- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
February 28, 2005
Date of Report (Date of earliest event reported)
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-7023 04-1933106
(State of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 678-1951
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under
any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange
Act (17CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under
the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under
the Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement
Quaker Fabric Corporation (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 information technology
systems.
The primary source of the Company's liquidity and capital resources in recent
years has been operating cash flow. The Company's net cash provided by operating
activities was $15.2 million and $22.8 million in the first nine months of 2004
and 2003, respectively. Cash provided by operating activities decreased during
2004 due principally to a reduction in net income of $4.8 million and a
reduction in the deferred tax provision. Historically, the Company has
supplemented its operating cash flow with borrowings under the Credit Agreement.
Capital expenditures in the first nine months of 2004 and 2003 were $12.1
million and $6.6 million, respectively. Capital expenditures during the first
nine months of 2004 were funded by operating cash flow. Management believes that
cash on hand, operating income and borrowings under the Credit Agreement (as
hereinafter defined), will provide sufficient funding for the Company's capital
expenditures, working capital and debt service needs for the foreseeable future,
subject to the favorable resolution of discussions with its Lenders (as
hereinafter defined) described below.
Quaker Fabric Corporation of Fall River, a wholly-owned subsidiary of the
Company ("Quaker") issued $45.0 million of Senior Notes due October 2005 and
2007 (the Senior Notes) during 1997 under a Note Agreement (as amended, the
"Senior Note Agreement") with an insurance company (the "Insurance Company").
The Senior Notes are unsecured and bear interest at a fixed rate of 7.09% on
$15.0 million and 7.18% on $30.0 million. The Senior Notes may be prepaid in
whole or in part prior to maturity, at Quaker's option, subject to a yield
maintenance premium, as defined. Annual principal payments began on October 10,
2003 with a final payment due October 10, 2007. Annual principal payment amounts
are three payments of $5.0 million beginning in October 2003 (of which only the
October 2005 payment is unpaid as of March 4, 2005), followed by two payments of
$15.0 million beginning in 2006.
On February 14, 2002, Quaker issued $5.0 million of 7.56% Series A Notes due
February 2009 (the "Series A Notes") under a Note Purchase Agreement (as
amended, the "Series A Note Agreement" and together with the Senior Note
Agreement, the "Note Agreements") with the Insurance Company. The Series A Notes
are unsecured and bear interest at a fixed rate of 7.56%, payable semiannually.
The Series A Notes may be prepaid in whole or in part prior to maturity, at
Quaker's option, subject to a yield maintenance premium, as defined. In
addition, the Series A Note Agreement includes a $45.0 million non-committed
shelf note provision pursuant to which, if the conditions to borrowing,
including the consent of the Insurance Company, were met, Quaker could issue
additional senior notes prior to February 14, 2005 with maturity dates of up to
ten years. Quaker does not anticipate issuing any additional senior notes under
the Series A Note Agreement.
2
The long term portion of the amounts outstanding under the Note Agreements was
classified as "current" on the Balance Sheet as of October 2, 2004 in accordance
with Emerging Issues Task Force Issue 86-30, "Classification of Obligations When
a Violation is Waived by the Creditor."
Quaker, two other subsidiaries of the Company and the Company, as guarantor, are
parties to a Credit Agreement with a bank (the "Bank," and the Bank, together
with the Insurance Company, the "Lenders") which expires January 31, 2007 (the
"Credit Agreement"). The Credit Agreement provides for a revolving credit
facility and a letter of credit facility. See Note 5 of Notes to Consolidated
Financial Statements included in the Company's 2003 Annual Report on Form 10-K.
The Company and/or Quaker are required to comply with a number of affirmative
and negative convenants under the Credit Agreement and the Note Agreements,
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 and
Quaker; restrictions on the Company's and/or Quaker'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.
On October 12, 2004, Quaker and the Company, as guarantor, entered into an
amendment, effective as of October 1, 2004, to the Note Agreements with the
Insurance Company. The amendment provides for a reduction in the Fixed Charge
Coverage Ratio (as defined in the Note Agreements) required to be maintained by
Quaker from 1.75 to 1.00, to 1.50 to 1.00 for the twelve (12) month period ended
on October 2, 2004 (the last day of the third fiscal quarter of 2004). In August
2004, Quaker, two other subsidiaries of the Company and the Company, as
guarantor, entered into a similar amendment to the Credit Agreement with the
Bank. The amendment to the Note Agreements also provides that (a) neither Quaker
nor any of its subsidiaries will create or permit to exist any Lien (as defined
in the Note Agreements) securing obligations under the Credit Agreement and (b)
before December 31, 2004 or at any time when a Default (as defined in the Note
Agreements) has occurred and is continuing, the Company will not declare or pay
any dividends on or make any distributions with respect, or purchase, redeem or
retire, any of its capital stock. As a result of the October 12, 2004 amendments
to the Note Agreements and the Credit Agreement, Quaker and the Company were in
compliance with their affirmative and negative covenants under those agreements
as of October 2, 2004.
On March 4, 2005, Quaker, two other subsidiaries of the Company and the Company,
as guarantor, entered into a Waiver and Amendment to the Credit Agreement (the
"Bank Waiver"). Pursuant to the terms of the Bank Waiver, Quaker, the Company
and the other signatories acknowledged that in the absence of a waiver from the
Bank, they anticipated that they would be in breach of both the debt service
coverage ratio covenant and the profitable operations covenant in the Credit
Agreement at year-end 2004 and that these breaches would constitute Events of
Default, as defined in the Credit Agreement (the "Specified Bank Defaults"). In
the Bank Waiver, the Bank agreed to waive the Specified Bank Defaults through
the period ending March 13, 2005 (the "Limited Bank Waiver Period"), subject to
certain conditions including the Bank's receipt of fully executed copies of a
similar waiver from the Insurance Company with respect to the fixed charge
coverage requirements
3
set forth in the Note Agreements. In the Bank Waiver, Quaker, the Company
and the other signatories agreed that an Event of Default under the
Credit Agreement will exist on March 14, 2005 and that at such time
the Bank will have all of its rights and remedies as a result of the existance
of an Event of Default. As of March 4, 2005, there were no loans
outstanding under the Credit Agreement, approximately $4,704,144 of letters
of credit and unused availability (after a reduction of the Bank's Commitment,
as defined in the Credit Agreement) of $15,295,856. The parties previously
had entered into waivers on December 20, 2004 and February 28, 2005 containing
similar terms and including a reduction in the Bank's Commitment to
$20.0 million.
On March 4, 2005, Quaker and the Company, as guarantor, entered into a waiver
agreement with respect to the Note Agreements with the Insurance Company (the
"Insurance Company Waiver"). Pursuant to the terms of the Insurance Company
Waiver, Quaker and the Company acknowledged that in the absence of a waiver from
the Insurance Company, Quaker and the Company anticipated that they would be in
breach of the fixed charge coverage covenant in the Note Agreements at year-end
2004 and that this breach would constitute an Event of Default, as defined in
the Note Agreements (the "Specificied Insurance Company Default"). In the
Insurance Company Waiver, the Insurance Company agreed to waive the Specified
Insurance Company Default through the period ending March 13, 2005 (the "Limited
Insurance Company Waiver period"), subject to certain conditions including, but
not limited to, the Insurance Company's receipt of fully executed copies of a
similar waiver from the Bank with respect to the debt service coverage ratio
covenant and the profitable operations covenant set forth in the Credit
Agreement. In the Insurance Company Waiver, Quaker and the Company agreed that
an Event of Default under the Note Agreements will exist on March 14, 2005 and
that at such time the Insurance Company will have all of its rights and remedies
as a result of the existance of an Event of Default. As of March 4, 2005,
Quaker owed $40,000,00 principal plus accrued interest under the Note
Agreements. The parties previously had entered into waivers on December 22, 2004
and February 28, 2005 containing similar terms.
The Company is in discussions with a commercial bank (the "Prospective Lender")
regarding a proposed new credit facility to replace, and repay borrowings under,
the Note Agreements and the Credit Agreement. Any such facility is expected to
include terms which may be unfavorable to the Company including, but not limited
to, the grant of security interests to the Prospective Lender to secure the
payment and performance of Quaker's and the Company's obligations under the
proposed credit facility and restrictions on Quaker's and the Company's capital
expenditures going forward. There can be no assurance that the Company will
reach agreement with the Prospective Lender on terms acceptable to the Company,
or at all. The Company may be required to seek alternate financing sources, the
terms of which financing, if obtainable, may be disadvantageous to the Company.
Based upon the anticipated performance of the Company for the foreseeable
future, and absent appropriate additional waivers from the Lenders, the failure
to obtain new financing would likely result in an Event of Default under the
Note Agreements and the Credit Agreement and the inability to borrow under the
Credit Agreement no later than March 14, 2005.
No dividends were paid on the Company's common stock prior to fiscal 2003.
During the first quarter of fiscal 2003, the Board of Directors adopted a new
dividend policy. This policy provides for future dividends to be declared at the
discretion of the Board of Directors, based on the Board's quarterly evaluation
of the Company's results of operations, cash requirements, financial conditions
and other factors deemed relevant by the Board. In the first nine months of 2004
and in 2003, the
4
Company paid cash dividends of $1.5 million or $0.09 per common share and $1.3
million or $0.075 per common share, respectively. As noted above, the Company
has agreed with its Lenders not to declare or pay any dividends or distributions
before [December 31, 2004] or at any time when a Default has occurred and is
continuing. It is anticipated that any further amendments to the Note Agreements
or the Credit Agreement, or any agreements for alternate financing, may prohibit
the declaration or payment of dividends.
The foregoing descriptions of the Bank Waiver and the Insurance Company Waiver
are qualified in their entirety by reference to the Bank Waiver and the
Insurance Company Waiver, which are filed as Exhibits 10.12 and 10.13,
respectively, to this Form 8-K and are incorporated by reference herein. The
waiver from the Bank dated February 28, 2005 and the waiver from the Insurance
Company dated February 28, 2005 are filed as Exhibits 10.14 and 10.15,
respectively, to this Form 8-K and are incorporated herein by reference.
5
Item 9.01 Financial Statements and Exhibits
(c) Exhibits
10.12 Waiver and Amendment dated as of March 4, 2005 to Second Amended and
Restated Credit Agreement dated as of February 14, 2002 by and among
Quaker Fabric Corporation of Fall River, Quaker Textile Corporation and
Quaker Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric
Corporation, as Parent, and Fleet National Bank, as the Lender.
10.13 Waiver Agreement dated as of March 4, 2005 to the Note Agreement dated
as of October 10, 1997 and the Note Purchase and Private Shelf
Agreement, dated as of February 14, 2002 by and among Quaker Fabric
Corporation of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America.
10.14 Waiver and Amendment dated as of February 28, 2005 to Second Amended
and Restated Credit Agreement dated as of February 14, 2002 by and
among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Borrowers,
Quaker Fabric Corporation, as Parent, and Fleet National Bank, as the
Lender.
10.15 Waiver Agreement dated as of February 28, 2005 to the Note Agreement
dated as of October 10, 1997 and the Note Purchase and Private Shelf
Agreement, dated as of February 14, 2002 by and among Quaker Fabric
Corporation of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America.
6
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
(Registrant)
Date: March 4, 2005 /s/ Paul J. Kelly
---------------------------------------
Paul J. Kelly
Vice President - Finance and Treasurer
7
EXHIBIT INDEX
10.12 Waiver and Amendment dated as of March 4, 2005 to Second Amended and
Restated Credit Agreement dated as of February 14, 2002 by and among
Quaker Fabric Corporation of Fall River, Quaker Textile Corporation and
Quaker Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric
Corporation, as Parent, and Fleet National Bank, as the Lender.
10.13 Waiver Agreement dated as of March 4, 2005 to the Note Agreement dated
as of October 10, 1997 and the Note Purchase and Private Shelf
Agreement, dated as of February 14, 2002 by and among Quaker Fabric
Corporation of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America.
10.14 Waiver and Amendment dated as of February 28, 2005 to Second Amended
and Restated Credit Agreement dated as of February 14, 2002 by and
among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Borrowers,
Quaker Fabric Corporation, as Parent, and Fleet National Bank, as the
Lender.
10.15 Waiver Agreement dated as of February 28, 2005 to the Note Agreement
dated as of October 10, 1997 and the Note Purchase and Private Shelf
Agreement, dated as of February 14, 2002 by and among Quaker Fabric
Corporation of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America.
8