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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 July 4, 1998
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 August 4, 1998, 15,642,925 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)
July 4, January 3,
1998 1998
--------- ---------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 275 $ 234
Accounts receivable, less allowances of $1,858 and $1,479 at
July 4, 1998 and January 3, 1998, respectively,
for doubtful accounts and sales returns and allowances 36,465 32,996
Inventories 42,830 32,176
Prepaid income taxes 52 25
Prepaid expenses and other current assets 4,691 4,688
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Total current assets 84,313 70,119
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Property, plant and equipment, net of depreciation and amortization
of $42,877 and $37,709 at July 4, 1998
and January 3, 1998, respectively 121,143 101,307
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Other assets:
Goodwill, net of amortization 6,108 6,204
Deferred financing costs 256 251
Other assets 226 207
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Total assets $ 212,046 $ 178,088
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 984 $ 995
Current portion of capital lease obligations 1,204 1,167
Accounts payable 16,008 18,203
Accrued expenses 6,140 7,120
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Total current liabilities 24,336 27,485
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Long-term debt, less current portion 79,533 47,436
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Capital lease obligations, net of current portion 4,725 5,336
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Deferred income taxes 14,439 13,771
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Other long-term liabilities 1,834 1,747
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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;
12,639,972 and 12,601,026 shares issued and outstanding as of
July 4, 1998 and January 3, 1998, respectively 126 126
Additional paid-in capital 46,918 46,530
Retained earnings 41,550 37,072
Cumulative translation adjustment (1,415) (1,415)
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Total stockholders' equity 87,179 82,313
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Total liabilities and stockholders' equity $ 212,046 $ 178,088
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1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
-------- -------- -------- --------
(Unaudited) (Unaudited)
Net sales $ 64,075 $ 52,475 $126,805 $105,673
Cost of products sold 49,481 39,469 98,620 79,568
-------- -------- -------- --------
Gross margin 14,594 13,006 28,185 26,105
Selling, general and administrative expenses 9,218 7,986 18,616 16,454
-------- -------- -------- --------
Operating income 5,376 5,020 9,569 9,651
Other expenses:
Interest expense, net 1,468 820 2,668 1,695
Other, net (3) 19 12 28
-------- -------- -------- --------
Income before provision for income taxes 3,911 4,181 6,889 7,928
Provision for income taxes 1,369 1,380 2,411 2,617
-------- -------- -------- --------
Net income $ 2,542 $ 2,801 $ 4,478 $ 5,311
======== ======== ======== ========
Earnings per common share - basic (Note 1) $ 0.20 $ 0.22 $ 0.35 $ 0.43
======== ======== ======== ========
Weighted average shares outstanding - basic (Note 1) 12,622 12,482 12,615 12,287
======== ======== ======== ========
Earnings per common share - diluted (Note 1) $ 0.19 $ 0.21 $ 0.34 $ 0.41
======== ======== ======== ========
Weighted average shares outstanding - diluted (Note 1) 13,361 13,115 13,325 12,894
======== ======== ======== ========
2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
July 4, July 5, July 5, July 5,
1998 1997 1998 1997
------- ------- ------- -------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 2,542 $ 2,801 $ 4,478 $ 5,311
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,774 2,374 5,309 4,343
Deferred income taxes 398 414 668 785
Stock option compensation expense 0 0 0 571
Changes in operating assets and liabilities:
Accounts receivable (net) (1,961) 1,443 (3,469) 569
Inventories (4,886) (297) (10,654) (1,071)
Prepaid expenses and other current assets (671) (193) (49) 646
Accounts payable and accrued expenses (5,114) (5,092) (3,175) (5,954)
Other long-term liabilities 46 (74) 87 (229)
------- ------- ------- -------
Net cash provided (used) by operating
activities (6,872) 1,376 (6,805) 4,971
------- ------- ------- -------
Cash flows from investing activities:
Net purchase of property, plant and equipment (12,692) (7,777) (25,004) (10,217)
------- ------- ------- -------
Net cash used for investing activities (12,692) (7,777) (25,004) (10,217)
------- ------- ------- -------
Cash flows from financing activities:
Repayments of capital leases (290) (331) (574) (656)
Net borrowings from revolving line of credit 19,500 7,000 32,600 3,000
Repayments of term debt (264) (235) (514) (466)
Proceeds from exercise of stock options 376 0 388 0
Proceeds from issuance of common stock,
net of offering expenses 0 (8) 0 3,267
Capitalization of finance cost (50) 0 (50) 0
------- ------- ------- -------
Net cash provided by financing activities 19,272 6,426 31,850 5,145
------- ------- ------- -------
Effect of exchange rates on cash 0 0 0 0
Net decrease in cash and cash equivalents (292) 25 41 (101)
Cash and cash equivalents, beginning of period 567 259 234 385
------- ------- ------- -------
Cash and cash equivalents, end of period $ 275 $ 284 $ 275 $ 284
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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 July 4, 1998 and January 3, 1998 and the
results of their operations and cash flows for the three months ended July 4,
1998 and July 5, 1997. 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 3, 1998. Certain
reclassifications have been made to the prior year financial statements for
consistent presentation with the current year.
EARNINGS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share," effective December 15, 1997. 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 Six Months Ended
----------------------- -------------------------
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
---- ---- ---- ----
Weighted average common shares outstanding 12,622 12,482 12,615 12,287
Dilutive potential common shares 739 633 710 607
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Weighted average common shares outstanding
and dilutive potential common shares 13,361 13,115 13,325 12,894
====== ====== ====== ======
On May 28, 1998, the Company announced that its Board of Directors had
approved a three-for-two split of its common stock to be effected in the form of
a stock dividend payable June 19, 1998 to stockholders of record as of business
June 8, 1998. Following the split, the Company had approximately 12.6 million
shares outstanding. Common shares and earnings per common share have been
restated to reflect the stock split.
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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 July 4, 1998 and January 3, 1998 consisted of the
following:
JULY 4, JANUARY 3,
1998 1998
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(In thousands)
Raw materials $ 20,305 $ 14,430
Work in process 12,934 9,917
Finished goods 9,381 8,092
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Inventory at FIFO 42,620 32,439
LIFO Reserve (210) 263
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Inventory at LIFO $ 42,830 $ 32,176
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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 1997" ended January 3, 1998 and "Fiscal
1998" will end January 2, 1999. The first six months of Fiscal 1997 and Fiscal
1998 ended July 5, 1997 and July 4, 1998, respectively.
RESULTS OF OPERATIONS - Quarterly Comparison
Net sales for the second three months of Fiscal 1998 increased $11.6
million or 22.1%, to $64.1 million from $52.5 million for the second three
months of Fiscal 1997. The average gross sales price per yard increased 6.9%, to
$4.48 for the second three months of Fiscal 1998 from $4.19 for the second three
months of Fiscal 1997. This increase was principally attributable to significant
growth in the higher priced middle to better-end fabric category. The gross
volume of fabric sold increased 17.8%, to 12.8 million yards for the second
three months of Fiscal 1998 from 10.9 million yards for the second three months
of Fiscal 1997. The Company sold 26.2% more yards of middle to better-end
fabrics and 4.2% more yards of promotional-end fabrics in the second three
months of Fiscal 1998 than in the second three months of Fiscal 1997. The
average gross sales price per yard of middle to better-end fabrics increased by
7.0%, to $5.03 in the second three months of Fiscal 1998 as compared to $4.70 in
the second three months of Fiscal 1997. The average gross sales price per yard
of promotional-end fabric increased by 0.9%, to $3.40 in the second three months
of Fiscal 1998 as compared to $3.37 in the second three months of Fiscal 1997.
5
Gross fabric sales within the United States increased 31.6% to $47.3
million in the second three months of Fiscal 1998 from $35.9 million in the
second three months of Fiscal 1997. Foreign and Export sales increased 2.3%, to
$10.0 million in the second three months of Fiscal 1998 from $9.8 million in the
second three months of Fiscal 1997. Gross yarn sales were approximately $8.0
million in the second three months of both Fiscal 1998 and 1997.
The gross margin percentage for the second three months of Fiscal 1998
decreased to 22.8% as compared to 24.8% for the second three months of Fiscal
1997. The decrease in gross profit margin percentage was primarily due to 1.)
lower operating efficiencies and other period costs associated with the $80.0
million, two-year capacity expansion plan which the Company began implementing
in 1997 and which is now substantially complete, and 2.) heavy overtime expenses
associated with operating almost all of the Company's manufacturing areas on a
six and one-half day per week schedule to meet customer demand.
Selling, general and administrative expenses increased to $9.2 million
for the second three months of Fiscal 1998 from $8.0 million for the second
three months of Fiscal 1997. Selling, general and administrative expenses as a
percentage of net sales decreased to 14.4% in the second three months of Fiscal
1998 from 15.2% in the second three months of Fiscal 1997. The increase in
selling, general and administrative expenses was primarily due to increases in
labor and fringe benefits, including continued expansion of the Company's
design staff, increased fabric sampling, yarn development expenses, and expenses
associated with the development of a fabric line to support the Company's entry
into the contract market, as well as costs such as selling commissions which are
based on sales.
Interest expense was $1.5 million for the second three months of Fiscal
1998, and $0.8 million for the second three months of Fiscal 1997. Higher levels
of borrowing on the Company's senior debt at higher rates of interest were the
primary reasons for the increase.
The effective tax rate was 35.0% for the second three months of Fiscal
1998, and 33.0% for the second three months of Fiscal 1997.
Net income for the second three months of Fiscal 1998 decreased to $2.5
million, or $0.19 per common share-diluted, from $2.8 million, or $0.21 per
common share-diluted, for the second three months of Fiscal 1997. 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 3, 1998 and Note 1 herein.
RESULTS OF OPERATIONS - Six-month Comparison
Net sales for the first half of Fiscal 1998 increased $21.1 million or
20.0%, to $126.8 million from $105.7 million for the first half of Fiscal 1997.
The average gross sales price per yard increased 6.6%, to $4.50 for the first
half of Fiscal 1998 from $4.22 for the first half of Fiscal 1997. This increase
was principally due to an increase in Foreign and Export sales
6
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
14.4%, to 25.1 million yards for the first half of Fiscal 1998 from 21.9 million
yards for the first half of Fiscal 1997. The Company sold 19.4% more yards of
middle to better-end fabrics and 5.6% more yards of promotional-end fabrics in
the first half of Fiscal 1998 than in the first half of Fiscal 1997. The average
gross sales price per yard of middle to better-end fabrics increased by 7.0% to
$5.03 in the first half of Fiscal 1998 as compared to $4.70 in the first half of
Fiscal 1997. The average gross sales price per yard of promotional-end fabric
increased by 1.5%, to $3.44 in the first half of Fiscal 1998 as compared to
$3.39 in the first half of Fiscal 1997.
Gross fabric sales within the United States were $92.6 million in the
first half of Fiscal 1998 an increase of 23.8% over the first half of 1997 gross
fabric sales of $74.8 million. Foreign and Export sales increased 13.4% to $20.2
million in the first half of Fiscal 1998 from $17.8 million in the first half of
Fiscal 1997. Gross yarn sales increased 8.7% to $16.7 million in the first half
of Fiscal 1998 from $15.3 million in the same period of Fiscal 1997.
The gross margin percentage for the first half of Fiscal 1998 decreased
to 22.2% as compared to 24.7% for the first half of Fiscal 1997. The decrease in
the gross margin percentage was due to 1.) lower operating efficiencies and
other period costs associated with the implementation of the $80.0 million,
two-year capacity expansion plan which the Company began implementing in 1997
and which is now substantially complete, and 2.) heavy overtime expenses
associated with operating almost all of the Company's manufacturing areas on a
six and one-half day per week schedule to meet customer demand.
Selling, general and administrative expenses increased to $18.6 million
for the first half of Fiscal 1998 from $16.5 million for the first half of
Fiscal 1997. Selling, general and administrative expenses as a percentage of net
sales decreased to 14.7% in the first half of Fiscal 1998 from 15.6% in the
first half of Fiscal 1997. 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 a fabric line to support the Company's
entry into the contract market. In Fiscal 1997, a $480 thousand, non-cash
increase in stock option amortization expense, due to complete 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 0.5%.
Interest expense increased to $2.7 million for the first half of Fiscal
1998 from $1.7 million in the first half of Fiscal 1997. Higher levels of senior
debt financing, at higher rates of interest were the primary reasons.
The effective tax rate was 35.0% for the first half of Fiscal 1998, and
33.0% for the first half of Fiscal 1997.
Net income for the first half of Fiscal 1998 decreased to $4.5 million,
or $0.34 per common share-diluted, from $5.3 million, or $0.41 per common
share-diluted, for the first half of Fiscal 1997. 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 3, 1998 and Note
1 herein.
7
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 1997, the Company amended its $50.0 million unsecured credit
facility with several banks (the "Credit Agreement") to extend its maturity to
December 31, 2002. In June 1998, the Company further amended its Credit
Agreement to increase the amount of the facility from $50.0 million to $70.0
million and to eliminate covenant limitations with respect to capital
expenditures. As of July 4, 1998, the Company had an outstanding balance of
$34.3 million under the Credit Agreement and unused availability of $35.6
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 3, 1998.
The Company issued $45.0 million of Senior Notes due October 2005 and
2007 (the "Senior Notes") during 1997. Proceeds from the Senior Notes were used
to replace the 6.81% Series A Notes and reduce borrowing under the Credit
Agreement. The Senior Notes bear interest at a fixed rate of 7.09% on $15.0
million and 7.18% on $30.0 million. Annual principal payments begin on October
10, 2003 with a final payment due October 10, 2007. 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 3, 1998.
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 six months of Fiscal 1997 were
$10.2 million. Capital expenditures during the first six months of Fiscal 1998
used $25.0 million of cash and were funded primarily by borrowings under the
Credit Agreement. Management anticipates that capital expenditures will total
approximately $54.0 million in 1998, including approximately $45.0 million for
new production equipment to expand chenille yarn manufacturing capacity,
increase weaving capacity, and support the Company's marketing, productivity,
quality, service and financial performance objectives. Management believes that
the net proceeds to the Company from the August 1998 Offering (as hereinafter
defined), together with cash flow from operations and borrowings under the
Company's Credit Agreement, will provide sufficient funding for the Company's
capital expenditures and working capital needs for at least the next 18 months.
8
SUBSEQUENT EVENTS
On July 28, 1998, the Board of Directors of the Company approved an
additional $17.8 million of capital expenditures, approximately $6.5 million of
which the Company anticipates spending in Fiscal 1998 for new manufacturing
equipment and to buy land in Fall River, Massachusetts on which the Company
plans to construct a new modular manufacturing facility.
On August 4, 1998, the Company completed a public offering of 3.2
million shares of its common stock of which 3.0 million were sold by the Company
and 0.2 million shares were sold by a selling stockholder at $13.00 per share
(the "August 1998 Offering"). The Company applied the net proceeds from the
August 1998 Offering to repay amounts borrowed under the Credit Agreement.
Following application of the net proceeds from the August 1998 Offering, the
Company had an outstanding balance of $1.9 million and unused availability under
the Credit Agreement of $68.0 million, net of outstanding letters of credit.
The Company converted to its new Enterprise Resource Planning system in
July 1998, with full implementation anticipated by year-end, various transition
issues related to this major change are being worked through currently. In
addition to being year 2000 compliant, the Company's new management information
system will also provide additional support to the Company's manufacturing
operations, improving the Company's ability to meet its productivity, service
and quality objectives.
9
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1998, an annual meeting of the shareholders of the Company
was held at which directors were elected to serve until their successors shall
have been elected and shall have qualified and the appointment of the Company's
outside auditors for the year ended January 2, 1999 was ratified. The number of
votes cast for, against, or withheld/abstained and the number of broker
non-votes with regard to each nominee or matter are set forth below:
Withheld/ Broker
For Against Abstained Non-votes
--- ------- --------- ---------
Election of directors:
Sangwoo Ahn 7,881,144 N/A 23,600 -
Larry A. Liebenow 7,881,144 N/A 23,600 -
Jerry I. Porras 7,881,144 N/A 23,600 -
Eriberto R. Scocimara 7,881,144 N/A 23,600 -
Ratification of auditors 7,898,508 1,800 4,435
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27.0 - Financial Data Schedule
(B) The Company filed one report on Form 8-K on June 23, 1998
to report an amendment to the Certificate of Incorporation
of the Company, dated October 25, 1993.
10
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: August 13, 1998 By: /s/ Paul J. Kelly
----------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
11