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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 GRINNELL STREET, FALL RIVER, MASSACHUSETTS 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of April 25, 2000, 15,701,331 shares of Registrant's Common Stock, $0.01 par
value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
April 1, January 1,
2000 2000
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(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 477 $ 332
Accounts receivable, less reverses of $1,993 and $1,755 at
April 1, 2000 and January 1, 2000, respectively 41,949 41,191
Inventories 41,895 40,890
Prepaid and refundable income taxes 1,558 1,563
Prepaid expenses and other current assets 6,391 7,440
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Total current assets 92,270 91,416
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Property, plant and equipment, net of depreciation and amortization
of $63,902 and $60,442 at April 1, 2000
and January 1, 2000, respectively 138,546 138,509
Other assets:
Goodwill, net of amortization 5,770 5,818
Deferred financing costs 300 293
Other assets 1,976 1,446
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Total assets $ 238,862 $ 237,482
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 18 $ 36
Current portion of capital lease obligations 1,024 1,026
Accounts payable 14,107 19,983
Accrued expenses 9,954 7,337
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Total current liabilities 25,103 28,382
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Long-term debt, less current portion 61,200 59,000
Capital lease obligations, net of current portion 2,423 2,672
Deferred income taxes 17,915 17,504
Other long-term liabilities 2,630 2,646
Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized. No shares issued and
outstanding. -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares authorized;
15,690,309 and 15,681,649 shares issued and outstanding as of
April 1, 2000 and January 1, 2000, respectively 157 157
Additional paid-in capital 83,584 83,554
Retained earnings 47,137 44,915
Accumulated other comprehensive loss (Note 3) (1,287) (1,348)
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Total stockholders' equity 129,591 127,278
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Total liabilities and stockholders' equity $ 238,862 $ 237,482
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The accompanying notes are an integral part of these consolidated
financial statements
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
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April 1, April 3,
2000 1999
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(Unaudited)
Net sales $ 75,042 $ 56,140
Cost of products sold 58,636 45,803
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Gross margin 16,406 10,337
Selling, general and administrative expenses 11,719 9,653
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Operating income 4,687 684
Other expenses:
Interest expense, net 1,261 1,284
Other, net 7 (13)
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Income (loss) before provision for income taxes 3,419 (587)
Provision (benefit) for income taxes 1,197 (205)
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Net income (loss) $ 2,222 $ (382)
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Earnings (loss) per common share - basic (Note 1) $ 0.14 $ (0.02)
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Weighted average shares outstanding - basic (Note 1) 15,690 15,647
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Earnings (loss) per common share - diluted (Note 1) $ 0.14 $ (0.02)
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Weighted average shares outstanding - diluted (Note 1) 16,107 15,647
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The accompanying notes are an integral part of these consolidated
financial statements
2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended
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April 1, April 3,
2000 1999
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(Unaudited)
Cash flows from operating activities:
Net income (loss) $ 2,222 $ (382)
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,521 3,240
Deferred income taxes 411 (54)
Changes in operating assets and liabilities:
Accounts receivable (net) (758) 5,216
Inventories (1,005) 2,621
Prepaid expenses and other assets 524 (160)
Accounts payable and accrued expenses (3,259) 3,542
Other long-term liabilities (16) (60)
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Net cash provided by operating activities 1,640 13,963
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Cash flows from investing activities:
Net purchase of property, plant and equipment (3,497) (4,257)
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Net cash used for investing activities (3,497) (4,257)
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Cash flows from financing activities:
Repayments of capital lease obligations (251) (340)
Net borrowings (repayments of) revolving line of credit 2,200 (9,300)
Repayments of term debt (18) (249)
Proceeds from exercise of common stock options 30 21
Capitalization of financing costs (20) --
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Net cash (used) provided by financing activities 1,941 (9,868)
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Effect of exchange rates on cash 61 64
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Net increase (decrease) in cash 145 (98)
Cash, beginning of period 332 432
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Cash, end of period $ 477 $ 334
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Non cash activity
Capital leases for new equipment $ -- $ 394
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The accompanying notes are an integral part of these consolidated
financial statements
3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Quaker Fabric Corporation
and Subsidiaries (the "Company") as of April 1, 2000 and January 1, 2000 and the
results of their operations and cash flows for the three months ended April 1,
2000 and April 3, 1999. The unaudited consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted pursuant to
those rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. Operating results
for the three months ended April 1, 2000 are not necessarily indicative of the
results expected for the full fiscal year or any future period. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
January 1, 2000. Certain reclassifications have been made to the prior year
financial statements for consistent presentation with the current year.
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.
Three Months Ended
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April 1, April 3,
2000 1999
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Weighted average common shares outstanding 15,690 15,647
Diluted potential common shares 417 --
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Weighted average common shares outstanding
and dilutive potential common shares 16,107 15,647
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Antidilutive options 1,058 913
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NOTE 2 - 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 at April 1, 2000 and January 1, 2000 consisted of the
following:
APRIL 1, JANUARY 1,
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(In thousands)
Raw materials $ 19,448 $ 19,380
Work in process 9,994 9,761
Finished goods 12,513 11,809
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Inventory at FIFO 41,955 40,950
LIFO Reserve (60) (60)
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Inventory at LIFO $ 41,895 $ 40,890
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NOTE 3 - COMPREHENSIVE INCOME
The Company's "Other Comprehensive Items" consist of foreign currency
translation gains or losses. Foreign currency translation gains were $61,000 and
$64,000 at April 1, 2000 and April 3, 1999, respectively. During the first
quarters of 2000 and 1999, the Company's comprehensive income (loss) was
$2,283,000 and $(318,000), respectively.
NOTE 4 - SEGMENT REPORTING
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.
The accounting policies of segment reporting are the same as those
described in Note 9 "Summary of Significant Accounting Policies" of the
Company's "1999 Annual Report." Management evaluates the Company's financial
performance in the aggregate and allocates the Company's resources without
distinguishing between yarn and fabric products.
5
Export sales from the United States to unaffiliated customers by major
geographical area were as follows:
Three Months Ended
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Apr. 1, Apr. 3,
2000 1999
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North America (excluding USA) $5,848 $4,269
Middle East 640 1,160
South America 323 395
Europe 1,313 2,200
All Other 1,167 1,268
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$9,291 $9,292
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Gross Sales by product category are as follows:
Three Months Ended
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Apr. 1, Apr. 3,
2000 1999
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Fabric $69,507 $52,817
Yarn 6,490 4,499
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$75,997 $57,316
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year is a 52 or 53 week period ending on the Saturday
closest to January 1. "Fiscal 1999" ended January 1, 2000 and "Fiscal 2000" will
end December 30, 2000. The first three months of Fiscal 1999 and Fiscal 2000
ended April 3, 1999 and April 1, 2000, respectively.
RESULTS OF OPERATIONS
Net sales for the first three months of Fiscal 2000 increased $18.9 million
or 33.7%, to $75.0 million from $56.1 million for the first three months of
Fiscal 1999. The average gross sales price per yard increased 8.9%, to $5.12 for
the first three months of Fiscal 2000 from $4.70 for the first three months of
Fiscal 1999. This increase was principally due to an increase in the average
selling price of middle to better-end fabrics. The gross volume of fabric sold
increased 21.0%, to 13.6 million yards for the first three months of Fiscal 2000
from 11.2 million yards for the first three months of Fiscal 1999. The Company
sold 29.6% more yards of middle to better-end fabrics and 0.6% fewer yards of
promotional-end fabrics in the first three months of Fiscal 2000 than in the
first three months of Fiscal 1999. The average gross sales price per yard of
middle to better-end fabrics increased by 7.5%, to $5.60 in the first three
months of Fiscal 2000 as compared to $5.21 in the first three months of Fiscal
1999. The average gross sales price per yard of promotional-end fabrics
increased by 4.1%, to $3.59 in the first three months of Fiscal 2000 as compared
to $3.45 in the first three months of Fiscal 1999.
6
Gross fabric sales within the United States increased 38.3%, to $60.2
million in the first three months of Fiscal 2000 from $43.5 million in the first
three months of Fiscal 1999. Foreign and Export sales remained constant at $9.3
million in the first three months of Fiscal 2000 and Fiscal 1999. Gross yarn
sales increased 44.3%, to $6.5 million in the first three months of Fiscal 2000
from $4.5 million in the same period of Fiscal 1999.
The gross margin percentage for the first three months of Fiscal 2000
increased to 21.9%, as compared to 18.4% for the first three months of Fiscal
1999. The increase in gross profit margin was primarily due to 1.) lower per
unit fixed overhead expenses caused by higher sales volume, and 2.) higher sales
volume of middle to better-end fabrics and yarn, both of which have higher than
average selling prices.
Selling, general and administrative expenses increased to $11.7 million for
the first three months of Fiscal 2000 from $9.7 million for the first three
months of Fiscal 1999. Selling, general and administrative expenses as a
percentage of net sales decreased to 15.6% in the first three months of Fiscal
2000 from 17.2% in the first three months of Fiscal 1999. The increase in
selling, general and administrative expenses was primarily due to the increase
in sales volume during the quarter and an increase in fabric sampling expenses,
while the decrease as a percentage of net sales is attributable to the
allocation of fixed costs over a higher sales base.
Interest expense was $1.3 million for the first three months of Fiscal 2000
and Fiscal 1999. Higher average levels of senior debt were offset by lower
capital lease obligations which have higher rates of interest.
In accordance with accounting principles generally accepted in the United
States, the Company provides for income taxes on an interim basis, using the
estimated annual effective income tax rate. The Company's estimated tax rate was
35.0% for the first three months of both Fiscal 2000 and Fiscal 1999. The
effective income tax rate is lower than the combined federal and state statutory
rates due primarily to the foreign sales corporation tax benefits and state
investment tax credits.
Net income for the first three months of Fiscal 2000 increased to $2.2
million, or $0.14 per common share-diluted, from a loss of $382,000, or ($0.02)
per common share-diluted, for the first three months of Fiscal 1999. For a
discussion of "Earnings Per Share," see Note 2 to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended January 1, 2000.
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 the purchase of
equipment to expand production capacity and improve the Company's quality and
productivity performance and with an increase in the Company's working capital
needs related to its sales growth.
7
Capital expenditures in the first three months of Fiscal 1999 and Fiscal
2000 were $4.7 million and $3.5 million, respectively. Capital expenditures were
funded by operating cash flow and borrowings. Management anticipates that
capital expenditures will total approximately $14.5 million in 2000, including
approximately $8.0 million 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
borrowing under the Credit Agreement will provide sufficient funding for the
Company's capital expenditures and working capital needs for the foreseeable
future.
The Company has outstanding $45.0 million of Senior Notes due October 2005
and 2007 (the "Senior Notes"). 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. For a
discussion of the "Senior Notes," see Note 5 to the Consolidated Financial
Statements included in the Company's Annual Report 10-K for the year ended
January 1, 2000.
The Company has a $70.0 million Credit Agreement with two banks which
expires December 31, 2002. As of April 1, 2000, the Company had $16.2 million
outstanding under the Credit Agreement and unused availability of $53.8 million.
For a discussion of the "Credit Agreement," see Note 5 to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended January 1, 2000.
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.
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27.0 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the three
months ended April 1, 2000.
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: April 26, 2000 By: /s/ Paul J. Kelly
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Paul J. Kelly
Vice President - Finance
and Treasurer
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