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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
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 May 4, 1999, 15,659,902 shares of Registrant's Common Stock,
$0.01 par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
April 3, January 2,
1999 1999
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(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 334 $ 432
Accounts receivable, less allowances of $1,754 and $1,939 at
April 3, 1999 and January 2, 1999, respectively 35,445 40,661
Inventories 43,973 46,594
Prepaid income taxes 1,325 1,311
Prepaid expenses and other current assets 6,878 6,791
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Total current assets 87,955 95,789
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Property, plant and equipment, net of depreciation and amortization
of $50,693 and $47,514 at April 3, 1999
and January 2, 1999, respectively 133,892 132,420
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Other assets:
Goodwill, net of amortization 5,963 6,011
Deferred financing costs 296 252
Other assets 297 294
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Total assets $ 228,403 $ 234,766
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 469 $ 700
Current portion of capital lease obligations 1,944 1,861
Accounts payable 15,951 13,754
Accrued expenses 8,125 6,780
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Total current liabilities 26,489 23,095
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Long-term debt, less current portion 56,218 65,536
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Capital lease obligations, net of current portion 3,447 3,475
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Deferred income taxes 15,820 15,874
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Other long-term liabilities 1,733 1,793
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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; 15,650,440 and 15,646,551 shares issued and
outstanding as of April 3, 1999 and January 2, 1999,
respectively 156 156
Additional paid-in capital 83,431 83,410
Retained earnings 42,460 42,842
Accumulated other comprehensive income(loss) (Note 3) (1,351) (1,415)
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Total stockholders' equity 124,696 124,993
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Total liabilities and stockholders' equity $ 228,403 $ 234,766
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1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
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April 3, April 4,
1999 1998
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(Unaudited)
Net sales $ 56,l4O $62,730
Cost of products sold 45,803 49,139
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Gross margin 10,337 13,591
Selling, general and administrative expenses 9,653 9,398
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Operating income 684 4,193
Other expenses:
Interest expense, net 1,284 1,200
Other, net (13) 15
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Income (loss) before provision for income taxes (587) 2,978
Provision benefit for income taxes (205) 1,042
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Net income (loss) $ (382) $l,936
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Earnings (loss) per common share - basic (Note 1) $ (0.02) $ 0.15
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Weighted average shares outstanding - basic (Note 1) 15,647 12,602
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Earnings (loss) per common share - diluted (Note 1) $ (0.02) $0.15
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Weighted average shares outstanding - diluted (Note 1) 15,647 13,273
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2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended
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April 3, April 4,
1999 1998
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(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (382) $ 1,936
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,240 2,535
Deferred income taxes (54) 270
Changes in operating assets and liabilities:
Accounts receivable (net) 5,216 (1,508)
Inventories 2,621 (5,768)
Prepaid expenses and other assets (160) 622
Accounts payable and accrued expenses 3,542 1,939
Other long-term liabilities (60) 41
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Net cash provided by operating activities 13,963 67
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Cash flows from investing activities:
Net purchase of property, plant and equipment (4,257) (12,312)
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Net cash used for investing activities (4,257) (12,312)
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Cash flows from financing activities:
Repayments of capital leases (340) (284)
Net borrowings (repayments of) revolving line of credit (9,300) 13,100
Repayments of term debt (249) (250)
Proceeds from exercise of common stock options 21 12
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Net cash (used) provided by financing activities (9,868) 12,578
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Effect of exchange rates on cash 64 0
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Net increase (decrease) in cash (98) 333
Cash and cash equivalents, beginning of period 432 234
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Cash and cash equivalents, end of period $ 334 $ 567
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Non cash activity
Capital leases for new equipment $ 394 $ 0
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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 April 3, 1999 and January 2, 1999 and the
results of their operations and cash flows for the three months ended April 3,
1999 and April 4, 1998. 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 2, 1999.
Certain reclassifications have been made to the prior year financial statements
for consistent presentation with the current year.
Earnings Per Common Share
The Company reports earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." Basic
income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. For diluted
income per share, the denominator also includes dilutive outstanding stock
options determined using the treasury stock method. The following table
reconciles weighted average common shares outstanding to weighted average common
shares outstanding and dilutive potential common shares.
Three Months Ended
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April 3, April 4,
1999 1998
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Weighted average common shares outstanding 15,647 12,602
Diluted potential common shares -- 671
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Weighted average common shares outstanding
and dilutive potential common shares 15,647 13,273
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Antidilutive options 913 --
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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 April 3, 1999 and January 2, 1999 consisted of the
following:
April 3, January 2,
1999 1999
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(In thousands)
Raw materials $ 18,737 $ 20,137
Work in process 12,190 12,439
Finished goods 13,133 14,297
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Inventory at FIFO 44,060 46,873
LIFO Reserve 87 279
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Inventory at LIFO $ 43,973 $ 46,594
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Note 3 - COMPREHENSIVE INCOME
In accordance with SFAS No. 130, the Company's "other comprehensive
items" consist of foreign currency translation gains or loss. Foreign currency
translation gains were $64,000 for the first quarter of 1999. No foreign
currency translation gains or losses were reported in fiscal year 1998. During
the first quarters of 1999 and 1998, the Company's comprehensive income (loss)
was $(318,000) and $1,936,000 respectively.
5
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 1998" ended January 2, 1999 and "Fiscal
1999" will end January 1, 2000. The first three months of Fiscal 1998 and Fiscal
1999 ended April 4, 1998 and April 3, 1999, respectively.
Results of Operations
Net sales for the first three months of Fiscal 1999 decreased $6.6
million or 10.5%, to $56.1 million from $62.7 million for the first three months
of Fiscal 1998. The average gross sales price per yard increased 4.0%, to $4.70
for the first three months of Fiscal 1999 from $4.52 for the first three months
of Fiscal 1998. This increase was principally due to an increase in the average
selling price of middle to better-end fabrics. The gross volume of fabric sold
decreased 8.2%, to 11.2 million yards for the first three months of Fiscal 1999
from 12.2 million yards for the first three months of Fiscal 1998. The Company
sold 2.1% fewer yards of middle to better-end fabrics and 20.2% fewer yards of
promotional-end fabrics in the first three months of Fiscal 1999 than in the
first three months of Fiscal 1998. The average gross sales price per yard of
middle to better-end fabrics increased by 3.4%, to $5.21 in the first three
months of Fiscal 1999 as compared to $5.04 in the first three months of Fiscal
1998. The average gross sales price per yard of promotional-end fabrics
decreased by 1.1%, to $3.45 in the first three months of Fiscal 1999 as compared
to $3.49 in the first three months of Fiscal 1998.
Gross fabric sales within the United States decreased 4.0%, to $43.5
million in the first three months of Fiscal 1999 from $45.3 million in the first
three months of Fiscal 1998. Foreign and Export sales decreased 8.6%, to $9.3
million in the first three months of Fiscal 1999 from $10.2 million in the first
three months of Fiscal 1998. Gross yarn sales decreased 48.8%, to $4.5 million
in the first three months of Fiscal 1999 from $8.8 million in the same period of
Fiscal 1998.
The gross margin percentage for the first three months of Fiscal 1999
decreased to 18.4%, as compared to 21.7% for the first three months of Fiscal
1998. The decrease in gross profit margin was primarily due to 1.) weakness in
several of the Company's key export markets which have higher than average
selling prices, 2.) lower sales volume of yarn due to heavy competition from
imported yarns and apparel products, and 3.) lower absorption of fixed costs.
Selling, general and administrative expenses increased to $9.7 million
for the first three months of Fiscal 1999 from $9.4 million for the first three
months of Fiscal 1998. The increase in selling, general and administrative
expenses was primarily due to an increase in fabric sampling expenses. Selling,
general and administrative expenses as a percentage of net sales increased to
17.2% in the first three months of Fiscal 1999 from 15.0% in the first three
months of Fiscal 1998. The increase in selling, general and administrative
expenses as a percentage of net sales was primarily due to lower revenues in the
first quarter of 1999.
6
Interest expense increased to $1.3 million for the first three months of
Fiscal 1999 from $1.2 million for the first three months of Fiscal 1998. Higher
average levels of senior debt caused the increase in interest expense.
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis, using the estimated annual
effective income tax rate. The Company's estimated tax rate was 35.0% for the
first three months of both Fiscal 1999 and Fiscal 1998. The effective income tax
rate is lower than the combined federal and state statutory rates due primarily
to the foreign sales corporation tax benefits and state investment tax credits.
Net income for the first three months of Fiscal 1999 decreased to a loss
of $382,000 and, or ($0.02) per common share-diluted, from $1.9 million, or
$0.15 per common share-diluted, for the first three months of Fiscal 1998. 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 2, 1999.
Liquidity and Capital Resources
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
under the Credit Agreement, and debt and equity offerings. The Company's capital
requirements have arisen principally in connection with the purchase of
equipment to expand production capacity and improve the Company's quality and
productivity performance and with an increase in the Company's working capital
needs related to its sales growth.
Capital expenditures in the first three months of Fiscal 1998 and Fiscal
1999 were $12.3 million and $4.7 million, respectively. Capital expenditures
were funded by operating cash flow and borrowings. Management anticipates that
capital expenditures will total approximately $24.0 million in 1999, consisting
of $10.9 million primarily for new production equipment to expand finishing
capacity and support the Company's marketing, productivity, quality, service and
financial performance objectives. Management believes that operating income and
borrowing under the Credit Agreement will provide sufficient funding for the
Company's capital expenditures and working capital needs for the foreseeable
future.
The Company 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 10-K for the year ended
January 2, 1999.
7
The Company has a $70.0 million Credit Agreement with two banks which
expires December 31, 2002. In 1998, the Company 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 April
3, 1999, the Company had $11.2 million outstanding under the Credit Agreement
and unused availability of $58.7 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 2, 1999.
Year 2000
The "Year 2000 issue" is a result of the many existing computer programs
that use only the last two, rather than all four, digits to specify a year. As a
result, it is anticipated that date sensitive programs may only recognize "00"
as signifying the year 1900, and therefore not recognize the year 2000. Although
the exact consequences of such an event are not yet fully known, there is
concern that there could be at least a temporary inability to engage in normal
business operations, which, in the aggregate, could have a negative effect on
the global economy.
The Company has considered and planned for the Year 2000 issue since the
middle of 1996 when the Company began working with outside consultants and
software vendors to both develop its response to the Year 2000 issue, as well as
to update its overall management information system. In addition, the Company
has an internal project team in place to coordinate these efforts. In late 1996,
the Company purchased a new Enterprise Resource Planning system (the "ERP"). The
ERP is intended to enhance the Company's ability to meet its productivity,
service and quality objectives, and is represented as fully Year 2000 compliant,
and therefore carries a warranty for the latter purpose. The ERP is designed to
read all four digits of a given year, and to convert two digit year
designations, as well. The Company converted to the ERP during July 1998, and
fully implemented the system by the end of 1998.
The Company has also initiated the process of reviewing its
manufacturing and other critical equipment that may be date-sensitive, including
equipment with embedded technology. The Company has organized an internal team
to conduct a survey of all such equipment. The survey is completed and
remediation of equipment is not expected to be material. A timetable and
approach to test certain critical equipment with embedded technology is under
consideration.
Through April 3, 1999, the Company has spent approximately $4.8 million
for product acquisition, planning, conversion, and implementation in connection
with the ERP. Substantially all of the hardware and software costs have been
capitalized.
The Company has sent surveys to its major vendors in an attempt to
ascertain their state of Year 2000 readiness and to determine the extent to
which the Company may be adversely effected by their failure to address the Year
2000 issue appropriately. The Company has received responses to those surveys
and a team of Company employees will continue to coordinate the Company's
efforts in this regard. Similarly, the Company has been in communication with
its major customers, and is receiving information from them as to their state of
readiness for the Year 2000.
8
The Company will continue to assess the state of Year 2000 preparedness
of its major suppliers and vendors. While the failure by these entities to
adequately address their Year 2000 issues could have a material adverse effect
on the Company, it is not presently possible to reasonably estimate the amount
of business that the Company could lose or the other costs that the Company
could sustain in the event of such failure. Similarly, to the extent that other
segments of the global political, financial, economic, transportation and
manufacturing sectors malfunction at the Year 2000, the Company's operations and
financial strength would likely be adversely affected to some presently unknown
degree.
The Company believes that it will be successful in its efforts to
address the Year 2000 issue and will therefore not suffer any material adverse
effect on its operations or financial condition. Although the Company is not
certain as to the nature and complete extent of the risks of failure in this
regard, such failure could lead to a "most reasonably likely worst case
scenario" where it was severely limited in its ability to perform its
manufacturing processes, deliver its products, and otherwise engage in its
ordinary business operations for an unknown period of time. At present, the
Company has no contingency plan in place for such an occurrence and has no firm
plans to initiate the creation of such a contingency plan or to further study
the uncertainty surrounding the risks of failure.
9
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27.0 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the
three months ended April 3, 1999.
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: May 14, 1999 By: /s/ Paul J. Kelly
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Paul J. Kelly
Vice President - Finance
and Treasurer
11