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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year
ended January 2, 1999
[ ]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, N.W.
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, 1999) was $3,295,000.
Page 1 of 42
The number of shares outstanding of the registrant's only class of common stock
as of March 1, 1999 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 18, 1999, which is to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report, are incorporated by reference in Part III of this
report.
Page 2 of 42
BURKE MILLS, INC.
PART I
ITEM 1 - BUSINESS
- -----------------
a) General Development of Business - General business development of Burke
Mills, Inc. (the Company) during the fiscal year ended January 2, 1999,
consisted of planning and implementing new products, researching and purchasing
new machinery, and reacting to competitive pricing pressures in the market.
In 1998 the Company began production and sales of two new products and made a
decision to add another in 1999. Development work was completed on an
intermingled yarn, which is processed by blending different colored yarns
together. The intermingled yarns will give the Company a value added product to
be sold primarily in the upholstery market. Sewing thread yarns, which will be
sold primarily to apparel markets, were also introduced during 1998.
Machinery needs for new products and for cost reductions were analyzed during
the year, and resulted in commitments for machinery to be delivered in 1999.
Machinery for the intermingled yarns, at a cost of $194,000, will arrive in the
second quarter. Machinery for a new product, at a cost of $450,000, will begin
to arrive in the second quarter and become operational in the second half of
1999. Commitments were also made for automated loading equipment for the
dyehouse at a cost of $500,000 and for new dyeing equipment at a cost of
$1,582,000 that will replace older, less efficient machinery and increase
capacity (also see note 16).
During the fourth quarter the Company experienced a weakening market and pricing
pressures. The market conditions forced price reductions in an attempt to retain
customers and resulted in lower gross margins. The Company expects this
condition to carryover into the first quarter of 1999.
Burke Mills, Inc., became ISO9002 Registered in October, 1998.
(b) Financial Information about Industry Segments - The Company had only one
industry segment during the fiscal year ended January 2, 1999.
(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.
Page 3 of 42
BURKE MILLS, INC.
PART I
ITEM 1 - BUSINESS (continued)
- -----------------------------
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 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 2, 1999 was
$3,832,000 and as of January 3, 1998 was $4,098,000. 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 54 days. On
average, the Company turns its inventory approximately 6 to 8 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 2, 1999, 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.
Page 4 of 42
BURKE MILLS, INC.
PART I
ITEM 1 - BUSINESS (continued)
- -----------------------------
Substantially all of the Company's manufacturing operations are 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 changes. Compliance by the Company during the
fiscal year ended January 2, 1999 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 has
made an adequate provision to earnings in 1997 to cover any future cost. No
provision was made in 1998. This situation will have no material impact on the
capital expenditures, earnings or competitive position of the Company.
On, February 10, 1999, the Company had 307 employees.
The Company's yarn division is its only division.
Page 5 of 42
BURKE MILLS, INC.
PART I
ITEM 1 - BUSINESS (continued)
- -----------------------------
During the fiscal year ended January 2, 1999, sales to CMI Industries, Inc.
exceeded ten percent of the Company's revenue for that year. The loss of the
customer would have a material adverse effect on the Company in the short run;
and, 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
Monterey, 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 will acquire yarn from Fytek and use 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 1998 accounted for
approximately 8% of total net sales. During 1997 sales to these countries were
less than 6%, and such sales aggregated less than 7% in 1996.
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 a sixteen-acre tract of land owned by the
Company. Eleven 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 Company contains approximately 308,928 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.
Page 6 of 42
BURKE MILLS, INC.
PART I
ITEM 2. PROPERTIES (continued)
- ------------------------------
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 2, 1999 are as follows:
Pounds/Year 1998
Department Capacity Utilization
---------- -------- -----------
Twisting Machines 676,000 62%
Winding Machines 21,218,000 45%
Texturing Machines 4,835,000 60%
Dyeing Equipment 20,000,000 71%
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.
Page 7 of 42
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 2, 1999, and on the latest
practicable date (as obtained from the NASDAQ Stock Market, Inc., in Washington,
DC)is as follows:
Quarter Ending
1997 High Bid Low Bid
------ ------ -----
March 31 $3.50 $2.625
June 30 $3.375 $2.50
September 30 $3.375 $2.375
December 31 $3.50 $2.50
1998
----
March 31 $3.125 $2.50
June 30 $4.313 $2.531
September 30 $4.438 $2.00
December 31 $3.75 $2.00
March 22, 1999 $1.875 $1.625
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 25, 1999 there were 428 holders of the common stock of the
Company.
(c) The Company has declared no dividends on its common stock during the past
two years.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The selected financial data set forth on the following page, for the five years
ended January 2, 1999 have been derived from the audited financial statements of
the Company. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and related notes thereto and other financial
information included therein.
Page 8 of 42
BURKE MILLS, INC.
PART II
ITEM 6. SELECTED FINANCIAL DATA (continued)
- --------------------------------------------
(in thousands except per share data)
Years Ended
--------------------------------------------
Jan. 2 Jan. 3 Dec. 28 Dec.30 Dec.31
1999 1998 1996 1995 1994
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA
Net Sales $42,169 $41,156 $40,649 $34,148 $36,194
Cost of Sales 37,825 36,765 36,887 30,666 30,928
------ ------ ------ ------ ------
Gross Profit $ 4,344 $ 4,391 $ 3,762 $ 3,482 $ 5,266
------- ------- ------- ------- -------
Income before Income Taxes $ 1,172 $ 1,059 $ 869 $ 1,156 $ 3,376
Income Taxes 383 433 284 212 867
--- --- --- --- ---
Net Income $ 789 $ 626 $ 585 $ 944 $ 2,509
====== ======= ======= ======= =======
Per Share (Note A)
Net income $ .29 $ .23 $ .21 $ .34 $ .92
====== ======= ====== ======= =======
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 $ 2,162 $ 1,343 $ 1,025 $ 6,372 $ 1,541
======= ======= ======= ======= =======
Depreciation $ 1,744 $ 1,600 $ 1,508 $ 1,052 $ 1,006
======= ======= ======= ======= =======
Cash provided by
operating activities $ 1,926 $ 3,646 $ 1,527 $ 2,004 $ 2,186
======= ======= ======= ======= =======
Jan. 2 Jan. 3 Dec. 28 Dec.30 Dec.31
1999 1998 1996 1995 1994
---- ---- ---- ---- ----
SELECTED BALANCE SHEET DATA
Current assets $11,213 $11,785 $ 9,905 $ 7,641 $ 8,814
Current liabilities 3,383 3,378 1,738 2,171 2,944
----- ----- ----- ----- -----
Working capital $ 7,830 $ 8,407 $ 8,167 $ 5,470 $ 5,870
======= ======= ======= ======= =======
Current ratio 3.31 3.49 5.70 3.52 2.99
==== ==== ==== ==== ====
Total assets $24,396 $24,348 $22,554 $20,769 $16,621
======= ======= ======= ======= =======
Long-term debt $ 4,563 $ 5,313 $ 6,000 $ 4,964 $ 955
======= ======= ======= ======= =======
Deferred income taxes $ 2,221 $ 2,218 $ 2,003 $ 1,406 $ 1,399
======= ======= ======= ======= =======
Shareholders' equity $14,229 $13,440 $12,813 $12,228 $11,284
======= ======= ======= ======= =======
(A) Income per share has been computed based on the weighted average number of
common shares outstanding during each period.
Page 9 of 42
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 to Period
Jan. 2 Jan. 3 Dec. 28 Increase (Decrease)
1999 1998 1996 1997-1998 1996-1997
---- ---- ---- -------------------
Net Sales 100.0% 100.0% 100.0% 2.5% 1.2%
Cost of Sales 89.7 89.3 90.7 2.9 (0.3)
Gross profit margin 10.3 10.7 9.3 (1.1) 16.7
---- ---- --- ---- ----
Selling, general,
administrative and
factoring expenses 7.1 6.9 6.3 5.8 11.9
--- --- --- --- ----
Operating earnings 3.2 3.8 3.0 (13.6) 26.6
Other income 0.4 0.4 0.3 6.8 35.8
Other expenses (1.3) (1.7) (1.2) (16.7) 37.5
---- ---- ---- ----- ----
Income before income
Taxes and net equity
In affiliates 2.3 2.5 2.1 (8.5) 21.8
Income taxes 0.9 1.0 0.7 (11.4) 52.3
--- --- --- ------ ----
1.4 1.5 1.4 (6.4) 7.0
Equity in Net Earnings
Of Affiliate 0.5 0.1 -- 860.0 --
--- --- --- ----- ---
Net income 1.9% 1.5% 1.4% 26.1% 7.0%
=== === === ==== ===
Page 10 of 42
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.
Page 11 of 42
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 (contd.)
- -----------------------------------------------------
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.
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 12 of 42
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 (contd.)
- -----------------------------------------------------
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 $228,000 in 1998 compared to $27,000 in 1997. The joint venture only began
operations in November of 1997.
Fytek had sales in 1998 of $7.5 million with income before taxes of $905,000,
and after tax income of $493,000. The balance at the end of 1998 in Fytek's
stockholders equity was $810,000.
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 13 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Results of Operations 1997 Compared to 1996
- -------------------------------------------
Net Sales
- ---------
Net sales for the 1997 fiscal year aggregated $41.1 million, representing an
increase of $ .5 million, as compared to net sales volume of $40.6 million
recorded by the Company for 1996. Net sales dollars increased by 1.2% and total
pounds shipped increased by 3.5% over those of 1996. Full yarn sales dollars
increased 2.8% and full yarn pounds shipped increased by 4.6%. Sales from
commission yarn sales (the dyeing and processing of customer owned yarns)
decreased in both dollars and pounds by 25.3% and 30.0%, respectively, in 1997
compared with 1996.
Cost of Sales and Gross Margin
- ------------------------------
Although net sales increased by 1.2%, and the sales mix changed to a larger
portion of full yarn sales, cost of sales actually declined by $122,000.
Material cost declined by $321,000, or 1.3%, mainly as a result of a lower unit
cost of yarns and an improvement in reworks.
Total labor cost increased by 2.1% mainly as a result of an annual wage
increase.
Manufacturing overhead declined by 0.8% mainly as a result of improvements in
reworks.
Inasmuch as net sales for 1997 as compared to 1996, increased by 1.2%, while
cost of sales decreased by 0.3%, the 1997 gross margin increased to 10.7% as
compared to 9.3% recorded in 1996.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses for 1997 aggregated $2.7 million,
as compared to $2.3 million in 1996. During the fourth quarter of 1997, the
Company recorded $157,000 for the severance arrangements for its retiring
president. The Company also experienced $63,000 in recruiting costs for its new
president.
Page 14 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Results of Operations 1997 Compared to 1996 (contd.)
- ----------------------------------------------------
Factor's Charges
- ----------------
Factor's charges for 1997 aggregated $183,000, or 0.4%, of net sales, as
compared to $194,000, or 0.5%, of net sales. The ratio of sales made to factored
accounts versus non-factored accounts was slightly lower in 1997.
Operating Margins
- -----------------
As a result of the discussion above with respect to the 1997 increase in sales
with an increase in gross profit percentage, coupled with an increase in
selling, general, and administrative expenses, the Company reported operating
earnings of $1.6 million in 1997, compared to $1.2 million in 1996.
Interest Income
- ---------------
Interest income for 1997 was $152,000 as compared to $36,000 for 1996. The
increase in interest income was the result of improved cash flow, which allowed
the Company to maintain a higher average investment of cash. The 1997 and 1996
interest income was primarily interest earned on short-term cash equivalents
held in the Company's bank.
Interest Expense
- ----------------
Interest expense for 1997 was $503,000 as compared to $495,000 in 1996. The
Company's average long-term debt did not change during the year. The increase in
interest expense resulted primarily from a 53-week fiscal year in 1997 compared
to a 52-week fiscal year in 1996.
Loss on Disposal of Assets
- --------------------------
In 1997 the Company incurred a loss of $177,000 on disposal of assets, as
compared to a gain on disposal of assets or $94,000 in 1996. During the fourth
quarter, the Company wrote off $154,000 for software which it abandoned and
$15,000 for the original undepreciated installation cost for the twisting
machines sent to Fytek, S.A. de C.V., its joint venture company.
Page 15 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Results of Operations 1997 Compared to 1996 (contd.)
- ----------------------------------------------------
Income Before Provision for Income Taxes
- ----------------------------------------
Income before provision for income taxes for 1997 was $1,059,000, compared to
$869,000 in 1996. The 1997 increase of $190,000 was the result of an increase in
operating earnings, discussed above, and an increase in interest income, which
was partially offset by a loss on disposal of assets.
Provision for Income Taxes
- --------------------------
Provision for income taxes for 1997 was $433,000, compared to $284,000 in 1996.
The increase in the provision for income taxes was primarily due to higher
taxable income in 1997.
Page 16 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Results of Operations 1998 - 1995 Sales Analysis
- ------------------------------------------------
The table below sets forth an analysis of sales volume for the period 1995 to
1998, inclusive. It discloses that full yarn sales prices decreased from a high
of $3.60 per pound in 1995 to $3.22 in 1998. 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
as discussed earlier. The Company expects in the future a larger portion of its
sales will be from horizontal dyeing and direct shipping of yarn.
% of Sales $
% of Pounds of Per
Net Sales Yarn Sold Pound
--------- --------- -----
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
=== ===
1995:
Yarn sales 88% 79% $3.60
Commission sales 12 21 1.82
--- ---
Total 100 100
=== ===
Page 17 of 42
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 2, 1999, the
Company had $2,864,000 due from its factor, which matured on January 25, 1999.
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 note payable
in eighty-four (84) equal monthly installments plus accrued interest.
The Company had inventories of $3,706,000 as of January 2, 1999. The Company's
average inventories aggregated approximately $3,821,000 for 1998, representing
approximately 54 days inventory on hand. The Company's inventories turn
approximately 6 to 8 times each year.
The Company's working capital decreased by approximately $577,000 at January 2,
1999, from that of January 3, 1998, primarily as a result of decreases in other
liabilities, and an increase in inventory. 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:
1998 1997 1996
---- ---- ----
Working Capital $7,830,000 $8,407,000 $8,167,000
Working Capital Ratio 3.31 to 1 3.5 to 1 5.7 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 2, 1999 and January 3, 1998:
January 2 January 3
1999 1998
---- ----
Cash, cash equivalents
and receivables $6,845,000 $8,078,000
Current liabilities 3,383,000 3,378,000
--------- ---------
Excess of quick assets
over current liabilities $3,462,000 $4,700,000
========== ==========
Page 18 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Liquidity and Capital Resources: (contd.)
- -----------------------------------------
The aggregate long-term debt at January 2, 1999 and January 3, 1998 was
$5,312,500 and $6,000,000 respectively. In order to finance the acquisition of
new property, plant and equipment of $6,371,819 in 1995, and $1,024,598 in 1996,
the Company incurred a long-term debt of $6,000,000, 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 Company's long-term debt to equity ratios aggregated 32.1% at January 2,
1999, 39.5% at January 3, 1998, and 46.8% at December 28, 1996.
Capital budget expenditures approved for 1999 aggregate $3,500,000. The Company
plans to finance its capital needs from cash provided from operations and bank
financing.
Year 2000 Compliance
- --------------------
The Company has assessed its systems and determined the areas that are
non-compliant. The company is replacing its manufacturing software and
accounting software with a fully integrated system. It is estimated that the
software will be installed and running by July 1999, and will solve any
non-compliant problems. The installation is coincidental to the year 2000
problem as the Company already had plans to upgrade its existing software to
improve information efficiencies.
The Company has initiated discussions with its significant suppliers, large
customers and financial institutions to ensure that those parties have
appropriate plans to remedy Year 2000 issues where their systems interface with
the Company's systems or otherwise impact its operations. The Company will
assess the extent to which its operations are vulnerable should those
organizations fail to remedy properly their computer systems. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's systems and operations rely, will be converted on a timely basis and
will not have a material effect on the Company. The Company has alternate or
substitute sources for major raw material, gas, and fuel oil.
Page 19 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Year 2000 Compliance (contd.)
- -----------------------------
The Company entered into a contract on November 5, 1998 with Osprey Systems,
Inc., to purchase and install Enterprise Resource Planning software. The
software will replace various custom manufacturing applications and the
accounting software, giving the Company a full integrated software operational
system. Currently, the Company's manufacturing applications are not fully
integrated, and there is no integration between manufacturing and accounting. It
is believed that the new software will better handle growing demands from
customers for information, improve the order to cash cycle, and solve any Year
2000 problems.
The cost of the project to include software, hardware, implementation and
training will be approximately $900,000 paid over seven months that began in
November 1998. The Company will expense approximately $600,000 of the project in
1999 which is expected to be completed in July 1999.
The cost to bring the existing software into compliance for Year 2000 is not
known as the Company planned to replace the software.
The Company believes the worst case scenario would occur if the Company's
electrical utilities were interrupted. The Company has no alternate source or
substitute for electricity, and any interruption would materially affect the
Company.
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 natural attenuation. The Company believes it has
made an adequate provision to earnings in 1997 to cover any future cost. No
provision was made in 1998. This situation will have no material impact on the
capital expenditures, earnings or competitive position of the Company.
Page 20 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Inflation
- ---------
The Company does not believe that operations for the periods discussed have bee
significantly affected by inflation. Further, the Company's performance in
maintaining control over elements of overhead have enabled it to remain
competitive with its competition.
7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------
Under its loan agreement dated March 29, 1996 with First Union National Bank of
North Carolina, providing for a term loan of $6,000,000 and a line of credit
facility of $2,000,000, the effective rate of interest being paid by the Company
on its term loan is 8.06% per annum. The interest rate is in effect a fixed rate
because in a fixed rate hedge contract between the Company and the bank, the
bank converted its floating rate into a fixed rate. Under the fixed rate hedge
contract, the Company pays the bank 8.06% per annum for the term of the loan.
The floating rate (LIBOR PLUS 1.9%) that the Company pays the bank is equal to
the floating rate that the bank's capital markets will pay to the Company under
the agreement. Whether LIBOR rates rise or fall over the life of the loan
agreement, the Company pays the bank a fixed rate of 8.06%, thereby resulting in
a fixed rate loan. Other than the foregoing arrangement with First Union
National Bank, 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.
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
Page 21 of 42
BURKE MILLS, INC.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- -------------------------------------
Forward Looking Statements (contd.)
- -----------------------------------
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 forwardlooking
statements to reflect new information, future events or otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward-looking statements include, but
are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and financial viability of significant customers, technological
advancements, employee relations, changes in construction spending and capital
equipment expenditures (including those related to unforeseen acquisition
opportunities), the timely completion of construction and expansion projects
planned or in process, continued availability of financial resources through
financing arrangements and operations, negotiations of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies, policies and legislation, and proceeds received from
the sale of assets held for disposal. In addition to these representative
factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company
competes; such as, changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.
Page 22 of 42
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 2, 1999 and January 3, 1998, and the related statements of operations,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended January 2, 1999. 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
2, 1999 and January 3, 1998, and the results of its operations and its cash
flows for each of the three years in the period ended January 2, 1999, in
conformity with generally accepted accounting principles.
Cole, Samsel & Bernstein LLC
Certified Public Accountants
Lodi, New Jersey
February 23, 1999
Page 23 of 42
BURKE MILLS, INC.
PART II
BALANCE SHEETS
January 2 January 3
1999 1998
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 3,384,439 $ 4,306,540
Accounts receivable 3,460,307 3,771,301
Inventories 3,705,849 3,006,298
Prepaid expenses, taxes,
and other current assets 313,872 38,832
Deferred income taxes 349,000 661,700
------- -------
Total Current Assets 11,213,467 11,784,671
========== ==========
Equity Investment in Affiliate 405,623 177,728
------- -------
Property, plant & equipment - at cost 28,478,700 26,350,679
Less: accumulated depreciation 15,869,275 14,158,330
---------- ----------
Property, Plant and Equipment- Net 12,609,425 12,192,349
---------- ----------
Other Assets 167,077 193,316
------- -------
Deferred charges $24,395,592 $24,348,064
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 750,000 $ 687,500
Accounts payable 2,303,876 2,081,237
Accrued salaries and wages 160,862 191,128
Other liabilities and accrued expenses 137,096 417,821
Income taxes payable 31,600 --
-------------------- ------ ------
Total Current Liabilities 3,383,434 3,377,686
Long-Term Debt 4,562,500 5,312,500
Deferred Income Taxes 2,220,836 2,218,300
--------- ---------
Total Liabilities 10,166,770 10,908,486
---------- ----------
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 9,308,302 8,519,058
--------- ---------
Total Shareholders' Equity 14,228,822 13,439,578
---------- ----------
$24,395,592 $24,348,064
=========== ===========
See notes to financial statements.
Page 24 of 42
BURKE MILLS, INC.
PART II
STATEMENTS OF OPERATIONS
Years Ended
------------------------------------------
January 2 January 3 December 28
1999 1998 1996
---- ---- ----
Net Sales $42,169,106 $41,155,629 $40,648,920
----------- ----------- -----------
Costs and Expenses
Cost of Sales 37,825,038 36,764,917 36,887,077
Selling, general and
administrative expenses 2,813,137 2,651,031 2,337,450
Factor's charges 186,234 183,072 194,427
------- ------- -------
Total Costs and Expenses 40,824,409 39,599,020 39,418,954
---------- ---------- ----------
Operating Earnings 1,344,697 1,556,609 1,229,966
--------- --------- ---------
Other Income
Interest income 163,506 151,996 35,567
Gain on disposal of
property assets - - 93,940
Other, net 3,209 4,068 4,891
----- ----- -----
Total Other Income 166,715 156,064 134,398
------- ------- -------
Other Expenses
Interest expense 463,099 503,306 495,009
Loss on disposal of
property assets 137 177,234 -
Other, net 103,702 - -
----- ----- -----
Total Other Expenses 566,938 680,540 495,009
------- ------- -------
Income Before Provision for
Income Taxes and Equity in
Net Earnings of Affiliate 944,474 1,032,133 869,355
Provision for Income Taxes 383,125 432,529 283,954
------- ------- -------
Income Before Equity in
Net Earnings of Affiliate 561,349 599,604 585,401
Equity in Net Earnings of
Affiliate 227,895 26,500 -
------- ------ ------
Net Income $ 789,244 $ 626,104 $ 585,401
=========== =========== ===========
Net Earnings per share $ .29 $ .23 $ .21
=========== =========== ===========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168 2,741,168
========= ========= =========
See notes to financial statements.
Page 25 of 42
BURKE MILLS, INC.
PART II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANARY 2, 1999
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. 30, 1995 2,741,168 $1,809,17 $3,111,349 $7,307,553 $12,228,073
Net Income for the year
ended Dec. 28, 1996 - - - 585,401 585,401
------- ------- ------- ------- -------
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 - - - 789,244 789,244
------- ------- ------- ------- -------
Balance at Jan. 2, 1999 2,741,168 $1,809,171 $3,111,349 $9,308,302 $14,228,822
========= ========== ========== ========== ===========
See notes to financial statements.
Page 26 of 42
BURKE MILLS, INC.
PART II
STATEMENTS OF CASH FLOWS
Years Ended
-----------------------------------
January 2 January 3 December 28
1999 1998 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 789,244 $ 626,104 $ 585,401
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,743,524 1,599,662 1,508,423
(Gain) loss on sales of plant and
equipment, including loss on disposals 137 177,234 (93,940)
Deferred income taxes 315,236 428,110 302,390
Equity in net earnings of affiliate (227,895) Changes in assets and
liabilities:
Accounts receivable 310,994 (573,090) (224,110)
Inventories (699,551) 444,507 (580,866)
Prepaid expenses, taxes & other
current assets (275,040) 184,536 159,145
Other non-current assets 26,239 (193,316) (5,993)
Accounts payable 222,639 645,183 (72,422)
Accrued salaries & wages (30,266) 61,176 6,315
Other liabilities and accrued expenses (280,725) 246,181 (57,472)
Income taxes payable 31,600 -- --
------ ------ ------
Total adjustments 1,136,892 3,020,183 941,470
--------- --------- -------
Net cash provided by operating activities 1,926,136 3,646,287 1,526,871
--------- --------- ---------
Cash flows from investing activities:
Acquisition of property, plant
and equipment (2,161,837) (1,343,090) (1,024,598)
Proceeds from sales of plant
and equipment 1,100 17,650 -
Investment in affiliate -- (171,735) -
------ ------ -----
Net cash (used) by investing activities (2,160,737) (1,497,175) (1,024,598)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term bank note - - 1,670,663
Principal payments of long-term debt (687,500) - (850,341)
-------- -------- --------
Net cash provided (used) by financing
activities (687,500) - 820,322
-------- -------- -------
Net increase (decrease) in cash and
cash equivalents (922,101) 2,149,112 1,322,595
Cash & cash equivalents at beginning
of year 4,306,540 2,157,428 834,833
--------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $3,384,439 $4,306,540 $2,157,428
========== ========== ==========
See notes to financial statements.
Page 27 of 42
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 1998, 1997 and 1996 ended on
January 2, 1999, January 3, 1998 and December 28, 1996, respectively. The fiscal
years ended January 2, 1999 and December 28, 1996 consisted of 52 weeks. The
fiscal year ended January 3, 1998 consisted of 53 weeks.
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 28 of 42
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE
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.
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 3,
1998, which amounted to 1.0% in 1998, 1.7% in 1997 and 4.2% in 1996. Sales to
customers in Canada in 1998, 1997 and 1996 aggregated 6.4%, 3.9% and 2.8%,
respectively. Additionally, the Company had sales to Brazil in 1998 and 1997
which amount to 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 2, 1999. For the three year
period ended January 2, 1999, 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 2, 1999. One
other customer has exceeded 10% in 1996. 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
1998 Amount Net Sales
---- ------ ---------
Customer 1 $5,793,000 13.7
Customer 2 *
% of
1997 Amount Net Sales
---- ------ ---------
Customer 1 $5,737,000 14.0
Customer 2 *
% of
1996 Amount Net Sales
---- ------ ---------
Customer 1 $5,387,000 13.3
Customer 2 4,074,000 10.0
*Less than 10%
Page 29 of 42
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable comprise the following:
January 2 January 3
1999 1998
---- ----
Due from factor on
regular factoring
account $2,864,000 $3,328,000
Non-factored accounts
receivable 596,000 443,000
------- -------
Total $3,460,000 $3,771,000
========== ==========
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. 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 1998 and 1997,
inasmuch as it borrowed no funds from its factor during these years. In
connection with such advances from its factor for 1996, the Company incurred
interest costs of only $5,442.
The Company's factor is collateralized by the accounts receivable sold to the
factor. No interest in inventory, other than returned goods, has been granted to
the factor under the factoring contract.
Page 30 of 42
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
January 2, January 3,
1999 1998
---- ----
Finished & in process $2,409,000 $1,813,000
Raw materials 728,000 716,000
Dyes & chemicals 413,000 337,000
Other 156,000 140,000
------- -------
Total $3,706,000 $3,006,000
========== ==========
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Major classifications of property, plant and equipment are as follows:
January 2, 1999 January 3, 1998
--------------- ---------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ---- ------------
Land $ 86,565 $ - $ 78,032 $ -
Land improvements 175,697 82,017 136,504 77,709
Building & improvements 6,376,050 4,222,677 6,337,114 4,056,293
Plant machinery & equipment 20,502,754 10,813,831 18,694,009 9,448,212
Office equipment 1,111,861 656,727 964,974 493,257
Automotive equipment 225,773 94,023 140,046 82,859
------- ------ ------- ------
Total $28,478,700 $15,869,275 $26,350,679 $14,158,330
=========== =========== =========== ===========
NOTE 6 - LINE OF CREDIT LOAN
Pursuant to a loan agreement dated March 29, 1996, and amended October 12, 1998,
the Company secured an Equipment Loan facility of $2,000,000 and a $1,250,000
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 2,
1999, the Company had no borrowings under this line of credit.
Also under the Company's factoring arrangement, the Company may borrow from the
factor up to 90% of the face amount of each account sold to the factor. As of
January 2, 1999, the Company had no borrowings from its factor.
Page 31 of 42
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 new 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 fixed rate of
8.06%. In order to effect this fixed interest rate, the bank converted its
interest rate cap into a fixed rate loan by entering into a fixed rate hedge
contract with the Company. Under this fixed rate hedge contract, the Company
will pay the bank 8.06% for the term of the contract. The floating rate (LIBOR
plus 1.9%) that the Company will pay the bank will be equal to the floating rate
that the bank's capital markets will pay to the Company. Whether LIBOR RATES
rise or fall over the life of the loan agreement, the Company will continue to
pay the bank a fixed rate of 8.06% for the life of the contract, thereby
creating a fixed rate loan.
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 the long-term debt at January 2, 1999 are as
follows:
Current portion $ 750,000
2000 $ 750,000
2001 750,000
2002 750,000
2003 750,000
Thereafter 1,562,500 4,562,500
--------- ---------
$5,312,500
==========
Page 32 of 42
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 2 January 3
1999 1998
---- ----
Employee 401k contributions $ -- $ 47,113
Payroll taxes payable 7,448 109,063
Utilities payable 31,779 132,165
Accrued interest 15,644 21,493
Accrued environmental cost 43,808 77,100
Other 38,417 31,887
------ ------
Total $137,096 $417,821
======== ========
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. 2 Jan. 3
1999 1998
---- ----
Deferred tax assets:
Alternative minimum taxes paid $ 349,000 $ 608,825
Net operating loss carry-forward - 12,190
Inventory capitalization - 18,700
Business credits - 11,585
Charitable contributions carryover - 10,400
--------- ---------
$ 349,000 $ 661,700
========== ==========
Deferred tax liabilities:
Accelerated depreciation for
tax purposes $2,202,300 $2,218,300
Undistributed earnings of foreign
Affiliate, net of tax credit 12,700 --
Other 5,836 --
----- ----- -----
$2,220,836 $ 2,218,300
========== ===========
Provision for taxes consist of:
Jan. 2 Jan. 3 Dec. 28
1999 1998 1996
---- ---- ----
Current:
Federal $ 49,445 $ 4,419 $ -
State 18,444 - -
Deferred 315,236 428,110 283,954
------- ------- -------
Total $ 383,125 $ 432,529 $ 283,954
========= ========= =========
Page 33 of 42
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:
January 2 January 3 December 28
1999 1998 1996
---- ---- ----
Income before income taxes $1,172,369 $1,058,633 $ 869,355
Federal income taxes 34% 34% 34%
------ ------ ------
Computed taxes at maximum
statutory tax rate 398,605 359,936 295,581
State income taxes, net of
Federal income tax benefits 56,098 56,051 44,468
Adjustment for deferred
income taxes - - (20,670)
Alternative minimum tax adjustment - - (35,425)
Tax credit for foreign affiliate
earnings (77,484) - -
Prior year tax examination
and other 5,906 16,542 -
------- ------ --------
Provision for income taxes $ 383,125 $ 432,529 $ 283,954
========= ========== ==========
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.
The company accounts for the ownership using the equity method. During 1998,
the Company had sales of $165,000 to Fytek compared to no sales in 1997.
Purchases from Fytek were $1,337,000 compared to $156,000 in 1997.
At January 2, 1999, Fytek owed the Company $130,000 for leased equipment which
will be paid in March 1999.
In 1998, the Company purchased $151,000 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 and by Letter of Credit 120 days after the Bill of Lading date.
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.
Page 34 of 42
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
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 $470,000 in 1998, $494,000 in 1997 and $515,000 in 1996. Cash paid
for income taxes aggregated $33,500 in 1998 and $6,000 in 1996. Taxes refunded
in 1997 aggregated $125,000.
NOTE 12 - RENTAL EXPENSES AND LEASE COMMITMENTS
Rental expenses under all lease commitments for the three fiscal years ended
January 2, 1999, aggregated $37,000, $45,000 and $40,000, respectively. Minimum
lease commitments under terms of all non-cancelable leases, which consist only
of leased equipment, are as follows as of January 2, 1999:
1999 $26,000
2000 23,000
2001 22,000
2002 4,000
------
$75,000
=======
NOTE 13 - QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands of dollars
except for per share amounts)
QUARTER
---------------------------------------
1998 First Second Third Fourth
---- ----- ------ ----- ------
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
1996
----
Net sales $ 9,905 $10,304 $10,225 $10,215
Cost of sales 9,215 9,519 9,122 9,031
Gross profit 690 785 1,103 1,184
Net income (loss) (40) 26 285 314
Net income (loss)
per common share $ (.02) $ .01 $ .11 $ .11
Page 35 of 42
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
oraccumulated net profits in an amount the employer may from time to time deem
advisable. No provision was made for a discretionary contribution in 1998, 1997
or 1996.
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 2,
1999, the Company had $2,864,000 due from its factor which matured on January
25, 1999. 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
Page 36 of 42
BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS
c) During 1996 in connection with a bank loan to the Company secured by real
estate, the Company had a Phase I Environmental Site Assessment conducted on its
property. The assessment indicated the presence of a contaminant in the
groundwater under the Company's property. The contaminant was a solvent used by
the Company in the past but no longer used. The contamination was reported to
the North Carolina Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed. The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving toward a solution of natural attenuation. The Company believes it has
made an adequate provision to earnings in 1997 to cover any future cost. No
provision was made in 1998. This situation will have no material impact on the
capital expenditures, earnings or competitive position of the Company.
d) The Company was committed to three outstanding irrevocable import Letters of
Credit for machinery purchases on January 2, 1999.
1) Latest ship date May 15, 1999, expiring June 15, 1999, in the amount of
$194,000 payable 90% against Bill of Lading and 10% at 60 days of Bill of
Lading date.
2) Latest ship date March 31, 1999, expiring on September 30, 1999, in the
amount of approximately $447,000 payable 6 months from Bill of Lading
date.
3) Latest ship date April 30, 1999, expiring on May 21, 1999, in the amount
of $500,000 payable 50% against Bill of Lading and 50% upon presentation
by Burke Mills of Commissioning Certificate.
e) The Company entered into an agreement to purchase $1,582,000 of dyeing
equipment to be delivered in 1999. The Company made a deposit of $176,000 in
1998, with the remainder to be paid by Letter of Credit to be established one
month before shipment.
Page 37 of 42
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 18, 1999, 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 38 of 42
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:
Auditors' report
Balance sheets
January 2, 1999
January 3, 1998
Statements of operations Year ended January 2, 1999 Year ended
January 3, 1998 Year ended December 28, 1996
Statements of changes in shareholders' equity Year ended
January 2, 1999 Year ended January 3, 1998 Year ended
December 28, 1996
Statements of cash flows Year ended January 2, 1999 Year ended
January 3, 1998 Year ended December 28, 1996
Notes to financial statements
Page 39 of 42
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 40 of 42
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 2, 1999.
NUMBER ITEM DESCRIPTION AMOUNT
5-02(1) cash & cash items $ 3,384,439
5-02(2) marketable securities 0
5-02(3)(a)(1) notes & accounts receivable-trade 3,460,307
5-02(4) allowances for doubtful accounts 0
5-02(6) inventory 3,705,849
5-02(9) total current assets 11,213,467
5-02(13) property, plant & equipment 28,478,700
5-02(14) accumulated depreciation 15,869,275
5-02(18) total assets 24,395,592
5-02(21) total current liabilities 3,383,434
5-02(22) bonds, mortgages & similar debt 4,562,500
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 12,419,651
5-02(32) total liabilities & stockholders' equity 24,395,592
5-03(b)1(a) net sales of tangible products 42,169,106
5-03(b)1 total revenues 42,169,106
5-03(b)2(a) cost of tangible goods sold 37,825,038
5-03(b)2 total costs & expenses applicable
to sales and revenues 37,825,038
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 463,099
5-03(b)(10) income before taxes & other items 1,172,369
5-03(b)(11) income tax expense 383,125
5-03(b)(14) income/loss continuing operations 789,244
5-03(b)(15) discontinued operations 0
5-03(b)(17) etraordinary items 0
5-03(b)(18) cumulative effect - changes in accounting
principles 0
5-03(b)(19) net income or loss 789,244
5-03(b)(20) earnings per share - primary $.29
5-03(b)(20) earnings per share - fully diluted $.29
Page 41 of 42
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 29, 1999 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 29, 1999 By: Humanyun N. Shaikh /s
---------------------------
Humayun N. Shaikh, Director
Date: March 29, 1999 By: Aehsun Shaikh /s
---------------------------
Aehsun Shaikh, Director
Date: March 29, 1999 By: Charles P. McCamy /s
---------------------------
Charles P. McCamy, Director
Date: March 29, 1999 By: Robert P. Huntley /s
---------------------------
Robert P. Huntley, Director
Date: March 29, 1999 By: William T. Dunn /s
---------------------------
William T. Dunn, Director
Page 42 of 42
End