SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934
and Rule 13e-3 thereunder)
[Amendment No....................]
BURKE MILLS, INC.
(Name of the Issuer)
BURKE MILLS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK
(Title of Class of Securities)
121362107
(CUSIP Number of Class of Securities)
Pender R. McElroy, James, McElroy & Diehl, P.A., 600 S. College St.,
Charlotte, NC 28202 704 372-9870
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. [ ] The filing of solicitation materials or an information statement subject
to Regulation 14A [17 CFR 240.14a-1 to 240.14b-1]. Regulation 14C [17 CFR
240.14c-1 to 240.14c-101] or Rule 13e-3(c) [ss.240.13e-3(c)] under the
Securities Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of 1933.
c. [ ] A tender offer.
d. [X] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ ]
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Amount of filing fee
valuation*
$955,000 $191.00
- --------------------------------------------------------------------------------
* Set forth the amount on which the filing fee is calculated and state how it
was determined:
The filing fee is calculated based upon the average of the high and low
prices of the stock on December 23, 1999 of $1.91 times the maximum possible
number of 500,000 shares of the Company's common stock which might be
repurchased by the Company.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)92)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid: N/A
Form or Registration No.: N/A
Filing Party: N/A
Date Filed: N/A
10
ITEM 1. ISSUER AND CLASS OF SECURITIES SUBJECT TO THE TRANSACTION.
(a) The Issuer is Burke Mills, Inc. (the "Company"). The class of
equity securities which is the subject of the Rule 13e-3 transaction is the
common stock of the Company. The address of the principal executive offices of
the Company is 191 Sterling Street, N.W., Valdese, North Carolina 28690.
(b) The common stock of the Company constitutes the securities
which are the subject of the Rule 13e-3 transaction. 2,741,168 shares of the
common stock of the Company are outstanding. The approximate number of holders
of record of the common stock as of December 20, 1999 is 413.
(c) The principal market on which the Company's common stock is
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 (as obtained from the National Association of
Securities Dealers) is as follows:
Quarter Ending High Bid Low Bid
December 31, 1997 $3.50 $2.50
March 31, 1998 $3.125 $2.50
June 30, 1998 $4.313 $2.531
September 30, 1998 $4.438 $2.00
December 31, 1998 $3.75 $2.00
March 31, 1999 $3.00 $1.625
June 30, 1999 $2.297 $1.375
September 30, 1999 $2.125 $1.563
Such over-the-counter market quotations reflect inter-dealers
prices, without retail markup, markdown or commission, and may not necessarily
represent actual transactions.
(d) The Company has declared no dividends on its common stock
during the past two years. The only restriction on the present or future ability
of the Company to pay dividends on its common stock are the availability of cash
and the negative covenants contained in the loan agreement dated March 29, 1996
between the Company and First Union National Bank of North Carolina. For
example, the Company is required under the loan agreement to maintain a cash
flow coverage ratio of not less than 1.25 to 1 and a quick ratio of not less
than 1.00 to 1.00. Payment of dividends could be limited by these covenants.
(e) The Company has made no public offering of securities or any
offering exempt from registration under the Securities Act of 1933 during the
past three years.
(f) Since the commencement of the Company's second full fiscal year
preceding the date of this schedule, the Company has purchased none of its
common stock.
ITEM 2. IDENTITY AND BACKGROUND.
The Company filing this statement is the Issuer of the class of
equity securities which is the subject of the Rule 13e-3 transaction.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) Not applicable.
(b) On November 11, 1999 representatives of the Company met with
representatives of Trevira Neckelmann A/S, a Danish company located in
Silkeborg, Denmark ("Neckelmann"). The contact was initiated by Neckelmann.
Neckelmann is engaged in the business of texturing and dyeing yarn.
Representatives of the two companies discussed Neckelmann's entry into the
United States market through joint cooperation of the two companies. One
possibility discussed was ownership of Burke stock by Neckelmann; however, this
possibility has been rejected by the Company. No understandings or agreements
were then, or have since then been, reached except to continue discussions.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The Rule 13e-3 transaction, which is the basis of this
schedule, is that on November 5, 1999 the board of directors of the Company
authorized purchase by the Company of its common stock on the open market from
time to time, as the cash position of the Company permits, up to a maximum of
500,000 shares. The Company has no plans to undertake any open market purchases
of its stock until after January 1, 2000. Such purchases are not mandatory and
will be made at the direction of the Chairman and CEO, Humayun N. Shaikh, as to
timing of purchases and amounts of stock to be purchased.
(b) There is no term or arrangement concerning the Rule 13e-3
transaction relating to any security holder of the Company which is not
identical to that relating to other security holders of the same class of
securities of the Company.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
There is no plan or proposal of the Company, or any affiliate of
the Company, regarding activities or transactions which are to occur after the
Rule 13e-3 transaction. If the Company's discussions with Trevira Neckelmann A/S
should continue and result in any such plan or proposal, an amendment to this
schedule will be filed.
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) The source of funds to be used in the Rule 13e-3 transaction
will be the working capital of the Company. The total amount of funds to be used
in the Rule 13e-3 transaction is unknown since it is not known (i) whether any
purchases will be made, (ii) the amount of stock which might be purchased and
(iii) the price at which such stock might be purchased.
(b) The expenses incurred or estimated to be incurred in connection
with the Rule 13e-3 transaction are as follows for all of which the Company will
be responsible for paying:
Filing Fee $ 191.00
Legal Fees $ 8,500.00
Accounting Fees $ 2,500.00
Reproduction Costs $ 2,000.00
Mailing Fees $ 1,000.00
(c) None of the funds to be used in the Rule 13e-3 transaction are
to be borrowed.
(d) No response necessary.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The purpose of the Rule 13e-3 transaction is to reduce the
number of outstanding shares of the Company's common stock and thus increase the
earnings per share and the book value per share. Also, the per share trading
price of the stock could increase.
(b) The Company did not consider alternative means to accomplish
the purposes, and this means was chosen since any other structure would be more
complicated and would not be necessary to accomplish the purpose of the Company.
(c) The reason for the structure of the Rule 13e-3 transaction is
that this is the sole method available to purchase shares of the Company's
common stock on the open market. The reason for undertaking such transaction at
this time is that the common stock of the Company has been trading at a
relatively low figure (under $2.00 per share) for some period of time and it was
the opinion of the board that the time was appropriate to go into the market to
purchase shares.
(d) Effects of this Rule 13e-3 transaction, if any stock is
purchased, would be as follows:
(i) The benefits to the Company would be that, after any such
purchases, the earnings per share and book value per share of the
Company would increase because of the lesser number of shares
outstanding. The detriment to the Company would be that cash would have
been used for the purchase of the stock which otherwise would have been
used in the operations of the Company, and the use of such cash would
diminish the amount of cash available for Company operations. However,
the Company will purchase shares only if cash is available to do so and
not needed for Company operations. Quantification of the benefits and
detriments is not practicable since it is not known how many shares, if
any, and at what price such shares would be purchased. With regard to
federal tax consequences, the Company would have to utilize after tax
dollars for these purchases, and the Company would receive no
offsetting deduction for the expenditure.
(ii) With respect to any affiliates of the Company, affiliates
would benefit with respect to the increased earnings per share and book
value per share. Affiliates would be impacted indirectly by the use of
the Company's cash for the purchases. Affiliates would have no direct
federal tax consequences as a result of such purchases.
(iii) The effects of the Rule 13e-3 transaction on
unaffiliated security holders who chose to sell their stock to the
Company would be that the selling unaffiliated security holder would
forego any future appreciation in value in the stock and any dividends
which might be paid on the stock in the future. Federal tax
consequences to an unaffiliated security holder would depend upon
whether a security holder sold the stock at a gain, in which case the
security holder would be subject to a capital gain tax, or at a loss,
in which case the security holder could have the benefit of a capital
loss. The federal tax consequences on a sale of stock by a selling
unaffiliated security holder would vary from security holder to
security holder and would depend upon the facts and circumstances
unique to that particular security holder.
(iv) The effect of the Rule 13e-3 transaction on nonselling
unaffiliated security holders would be that these security holders
would benefit from the increased earnings per share in book value per
share due to the decreased number of shares outstanding. These security
holders would share in any future appreciation in market price and
value of the stock and in any future dividends paid on the stock. Since
the nonselling unaffiliated security holders would not be selling
stock, there would be no federal tax consequences based on a sale of
the stock. Potentially detrimental to the nonselling unaffiliated
security holders would be the diminution in cash of the Company used to
purchase the stock.
Since it is not known how many shares will be purchased or at what
price such shares would be purchased, specific dollar amounts and percentages
are not practicable.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The Company reasonably believes that the Rule 13e-3
transaction is fair to both selling unaffiliated security holders and nonselling
unaffiliated security holders.
(b) The material factors upon which the beliefs stated in Item
8(a) above is based are as follows:
(i) As of November 17, 1999, the market price of the Company's
stock was $1.75 per share. All purchases by the Company in the Rule
13e-3 transaction would be at the then current market price. Any
selling unaffiliated security holders would receive a market price for
their stock. All such sales would be totally voluntary.
(ii) Since January 1, 1996 through November 17, 1999, the
highest bid price for the Company's stock has been $4.438 per share and
the lowest bid price for the Company's stock has been $1.375. While, a
selling unaffiliated security holder could be selling his stock at a
price under the historical price over the last two and three quarter
years, the future market price of the Company's stock is unknown and
cannot be predicted, and no unaffiliated security holder has any
guarantee with respect to the future price of the stock.
(iii) The net book value per share of the Company's stock as
of the quarter ended October 2, 1999 was $5.26. This figure is
significantly above the per share market price of the stock on November
17, 1999 of $1.75. Over the last two and three quarter years, the
Company's stock has sold at a price that is under the net book value
per share of the stock.
(iv) The Company has not conducted any appraisals of the value
of the Company or of its stock. Therefore, it does not have any
information upon which to base a discussion of the going concern value
of the stock. The Company believes that the going concern value of the
Company would be in excess of the market price of the stock. However,
the Company has no plans to enter into any transaction which would
cause a sale of the stock of the Company or of its assets thus allowing
unaffiliated security holders to realize the going concern value of the
Company. The only avenue for an unaffiliated security holder to realize
value for his stock is to sell the stock on the open market at the then
market price.
(v) The Company estimates that the liquidation value of the
Company as of the quarter ended October 2, 1999 would be zero. If the
Company had to be liquidated, it would probably realize no more than
50% on its house accounts receivable and its inventory, and no more
than 25% on sale of its net fixed assets. When these assets are
discounted to that extent, the liabilities of the Company as of such
date exceed the assets of the Company as of such date.
(vi) There have been no purchases of securities of the Company
made by the Company or any affiliate since the commencement of the
Company's second full fiscal year preceding the date of this schedule.
(vii) The Company has not obtained any report, opinion or
appraisal from an outside party as to the value of the Company or of
its stock.
(viii) The Company is unaware of any offers, firm or
otherwise, made by any unaffiliated person during the eighteen months
preceding the date of this schedule for the merger or consolidation of
the Company into or with any person, the sale or other transfer of all
or any substantial part of the assets of the Company or securities of
the Company which would enable the holder thereof to exercise control
of the Company.
(c) No approval of the unaffiliated security holders is required
for this transaction.
(d) None of the directors who are not employees of the Company
have retained an unaffiliated representative to act solely on behalf of
unaffiliated security holders for the purpose of negotiating the terms of the
Rule 13e-3 transaction and/or prepare a report concerning the fairness of such
transaction.
(e) The Rule 13e-3 transaction was approved by each of the members
of the board of directors of the Company who are not employees of the Company.
(f) The Company has received no offer, and to the knowledge of the
Company no affiliate of the Company has received an offer, from any unaffiliated
person during the eighteen months preceding the date of this schedule for the
merger or consolidation of the Company into or with any person or of any person
into or with the Company, the sale or other transfer of all or any substantial
part of the assets of the Company or securities of the Company which would
enable the holder thereof to exercise control of the Company. On November 11,
1999, representatives of the Company had discussions with representatives of
Trevira Neckelmann A/S ("Neckelmann") (Item 3(b) above) concerning a possible
ownership position by Neckelmann in the Company.
ITEM 9. REPORTS, OPINIONS, AND CERTAIN NEGOTIATIONS.
(a) The Company has not, and to the knowledge of the Company no
affiliate has, received any report, opinion or appraisal from an outside party
which is materially related to the Rule 13e-3 transaction including but not
limited to any report, opinion or appraisal relating to the consideration or the
fairness of the consideration to be offered to security holders of the class of
securities which is the subject of the Rule 13e-3 transaction or the fairness of
such transaction to the Company or affiliate or to security holders who are not
affiliates.
(b) No response necessary.
(c) No response necessary.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) Information as to the securities beneficially owned by the
officers, directors and associates of the Company:
[CONTINUED ON NEXT PAGE]
Amount of Shares and Nature of Percent
Name Office Beneficial Ownership of Class
Humayun N. Shaikh Chairman 1,443,329 52.7%
(Indirect)
Charles P. McCamy President 10,100 0.37%
(Direct)
William T. Dunn Director 7,000 0.25%
(Direct)
Robert P. Huntley Director 120,000 4.4%
(Direct)
Aehsun Shaikh Director 0 0.0%
Thomas I. Nail Vice President-Finance 6,800 0.25%
(Direct)
Richard F. Byers Vice President-Sales 6,000 0.22%
(Direct)
Jack M. Briggs Vice 0 0.00%
President-Manufacturing
"Direct" ownership means ownership as a record owner. "Indirect" ownership
means beneficial ownership other than as record owner. 1,443,329 shares
of the common stock of the Company are owned by Naseus, Inc., a
Panamanian corporation. Humayun N. Shaikh owns all of the outstanding shares
of Naseus, Inc.
(b) There has been no transaction in the common stock of the
Company which is the subject of a Rule 13e-3 transaction which was effected
during the past sixty days by the Company.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT
TO THE ISSUER'S SECURITIES.
No contract, arrangement, understanding or relationship (whether
or not legally enforceable) exists in connection with the Rule 13e-3 transaction
between the Company and any person with respect to any securities of the Company
(including, but not limited to, any contract, arrangement, understanding or
relationship concerning the transfer or the voting of any such securities, joint
ventures, loan or option arrangements, puts or calls, guarantees of loans,
guarantees against loss or the giving or withholding of proxies, consents or
authorizations).
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH
REGARD TO THE TRANSACTION.
(a) The Company is unaware of any intention or expectation on the
part of any executive officer, director or affiliate of the Company, or any
person enumerated in Instruction C of Schedule 13e-3, to tender or sell
securities of the Company owned or held by such person with regard to the Rule
13e-3 transaction.
(b) No response necessary.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) Appraisal rights are not available under applicable state law
or under the Company's articles of incorporation, and will not be voluntarily
accorded by the Company to security holders, in connection with the Rule 13e-3
transaction. Security holders who object to the transaction could bring claims
based upon breach of fiduciary duty by the board of directors, although the
Company believes that any such action would have no basis in fact or law.
(b) No provision has been made by the Company in connection with
the Rule 13e-3 transaction to allow unaffiliated security holders to obtain
access to the corporate files of the Company or to obtain counsel or appraisal
services at the expense of the Company. However, the Company has nothing to
conceal with respect to this transaction, and officers and directors of the
Company are available to discuss the matter with unaffiliated security holders.
No reasonable request for information will be denied.
(c) No response necessary.
ITEM 14. FINANCIAL INFORMATION.
(a) The following financial data concerning the Company is
furnished:
(1) Audited Financial Statements of the Company for the Two Fiscal Years
Required to be Filed With the Company's Most Recent Annual Report Under
Sections 13 and 15(d) of the Securities Exchange Act of 1934 (the
"Act").
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.
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
========== ========== ==========
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.
Revenue recognition - Revenues from sales are recognized at the time shipments
are made to customers.
Statement of cash flows - For the purposes of the statements of cash flows, the
Company considers cash and cash equivalents to include cash on hand, deposits in
banks, interest bearing demand matured funds on deposit with factor, and all
highly liquid debt instruments with a maturity of three months or less when
purchased.
Inventories - Inventories are stated at the lower of cost (first-in, first-out)
or market. Cost elements included in work in process and finished goods
inventories are raw materials, direct labor and manufacturing overhead. Market
is considered to be net realizable value.
Property, plant and equipment - Property, plant and equipment are stated at
cost.
Depreciation and amortization of the property accounts are provided over the
estimated useful lives of the assets. For financial reporting purposes,
depreciation on plant and equipment is provided primarily at straight-line
rates. For income tax purposes, depreciation has been provided at straight-line
rates for all property, plant and equipment acquired prior to 1981 and the
accelerated and modified accelerated cost recovery system for property assets
acquired subsequent to December 31, 1980. The estimated useful lives used for
computing depreciation for financial reporting purposes are generally:
Buildings and improvements 5 - 45 years
Plant machinery and equipment 5 - 17 years
Office equipment 5 - 10 years
Automotive equipment 3 - 5 years
Computer equipment 3 - 5 years
Earnings per share - Earnings per share are based on the net income divided by
the weighted average number of common shares outstanding during the respective
periods.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE
The Company is engaged in 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. [See 10KA]
The Company has an agreement with the factor that the sale of receivables to the
factor is without recourse. The factor has filed a UCC-1 to evidence ownership
of the receivables and separate the asset from the Company's creditors. After
the sale of the receivables to the factor, the Company does not maintain any
detailed accounts receivable information for customer activities, but maintains
an accounts receivable from the factor.
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.
Fytek began operation in the fourth quarter of 1997. 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 3, 1999, Fytek owed the
Company $130,000 for leased equipment which will be paid in March 1999.
Fytek's financial information is as follows:
Statement of Income
(In thousands of U.S. Dollars)
1998 1997
---- ----
Net Sales $7,767 $1,239
Gross Profit 1,177 155
Net income from continuing operations 994 91
Income before income taxes 994 91
Income taxes 470 32
---- ----
Net income $ 523 $ 59
====== ======
Balance Sheet
(In thousands of U.S. Dollars)
1998 1997
---- ----
Current assets $3,217 $2,182
Non-current 55 -0-
---- ----
Total assets $3,272 $2,182
====== ======
Current liabilities $2,461 $1,729
Non-current liabilities -0- -0-
---- ----
Total liabilities $2,461 $1,729
Stockholder's equity 811 453
---- ----
Total liabilities and stockholder's equity $3,272 $2,182
====== ======
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.
[Insert FYTEK from 10K/A]
Page 37 of 42
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use of our report in the financial statements of Fytek,
S.A. de C.V., as of and for the years ending December 31, 1998 and 1997, dated
January 25, 1999 on the consolidated financial statements of Burke Mills, Inc.,
and subsidiaries.
PricewaterhouseCoopers
FYTEK, S.A. DE C.V.
(a Mexican corporation)
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
CONTENTS
--------
Page
Report of independent auditors 1
Financial statements:
Balance sheet 2
Statement of income 3
Statement of changes in stockholders' equity 4
Statement of changes in financial position 5
Notes to financial statements 6-10
REPORT OF INDEPENDENT AUDITORS
- - ------------------------------
Monterrey, N.L., January 25, 1999
To the Stockholders of
Fytek, S.A. de C.V.
We have audited the balance sheets of Fytek, S.A. de C.V. as of December 31,
1998 and 1997, and the related statements of income, of changes in
stockholders's equity and of changes in financial position for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Mexico. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and that they were prepared in accordance with generally accepted
accounting principles. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the aforementioned financial statements present fairly, in all
material respects, the financial position of Fytek, S.A. de C.V. at December 31,
1998 and 1997, and the results of its operations, the changes in its
stockholder's equity and the changes in its financial position for the years
then ended, in conformity with accounting principles generally accepted in
Mexico.
PricewaterhouseCoopers
FYTEK, S.A. DE C.V.
(a Mexican corporation)
BALANCE SHEET
AT DECEMBER 31, 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
1998 1997
---- ----
Assets
- - ------
CURRENT ASSETS:
Cash and temporary investments Ps 2,758 Ps 4,249
Trade accounts receivable, less
allowance for doubtful accounts
of Ps244 in 1998 and
Ps39 in 1997 16,700 9,496
Other accounts receivable 2,171 299
Inventories (Note 3) 10,122 3,566
------ -----
Total current assets 31,751 17,610
CONSTRUCTIONS IN PROCESS 543 0
------ ------
Total assets Ps32,294 Ps17,610
====== ======
Liabilities and Stockholders' Equity
- - ------------------------------------
CURRENT LIABILITIES:
Suppliers Ps12,277 Ps 331
Affiliated companies (Note 6) 11,159 13,312
Accounts payable and accrued expenses 854 313
------ ------
Total liabilities 24,290 13,956
------ ------
STOCKHOLDERS' EQUITY (Note 4):
Capital stock 3,086 3,086
Retained earnings 5,259 454
(Deficit) surplus on restatement
of capital (341) 114
---- ---
Total stockholders' equity 8,004 3,654
----- -----
Total liabilities and
stockholders' equity Ps32,294 Ps17,610
====== ======
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
STATEMENT OF INCOME
FOR THE YEAR 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
1998 1997
---- ----
Net sales Ps70,467 Ps10,120
Cost of sales (59,658) (8,857)
------- ------
Gross margin 10,809 1,263
------ ------
Operating expenses:
Selling (1,805) (98)
Administrative (2,335) (541)
------ ------
(4,140) (639)
------ ------
Operating income 6,669 624
------ ------
Comprehensive financing income (expense):
Financial income, net 1,343 247
Exchange gain, net 1,007 18
Gain (loss) on monetary position 60 (145)
------ ------
2,410 120
------ ------
9,079 744
Other income, net 45
------ ------
Income before the following provision 9,124 744
Provision for income tax (Note 5) (4,319) (258)
------ ------
Net income for the year Ps 4,805 Ps 486
======== ========
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
Surplus
(Deficit) (deficit)on
Capital retained restatement
stock earnings of capital Total
----- -------- ---------- -----
Balances at
December 31, 1996 Ps 88 (Ps 32) Ps 56
Changes in 1997:
Increase in capital
stock 2,998 2,998
Net income for
the year 486 486
Gain from holding non-
monetary assets Ps 114 114
----- ----- ----- -----
3,086 454 114 3,654
Balances at December 31, 1997
Changes in 1998:
Net income for the year 4,805 4,805
Loss from holding non-
monetary assets (455) (455)
----- ----- ----- -----
Balances at
December 31, 1998 Ps3,086 Ps5,259 (Ps 341) Ps8,004
(Note 4) ======= ======= ======= =======
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
STATEMENT OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR 1998 WITH COMPARATIVE FIGURES FOR 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
1998 1997
---- ----
Operations
- - ----------
Net income for the year Ps4,805 Ps 486
Changes in working capital other than financing:
Trade accounts receivable (7,204) (9,496)
Inventories (7,011) (3,453)
Suppliers 11,946 331
Affiliated companies (2,153) 13,312
Other, net (1,331) 20
------ ------
Resources (used in)
provided by operations (948) 1,200
Financing:
- - ----------
Increase in capital stock 2,998
Investment
- - ----------
Construction in process (543) 0
------ ------
(Decrease) increase in cash and
temporary investments (1,491) 4,198
Cash and temporary investments
at beginning of year 4,249 51
------ ------
Cash and temporary investments at
end of year Ps2,758 Ps4,249
===== =====
The accompanying seven notes are an integral part of these financial statements.
FYTEK, S.A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 COMPARATIVE WITH 1997
Thousands of Mexican Pesos of December 31, 1998
Purchasing Power
(except where otherwise indicated)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ---------------------------------------------------
The Company, a subsidiary of Novacorp, S.A. de C.V. is engaged in the
manufacture of chemical fibers; to carry out it activities, the Company leases
machinery and equipment to an affiliated company.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in Mexico, including the standard
requiring comprehensive recognition of the effects of inflation on the financial
information. Consequently, all financial statements, including those of prior
periods presented for comparative purposes, are stated in constant pesos of
December 31, 1998 purchasing power.
The most important indexes (National Consumer Price Index - NCPI) used to
reflect the effects of general inflation on the financial statements were:
275.038, 231.886 and 200.388 at December 31, 1998, 1997, and 1996, respectively
(1994 = 100).
Following is a summary of the most significant accounting policies:
a. Transactions in foreign currency and exchange differences (Note 2)
- - ---------------------------------------------------------------------
Monetary assets and liabilities in foreign currencies, mainly U.S. dollars
(US$), are stated in Mexican currency at the rates of exchange in effect at the
balance-sheet date. Exchange differences arising from changes in exchange rates
between the transaction and settlement dates or the balance-sheet date are
charged or credited to comprehensive financing income (expense).
b. Temporary investments
- - ------------------------
These investments are stated at market value.
c. Inventories and cost of sales (Note 3)
- - -----------------------------------------
Inventories are stated at estimated replacement cost, basically at the latest
purchase prices and production costs for the year. The amounts shown for
inventories do not exceed market value.
The cost of sales is determined based on the estimated replacement costs
prevailing on the dates when the sales were effected.
d. Comprehensive financing income (expense)
- - -------------------------------------------
This item is determined by grouping together in the statement of income the
financial income and expense, exchange gains and losses, and the gain or loss on
monetary position.
The gain or loss on monetary position represents the effect of inflation, as
measured by the NCPI, on the Company's monthly net monetary assets or
liabilities during the year.
e. Income tax (Note 5)
- - ----------------------
Income tax is recorded using interperiod allocation procedures under the partial
liability method. Under this method the effect on income tax of nonrecurring
timing differences between taxable income and financial pretax income which are
expected to reverse in an identifiable time period is recorded as deferred
income tax.
NOTE 2- FOREIGN CURRENCY POSITION
- - ---------------------------------
At December 31, 1998 and 1997, the exchange rates were 9.88 and 8.05 nominal
pesos to the U.S. dollar, respectively. At January 25, 1999, date of issuance of
the audited financial statements, the exchange rate was 10.24 nominal pesos to
the dollar.
Amounts shown below in this note are expressed in thousands of U.S. dollars
(US$), since this is the currency in which most of the Company's foreign
currency transactions are carried out.
At December 31, the company had the following foreign currency assets and
liabilities:
1998 1997
---- ----
Monetary assets US$738 US$324
Monetary liabilities (78) 0
------ ------
Foreign currency monetary position US$660 US$324
====== ======
Nonmonetary assets US$ 45
======
During 1998 and 1997 the transactions for goods export in foreign currency were
US$2,443 and US$227, respectively.
NOTE 3 - INVENTORIES
- - --------------------
At December 31, this caption comprised the following:
1998 1997
---- ----
Finished goods Ps 7,435 Ps 1,927
Work in process 2,058 1,639
Materials and supplies 629
------ ------
Estimated replacement cost Ps10,122 Ps 3,566
======== ========
NOTE 4 - STOCKHOLDERS' EQUITY
- - -----------------------------
At December 31, 1998 the restated figures of stockholders' equity were as
follows:
Nominal Restated
amount Restatement amount
------ ----------- ------
Capital stock Ps2,445 Ps641 Ps3,086
Retained earnings 5,191 68 5,259
Deficit on restatement
of capital 0 (341) (341)
------ ------ ------
Ps7,636 Ps368 Ps8,004
======= ===== =======
The capital stock is variable with a fixed minimum of Ps50 and an unlimited
maximum. At December 31, 1998, the subscribed and paid-in capital stock of
Ps2,445, was represented by 24,450 Series A common, nominative, shares of one
hundred nominal pesos par value each.
Dividends paid from previously taxed earnings are not subject to any additional
tax (at December 31, 1998 these earnings amounted to approximately Ps8,234). For
dividends paid from retained earnings which have not previously been taxed, a
tax equivalent to 53.85% of the dividend will be payable by the Company. In the
event dividends are paid to individuals or to residents abroad arising or not
from previously taxed earnings they will also be subject to a maximum
withholding tax equivalent to 7.69%.
In the event of capital stock reductions, any excess of stockholders' equity
over capital contributions plus net taxable income and net reinvested taxable
income, calculated in accordance with the procedures established by the Mexican
Income Tax law, is accorded the same tax treatment as dividends.
The deficit on restatement of capital comprises principally the accumulated loss
from holding nonmonetary assets and represents the difference resulting from
restating these assets by the specific cost method and their restatement based
on inflation measured in terms of the NCPI.
NOTE 5 - INCOME TAX
- --------------------
The net charge to income for taxes was as follows:
1998 1997
---- ----
Income tax (Ps4,319) (Ps287)
Extraordinary item - Income tax
reduction from realization of
tax loss carryforwards from
prior years 29
------ ------
(Ps4,319) (Ps258)
======= =====
Taxable income differs from accounting income due to: (a) permanent differences
mainly comprising items recorded to reflect the effects of inflation, and (b)
recurring timing differences affecting accounting and taxable income in
different periods, basically the deduction of inventory purchases for tax
purposes and certain provisions. In accordance with Mexican generally accepted
accounting principles no deferred tax effect is recognized for such timing
differences.
NOTE 6 - RELATED PARTIES
- -------------------------
The financial statements includes the following significant transactions with
ALFA companies and other related parties:
1998 1997
---- ----
Purchase of raw and other materials (Ps41,583) (Ps7,533)
Cost of administrative and
technical services (5,400) (1,103)
Rentals of property, machinery
and equipment (6,762) (815)
Balances with affiliated companies included in the balance sheet derive from
these transactions.
NOTE 7 - YEAR 2000
- -------------------
As many computer systems use only two digits to represent the year, they may be
unable to accurately identify date data between the years 1900 and 2000.
Consequently, remedial action where necessary must be implemented to avoid any
disruption in the Company's business operations as a result of possible
miscalculations or systems failures.
In order for the systems to be Year 2000 compliant, among other factors, a
timely identification of critical issues, together with appropriate remedial
action to be taken by the Company's management and its main customers and
suppliers (external agents), is necessary.
The Company has developed various plans intended to mitigate the aforementioned
problem. Specialized personnel is working to adjust the main computer
applications affecting the Company's business operations, such as those related
to control of trade accounts receivable, production, distribution, treasury,
communications, etc. Additionally, management has been in contact with related
external agents, who may also be affected as a consequence of the Year 2000
problem, in order to discuss the current situation and determine the effects, if
any, which the relationship with these agents might have on the Company's
operations.
The accumulated cost of dealing with the Year 2000 issue, incurred by a related
party, has been charged to its income for the year.
(2) Unaudited Balance Sheets and Comparative Year-to-Date Income Statements
and Statements of Cash Flows and Related Earnings Per Share Amounts of
the Company Required to be Included in the Company's Most Recent
Quarterly Report Filed Pursuant to the Act.
BURKE MILLS, INC.CONDENSED BALANCE SHEETS October 2, January 2,
1999 1999
(Unaudited) (Note A)
----------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 1,949,048 $ 3,384,439
Accounts receivable 5,157,706 3,460,307
Inventories 4,210,006 3,705,849
Prepaid expenses, taxes and other
current assets 513,411 313,872
Deferred income taxes 239,970 349,000
--------- ----------
Total Current Assets $12,070,141 $11,213,467
----------- -----------
Equity Investment in Affiliate 423,523 405,623
------- -------
Property, Plant and Equipment - at cost 31,095,081 28,478,700
Less: Accumulated depreciation 15,823,733 15,869,275
----------- ----------
Property, Plant and Equipment - Net 15,271,348 12,609,425
----------- ----------
Other Assets
Deferred Charges & Other Non Current 118,748 167,077
------- -------
Total Assets $27,883,760 $24,395,592
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 849,714 $ 750,000
Accounts payable 4,415,263 2,303,876
Accrued salaries, wages and vacation pay 450,852 160,862
Other liabilities and accrued expenses 268,959 137,096
Income taxes payable --- 31,600
---------- ----------
Total Current Liabilities $ 5,984,788 $ 3,383,434
Long-term Debt 5,296,286 4,562,500
Deferred Income Taxes 2,179,836 2,220,836
---------- ----------
Total Liabilities $13,460,910 $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 9,502,330 9,308,302
--------- ---------
Total Shareholders' Equity 14,422,850 14,228,822
---------- ----------
Total Liabilities & Shareholders' Equity $27,883,760 $24,395,592
=========== ===========
Note A: The January 2, 1999, Condensed Balance Sheet has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required for generally accepted accounting principles
for complete financial statements.
See notes to condensed financial statements.
Page 3
BURKE MILLS, INC.CONDENSED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
-------- -------- -------- --------
Net Sales $11,625,189 $11,509,188 $32,416,882 $32,181,297
- --------- ----------- ----------- ----------- -----------
Cost and Expenses
Cost of Sales 10,105,347 9,976,035 28,606,839 28,419,391
Selling, General and
Administrative Expenses 1,182,970 737,008 3,291,930 2,136,703
Factor's Charges 47,375 46,447 120,077 138,017
-------- -------- -------- --------
Total Costs and Expenses 11,335,692 10,759,490 32,018,846 30,694,111
---------- ---------- ---------- ----------
Operating Earnings 289,497 749,698 398,036 1,487,186
-------- -------- -------- --------
Other Income
Interest Income 13,814 41,886 62,802 136,902
Gain (Loss)on
Disposal of Property --- (1,237) 224,740 (1,237)
Other, net 9,208 --- 11,837 ---
------- ------- ------- -------
Total 23,022 40,649 299,379 135,665
------ ------ ------- -------
Other Expenses
Interest Expense 109,991 114,445 315,659 352,822
Other, net 31,082 30,753 94,036 91,575
------- ------- ------- -------
Total 141,073 145,198 409,695 444,397
------- ------- ------- -------
Income before Provision for
Income Taxes and Equity in Net
Earnings (Loss) of Affiliate 171,446 645,149 287,720 1,178,454
Provision for Income Taxes 61,054 252,500 111,592 471,289
------- ------- ------- -------
Income before Equity in Net
Earnings (Loss) of Affiliate 110,392 392,649 176,128 707,165
Equity in Net Earnings (Losses)
of Affiliate (82,000) 1,500 17,900 202,100
------- ------- ------ -------
Net Income 28,392 394,149 194,028 909,265
Retained Earnings at Beginning
of Period $9,473,938 $9,034,174 $9,308,302 $8,519,058
---------- ---------- ---------- ----------
Retained Earnings at End
of Period $9,502,330 $9,428,323 $9,502,330 $9,428,323
========== ========== ========== ==========
Earnings Per Share $ .01 $ .14 $ .07 $ .33
========== ========== ========== ==========
Dividends Per Share of
Common Stock None None None None
========== ========== ========== ==========
Weighted Average Common
Shares Outstanding 2,741,168 2,741,168 2,741,168 2,741,168
========== ========== ========== ==========
See notes to condensed financial statements.
Page 4
BURKE MILLS, INC.STATEMENTS OF CASH FLOWS(Unaudited)
Thirty-Nine Weeks Ended
----------------------
October 2, October 3,
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 194,028 $ 909,265
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 1,397,387 1,220,817
Equity in earnings of affiliate (17,900) (202,100)
(Gain) Loss on disposal of
property assets (224,740) 1,237
Provision for deferred income taxes 68,030 412,300
Changes in assets and liabilities:
Accounts receivable (1,697,399) (1,554,525)
Inventories (504,157) (1,579,948)
Prepaid expenses, taxes and other
current assets (199,539) (164,735)
Income taxes payable (31,600) ---
Other non-current assets 48,329 31,754
Accounts payable 2,111,387 1,211,065
Accrued salaries, wages and vacation pay 289,990 184,521
Other liabilities and accrued expenses 131,863 (135,659)
------- --------
Total Adjustments 1,371,651 (575,273)
-------- --------
Net cash provided by operating activities 1,565,679 333,992
--------- ---------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (4,359,263) (1,050,280)
Proceeds from sale of equipment 524,693 0
--------- ---------
Net cash (used) by investing activities (3,834,570) (1,050,280)
--------- ---------
Cash flows from financing activities:
Principal payments of long-term debt (562,500) (500,000)
Proceeds from bank note 1,396,000 0
--------- ---------
Net cash provided (used)
by financing activities 833,500 (500,000)
--------- ---------
Net (decrease) in cash and cash
equivalents (1,435,391) (1,216,288)
Cash and cash equivalents at
beginning of year 3,384,439 4,306,540
--------- ---------
CASH AND EQUIVALENTS AT END OF
THE THIRD QUARTER $1,949,048 $3,090,252
========== ==========
See notes to condensed financial statements.
Page 5
BURKE MILLS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS(Unaudited)
NOTE 1 - BASIS OF PRESENTATION------------------------------
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments (consisting
of normal recurring accruals)considered necessary for a fair presentation have
been included. Operating results for the thirty-nine week period ended October
2, 1999 are not necessarily indicative of the results that may be expected for
the year ended January 1, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended January 2, 1999.
NOTE 2 - STATEMENTS OF CASH FLOWS
- ---------------------------------
For the purposes of the statements of cash flows, the Company considers
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 as cash and cash equivalents.
FASB No. 95 requires that the following supplemental disclosures to the
statements of cash flows be provided in related disclosures. Cash paid for
interest for the thirty-nine weeks ended October 2, 1999 and October 3, 1998 was
$322,000 and $358,000, respectively. Income taxes paid during the thirty-nine
week period ended October 2, 1999 and October 3, 1998 were $40,698 and $25,000
respectively.
NOTE 3 - OPERATIONS OF THE COMPANY
- ----------------------------------
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 Company's fiscal year is the 52 or 53 week period ending on the
Saturday nearest to December 31. Its fiscal quarters also end on the Saturday
nearest to the end of the calendar quarter.
NOTE 4 - USE OF ESTIMATES
- -------------------------
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 6
BURKE MILLS, INC.NOTES TO CONDENSED FINANCIAL
STATEMENTS(Unaudited)(Continued) NOTE 5 - ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
October 2, January 2,
1999 1999
---- ----
Account current - Factor:
Due from Factor on regular
factoring account........ $3,670,000 $2,864,000
Non-factored accounts
receivable............... 1,488,000 596,000
--------- ----------
$5,158,000 $3,460,000
========== ==========
NOTE 6 - INVENTORIES
Inventories are summarized as follows:
October 2, January 2,
1999 1999
---- ----
Finished and in process.... $2,431,000 $2,409,000
Raw materials.............. 1,285,000 728,000
Dyes and chemicals......... 367,000 413,000
Other...................... 127,000 156,000
--------- ---------
$4,210,000 $3,706,000
========== ==========
NOTE 7 - LINE OF CREDIT
- -----------------------
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 October 2,
1999, the Company had borrowed $1,396,000 under this line of credit.
The Company plans to draw the remainder of the $2,000,000 between October
and December 31, 1999 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 October 2, 1999, the Company had no borrowings from its factor.
NOTE 8 - 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.
Page 7
BURKE MILLS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS(Unaudited)(Continued)
NOTE 8 - LONG-TERM DEBT (cont.)
- -------------------------------
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 long-term debt at October 2, 1999 are as
follows:
Current portion $ 750,000
2000/2001 750,000
2001/2002 750,000
2002/2003 750,000
2003/2004 750,000
Thereafter 1,000,000 4,000,000
--------- ---------
$4,750,000
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 in April 2000.
The annual principal maturities of this long-term debt at October 2, 1999,
based on the current amount owned are as follows:
Current Portion $ 99,714
2000/2001 $ 199,429
2001/2002 199,429
2002/2003 199,429
2003/2004 199,429
Thereafter 498,570 1,296,286
------- ---------
$1,396,000
Page 8
BURKE MILLS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS(Unaudited)(Continued)
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 which comprise deferred tax assets and liabilities are as follows:
October 2, January 2,
1999 1999
---- ----
Deferred Tax Assets:
Alternative minimum taxes paid $ 239,970 $ 349,000
========== ===========
Deferred Tax Liabilities:
Accelerated depreciation
for tax purposes $2,160,400 $2,202,300
Undistributed earnings of foreign
affiliate, net of tax credit 13,600 12,700
Other 5,836 5,836
--------- ---------
$2,179,836 $2,220,836
========== ==========
Thirty-Nine Weeks Ended
--------------------
October 2, October 3,
Provision for income taxes 1999 1998
---- ----
consists of:
Deferred $ 68,030 $ 412,300
Federal 22,702 18,300
State 20,860 40,689
--------- ----------
$ 111,592 $ 471,289
========= ==========
NOTE 10 - 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 for the
periods ended October 2, 1999 and October 3, 1998.
Page 9
BURKE MILLS, INC.NOTES TO CONDENSED FINANCIAL
STATEMENTS(Unaudited)(Continued) NOTE 11 - 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 20th to the 30th of the following month. At October 2, 1999, the Company had
$3,670,000 due from its factor of which $3,098,000 matured on October 29, 1999.
Upon maturity, the funds are automatically transferred by the factor to the
Company's bank.
NOTE 12 - 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.
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
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.
Page 10
NOTE 13 - 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 the
thirty-nine weeks, the Company had purchases from Fytek of $1,153,000 compared
to $1,235,000 in 1998. The Company has a receivable with Fytek of $48,000 for
equipment sold and leased to Fytek which will be paid in the first quarter of
2000. The Company owes Fytek $112,000 for the purchase of twisted yarns.
Financial information for Fytek is as follows:
STATEMENT OF INCOME
(In thousands of U.S. dollars)
(Unaudited)
3rd Quarter Nine Months
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales $1,839 $1,673 $5,411 $5,480
Gross Profit 218 211 634 676
Income from continuing
operations 124 267 463 723
Income before taxes 124 267 463 723
Provision for income tax 295 263 462 403
------- ------ ------- -------
Net Income (Loss) $ (171) $ 4 $ 1 $ 320
======= ======= ======= =======
BALANCE SHEETS
(In thousands of U.S. dollars)
September 30,
1999 December 31,
(Unaudited) 1998
----------- -----------
ASSETS
Current assets $3,377 $3,217
Non-current assets 130 55
--------- ----------
Total Assets $3,507 $3,272
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $2,660 $2,461
Non-current liabilities 0 0
---------- ----------
Total Liabilities $2,660 $2,461
Shareholders equity 847 811
--------- ---------
Total Liabilities & Shareholders' Equity $3,507 $3,272
=========== ===========
NOTE 14 - ACCOUNTING FOR POSSIBLE IMPAIRMENT OF LONG-LIVED ASSETS
- -----------------------------------------------------------------
In 1995 the Financial Accounting Standards Board issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets carrying amount. Statement No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company adopted
Statement No. 121 in the first quarter of 1996 and such adoption did not have
any material effect on the financial statements for 1998 or for the thirty-nine
weeks ended October 2, 1999.
NOTE 15 - EARNINGS PER SHARE
- ----------------------------
Earnings per share are based on the net income divided by the weighted
average number of common shares outstanding during the thirteen and thirty-nine
week periods ended October 2, 1999, and October 3, 1998.
(3) Ratio of Earnings to Fixed Charges for the Two Most Recent Fiscal Years and
the Interim Periods Provided under Item 14(a)(ii).
Nine Months
Fiscal Year Ended Ended
1-3-98 1-2-99 10-2-99
NET INCOME $ 626,104 $ 789,244 $ 194,028
ADD:
INCOME TAXES $ 432,529 $ 383,125 $ 111,592
INTEREST EXPENSE $ 503,306 $ 463,099 $ 315,659
DEDUCT:
EQUITY IN NET EARNINGS OF AFFILIATE $ 26,500 $ 227,895 $ 17,900
ADJUSTED EARNINGS $1,535,439 $1,407,573 $ 603,379
FIXED CHARGES:
INTEREST EXPENSE $ 503,306 $ 463,099 $ 315,659
RATIO OF EARNINGS TO FIXED CHARGES 3.05 3.04 1.91
(4) Book Value per Share of the Company as of the Most Recent Fiscal Year
End, January 2, 1999, is $5.19 Per Share. Book Value per Share as of
the Date of the Latest Interim Balance Sheet provided under Item
14(a)(ii), the Quarterly Period Ended October 2, 1999, is $5.26.
(b) In response to Item 14(b)(i), (ii) and (iii), it would not be
material to provide pro forma data disclosing the effect of the Rule 13e-3
transaction on the Company's balance sheet, the Company's statement of income,
earnings per share amounts and ratio of earnings to fixed charges or the
Company's book value per share as of the most recent fiscal year and the latest
interim period provided under Item 14(a)(ii) since there is no certainty that
the Company will purchase any of its shares and, if the Company did purchase any
of its shares, there is no way to project the number of such shares which might
be purchased or the price which might be paid for such shares.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) Cash on hand will be used to make any purchases of the
common stock of the Company in the Rule 13e-3 transaction and to pay expenses
incurred or estimated to be incurred in connection with the Rule 13e-3
transaction as specified in Item 6. The Chairman and CEO, Humayun N. Shaikh,
will, as authorized by the board of directors, make decisions concerning the
specific timing and amounts of any such purchases of stock. Other officers or
employees of the Company could be utilized to provide administrative assistance
and recordkeeping in connection with the Rule 13e-3 transaction.
(b) Except as stated in Item 15(a) no persons or classes of
persons are to be employed, retained, or compensated by the Company, or by any
person on behalf of the Company, to make solicitations or recommendations in
connection with the Rule 13e-3 transaction.
ITEM 16. ADDITIONAL INFORMATION.
No response.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a) No loan agreement exists in regard to this
transaction.
(b) No report, opinion or appraisal exists in regard to this
transaction.
(c) No contract, arrangements or understandings or
relationships referred to in Item 11 of
this schedule exists.
(d) The disclosure materials furnished to security holders in
connection with the transaction pursuant to Rule 13e-3(d) consists of this
Schedule 13E-3 and a cover sheet which is filed herewith as an exhibit.
(e) No appraisal rights exist in connection with this
transaction.
(f) No oral solicitation of, or recommendations to, security
holders are to be made by or on behalf of the Company.
[SIGNATURE ON NEXT PAGE]
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
/S Charles P. McCamy
Dated: December 28, 1999 ___________________________
Charles P. McCamy
EXHIBIT D-1 AUTHORIZATION
President
TO: THE SHAREHOLDERS OF BURKE MILLS, INC.
On November 5, 1999, the Board of Directors of Burke Mills, Inc.
authorized purchase of company stock on the open market from time to time,
as the cash position of the Company permits, up to a maximum of 500,000
shares. The Company has no plans to undertake any open market purchases
of its stock until after January 1, 2000. Further, such purchases are not
mandatory and will be made only at the direction of the Chairman and CEO,
Humayun N. Shaikh, as to timing of purchases and amounts of stock to be
purchased.
As a result of this action, it is necessary for the Company to
prepare and file Schedule 13E-3 with the Securities and Exchange Commission
(SEC). The Company is required to provide to it shareholders the information
contained in Schedule 13E-3. Enclosed is a copy of Schedule 13E-3 filed
by the Company with the SEC. The Company is required to set forth
prominently the information required by Items 7, 8 and 9 in Schedule 13E-3 in
a Special Factors Section included in the forepart of the document, and this
is done on the four pages following this page.
In addition, the Company is required to provide the following statement:
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED ON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Any inquiries by shareholders concerning the enclosed
information may be directed to the principal offices of the Company.
S/Humayun N. Shaik
December 28, 1999 __________________________
Humayun N. Shaikh
Chairman and CEO
SPECIAL FACTORS SECTION
ITEMS 7, 8 and 9 EXCERPTED FROM
SCHEDULE 13-3 OF BURKE MILLS, INC.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The purpose of the Rule 13e-3 transaction is to reduce the
number of outstanding shares of the Company's common stock and thus
increase the earnings per share and the book value per share. Also, the per
share trading price of the stock could increase.
(b) The Company did not consider alternative means to
accomplish the purposes, and this means was chosen since any other structure
would be more complicated and would not be necessary to accomplish the purpose
of the Company.
(c) The reason for the structure of the Rule 13e-3
transaction is that this is the sole method available to purchase shares of
the Company's common stock on the open market. The reason for undertaking
such transaction at this time is that the common stock of the Company has
been trading at a relatively low figure (under $2.00 per share) for some
period of time and it was the opinion of the board that the time was
appropriate to go into the market to purchase shares.
(d) Effects of this Rule 13e-3 transaction, if any stock is
purchased, would be as follows:
(i) The benefits to the Company would be that,
after any such purchases, the earnings per share and book value per share of
the Company would increase because of the lesser number of shares
outstanding. The detriment to the Company would be that cash would have been
used for the purchase of the stock which otherwise would have been used in
the operations of the Company, and the use of such cash would diminish the
amount of cash available for Company operations. However, the Company
will purchase shares only if cash is available to do so and not needed for
Company operations. Quantification of the benefits and detriments is not
practicable since it is not known how many shares, if any, and at what
price such shares would be purchased. With regard to federal tax consequences,
the Company would have to utilize after tax dollars for these purchases, and
the Company would receive no offsetting deduction for the
expenditure.
(ii) With respect to any affiliates of the Company,
affiliates would benefit with respect to the increased earnings per share
and book value per share. Affiliates would be impacted indirectly by the use
of the Company's cash for the purchases. Affiliates would have no direct
federal tax consequences as a result of such purchases.
(iii) The effects of the Rule 13e-3 transaction on
unaffiliated security holders who chose to sell their stock to the Company
would be that the selling unaffiliated security holder would forego any
future appreciation in value in the stock and any dividends which might be
paid on the stock in the future. Federal tax consequences to an
unaffiliated security holder would depend upon whether a security holder
sold the stock at a gain, in which case the security holder would be
subject to a capital gain tax, or at a loss, in which case the
security holder could have the benefit of a capital loss. The
federal tax consequences on a sale of stock by a selling unaffiliated
security holder would vary from security holder to security holder and
would depend upon the facts and circumstances unique to that particular
security holder.
(iv) The effect of the Rule 13e-3 transaction on
nonselling unaffiliated security holders would be that these security
holders would benefit from the increased earnings per share in book value
per share due to the decreased number of shares outstanding. These
security holders would share in any future appreciation in market price and
value of the stock and in any future dividends paid on the stock. Since
the nonselling unaffiliated security holders would not be selling stock,
there would be no federal tax consequences based on a sale of the stock.
Potentially detrimental to the nonselling unaffiliated security holders would
be the diminution in cash of the Company used to purchase the stock.
Since it is not known how many shares will be purchased or at what
price such shares would be purchased, specific dollar amounts and percentages
are not practicable.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The Company reasonably believes that the Rule 13e-3
transaction is fair to both selling unaffiliated security holders and
nonselling unaffiliated security holders.
(b) The material factors upon which the beliefs stated in
Item 8(a) above is based are as follows:
(i) As of November 17, 1999, the market price of the
Company's stock was $1.75 per share. All purchases by the Company in the
Rule 13e-3 transaction would be at the then current market price. Any
selling unaffiliated security holders would receive a market price for their
stock. All such sales would be totally voluntary.
(ii) Since the quarter beginning January 1, 1996, the
highest bid price for the Company's stock has been $4.438 per share and the
lowest bid price for the Company's stock has been $1.375 as of November 17,
1999. While, a selling unaffiliated security holder could be selling his
stock at a price under the historical price over the last two and three
quarter years, the future market price of the Company's stock is unknown and
cannot be predicted, and no unaffiliated security holder has any guarantee with
respect to the future price of the stock.
(iii) The net book value per share of the Company's
stock as of the quarter ended October 2, 1999 was $5.26. This figure is
significantly above the per share market price of the stock on November
17, 1999 of $1.75. Over the last two and three quarter years, the
Company's stock has sold at a price that is under the net book value
per share of the stock.
(iv) The Company has not conducted any appraisals of the
value of the Company or of its stock. Therefore, it does not have any
information upon which to base a discussion of the going concern value of the
stock. The Company believes that the going concern value of the Company
would be in excess of the market price of the stock. However, the Company has
no plans to enter into any transaction which would cause a sale of the
stock of the Company or of its assets thus allowing unaffiliated security
holders to realize the going concern value of the Company. The only avenue
for an unaffiliated security holder to realize value for his stock is to sell
the stock on the open market at the then market price.
(v) The Company estimates that the liquidation value
of the Company as of the quarter ended October 2, 1999 would be zero. If
the Company had to be liquidated, it would probably realize no more than
50% on its house accounts receivable and its inventory, and no more than
25% on sale of its net fixed assets. When these assets are discounted to
that extent, the liabilities of the Company as of such date exceed the
assets of the Company as of such date.
(vi) There have been no purchases of securities of the
Company made by the Company or any affiliate since the commencement of the
Company's second full fiscal year preceding the date of this schedule.
(vii) The Company has not obtained any report, opinion or
appraisal from an outside party as to the value of the Company or of its stock.
(viii) The Company is unaware of any offers, firm or
otherwise, made by any unaffiliated person during the eighteen months
preceding the date of this schedule for the merger or consolidation of the
Company into or with any person, the sale or other transfer of all or any
substantial part of the assets of the Company or securities of the Company
which would enable the holder thereof to exercise control of the Company.
(c) No approval of the unaffiliated security holders is required
for this transaction.
(d) None of the directors who are not employees of the Company
have retained an unaffiliated representative to act solely on behalf of
unaffiliated security holders for the purpose of negotiating the terms
of the Rule 13e-3 transaction and/or prepare a report concerning the fairness of
such transaction.
(e) The Rule 13e-3 transaction was approved by each of the
members of the board of directors of the Company who are not employees of the
Company.
(f) The Company has received no offer, and to the knowledge
of the Company no affiliate of the Company has received an offer, from any
unaffiliated person during the eighteen months preceding the date of this
schedule for the merger or consolidation of the Company into or with any person
or of any person into or with the Company, the sale or other transfer of all or
any substantial part of the assets of the Company or securities of the Company
which would enable the holder thereof to exercise control of the Company.
On November 11, 1999, representatives of the Company had discussions with
representatives of Trevira Neckelmann A/S ("Neckelmann")(Item 3(b) above)
concerning a possible ownership position by Neckelmann in the Company.
ITEM 9. REPORTS, OPINIONS, AND CERTAIN NEGOTIATIONS.
(a) The Company has not, and to the knowledge of the Company no
affiliate has, received any report, opinion or appraisal from an outside
party which is materially related to the Rule 13e-3 transaction including
but not limited to any report, opinion or appraisal relating to the
consideration or the fairness of the consideration to be offered to security
holders of the class of securities which is the subject of the Rule 13e-3
transaction or the fairness of such transaction to the Company or affiliate
or to security holders who are notaffiliates.
(b) No response necessary.
(c) No response necessary.