assets that do no have commercial substance. SFAS No. 153 is
effective for the Company as of January 1, 2005. The Company will apply the
requirements of SFAS No. 153 when such an exchange occurs.
In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities" and in December 2003, a revised interpretation
was issued (FIN No. 46, as revised). In general, a variable interest entity
("VIE") is a corporation, partnership, trust, or any other legal structure used
for business purposes that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46, as revised,
requires a VIE to be consolidated by a company if that company is designated as
the primary beneficiary. The interpretation applies to VIEs created after
January 31, 2003, and for all financial statements issued after December 15,
2003 for VIEs in which an enterprise held a variable interest that it acquired
before February 1, 2003. The adoption of FIN No. 46, as revised, did not have a
material effect on our financial position or results of operations.
Results of Operations: 2003 Compared to 2002
--------------------------------------------
Net Sales
- ----------
Net sales for 2003 decreased to $24.8 million from $29.9 million in 2002 or
17.1%. The Company has not lost any major customers, but as a result of a weak
textile economy and competition from imports, the Company's customers have
experienced a decrease in sales.
Cost of Sales and Gross Margin
- -------------------------------
Cost of sales for 2003 decreased to $24.2 million compared to $28.0 million in
2002 or 13.3%.
Material cost decreased $3,457,000 or 19.4%. The decrease in material cost was
primarily due to a decrease in sales and sales mix.
Page 11
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Results of Operations: 2003 Compared to 2002
- ---------------------------------------------
Cost of Sales and Gross Margin (continued)
- --------------------------------------------
Direct labor decreased by 16.9%, mainly as a result of lower sales volume.
Overhead expenses decreased by only .1%. Although the Company reduced indirect
labor, water and electricity cost, natural gas and fuel oil increased 26.6%,
employee health claims increased 9.1%, and equipment repair cost increased by
40.0%. The Company also had 53 weeks in 2003 compared to 52 weeks in 2002.
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses decreased by 8.6%. Although the
Company added a sales person in first quarter of 2003 and had one extra week in
2003, the Company was able to effect an overall reduction in selling, general,
and administrative expenses.
Factor's Charges
- -----------------
During the fourth quarter of 2003, the Company changed factors and paid a
minimum fee to the old factor per the factoring agreement. This fee was
approximately $42,000. Consequently, the factoring expense for 2003 increased
$35,000 or 28.7% compared to 2002.
Interest Expense
- -----------------
Interest expense decreased by $87,000 or 48.7%. The decrease was due to a lower
average long-term debt.
The Company paid off its long-term debt the last week of December 2003.
Interest Income
- ----------------
Interest income decreased by $24,000 or 50.3% as a result of lower average funds
invested.
Gain (Loss) on Disposal of Equipment
- ------------------------------------
In 2003 the Company wrote off equipment with a net book value of $268,000. With
the decrease in sales volume and no anticipated business increase in products
that will run on the machinery, the machinery was written off as a
non-performing asset. No salvage value has been assigned to the machinery as the
Company has no potential buyer.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company recorded its portion of a loss of ($59,000) after a charge for
impairment, compared to a loss of ($8,300) after a charge for impairment in
2002. The joint venture began operations in November of 1997.
Fytek sales in 2003 were $2,305,000 with a loss before taxes of ($139,000), and
an after tax loss of ($87,000). The balance at the end of 2003 in Fytek's
stockholders equity was $1,559,000 compared to $1,797,000 at the end of 2002.
The Company is taking a charge for impairment against the equity investment in
Fytek due to a permanent decline in value. (See Note 10.)
Credit for Income Taxes
- -----------------------
The Company recorded a net credit of $638,000 as restated in 2003 for income
taxes on a net loss before taxes of $2,223,000. This compares to a net credit of
$322,000 in 2002 for a net loss before taxes of $641,000. See Note 9 - Income
Taxes.
Page 12
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Results of Operations 2004 - 2002 Sales Analysis
-------------------------------------------------
The table below sets forth an analysis of sales volume for the period 2002 to
2004, inclusive. It discloses that full yarn sales prices decreased from a high
of $2.67 per pound in 2002 to $2.54 in 2004. 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
2004:
Yarn sales 94% 93% $2.54
Commission sales 6 7 2.43
---- ----
Total 100% 100%
==== ====
2003:
Yarn sales 97% 97% $2.61
Commission sales 3 3 2.78
---- ----
Total 100% 100%
==== ====
2002:
Yarn sales 97% 97% $2.67
Commission sales 3% 3% 2.60
---- ----
Total 100% 100%
==== ====
Liquidity and Capital Resources
- -------------------------------
The Company historically has financed its operations and capital requirements
through a combination of funds generated from operations, line of credit, and
long-term debt. In 2003 the Company paid off its long-term debt. In 2004 all of
its fund requirements were financed with funds generated from operations, with a
credit line in place to smooth out the cash needs. At January 1, 2005, the
Company had no long-term debt or debt under its credit line.
As set forth in the Statement of Cash Flows, funds provided from operating
activities were $156,000. Although the increase of $699,000 in accounts
receivable required the use of funds, the Company's accounts payable increased
by $594,000 and offset a portion of the funds needed. The Company's practice is
to pay its vendors per their terms. The increase in accounts receivable and
accounts payable was due to higher shipping level in the last half of the fourth
quarter versus fourth quarter of 2003.
Cash provided from investing activities was $155,000. The Company received
$150,000 from Fytek, its joint venture in Mexico, and had proceeds of $77,000
from the sale of Company owned machinery located at Fytek. Capital expenditures
were $72,000 in 2004 versus $127,000 in 2003, and $888,000 in 2002. Planned
capital expenditures in 2005 are estimated at $200,000. The Company plans to
finance its capital needs from cash provided from operations, proceeds from the
liquidation of Fytek, and proceeds from the sale of Company owned machinery
located at Fytek.
The net cash used by financing activities of $142,000 was the result of paying
off the Company's line of credit.
In the first quarter of 2005 the Company sold $85,000 of its machinery located
at its joint venture, Fytek, and has a $15,000 non-refundable deposit for
Page 13
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Liquidity and Capital Resources (continued)
- ------------------------------------------
$144,000 for the remainder of the machinery at Fytek. Proceeds from the
liquidation of Fytek will be approximately $196,000, which should be received in
April 2005.
The Company's ability to generate cash from operating activity is subject to the
level of net sales. As discussed earlier, the Company has expanded into other
fibers and added customers.
The Company has a line of credit for accounts receivable. 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 receivable. At January 1, 2005 the Company had $2,192,000 due from its
factor which should be collected over the next 60 days. The Company has the
right to borrow up to 80% of the face amount of each uncollected account sold to
the factor.
At year end the Company had no debt under the line of credit. The unused line of
credit was approximately $1,500,000.
In the first quarter of 2005 the Company will move its accounts receivable
in-house, eliminating its factoring arrangement. The Company believes it can
meet its cash need from its operations. However, the Company is in the process
of securing a line of credit to replace its line of credit with the factor.
The Company had inventories of $1,641,000 as of January 1, 2005. The Company's
average inventories aggregated approximately $2,001,000 for 2004, representing
approximately 48 days inventory on hand. The Company's inventories turn
approximately 6 to 8 times each year.
The Company's working capital at January 1, 2005 increased by approximately
$195,000 primarily as a result of an increase in accounts receivable and cash.
The working capital of the Company and its line of credit 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:
2004 2003 2002
---- ---- ----
Working Capital $3,459,000 $3,264,000 $6,188,000
Working Capital Ratio 3.06 to 1 3.76 to 1 3.49 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
January 1, 2005 and January 3, 2004:
January 1 January 3
2005 2004
---- ----
Cash, cash equivalents
and receivables $3,381,000 $2,512,000
Current liabilities 1,676,000 1,181,000
--------- ---------
Excess of quick assets
over current liabilities $1,705,000 $1,331,000
========= =========
Quick Ratio 2.02 to 1 2.12 to 1
Page 14
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Contractual Obligations
- -----------------------
The following is a summary of the Company's known contractual obligations as of
the latest fiscal year end on January 1, 2005.
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 $ -0- $ -0- $ -0- $ -0- $ -0-
Capital Lease
Obligations $ -0- $ -0- $ -0- $ -0- $ -0-
Operating Lease
Obligations $ 154,000 $ 62,000 $ 92,000 $ -0- $ -0-
Purchase Obligations $1,234,000 $1,234,000 $ -0- $ -0- $ -0-
Raw Material Purchase
Obligations(1) $21,500,000 $4,000,000 $8,500,000 $9,000,000 $ -0-
Other Long-Term Liabilities
Reflected under GAAP on
the Company's Balance
Sheet $ -0- $ -0- $ -0- $ -0- $ -0-
TOTAL $22,888,000 $5,296,000 $8,592,000 $9,000,000 $ -0-
(1)Estimated obligations that will change with demand.
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
continues to move toward a solution of natural attenuation. The cost of
monitoring is approximately $31,000 per year.
Inflation
- ----------
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 and recent accounting scandals.
The healthcare cost for reinsurance has increased as well as health claims per
employee.
The Company's fuel oil and natural gas cost have increased over the last three
years.
Textured polyester yarns increased by 17% in 2004. Also, in January 2005 some
major suppliers of natural yarn announced price increases of approximately 9%.
Page 15
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Forward Looking Statements
- ---------------------------
Certain statements in this Management's Discussion and Analysis of Financial
condition and Results of Operations, and other sections of this report, contain
forward-looking statements within the meaning of federal securities laws about
the Company's financial condition and results of operations that are based on
management's current expectations, beliefs, assumptions, estimates and
projections about the markets in which the Company operates. Words such as
"expects", "anticipates", "believes", "estimates", variations of such words and
other similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecasted in, or implied by, such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof. The
Company undertakes no obligations to update publicly any of these
forward-looking statements to reflect new information, future events or
otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward-looking statements include, but
are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and financial viability of significant customers, technological
advancements, employee relations, changes in construction spending and capital
equipment expenditures (including those related to unforeseen acquisition
opportunities), the timely completion of construction and expansion projects
planned or in process, continued availability of financial resources through
financing arrangements and operations, negotiations of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies, policies and legislation, and proceeds received from
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes; such as, changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The Company has not purchased any material instruments or entered into any
arrangements resulting in market risk to the Company for trading purposes or for
purposes other than trading purposes. The Company had no long-term debt during
the fiscal year ended January 1, 2005.
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Burke Mills, Inc.
We have audited the accompanying balance sheets of Burke Mills, Inc. as of
January 1, 2005 and January 3, 2004 and the related statements of operations,
shareholders' 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
Page 16
BURKE MILLS INC. PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------
Item 8 - Financial Statements and Supplementary Data (continued)
- -----------------------------------------------------------------
Report of Independent Registered Public Accounting Firm (continued)
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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. at January 1,
2005 and January 3, 2004, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the financial statements, the 2003 financial
statements have been restated to correct errors in accounting for income taxes.
/s/BDO SEIDMAN LLP
High Point, North Carolina
February 4, 2005, [Except for Note 2 which is as of March 29, 2005]
- -------------------------------------------------------------------------------
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 17
BURKE MILLS, INC.
BALANCE SHEET
Restated
January 1 January 3
2005 2004
---- --------
ASSETS
Current Assets
Cash and cash equivalents $ 316,745 $ 147,062
Accounts receivable 3,064,365 2,365,284
Inventories 1,640,983 1,880,477
Prepaid expenses and other current assets 112,580 52,633
---------- ----------
Total Current Assets 5,134,673 4,445,456
---------- ----------
Equity Investment in Affiliate 196,300 553,180
--------- ----------
Property, plant & equipment - at cost 29,848,475 30,513,251
Less: accumulated depreciation 23,724,193 22,450,432
---------- ----------
Property, Plant and Equipment- Net 6,124,282 8,062,819
---------- ----------
Other Assets
Other 16,575 16,575
---------- ----------
Total Assets $11,471,830 $13,078,030
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt - revolving bank line $ -0- $ 141,514
Accounts payable 1,465,630 871,695
Accrued salaries and wages 89,847 54,050
Other liabilities and accrued expenses 120,137 113,412
---------- ----------
Total Current Liabilities 1,675,614 1,180,671
Net deferred tax liability -0- 394,000
---------- ----------
Total Liabilities $1,675,614 $1,574,671
---------- ----------
Commitments and contingencies
Shareholders' Equity
Common stock, no par value
(stated value, $.66)
Authorized - 5,000,000 shares
Issued and outstanding -
2,741,168 shares 1,809,171 1,809,171
Paid-in capital 3,111,349 3,111,349
Retained earnings 4,875,696 6,582,839
---------- ----------
Total Shareholders' Equity 9,796,216 11,503,359
---------- ----------
$11,471,830 $13,078,030
=========== ===========
See notes to financial statements.
Page 18
BURKE MILLS, INC.
STATEMENTS OF OPERATIONS
Years Ended
----------------------------------------
Restated
January 1 January 3 December 28
2005 2004 2002
---- -------- ----
Net Sales $25,133,683 $24,814,941 $29,989,912
- ---------
Costs and Expenses
Cost of sales 24,546,085 24,237,006 27,967,612
----------- ----------- -----------
Gross Profit 587,598 577,935 2,022,300
Selling, general and
administrative expenses 2,350,520 2,400,335 2,577,005
Loss (gain) on disposal of
property assets 154,353 276,468 (5,144)
----------- ----------- -----------
Operating Loss (1,917,275) (2,098,868) (549,561)
----------- ----------- ----------
Other Income
Interest income 2,788 24,030 48,378
Other, net 33,811 67,720 56,523
----------- ----------- -----------
Total Other Income 36,599 91,750 104,901
----------- ----------- -----------
Other Expenses
Interest expense 1,263 91,176 177,916
Other, net 17,790 64,944 -0-
----------- ----------- -----------
Total Other Expenses 19,053 156,120 177,916
----------- ----------- -----------
Loss Before Benefit of
Income Taxes and Equity
in Loss of Affiliate (1,899,729) (2,163,238) (632,864)
Income Tax Benefit (399,478) (638,200) (322,400)
----------- ----------- -----------
Loss before Equity in Net
Loss of Affiliate (1,500,251) (1,525,038) (310,464)
Equity in Net Loss of
Affiliate (206,892) (59,095) (8,317)
----------- ---------- -----------
Net Loss $ (1,707,143) $(1,584,133) $ (318,781)
============ ============ ===========
Basic
Net Loss per share $ (.62) $ (.58) $ (.12)
============ ============ ===========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168 2,741,168
=========== =========== ===========
See notes to financial statements.
Page 19
BURKE MILLS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED January 1, 2005
Common Stock
No Par Value
Stated Value
$.66 Per Share
5,000,000 Shares
AUTHORIZED
Total
Shares Common Paid-In Retained Shareholders
Issued Stock Capital Earnings Equity
------ ------ ------- -------- ------
Balance at 2,741,168 $1,809,171 $3,111,349 $8,485,753 $13,406,273
Dec. 29, 2001
Net Loss
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
Net Loss
for the year ended
Jan. 3, 2004 - - - (1,584,133) (1,584,133)
(Restated) ---------- ---------- ---------- ----------- -----------
Balance at
Jan. 3, 2004 2,741,168 $1,809,171 $3,111,349 $6,582,839 $11,503,359
(Restated)
Net Loss
for the year ended
Jan. 1, 2005 - - - (1,707,143) (1,707,143)
---------- ---------- ---------- ----------- -----------
Balance at
Jan. 1, 2005 2,741,168 $1,809,171 $3,111,349 $4,875,696 $9,796,216
========== ========== =========== =========== ==========
See notes to financial statements.
Page 20
BURKE MILLS, INC.
STATEMENTS OF CASH FLOWS
Years Ended
-----------------------------------
Restated
January 1 January 3 December 28
2005 2004 2002
---- -------- ----
Cash flows from operating activities:
Net loss $(1,707,143) $(1,584,133) $ (318,781)
---------- ---------- ----------
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 1,779,135 2,010,674 2,055,226
Loss on sales of plant & equipment
including loss on disposals 154,353 276,468 5,143
Provision for impairment of inventory 54,084 96,000 -0-
Deferred income taxes (394,000) (638,200) (338,000)
Loss in net earnings of affiliate 206,892 59,095 8,317
Changes in assets and liabilities:
Accounts receivable (699,081) (96,195) 402,235
Inventories 185,410 119,386 1,124,331
Prepaid expenses and other
current assets (59,947) 61,367 (17,913)
Other non-current assets -0- -0- 29,194
Accounts payable 593,935 (225,436) (622,936)
Accrued salaries & wages 35,797 (46,798) (152,734)
Other liabilities and accrued expenses 6,725 7,817 (63,699)
---------- --------- ----------
Total adjustments 1,863,303 1,624,178 2,429,164
---------- --------- ----------
Net cash provided by operating activities 156,160 40,045 2,110,383
---------- --------- ----------
Cash flows from investing activities:
Acquisition of property, plant
and equipment (72,267) (127,456) (887,679)
Proceeds from sales of plant
and equipment 77,316 -0- 2,700
Proceeds from Investment in Affiliate 149,988 -0- -0-
---------- ---------- ----------
Net cash provided (used) by
investing activities 155,037 (127,456) (884,979)
----------- ---------- ----------
Cash flows from financing activities:
Net proceeds from revolving credit line -0- 141,514 -0-
Principal payments of long-term debt -0- (4,098,214) (1,178,571)
Net payments to revolving credit line (141,514) -0- -0-
---------- ---------- ----------
Net cash used by financing activities (141,514) (3,956,700) (1,178,571)
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 169,683 (4,044,111) 46,833
Cash & cash equivalents at beginning
of year 147,062 4,191,173 4,144,340
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 316,745 $ 147,062 $4,191,173
=========== ========== ==========
See notes to financial statements.
Page 21
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 2004 and 2002 ended on January
1 and December 28, respectively. The two fiscal years consisted of 52 weeks.
Fiscal year 2003 ended on January 3, 2004 and consisted of 53 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.
Cash and Cash Equivalents. For the purposes of the statements of cash flows, the
Company considers cash and cash equivalents to include cash on hand, deposits in
banks, and all highly liquid debt instruments with a maturity of three months or
less when purchased.
Accounts Receivable. Substantially all of the Company's accounts receivable are
due from manufacturers in the furniture, contract, automotive upholstery and
apparel industries. Over 50% of the Company's accounts receivable are factored
without recourse. The Company grants credit to non-factored customers and
generally does not require collateral. Management continuously performs credit
evaluations of its customers, considering numerous inputs including past payment
history, financial condition, operating performance, and economic conditions and
prospects. While management believes that adequate allowances for doubtful
accounts have been provided in the financial statement, it is possible that the
Company could experience unexpected credit losses.
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 land 15 - 45 years
Buildings and land improvements 5 - 20 years
Plant machinery and equipment 5 - 17 years
Office equipment 5 - 10 years
Automotive equipment 3 - 5 years
Computer equipment 3 - 5 years
Accounting for Possible Impairment of Long-lived Assets. Long-lived assets are
evaluated for impairment when events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated undiscounted future cash
flows expected to result from the use of these assets and its eventual
disposition are less than its carrying amount. Impairment, if any, is assessed
using discounted cash flows.
In 2004 and 2003 the Company wrote off equipment with net book values of
$198,000 and $268,000 respectively. With the decrease in sales volume and no
anticipated business increase in products that will run on the machinery, the
machinery was written off as a non-performing asset. No salvage value has been
assigned to the machinery, as the Company has no potential buyer.
Page 22
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
- ----------------------------------------------------
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. Significant estimates are the liability for self-funded health
claims, inventory markdowns, and the investment value of affiliates.
Income Taxes. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109 - "Accounting for Income
Taxes". Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Because the realization
of tax benefits related to the Company's net deferred tax asset is uncertain, a
valuation allowance has been provided against the net deferred tax asset.
Financial Instruments. The Company's financial instruments consist primarily of
receivables, accounts payable, and accrued expenses. The carrying amounts of
receivables, accounts payable, and accrued expenses approximates their fair
value because of the short-term maturity of such instruments.
Recent Accounting Pronouncements. In December 2004, the FASB issued FASB Staff
Position No. 109-1 ("FSP FAS No. 109-1"), "Application of FASB Statement No.
109, `Accounting for Income Taxes,' to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004." The American
Jobs Creation Act of 2004 introduces a special tax deduction of up to 9.0
percent when fully phased in, of the lesser of "qualified production activities
income" or taxable income. FSP FAS 109-1 clarifies that this tax deduction
should be accounted for as a special tax deduction in accordance with SFAS No.
109. Although FSP FAS No. 109-1 was effective upon issuance, we are still
evaluating the impact FSP FAS No. 109-1 will have on our financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", an amendment
of Accounting Research Bulletin No. 43, Chapter 4. SFAS No. 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not believe
adoption of SFAS No. 151 will have a material effect on our financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," provided an exception to its basic measurement
principle (fair value) for exchanges of similar productive assets. Under APB
Opinion No. 29, an exchange of a productive asset for a similar productive asset
was based on the recorded amount of the asset relinquished. SFAS No. 153
eliminates this exception and replaces it with an exception of exchanges of
nonmonetary assets that do no have commercial substance. SFAS No. 153 is
effective for the Company as of January 1, 2005. The Company will apply the
requirements of SFAS No. 153 when such an exchange occurs.
Page 23
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)
- ----------------------------------------------------
Recent Accounting Pronouncements (continued)
- --------------------------------------------
In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation
of Variable Interest Entities" and in December 2003, a revised interpretation
was issued (FIN No. 46, as revised). In general, a variable interest entity
("VIE") is a corporation, partnership, trust, or any other legal structure used
for business purposes that either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46, as revised,
requires a VIE to be consolidated by a company if that company is designated as
the primary beneficiary. The interpretation applies to VIEs created after
January 31, 2003, and for all financial statements issued after December 15,
2003 for VIEs in which an enterprise held a variable interest that it acquired
before February 1, 2003. The adoption of FIN No. 46, as revised, did not have a
material effect on our financial position or results of operations.
NOTE 2 - RESTATEMENT
- --------------------
The Company has restated its previously issued financial statement for the year
ended January 3, 2004. For the fiscal year ended January 3, 2004, the Company
calculated the valuation allowance (mark-down) based upon the gross value of
deferred tax assets which was $980,000. The Company has concluded that this
calculation should be restated to calculate the valuation allowance based on the
difference between deferred tax assets and deferred tax liabilities. Deferred
tax liabilities exceeded deferred tax assets by $394,000 during the fiscal year
ended January 3, 2004. The effect of the change will be to reduce the Company's
total assets as of January 3, 2004 by $60,000, decrease total liabilities by
$980,000, increase total shareholder's equity by $920,000 and decrease by
$920,000 the Company's net loss for the fiscal year ended January 3, 2004.
The following is a summary of the impact of the restatement on previously issued
Statements of Operation and Balance Sheet:
Year Ended January 3, 2004
--------------------------
(In 000s except per share data)
As
Originally As
Reported Restated
---------- --------
Statement of Operations:
Provision (credit) for taxes $ 281 $ (638)
Net loss $(2,504) $(1,584)
Net loss per share $ (0.91) $ (0.58)
Balance Sheet:
Deferred income tax asset $ 60 $ -0-
Total assets $13,138 $13,078
Deferred income tax liability $ 1,374 $ 394
Total liabilities $ 2,555 $ 1,575
Total Shareholders' Equity $10,583 $11,503
NOTE 3 - SEGMENTS OF BUSINESS ENTERPRISE
- ----------------------------------------
The Company is engaged in texturing, twisting, winding, dyeing, processing and
selling of cotton, 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 24
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SEGMENTS OF BUSINESS ENTERPRISE (continued)
- ----------------------------------------------------
The Company had foreign sales as a percentage of total sales
as follows:
Country 2004 2003 2002
------- ---- ---- ----
Mexico .27% 1.10% 1.89%
Canada .06% .0% .22%
Honduras 1.62% 3.95 .74%
Barbados .0% .0% .47%
Hong Kong .13% .0% .0%
Turkey .01% .0% .0%
---- ---- ----
Total.......... 2.09% 5.05% 3.32%
Other than sales as shown above, the Company had no other sales in foreign
markets during the three year period ended January 1, 2005. For the three year
period ended January 1, 2005, the Company has operated within a single industry
segment with classes of similar products. The principal markets served by the
Company are apparel, upholstery, home furnishings, 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 January 1, 2005, and
another customer exceeded 10% of the company's sales for the year ended January
1, 2005. For the purpose of this determination, sales to groups of companies
under common control have been combined.
Customer A B
-------- ---- ----
2004 20.7% 11.8%
2003 25.5% 9.7%
2002 35.8% 3.2%
The Company has equipment located in Mexico that was leased to its joint venture
Fytek. The equipment has a net book value of $0. The Company is in the process
of trying to sell the equipment.
NOTE 4 - ACCOUNTS RECEIVABLE
- ----------------------------
Accounts receivable comprise the following:
January 1 January 3
2005 2004
---- ----
Due from factor on
regular factoring account $2,192,000 $1,520,000
Non-factored accounts
receivable 872,000 845,000
---------- ---------
Total $3,064,000 $2,365,000
========== ==========
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 had accounts
receivable of $864,000 at January 1, 2005 compared to $232,000 on January 3,
2004, that had been sold to the factor with recourse.
Page 25
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - ACCOUNTS RECEIVABLE (continued)
- ----------------------------------------
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 collection of the
receivables sold (as defined), it is required to pay interest to the factor on
these advances. In 2004 the Company incurred $1,300 and $42 and in 2003.
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.
Also, the Company's factor has become more conservative in approving customer
credit, and the Company is taking more accounts receivable at its risk.
Subsequently, the Company will move its accounts receivable in-house during the
first quarter of 2005, eliminating its factoring agreement.
NOTE 5 - INVENTORIES
- ----------------------
Inventories are summarized as follows:
January 1 January 3,
2005 2004
---- ----
Finished & in process $ 864,000 $1,123,000
Raw materials 493,000 473,000
Dyes & chemicals 186,000 194,000
Other 98,000 90,000
---------- ----------
Total $1,641,000 $1,880,000
========== ==========
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
- ------------------------------------------
Major classifications of property, plant and equipment are as follows:
January 1, 2005 January 3, 2004
------------------ ----------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
Land $ 156,425 $ -0- $ 156,425 $ -0-
Land improvements 182,913 119,928 182,913 113,609
Building & improvements 6,385,441 5,121,383 6,385,441 4,984,321
Plant machinery &
equipment 21,980,038 17,422,409 22,638,551 16,337,321
Office equipment 967,766 928,722 966,132 895,683
Automotive equipment 175,892 131,751 183,789 119,498
--------- ---------- ---------- ----------
Total $29,848,475 $23,724,193 $30,513,251 $22,450,432
=========== =========== =========== ===========
NOTE 7 - LINE OF CREDIT
- -----------------------
The Company has a revolving credit agreement with its factor. Under the
agreement the Company can borrow up to 80% of the face amount of each account
sold to the factor. The borrowing rate is LIBOR plus 2.5%. At year end the
borrowing rate was 4.8%. At year end the Company had no debt under the line of
credit. The unused line of credit was approximately $1,500,000.
Also, the Company's factor has become more conservative in approving customer
credit, and the Company is taking more accounts receivable at its risk.
Subsequently, the Company will move its accounts receivable in-house during the
first quarter of 2005, eliminating its factoring agreement.
Page 26
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - LONG-TERM DEBT
- -----------------------
In the fourth quarter of 2003, the Company paid off its long-term debt. The
Company used its cash and a revolving loan. Subsequently, the first liens held
by the lender on real estate and equipment are terminated.
NOTE 9 - OTHER LIABILITIES AND ACCRUED EXPENSES
- ----------------------------------------------
Other liabilities and accrued expenses consist of the following:
January 1 January 3
2005 2004
---- ----
Employee insurance $ 60,000 $ 70,000
Payroll taxes payable 24,000 8,100
Other 36,000 35,300
-------- --------
Total $120,000 $113,400
======== ========
NOTE 10 - INCOME TAXES
- ----------------------
The Company uses the liability method as required by FASB Statement 109
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws.
The items that comprise deferred tax assets and liabilities are as follows:
Restated
Jan. 1 Jan. 3
2005 2004
---- --------
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 349,000
Net operating loss carryover 873,000 530,000
Charitable contributions carryover 12,000 12,000
State tax credits 41,000 41,000
Other -0- 3,000
Inventory 52,000 45,000
---------- ---------
Total gross deferred tax assets $1,327,000 $ 980,000
Valuation Allowance (301,000) -0-
----------- ----------
Net deferred tax assets $1,026,000 $ 980,000
----------- ----------
Deferred tax liabilities:
Accelerated depreciation for tax purposes 1,026,000 1,374,000
----------- ----------
Net deferred tax liability $ -0- $ 394,000
========== ==========
At January 1, 2005, the Company had a net operating loss carry forward of
approximately $2,197,000 which expires in various amounts starting 2022-2023.
The provision for income taxes on historical income differs from the amounts
computed by applying the applicable Federal statutory rates, due to the
following:
Page 27
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (continued)
- ----------------------------------
Years Ended
-----------------------------------------
Restated
January 1 January 3 December 28
2005 2004 2002
---- -------- ----
Loss before income taxes (credit) $(2,106,622) ($2,223,000) $(641,180)
Federal income taxes 34% 34% 34%
---------- ---------- ----------
Computed taxes (credit) at maximum
statutory tax (716,000) (756,000) (218,001)
State income taxes (credit), net of
federal income tax benefits (96,000) (101,000) (50,886)
Total adjustment for foreign
affiliate earnings 115,000 21,000 -0-
Adjustment for deferred income taxes (4,000) 194,000 (53,513)
Prior year tax examination and other 6,000 4,000 -0-
State Tax Refund (5,000) -0- -0-
---------- ---------- ----------
Sub-Total $ (700,000) $ (638,000) $ (322,400)
Valuation Allowance 301,000 -0- -0-
---------- ---------- ----------
Provision (credit)for Income Taxes $ (399,000) $ (638,000) $(322,400)
=========== =========== ===========
The benefit for taxes on income consists of the following:
Years Ended
-----------------------------------------
Restated
January 1 January 3 December 28
2005 2004 2002
---- ---- ----
Deferred:
Federal $(605,000) $(541,000) $(271,514)
State and local (95,000) (97,000) (50,886)
Valuation Allowance 301,000 -0- -0-
---------- ----------- ----------
Total $(399,000) $ 638,000) $(322,400)
=========== ========== ==========
NOTE 11 - 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. The Company and its joint venture
partner, Teijin/Akra, voted on March 26, 2004 to close their joint venture,
Fytek. The joint venture operated on a scaled down basis through mid-August
2004. Company estimates that it will receive approximately $196,000 cash
distribution after liquidation in addition to a $150,000 disbursement received
in September 2004. During the year the investment was written down by $207,000.
During 2004 the Company had purchases from Fytek of $800,000 compared to
$882,000 in 2003. Financial information for Fytek is as follows:
Page 28
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS (continued)
- -----------------------------------------------------------------------------
Statement of Income
(In thousands of U.S. Dollars)
December 31
---------------------------------
2004 2003 2002
---- ---- ----
Net Sales $1,436 $2,305 $3,827
Gross Profit (173) 15 680
Income from operating income (378) (192) 208
Income before income taxes (563) (139) 306
Income taxes -0- 52 (78)
------ ------ -------
Net income (loss) $ (563) $ (87) $ 228
====== ====== =======
Balance Sheet
(In thousands of U.S. Dollars)
December 31
----------------------------
2004 2003 2002
---- ---- ----
Current assets $ 783 $1,861 $2,448
Non-current 185 164 139
---- ---- ----
Total assets $ 968 $2,025 $2,587
====== ====== ======
Current liabilities $ 160 $ 466 $ 788
Non-current liabilities -0- -0- 2
------ ------ ------
Total liabilities $ 160 $ 466 $ 790
Stockholder's equity 808 1,559 1,797
------ ------ ------
Total liabilities and stockholder's equity $ 968 $2,025 $2,587
====== ====== ======
NOTE 12 - STATEMENTS OF CASH FLOWS
- ----------------------------------
Cash paid for interest was $1,300 in 2004, $91,000 in 2003, and $178,000 in
2002. The Company had cash payments for state franchise taxes of $6,000 in 2004,
$14,000 in 2003, and $14,000 in 2002. The Company received a state tax refund of
$6,000 in 2004.
NOTE 13 - RENTAL EXPENSES AND LEASE COMMITMENTS
- -----------------------------------------------
Rental expenses under all lease commitments for the three fiscal years ended
January 1, 2005, aggregated $57,000, $60,000, and $53,000 respectively.
Minimum commitments under terms of all non-cancelable leases, which consist only
of leased equipment, are as follows as of January 1, 2005:
2005 $62,000
2006 $57,000
2007 $34,000
2008 $1,000
Page 29
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------
(in thousands of dollars except for per share amounts)
QUARTER
-----------------------------------------
Restated Restated Restated
2004 First(1)(4) Second(4) Third(4) Fourth(2)
---- ----- ------ ------ ------
Net sales $6,601 $6,710 $6,162 $5,661
Cost of sales 6,401 6,295 6,119 5,731
Gross profit/(loss) 200 415 43 (70)
Net loss (462) (84) (321) (840)
Net loss per common share $(.17) $(.03) $ (.12) $ (.30)
2003 Restated
---- First Second Third Fourth(3)(4)
----- ------ ------ --------
Net sales $6,620 $5,830 $6,537 $5,828
Cost of sales 6,120 5,799 6,196 6,122
Gross profit/(loss) 500 31 341 (294)
Net loss (119) (300) (182) (983)
Net loss per common share $(0.04) $(0.11) $(0.07) $(0.36)
(1)During the first quarter of 2004, the Company recorded a write-down for the
impairment of its investment in affiliate of $298,000.
(2)During the fourth quarter of 2004, the Company recorded a write-down for the
impairment of machinery of $198,000.
(3)During the fourth quarter of 2003, the Company recorded a write-down for the
impairment of machinery of $268,000.
(4)The Company recognized an error in the calculation of the valuation allowance
for its deferred tax assets in the first, second, and third quarters of 2004,
and the fourth quarter of 2003. The valuation allowance was calculated on the
gross deferred tax assets and should have been calculated on the net of the
deferred tax assets and the deferred tax liabilities. See Note 2.
The effect of this change for the fourth quarter of 2003, and each of the
three quarters ended October 2, 2004, is summarized in the following tables.
10K Quarterly Adjustments
----------------------------
(In 000's except per data share)
(Unaudited)
Quarter 4 Quarter 1 Quarter 2 Quarter 3
2003 2004 2004 2004
---------- ---------- --------- ---------
Net loss:
Reported $(1,903) $(663) $(29) $(299)
Adjustment $ 920 $ 201 $(55) $ (22)
As Restated $ (983) $(462) $(84) $(321)
Net loss per share:
Reported $(0.69) $(0.24) $(0.01) $(0.11)
Adjustment $(0.33) $ 0.07 $(0.02) $(0.01)
As Restated $(0.36) $(0.17) $(0.03) $(0.12)
Page 30
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - 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 2004, 2003,
or 2002.
NOTE 16 - 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
basis. The receivables sold to the factor during a month are generally collected
over the next 60 days. At January 1, 2005 the Company had $2,192,000 due from
its factor of which $864,000 are with recourse. Upon collection, the funds are
automatically transferred by the factor to the Company's bank.
NOTE 17 - 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 exceed 140,000 pounds per week, the Company will purchase at least
50% of its requirements from Titan. The textured yarn pricing structure will be
reviewed every six months and when partially oriented yarn (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
continues to move toward a solution of natural attenuation. The cost of
monitoring is approximately $31,000 per year.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE
- -------------------------------------------------------------------------------
On October 1, 2003 Cole, Samsel & Bernstein LLC, of Lodi, NJ, the independent
accountant engaged for many years by the Company as the principal accountant to
audit the Company's financial statements gave notice to the Company that it
would be resigning as the independent accountant for the Company. The reason
stated for the impending resignation was that this accounting firm is declining
to serve as the independent accountant and certifying accountant for companies
with securities registered with the Securities and Exchange Commission. The
Audit Committee and management of the Company commenced the process to engage a
new independent accountant. The effective date of the resignation of Cole,
Samsel & Bernstein, LLC was December 1, 2003.
The report of Cole, Samsel & Bernstein LLC on the financial statements of the
Company for either of the past two fiscal years did not contain an adverse
opinion nor a disclaimer of opinion, nor was the report qualified or modified as
to uncertainty, audit scope or accounting principles. During the Company's two
Page 31
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE (continued)
- -------------------------------------------------------------------------------
most recent fiscal years and during the subsequent interim periods preceding the
resignation of the accounting firm, there were not any disagreements with the
former accounting firm on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
Neither the audit committee of the board of directors nor the board of directors
of the Company recommended any change in the accounting firm for the Company.
During the Company's two most recent fiscal years and the subsequent interim
periods preceding the resignation of the accounting firm, the accounting firm
did not advise the Company that the internal controls necessary for the Company
to develop reliable financial statements do not exist; the accounting firm did
not advise the Company that any information had come to the attention of the
accounting firm that lead it to no longer be able to rely on management's
representations or that made it unwilling to be associated with the financial
statements prepared by management; the accounting firm has not advised the
Company of the need to expand significantly the scope of its audit nor that
information has come to the attention of the accounting firm during the stated
time period that, if further investigated, might (a) materially impact the
fairness or reliability of either: a previously issued audit report or the
underlying financial statements, or the financial statements issued or to be
issued covering the fiscal periods subsequent to the date of the most recent
financial statements covered by an audit report (including information that may
prevent it from rendering an unqualified audit report on those financial
statements), or (b) cause it to be unwilling to rely on management's
representations or be associated with the Company's financial statements, and
there was no connection between the resignation of the accounting firm and the
scope of the audit or further investigation of the accounting firm; the
accounting firm has not advised the Company that any information has come to the
attention of the accounting firm that it has concluded materially impacts the
fairness or reliability of either (a) a previously issued audit report or the
underlying financial statements or (b) the financial statements issued or to be
issued covering the fiscal periods subsequent to the date of the most recent
financial statements covered by an audit report (including information that,
unless resolved to the satisfaction of the accounting firm, would prevent it
from rendering an unqualified audit report on those financial statements), and
there was no issue to be resolved to the satisfaction of the accounting firm
prior to its resignation.
Attached as Exhibit 99A to the Company's annual report on Form 10-K for the
fiscal year ended January 3, 2004, filed with the Securities and Exchange
Commission, is a letter addressed to the Securities and Exchange Commission from
Cole, Samsel & Bernstein, LLC provided to the Company stating that Cole, Samsel
& Bernstein, LLC agrees with the statements made by the Company in this report.
Effective January 15, 2004, the Company engaged BDO Seidman LLP as the
independent registered accounting firm to audit the Company's financial
statements. A formal engagement letter between the Company and BDO Seidman LLP
was signed on January 15, 2004.
Prior to engaging BDO Seidman LLP on January 15, 2004, BDO Seidman LLP was not
engaged as either the principal accountant to audit the Company's financial
statements or as an independent accountant to audit a significant subsidiary and
on whom the principal accountant was expected to express reliance in its report.
Prior to engaging BDO Seidman LLP, neither the Company, nor anyone on its behalf
consulted BDO Seidman LLP regarding (a) either the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements,
and no written report was provided to the Company and no oral advice was
provided to the Company by BDO Seidman LLP which was considered by the Company
in reaching a decision as to the accounting, auditing or financial reporting
issues; and (b) there was no matter that was a subject of disagreement as
defined in paragraph 304(a)(1)(iv) of SEC Regulation S-K and the related
instructions to said item, or a reportable event, as described in paragraph
304(a)(1)(v) of SEC Regulation S-K.
Page 32
BURKE MILLS, INC. PART II
NOTES TO FINANCIAL STATEMENTS
ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES
- --------------------------------------------
As of the fiscal year ended January 1, 2005, the Company, with the participation
of the Company's chief executive officer and chief financial officer, carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in SEC Rule 13a-15(e)).
Based upon that evaluation, the chief executive officer and the chief financial
officer of the Company have concluded that such disclosure controls and
procedures were not effective due to an error in the treatment of an item in the
Company's financial statements for the fiscal year ended January 3, 2004 and for
the first three quarters of the fiscal year ended January 1, 2005, as specified
below. The Company deems this error to be a material weakness, as such term is
defined in PCAOB Auditing Standard No. 2.
For the fiscal year ended January 3, 2004, the Company calculated the valuation
allowance (mark-down) based upon the gross value of deferred tax assets which
was $920,000. The Company has concluded that this calculation should be restated
to calculate the valuation allowance based on the difference between deferred
tax assets and deferred tax liabilities. Deferred tax liabilities exceeded
deferred tax assets by $60,000 during the fiscal year ended January 3, 2004. The
effect of the change will be to reduce the Company's total assets as of January
3, 2004 by $60,000, decrease total liabilities by $980,000, increase total
shareholders' equity by $920,000 and decrease by $920,000 the Company's net loss
for the fiscal year ended January 3, 2004.
To address this material weakness subsequent to the date of its discovery on
March 29, 2005, the Company's chief executive officer and chief financial
officer have taken the following action:
(1) The Company performed anextensive evaluation of its method of calculating
the valuation allowance needed on its deferred tax asset.
(2) During this evaluation, the Company identified adjustments to the valuation
allowance account that related to a prior period.
(3) Management discussed the materiality of these adjustments with the Audit
Committee and concluded that the historical financial statements indicated above
should be restated.
(4) The Company has implemented detailed procedures to be followed in future
periods to ensure that the calculation of the deferred tax asset valuation
analysis is performed in a manner consistent with generally accepted accounting
principles.
As a result of the corrections made in this report with respect to the valuation
allowance, the Company believes that the financial statements included in this
report fairly present in all material respects its financial condition, results
of operations and cash flows for the periods presented.
During the fiscal year ended January 1, 2005, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect such internal controls. Subsequent to the date of the
evaluation, there have been no changes or corrective actions with regard to the
material weakness, except for the items listed above.
ITEM 9B. OTHER INFORMATION.
- ----------------------------
No disclosure required.
Page 33
BURKE MILLS, INC.
PART III
The information required for Items 10, 11, 12, 13 and 14 of Part III of this
report 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 17, 2005, 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.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ---------------------------------------------------
(a) The following documents are filed as a part of this report.
1. Report of Independent Registered Public Accounting Firm.
2. 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:
Report of Independent Registered Public Accounting Firm
Balance sheets
January 1, 2005
January 3, 2004
Statements of operations
Year ended January 1, 2005
Year ended January 3, 2004
Year ended December 28, 2002
Statements of changes in shareholders' equity
Year ended January 1, 2005
Year ended January 3, 2004
Year ended December 28, 2002
Statements of cash flows
Year ended January 1, 2005
Year ended January 3, 2004
Year ended December 28, 2002
Notes to financial statements
Page 34
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.
3. The exhibits required by Item 601 of Regulation S-K and paragraph (c) of
Item 14 are: (a) 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) Exhibit 31 - Rule 13a-14(a)
certifications; and (c) Exhibit 32 - Section 1350 certifications.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: April 1, 2005 BURKE MILLS, INC.
By: s/Humayun N. Shaikh
----------------------
Humayun N. Shaikh
Chairman of the Board
(Principal Executive Officer)
Date: April 1, 2005 By: s/Thomas I. Nail
-----------------------
Thomas I. Nail
President and COO
(Principal Financial Officer)
Page 35
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: April 1, 2005 By: s/Humayun N. Shaikh
---------------------------
Humayun N. Shaikh, Director
Date: April 1, 2005 By: s/Thomas I. Nail
---------------------------
Thomas I. Nail, Director
Date: April 1, 2005 By: s/Richard F. Byers
---------------------------
Richard F. Byers, Director
Date: April 1, 2005 By: s/William T. Dunn
---------------------------
William T. Dunn, Director
Date: April 1, 2005 By: s/Robert P. Huntley
---------------------------
Robert P. Huntley, Director
Date: April 1, 2005 By: s/Robert T. King
---------------------------
Robert T. King, Director
Date: April 1, 2005 By: s/Aehsun Shaikh
---------------------------
Aehsun Shaikh, Director
Page 36
EXHIBIT TABLE
(3)(i) Articles of Incorporation - Incorporated by reference
(ii) Bylaws - Incorporated by reference
(14) Code of Ethics
(16) Letter regarding change in certifying accountant -
Incorporated by reference
(31)(1) Rule 13a - 14(a)/15d - 14(a) Certifications
(32) Section 1350 Certifications
Page 37
EXHIBIT 14
CODE OF ETHICS
OF
BURKE MILLS, INC.
Burke Mills, Inc. (the "Company") has adopted a Code of Ethics.
The terms of this code are as follows:
(1) This Code of Ethics applies to the Company's principal executive
officer, principal financial officer, principal accounting officer or
controller, and any other persons who, now or in the future, are performing
similar functions (hereafter individually "Officer").
(2) No Officer shall engage in any criminal, fraudulent or unethical
acts or omissions with respect to conduct of the business, operations,
financial, accounting and all other functions of the Company.
(3) All actual or apparent conflicts of interest between personal and
professional relationships involving the Company shall be reported to the chief
executive officer of the Company or in his absence, the chief operating officer
or next highest-ranking officer. If the actual or apparent conflict of interest
exists with respect to the chief executive officer, the chief operating officer
or other next highest-ranking officer, such conflict of interest shall be
reported to an independent member of the board of directors of the Company.
(4) All Officers shall at all times insure that all reports and
documents filed with or submitted to the Securities and Exchange Commission and
any other public communications made by the Company shall be prepared, filed,
submitted and disseminated with complete, full, fair, accurate, timely and
understandable disclosure.
(5) No Officer shall take any action, or fail to take any action, to
fraudulently influence, coerce, manipulate or mislead the outside auditors of
the Company's financial statements for the purpose of rendering those financial
statements materially misleading.
(6) All Officers shall at all times comply with all governmental laws,
rules and regulations in the conduct of the business, operations, financial,
accounting and all other functions of the Company.
(7) Any violations of this code shall be reported to the chief
executive officer, or in the absence of the chief executive officer, to the
chief operating officer or the next highest-ranking officer of the Company. In
the event any violation of the code involves the chief executive officer, or the
chief operating officer or next highest-ranking officer of the Company, then
such violation shall be reported to an independent member of the board of
directors of the Company.
(8) All Officers of the Company shall be held accountable for adherence
to this Code of Ethics. Whenever any violation of this Code of Ethics has been
determined by management or by the board of directors of the Company to have
occurred, appropriate measures shall be taken with respect to the Officer or
Officers committing such violations.
Adopted by the board of directors of the Company on May 20, 2003.
Page 38
EXHIBIT 31
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 report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
s/Humayun N. Shaikh
Date: April 1, 2005 ---------------------------
Humayun N. Shaikh
Chairman and CEO
(Principal Executive Officer)
Page 39
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 report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal control
over financial reporting.
s/Thomas I. Nail
Date: April 1, 2005 ---------------------------
Thomas I. Nail
President and COO
(Principal Financial Officer)
Page 40
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S. CODE ss. 1350
The undersigned Chief Executive Officer of Burke Mills, Inc., (the "Issuer")
hereby certifies that the foregoing periodic report containing financial
statements of the issuer fully complies with the requirements of sections 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that
the information contained in the foregoing report fairly presents, in all
material respects, the financial condition and results of operations of the
issuer.
s/Humayun N. Shaikh
Date: April 1, 2005 ---------------------------
Humayun N. Shaikh
Chairman and CEO
CERTIFICATION PURSUANT TO 18 U.S. CODE ss. 1350
The undersigned Chief Financial Officer of Burke Mills, Inc., (the "Issuer")
hereby certifies that the foregoing periodic report containing financial
statements of the issuer fully complies with the requirements of sections 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that
the information contained in the foregoing report fairly presents, in all
material respects, the financial condition and results of operations of the
issuer.
s/Thomas I. Nail
Date: April 1, 2005 ---------------------------
Thomas I. Nail
President and COO
(Chief Financial Officer)
Page 41