FINANCIAL HIGHLIGHTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Financial Highlights ................................ 1
Letter to our Shareholders .......................... 2
The Company ......................................... 4
Selected Financial Data ............................. 12
Financial Statements ................................ 13
Notes to Financial Statements........................ 17
Report of Independent
Accountants ......................................... 25
Management's Discussion
and Analysis ........................................ 26
Summary Quarterly Financial Data .................... 31
General Information ................................. 32
Quaker Fabric Corporation is a leading manufacturer of woven upholstery fabrics
for residential furniture markets in the United States and abroad. The company's
broad product line includes over 3,000 individual patterns, and Quaker's
manufacturing operations are vertically integrated, beginning with the
production of yarns for use in the manufacture of its fabrics and continuing
through fabric weaving and finishing. The company also sells a portion of the
yarn it produces to manufacturers of home furnishings products and apparel
throughout the United States.
(Dollars in thousands,
except per share data)
-------------------------------------------
FISCAL Fiscal Percent
1999 1998 Change
-------------------------------------------
Net sales ............................ $250,824 $252,558 (0.7)%
Operating income...................... 8,270 13,989 (40.9)%
Net income............................ 2,073 5,770 (64.1)%
Earnings per common
share-diluted........................ $ 0.13 $ 0.40 (67.5)%
Working capital....................... 63,034 72,694 (13.3)%
Funded debt........................... 62,734 71,572 (12.3)%
Shareholders' equity.................. 127,278 124,993 1.8%
1
TO OUR SHAREHOLDERS
Last year was an important transition year for Quaker, as we finished laying the
foundation for additional market share gains in the U.S. and continued growth of
our export business by further consolidating our product leadership position and
making significant headway in our efforts to build an equally strong service
advantage. With a great product line and customer confidence in our service
capabilities very high, all of us at Quaker share a common belief that we have
built the platform needed to hit the ground running in 2000 and to position the
company as the supplier of choice to the worldwide furniture industry.
We were successful in generating significant top-line momentum as we
moved through last year -- with fourth quarter net sales of almost $69.0 million
setting a new record for us, and domestic fabric sales and yarn sales for the
quarter both up almost 9% versus the comparable period of 1998. But, our fourth
quarter top-line gains came too late to fully make up for last year's slow
start, and our 1999 financial performance as a whole was a disappointment - with
net sales, at $250.8 million, essentially flat in relationship to 1998, net
income at $2.1 million versus $5.8 million in 1998, and diluted EPS of $0.13
compared to $0.40 in 1998. At year-end, our book value per share was at $8.12
and our balance sheet was further strengthened -- reflecting the effort we have
made to maintain tight controls over inventory levels, capital spending,
operating costs, debt levels and working capital. In addition, the strong
operating cash flows we generated last year allowed us to reduce our long-term
debt by about $9.0 million, resulting in funded debt of approximately $63.0
million and a debt to total capitalization ratio of about 33% at year-end.
We have new initiatives underway in virtually every area of the company
to further improve our financial performance. Additional technology-based
analytical tools are being introduced in a number of key areas to improve the
quality and timeliness of our decision-making processes. We continue to have the
best yarn and fabric design and styling teams in the industry - and to help us
achieve our revenue objectives in every market, we have new product development
efforts underway to support each of our core business segments - including the
development of new softening and finishing techniques to continue responding to
strong demand for fabrics with a soft "hand." We have new marketing programs in
place to build our yarn sales into the home furnishings segment. We are
continuing to strengthen our sales and marketing team, both in the domestic
market and around the world, including new, dedicated marketing representatives
in China, the U.K. and Poland -- a new sales office and showroom in the Middle
East -- and a new wholly-owned subsidiary in Brazil, with both a sales and
marketing as well as a warehousing and distribution component to it. And we're
introducing new methods and procedures in our production areas to improve our
manufacturing efficiencies, increase throughput and reduce our overall operating
costs.
We're confident we are well positioned to take full advantage of the
continuing strength of the domestic economy and favorable U.S. demographic
trends -- and this year is off to a strong start. Incoming orders during the
fourth quarter of last year were up approximately 44% versus the fourth quarter
of 1998. Our production backlog at year-end was up about
2
18% versus year-end 1998, despite a simultaneous reduction in our delivery lead
times. And we remain committed to reaching the goals we've set for ourselves
with respect to our yarn and fabric export businesses -- and have clear game
plans in place to do that.
We have a lot of work to do this year, but an enormous amount has
already been accomplished. Quaker has had many years of very solid financial
performance -- and significant investments have been made throughout the company
to create the opportunities we have today -- investments in hard assets and,
even more importantly, investments in Quaker's intellectual capital, including
the development of the company's supply chain management expertise, strong new
product development capabilities and equally strong technological competencies.
It is with those investments in mind and an understanding of what they mean to
our potential that we remain confident we have the product, the manufacturing
capacity, the service, the technical know-how and the people to get the job
done. And it is our objective during 2000 to use the investments we have made in
our product and service capabilities to achieve a strong financial performance
for our company.
As we pursue that objective, we remain deeply appreciative of your
continued support -- as well as the support of our associates and their
continuing commitment to our shared vision.
Sincerely,
Larry A. Liebenow Sangwoo Ahn
Larry A. Liebenow Sangwoo Ahn
President and Chief Executive Officer Chairman of the Board
3
THE COMPANY
Quaker makes upholstery fabric -- great upholstery fabric. In fact, the company
is one of the largest residential upholstery fabric manufacturers in the United
States -- and with about 17% of our gross fabric sales made outside the U.S. --
we have a strong international presence as well. We are also the world's largest
producer of chenille yarn -- and our operations are vertically integrated --
from specialty yarn manufacturing through fabric weaving and finishing.
As an upholstery fabric manufacturer, our fortunes are tied to the
furniture business, rather than the broader textile industry -- with overall
demand levels in our business a function of general economic conditions,
consumer confidence levels and population demographics.
GREAT PRODUCTS
We offer a broad product line that serves the entire residential furniture
industry -- with our Whitaker'r' Collection fabrics offering our higher-end
customers a differentiated product -- and our Quaker'TM' line designed to meet
the product and pricing needs of our higher volume, mid-price and
promotional-end customers. Our customer base includes more than 3,000
manufacturers of fine furniture around the world, including virtually every
major domestic furniture manufacturer and over 600 fabric distributors and
furniture manufacturers in more than 40 other countries.
In a product-driven industry like ours, styling and design expertise is
a critical success factor -- and we have one of the best design departments in
the industry. In fact, our new product development expertise was acknowledged,
in a very public way, by our entire industry last April when -- in a survey
sponsored by one of the furniture industry's most widely-read trade publications
our customers voted overwhelmingly to award us "Design Giant" status in two
categories -- "Overall Design Innovation" and "Creative Use of Technology."
In addition to our fabrics, we also design and manufacture specialty
yarns -- and last year, we sold about $22.0 million of spun and chenille yarns
to manufacturers of home furnishings and apparel products in the U.S.
4
[PHOTO]
5
[PHOTO]
6
THE COMPANY (CONTINUED)
QUALITY MANUFACTURING
The new equipment we have added over the past few years has given us one of the
most modern production operations in the industry and the capacity we need to
provide great service to our customers. All of our looms are equipped with
Jacquard heads -- the most versatile fabric formation equipment on the market
today -- and our newest looms are equipped with microprocessors to accelerate
product changeovers. It is our Jacquard weaving equipment, combined with our
chenille yarns, that allows our Jacquard products to compete effectively with
almost every other type of upholstery fabric.
In addition to making most of the specialty yarns we use in our
fabrics, the company is also vertically integrated in terms of its fabric
finishing operations -- where we have developed product advantages. Our Quaker
Plush'TM' products are a good example of this. They are rich in appearance -
durable -- distinctive -- and extraordinarily soft. We introduced our very first
Plush products in late 1997 -- and they have been a big hit with our customers.
Since then, we have also developed a collection of washed fabrics to provide
additional product choices to our upper-end customers -- and introduced
additional post-finishing equipment and processes into our manufacturing
operations to increase the softness of our promotional-end fabrics.
To ensure that all of the yarns and fabrics we produce meet our
exacting quality standards, Quaker is ISO 9001 certified on a company-wide basis
- - from new product design to final product shipment.
GREAT SERVICE
Our customers want our products fast -- and delivered on time. We offer
immediate delivery on the products we have in inventory at our distribution
centers in North Carolina, Mississippi, California and Mexico -- but most of
our products are made to customer order. Our current lead-time is four to
six weeks -- which ranks us among the best in the business.
One of our most important strategic initiatives is to lock in a service
advantage for ourselves. To further that objective, in 1998, we added an
experienced supply chain management professional to our senior management team,
and each of the functional areas at Quaker critical to "getting the right
product to the right customer at the right time" reports to him. With the
additional capacity we have added over the past few
7
THE COMPANY (CONTINUED)
years -- and our increased emphasis on supply chain management opportunities --
we are proud to say that we have given our customers good reason to have a high
degree of confidence in our delivery performance.
BUSINESS STRATEGY
Our objective is to produce sustained, superior growth and profitability for the
company over the long-term by dominating our market. We believe that the
competitive advantages we have already developed -- strengthened by the addition
of a service advantage to our arsenal -- will allow us to do that. The key
components of our strategy include:
Increasing our share of the domestic fabric market
Expanding our international fabric sales
Capitalizing on the growing demand for softer upholstery fabric
Penetrating related fabric markets -- including the office furniture
market, and
Growing our specialty yarn sales.
In every case, our approach is to emphasize the superior styling and
performance of our fabrics and yarns -- and our continuing commitment to product
quality and customer service.
MANUFACTURING CAPACITY
The new fabrics we introduced in 1996 and 1997 -- particularly our new Whitaker
and Quaker Plush products -- created enormous demand, and in early 1997, we
began implementing a two-year, $67.0 million capacity expansion project. That
expansion program was completed in 1998, and it has given us the ability to
produce more than $300.0 million of yarn and fabric annually.
All of the new equipment included in our 1997-98 capacity expansion
program was installed at our six manufacturing facilities in the Fall River,
Massachusetts area. To plan for our long-term growth, we have purchased about
sixty acres of undeveloped land in Fall River -- so that, in the future, we can
add discrete production "modules" at a separate facility -- as customer demand
warrants -- without disruption to our existing operations.
8
[PHOTO]
9
THE COMPANY (CONTINUED)
During 1999, we made important gains in several critical areas -
product leadership, product innovation, supply chain management and overall
service levels -- and focused significant resources on building the platform
needed -- when it comes to both product and service -- to achieve our operating
and financial objectives in 2000. We're confident that we have the product, the
manufacturing capacity, the service, the technical expertise and the people to
get the job done. And our entire staff is committed to doing just that --
because everyone at Quaker knows that what we do -- every day -- matters to
our customers -- and to our shareholders.
10
[PHOTO]
11
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(In thousands, except per share
and per yard data)
The following table sets forth certain consolidated financial and operating data
of the Company for the periods indicated, which data has been derived from the
Consolidated Financial Statements of the Company and the Notes thereto, which
have been audited by Arthur Andersen LLP, independent public accountants. This
selected financial and operating data should be read in conjunction with the
Consolidated Financial Statements, the Notes thereto and the other financial
information included herein.
Fiscal Year Ended
-------------------------------------------------------------
JANUARY 1, January 2, January 3, January 4, December 30,
2000 1999 1998 1997(1) 1995
-------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales ................... $250,824 $252,558 $219,174 $198,856 $173,487
Cost of products sold ....... 201,236 199,886 167,401 152,787 137,083
---------------------------------------------------------
Gross margin ................ 49,588 52,672 51,773 46,069 36,404
Selling, general and
administrative expenses .... 41,318 38,683 32,311 29,121 26,176
---------------------------------------------------------
Operating income ............ 8,270 13,989 19,462 16,948 10,228
Other expenses:
Interest expense, net ..... 5,127 5,405 3,700 4,092 3,898
Other, net ................ (46) (28) 65 77 98
---------------------------------------------------------
Income before provision
for income taxes ........... 3,189 8,612 15,697 12,779 6,232
Provision for income taxes .. 1,116 2,842 4,584 4,217 712
---------------------------------------------------------
Net income .................. $ 2,073 $ 5,770 $ 11,113 $ 8,562 $ 5,520
=========================================================
Earnings per common
share(2)--basic ........... $ 0.13 $ 0.42 $ 0.90 $ 0.71 $ 0.46
=========================================================
Earnings per common
share(2)--diluted .......... $ 0.13 $ 0.40 $ 0.85 $ 0.69 $ 0.44
=========================================================
Weighted average shares
outstanding(2)--basic....... 15,664 13,861 12,412 12,032 12,032
=========================================================
Weighted average shares
outstanding(2)--diluted .... 16,081 14,477 13,022 12,498 12,440
=========================================================
SELECTED OPERATING DATA:
EBITDA(3).................... $ 21,518 $ 24,633 $ 28,479 $ 24,569 $ 16,821
Depreciation and amortization 13,202 10,616 8,511 7,437 6,462
Net capital expenditures(4).. 19,030 41,487 25,484 11,979 13,165
Unit volume (in yards) ...... 48,036 50,397 44,976 43,552 40,761
Average gross sales price
per yard .................. $ 4.84 $ 4.54 $ 4.23 $ 4.05 $ 3.88
BALANCE SHEET DATA:
Working capital ............. $ 63,034 $ 72,694 $ 42,630 $ 32,620 $ 30,780
Total assets ................ 237,482 234,766 178,088 148,832 138,117
Long-term debt, net of
current portion,
and capital leases ........ 61,672 69,011 52,772 42,235 45,118
Stockholders' equity ........ 127,278 124,993 82,313 66,572 57,850
(1) The fiscal year ended January 4, 1997 was a 53-week period.
(2) Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the year. Earnings per
share and weighted average shares outstanding reflect a three-for-two stock
split paid on June 19, 1998.
(3) Represents income from continuing operations plus interest, taxes,
depreciation, amortization and other non-cash expenses. Although the Company has
measured EBITDA consistently among the periods presented, EBITDA as a measure of
liquidity is not governed by GAAP and, as such, may not be comparable to other
similarly titled measures of other companies. The Company believes that EBITDA,
while providing useful information, should not be considered in isolation or as
an alternative to either (i) operating income determined in accordance with GAAP
as an indicator of operating performance or (ii) cash flows from operating
activities determined in accordance with GAAP as a measure of liquidity.
(4) Net capital expenditures reflects assets acquired by purchase and capital
lease.
12
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
JANUARY 1, January 2,
2000 1999
------------------------
ASSETS
Current assets:
Cash ................................................................. $ 332 $ 432
Accounts receivable, less reserves of $1,755 and $1,939 at January 1,
2000 and January 2, 1999, respectively,
for doubtful accounts and sales returns and allowances .......... 41,191 40,661
Inventories .......................................................... 40,890 46,594
Prepaid and refundable income taxes .................................. 1,563 1,311
Prepaid expenses and other current assets ............................ 7,440 6,791
------------------------
Total current assets .................................... 91,416 95,789
Property, plant and equipment, net of accumulated depreciation and
amortization of $60,442 and $47,514 at January 1, 2000 and
January 2, 1999, respectively ........................................ 138,509 132,420
Other assets:
Goodwill, net of amortization ........................................ 5,818 6,011
Deferred financing costs, net ........................................ 293 252
Other assets ......................................................... 1,446 294
------------------------
Total assets ............................................ $237,482 $234,766
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .................................... $ 36 $ 700
Current portion of capital lease obligations ......................... 1,026 1,861
Accounts payable ..................................................... 19,983 13,754
Accrued expenses ..................................................... 7,337 6,780
------------------------
Total current liabilities ............................... 28,382 23,095
Long-term debt, less current portion ...................................... 59,000 65,536
Capital lease obligations, net of current portion ......................... 2,672 3,475
Deferred income taxes ..................................................... 17,504 15,874
Other long-term liabilities ............................................... 2,646 1,793
Commitments and contingencies (Note 7)
Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized, none issued .............. -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares authorized;
15,681,649 and 15,646,551 shares issued and outstanding at
January 1, 2000 and January 2, 1999, respectively................ 157 156
Additional paid-in capital ....................................... 83,554 83,410
Retained earnings ................................................ 44,915 42,842
Other accumulated comprehensive loss ............................. (1,348) (1,415)
------------------------
Total stockholders' equity .............................. 127,278 124,993
------------------------
Total liabilities and stockholders' equity .............. $237,482 $234,766
========================
The accompanying notes are an integral part of these
consolidated financial statements.
13
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands,
except per share amounts)
Fiscal Year Ended
--------------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
--------------------------------------
Net sales ................................ $250,824 $252,558 $219,174
Cost of products sold .................... 201,236 199,886 167,401
--------------------------------------
Gross margin ............................. 49,588 52,672 51,773
Selling, general and
administrative expenses ................ 41,318 38,683 32,311
--------------------------------------
Operating income ......................... 8,270 13,989 19,462
Other expenses:
Interest expense, net .................. 5,127 5,405 3,700
Other, net ............................. (46) (28) 65
--------------------------------------
Income before provision
for income taxes ........................ 3,189 8,612 15,697
Provision for income taxes ............... 1,116 2,842 4,584
--------------------------------------
Net income ............................... $ 2,073 $ 5,770 $ 11,113
--------------------------------------
Earnings per common share -- basic ....... $ 0.13 $ 0.42 $ 0.90
======================================
Earnings per common share -- diluted ..... $ 0.13 $ 0.40 $ 0.85
======================================
Weighted average shares
outstanding -- basic ................... 15,664 13,861 12,412
======================================
Weighted average shares
outstanding -- diluted ................. 16,081 14,477 13,022
======================================
The accompanying notes are an integral part of these
consolidated financial statements.
14
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands,
except share amounts)
Other
Additional Accumulated Total
Common Paid-in Retained Comprehensive Stockholders'
Stock Capital Earnings Loss Equity
-----------------------------------------------------------------
Balance, January 4, 1997 ............... $120 $41,908 $25,959 $(1,415) $ 66,572
Stock option compensation expense .... -- 571 -- -- 571
Net income ........................... -- -- 11,113 -- 11,113
Proceeds from sale of 450,000 shares
of common stock, net of expenses . 5 3,262 -- -- 3,267
Proceeds from stock options exercised,
including tax benefits ........... 1 789 -- -- 790
-------------------------------------------------------------
Balance, January 3, 1998 ................ $126 $46,530 $37,072 $(1,415) $ 82,313
Net income ........................... -- -- 5,770 -- 5,770
Proceeds from sale of 3,000,000 shares
of common stock, net of expenses . 30 36,454 -- -- 36,484
Proceeds from stock options exercised,
including tax benefits ........... -- 426 -- -- 426
-------------------------------------------------------------
Balance, January 2, 1999 ................ $156 $83,410 $42,842 $(1,415) $124,993
Net income ........................... -- -- 2,073 -- 2,073
Proceeds from stock options exercised,
including tax benefits ........... 1 144 -- -- 145
Foreign translation adjustment ....... -- -- -- 67 67
-------------------------------------------------------------
BALANCE, JANUARY 1, 2000 ................ $157 $83,554 $44,915 $(1,348) $127,278
=============================================================
The accompanying notes are an integral part of these consolidated financial
statements.
15
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Fiscal Year Ended
------------------------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
------------------------------------------------
Cash flows from operating activities:
Net income .................................................. $ 2,073 $ 5,770 $ 11,113
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization ............................. 13,210 10,616 8,511
Stock option compensation expense ......................... -- -- 571
Deferred income taxes ..................................... 1,630 2,103 2,122
Changes in operating assets and liabilities-
Accounts receivable ....................................... (530) (7,665) (6,735)
Inventories ................................................ 5,704 (14,418) (5,219)
Prepaid expenses and other assets ......................... (2,053) (3,476) (455)
Accounts payable and accrued expenses ..................... 6,786 (4,789) 2,512
Other long-term liabilities ............................... 853 46 (1,335)
--------------------------------------------
Net cash provided by (used in) operating activities...... 27,673 (11,813) 11,085
--------------------------------------------
Cash flows from investing activities:
Net purchases of property, plant and equipment .............. (18,630) (41,487) (25,484)
--------------------------------------------
Net cash used for investing activities .................. (18,630) (41,487) (25,484)
--------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .................... -- -- 45,000
Net borrowings (repayments) of debt ......................... (7,200) 17,805 (33,251)
Repayments of capital lease obligations ..................... (2,038) (1,167) (1,533)
Capitalization of financing costs ........................... (109) (50) (25)
Proceeds from issuance of common stock, net of
offering expenses ......................................... -- 36,484 3,267
Proceeds from exercise of common stock options .............. 145 426 790
--------------------------------------------
Net cash provided by (used in) financing activities ..... (9,202) 53,498 14,248
Effect of exchange rates on cash ................................. 59 -- --
--------------------------------------------
Net increase (decrease) in cash .................................. (100) 198 (151)
Cash, beginning of period ........................................ 432 234 385
--------------------------------------------
Cash, end of period .............................................. $ 332 $ 432 $ 234
============================================
Supplemental disclosure of cash flow information:
Cash paid for-
Interest .......................................... $ 5,093 $ 5,290 $ 3,108
Income taxes ...................................... $ 291 $ 2,055 $ 3,648
Supplemental disclosure of non-cash investing and financing
activities:
Capital lease obligations incurred for new equipment ........ $ 400 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
16
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
1 OPERATIONS
Quaker Fabric Corporation and subsidiaries (the "Company" or "Quaker") designs,
manufactures and markets woven upholstery fabrics primarily for residential
furniture markets and specialty yarns for use in the production of its own
fabrics and for sale to manufacturers of home furnishings and other products.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of Quaker Fabric Corporation and its wholly
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(b) FISCAL YEAR The Company's fiscal year ends on the Saturday nearest to
January 1 of each year. The fiscal years ended January 1, 2000, January 2, 1999,
and January 3, 1998 contain 52 weeks.
(c) INVENTORIES Inventories are stated at the lower of cost or market and
include materials, labor and overhead. Cost is determined by the last-in,
first-out (LIFO) method. Inventories consist of the following at January 1, 2000
and January 2, 1999:
JANUARY 1 January 2,
2000 1999
---------------------
Raw materials ............................... $19,380 $20,137
Work-in-process.............................. 9,761 12,439
Finished goods............................... 11,809 14,297
------------------
Inventory at FIFO.......................... 40,950 46,873
LIFO reserve................................. (60) (279)
------------------
Inventory at LIFO.......................... $40,890 $46,594
==================
(d) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at
cost. The Company provides for depreciation on property and equipment on a
straight-line basis over their estimated useful lives as follows:
Buildings and improvements ......................... 32-39 years
Machinery and equipment ............................ 2-20 years
Furniture and fixtures ............................. 5-10 years
Motor vehicles ..................................... 4-5 years
Leasehold Improvements ............................. 1-15 years
Maintenance and repairs are charged to operations as incurred. When equipment
and improvements are sold or otherwise disposed of, the assets cost and
accumulated depreciation are removed from the accounts, and the resulting gain
or loss, if any, is included in the results of operations. Fully depreciated
assets are removed from the accounts when they are no longer in use.
(e) GOODWILL Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. Accumulated amortization is $1,893 and $1,700
at January 1, 2000 and January 2, 1999, respectively. Amortization expense was
approximately $193 for both years. The Company's policy is to evaluate annually
whether the useful life of goodwill should be revised or whether the remaining
balance has been impaired. When evaluating impairment, the Company uses an
estimate of future operating income over the remaining goodwill life to measure
whether the goodwill is recoverable.
(f) INCOME TAXES Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(g) DEFERRED FINANCING COSTS Financing costs related to certain loans and
capital leases have been capitalized and are being amortized over the life of
the related loan or capital lease. Accumulated amortization was $526 and $458 as
of January 1, 2000 and January 2, 1999, respectively.
(h) EARNINGS PER COMMON SHARE Basic income per common share is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. For diluted income per share, the denominator also includes
dilutive outstanding stock options determined using the treasury stock method.
The following table reconciles weighted average common shares outstanding to
weighted average common shares outstanding and dilutive potential common shares.
-----------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
-----------------------------------
Weighted average common shares outstanding ......... 15,664 13,861 12,412
Dilutive potential common shares ................... 417 616 610
------------------------------
Weighted average common shares outstanding
and dilutive potential common shares ............. 16,081 14,477 13,022
------------------------------
Antidilutive options ............................... 1,052 239 --
==============================
17
(i) FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's
Mexican operations are translated at period-end exchange rates, and statement of
income accounts are translated at weighted average exchange rates. In Fiscal
1999, the resulting translation adjustments are included in the consolidated
balance sheet as a separate component of equity, "Other Accumulated
Comprehensive Loss," and foreign currency transactions gains and losses are
included in the consolidated statements of income. In 1997 and 1998, Mexico was
designated a "highly inflationary country" and accordingly, the Company recorded
translation gains and losses in the income statement rather than as a separate
component of stockholders' equity.
(j) IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically assesses its
long-lived assets for impairment whenever events or changes in business
circumstances indicate the carrying value may not be recoverable. Based on its
review, the Company does not believe that any material impairment of its
long-lived assets has occurred.
(k) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The presentation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of income and expenses during the reporting periods. Operating results
in the future could vary from the amounts derived from management's estimates
and assumptions. Material estimates that are particularly susceptible to
significant changes in the near term relate to the determination of deferred
taxes, inventory reserves, accounts receivable reserves, and accruals.
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments
consist mainly of cash and cash equivalents, accounts receivable, current
maturities of long term debt, accounts payable, and long term debt. The carrying
amount of these financial instruments as of January 1, 2000 approximates fair
value due to the short term nature and terms of these instruments and also the
rates available to the Company for debt with similar terms and remaining
maturities.
(m) COMPREHENSIVE INCOME In accordance with Statement of Financial Accounting
Standards (SFAS) No. 130, the Company's "Other Comprehensive Items" consist of
foreign currency translation gains or losses. Foreign currency translation gains
during 1999 were $67. No foreign currency translation gains or losses were
reported in Fiscal 1998 or 1997. The Company's comprehensive income for Fiscal
1999, 1998 and 1997 was $2,140, $5,770, and $11,113, respectively.
(n) RECLASSIFICATIONS Certain reclassifications have been made to the prior
years' financial statements to conform to the presentation of the Fiscal 1999
Financial Statements.
(o) STOCK SPLIT On May 28, 1998, the Board of Directors declared a three-for-two
stock split effected by means of a stock dividend paid on June 19, 1998 to
stockholders of record on June 8, 1998. All share and per share amounts give
effect to such stock split.
(p) REVENUE RECOGNITION Revenue is recognized upon the shipment of product.
(q) SELF INSURANCE The Company is primarily self insured for worker's
compensation and health benefits. Self insurance liabilities are based upon
claims filed and estimates of claims incurred but not reported.
3 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
JANUARY 1, January 2,
2000 1999
-------------------------------
Land ............................................. $ 3,320 $ 236
Buildings and improvements ....................... 21,231 19,983
Leasehold improvements ........................... 3,775 2,165
Machinery and equipment .......................... 167,698 151,966
Furniture and fixtures ........................... 1,782 1,736
Motor vehicles ................................... 356 333
Construction in progress ......................... 789 3,515
------------------------
198,951 179,934
Less -- Accumulated depreciation and amortization. 60,442 47,514
------------------------
$138,509 $132,420
========================
18
Included in machinery and equipment is equipment under capital lease of $8,183
as of January 1, 2000 and $10,919 as of January 2, 1999. The Company is
depreciating the equipment over economic useful lives of 15 to 20 years, which
is greater than the lease terms, because the Company intends to exercise its
option to purchase the equipment at the end of the initial lease terms at fair
market value.
4 ACCRUED EXPENSES AND TAXES
Accrued expenses and taxes consisted of the following:
JANUARY 1, JANUARY 2,
2000 1999
------------------------------
Accrued workers' compensation $1,280 $1,100
Accrued medical insurance 740 1,193
Other accrued expenses, including taxes 5,317 4,487
----------------------
$7,337 $6,780
======================
5 DEBT
Debt consisted of the following:
JANUARY 1, January 2,
2000 1999
---------------------------
7.18% Senior Notes due October 10, 2007 $30,000 $30,000
7.09% Senior Notes due October 10, 2005 15,000 15,000
Unsecured credit facility payable to several banks 14,000 20,500
9.73% Note payable in monthly principal and interest
installments of $81 through August 1999, secured
by certain equipment -- 628
Note payable in monthly principal installments of $6
plus interest from August 1998 to July 2000,
interest at prime plus 1% (9.50% at January 1,
2000 and 8.75% at January 2, 1999), secured by
certain equipment 36 108
59,036 66,236
Less -- Current portion 36 700
-----------------------
$59,000 $65,536
=======================
On October 10, 1997, the Company issued $30,000 of 7.18% Senior Notes and
$15,000 of 7.09% Senior Notes (the "Senior Notes"). The Senior Notes are
unsecured and bear interest at fixed rates of 7.18% and 7.09%, payable
semiannually. The Senior Notes may be prepaid in whole or in part prior to
maturity, at the Company's option, subject to a yield maintenance premium, as
defined. Required principal payments of the Senior Notes are as follows:
7.18% NOTE 7.09% NOTE
October 10, 2003 ................. $ -- $ 5,000
October 10, 2004 ................. -- 5,000
October 10, 2005 ................. -- 5,000
October 10, 2006 ................. 15,000 --
October 10, 2007 ................. 15,000 --
--------------------------
$30,000 $15,000
==========================
Under the terms of the unsecured credit facility (the "Credit Agreement"), the
Company may borrow up to $70,000 through December 31, 2002. Advances made under
the Credit Agreement bear interest at either the prime rate or the Eurodollar
(Libor) rate plus an "Applicable Margin." The Applicable Margin on advances is
adjusted quarterly based on the Company's Leverage Ratio as defined in the
Credit Agreement. The Applicable Margin for Eurodollar (Libor) advances may
range from 0.75% to 1.625%. The Company is also required to pay certain fees
including a commitment fee which will vary based on the Company's Leverage
Ratio. As of January 1, 2000, the commitment fee is 0.375% of the unused portion
of the Credit Agreement which was $56,000. As of January 1, 2000, the Company
had $14,000 outstanding under the Credit Agreement at an effective interest rate
of 8.08%. As of January 2, 1999, the Company had $20,500 outstanding under the
Credit Agreement at an effective interest rate of 6.45%.
19
The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement and the Senior Notes. Among other things,
the Credit Agreement and the Senior Notes require the Company to satisfy certain
financial tests and ratios (including interest coverage ratios, leverage ratios,
and net worth requirements). The Credit Agreement and the Senior Notes also
impose limitations on the Company's ability to incur additional indebtedness,
create certain liens, incur capital lease obligations, declare and pay
dividends, make certain investments, and purchase, merge or consolidate with or
into any other corporation. As of January 1, 2000, the Company is in compliance
with all debt covenants.
As of January 1, 2000, total debt principal payments for each of the next five
fiscal years and thereafter are as follows:
2000 .............................................. $ 36
2001 .............................................. --
2002 .............................................. 14,000
2003 .............................................. 5,000
2004 .............................................. 5,000
Thereafter ........................................ 35,000
-------
$59,036
=======
6 INCOME TAXES
Income before provision for income taxes consists of:
Fiscal Year Ended
-----------------------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
-----------------------------------------------
Domestic ....................................... $3,039 $8,818 $14,471
Foreign ........................................ 150 (206) 1,226
-----------------------------------------------
$3,189 $8,612 $15,697
===============================================
The following is a summary of the provision (benefit) for income taxes:
Fiscal Year Ended
-----------------------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
-----------------------------------------------
Federal
Current ............................. $ (955) $ 597 $2,544
Deferred ............................ 1,690 1,814 1,341
----------------------------------------------
$ 735 $2,411 $3,885
----------------------------------------------
State
Current ............................. $ 220 $ 360 $ 410
Deferred ............................ 52 71 (195)
----------------------------------------------
$ 272 $ 431 $ 215
----------------------------------------------
Foreign
Current ............................. $ 97 $ 72 $ 60
Deferred ............................ 12 (72) 424
----------------------------------------------
$ 109 $ -- $ 484
----------------------------------------------
$1,116 $2,842 $4,584
==============================================
20
A reconciliation between the provision for income taxes computed at U.S. federal
statutory rates and the amount reflected in the accompanying consolidated
statements of income is as follows:
Fiscal Year Ended
---------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
---------------------------------
Computed expected tax provision ............................... $ 1,084 $ 2,928 $ 5,494
Increase in taxes resulting from:
Amortization of goodwill ............................... 67 67 67
State and foreign income taxes, net of federal benefit.. 390 456 893
Decrease in taxes resulting from:
State investment tax credits, net of federal provision.. (612) (1,124) (813)
Reversal of tax reserves no longer required ............ -- -- (1,081)
Foreign sales corporation benefit ...................... (275) (476) (485)
Valuation allowance .................................... 473 959 488
Other .................................................. (11) 32 21
-------------------------------
$ 1,116 $ 2,842 $ 4,584
===============================
At January 1, 2000, the Company had net operating loss carryforwards of
approximately $9,425 for federal income tax purposes available to offset future
taxable income which have been benefitted for financial reporting purposes.
These carryforwards expire from 2003 to 2020. Additionally, the Company has
available for use $1,271 of federal tax credit carryforwards, of which
approximately $494 expire from 2000 to 2017. The remaining tax credit
carryforwards have no expiration dates. The timing and use of the net operating
loss carryforwards and the tax credit carryforwards are limited under applicable
federal income tax legislation. In addition, the Company has approximately
$4,300 of state investment tax credit carryforwards. These tax credits have
no expiration date, however, the timing and use of these credits is limited
under applicable state income tax legislation.
The significant items comprising the domestic deferred tax asset/liability are
as follows:
JANUARY 1, 2000 January 2, 1999
---------------------------------------------
CURRENT LONG-TERM Current Long-term
---------------------------------------------
Assets:
Net operating loss carryforwards ......... $ 270 $ 3,170 $ 270 $ 355
Tax credit carryforwards ................. 324 3,819 322 3,792
Receivable reserves ...................... 255 -- 137 --
Other .................................... 222 2,243 880 2,233
---------------------------------------------
Total assets ........................ $ 1,071 $ 9,232 $ 1,609 $ 6,380
Valuation allowance ................. -- (1,880) -- (1,447)
---------------------------------------------
Total assets, net of valuation allowance.. $ 1,071 $ 7,352 $ 1,609 $ 4,933
---------------------------------------------
Liabilities:
Property basis differences ............... $ -- $(24,856) $ -- $(20,807)
Inventory basis differences .............. (694) -- (1,002) --
---------------------------------------------
Total liabilities ................... $ (694) $(24,856) $ (1,002) $(20,807)
---------------------------------------------
Net assets (liabilities) .......... $ 377 $(17,504) $ 607 $(15,874)
=============================================
The Company has provided a valuation allowance for a portion of certain state
tax credits that may not be realized.
The significant items comprising the foreign deferred tax asset/liability are
as follows:
JANUARY 1, 2000 January 2, 1999
---------------------------------------
CURRENT LONG-TERM Current Long-term
---------------------------------------
Assets:
Net operating loss carryforwards ........ $ 216 $ -- $ 144 $ --
Liabilities:
Inventory ............................... $ (580) $ -- $ (569) $ --
---------------------------------------
Net assets (liabilities) ............ $ (364) $ -- $ (425) $ --
========================================
21
7 COMMITMENTS AND CONTINGENCIES
(a) LITIGATION AND ENVIRONMENTAL CLEANUP MATTERS The Company, its directors, and
certain of its officers were named as defendants in several putative class
action lawsuits filed during September and October 1998 relating to the
Company's public offering of 3.2 million shares of common stock that was
completed on August 4, 1998 (the "Offering"). These cases were consolidated and
an amended class action complaint (the "Complaint") was subsequently filed on
September 13, 1999. The Company and the individual defendants have moved to
dismiss the Complaint, and the court has reserved decision following the oral
argument heard on the matter in January 2000. While the plaintiffs seek
unspecified damages and rescission for alleged material misrepresentations and
omissions in the registration statement and prospectus for the Offering, the
Company does not believe that this matter will have a material adverse effect on
its operations or financial condition.
The Company is engaged in certain routine environmental cleanup matters. In the
opinion of management, the costs associated with these cleanup matters are not
expected to materially affect the Company's financial condition, results of
operations or liquidity.
(b) LEASES The Company leases certain facilities and equipment under operating
lease agreements and capital lease agreements that expire at various dates from
the current year to the year 2005. As of January 1, 2000, the aggregate minimum
future commitments under leases are as follows:
CAPITAL OPERATING Total
LEASES LEASES Leases
------------------------------
2000 ....................................... $1,293 $1,990 $3,283
2001 ....................................... 2,114 1,647 3,761
2002 ....................................... 725 1,372 2,097
2003 ....................................... -- 1,211 1,211
2004 ....................................... -- 159 159
2005 ....................................... -- 6 6
-----------------------------
$4,132 $6,385 $10,517
==================
Less -- Amount representing interest ....... 434
------
$3,698
Less -- Current portion .................... 1,026
------
$2,672
======
Rent expense for operating leases for the years ended January 1, 2000, January
2, 1999 and January 3, 1998 was $3,050, $1,982, and $953, respectively.
(c) LETTERS OF CREDIT In the normal course of its business activities, the
Company is required under certain contracts to provide letters of credit which
may be drawn down in the event the Company fails to perform under the contracts.
As of January 1, 2000 and January 2, 1999, the Company has issued or agreed to
issue letters of credit totaling $0 and $86, respectively.
(d) EMPLOYMENT CONTRACT In 1999, the Company's Board of Directors approved a
second amendment to the President and Chief Executive Officer's Employment
Agreement (the "Employment Agreement"). The Employment Agreement provides for
Mr. Liebenow to continue to serve as President and Chief Executive Officer of
the Company on a full-time basis through March 12, 2002, subject to an automatic
three-year extension, unless terminated by the Company upon one year's prior
notice. The Employment Agreement provides for a base salary of $600, subject to
such annual increases as may be determined by the Board of Directors, as well as
certain benefits and reimbursement of expenses. If the Employment Agreement had
terminated as of January 1, 2000, Mr. Liebenow would have been entitled to
receive $1,800 (in the event of a voluntary termination, termination for cause
or for any other reason). During 1999, the Company entered into
change-in-control agreements with the Company's corporate officers. These
agreements provide certain benefits to the Company's officers in the event their
employment with the Company is terminated as a result of a change-in-control as
defined. The maximum contingent liability related to the change-in-control
agreements is approximately $2.5 million.
8 STOCK OPTIONS
In 1993, the Company adopted the 1993 Stock Option Plan for Company officers,
and options to purchase a total of 953,692 shares of common stock were granted
to certain officers that year. The difference of $1,186 between the fair market
value at the grant date and the exercise price of these options was charged to
compensation expense over five years. During 1996, additional options to
purchase 141,000 shares of common stock were granted to certain officers
22
under the 1993 Stock Option Plan. The difference of $348 between the fair market
value at the grant date and the exercise price of these options was charged to
compensation expense over five years. The 1993 Stock Option Plan provided that
all options granted under the plan would vest over five years and be exercisable
for ten years except in the event of a change in control, in which case all
outstanding options granted pursuant to the plan would vest immediately. Upon
the consummation of the Company's public offering of common stock in 1997, all
previously unvested options granted under the 1993 Stock Option Plan became
immediately exercisable in full, and the amount of unamortized compensation
expense of $480 was recorded as a charge to the statement of income at that
time.
During 1996, the Company adopted the 1996 Stock Option Plan for key middle
managment employees. Options are granted at not less than fair market value,
vest over a five year period, and are exercisable for ten years. A total of
600,000 shares are reserved under this plan, and options to purchase 319,500
shares have been granted.
During 1997, the Company adopted the 1997 Stock Option Plan. Options to purchase
700,000 shares of common stock have been granted to certain officers under the
1997 Stock Option Plan. These options vest over five years, and are exercisable
for ten years. A total of 750,000 shares are reserved under this plan.
During 1995, options to purchase 7,500 shares of common stock were granted to a
director of the Company. During 1997, options to purchase an aggregate of 15,000
shares of common stock were granted to two directors of the Company. During
1998, options to purchase an aggregate of 30,000 shares of common stock were
granted to three directors of the Company. All options granted to directors in
1995, 1997 and 1998 vest over three years and are exercisable for ten years.
During 1999, options to purchase an aggregate of 30,000 shares of common stock
were granted to three directors of the Company. These options vested immediately
and are exercisable for ten years.
During 1997, the Company recorded $571 as stock option compensation expense.
PRO FORMA STOCK-BASED COMPENSATION EXPENSE SFAS No. 123, "Accounting for
Stock-Based Compensation," sets forth a fair-value-based method of
recognizing stock-based compensation expense. As permitted under SFAS No. 123,
the Company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. Had compensation cost for awards granted in
Fiscal 1999, Fiscal 1998 and Fiscal 1997 under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with the method set forth in SFAS No. 123, the effect on the
Company's net income and earnings per common share would have been as follows:
1999 1998 1997
--------------------------
Net income
As reported ........................... $ 2,073 $ 5,770 $11,113
Pro forma ............................. $ 1,139 $ 5,082 $10,788
Earnings per common share -- basic
As reported ........................... $ 0.13 $ 0.42 $ 0.90
Pro forma ............................. $ 0.07 $ 0.37 $ 0.87
Earnings per common share -- diluted
As reported ........................... $ 0.13 $ 0.40 $ 0.85
Pro forma ............................. $ 0.07 $ 0.35 $ 0.83
Pro forma compensation expense for options is reflected over the vesting period;
therefore, future pro forma compensation expense may be greater as additional
options are granted.
The fair value on the grant date of each option granted was estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1999 1998 1997
------------------------------------
Volatility ............................... 61.00% 60.13% 44.83%
Risk-free interest rate .................. 5.38% 4.99% 6.69%
Expected life of options ................. 7.00 YEARS 5.98 years 6.48 years
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions used
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
23
STOCK OPTION ACTIVITY A summary of the Company's stock option activity is as
follows:
1999 1998 1997
-------------------------------------------------------------------------
WEIGHTED Weighted Weighted
NUMBER AVG. EXERCISE Number Avg. Exercise Number Avg. Exercise
OF SHARES PRICE of Shares Price of Shares Price
-------------------------------------------------------------------------
Options outstanding,
beginning of year ................. 1,836,430 $ 5.71 1,549,080 $ 4.74 1,092,311 $1.73
Granted ............................. 145,500 $ 5.08 379,000 $10.03 586,500 $9.97
Exercised ........................... -- -- (37,350) $ 4.09 (119,381) $2.83
Forfeited ........................... (6,000) $12.93 (54,300) $ 10.2 (10,350) $5.91
Expired ............................. -- -- -- -- -- --
Options outstanding, end of year .... 1,975,930 $ 5.64 1,836,430 $ 5.71 1,549,080 $4.74
Options exercisable ................. 1,250,430 $ 3.69 1,004,080 $ 2.33 912,705 $1.33
Options available for grant ......... 314,900 -- 124,400 -- 270,300 --
Weighted average fair value
per share of options granted -- $ 3.33 -- $ 5.56 -- $5.50
The following table summarizes information for options outstanding and
exercisable at January 1, 2000:
- -----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average. Average Average
Range of Options Exercise Remaining Options Exercise
Prices Outstanding Price Life Exercisable Price
- -----------------------------------------------------------------------------------
$ 0.80 555,539 $0.80 3.28 555,539 $ 0.80
$ 1.37 151,956 1.37 4.35 151,956 1.37
$ 12.75 166,435 2.75 4.30 166,435 2.75
$ 4.25-5.50 242,300 4.99 8.62 64,600 5.25
$ 7.25-10.25 736,700 9.22 7.75 283,300 9.56
$13.00-17.67 123,000 16.53 8.44 28,600 16.04
-----------------------------------------------------------
1,975,930 $5.64 6.09 1,975,930 $ 3.69
===========================================================
9 SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information" which
the Company has adopted. Segments are defined as components of an enterprise for
which separate financial information is available and is evaluated regularly by
the chief operating decision-maker in deciding how to allocate resources and in
assessing performance. The Company operates as a single business segment
consisting of sales of two products, upholstery fabric and yarn. Management
evaluates the Company's financial performance in the aggregate and allocates the
Company's resources without distinguishing between yarn and fabric products.
Export sales from the United States to unaffiliated customers by major
geographical area were as follows:
FISCAL YEAR ENDED
----------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
----------------------------------
North America (excluding USA) ........... $14,600 $ 15,500 $ 11,900
Middle East ............................. 5,500 9,000 11,300
South America ........................... 1,200 2,300 1,800
Europe .................................. 6,600 4,500 2,900
All other areas ......................... 5,400 4,100 4,600
----------------------------------
$33,300 $ 35,400 $ 32,500
==================================
Gross sales by product category are as follows:
FISCAL YEAR ENDED
----------------------------------
JANUARY 1, January 2, January 3,
2000 1999 1998
----------------------------------
Fabric ................................ $232,553 $228,704 $190,183
Yarn .................................. 22,430 30,116 32,979
----------------------------------
$254,983 $258,820 $223,162
==================================
24
10 401(k) PLAN
The Company has established a 401(k) plan (the "401(k) Plan") for eligible
employees of the Company who may contribute up to 15% of their annual salaries
(up to $10,000) to the 401(k) Plan. All contributions made by an employee are
fully vested and are not subject to forfeiture. Each year the Company
contributes on behalf of each participating employee an amount equal to 100% of
the first $200 contributed by each employee and 25% of the next $800 contributed
by such employee, for a maximum annual Company contribution of $400 per
employee. An employee is fully vested in the contributions made by the Company
upon his or her completion of five years of participation in the 401(k) Plan.
11 RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. This statement requires that changes in
the derivative's fair value be recognized currently in income unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of income and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133, as amended by SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133," shall be effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. SFAS No. 133 cannot
be applied retroactively. SFAS No. 133, as amended, must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998). The Company
has not yet quantified the effect of adopting SFAS No. 133 on its consolidated
financial statements and has not determined the timing or method of its adoption
of the statement. However, the Company does not expect the adoption of this
statement to have a material impact on its financial position or results of
operations.
- -------------------------------------------------------------------------------
REPORT OF
INDEPENDENT
PUBLIC
ACCOUNTANTS
TO QUAKER FABRIC CORPORATION:
We have audited the accompanying consolidated balance sheets of Quaker Fabric
Corporation (a Delaware corporation) and subsidiaries as of January 1, 2000 and
January 2, 1999, and the related statements of income, changes in stockholders'
equity and cash flows the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quaker Fabric
Corporation and subsidiaries as of January 1, 2000 and January 2, 1999, and the
results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 2000
25
MANAGEMENT'S
DISCUSSION
AND
ANALYSIS
OF
FINANCIAL
CONDITION
AND RESULTS
OF
OPERATIONS
The following analysis of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.
GENERAL
OVERVIEW Quaker is a leading designer, manufacturer and worldwide marketer of
woven upholstery fabrics and one of the largest producers of Jacquard upholstery
fabrics in the world. The Company also manufactures specialty yarns, most of
which are used in the production of the Company's fabric products. The balance
is sold to manufacturers of home furnishings and other products throughout the
United States.
During the second half of 1997, record order rates for the Company's fabric and
yarn products caused the Company's production backlog and delivery lead times to
increase significantly. To respond to this growing demand for the Company's
products and to support its new market development efforts, Quaker began
implementing an aggressive capacity expansion plan involving the expenditure of
approximately $67.0 million during 1997 and 1998. Period costs associated with
the implementation of this plan, including the cost of identifying and preparing
the space needed to house the new equipment included in the plan, costs related
to the hiring and training of the more than 350 new employees needed to run this
new equipment, and some deterioration in the Company's productivity and internal
quality performance resulting from the addition of these new employees adversely
affected the Company's margin performance during the third and fourth quarters
of 1997. In addition, heavy overtime expenses incurred to meet customer demand
despite existing capacity constraints, also put pressure on the Company's
margins during the second half of 1997.
These cost factors continued to exert downward pressure on the Company's margins
during 1998, but their effect had begun to diminish by the end of the second
quarter. The Company's margins were beginning to improve and Quaker's financial
performance during the first half was reasonably strong. However, production
delays encountered during the Company's implementation of a new management
information system during the third quarter of 1998, coupled with a significant
decline in the Company's new order rate during the latter part of the year,
resulted in a disappointing second half. Management believes the decline in the
Company's order rate at that time was attributable to a number of facturs,
including order rate adjustments made by Quaker's customers later in the year to
account for improvements in the Company's delivery lead times. International
economic conditions, which continued to weaken throughout the year, hurt
Quaker's fabric exports, as well as its yarn sales business, which faced heavy
competition from imported apparel products from the Far East during 1998.
The Company's new order rate continued to demonstrate weakness during the early
part of 1999, but strengthened significantly throughout the year, leading to
record revenues during the fourth quarter of 1999 and a fourth quarter order
rate which was up 44% in comparison to the same period of 1998. In addition, the
Company continued to make substantial improvements in its overall service levels
in 1999, and management believes its delivery lead times are now among the best
in the industry. Quaker also further strengthened its balance sheet in 1999,
reducing its long-term debt by nearly $9 million and thereby achieving a debt to
total capitalization ratio of about 33% at year-end.
Management believes that a relatively strong U.S. economy will continue to
provide the Company with a business environment which is generally favorable to
the achievement of Quaker's growth and marketing objectives. Uncertainty
surrounding the global economic environment, however, is expected to continue to
depress the Company's revenues from its yarn and export businesses over the near
term.
QUARTERLY OPERATING RESULTS The following table sets forth certain condensed
unaudited consolidated statements of income data for the eight fiscal quarters
ended January 1, 2000, as well as certain data expressed as a percentage of the
Company's total net sales for the periods indicated:
Fiscal 1999 Fiscal 1998
-------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales ......................... $56,140 $64,463 $61,305 $68,916 $62,730 $64,075 $60,331 $65,422
Gross margin....................... 10,337 13,127 12,332 13,792 13,591 14,594 12,137 12,350
Gross margin percentage............ 18.4% 20.4% 20.1% 20.0% 21.7% 22.8% 20.1% 18.9%
Operating income................... 684 2,463 2,500 2,623 4,193 5,376 2,456 1,964
Operating income percentage........ 1.2% 3.8% 4.1% 3.8% 6.7% 8.4% 4.1% 3.0%
Income before provision for
income taxes..................... $ (587) $ 1,243 $ 1,243 $ 1,290 $ 2,978 $ 3,911 $ 1,066 $ 657
-----------------------------------------------------------------------------------------
Net income......................... $ (382) $ 809 $ 808 $ 838 $ 1,936 $ 2,542 $ 692 $ 600
=========================================================================================
Earnings per common share-basic.... $ (0.02) $ 0.05 $ 0.05 $ 0.05 $ 0.15 $ 0.20 $ 0.04 $ 0.04
=========================================================================================
Earnings per common share-diluted.. $ (0.02) $ 0.05 $ 0.05 $ 0.05 $ 0.15 $ 0.19 $ 0.04 $ 0.04
=========================================================================================
(1) The data reflected in this table has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this report.
26
The Company follows industry practice by closing its operating facilities for a
one-to-two week period during July of each year. In 1999, this shutdown period,
and the resulting effect on sales, occurred in the third fiscal quarter. In 1997
and 1998, the first week of the annual shutdown period occurred in the second
fiscal quarter.
PRODUCT MIX By increasing the number of higher margin, middle to better-end
fabrics in its line and by expanding the number of fabrics it offers at each
price point and in each styling category, the Company has added new
manufacturers of higher-end furniture to its customer base and positioned itself
as a full service supplier of Jacquard and plain woven fabrics to all of its
customers. The following table sets forth certain information relating to the
changes that have occurred in the Company's product mix and the average gross
sales price of its fabrics since 1997:
FISCAL YEAR
-------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------
PERCENT Percent Percent
OF of of
AMOUNT SALES Amount Sales Amount Sales
-------------------------------------------------------------------
(in thousands, except per yard data)
Gross fabric sales (dollars):
Promotional-end fabrics ......... $ 44,542 19.2% $ 54,913 24.00% $ 57,395 30.2%
Middle to better-end fabrics .... 188,011 80.8 173,791 76.0 132,788 69.8
-------------------------------------------------------------------
Gross fabric sales ............ $232,553 100% $228,704 100.0% $190,183 100.0%
-------------------------------------------------------------------
Gross fabric sales (yards):
Promotional-end fabrics ......... 12,877 26.8% 15,951 31.7% 16,822 37.4%
Middle to better-end fabrics .... 35,159 73.2 34,446 68.3 28,154 62.6
-------------------------------------------------------------------
Gross fabric sales ............ 48,036 100.0% 50,397 100.0% 44,976 100.0%
-------------------------------------------------------------------
Average gross sales price per yard:
Promotional-end fabrics ......... $ 3.46 $ 3.44 $ 3.41
Middle to better-end fabrics .... 5.35 5.05 4.72
Average per yard--all fabrics.. 4.84 4.54 4.23
GEOGRAPHIC DISTRIBUTION OF FABRIC SALES To develop markets for upholstery fabric
outside the United States, the Company has placed substantial emphasis on
building both direct exports from the United States as well as sales from its
Mexico City, Mexico distribution center. The following table sets forth certain
information about the changes which have occurred in the geographic distribution
of the Company's gross fabric sales since 1997:
FISCAL YEAR
---------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------
PERCENT Percent Percent
OF of of
AMOUNT SALES Amount Sales Amount Sales
---------------------------------------------------------------
(in thousands)
Gross fabric sales:
Domestic sales .................. $193,376 83.2% $187,231 81.9% $150,525 79.1%
Foreign sales(1) ................ 39,177 16.8 41,473 18.1 39,658 20.9
---------------------------------------------------------------
Gross fabric sales ........ $232,553 100.0% $228,704 100.0% $190,183 100.0%
===============================================================
(1) Foreign sales consists of both direct exports from the United States as well
as sales from the Company's Mexico City distribution center.
RESULTS OF OPERATIONS
FISCAL 1999 COMPARED TO FISCAL 1998 Net Sales. Net sales for 1999 decreased $1.8
million, or 0.7%, to $250.8 million from $252.6 million in 1998. Gross fabric
sales and gross yarn sales were lower during the period. Gross fabric sales
decreased due to a decline in foreign fabric sales. Gross fabric sales within
the United States increased 3.3%, to $193.4 million in 1999 from $187.2 million
in 1998. Foreign sales decreased 5.5%, to $39.2 million in 1999 from $41.5
million in 1998. This decrease was due to lower sales in Mexico and other
international markets important to the Company. Gross yarn sales decreased
25.5%, to $22.4 million in 1999 from $30.1 million in 1998, due primarily to
weakness in the domestic apparel market caused by an increase in imported yarn
and apparel products.
The gross volume of fabric sold decreased 4.7%, to 48.0 million yards in 1999
from 50.4 million yards in 1998. The average gross sales price per yard
increased 6.6%, to $4.84 in 1999 from $4.54 in 1998. The increase was
principally due to a product shift to more middle to
27
better-end fabrics. The Company sold 2.1% more yards of middle to better-end
fabrics and 19.3% fewer yards of promotional-end fabrics in 1999 than in 1998.
The average gross sales price per yard of middle to better-end fabrics increased
by 5.9%, to $5.35 in 1999 from $5.05 in 1998. The average gross sales price per
yard of promotional-end fabrics increased by 0.6%, to $3.46 in 1999 from $3.44
in 1998.
Gross Margin. The gross margin percentage for Fiscal 1999 decreased to 19.8% as
compared to 20.9% for Fiscal 1998. The decrease in the gross margin percentage
was primarily due to an increase in the Company's fixed overhead expenses and a
decrease in the Company's unit sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $41.3 million in 1999 from $38.7 million in
1998 due to increases in labor and fringes and sampling expenses associated with
the Company's efforts to increase sales. Selling, general and administrative
expenses as a percentage of net sales were 16.5% in 1999 and 15.4% in 1998.
Interest Expense, Net. Interest expense decreased to $5.1 million in 1999 from
$5.4 million in 1998 primarily due to lower senior debt levels.
Effective Tax Rate. The effective tax rate increased to 35.0% in 1999 from 33.0%
in 1998. See Note 6 of Notes to Consolidated Financial Statements included
elsewhere in this report.
FISCAL 1998 COMPARED TO FISCAL 1997 Net Sales. Net sales for 1998 increased
$33.4 million, or 15.2%, to $252.6 million from $219.2 million in 1997. Gross
fabric sales were higher while gross yarn sales were lower during the period.
Gross fabric sales increased due to increases in both domestic and foreign
fabric sales. Gross fabric sales within the United States increased 24.4%, to
$187.2 million in 1998 from $150.5 million in 1997. Foreign sales increased
4.6%, to $41.5 million in 1998 from $39.7 million in 1997. This increase was due
to improved sales in Canada as well as increased penetration of other
international markets. Gross yarn sales decreased 8.7%, to $30.1 million in 1998
from $33.0 million in 1997.
The gross volume of fabric sold increased 12.1%, to 50.4 million yards in 1998
from 45.0 million yards in 1997. The average gross sales price per yard
increased 7.3%, to $4.54 in 1998 from $4.23 in 1997. The increase was
principally due to a product shift to more middle to better-end fabrics. The
Company sold 22.3% more yards of middle to better-end fabrics and 5.2% fewer
yards of promotional-end fabrics in 1998 than in 1997. The average gross sales
price per yard of middle to better-end fabrics increased by 7.0%, to $5.05 in
1998 from $4.72 in 1997. The average gross sales price per yard of
promotional-end fabrics increased by 0.9%, to $3.44 in 1998 from $3.41 in 1997.
Gross Margin. The gross margin percentage for the first half of Fiscal 1998
decreased to 22.2% as compared to 24.7% for the first half of 1997. The decrease
in the gross margin percentage was due to 1.) lower operating efficiencies and
other period costs associated with a two-year capacity expansion plan, which the
Company began implementing in 1997, and 2.) heavy overtime expenses associated
with operating almost all of the Company's manufacturing areas on a six and
one-half day per week schedule to meet customer demand. For the second half of
Fiscal 1998, the gross margin percentage was 19.5% as compared to 22.6% during
the second half of 1997. This decrease was due to 1.) systems-related issues
which depressed the Company's production rates during the third quarter of 1998,
2.) a significant shortfall in expected sales during the fourth quarter of 1998
due to an order rate approximately 40% below the comparable period of 1997, and
3.) a significant increase in the sale of seconds in the second half of the year
as compared to both the first half of Fiscal 1998 and the second half of Fiscal
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $38.7 million in 1998 from $32.3 million in
1997 due to increases in sales commissions, labor and fringes, freight expenses
and sampling expenses associated with the Company's higher net sales for the
period. Selling, general and administrative expenses as a percentage of net
sales were 15.4% in 1998 and 14.7% in 1997.
Interest Expense, Net. Interest expense increased to $5.4 million in 1998 from
$3.7 million in 1997. Higher levels of senior debt financing at higher rates of
interest was the primary reason.
Effective Tax Rate. The effective tax rate increased to 33.0% in 1998 from 29.2%
in 1997. The unusually low effective tax rate in Fiscal 1997 was due to the
reversal of tax reserves no longer required and an increase in the foreign sales
corporation benefit partially offset by an increase in state and foreign income
taxes. See Note 6 of Notes to Consolidated Financial Statements included
elsewhere in this report.
28
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and capital requirements
through a combination of internally generated funds, borrowings under the Credit
Agreement, and debt and equity offerings. The Company's capital requirements
have arisen principally in connection with (i) the purchase of equipment to
expand production capacity, enhance the softness of the Company's fabrics, and
improve the Company's quality and productivity performance and (ii) an increase
in the Company's working capital needs related to its sales growth.
The primary source of the Company's liquidity and capital resources has been
operating cash flow. The Company's net cash provided by (used in) operating
activities was $11.1 million, ($11.8) million and $27.7 million in 1997, 1998
and 1999, respectively. The Company has supplemented its operating cash flow
with borrowings. Net borrowings (repayments) were ($10.2) million in 1997, $16.6
million in 1998 and ($9.2) million in 1999. The Company also raised $3.3 million
from the offering of 450,000 new common shares in 1997, and $36.5 million from
the offering of 3,000,000 new common shares in 1998.
Capital expenditures in 1998 and 1999 were $41.5 million and $19.0 million,
respectively. Capital expenditures during 1999 were funded by operating cash
flow and borrowings. Management anticipates that capital expenditures will total
approximately $14.5 million in 2000, consisting of approximately $8.0 million
primarily for new production equipment to expand finishing capacity and support
the Company's marketing, productivity, quality, service and financial
performance objectives. Management believes that operating income and borrowings
under the Credit Agreement will provide sufficient funding for the Company's
capital expenditures and working capital needs for the foreseeable future.
As discussed in Note 5 of Notes to Consolidated Financial Statements, the
Company issued $45.0 million of Senior Notes due October 2005 and 2007 (the
"Senior Notes") during 1997. Proceeds from the Senior Notes were used to replace
the 6.81% Series A Notes and reduce borrowings under the Credit Agreement. The
Senior Notes bear interest at a fixed rate of 7.09% on $15.0 million and 7.18%
on $30.0 million. Annual principal payments begin on October 10, 2003 with a
final payment due October 10, 2007.
The Company also has a $70.0 million Credit Agreement with two banks which
expires December 31, 2002. In 1998, the Company amended its Credit Agreement to
increase the amount of the facility from $50.0 million to $70.0 million and to
eliminate covenant limitations with respect to capital expenditures. As of
January 1, 2000, the Company had $14.0 million outstanding under the Credit
Agreement and unused availability of $56.0 million. See Note 5 of Notes to
Consolidated Financial Statements included elsewhere in this report.
In 1998, the Company completed a public offering of 3.2 million shares of its
common stock of which 3.0 million shares were sold by the Company and 0.2
millions shares were sold by a selling stockholder (the "1998 Offering"). The
Company applied its share of the net proceeds from the 1998 Offering, or
approximately $36.5 million, to repay amounts borrowed under the Credit
Agreement.
The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement and the Senior Notes, including, but not
limited to, maintenance of certain financial tests and ratios (including
interest coverage ratios, net worth related ratios, and net worth requirements);
limitations on certain business activities of the Company; restrictions on the
Company's ability to declare and pay dividends, incur additional indebtedness,
create certain liens, incur capital lease obligations, make certain investments,
engage in certain transactions with stockholders and affiliates, and purchase,
merge, or consolidate with or into any other corporation. The Company is
currently in compliance with all of the affirmative and negative covenants in
the Credit Agreement and the Senior Notes and management believes the Company's
continued compliance will not prevent the Company from operating in the normal
course of business.
INFLATION
The Company does not believe that inflation has had a significant impact on the
Company's results of operations for the periods presented. Historically, the
Company believes it has been able to minimize the effects of inflation by
improving its manufacturing and purchasing efficiency, by increasing employee
productivity, by reflecting the effects of inflation in the selling prices of
the new products it introduces each year and, to a lesser degree, by increasing
the selling prices of those products which have been included in the Company's
product line for more than one year.
29
FOREIGN CURRENCY TRANSLATION
All of the Company's sales are denominated in U.S. dollars except sales through
the Company's Mexico City distribution center. These sales are denominated in
pesos and are, therefore, subject to currency fluctuations. Accounts receivable
in pesos at January 1, 2000 were $2.3 million.
In 1997 and 1998, Mexico was designated as a "highly inflationary country" for
purposes of applying Statement of Financial Standards No. 52, Foreign Currency
Translation. Accordingly, the Company has recorded translation gains and losses
in the income statement rather than as a separate component of equity in Fiscal
1997 and Fiscal 1998. In Fiscal 1999 and prior to Fiscal 1997, the translation
adjustments were included in the balance sheet as a separate component of
equity. See Note 2(i) of Notes to Consolidated Financial Statements included
elsewhere in this report.
YEAR 2000
Because many existing computer programs use only the last two, rather than all
four, digits to specify a year, there was widespread concern prior to January 1,
2000 that date sensitive programs would only recognize "00" as signifying the
year 1900 and, therefore, not recognize the year 2000. This concern was commonly
referred to as the "Year 2000" or "Y2K" issue.
The Company believes that it has been successful in its efforts to address the
Year 2000 issue and will, therefore, not suffer any material adverse effect on
its operations or financial condition due to the Y2K problem. In addition, the
Company has developed a contingency plan designed to minimize risks associated
with failure of critical systems after December 31, 1999.
30
SUMMARY
QUARTERLY
FINANCIAL
DATA
(Unaudited)
The following is a summary of the results of operations for each of the quarters
within the years ended January 1, 2000 and January 2, 1999.
In thousands, except per share data
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
NET SALES.................................. $56,140 $64,463 $61,305 $68,916
GROSS MARGIN............................... 10,337 13,127 12,332 13,792
OPERATING INCOME........................... 684 2,463 2,500 2,623
NET INCOME (LOSS).......................... $ (382) $ 809 $ 808 $ 838
EARNINGS PER COMMON SHARE-BASIC............ $ (0.02) $ 0.05 $ 0.05 $ 0.05
EARNINGS PER COMMON SHARE-DILUTED.......... $ (0.02) $ 0.05 $ 0.05 $ 0.05
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Net sales.................................. 62,730 $64,075 $60,331 $65,422
Gross margin............................... 13,591 14,594 12,137 12,350
Operating income........................... 4,193 5,376 2,456 1,964
Net income................................. $ 1,936 $ 2,542 $ 692 $ 600
Earnings per common share-basic............ $ 0.15 $ 0.20 $ 0.04 $ 0.04
Earnings per common share-diluted.......... $ 0.15 $ 0.19 $ 0.04 $ 0.04
-----------------------------------------
The following summarizes common stock prices for the years ended January 1, 2000
and January 2, 1999.
PRICE PER SHARE
1999 HIGH LOW
- --------------------------------------------------------------------------------
FIRST QUARTER................................................. $ 6.69 $ 3.50
SECOND QUARTER................................................ $ 6.00 $ 4.00
THIRD QUARTER................................................. $ 6.25 $ 4.13
FOURTH QUARTER................................................ $ 5.00 $ 3.00
Price per Share
1998 High Low
First Quarter................................................. $17.67 $11.42
Second Quarter................................................ $20.17 $13.00
Third Quarter................................................. $17.00 $ 4.38
Fourth Quarter...................................................$ 7.63 $ 3.91
(1) The Company's common stock is traded over the counter and is quoted on the
Nasdaq National Market under the symbol "QFAB."
(2) No dividends have been paid on the Company's common stock.
(3) As of March 21, 2000, there were approximately 105 record holders of common
stock.
(4) The Company's Credit Agreement and Senior Notes contain restrictive
covenants which limit the Company's ability to declare and pay dividends. Under
the most restrictive of these covenants, $22.0 million was available for the
payment of dividends as of January 1, 2000.
(5) On May 28, 1998, the Board of Directors declared a three-for-two stock split
effected by means of a stock dividend paid on June 19, 1998 to stockholders of
record on June 8, 1998. All share amounts give effect to such stock split.
31
GENERAL
INFORMATION
DIRECTORS
- --------------------------------------------------------------------------------
SANGWOO AHN, Chairman DR. JERRY I. PORRAS
Partner Lane Professor of Organizational
Morgan Lewis Githens & Ahn Behavior and Change
Stanford University Graduate
LARRY A. LIEBENOW School of Business
President and CEO
Quaker Fabric Corporation ERIBERTO R. SCOCIMARA
President and Chief Executive Officer
Hungarian-American Enterprise Fund
COMMITTEES
- --------------------------------------------------------------------------------
AUDIT COMMITTEE COMPENSATION COMMITTEE
Sangwoo Ahn Sangwoo Ahn
Eriberto R. Scocimara Larry A. Liebenow
Jerry I. Porras
STOCK OPTION COMMITTEE
Sangwoo Ahn
Jerry I. Porras
OFFICERS
- --------------------------------------------------------------------------------
LARRY A. LIEBENOW MARK R. HELLWIG
President and Chief Vice President
Executive Officer Supply Chain Management
MICHAEL E. COSTA PAUL J. KELLY
Controller Vice President -- Finance,
Treasurer and Chief Financial Officer
ANTHONY DEGOMES
Vice President THOMAS H. MUZEKARI
New Business Development Vice President
Sales and Marketing
JAMES A. DULUDE
Vice President BEATRICE SPIRES
Manufacturing Vice President
Styling and Design
CYNTHIA L. GORDAN
Vice President, Secretary J. DUNCAN WHITEHEAD
and General Counsel Vice President
Research and Development
CORPORATE DATA
- --------------------------------------------------------------------------------
CORPORATE OFFICE NASDAQ: QFAB [LOGO]
Quaker Fabric Corporation
941 Grinnell Street INDEPENDENT AUDITORS
Fall River, Massachusetts 02721 Arthur Andersen LLP
(508) 678-1951 225 Franklin Street
http://www.quakerfabric.com Boston, Massachusetts 02110
ANNUAL MEETING LEGAL COUNSEL
11:00 a.m., May 18, 2000 Proskauer Rose LLP
BankBoston N.A. 1585 Broadway
100 Federal Street New York, New York 10036
Boston, Massachusetts 02105
FORM 10-K
TRANSFER AGENT AND REGISTRAR The Company's Form 10-K Report,
BankBoston, N.A. as filed with the Securities and
c/o EquiServe Limited Partnership Exchange Commission, is available
P.O. Box 8040 to stockholders without charge
Boston, MA 02266-8040 upon request to the Corporate Office,
(781) 575-3170 Attn: Corporate Secretary
http://www.equiserve.com
32