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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
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
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of October 30, 2001, 15,818,464 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
(In thousands, except share and per share amounts)
September 29, December 30,
2001 2000
(Unaudited) (Audited)
------------ -----------
ASSETS
Current assets:
Cash $ 495 $ 440
Accounts receivable, less reserves of $2,430 and $1,873 at
September 29, 2001 and December 30, 2000, respectively 50,476 42,735
Inventories 48,586 43,831
Prepaid and refundable income taxes 1,970 2,977
Production supplies 1,327 1,875
Prepaid expenses and other current assets 5,447 4,407
-------- --------
Total current assets 108,301 96,265
Property, plant and equipment, net 145,065 141,929
Other assets:
Goodwill, net 5,481 5,625
Deferred financing costs, net 184 238
Other assets 1,810 1,979
-------- --------
Total assets $260,841 $246,036
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 442 $ 1,975
Accounts payable 21,734 18,761
Accrued expenses 8,996 8,991
-------- --------
Total current liabilities 31,172 29,727
Long-term debt, less current portion 57,600 52,700
Capital lease obligations, less current portion 488 697
Deferred income taxes 24,135 22,400
Other long-term liabilities 2,115 2,179
Redeemable preferred stock:
Series A convertible, $0.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized, none issued -- --
Stockholders' equity:
Common stock, $0.01 par value per share, 40,000,000 shares authorized;
15,818,464 and 15,716,629 shares issued and outstanding as of
September 29, 2001 and December 30, 2000, respectively 158 157
Additional paid-in capital 84,190 83,696
Retained earnings 62,343 55,860
Other accumulated comprehensive loss (1,360) (1,380)
-------- --------
Total stockholders' equity 145,331 138,333
-------- --------
Total liabilities and stockholders' equity $260,841 $246,036
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements
1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
------------------ -----------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
Net sales $76,376 $68,790 $240,849 $224,514
Cost of products sold 61,163 53,940 190,532 174,287
------- ------- -------- --------
Gross margin 15,213 14,850 50,317 50,227
Selling, general and administrative expenses 12,893 10,704 36,311 34,160
Non-recurring charge (Note 5) 800 -- 800 --
------- ------- -------- --------
Operating income 1,520 4,146 13,206 16,067
Other expenses:
Interest expense 1,004 1,167 3,062 3,716
Other expense (income), net (1) (9) 14 4
------- ------- -------- --------
Income before provision for income taxes 517 2,988 10,130 12,347
Provision for income taxes 186 1,046 3,647 4,322
------- ------- -------- --------
Net income $ 331 $ 1,942 $ 6,483 $ 8,025
------- ------- -------- --------
------- ------- -------- --------
Earnings per common share - basic (Note 1) $ 0.02 $ 0.12 $ 0.41 $ 0.51
------- ------- -------- --------
------- ------- -------- --------
Earnings per common share - diluted (Note 1) $ 0.02 $ 0.12 $ 0.39 $ 0.50
------- ------- -------- --------
------- ------- -------- --------
Weighted average shares outstanding - basic (Note 1) 15,789 15,710 15,751 15,701
------- ------- -------- --------
------- ------- -------- --------
Weighted average shares outstanding - diluted (Note 1) 16,554 16,156 16,504 16,137
------- ------- -------- --------
------- ------- -------- --------
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
Net income $ 331 $ 1,942 $ 6,483 $ 8,025
Foreign currency translation adjustment (97) 117 22 21
Derivative instrument adjustment 7 -- (2) --
------- ------- -------- --------
Comprehensive income $ 241 $ 2,059 $ 6,503 $ 8,046
------- ------- -------- --------
------- ------- -------- --------
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)
Nine Months Ended
--------------------------------
September 29, September 30,
2001 2000
------------- -------------
(Unaudited)
Cash flows from operating activities:
Net income $ 6,483 $ 8,025
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 11,394 10,507
Deferred income taxes 1,735 1,228
Changes in operating assets and liabilities:
Accounts receivable, net (7,741) (1,174)
Inventories (4,755) (3,776)
Prepaid expenses and other assets 684 1,361
Accounts payable and accrued expenses 2,978 (247)
Other long-term liabilities (64) 21
-------- --------
Net cash provided by operating activities 10,714 15,945
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (14,332) (13,526)
-------- --------
Net cash used for investing activities (14,332) (13,526)
-------- --------
Cash flows from financing activities:
Repayments of capital lease obligations (1,742) (764)
Change in revolving credit facility 4,900 (1,300)
Repayments of long-term debt -- (36)
Proceeds from exercise of common stock options and
issuance of shares under the employee stock purchase plan 495 111
Capitalization of financing costs -- (20)
-------- --------
Net cash provided by (used in) financing activities 3,653 (2,009)
-------- --------
Effect of exchange rates on cash 20 21
-------- --------
Net increase in cash 55 431
Cash, beginning of period 440 332
-------- --------
Cash, end of period $ 495 $ 763
-------- --------
-------- --------
The accompanying notes are an integral part of these
consolidated financial statements
3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 (Company) as of September 29, 2001 and December 30, 2000 and
the results of their operations and cash flows for the nine months ended
September 29, 2001 and September 30, 2000. 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 and nine months ended September 29, 2001
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 December 30, 2000. Certain
reclassifications have been made to the prior year financial statements for
consistent presentation with the current year.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period. For
diluted earnings 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 Nine Months Ended
------------------ -----------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Weighted average common shares outstanding 15,789 15,710 15,751 15,701
Dilutive potential common shares 765 446 753 436
------ ------ ------ ------
Weighted average common shares outstanding
and dilutive potential common shares 16,554 16,156 16,504 16,137
====== ====== ====== ======
Antidilutive options 658 1,193 658 1,193
====== ====== ====== ======
4
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 September 29, 2001 and December 30, 2000 consisted of
the following:
Sept. 29, Dec. 30,
2001 2000
---- ----
Raw materials $22,492 $21,749
Work in process 10,300 8,641
Finished goods 15,794 13,441
------- -------
$48,586 $43,831
======= =======
Note 3 - SEGMENT REPORTING
The Company operates as a single business segment consisting of sales
of two products, upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.
Gross foreign and export sales from the United States to unaffiliated
customers by major geographical area were as follows:
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
North America (excluding USA) $5,968 $6,214 $19,865 $18,365
Middle East 470 687 2,511 2,482
South America 809 390 2,603 1,012
Europe 997 1,152 3,337 3,966
All Other 1,000 1,532 2,860 4,206
------ ------ ------- -------
$9,244 $9,975 $31,176 $30,031
====== ====== ======= =======
5
Gross sales by product category are as follows:
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept 30,
2001 2000 2001 2000
---- ---- ---- ----
(In thousands)
Fabric $71,718 $63,857 $225,746 $208,203
Yarn 5,491 5,962 17,781 18,971
------- ------- -------- --------
$77,209 $69,819 $243,527 $227,174
======= ======= ======== ========
Note 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In Fiscal 2000, the Company adopted Emerging Issues Task Force (EITF)
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" (EITF 00-10).
At adoption, EITF 00-10 required the Company to classify amounts billed to a
customer in a sales transaction related to shipping and handling as revenues and
to classify similar costs in a sales transaction as cost of goods sold. The net
effect of the adoption of EITF 00-10 resulted in the Company reclassifying net
shipping costs from "selling, general and administrative" expenses to "net
sales" and "cost of products sold" within the consolidated statements of income.
In accordance with SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," the Company has adopted SFAS No. 133, "Accounting for Certain Derivative
Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Hedging Activities, an Amendment of FASB Statement
No. 133" (collectively, SFAS 133 as amended), effective December 31, 2000.
During the second quarter of 2001, the Company adopted a formal policy of
hedging a portion of its Mexican and Brazilian currency exposures. The effect of
this hedging activity was not material.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 requires all business combinations initiated after
June 30, 2001 to be accounted for using the purchase method. This statement is
effective for all business combinations initiated after June 30, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." This statement supercedes Accounting Principles Board
Opinion No. 17 ("APB 17"), "Intangible Assets," and applies to goodwill and
intangible assets acquired after June 30, 2001, as well as goodwill and
intangible assets previously acquired. Under this statement goodwill as well as
certain other intangible assets, determined to have an infinite life, will no
longer be amortized, instead these assets will be reviewed for impairment on a
periodic basis. The Company will adopt the requirements of SFAS No. 142
effective December 30, 2001. The Company is evaluating the impact of adoption of
this standard and has not yet determined the effect of adoption on its financial
statements. Amortization of goodwill for the three and nine-month periods ended
September 29, 2001, was $48 thousand and $145 thousand, respectively.
6
Note 5 - NON-RECURRING CHARGE
In July 2001, the Company's negotiations with a potential acquisition
target were terminated. Costs incurred related to this potential acquisition
were $800. As a result, a non-recurring, pre-tax charge of $800 ($500 after-tax
or $0.03 per diluted share) was recorded in the third quarter of Fiscal 2001.
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 2000" ended December 30, 2000 and "Fiscal
2001" will end December 29, 2001. The first nine months of Fiscal 2000 and
Fiscal 2001 ended September 30, 2000 and September 29, 2001, respectively.
Results of Operations - Quarterly Comparison
Net sales for the third quarter of 2001 increased $7.6 million or
11.0%, to $76.4 million from $68.8 million for the third quarter of 2000. The
average gross sales price per yard increased 2.6%, to $5.49 for the third
quarter of 2001 from $5.35 for the third quarter of 2000. The gross
volume of fabric sold increased 9.4%, to 13.1 million yards for the third
quarter of 2001 from 11.9 million yards for the third quarter of 2000. The
Company sold 1.9% fewer yards of middle to better-end fabrics and 46.6% more
yards of promotional-end fabrics in the third quarter of 2001 than in the third
quarter of 2000. The average gross sales price per yard of middle to better-end
fabrics increased by 6.0%, to $6.17 in the third quarter of 2001 as compared to
$5.82 in the third quarter of 2000. The average gross sales price per yard of
promotional-end fabric increased by 5.8%, to $3.99 in the third quarter of 2001
as compared to $3.77 in the third quarter of 2000.
Gross fabric sales within the United States increased 15.9%, to $62.5
million in the third quarter of 2001 from $53.9 million in the third quarter of
2000. Foreign and Export sales decreased 7.3%, to $9.2 million in the third
quarter of 2001 from $10.0 million in the third quarter of 2000. Gross yarn
sales decreased 7.9%, to $5.5 million in the third quarter of 2001 from $6.0
million in the same period of 2000.
The gross profit margin for the third quarter of 2001 decreased to
19.9%, as compared to 21.6% for the third quarter of 2000. The Company
experienced a significant increase in orders from its customers during the third
quarter of 2001. As a consequence, the Company scheduled production during its
customary two-week annual July vacation period, resulting in a significant
increase in overtime and other manufacturing costs. Also, the trend toward more
frequent but smaller customer orders continued during the third quarter. As a
result, the Company's operating efficiencies have been negatively affected by
the need to produce a higher number of smaller customer orders.
Selling, general and administrative expenses increased to $12.9 million
for the third quarter of 2001 from $10.7 million for the third quarter of 2000.
Selling, general and administrative expenses as a percentage of net sales
increased to 16.9% in the third quarter of
7
2001 from 15.6% in the third quarter of 2000. The increase in selling, general
and administrative expenses was due to higher variable costs, such as sales
commissions, resulting from higher sales, increased costs associated with
foreign operations, and an increase in bad debt provisions due to several
bankruptcy filings during the third quarter within the furniture industry.
In July 2001, the Company's negotiations with a potential acquisition
target were terminated. Costs incurred related to this potential acquisition
were $800. As a result, a non-recurring, pre-tax charge of $800 ($500 after-tax
or $0.03 per diluted share) was recorded in the third quarter of Fiscal 2001.
Interest expense decreased to $1.0 million for the third quarter of
2001 from $1.2 million for the third quarter of 2000. Lower average levels of
senior debt and lower rates of interest were the primary reasons for the
decrease.
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
36.0% for the third quarter of 2001 and 35.0% for the third quarter of 2000. The
effective income tax rate is lower than the combined federal and state statutory
rates, due primarily to certain tax benefits related to extraterritorial income
at the federal level and investment tax credits at the state level.
Net income for the third quarter of 2001 decreased to $0.3 million or
$0.02 per common share-diluted, from $1.9 million or $0.12 per common
share-diluted for the third quarter of 2000.
Results of Operations - Nine-month Comparison
Net sales for the first nine months of 2001 increased $16.3 million or
7.3%, to $240.8 million from $224.5 million for the first nine months of 2000.
The average gross sales price per yard increased 5.2%, to $5.50 for the first
nine months of 2001 from $5.23 for the first nine months of 2000. The
gross volume of fabric sold increased 3.0%, to 41.0 million yards for the first
nine months of 2001 from 39.8 million yards for the first nine months of 2000.
The Company sold 2.2% fewer yards of middle to better-end fabrics and 19.2% more
yards of promotional-end fabrics in the first nine months of 2001 than in the
first nine months of 2000. The average gross sales price per yard of middle to
better-end fabrics increased by 6.8%, to $6.11 in the first nine months of 2001
as compared to $5.72 in the first nine months of 2000. The average gross sales
price per yard of promotional-end fabric increased by 7.1%, to $3.94 in the
first nine months of 2001 as compared to $3.68 in the first nine months of 2000.
Gross fabric sales within the United States increased 9.2%, to $194.6
million in the first nine months of 2001 from $178.2 million in the first nine
months of 2000. Foreign and Export sales increased 3.8%, to $31.2 million in the
first nine months of 2001 from $30.0 million in the first nine months of 2000.
Gross yarn sales decreased 6.3%, to $17.8 million in the first nine months of
2001 from $19.0 million in the same period of 2000.
The gross profit margin for the first nine months of 2001 decreased to
20.9%, as compared to 22.4% for the first nine months of 2000. The Company
experienced a significant increase in orders from its customers during the third
quarter of 2001. As a consequence, the Company scheduled production during its
customary two-week annual July vacation period, resulting in a significant
increase in overtime and other manufacturing costs. Also, the trend toward more
frequent but smaller customer orders continued during the third quarter. As a
result,
8
the Company's operating efficiencies have been negatively affected by the need
to produce a higher number of smaller customer orders.
Selling, general and administrative expenses increased to $36.3 million
for the first nine months of 2001 from $34.2 million for the first nine months
of 2000. Selling, general and administrative expenses as a percentage of net
sales decreased to 15.1% in the first nine months of 2001 from 15.2% in the
first nine months of 2000. The increase in selling, general and administrative
expenses was due to higher variable costs, such as sales commissions, resulting
from higher sales, and increased costs associated with foreign operations.
In July 2001, the Company's negotiations with a potential acquisition
target were terminated. Costs incurred related to this potential acquisition
were $800. As a result, a non-recurring, pre-tax charge of $800 ($500 after-tax
or $0.03 per diluted share) was recorded in the third quarter of Fiscal 2001.
Interest expense decreased to $3.0 million for the first nine months of
2001 from $3.7 million for the first nine months of 2000. Lower average levels
of senior debt and lower rates of interest were the primary reasons for the
decrease.
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
36.0% for the first nine months of 2001 and 35.0% for the first nine months of
2000. The effective income tax rate is lower than the combined federal and state
statutory rates due primarily to certain tax benefits related to
extraterritorial income at the federal level and investment tax credits at the
state level.
Net income for the first nine months of 2001 decreased to $6.5 million
or $0.39 per common share-diluted, from $8.0 million or $0.50 per common
share-diluted, for the first nine months of 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 (as hereinafter defined), 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,
introduce new technologies to broaden and differentiate the Company's products
and improve the Company's quality and productivity performance, (ii) increases
in the Company's working capital needs related to its sales growth, and (iii)
investments in the Company's IT systems.
Capital expenditures in the first nine months of 2000 and 2001 were
$13.5 million and $14.3 million, respectively. Capital expenditures were funded
by operating cash flow and borrowings. Management has increased the Company's
capital spending plan for Fiscal 2001 by approximately $14.0 million and as a
result, now anticipates that total capital expenditures during Fiscal 2001 will
approximate $26.0 million. The increase of $14.0 million consists of the
purchase price of additional weaving and yarn manufacturing equipment to expand
capacity and the cost of acquiring additional manufacturing facilities to house
this machinery. The remaining $12.0 million reflects the cost of new production
equipment to expand the Company's finishing capacity and support the Company's
marketing, productivity, quality, service and financial objectives. Management
believes that operating income and borrowings under the Credit
9
Agreement will provide sufficient funding for the Company's capital expenditures
and working capital needs for the foreseeable future.
The Company issued $45.0 million of Senior Notes due October 2005 and
2007 (the Senior Notes) during 1997. 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 on Form 10-K for the year
ended December 30, 2000.
The Company also has a $70.0 million Credit Agreement with a bank which
expires December 31, 2002 (the Credit Agreement). As of September 29, 2001, the
Company had $12.6 million outstanding under the Credit Agreement and unused
availability of $57.3 million net of an outstanding letter of credit of
approximately $100 thousand. 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 December 30, 2000.
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.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements made by
the Company that are prefaced with the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "designed" and
similar expressions, are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, results of operations and
financial position. These statements are based on the Company's current
expectations and estimates as to prospective events and circumstances about
which the Company can give no firm assurance. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made.
As it is not possible to predict every new factor that may emerge,
forward-looking statements should not be relied upon as a prediction of the
Company's actual future financial condition or results. These forward-looking
statements like any forward-looking statements, involve risks and uncertainties
that could cause actual results to differ materially from those projected or
anticipated. Such risks and uncertainties include product demand and market
acceptance of the Company's products, regulatory uncertainties, the effect of
economic conditions, the impact of competitive products and pricing, foreign
currency exchange rates, changes in customers' ordering patterns, and effect of
uncertainties in markets outside the U.S. (including Mexico and South America)
in which the Company operates.
10
Quantitative and Qualitative Disclosures about Market Risk
(In thousands)
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
The Company purchases foreign exchange contracts as a cash flow hedge
in connection with the forecasted purchase of equipment. Under the disclosure
rules of SFAS No. 133, the Company has evaluated the contracts and recorded a $2
net loss to "Other Comprehensive Income" and a current liability for the same
amount. Because of the size of the contracts and their short term nature, the
Company believes that changes in their fair market value would not have a
material adverse effect on the Company's operations or financial performance.
The Company uses excess cash to reduce borrowings under its Credit
Agreement. Occasionally the Company will invest excess cash in short-term Euro
dollar deposits or money market accounts that are carried on the Company's books
at amortized cost, which approximates fair market value.
Primary Market Risk Exposures
The Company's primary market risk exposures are in the areas of
interest rate risk and foreign currency exchange rate risk. The Company's
long-term obligations are sensitive to changes in interest rates. Interest rate
changes would result in a change in the fair value of these financial
instruments due to the difference between the market interest rate and the rate
at the date of issuance of the financial instrument. Further, the Company has
cash flow and earnings risk related to borrowings under its Credit Agreement.
The interest rate on those borrowings fluctuates with changes in short-term
borrowing rates. A ten-percent change in period-end 2001 and 2000 market
interest rates would not result in a material impact to the Company.
The Company is also exposed to currency exchange rate fluctuations
related to its operations in Mexico and Brazil. Operations in Mexico are
denominated in Mexican Pesos, and operations in Brazil are denominated in
Brazilian Reals. The Company had not engaged in formal currency hedging
activities related to these operations prior to April 2001. In May 2001, the
Company adopted a policy of hedging a portion of its Mexican Peso and Brazilian
Real currency exposures. In addition, the Company has a limited natural hedge in
that the Company's expenses in Mexico and Brazil are primarily denominated in
the local currencies of those two countries. The Company also attempts to
minimize exchange rate risk by converting non-U.S. currency to U.S. dollars as
often as practicable. The Company generally views its investments in foreign
subsidiaries with a functional currency other than the Company's reporting
currency as long-term. The Company's investments in foreign subsidiaries are
sensitive to fluctuations in foreign currency exchange rates. The effect of a
change in foreign exchange rates on the Company's net investment in foreign
subsidiaries is reflected in the "Other accumulated comprehensive loss"
component of shareholder' equity. A ten-percent depreciation in the functional
currencies, relative to the U.S. dollar, would not result in a material
reduction of shareholders' equity in 2001 or 2000.
11
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 8, 2001, the Company executed an agreement with the Lemelson
Medical, Education and Research Foundation, LP (the Foundation) which, in
addition to granting the Company a license in connection with the use of certain
Bar Coding and machine vision technology, fully resolves and releases the
Company from all claims, demands and rights of action related to claims of
patent infringement and any allegations of infringement. In consideration of the
rights granted to the Company pursuant to the Agreement, the Company has paid
the Foundation a license fee, which was immaterial.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
None
(B) There were no reports on Form 8-K filed during the three
months ended September 29, 2001.
12
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: October 30, 2001 By: /s/ Paul J. Kelly
-------------------- -----------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
13