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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 October 4, 1997
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 November 3, 1997, 8,383,997 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)
October 4, January 4,
1997 1997
----------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 215 $ 385
Accounts receivable, less allowances of $1,672 and $2,052
at October 4, 1997 and January 4, 1997, respectively,
for doubtful accounts and sales returns and allowances 32,342 26,261
Inventories 31,118 27,737
Prepaid and refundable income taxes 744 694
Prepaid expenses and other current assets 2,178 2,837
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Total current assets 66,597 57,914
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Property, plant and equipment, net of depreciation and
amortization of $36,688 and $32,121 at October 4, 1997
and January 4, 1997, respectively 94,749 84,045
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Other assets:
Goodwill, net of amortization 6,253 6,397
Deferred financing costs 249 322
Other assets 209 154
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Total assets $ 168,057 $ 148,832
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 992 $ 951
Current portion of capital lease obligations 1,409 1,532
Accounts payable 16,218 14,384
Accrued expenses 7,318 8,427
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Total current liabilities 25,937 25,294
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Long-term debt, less current portion 41,384 35,731
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Capital lease obligations, net of current portion 5,635 6,504
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Deferred income taxes 12,852 11,649
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Other long-term liabilities 2,828 3,082
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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; 8,383,397 and 8,021,097 shares issued
and outstanding as of October 4, 1997 and
January 4, 1997, respectively. 84 80
Additional paid-in capital 46,402 41,948
Retained earnings 34,350 25,959
Cumulative translation adjustment (1,415) (1,415)
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Total stockholders' equity 79,421 66,572
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Total liabilities and stockholders' equity $ 168,057 $ 148,832
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1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
-------------------- ---------------------
Oct.4, Sept.28, Oct.4, Sept.28,
1997 1996 1997 1996
-------- -------- -------- ----------
(Unaudited) (Unaudited)
Net sales $ 55,130 $ 46,436 $ 160,803 $ 140,715
Cost of products sold 42,474 35,685 122,042 109,355
-------- -------- -------- --------
Gross margin 12,656 10,751 38,761 31,360
Selling, general and administrative expen 7,783 6,698 24,237 20,620
-------- -------- -------- --------
Operating income 4,873 4,053 14,524 10,740
Other expenses:
Interest expense, net 928 1,062 2,623 3,022
Other, net 20 7 48 66
-------- -------- -------- --------
Income before provision for income taxes 3,925 2,984 11,853 7,652
Provision for income taxes 845 985 3,462 2,525
-------- -------- -------- --------
Net income $ 3,080 $ 1,999 $ 8,391 $ 5,127
======== ======== ======== ========
Earnings per common share (Note $ 0.35 $ 0.24 $ 0.97 $ 0.62
======== ======== ======== ========
Average shares outstanding (Note 1) 8,843 8,324 8,636 8,314
======== ======== ======== ========
2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended Nine Months Ended
---------------------- ---------------------
Oct.4, Sept.28, Oct.4, Sept.28,
1997 1996 1997 1996
--------- --------- -------- ----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 3,080 $ 1,999 $ 8,391 $ 5,127
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,178 1,566 6,521 5,194
Deferred income taxes 418 288 1,203 741
Stock option compensation expense -- 61 571 189
Changes in operating assets and
liabilities:
Accounts receivable (net) (6,650) 810 (6,081) (4,365)
Inventories (2,310) (3,323) (3,381) (3,714)
Prepaid expenses and other assets (92) (113) 554 564
Accounts payable and accrued
expenses 6,679 1,411 725 4,957
Other long-term liabilities (25) (52) (254) (192)
-------- -------- -------- --------
Net cash provided by operating 3,278 2,647 8,249 8,501
-------- -------- -------- --------
Cash flows from investing activities:
Net purchase of property, plant and
equipment (6,791) (2,666) (17,008) (9,581)
-------- -------- -------- --------
Net cash used for investing act (6,791) (2,666) (17,008) (9,581)
-------- -------- -------- --------
Cash flows from financing activities:
Repayments of capital leases (336) (315) (992) (929)
Repayment of term debt (240) (221) (706) (652)
Capitalization of financing costs -- -- -- (14)
Net borrowings on revolving line of credit 3,400 500 6,400 2,700
Proceeds from issuance of common stock,
net of offering expenses -- 3,267
Proceeds from exercise of common share stock 249 -- 249 --
options Tax benefit on stock options
exercised 371 -- 371
-------- -------- -------- --------
Net cash provided by financing
activities 3,444 (36) 8,589 1,105
-------- -------- -------- --------
Effect of exchange rates on cash -- (6) -- (24)
Net (decrease) increase in cash and cash
equivalents (69) (61) (170) 1
Cash and cash equivalents, beginning of
period 284 262 385 200
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 215 $ 201 $ 215 $ 201
======== ======== ======== ========
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 October 4, 1997 and January 4, 1997 and
the results of their operations and cash flows for the three months and nine
months ended October 4, 1997 and September 28, 1996. 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 generally accepted accounting principles 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. 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 4, 1997. Certain reclassifications have been made to the
prior year financial statements for consistent presentation with the current
year.
Earnings Per Common Share
Earnings per common share is computed using the weighted average number
of common shares and common share equivalents outstanding during the period. See
Note 2 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended January 4, 1997.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock. This statement is effective for fiscal years ending after December 15,
1997 and early adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. The Company will adopt
this statement for its fiscal year ending January 3, 1998 and does not believe
that the effect of the adoption of this standard on the Company's earnings per
share results would be materially different from the amounts presented in the
accompanying statements of income.
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
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 October 4, 1997 and January 4, 1997 consisted of the
following:
October 4, January 4,
1997 1997
---- ----
(In thousands)
Raw materials .............................. $12,344 $11,127
Work in process ............................ 9,691 8,421
Finished goods ............................. 9,174 8,280
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Inventory at FIFO ................... 31,209 27,828
LIFO Reserve ............................... 91 91
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Inventory at LIFO ...................... $31,118 $27,737
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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 1996" ended January 4, 1997 and "Fiscal
1997" will end January 3, 1998. The first nine months of Fiscal 1996 and Fiscal
1997 ended September 28, 1996 and October 4, 1997, respectively.
Results of Operations - Quarterly Comparison
Net sales for the third quarter of Fiscal 1997 increased $8.7 million or
18.7%, to $55.1 million from $46.4 million for the third quarter of Fiscal 1996.
The Company benefited from one additional week of operations during the third
quarter of Fiscal 1997 as compared to the third quarter of Fiscal 1996 due to
the timing of the annual vacation shutdown. The average gross sales price per
yard increased 4.7%, to $4.21 for the third quarter of Fiscal 1997 from $4.02
for the third quarter of Fiscal 1996. This increase was principally due to an
increase in Foreign and Export sales which have a higher than average selling
price, and to an increase in the average selling price of middle to better-end
fabric sales. The gross volume of fabric sold increased 11.1%, to 11.2 million
yards for the third quarter of Fiscal 1997 from 10.0 million yards for the third
quarter of Fiscal 1996. The Company sold 6.4% more yards of middle to better-end
fabrics and 19.1% more yards of promotional-end fabrics in the third quarter of
Fiscal 1997 than in the third quarter of Fiscal 1996. The average gross sales
price per yard of middle to better-end fabrics increased by 7.0%, to $4.71 in
the third quarter of Fiscal 1997 as compared to $4.40 in the third quarter of
Fiscal 1996.
5
The average gross sales price per yard of promotional-end fabric
increased by 1.5%, to $3.44 in the third quarter of Fiscal 1997 as compared to
$3.39 in the third quarter of Fiscal 1996. Gross fabric sales within the United
States increased 11.6%, to $36.0 million in the third quarter of Fiscal 1997
from $32.2 million in the third quarter of Fiscal 1996. Foreign and Export sales
increased 34.5%, to $11.0 million in the third quarter of Fiscal 1997 from $8.1
million in the third quarter of Fiscal 1996. Gross yarn sales increased 31.2%,
to $9.1 million in the third quarter of Fiscal 1997 from $7.0 million in the
same period of Fiscal 1996.
The gross margin percentage for the third quarter of Fiscal 1997
decreased to 23.0% as compared to 23.2% for the third quarter of Fiscal 1996.
The decrease in gross profit margin percentage was primarily due to costs
related to the rapid implementation of the Company's capacity expansion program.
These costs include the effects of a 15% increase in the work force this year as
well as the efforts to both add new manufacturing floor space and reorganize
existing operations.
Selling, general and administrative expenses increased to $7.8 million
for the third quarter of Fiscal 1997 from $6.7 million for the third quarter of
Fiscal 1996. Selling, general and administrative expenses as a percentage of net
sales decreased to 14.1% in the third quarter of Fiscal 1997 from 14.4% in the
third quarter of Fiscal 1996. The increase in selling, general and
administrative expenses was primarily due to the increase in sales volume during
the quarter 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 $0.9 million for the third quarter of Fiscal 1997,
and $1.1 million for the third quarter of Fiscal 1996. Lower levels of borrowing
on the Company's senior debt and lower interest on capital leases and term debt
were the primary reasons for the decrease.
The effective tax rate was 21.5% for the third quarter of Fiscal 1997,
and 33.0% for the third quarter of Fiscal 1996. The decrease in the effective
tax rate is due to a reduction in certain deferred and other tax liabilities.
This reduction was in part caused by higher levels of anticipated benefits from
the Company's foreign sales corporation and higher levels of tax credits. In
addition, the Company has been seeking a historic preservation federal tax
credit in excess of $450,000 in connection with the rehabilitation of its
executive office and warehouse facility in Fall River, Massachusetts. However,
the Company was notified on November 7, 1997 that its application was denied.
The Company intends to seek reconsideration of its application, but there can be
no assurance that the Company will ultimately qualify for the credit, or if it
does qualify, of the amount of any such credit.
Net income for the third quarter of Fiscal 1997 increased to $3.1
million, or $0.35 per share, from $2.0 million, or $0.24 per share, for the
third quarter of Fiscal 1996. 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 4, 1997.
Results of Operations - Nine-month Comparison
Net sales for the nine months of Fiscal 1997 increased $20.1 million or
14.3%, to $160.8 million from $140.7 million for the first nine months of Fiscal
1996. The average gross sales price per yard increased 4.5%, to $4.22 for the
first nine months of Fiscal 1997 from $4.04 for the first
6
nine months of Fiscal 1996. This increase was principally due to an increase in
Foreign and Export sales which have a higher than average selling price and to a
higher percentage of middle to better-end fabric sales.
The gross volume of fabric sold increased 6.9%, to 33.1 million yards
for the first nine months of Fiscal 1997 from 30.9 million yards for the first
nine months of Fiscal 1996. The Company sold 7.2% more yards of middle to
better-end fabrics and 6.4% more yards of promotional-end fabrics in the first
nine months of Fiscal 1997 than in the first nine months of Fiscal 1996. The
average gross sales price per yard of middle to better-end fabrics increased by
6.3%, to $4.70 in the first nine months of Fiscal 1997 as compared to $4.42 in
the first nine months of Fiscal 1996. The average gross sales price per yard of
promotional-end fabric decreased by 0.3%, to $3.41 in the first nine months of
Fiscal 1997 as compared to $3.42 in the first nine months of Fiscal 1996. Gross
fabric sales within the United States were $110.7 million in the first nine
months of Fiscal 1997 an increase of 9.9% over the first nine months of 1996
gross fabric sales of $100.8 million. Foreign and Export sales increased 18.9%,
to $28.7 million in the first nine months of Fiscal 1997 from $24.2 million in
the first nine months of Fiscal 1996. Gross yarn sales increased 30.0%, to $24.4
million in the first nine months of Fiscal 1997 from $18.8 million in the same
period of Fiscal 1996.
The gross margin percentage for the first nine months of Fiscal 1997
increased to 24.1% as compared to 22.3% for the first nine months of Fiscal
1996. The increase in the gross margin percentage was due to 1.) increased sales
volume in the higher-margin middle to better-end and foreign/export fabric
categories 2.) lower manufacturing costs resulting from improved manufacturing
efficiencies during the first and second quarters of 1997, and 3.) improved
manufacturing quality performance resulting in a decrease in sales of second
quality fabric. The Fiscal 1997 gross margin was negatively impacted by the
costs of rapid implementation of the capacity expansion program.
Selling, general and administrative expenses increased to $24.2 million
for the first nine months of Fiscal 1997 from $20.6 million for the first nine
months of Fiscal 1996. Selling, general and administrative expenses as a
percentage of net sales increased to 15.1% in the first nine months of Fiscal
1997 from 14.7% in the first nine months of Fiscal 1996. The increase in
selling, general and administrative expenses was primarily due to increases in
sales commissions, labor and fringe benefits, fabric sampling expenses,
continued expansion of the design staff, and costs associated with the
development of an initial fabric line to support the Company's entry into the
contract market. A $480 thousand, non-cash increase in stock option amortization
expense, due to accelerated vesting of certain stock options as a result of the
1997 Offering (as hereinafter defined), increased selling, general and
administrative expenses as a percentage of net sales by 0.3%.
Interest expense decreased to $2.6 million for the first nine months of
Fiscal 1997 from $3.0 million in the first nine months of Fiscal 1996. Lower
levels of senior debt financing, and lower capital lease and term debt
obligations were the primary reasons.
The effective tax rate was 29.2% for the first nine months of Fiscal
1997, and 33.0% for the first nine months of Fiscal 1996. The decrease in the
effective tax rate is due to an adjustment in the third quarter reducing certain
deferred and other tax liabilities. This reduction was in part caused by higher
levels of anticipated benefits form the Company's foreign sales corporation and
higher levels of tax credits.
7
Net income for the first nine months of Fiscal 1997 increased to $8.4
million, or $0.97 per share, from $5.1 million, or $0.62 per share, for the
first nine months of Fiscal 1996. 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 4, 1997.
Liquidity and Capital Resources
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings and
equipment leasing. The Company's capital requirements have arisen principally in
connection with expansion of the Company's production capacity, the equipment
modernization program the Company has been executing to reduce manufacturing
costs, and increased working capital needs associated with the growth of the
Company's sales.
In December 1995, the Company amended its unsecured credit facility with
several banks (the "Credit Agreement") and increased the facility to $50.0
million. As of October 4, 1997, the Company had $10.4 million outstanding under
the Credit Agreement and had unused availability of $39.3 million, net of
outstanding letters of credit. 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 4, 1997.
On March 24, 1997, the Company completed a public offering of 3.4
million shares of its common stock, of which 3.1 million shares were sold by
selling stockholders and 0.3 million were sold by the Company (the "1997
Offering"). The proceeds to the Company from the 1997 Offering were
approximately $3.3 million, net of offering expenses.
Net capital expenditures for the first nine months of Fiscal 1996 were
$9.6 million. Capital expenditures during the first nine months of Fiscal 1997
used $17.0 million of cash and were funded by internally generated cash flows,
proceeds from 1997 Offering and borrowing under the Credit Agreement. In July
1997, the Company announced plans to move forward with a $35.0 million capacity
expansion program, of which approximately $12.0 million is expected to be spent
in Fiscal 1997. This increases the total anticipated capital expenditures for
Fiscal 1997 to $34.0 million. Capital expenditures will consist primarily of
additional manufacturing equipment to support anticipated demand for the
Company's fabric and yarn, and will be financed through internally generated
funds and borrowings under the Credit Agreement. Management believes that the
Company will have sufficient funding resources to meet its working capital and
capital expenditure needs for the next 12 months.
Subsequent Event
On October 10, 1997, the Company renegotiated its Series A Notes due
December 15, 2002 to increase the principal amount from $30.0 million to $45.0
million and to extend the maturity date from December 2002 to October 2007. The
average interest rate of the Senior Notes was also increased from 6.81% to
7.15%. The net proceeds of $15.0 million will be used to reduce borrowings under
the Credit Agreement and finance the Company's capacity expansion program.
THIS DOCUMENT CONTAINS "FORWARD LOOKING STATEMENTS," AS THAT TERM IS
DEFINED IN THE FEDERAL SECURITIES LAWS. THE READER IS CAUTIONED THAT SUCH
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND THAT, AS A RESULT OF
VARIOUS FACTORS, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED. FOR
A FURTHER DISCUSSION OF THESE FACTORS, SEE THE COMPANY'S 1996 FORM 10-K.
8
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 October 4, 1997.
9
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: November 17, 1997 By: /s/ Paul J. Kelly
----------------- --------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
10