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, 2000
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
_________________ to _________________
Commission File No. 0-5680
BURKE MILLS, INC.
(Exact name of registrant as specified in its charter)
(I.R.S. Employer Identification No.) 56-0506342
State or other jurisdiction of incorporation or organization:
North Carolina
191 Sterling Street, NW
Valdese, North Carolina 28690
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
828 874-6341
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No Par Value (Stated Value of $0.66 Per Share)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
Indicate by check mark if a disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form10-K.[ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (computed by reference to the average bid and asked price on February
24, 2000) was $1,973,135.
Page 1 of 41
<PAGE>
The number of shares outstanding of the registrant's only class of common stock
as of March 1, 2000 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 16, 2000, 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.
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BURKE MILLS, INC.PART I
ITEM 1 - BUSINESS
- ------------------
(a) General Development of Business - General business development during
fiscal year ended January 1, 2000, consisted of installing new software to
replace the Company's manufacturing and accounting software, installing
machinery in the dyeing and dry processing areas, and reacting to competitive
pricing pressures in the market.
On May 29, 1999, the Company went live with a new fully integrated
system that replaced its manufacturing and accounting software. The new software
was installed to improve the Company's information efficiencies and bring the
Company into compliance for all critical applications affected by the year 2000.
During the year the Company installed new machinery in the dyeing process
which consisted of new dyeing, drying and automated load and unload machinery.
The dyeing machinery was installed to replace some older equipment and to
increase capacities. The automated load and unload machinery was purchased to
lower labor cost. Although the machinery was received in 1999, it will be
approximately the second quarter of 2000 before this machinery is fully
operational.
In its dry process area, the Company installed machinery that increased
its intermingling capacity by approximately 67% and installed machinery for a
new product.
During the year the Company experienced volatility in the cost of raw
yarns. In the first half of the year raw yarn prices declined, while in the
second half of the year they increased. This resulted in the Company reducing
and then raising prices to its customers.
(b) Financial Information about Industry Segments The Company had only
one industry segment during the fiscal year ended January 1, 2000.
(c) Narrative Description of Business - The Company is engaged in
twisting, texturing, winding, dyeing, processing and selling of filament,
novelty and spun yarns and in the dyeing and processing of these yarns for
others on a commission basis.
The principal markets served by the Company are upholstery and
industrial uses through the knitting and weaving industry.
The Company's products are sold in highly competitive markets primarily
throughout the United States. Competitiveness of the Company's products is based
on price, service and product quality. Many of the Company's competitors are
divisions or segments of larger, diversified firms with greater financial
resources than those of the Company.
The methods of distribution of the Company's products consist of the
efforts of the Company's sales force which makes contact with existing and
prospective customers. The Company markets its products throughout the United
States and Canada, with the bulk of business being primarily in the eastern
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BURKE MILLS, INC.PART I
ITEM 1 - BUSINESS (continued)
- ------------------------------
United States, through three salesmen employed directly by the Company on salary
and a number of commissioned sales agents working on various accounts. The
Company also has begun to market its products in Mexico, Central America and
South America through its fifty-percent (50%) owned affiliate, Fytek, S.A. de
C.V.
The dollar amount of backlog of unshipped orders as of January 1, 2000
was $3,184,000 and as of January 2, 1999 was $3,832,000. 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 64 days.
On average, the Company turns its inventory approximately 5 to 7 times each
year. The Company has been able to meet its delivery schedules and has been able
to enjoy a ready supply of raw materials from suppliers. For the fiscal year
ended January 1, 2000, approximately 5.0% of the Company's sales were from
dyeing and processing of yarn for customers who supplied the yarn. The Company
does not allow customers the right to return merchandise except where the
merchandise is defective. The Company rarely allows payment terms to its
customers beyond sixty (60) days, and the Company has experienced no significant
problems in collecting its accounts receivable. The Company believes that
industry practices are very similar to that of the Company in regard to these
matters.
Substantially all of the Company's manufacturing operations run by
electrical energy purchased from local utility companies and its premises are
heated with oil and gas. The Company has not experienced any shortages in
electricity, oil or gas during the fiscal year. The Company has made no
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
the Company's operations.
The Company has established a recycling program for its major waste
items: yarn, cardboard, plastic tubes and cleaning fluid.
The Company has made various changes in its plant that regulates discharge
of materials into the environment. The Company believes its manufacturing
operations are in compliance with all presently applicable federal, state and
local legislative and administrative regulations concerning environmental
protection; and, although it cannot predict the effect that future changes in
such regulations may have, particularly as such changes may require capital
expenditures or affect earnings, it does not believe that any competitor subject
to the same or similar regulations will gain any significant and competitive
advantages as a result of any such
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BURKE MILLS, INC.PART I
ITEM 1 - BUSINESS (continued)
- ------------------------------
changes. Compliance by the Company during the fiscal year ended January 1, 2000
with federal, state and local environmental protection laws had no material
effect on capital expenditures, earnings or the competitive position of the
Company.
During 1996 in connection with a bank loan to the Company secured by
real estate the Company had a Phase I Environmental Site Assessment conducted on
its property. The assessment indicated the presence of a contaminant in the
groundwater under the Company's property. The contaminant was a solvent used by
the Company in the past but no longer used. The contamination was reported to
the North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving toward a solution of natural attenuation. The Company believes it made an
adequate provision to earnings in 1997 to cover any future cost. No additional
provision was made in 1998 or 1999. This situation will have no material impact
on the capital expenditures, earnings or competitive position of the Company.
On, February 28, 2000, the Company had 281 employees. The Company's yarn
division is its only division. During the fiscal year ended January 1, 2000,
sales to Milliken Company and CMI Industries, Inc., each exceeded ten percent of
the Company's revenue for that year. The loss of these customers would have a
material adverse effect on the Company in the short run, but the Company
believes that it would be able to replace the business within a reasonable time.
The Company owns 49.8% of the stock and 50% of the voting control of
Fytek, S.A. de C.V. (Fytek), a Mexican corporation with its principal place of
business in Monterrey, Mexico. The other shareholder in Fytek is Fibras
Quimicas, S.A., a Mexican Corporation. The purpose of Fytek is the manufacture
and marketing of yarns. The Company acquires yarn from Fytek and uses Fytek to
market and distribute its dyed yarn in Mexico, Central America and South
America. Fytek began production in the fourth quarter of 1997.
(d) Financial Information about Foreign and Domestic Operations and
Export Sales -- Company sales to Brazil, Canada and Mexico during 1999 accounted
for approximately 4% of total net sales. During 1998 sales to these countries
were less than 8%, and such sales aggregated less than 6% in 1997.
ITEM 2. PROPERTIES
- -------------------
The executive offices and manufacturing plant of the Company are located
at Valdese, North Carolina, which is 75 miles northwest of Charlotte, North
Carolina, and 60 miles east of Asheville, North Carolina. The main plant and
executive offices are located on an approximate nineteen-acre tract of land
owned by the Company. Seventeen acres of this tract are encumbered by a first
priority lien deed of trust held by First Union National Bank of North Carolina.
The main plant building used by the
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BURKE MILLS, INC.PART I
ITEM 2 - PROPERTIES (continued)
- ------------------------------
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, 2000 are as follows:
Pounds/Year 1999
Department Capacity Utilization
---------- -------- -----------
Winding Machines 21,218,000 52%
Texturing Machines 2,767,500 37.5
Dyeing Equipment 20,000,000 76%
During the year the Company phased out the remainder of its twisting
machinery. Texturing capacity is the average capacity available during 1999.
Capacity for 2000 will be 700,000 pounds.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not a party and its property is not subject to any
material pending legal proceedings other than ordinary routine litigation
incidental to the business.
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.
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BURKE MILLS, INC.PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- --------------------------------------------------------------
(a) The principal United States (or other) market on which the
Company's common stock is being traded is the United States over-the-counter
market. The range of high and low bid quotations for the Company's common stock
for each quarterly period during the past two fiscal years ended January 1,
2000, and on the latest practicable date (as obtained from the NASDAQ Stock
Market, Inc., in Washington, DC) is as follows:
Quarter Ending
1999 High Bid Low Bid
------ ------ -----
March 31 $3.00 $1.625
June 30 $2.297 $1.375
September 30 $2.125 $1.563
December 31 $2.438 $1.50
Quarter Ending
1998 High Bid Low Bid
-------- -------- --------
March 31 $3.125 $2.50
June 30 $4.313 $2.531
September 30 $4.438 $2.00
December 31 $3.75 $2.00
February 24, 2000 $1.75 $1.688
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 28, 2000 there were 404 holders of the common stock
of the Company.
(c) The Company has declared no dividends on its common stock during the
past two fiscal years.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The selected financial data set forth on the following page, for the
five years ended January 1, 2000 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.
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BURKE MILLS, INC.PART II
ITEM 6. SELECTED FINANCIAL DATA (continued)
- ---------------------------------------------
(in thousands except per share data)
Years Ended
Jan. 1 Jan. 2 Jan. 3 Dec. 28 Dec. 30
2000 1999 1998 1996 1995
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA
Net Sales $42,840 $42,169 $41,156 $40,649 $34,148
Cost of Sales 38,779 37,825 36,765 36,887 30,666
------ ------ ------ ----- ------
Gross Profit $ 4,061 $ 4,344 $ 4,391 $3,762 $ 3,482
------- ------- ------- ------ -------
Income (loss) before income
taxes $ (300) $ 1,087 $ 1,059 $869 $ 1,156
Income Taxes (credit) (98) 383 433 284 212
------ ------ ------ ------ ------
Net Income (loss) $ (202) $ 704 $ 626 $585 $ 944
====== ====== ====== ====== ======
Per Share (Note A)
Net income (loss) $ (.07) $ .26 $ .23 $.21 $ .34
====== ====== ====== ====== ======
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 $ 4,640 $ 2,162 $ 1,343 $1,025 $ 6,372
======= ======= ======= ======= =======
Depreciation $ 1,839 $ 1,744 $ 1,600 $1,508 $ 1,052
======= ======= ======= ======= =======
Cash provided by
operating activities $ 74 $ 1,926 $ 3,646 $1,527 $ 2,004
======= ======= ======= ======= =======
Jan. 1 Jan. 2 Jan. 3 Dec.28 Dec.30
2000 1999 1998 1996 1995
---- ---- ---- ---- ----
SELECTED BALANCE SHEET DATA
Current assets $10,345 $11,213 $11,785 $9,905 $7,641
Current liabilities 4,381 3,383 3,378 1,738 2,171
----- ----- ----- ----- -----
Working capital $ 5,964 $ 7,830 $ 8,407 $8,167 $5,470
======= ======= ======= ======= =======
Current ratio 2.36 3.31 3.49 5.70 3.52
==== ==== ==== ==== ====
Total assets $25,995 $24,311 $24,348 $22,554 $20,769
======= ======= ======= ======= =======
Long-term debt $ 5,551 $ 4,563 $ 5,313 $6,000 $ 4,964
======= ======= ======= ======= =======
Deferred income taxes $ 2,122 $ 2,221 $ 2,218 $2,003 $ 1,406
======= ======= ======= ======= =======
Shareholders' equity $13,942 $14,144 $13,440 $12,813 $12,228
======= ======= ======= ======= =======
(A) Income per share has been computed based on the weighted average number of
common shares outstanding during each period.
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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
------------------------------ Period toPeriod
Jan. 1 Jan. 2 Jan. 3 Increase(Decrease)
2000 1999 1998 1998-1999 1997-1998
---- ---- ---- ------------ -------
Net Sales 100.0% 100.0% 100.0% 1.6% 2.5%
Cost of Sales 90.5 89.7 89.3 2.5 2.9
Gross profit margin 9.5 10.3 10.7 (6.5) (1.1)
----- ----- ----- ----- -----
Selling, general,
administrative and
factoring expenses 9.8 7.1 6.9 40.6 5.8
----- ----- ----- ----- ----
Operating earnings/
(loss) (0.3) 3.2 3.8 (111.7) (13.6)
Other income 0.6 0.4 0.4 66.9 6.8
Other expenses (1.3) (1.3) (1.7) (1.8) (16.7)
----- ----- ----- ----- -----
Income (loss) before
income taxes and net
equity in affiliates (1.0) 2.3 2.5 (146.1) (8.5)
Income taxes (credit) (0.2) 0.9 1.0 (125.5) (11.4)
----- ----- ----- ----- -----
(0.8) 1.4 1.5 (160.1) (6.4)
Equity in Net Earnings
Of Affiliate 0.3 0.3 0.1 (5.6) 539.6
----- ----- ----- ----- -----
Net income (loss) (0.5)% 1.7% 1.5% (128.7)% 12.5%
===== ===== ===== ===== =====
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BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 1999 Compared to 1998
- --------------------------------------------
Net Sales
- ----------
Net sales for 1999 increased to $42.8 million from $42.2 million in 1998 or
1.6%. Total pounds shipped increased by 2.1%. Full-yarn sales dollars increased
by 2.0% and full-yarn pounds increased by 5.0% Sales of commission yarns (the
dyeing and processing of customer owned yarns) decreased in both dollars and
pounds by 7.1% and 1.1% respectively. The increase in sales was mainly
attributable to the introduction of new products in 1998. In the fourth quarter
of 1998, the Company experienced a weakening market and pricing pressures. These
conditions forced reductions in prices to retain customers. After lowering sales
prices in the fourth quarter of 1998, the Company experienced a volatile raw
yarn market. In the first half of 1999, raw yarn prices declined forcing the
Company again to lower sales prices to its customers. Then in the second half of
1999, raw yarn prices increased and the Company began to increase sales prices
to its customers.
Cost of Sales and Gross Margin
- -------------------------------
Cost of sales for 1999 increased to $38.8 million or 2.5% as compared to
37.8 million in 1998.
Material cost decreased $549,000 or 2.2% primarily as a result of lower
yarn cost in the first half of 1999.
Direct labor increased by 13.3% and overhead cost increased by 11.0%. The
increase in labor and overhead cost was primarily the result of the installation
and start-up of the new ERP software, and installation and start-up of new
dyehouse equipment which replaced a portion of older equipment.
In the first half of 1999 the Company experienced a lag from the time yarn
prices declined to the time the Company lowered sales prices to the customer.
This lag increased the Company's profit margin on materials. Conversely, in the
second half of the year, especially the fourth quarter, when yarn prices
increased, there was a lag in increasing the sales prices to the customers which
decreased the Company's profit margin on materials.
Inasmuch as net sales increased by 1.6% and cost of sales increased by
2.5%, the 1999 gross margin decreased to 9.5%, as compared to 10.3% in 1998.
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses for 1999 aggregated $4.1
million as compared to $2.8 million in 1998. The primary reason for the increase
was $1,186,000 of cost related to the implementation of the Company's ERP
software.
Page 10 of 41
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BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations: 1999 Compared to 1998 (continued)
- --------------------------------------------------------
Factor's Charges
- -----------------
Factor's charges decreased slightly as the percentage of factored accounts
declined. There was no change in the factor's agreement during 1999.
Interest Income
- ----------------
Interest income decreased to $76,000 from $164,000 in 1998. The decrease
was primarily due to lower average investment of cash during the year. The 1999
and 1998 interest income was primarily interest earned on short-term cash
equivalents invested with the Company's bank.
Interest Expense
- -----------------
Interest expense decreased slightly due to lower average long-term debt
during the year.
Gain on Disposal of Equipment
- ---------------------------
During the thirty-nine week period the Company sold its friction
texturing equipment, which had a gross value of $1,342,000 and a net book value
of $230,000 for $446,000 (also see Note 16 Commitments), resulting in a gain on
disposal of $216,000.
Also, the Company replaced dyeing equipment with a gross value of $86,000
and a net book value of $26,000, resulting in a loss on disposal of $26,000.
These were the major transactions that netted a gain on disposal of
equipment.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company's Mexican joint venture, Fytek, contributed earnings to the
Company of $135,000 in 1999 compared to $143,000 in 1998. The joint venture only
began operations in November of 1997.
Fytek had sales in 1999 of $7.6 million with income before taxes of
$709,000, and after tax income of $270,000. The balance at the end of 1999 in
Fytek's stockholders equity was $934,000.
(See Note 10.)
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BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations: 1999 Compared to 1998(continued)
- --------------------------------------------------------
Provision for Income Taxes
- ---------------------------
Provision for income taxes for 1999 was a credit of $97,705 compared to
tax provision of $383,000 in 1998. The credit in the provision for income taxes
was primarily due to a loss in 1999. The provision for income taxes includes an
amount which represents the tax rate difference of approximately 5% between the
United States and Mexico as applied to the Company's share of undistributed net
earnings of affiliate.
Page 12 of 41
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BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 1998 Compared to 1997
- --------------------------------------------
Net Sales
- ----------
Net sales for 1998 increased to $42.2 million from $41.2 million in 1997.
The net sales dollars increased by 2.5%, and total pounds shipped increased by
3.4%. Full yarn sales dollars increased 2.0%, and full yarn pounds shipped
increased by 2.8%. Sales of commission yarns (the dyeing and processing of
customer owned yarns) increased in both dollars and pounds by 19.2% and 23.0%
respectively. The increase in sales was mainly attributable to the introduction
of new products. In the fourth quarter of 1998, the company experienced a
weakening market and pricing pressures. These conditions forced reductions in
prices to retain customers and resulted in lower gross profits.
Cost of Sales and Gross Margin
- ------------------------------
Cost of sales for 1998 increased to $37.8 million, or 2.9%, as compared to
$36.8 million in 1997.
Material cost increased $1,162,000 or 4.9%.
Direct labor increased by 5.7%, primarily as a result of increased pounds
produced and an annual wage increase.
Manufacturing overhead declined by 2.2% mainly as a result of cost
controls.
Inasmuch as net sales for 1998 increased by 2.5% and cost of sales
increased by 2.9%, the 1998 gross margin decreased to 10.3% as compared to 10.7%
in 1997.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for 1998 aggregated $2.8
million as compared to $2.7 million in 1997. Expenses increased primarily as a
result of adding a sales person for the new sewing thread products, professional
service paid for software evaluation, an increase in depreciation expenses, and
an increase in travel expenses.
Factor's Charges
- ----------------
Factor's charges for 1998 aggregated $186,000 or 0.4% of net sales, as
compared to $183,000 or 0.4% of net sales in 1997. There was no change in the
factor's agreement during 1998.
Page 13 of 41
<PAGE>
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 1998 Compared to 1997(continued)
- ----------------------------------------------
Operating Margins
- -----------------
As a result of the discussion above with respect to the decrease in gross
profit percentage and an increase in selling, general and administrative
expenses, the operating earnings were $1.3 million in 1998 as compared to $1.6
million in 1997.
Interest Income
- ---------------
Interest income for 1998 was $164,000 as compared to $152,000 in 1997. The
increase in interest income was the result of a higher average investment of
cash during the year. The 1998 and 1997 interest income was primarily interest
earned on short-term cash equivalents invested with the company's bank.
Interest Expense
- ----------------
Interest expense for 1998 was $463,000 as compared to $503,000 in 1997.
The Company's average long-term debt was lower during the year as a result of
principal payments that began in February.
Loss on Disposal of Assets
- --------------------------
In 1998 the loss on disposal of assets was only $137 as compared to
$177,000 in 1997. In 1997 the Company wrote off $154,000 of software which was
abandoned, and $15,000 for the original undepreciated installation cost of the
twisting machines sent to Fytek, S.A. de c.v., its joint venture company.
Income Before Provision for Income Taxes and Equity in Net
Earnings of Affiliate
- -------------------------------------------------------------------
- --------
Income before provision for income taxes and equity in net earnings of
affiliate decreased to $944,000 from $1,032,000 in 1997. The decrease was a
result of reduced operating earnings as discussed above.
Page 14 of 41
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BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 1998 Compared to 1997(continued)
- ----------------------------------------------
Provision for Income Taxes
- --------------------------
Provision for income taxes for 1998 was $383,000 compared to $433,000 in
1997. The decrease in the provision for income taxes was primarily due to lower
taxable income in 1998. The provision for income taxes includes an amount which
represents the tax rate difference of approximately 5% between the United States
and Mexico as applied to the Company's share of undistributed net earnings of
affiliate.
Equity in Net Earnings of Affiliate
- -----------------------------------
The Company's Mexican joint venture, Fytek, contributed earnings to the
Company of $143,000 in 1998 compared to $27,000 in 1997. The joint venture only
began operations in November of 1997.
Fytek had sales in 1998 of $7.1 million with income before
taxes of $800,000, and after tax income of $286,000. The
balance at the end of 1998 in Fytek's stockholders equity was
$643,000. (See Note 10)
Other Discussion
- ----------------
During the fourth quarter the Company experienced a weakening market,
pricing pressures and smaller quantities per order. The Company was forced to
reduce prices, resulting in lower gross margins. The Company primarily produces
on a make to order basis, due to the special colors specific to each customer.
As pounds per order declined in the fourth quarter, there was a strain on the
capacity of the older, smaller dye machines while the newer, larger dye machines
were under utilized. This order mix increased the Company's manufacturing cost
per pound.
The Company has instituted plans to offset, at least in part, the loss of
margins from lower prices and smaller order mix. Through negotiations with raw
material vendors, raw material prices are being lowered. Also, the overhead
structure has been reviewed and is being adjusted. The savings from these
actions will begin to take place in the first quarter of 1999.
The Company believes the weak market conditions will continue at least
through the first quarter.
Page 15 of 41
<PAGE>
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Results of Operations 1999 - 1996 Sales Analysis
- -------------------------------------------------
The table below sets forth an analysis of sales volume for the period 1996
to 1999, inclusive. It discloses that full yarn sales prices decreased from a
high of $3.29 per pound in 1996 to $3.13 in 1999. Unit prices for commission
sales have varied based on mix and market conditions.
The decrease in full yarn average sales prices is a result of a shift from
vertical dyeing and winding yarn on cones to horizontal dyeing and direct
shipping which began in 1996, and lowering of sales prices in the fourth quarter
of 1998 as discussed earlier. The Company expects in the future a larger portion
of its sales will be from direct shipping of yarn.
% of
Sales $
% of Pounds of
Per
Net Sales Yarn Sold
Pound
--------- ---------
- -----
1999:
Yarn sales 95% 92%
$3.13
Commission sales 5 8
1.94
--- ---
Total 100 100
=== ===
1998:
Yarn sales 95% 91%
$3.22
Commission sales 5 9
1.82
--- ---
Total 100 100
=== ===
1997:
Yarn sales 96% 93%
$3.24
Commission sales 4 7
1.87
--- ---
Total 100 100
=== ===
1996:
Yarn sales 94% 89%
$3.29
Commission sales 6 11
1.74
--- ---
Total 100 100
=== ===
Page 16 of 41
<PAGE>
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
The Company sells a substantial portion of its accounts receivable to a
commercial factor so that the factor assumes the credit risk for these accounts
and effects the collection of the receivables. As of January 1, 2000, the
Company had $2,271,000 due from its factor, of which $2,103,000 matured on
January 24, 2000. The Company has the right to borrow up to 90% of the face
amount of each account sold to the factor.
The Company has an equipment line of credit from its bank and under which
the Company may borrow up to $2,000,000 for the acquisition of production
machinery. The amounts borrowed under the credit line would be converted to a
notes payable in eighty-four (84) equal monthly installments plus accrued
interest. The Company has borrowed the $2,000,000 and will convert to a notes
payable February 29, 2000.
The Company had inventories of $5,062,000 as of January 1, 2000. The
Company's average inventories aggregated approximately $4,391,000 for 1999,
representing approximately 64 days inventory on hand. The Company's inventories
turn approximately 5 to 7 times each year.
The Company's working capital decreased by approximately $1,858,000 at
January 1, 2000, from that of January 2, 1999, primarily as a result of
expenditures for equipment. The working capital of the Company and its line of
credit with its bank are deemed adequate for the operational needs of the
Company. The following table sets forth the Company's working capital and
working capital ratios as of the close of the last three years:
1999 1998
1997
---- ---- -
- ---
Working Capital $5,964,000 $7,830,000
$8,407,000
Working Capital Ratio 2.36 to 1 3.31 to 1 3.5
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, 2000 and January 2, 1999:
January 1 January 2
2000 1999
---- ----
Cash, cash equivalents
and receivables $4,388,000 $6,845,000
Current liabilities 4,381,000 3,383,000
--------- ---------
Excess of quick assets
over current liabilities $ 7,000 $3,462,000
========== ==========
Page 17 of 41
<PAGE>
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Liquidity and Capital Resources (continued)
- -------------------------------------------
The aggregate long-term debt at January 1, 2000 and January 2, 1999 was
$6,562,500 and $5,312,500 respectively. In order to finance the acquisition of
new property, plant and equipment of $6,372,000 in 1995, and $4,640,000 in 1999,
the Company incurred a long-term debt of $6,000,000 in 1996 and 2,000,000 in
1999, as more fully described in Note 7 of Notes to Financial Statements.
Pursuant to an agreement with its bank, the obligation had no principal
maturities until February 1998. Thereafter, principal payments of $62,500 are
payable monthly for ninety-six (96) consecutive months. The $2,000,000
obligation principal maturities will begin February 24, 2000 and are payable
monthly for eighty-four (84) consecutive months.
The Company's long-term debt to equity ratios aggregated 39.8% at January
1, 2000, 32.3% at January 2, 1999, and 39.5% at January 3, 1998.
Capital budget expenditures approved for 2000 aggregate $1,200,000. The
Company plans to finance its capital needs from cash provided from operations
and bank financing.
Year 2000 Compliance
- ---------------------
After the first two months of the year 2000, the Company has had no
information systems, non-information systems, or supplier problems related to
the year 2000.
On May 29, 1999, the Company began using a new fully integrated system
that replaced its manufacturing and accounting software. The new software was
installed to improve the Company's information efficiencies and bring the
Company into compliance for all critical applications affected by the year 2000.
During 1999, the Company experienced an effect on earnings of $1,186,000 for
data conversion and training.
The cost to bring the existing software into compliance for year 2000 is
not known as the company planned to replace the software.
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 remediable issues, and is
moving toward a solution of
Page 18 of 41
<PAGE>
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Environmental Matters (continued)
- ---------------------------------
natural attenuation. The Company believes it has made an adequate provision to
earnings in 1997 to cover any future cost. No additional provision was made in
1998 or 1999. This situation will have no material impact on the capital
expenditures, earnings or competitive position of the Company.
Inflation
- ----------
The Company does not believe that operations for the periods discussed
have been significantly affected by inflation.
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 judgement only as
of the date hereof. The Company undertakes no obligations to update publicly any
of these forward looking statements to reflect new information, future events or
otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward- looking statements include,
but are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and financial viability of significant customers, technological
advancements, employee relations, changes in construction spending and capital
equipment expenditures (including those related to unforeseen acquisition
opportunities), the timely completion of construction and expansion projects
planned or in process, continued availability of financial resources through
financing arrangements and operations, negotiations of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies, policies and legislation, and proceeds received from
Page 19 of 41
<PAGE>
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------------------------------------
Forward Looking Statements (continued)
- --------------------------------------
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes, such as changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
7A. Quantitative and Qualitative Disclosures about Market Risk
- ---------------------------------------------------------------
The Company has not entered into any instruments resulting in market risk
to the Company for trading purposes or for purposes other than trading purposes.
Page 20 of 41
<PAGE>
BURKE MILLS, INC.
PART II
305 Madison Avenue 72 Essex
Street
New York, NY 10165 Lodi, NJ
07644
(212) 972-9600 (201)
368-9300
FAX: (212) 972-9605 FAX: (201)
368-9069
Item 8 - Financial Statements and Supplementary Data
- ----------------------------------------------------
Independent Auditors' Report
----------------------------
To the Board of Directors of
Burke Mills, Inc.
We have audited the accompanying balance sheets of Burke Mills, Inc. as of
January 1, 2000 and January 2, 1999, and the related statements of operations,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended January 1, 2000. 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 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 January
1, 2000 and January 2, 1999, and the results of its operations and its cash
flows for each of the three years in the period ended January 1, 2000, in
conformity with generally accepted accounting principles.
Cole, Samsel & Bernstein LLC
Certified Public Accountants
Lodi, New Jersey
January 28, 2000
Page 21 of 41
<PAGE>
BURKE MILLS, INC.
PART II
BALANCE SHEETS
January 1
January 2
2000
1999
---- -
- ---
ASSETS
Current Assets
Cash and cash equivalents $ 592,513 $
3,384,439
Accounts receivable 3,795,519
3,460,307
Inventories 5,062,294
3,705,849
Prepaid expenses, taxes,
and other current assets 537,980
313,872
Deferred income taxes 356,722
349,000
-------
- -------
Total Current Assets 10,345,028
11,213,467
==========
==========
Equity Investment in Affiliate 455,728
320,728
-------
- -------
Property, plant & equipment - at cost 31,154,954
28,478,700
Less: accumulated depreciation 16,078,440
15,869,275
---------- --
- --------
Property, Plant and Equipment- Net 15,076,514
12,609,425
---------- --
- --------
Other Assets
Deferred charges 118,102
167,077
-------
- -------
$25,995,372
$24,310,697
===========
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,011,905 $
750,000
Accounts payable 2,929,217
2,303,876
Accrued salaries and wages 200,911
160,862
Other liabilities and accrued expenses 239,437
137,096
Income taxes payable -
31,600
-------------------- ------
- ------
Total Current Liabilities 4,381,470
3,383,434
Long-Term Debt 5,550,595
4,562,500
Deferred Income Taxes 2,121,800
2,220,836
--------- -
- --------
Total Liabilities 12,053,865
10,166,770
- ---------- ----------
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 9,020,987
9,223,407
--------- -
- --------
Total Shareholders' Equity 13,941,507
14,143,927
---------- --
- --------
$25,995,372
$24,310,697
===========
===========
See notes to financial statements.
Page 22 of 41
<PAGE>
BURKE MILLS, INC.
PART II
STATEMENTS OF OPERATIONS
Years Ended
--------------------------------
- ----------
January 1, January 2
January 3
2000 1999
1998
---- ----
- ----
Net Sales $42,839,759 $42,169,106
$41,155,629
----------- ----------- --------
---
Costs and Expenses
Cost of Sales $38,778,823 $37,825,038
$36,764,917
Selling, general and
administrative expenses 4,062,367 2,813,137
2,651,031
Factor's charges 155,334 186,234
183,072
------- ------- --
- -----
Total Costs and Expenses 42,996,524 40,824,409
39,599,020
---------- ----------
- ----------
Operating Earnings (Loss) (156,765) 1,344,697
1,556,609
--------- ---------
- ---------
Other Income
Interest income 75,998 163,506
151,996
Gain on disposal of
property assets 190,397 -
- -
Other, net 11,815 3,209
4,068
------- -------
- -------
Total Other Income 278,210 166,715
156,064
------- -------
- -------
Other Expenses
Interest expense 430,443 463,099
503,306
Loss on disposal of
property assets - 137
177,234
Other, net 126,127 103,702
- -
------- -------
- -------
Total Other Expenses 556,570 566,938
680,540
------- -------
- -------
Income (Loss) Before Provision (credit) for
Income Taxes and Equity in
Net Earnings of Affiliate (435,125) 944,474
1,032,133
Provision (Credit) for Income Taxes (97,705) 383,125
432,529
------- -------
- -------
Income (Loss) Before Equity in
Net Earnings of Affiliate (337,420) 561,349
599,604
Equity in Net Earnings of
Affiliate 135,000 143,000
26,500
------- -------
- -------
Net Income (Loss) $ (202,420) $ 704,349
$ 626,104
=========== ===========
===========
Net Earnings (Loss) per share $ (.07) $ .26
$ .23
=========== ===========
===========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168
2,741,168
========= =========
=========
See notes to financial statements.
Page 23 of 41
<PAGE>
BURKE MILLS, INC.
PART II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANARY 1, 2000
Common Stock
No Par Value
Stated Value
$.66 Per Share
5,000,000 Shares
AUTHORIZED
Total
Shares Paid-In
Retained Shareholders
Issued Amount Capital
Earnings Equity
------ ------ ------- ----
- ---- ------
Balance at Dec. 28, 1996 2,741,168 $1,809,171 $3,111,349
$7,892,954 $12,813,474
Net Income for the year
ended Jan.3, 1998 - - -
626,104 626,104
------- ------- ------- ---
- ---- -------
Balance at Jan. 3, 1998 2,741,168 $1,809,171 $3,111,349
$8,519,058 13,439,578
Net Income for the year
ended Jan. 2, 1999 - - -
704,349 704,349
------- ------- ------- ---
- ---- -------
Balance at Jan. 2, 1999 2,741,168 $1,809,171 $3,111,349
$9,223,407 14,143,927
Net Income (loss) for the
year ended Jan. 1, 2000 - - - ($
202,420) ($ 202,420)
------- ------- ------- ---------
- ----------
Balance at Jan. 1, 2000 2,741,168 $1,809,171 $3,111,349
$9,020,987 $13,941,507
========= ========== ========== ==========
==========
See notes to financial statements.
Page 24 of 41
<PAGE>
BURKE MILLS, INC.
PART II
STATEMENTS OF CASH FLOWS
Years Ended
-----------------------
- ------------
January 1 January 2
January 3
2000 1999
1998
---- ----
- ----
Cash flows from operating activities:
Net income (loss) $ (202,420) $ 704,349
$ 626,104
---------- ----------
- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,838,995 1,743,524
1,599,662
(Gain) loss on sales of plant and
equipment, including loss on disposals (190,397) 137
177,234
Deferred income taxes (106,758) 315,236
428,110
Equity in net earnings of affiliate (135,000)
(143,000) --
Changes in assets and liabilities:
Accounts receivable (335,212) 310,994
(573,090)
Inventories (1,356,445)
(699,551) 444,507
Prepaid expenses, taxes & other
current assets (224,108)
(275,040) 184,536
Other non-current assets 48,975 26,239
(193,316)
Accounts payable 625,341 222,639
645,183
Accrued salaries & wages 40,049
(30,266) 61,176
Other liabilities and accrued expenses 102,341
(280,725) 246,181
Income taxes payable (31,600) 31,600
- --
--------- --------- -------
--
Total adjustments 276,181 1,221,787
3,020,183
--------- ---------
- ---------
Net cash provided by operating activities 73,761 1,926,136
3,646,287
--------- ---------
- ---------
Cash flows from investing activities:
Acquisition of property, plant
and equipment (4,640,380)
(2,161,837) (1,343,090)
Proceeds from sales of plant
and equipment 524,693 1,100
17,650
Investment in affiliate --
(171,735)
---------- ----------
- ----------
Net cash (used) by investing activities (4,115,687) (2,160,737)
(1,497,175)
---------- ----------
- ----------
Cash flows from financing activities:
Proceeds from long-term bank note 2,000,000 --
- --
Principal payments of long-term debt (750,000) (687,500)
- --
---------- ----------
- ----------
Net cash provided (used) by financing
activities 1,250,000 (687,500)
- -
---------- ---------
- - ----------
Net increase (decrease) in cash and
cash equivalents (2,791,926)
(922,101) 2,149,112
Cash & cash equivalents at beginning
of year 3,384,439 4,306,540
2,157,428
---------- ---------
- - ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 592,513 $3,384,439
$4,306,540
==========
========== ==========
See notes to financial statements.
Page 25 of 41
<PAGE>
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 1999, 1998 and 1997
ended on January 1, 2000, January 2, 1999 and January 3, 1997, respectively. The
fiscal years ended January 1, 2000 and January 2, 1999 consisted of 52 weeks.
The fiscal year ended January 3, 1998 consisted of 53 weeks.
Revenue recognition - Revenues from sales are recognized at the time
shipments are made to the customer.
Statement of cash flows - For the purposes of the statements of cash flows,
the Company considers cash and cash equivalents to include cash on hand,
deposits in banks, interest bearing demand matured funds on deposit with factor,
and all highly liquid debt instruments with a maturity of three months or less
when purchased.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market. Cost elements included in work-in- process and finished
goods inventories are raw materials, direct labor and manufacturing overhead.
Market is considered to be net realizable value.
Property, plant and equipment - Property, plant and equipment are stated at
cost.
Depreciation and amortization of the property accounts are provided over
the estimated useful lives of the assets. For financial reporting purposes,
depreciation on plant and equipment is provided primarily at straight-line
rates. For income tax purposes, depreciation has been provided at straight-line
rates for all property, plant and equipment acquired prior to 1981 and the
accelerated and modified accelerated cost recovery system for property assets
acquired subsequent to December 31, 1980. The estimated useful lives used for
computing depreciation for financial reporting purposes are generally:
Buildings and improvements 5 - 45 years
Plant machinery and equipment 5 - 17 years
Office equipment 5 - 10 years
Automotive equipment 3 - 5 years
Computer equipment 3 - 5 years
Earnings per share - Earnings per share are based on the net income divided
by the weighted average number of common shares outstanding during the
respective periods.
Use of Estimates in Preparing Financial Statements The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
Page 26 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE
- --------------------------------------------
The Company is engaged in texturing, winding, dyeing, processing and
selling of filament, novelty and spun yarns and in the dyeing and processing of
these yarns for others on a commission basis.
With respect to its operations, the Company's products and its services for
others on a commission basis are sold and/or performed for customers primarily
located in the territorial limits of the United States. The Company did have
sales to customers in Mexico, during the three fiscal years ended January 1,
2000, which amounted to 0.2% in 1999, 1.0% in 1998 and 1.7% in 1997. Sales to
customers in Canada in 1999, 1998 and 1997 aggregated 4.3%, 6.4% and 3.9%,
respectively. Additionally, the Company had sales to Brazil in 1999, 1998, and
1997 which amount to 0.3%, 0.3%, and 0.2% respectively. Other than sales to
Mexico, Canada and Brazil, as discussed above, the Company had no other sales in
foreign markets during the three year period ended January 1, 2000. For the
three year period ended January 1, 2000, the Company has operated within a
single industry segment with classes of similar products. The principal markets
served by the Company are upholstery and industrial uses through the knitting
and weaving industry.
In connection with sales to major customers, only one customer has exceeded
10% of the Company's sales during each of the three years ended January 1, 2000.
One other customer has exceeded 10% in 1999. For the purpose of this
determination, sales to groups of companies under common control have been
combined and accounted for as sales to individual companies. The following table
gives information with respect to these two customers:
% of
1999 Amount Net
Sales
---- ------ --------
- -
Customer 1 $8,012,000 18.7
Customer 2 5,089,000 11.9
% of
1998 Amount Net
Sales
---- ------ --------
- -
Customer 1 * ----
Customer 2 $5,793,000 13.7
% of
1997 Amount Net Sales
---- ------ ---------
Customer 1 * ----
Customer 2 $5,737,000 14.0
*Less than 10%
Page 27 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - ACCOUNTS RECEIVABLE
- --------------------------------
Accounts receivable comprise the following:
January 1 January 2
2000 1999
---- ----
Due from factor on
regular factoring
account $2,271,000 $2,864,000
Non-factored accounts
receivable 1,525,000 596,000
---------- ---------
Total $3,796,000 $3,460,000
========== ==========
Pursuant to a factoring agreement, the Company sells substantial portions
of its accounts receivable to a commercial factor without recourse, up to
maximum credit limits established by the factor for individual accounts. The
factor assumes the credit risks for these accounts and effects the collection of
the receivables. Amounts invoiced to customers on accounts receivable factored
in excess of the established maximum credit limits are sold to the factor with
recourse in the event of nonpayment by customers.
The Company pays a service charge to its factor to cover credit checking,
assumption of credit risk, record keeping and similar services. In addition, if
the Company takes advances from its factor prior to the average maturity of the
receivables sold (as defined), it is required to pay interest to the factor on
these advances. The Company incurred no interest costs during 1999 and 1998,
inasmuch as it borrowed no funds from its factor during these years.
The Company's factor is collateralized by the accounts receivable sold to
the factor, and the factor has filed a UCC-1 to evidence ownership of the
receivables and to separate the receivables from the company's creditors. No
interest in inventory, other than returned goods, has been granted to the factor
under the factoring contract.
Page 28 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - INVENTORIES
- -----------------------
Inventories are summarized as follows:
January 1, January 2,
2000 1999
---- ----
Finished & in process $3,235,000 $2,409,000
Raw materials 1,345,000 728,000
Dyes & chemicals 343,000 413,000
Other 139,000 156,000
------- -------
Total $5,062,000 $3,706,000
========== ==========
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
- ------------------------------------------
Major classifications of property, plant and equipment are as follows:
January 1, 2000
January 2, 1999
--------------- ----
- -----------
Accumulated
Accumulated
Cost Depreciation Cost
Depreciation
---- ------------ ----
- ------------
Land $ 86,565 $ - $ 86,565
$ -
Land improvements 182,913 88,335 175,697
82,017
Building & improvements 6,427,129 4,384,047 6,376,050
4,222,677
Plant machinery & equipment 22,854,112 10,721,424 20,502,754
10,813,831
Office equipment 1,381,155 755,061 1,111,861
656,727
Automotive equipment 223,080 129,573 225,773
94,023
------- ------ -------
- ------ Total $31,154,954 $16,078,440
$28,478,700 $15,869,275
=========== =========== ===========
==========
NOTE 6 - LINE OF CREDIT LOAN
- --------------------------------
Pursuant to a loan agreement dated March 29, 1996, and a second amendment
dated January 20, 2000, the Company secured an Equipment Loan facility of
$3,000,000 and a $1,750,000 Letter of Credit facility. The Equipment Loan shall
be evidenced by the Equipment Note, and shall bear interest at a rate that
varies with the LIBOR rate. The Equipment Note would be payable in 84
installments. At January 1, 2000, the Company has borrowed $2,000,000 under this
line of credit.
The Company plans to draw the remainder of the $3,000,000 in January, 2000
to finance equipment purchases.
Also under the Company's factoring arrangement, the Company may borrow
from the factor up to 90% of the face amount of each account sold to the factor.
As of January 1, 2000 the Company had no borrowings from its factor.
Page 29 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - LONG-TERM DEBT
- -----------------------
On March 29, 1996, the Company entered into a loan agreement with its bank
providing for a term loan of $6,000,000. The term loan refinanced the two
formerly existing term loans, and accordingly, all term obligations were
consolidated into the one $6,000,000 obligation. This new loan is secured by (1)
a first Deed of Trust on property and buildings located at the Company's
manufacturing sites in North Carolina, (2) a first lien position on the new
equipment and machinery installed at these manufacturing sites and (3) a first
lien position on the existing machinery and equipment located at the Company's
manufacturing sites.
Under the term loan agreement, interest only was payable monthly until
February 1998. Thereafter, principal maturities are payable in the amount of
$62,500 per month for ninety-six (96) consecutive months plus interest at the
floating LIBOR rate plus 1.90%.
Among other things, covenants include a debt service coverage ratio, a
limit on annual property asset acquisitions exclusive of property acquired with
the loan proceeds under this new loan agreement, the retirement or acquisition
of the Company's capital stock in excess of a stated amount, the maintenance of
a minimum tangible net worth which shall increase by a stated amount annually, a
minimum quick ratio, and a maximum debt to tangible net worth ratio.
The annual principal maturities of this long-term debt at January 1, 2000
are as follows:
Current portion $ 750,000
2001 750,000
2002 750,000
2003 750,000
2004 750,000
Thereafter 812,500 3,812,500
--------- ---------
$4,562,500
Under the loan agreement, the Equipment Line of Credit will be converted to
a long-term note payable in 84 installments. The Company plans to convert the
Line of Credit and begin installments on February 29, 2000.
The annual principal maturities of this long-term debt at January 1, 2000
based on the current amount owned are as follows:
Current Portion $ 261,905
2001 $ 285,714
2002 285,714
2003 285,714
2004 285,714
Thereafter 595,239 1,738,095
------- ---------
$2,000,000
Page 30 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - OTHER LIABILITIES AND ACCRUED EXPENSES
- ----------------------------------------------
Other liabilities and accrued expenses consist of the following:
January 1 January 2
2000 1999
---- ----
Employee insurance $119,688 $ --
Payroll taxes payable 106,109 7,448
Utilities payable -- 31,779
Accrued interest -- 15,644
Accrued environmental cost -- 43,808
Other 13,640 38,417
------ ------
Total $239,437 $137,096
======== ========
NOTE 9 - INCOME TAXES
- ----------------------
The Company uses the liability method as required by FASB Statement 109
"Accounting for Income Taxes". Under this method, deferred tax assets and
liabilities are determined based on the differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws.
The items that comprise deferred tax assets and liabilities are as follows:
Jan. 1 Jan. 2
2000 1999
---- ----
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $
349,000
Inventory capitalization 6,020
- -
Charitable contributions carryover 1,702
- -
--------- -------
- --
$ 356,722 $
349,000
==========
==========
Deferred tax liabilities:
Accelerated depreciation for
tax purposes $2,100,700
$2,202,300
Undistributed earnings of foreign
Affiliate, net of tax credit 21,100
12,700
Other -
5,836
--------- ------
- ---
$2,121,800 $
2,220,836
==========
===========
Provision for taxes consist of:
Jan. 1 Jan. 2
Jan. 3
2000 1999
1998
---- ----
- ----
Current:
Federal $ - $ 49,445
$ 4,419
State - 18,444
- -
Deferred (97,705) 315,236
428,110
------- -------
- -------
Total ($ 97,705) $ 383,125
$ 432,529
========= =========
=========
Page 31 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (continued)
- ---------------------------------
The provision for income taxes on historical income differs from the
amounts computed by applying the applicable Federal statutory rates, due to the
following:
Years Ended
January 1 January 2
January 3
2000 1999
1998
---- ----
- ----
Income (loss) before income taxes
(credit) ($435,125) $1,184,974
$1,058,633
Federal income taxes 34% 34%
34%
-------- ---------- -
- --------
Computed taxes (credit) at maximum
statutory tax rate (147,943) 402,891
359,936
State income taxes (credit), net of
Federal income tax benefits (15,260) 56,098
56,051
Total adjustment for foreign
affiliate earnings 66,130 (81,770)
- -
Prior year tax examination and
other (632) 5,906
16,542
------- --------- -
- -------
Provision for income taxes ($97,705) $ 383,125
$432,529
======== ==========
==========
The net operating loss carryforward is $477,000, expiring 2019. The tax
effect at the maximum tax rate would be $162,000. Inasmuch as the Company has
paid and has set forth $349,000 for alternative minimum taxes paid, which may
only be used to offset normal income taxes that may be incurred in future years,
the Company has provided a valuation allowance for the tax effect of this net
operating loss carryforward.
NOTE 10 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS
- -------------------------------------------------------------------
The company owns 49.8% of Fytek, S.A. de C.V. (Fytek), a Mexican
corporation. Fytek began operation in the fourth quarter of 1997. The company
accounts for the ownership using the equity method. The Company had no sales to
Fytek in 1999 compared to $165,000 in 1998. Purchases from Fytek in 1999 were
$1,441,000 compared to $1,337,000 in 1998. At January 1, 2000 Fytek owed the
Company $80,000 for leased equipment which will be paid in March 2000. Fytek's
financial information is as follows:
Statement of Income
(In thousands of U.S. Dollars)
1999 1998
---- ----
Net Sales $7,623
$7,134
Gross Profit 1,262
961
Income from continuing operations 709
800
Income before income taxes 709
800
Income taxes 439
514
----
- ----
Net income $ 270
$ 286
======
======
Page 32 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS
(continued)
- -------------------------------------------------------------------
Fytek's financial information (continued):
Balance Sheet
(In thousands of U.S. Dollars)
1999
1998
----
- ----
Current assets $4,176
$3,085
Non-current 144
57
----
- ----
Total assets $4,320
$3,142
======
======
Current liabilities $3,386
$2,499
Non-current liabilities -0-
- -0-
----
- ----
Total liabilities $3,386
$2,499
Stockholder's equity 934
643
----
- ----
Total liabilities and stockholder's equity $4,320
$3,142
======
======
For 1998, the operating and balance sheet accounts have been changed from
data originally set forth in the audited financial statements of the affiliate
which were utilized and set forth in the Company's Form 10-K for the year ended
January 2, 1999. The financial statements of the affiliate were presented to the
Company using accounting standards generally accepted in Mexico. The financial
statements as summarized above and which are filed as an Exhibit to the Form
10-K for the current fiscal year ended January 1, 2000, have been prepared and
submitted to the Company pursuant to standards applicable and generally accepted
in the United States.
In 1999, the Company purchased $51,000 of yarns from Nafees Cotton Mills,
Ltd. The Company paid for the yarn purchased by wire transfer 30 days after the
Bill of Lading date. Future purchases could reasonably be anticipated if the
Company receives orders for its Nafees yarns.
Humayun N. Shaikh, Chairman and CEO of the Company, is also director of
Nafees Cotton Mills, Ltd. Aehsun Shaikh, Director of the Company, is also a
Director of Nafees Cotton Mills, Ltd., since 1993 and of Legler-Nafees Denim
Mills, Ltd., since 1999.
NOTE 11 - STATEMENTS OF CASH FLOWS
- --------------------------------------
FASB No. 95 requires that the following supplemental disclosures to the
statements of cash flows be provided in related disclosures. Cash paid for
interest was $446,000 in 1999, $470,000 in 1998 and $494,000 in 1997. Cash paid
for income taxes aggregated $65,055 in 1999 and $33,500 in 1998. Taxes refunded
in 1997 aggregated $125,000.
Page 33 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - RENTAL EXPENSES AND LEASE COMMITMENTS
- ----------------------------------------------------
Rental expenses under all lease commitments for the three fiscal years
ended January 1, 2000, aggregated $48,000, $37,000 and $46,000, respectively.
Minimum lease commitments under terms of all non-cancelable leases, which
consist only of leased equipment, are as follows as of January 1, 2000:
2000 $17,000
2001 17,000
2002 5,000
------
$39,000
=======
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
(in thousands of dollars except for per share
amounts)
QUARTER
----------------------------
- -----------
1999 First Second Third
Fourth
---- ----- ------ -----
- ------
Net sales $ 9,996 $10,796 $11,625
$10,423
Cost of sales 8,719 9,782 10,106
10,172
Gross profit 1,277 1,014 1,519
251
Net income (loss) 106 60 28
(396)
Net income (loss)
per common share $ .04 $ .02 $ .01
$ (.14)
1998
----
Net sales $10,649 $10,023 $11,509
$ 9,988
Cost of sales 9,388 9,055 9,976
9,406
Gross profit 1,261 968 1,533
582
Net income (loss) 307 208 394
(120)
Net income (loss)
per common share $ .11 $ .08 $ .14
$ (.04)
1997
----
Net sales $10,060 $10,442 $ 9,874
$10,780
Cost of sales 9,061 9,393 8,797
9,514
Gross profit 999 1,049 1,077
1,266
Net income 143 181 230
72
Net income
per common share $ .05 $ .07 $ .08
$ .03
Page 34 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - EMPLOYEE BENEFIT PLAN
- -----------------------------------
The Company is a participating employer in the Burke Mills, Inc. Savings and
Retirement Plan and Trust that has been qualified under Section 401(k) of the
Internal Revenue Code. This plan allows eligible employees to contribute a
salary reduction amount of not less than 1% nor greater than 25% of the
employee's salary but not to exceed dollar limits set by law. The employer may
make a discretionary contribution for each employee out of current net profits
or accumulated net profits in an amount the employer may from time to time deem
advisable. No provision was made for a discretionary contribution in 1999, 1998
or 1997.
NOTE 15 - CONCENTRATIONS OF CREDIT RISK
- --------------------------------------------
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of occasional temporary cash investments and
amounts due from the factor on receivables sold to the factor on a non-recourse
basis. The receivables sold to the factor during a month generally have a
maturity date on the 21st to the 30th of the following month. At January 1,
2000, the Company had $2,271,000 due from its factor of which $2,103,000 matured
on January 24, 2000. Upon maturity, the funds are automatically transferred by
the factor to the Company's bank.
NOTE 16 - OTHER COMMITMENTS
- ------------------------------
a) The Company entered into a supply agreement, dated November 23, 1996,
with its joint venture company, Fytek, S.A. de C.V. to purchase twisted yarns.
The Company agrees to purchase approximately $1,800,000 of twisted yarn annually
for the five years beginning November 1997.
b) The Company entered into a supply agreement, dated November 19, 1996,
with Fibras Quimicas, S.A. to purchase yarn. The Company agrees to purchase yarn
based on the schedule below, beginning February 1, 1997, for a five year period.
Year 1 Approximately $2,600,000
Year 2 Approximately $6,400,000
Year 3 Approximately $7,100,000
Year 4 Approximately $7,700,000
Year 5 Approximately $7,700,000
c) The Company and Titan Textile Company, Inc., signed an agreement which
became effective April 1, 1999, whereby the Company sold its friction texturing
equipment to Titan and in turn will purchase textured yarns from Titan. The
agreement states that the Company will purchase 70,000 pounds per week as long
as the Company has a requirement for textured yarns. When the Company's
requirements exceeds 140,000 pounds per week, the Company will purchase at least
50% of its requirements from Titan. The textured yarn pricing structure will be
reviewed every six months and when POY prices increase or decrease by 5% or
more.
Page 35 of 41
<PAGE>
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - OTHER COMMITMENTS (continued)
- -------------------------------------------
d) During 1996 in connection with a bank loan to the Company secured by
real estate, the Company had a Phase I Environmental Site Assessment conducted
on its property. The assessment indicated the presence of a contaminant in the
groundwater under the Company's property. The contaminant was a solvent used by
the Company in the past but no longer used. The contamination was reported to
the North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving toward a solution of natural attenuation. The Company believes it has
made an adequate provision to earnings in 1997 to cover any future cost. No
additional provision was made in 1998 or 1999. This situation will have no
material impact on the capital expenditures, earnings or competitive position of
the Company.
e) On November 18, 1999, the Company entered into a three year agreement
with Trio Marketing & Sales Company, LLC (Trio) to market and sell imported
yarns. Under the agreement the Company will import yarns which would be marketed
and sold by Trio. Trio will receive a commission based on the net sales price.
The commission would be 4% during the first six months of the contract and 3%
thereafter. Trio would also receive 15% of the profits before taxes realized on
the sales of the yarns.
Page 36 of 41
<PAGE>
BURKE MILLS, INC.
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------------------
There have been no changes in nor disagreements with accountants on
accounting and financial disclosure during the Company's two most recent fiscal
years or during any subsequent interim period. The current accounting firm for
the Company, Cole, Samsel & Bernstein LLC of New York, New York, and Lodi, New
Jersey, has served as accountants for the Company during the last two fiscal
years.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- --------------------------------------------------------------
The information required for Part III of this report (Items 10-13) is
incorporated by reference from the Company's definitive proxy statement to be
filed pursuant to Regulation 14A for the annual meeting of shareholders
scheduled for May 16, 2000, involving the election of directors, which is
expected to be filed not later than 120 days after the end of the fiscal year
covered by this report.
Page 37 of 41
<PAGE>
BURKE MILLS, INC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------
(a) The following documents are filed as a part of this report.
(a) 1. Report of Independent Certified Public Accountants.
---------------------------------------------------
The following financial statements of Burke Mills, Inc. and the related
auditors' report required to be included in Part II Item 8, are listed below:
Independent auditors' report
Balance sheets
January 1, 2000
January 2, 1999
Statements of operations Year ended January 1, 2000 Year ended
January 2, 1999 Year ended January 3, 1998
Statements of changes in shareholders' equity Year ended January
1, 2000 Year ended January 2, 1999 Year ended January 3, 1998
Statements of cash flows Year ended January 1, 2000 Year ended
January 2, 1999 Year ended January 3, 1998
Notes to financial statements
Page 38 of 41
<PAGE>
BURKE MILLS, INC.
Financial statement schedules have been omitted since the required
information is not present in amounts sufficient to require submission of the
schedule, or because the required information is included in the financial
statements or the notes thereto.
(a)2. The exhibits required by Item 601 of Regulation S-K and paragraph
(c)of Item 14 are the articles of incorporation and by-laws of the Company which
are incorporated herein by reference from the Amendment on Form 8 to the annual
report on Form 10-K of the Company for the fiscal year ended January 2, 1982
previously filed with the Commission. The exhibit required by Item 601(c) of
Regulation SK, Financial Data Schedule, is set forth on page 41 of this report.
(b) During the last quarter of the period covered by this report no report on
Form 8-K was filed.
(c) See sub-Item (a)2 above.
(d) Not applicable.
Page 39 of 41
<PAGE>
Burke Mills, Inc.
Financial Data Schedule
Pursuant to Item 601(c) of Regulation S-K
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED
FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL
REPORT
ON FORM 10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 1,
2000.
NUMBER ITEM DESCRIPTION
AMOUNT
5-02(1) cash & cash items
$ 592,513
5-02(2) marketable securities
0
5-02(3)(a)(1) notes & accounts receivable-trade
3,795,519
5-02(4) allowances for doubtful accounts
0
5-02(6) inventory
5,062,294
5-02(9) total current assets
10,345,028
5-02(13) property, plant & equipment
31,154,954
5-02(14) accumulated depreciation
16,078,440
5-02(18) total assets
25,995,372
5-02(21) total current liabilities
4,381,470
5-02(22) bonds, mortgages & similar debt
5,550,595
5-02(28) preferred stock - mandatory redemption
0
5-02(29) preferred stock - no mandatory redemption
0
5-02(30) common stock
1,809,171
5-02(31) other stockholders' equity
12,132,336
5-02(32) total liabilities & stockholders' equity
25,995,372
5-03(b)1(a) net sales of tangible products
42,839,759
5-03(b)1 total revenues
42,839,759
5-03(b)2(a) cost of tangible goods sold
38,778,823
5-03(b)2 total costs & expenses applicable
to sales and revenues
38,778,823
5-03(b)3 other costs & expenses
0
5-03(b)5 provision for doubtful accounts & notes
0
5-03(b)(8) interest & amortization of debt discount
430,443
5-03(b)(10) income (loss) before taxes & other items
(300,125)
5-03(b)(11) income tax expense (credit)
(97,705)
5-03(b)(14) income (loss) continuing operations
(202,420)
5-03(b)(15) discontinued operations
0
5-03(b)(17) extraordinary items
0
5-03(b)(18) cumulative effect - changes in accounting
principles
0
5-03(b)(19) net income or loss
(202,420)
5-03(b)(20) earnings (loss) per share - primary
($.07)
5-03(b)(20) earnings (loss) per share - fully diluted
($.07)
Page 40 of 41
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 BURKE MILLS, INC.
By: Humayun N. Shaikh /s
----------------------
Humayun N. Shaikh,
Chairman of the Board
(Principal Executive
Officer)
By: Thomas I. Nail /s
-----------------------
Thomas I. Nail
Vice President of
Finance
(Principal Financial
Officer)
(Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Date: March 30, 2000 By: Humayun N. Shaikh
/s
-----------------------
- ----
Humayun N. Shaikh,
Director
Date: March 30, 2000 By: Aehsun Shaikh
/s
-----------------------
- ----
Aehsun Shaikh, Director
Date: March 30, 2000 By: Charles P. McCamy
/s
-----------------------
- ----
Charles P. McCamy,
Director
Date: March 30, 2000 By: Robert P. Huntley
/s
-----------------------
- ----
Robert P. Huntley,
Director
Date: March 30, 2000 By: William T. Dunn
/s
-----------------------
- ----
William T. Dunn,
Director
Page 41 of 41
<PAGE>
FYTEK, S.A. DE C.V.
(a Mexican corporation)
FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
CONTENTS
Page
Report of independent auditors 1
Financial statements:
Balance sheets 2
Statement of income 3
Statement of changes in stockholders' equity 4
Statement of cash flows 5
Notes to financial statements 6-12
-----------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Monterrey, N. L., February 29, 2000
To the Stockholders of Fytek, S. A. de C. V.
1.We have audited the accompanying balance sheets of Fytek, S. A. de C. V. as
of December 31, 1999 and 1998, and the related statements of income, of
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
2.We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and that they were
prepared in accordance with generally accepted accounting principles. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
3.As more fully described in Note 1 to the financial statements, through
December 31, 1998, Mexico had a highly inflationary economy. Accounting
principles generally accepted in the United States of America require that
financial statements of a company denominated in the currency of a country
with a highly inflationary economy be remeasured into a more stable currency
unit. Effective January 1, 1999, Mexico is no longer deemed a highly
inflationary economy. Consequently, for the year ended December 31, 1999, the
company's functional currency is the Mexican peso.
<PAGE>
4.In our opinion, the aforementioned financial statements present fairly, in
all material respects, the financial position of Fytek, S. A. de C. V. at
December 31, 1999 and 1998, and the results of its operations, the changes in
its stockholders' equity and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States
of America.
PricewaterhouseCoopers
<PAGE>
FYTEK, S. A. DE C. V.
BALANCE SHEETS
Thousands of U.S. dollars
December 31,
1999 1998
Assets:
Cash and cash equivalents $600 $279
Accounts receivable 2,505 1,841
Related parties receivable 97
Inventories 974 965
--- ---
Total current assets 4,176 3,085
Machinery and equipment 144 57
--- --
Total assets $4,320 $3,142
====== ======
Liabilities:
Suppliers $1,127 $1,064
Related parties payable 1,963 1,239
Deferred income tax 73 109
Sundry creditors and accrued expenses 223 87
--- --
Total current assets 3,386 2,499
----- -----
Stockholders' equity:
Capital stock 307 307
Retained earnings 606 336
Cumulative translation adjustment 21
----- -----
Total stockholders' equity 934 643
----- -----
Total liabilities and stockholders' equity $4,320 $3,142
====== ======
The accompanying notes are an integral part of these financial statements.
<PAGE>
FYTEK, S. A. DE C. V.
STATEMENTS OF INCOME
Thousands of U.S. dollars
Years ended
December 31,
1999 1998
Net sales $7,623 $7,134
Cost of sales (6,361) (6,173)
------ ------
Gross margin 1,262 961
Operating expenses (561) (423)
---- ----
Operating income 701 538
--- ---
Interest income 33 144
Interest expense (15) (8)
Exchange (loss) gain, net (24) 121
--- ---
(6) 257
-- ---
695 795
Other income, net 14 5
-- -
Income before income tax 709 800
Income taxes expense (439) (514)
---- ----
Net income $ 270 $286
===== ====
The accompanying notes are an integral part of these financial statements.
<PAGE>
FYTEK, S. A. DE C. V.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Thousands of U.S. dollars
Cumulative Cumulative
Capital Retained translation comprehensive
stock earnings adj. Total income
----- -------- --------- ----- ------
Balances at December 31,
1997 $307 $50 $357 $50
Net income $286 $286
Comprehensive income $286
----- ----- --------- ----- -----
Balances at December 31,
1998 $307 $336 $643 $336
Net income $270 $270
Effect of change in functional
currency (Note 1.e) ($3) ($3)
Foreign currency translation
adjustment $24 $24
Comprehensive income $291
----- ----- --------- ----- -----
Balances at December 31,
1999 $307 $606 $21 $934 $627
The accompanying notes are an integral part of these financial statements.
<PAGE>
FYTEK, S. A. DE C. V.
STATEMENTS OF CASH FLOWS
Thousands of U.S. dollars
Years ended
December 31,
1999 1998
Net income $270 $286
Items not affecting cash:
Allowance for doubtful accounts 41 22
Deferred income taxes (43) 87
Changes in working capital:
Accounts receivable (636) (1,129)
Inventories 27 (691)
Related parties, net 580 156
Suppliers 23 1,090
Sundry creditors, accrued expenses and other 140 55
--- --
Net cash provided by (used in) operating
activities 419 (110)
--- ----
Cash flow from investing activities
Acquisition of machinery and equipment (85) (58)
--- ---
Cash used in investing activities (85) (58)
--- ---
Effect of exchange rate changes on
cash and cash equivalents (13) 2
--- ---
Increase (decrease) in cash
and cash equivalents 321 (166)
Cash and cash equivalents at
beginning of the year 279 445
--- ---
Cash and cash equivalents at end of the year $600 $279
==== ====
The accompanying notes are an integral part of these financial statements.
<PAGE>
FYTEK, S. A. DE C. V.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 COMPARATIVE WITH 1998
(Thousands of U.S. dollars, except exchange rates)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The main activity of Fytek, S. A. de C. V. (the "Company") is the
manufacture of chemical fibers. To carry out these activities the
Company leases machinery and equipment from related parties (see
Note 8). The Company has no employees and technical and
administrative services are provided to it by a related party.
The Company is owned 50.01% by Akra Teijin, S. A. de C. V. and
49.99% by Burke Mills, Inc.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Following is a summary of the most significant accounting policies:
a. Functional currency and translation
The Company's functional currency is the Mexican peso (Ps). Through December
31, 1998 Mexico was considered an hyperinflationary economy. An economy is
considered to be hyperinflationary when the cumulative inflation for the
previous three years exceeds 100%.
As required by SFAS No. 52, "Foreign Currency Translation" companies operating
in hyperinflationary economies and whose functional currency is the local
currency must remeasure their financial statements in a manner similar to
companies whose functional currency is the U.S. dollar.
Using the remeasurement method monetary assets and liabilities denominated in
pesos are translated into U.S. dollars using current or period end exchange
rates. The difference between the exchange rate at the date of the transaction
and the exchange rate on the settlement date or balance sheet date if not
settled, is included in the results of operations as a foreign exchange gain
or loss. Non-monetary assets or liabilities, originally denominated in Ps are
translated into U.S. dollars using historical exchange rates at the date of
the transactions. Capital stock transactions are also translated at historical
exchange rates.
<PAGE>
Income statement components are generally translated at average rates;
however, depreciation and amortization charges and costs of goods sold are
translated at historical rates based on the U.S. dollar basis of the
respective assets.
Effective January 1, 1999, Mexico is no longer considered a hyperinflationary
economy. Therefore, the Company used the current method to translate its Ps
financial statements to U.S. dollars. The current method requires the
translation of all assets and liabilities using the current year exchange
rate. Capital stock continues to be translated at historical exchange rates.
The effect of the difference between the exchange rates at the beginning and
the end of the reporting periods is reflected as a separate component of
stockholders'equity.
Provided below is a summary of the year end and average exchange rates
experienced during 1999 and 1998.
Ps per $
At December 31, 1999 Year end 9.5222
Year ended December 31, 1999 Average 9.5264
At December 31, 1998 Year end 9.8780
Year ended December 31, 1998 Average 9.0760
b. Cash and cash equivalents
Cash and cash equivalents are stated at cost, which approximates the fair
value. The Company considers all highly and temporary cash investments with
original maturities of three months or less to be cash equivalents.
c. Inventories and cost of sales (Note 3)
Inventories are stated at the lower of average cost or market.
d. Machinery, equipment and depreciation (Note 4)
Machinery and equipment are stated at acquisition cost.
Depreciation of capitalized assets will be calculated by the straight-line
method at an annual rate of 4%, beginning January 1, 2000. This rate is based
on the estimated useful lives of the assets as determined by the Company.
<PAGE>
e. Income tax
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes".
This statement requires an asset and liability approach for financial
accounting and reporting for income tax under the following basic principles:
(a) a current tax liability or asset is recognized for the estimated taxes
payable or refundable on tax returns for the current year, (b) a deferred tax
liability or asset is recognized for the estimated future tax effects
attributable to temporary differences, (c) the measurement of current and
deferred tax liabilities and assets is based on provisions of the enacted tax
law and the effects of future changes in tax laws or rates are not
anticipated, and (d) the measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits for which available evidence
indicates that it is more likely than not that they will not be realized.
Under this method, deferred tax is recognized with respect to all temporary
differences.
The temporary differences under FAS No. 109 are determined based on the
difference between the historical tax-basis amount of the asset or liability
and the related historical amount reported in the financial statements.
An additional deferred tax liability of $3 was recorded as of January 1, 1999
to reflect the temporary difference relating to machinery and equipment
generated as a result of the change in the methodology used to translate the
company's peso denominated financial statements. This effect was recorded as
part of the cumulative translation adjustment in stockholders' equity.
f. Revenue recognition
The Company recognizes revenue when merchandise is delivered to customers. The
allowance for returns and doubtful accounts is sufficient to cover any
possible loss.
<PAGE>
g. Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual results
could differ from those estimates.
h. Comprehensive income
Comprehensive income is the change in equity of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
i. Disclosure about concentration of credit risk
The Company's financial statements do not include any financial instruments
that represent a significant concentration of credit risk.
NOTE 2 - ACCOUNTS RECEIVABLE
At December 31 this caption comprised the following:
1999 1998
Bermatex, Inc. $ 431 $722
Fariel, S. A. de C. V. 253 179
Other customers 1,508 745
Other accounts receivable 379 220
2,571 1,866
Allowance for doubtful accounts (66) (25)
$2,505 $1,841
NOTE 3 - INVENTORIES
At December 31 this caption comprised the following:
1999 1998
Finished products $431 $722
Work in process 253 179
Spare parts and others 290 64
$974 $965
<PAGE>
NOTE 4 - MACHINERY AND EQUIPMENT
At December 31 this caption comprised the following:
1999 1998
Machinery and equipment $ 79 $-
Construction in progress 65 57
$144 $ 57
NOTE 5 - STOCKHOLDERS' EQUITY
The capital stock is variable with a fixed minimum of $6 and an unlimited
maximum. At December 31, 1999, the subscribed and paid-in nominal capital stock
of $307, was represented by 24,450 Series "A" common, nominative shares of one
hundred nominal pesos par value each.
Dividends paid from retained earnings which have not previously been taxed are
subject to an income tax payable by the Company.
NOTE 6 - INCOME TAX
The components of income tax expense (benefit) for the years ended December 31,
are as follows:
1999 1998
Current income tax $482 $427
Deferred income tax (benefit) (43) 87
$439 $514
<PAGE>
The primary components of the net deferred tax liabilities at December 31, are
as follows:
1999 1998
Short-term deferred income tax liabilities:
Inventory ($274) ($216)
Machinery and equipment (2)
(276) (216)
Short-term deferred income tax assets:
Allowance for doubtful accounts 23 8
Accrued expenses 180 99
203 107
Net short-term income (liabilities) ($73) ($109)
The following is a reconciliation of the statutory income tax rate of the actual
effective income tax rate for the years ended December 31.
1999 1998
Income tax computed at statutory tax
rate (35% in 1999 and 34% in 1998) $248 $
272
Non-deductible items 130 235
Other permanent differences 11 1
Provision to return difference 34
Effect of change in statutory tax rate 3
Inflationary components and
translation adjustments 24 6
Income tax expense $439 $514
NOTE 7 - BALANCES AND TRANSACTIONS WITH RELATED PARTIES
Balances with related parties at December 31, are as follows:
1999 1998
Accounts receivable:
Burke Mills, Inc. $ 97
====
Accounts payable:
Burke Mills, Inc. $- $109
Nylon de Mxico, S. A. de C. V. 190 402
Fibras Qumicas, S. A. de C. V. 1,773 728
----- ---
$1,963 $1,239
====== ======
<PAGE>
The financial statements include the following significant transactions with
related parties for the years ended December 31:
1999 1998
Sale of finished goods to Burke Mills, Inc. $1,454 $1,510
Purchase of raw and other materials (4,304) (4,392)
Cost of administrative and technical services(1,016) (543)
Rentals of property, machinery and equipment (549) (520)
Balances with related parties included in the balance sheet arise from the
above-mentioned transactions.
NOTE 8 - COMMITMENTS
Operating lease:
The Company leases buildings, machinery and equipment from its stockholders and
an affiliated company, under non-cancellable operating lease agreements. During
the years ended December 31, 1999 and 1998, the Company paid rentals of $549,454
and $520,130, under the terms of these agreements, respectively.
Future lease obligations for these leases at December 31, 1999, are as follows:
2000 $549,454
2001 503,666
- ---- -------
$1,053,120
==========
Supply agreements:
In 1996, the Company entered into a five years supply agreement with Burke
Mills, Inc. to supply approximately $1,800,000 annually of polyester twisted
yarn, beginning November 1997.
In 1996, the Company entered into a five years supply agreement
with Fibras Qumicas, S. A. de C. V. (affiliated company) to
purchase approximately $3,500,000 annually of polyester natural
yarn, beginning November 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 592,513
<SECURITIES> 0
<RECEIVABLES> 3,795,519
<ALLOWANCES> 0
<INVENTORY> 5,062,294
<CURRENT-ASSETS> 10,172,095
<PP&E> 31,154,954
<DEPRECIATION> 16,078,440
<TOTAL-ASSETS> 25,940,934
<CURRENT-LIABILITIES> 4,200,398
<BONDS> 5,550,595
0
0
<COMMON> 1,809,171
<OTHER-SE> 12,193,399
<TOTAL-LIABILITY-AND-EQUITY> 25,940,934
<SALES> 42,839,759
<TOTAL-REVENUES> 42,839,759
<CGS> 38,778,823
<TOTAL-COSTS> 38,778,823
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 430,443
<INCOME-PRETAX> (300,125)
<INCOME-TAX> (97,705)
<INCOME-CONTINUING> (202,420)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (202,420)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
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