SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-7023
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QUAKER FABRIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 04-1933106
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
941 GRINNELL STREET 02721
FALL RIVER, MASSACHUSETTS (ZIP CODE)
(ADDRESS PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (508) 678-1951
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01 The Nasdaq Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if the Registrant is a well-known seasoned
issuer as defined in Rule 405 of the Securities Act.
Yes: |_| No: |X|
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes: |_| No: |X|
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes: |X| No:|_|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or non-accelerated filer. (as defined in Exchange
Act Rule 12b-2).
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes: |_| No: |X|
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant, computed by reference to the closing sales
price as quoted on NASDAQ on July 1, 2006 was approximately $18.0 million. As of
May 14, 2007, 16,876,918 shares of the Registrant's common stock, par value
$0.01 per share, were outstanding.
Table of Contents
QUAKER FABRIC CORPORATON
Quarterly Report on Form 10-Q
Quarter ended March 31, 2007
PART I FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets............................................................. 2
Consolidated Statements of Operations................................................... 3
Consolidated Statements of Comprehensive Loss........................................... 3
Consolidated Statements of Cash Flows................................................... 4
Notes to Consolidated Financial Statements.............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...15
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................22
Item 4. Controls and Procedures.................................................................22
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................24
Item 1A. Risk Factors............................................................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................24
Item 3. Defaults upon Senior Securities.........................................................24
Item 4. Submission of Matters to a Vote of Security Holders.....................................24
Item 5. Other Information.......................................................................24
Item 6. Exhibits................................................................................24
Signatures..............................................................................25
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share information)
March 31, December 30,
2007 2006
----------- ---------
ASSETS
Current assets:
Cash ............................................................. $ 581 $ 724
Accounts receivable, net of reserves for bad debts and
sales allowances of $941 and $2,019 at March 31,
2007 and December 30, 2006, respectively ....................... 21,649 21,512
Inventories, net ................................................. 27,749 28,122
Production supplies .............................................. 1,571 1,651
Prepaid insurance ................................................ 1,338 1,582
Other current assets ............................................. 2,546 2,387
--------- ---------
Total current assets ......................................... 55,434 55,978
Property, plant and equipment, net ...................................... 74,882 77,413
Assets held for sale .................................................... 21,579 21,811
Other assets ........................................................... 5,297 5,642
--------- ---------
Total assets ................................................. $ 157,192 $ 160,844
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt (Note 7) ................................. $ 13,003 $ 11,280
Current portion of capital lease obligations ..................... 154 152
Accounts payable ................................................. 12,808 12,405
Accrued expenses and other current liabilities ................... 10,820 8,844
--------- ---------
Total current liabilities .................................... 36,785 32,681
Long-term debt, less current portion .................................... 19,744 22,440
Capital lease obligations, less current portion ......................... 438 477
Other long-term liabilities ............................................. 2,324 2,317
Commitments and contingencies (Note 9) 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;
16,876,918 shares issued and outstanding
as of March 31, 2007 and December 30, 2006 ........................ 169 169
Additional paid-in capital ........................................... 89,188 89,168
Retained earnings .................................................... 10,669 15,784
Other accumulated comprehensive loss ................................. (2,125 (2,192
--------- ---------
Total stockholders' equity .................................. 97,901 102,929
--------- ---------
Total liabilities and stockholders' equity .................. $ 157,192 $ 160,844
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
2
QUAKER FABRIC
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(Amounts in thousands, except per share amounts)
THREE MONTHS ENDED
-----------------------------------------
March 31, April 1,
2007 2006
---------------- ----------------
Net sales ................................... $ 32,596 $ 46,280
Cost of products sold ....................... 28,974 40,839
---------------- ----------------
Gross profit ................................ 3,622 5,441
Selling, general and administrative expenses 7,137 10,029
Restructuring charges ....................... 299 599
---------------- ----------------
Operating loss .............................. (3,814) (5,187)
Other expenses:
Interest expense ......................... 1,049 769
Amortization of deferred financing costs . 201 539
Other expense (income) ................... (36) (133)
---------------- ----------------
Loss before provision for income taxes ...... (5,028) (6,362)
Provision (benefit) for income taxes ........ 87 (2,227)
---------------- ----------------
Net loss .................................... $ (5,115) $ (4,135)
================ ================
Loss per common share - basic ............... $ (0.30) $ (0.25)
================ ================
Loss per common share - diluted ............. $ (0.30) $ (0.25)
================ ================
Weighted average shares outstanding - basic . 16,877 16,843
================ ================
Weighted average shares outstanding - diluted 16,877 16,843
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS - UNAUDITED
(Amounts in thousands)
THREE MONTHS ENDED
--------------------------------
March 31, April 1,
2007 2006
-------------- --------------
Net loss...................................................... $ (5,115) $ (4,135)
-------------- ---------------
Other comprehensive income (loss)
Foreign currency translation adjustments, net
of tax provision benefit of $0 and $44 67 83
-------------- ---------------
Other comprehensive income............................. 67 83
-------------- ---------------
Comprehensive loss............................................ $ (5,048) $ (4,052)
============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(Dollars in thousands)
THREE MONTHS ENDED
---------------------------
March 31, April 1,
2007 2006
---------- -----------
Cash flows from operating activities:
Net loss ...................................................................... $ (5,115) $ (4,135)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ............................................. 2,846 4,292
Amortization of unearned compensation ..................................... 20 --
Provision for bad debts ................................................... 119 105
Deferred income tax provision (benefit) ................................... -- (2,278)
Changes in operating assets and liabilities:
Accounts receivable ........................................................... (257) 1,644
Inventories ................................................................... 394 343
Prepaid expenses and other assets ............................................. 310 455
Accounts payable, accrued expenses and other current liabilities .............. 2,467 1,165
Other long-term liabilities ................................................... 7 (132
-------- --------
Net cash provided by operating activities ................................. 791 1,459
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment ..................................... (115) (187
Proceeds from disposal of equipment ........................................... 232 --
-------- --------
Net cash provided by (used in) investing activities ....................... 117 (187)
-------- --------
Cash flows from financing activities:
Borrowings from revolving credit facility ..................................... 33,120 8,735
Repayments of revolving credit facility ....................................... (31,396) (8,201
Repayment of long-term debt ................................................... -- (1,010)
Repayment of term loans ....................................................... (2,697) --
Repayment of capital leases ................................................... (37) (35
Change in overdraft ........................................................... (88) (381
Debt issuance costs ........................................................... -- (364
Proceeds from exercise of common stock options, including tax benefits ........ -- 93
-------- --------
Net cash used in financing activities ..................................... (1,098) (1,163)
-------- --------
Effect of exchange rates on cash ................................................. 47 36
-------- --------
Net increase (decrease) in cash .................................................. (143) 145
Cash and cash equivalents, beginning of period ................................... 724 725
-------- --------
Cash and cash equivalents, end of period ......................................... $ 581 $ 870
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
4
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts)
1. OPERATIONS
Quaker Fabric Corporation and subsidiaries (the "Company" or "Quaker")
designs, manufactures and markets woven upholstery fabrics primarily for
residential furniture markets and specialty yarns for use in the production of
its own fabrics and for sale to distributors of craft yarns and manufacturers of
home furnishings and other products.
On a comparative basis, the Company's sales have declined
quarter-to-quarter in each of the eleven consecutive fiscal quarters ended March
31, 2007. Quaker has also reported operating losses in each of those fiscal
quarters. In 2005, management put a restructuring plan in place intended to
restore the Company to profitability. The key elements of this restructuring
plan include: (i) stabilizing revenues from Quaker's U.S.-based residential
fabric business by concentrating the Company's marketing efforts on those
markets least sensitive to imported products; (ii) reducing operating costs
enough to compensate for the drop the Company has experienced in its revenues
over the past few years; (iii) selling excess assets; (iv) developing
strategically important commercial relationships with a limited number of
carefully chosen offshore fabric mills to recapture the share of the domestic
residential market lost to foreign imports over the past few years; and (v)
generating additional profitable sales by penetrating the outdoor and contract
fabric markets. To reduce the Company's working capital requirements and further
conserve cash, the Company may also further reduce its cost structure by taking
actions such as further personnel reductions and/or the suspension of certain
new product/new market development projects. Successful execution of the
Company's restructuring plan will require considerable operational, management,
financial, sales and marketing, supply chain, information systems and design
expertise involving the need to continually recruit, train and retain qualified
personnel.
2. 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, results of operations and
cash flows for the interim periods presented. The unaudited consolidated
financial statements have been prepared pursuant to the instructions to Form
10-Q and Rule 10-01 of regulation S-X of the Securities and Exchange Commission.
In the opinion of management, the accompanying unaudited consolidated financial
statements were prepared following the same policies and procedures used in the
preparation of the audited financial statements for the year ended December 30,
2006 and reflect all adjustments (consisting of normal recurring adjustments)
considered necessary to present fairly the financial position and results of
operations of Quaker Fabric Corporation and Subsidiaries (the "Company").
Operating results for the three months ended March 31, 2007 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, 2006. Certain prior year amounts
have been reclassified to conform with the current year's presentation. These
reclassifications had no impact on the Company's financial position or results
of operations.
LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the period. For
diluted loss per share, the denominator also includes dilutive outstanding stock
options determined using the treasury stock method. Due to losses for the three
months ended March 31, 2007 and April 1, 2006, no incremental shares are
included in the dilutive weighted average shares outstanding because the effect
would be antidilutive. The dilutive potential common shares for the three months
ended March 31, 2007 and April 1, 2006 would have been 0 and 9, respectively.
The following table reconciles weighted average common shares outstanding to
weighted average common shares outstanding and dilutive potential common shares.
5
THREE MONTHS ENDED
------------------------
March 31, April 1,
2007 2006
---- ----
Weighted average common shares outstanding .................................... 16,877 16,843
Dilutive potential common shares .............................................. -- --
------ ------
Weighted average common shares outstanding and dilutive potential common shares 16,877 16,843
====== ======
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company provides
for depreciation and amortization on property and equipment on a straight-line
basis over their estimated useful lives. The useful life for leasehold
improvements is initially established as the lesser of (i) the useful life of
the asset or (ii) the initial term of the lease excluding renewal option
periods, unless it is reasonably assured that renewal options will be exercised
based on the existence of a bargain renewal option or economic penalties. If the
exercise of renewal options is reasonably assured due to the existence of
bargain renewal options or economic penalties, such as the existence of
significant leasehold improvements, the useful life of the leasehold
improvements includes both the initial term and any renewal periods.
During the first quarter of 2006, the Company sold certain fully
depreciated equipment for a gain of $110. This gain is included in "Other
Expenses" in the Consolidated Statement of Operations.
3. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS
A summary of the Company's restructuring and asset impairments charges by
period is below:
Three Months Ended April 1, 2006
--------------------------------
Balance Cost Cash Non-Cash Balance
Jan. 1, 2006 Incurred Payments Adjustments April 1,2006
------------ -------- -------- ----------- ------------
Employee severance costs $ 25 $ 296 $(127) $-- $194
Restructuring professional fees -- 303 (303) -- --
---- ----- ----- --- ----
$ 25 $ 599 $(430) $-- $194
==== ===== ===== === ====
Three Months Ended March 31, 2007
---------------------------------
Balance Cost Cash Non-Cash Balance
Dec. 31, 2006 Incurred Payments Adjustments March 31, 2007
------------- -------- -------- ----------- --------------
Employee severance costs $ 35 $ 134 $ (126) $ -- $ 43
Restructuring professional fees 28 18 (28) -- 18
Plant consolidation costs -- 118 (118) -- --
Lease, occupancy and other exit costs 693 29 (171) (13) 538
---- ----- ------ ----- ----
$756 $ 299 $ (443) $ (13) $599
==== ===== ====== ===== ====
2005 RESTRUCTURING
During 2005, the Company implemented a restructuring plan to address a
declining order rate and sales volume, and the following steps were taken as
part of that plan: o Reduced production capacity by idling excess manufacturing
equipment.
o Reduced the workforce from 2,314 employees as of January 1,
2005 to 1,655 employees as of December 31, 2005.
o Closed the Company's manufacturing facility located at 763
Quequechan Street in Fall River, Massachusetts and offered the
building for sale.
o Idled all of the manufacturing equipment at its Somerset,
Massachusetts facility and offered the building for sale.
o Offered for sale 60 acres of undeveloped land purchased in
1998.
6
As a result of these steps, the Quequechan Street and Somerset
facilities and idled equipment were evaluated for impairment in accordance with
SFAS No. 144. Based on projected gross cash flows expected from this equipment
and these facilities, the Company determined that these assets were impaired and
recorded a charge of $10,241, representing the difference between management's
estimate of their fair value and their book value. Also, the Company incurred
$255 of employee termination costs related to 27 employees. In addition, as part
of the consolidation of manufacturing and warehousing facilities, the Company
incurred $1,203 of moving and duplicate occupancy costs during the year ended
December 31, 2005. These costs are included in cost of goods sold.
2006 RESTRUCTURING
During 2006, the Company continued to implement its restructuring plan,
including taking actions intended to reduce costs and bring them in line with
lower revenue estimates and the 2006 Business Plan. The following steps were
taken:
o A plan was adopted to reduce the number of facilities occupied
by the Company from six to two. Consistent with that plan,
during 2006, the Company offered for sale three owned
manufacturing facilities and its corporate headquarters and
research and development facility.
o Additional equipment was idled to reduce production capacity
to levels consistent with anticipated order volumes.
o Reduced the workforce from 1,655 employees as of December 31,
2005 to 1,008 employees as of December 30, 2006.
o Completed the sale of the Company's Quequechan Street and
Somerset facilities, which realized cash proceeds of
approximately $2,800.
As a result of these actions, the Company evaluated its facilities and
equipment for impairment, in accordance with SFAS No. 144. Based upon the
projected gross cash flows expected from the assets idled during 2006, the
Company determined that these assets were impaired and recorded an impairment
charge of $21,967. Also, the Company recorded additional impairment charges of
$507 related to the 60 acres of land held for sale. This land previously had a
book value of $4,007, which approximated the fair market value based upon
independent appraisals. The land was written down in the third quarter of 2006
to a revised estimated sales value of $3,500, based on written offers received
but not accepted during the fourth quarter. This property remains for sale.
The Company also closed its Graham Road, Fall River, Massachusetts yarn
manufacturing facility in the fourth quarter of 2006. The Company recorded a
charge of $193 during the fourth quarter of 2006 for the remaining contractual
lease payments due with respect to this facility through the June 2007 lease
termination date. Also included in 2006 restructuring expenses were occupancy
costs of $159 for the period in which the facility was idled. The Company also
recorded $500 of other occupancy related restructuring charges.
In addition, as part of the consolidation of manufacturing and
warehousing facilities, the Company incurred $620 of moving and duplicate
occupancy costs during the year ended December 30, 2006. Also, the Company
incurred $639 of employee termination costs related to 40 employees. In
accordance with Amendment No. 5 to the 2005 Credit Agreement, the Company was
required by its lenders to engage Alvarez & Marsal, a New York-based financial
and management consulting firm, to assist the Company with the implementation of
its restructuring, refinancing and consolidation plans. Expenses incurred during
2006 for these services were $1,531. In addition, the Company also incurred $342
of other professional fees related to the November 2006 refinancing of the
Company's debt.
4. ASSETS HELD FOR SALE
During the second half of 2005, the Company idled certain manufacturing
equipment and decided to offer two owned facilities for sale. The land,
buildings and improvements were written down to management's estimate of fair
market value and placed with a real estate broker. Subsequently, the Company
entered into agreements during the first quarter of 2006 to sell its Quequechan
Street facility in Fall River and its County Street facility in Somerset,
Massachusetts for $1,400 and $1,700, respectively. The Quequechan Street
facility sold in June 2006 for $1,400 less expenses of $118, and the County
Street facility sold in July 2006 for $1,625. The Company sold the County Street
facility for a gain of $367. In addition, the Company has 60 acres of unimproved
land purchased in 1998, which has been placed with a real estate broker for
sale. This land is stated at estimated fair market value based upon management's
estimate of the expected proceeds to be received upon sale of the property.
During the third quarter of 2006, the Company decided to offer three additional
manufacturing facilities and its administrative office and R&D facility for
sale. A real estate broker is actively marketing these four properties which
have an aggregate book value of $13,636.
7
During the fourth quarter of 2006, the Company entered into an agreement
to sell certain equipment for $2,100. The Company received a deposit of $210,
and will receive monthly installment deposits of $315 though June 2007. The
Company has also identified certain other manufacturing equipment with a book
value of $2,300, which is being offered for sale.
March 31, December 30,
2007 2006
--------- -----------
Land, Buildings and Improvements ....................... $13,636 $13,636
Equipment .............................................. 4,443 4,675
60 Acres of Unimproved Land in Fall River, Massachusetts 3,500 3,500
------- -------
$21,579 $21,811
======= =======
5. INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. A standard cost system is used and approximates
cost on a first-in, first-out (FIFO) basis. Cost for financial reporting
purposes is determined using the last-in, first-out (LIFO) method.
Inbound freight, purchasing and receiving costs, inspection costs,
internal transfer costs and raw material warehousing costs are all capitalized
into inventory and included in cost of goods sold when inventory is sold.
Finished goods warehousing costs and the cost of operating the Company's
finished product distribution centers are included in SG&A expenses.
Inventories consisted of the following:
March 31, December 30,
2007 2006
---------- --------
Raw materials.......................................... $ 14,727 $ 16,532
Work-in-process ........................................ 4,493 3,397
Finished goods ......................................... 10,176 10,703
------- --------
Inventory at FIFO ................................... 29,396 30,632
LIFO adjustment ........................................ (1,647) (2,510)
------- --------
Inventory at LIFO................................... $ 27,749 $ 28,122
======= ========
6. 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.
8
Net sales to unaffiliated customers by major geographical area were as
follows:
Three Months Ended
------------------------------
March 31, April 1,
2007 2006
---- ----
United States..............................................$ 26,577 $ 39,658
Canada..................................................... 1,724 2,272
Mexico..................................................... 1,940 1,600
Middle East................................................ 131 552
South America.............................................. 1,181 991
Europe..................................................... 563 739
All Other.................................................. 480 468
-------------- -------------
$ 32,596 $ 46,280
============== =============
Net sales by product category are as follows:
Three Months Ended
-------------------------------
March 31, April 1,
2007 2006
---- ----
Fabric..................................................... $ 31,564 $ 44,737
Yarn....................................................... 1,032 1,543
-------------- -------------
$ 32,596 $ 46,280
============== =============
7. DEBT
Debt consists of the following:
March 31, December 30,
2007 2006
--------------- ---------------
Senior Secured Revolving Credit Facility.................................... $ 11,203 $ 9,480
Term Loans payable by May 2010 ............................................. 21,544 24,240
--------------- ----------------
Total Debt.................................................................. $ 32,747 $ 33,720
Less: Current Portion of Senior Secured Revolving Credit Facility....... 11,203 9,480
Current Portion of Term Loans...................................... 1,800 1,800
--------------- ----------------
Total Long-Term Debt........................................................ $ 19,744 $ 22,440
=============== ================
On November 9, 2006, Quaker Fabric Corporation of Fall River
("Quaker"), a wholly-owned subsidiary of Quaker Fabric Corporation (the
"Company"), entered into a $25,000 amended and restated senior secured revolving
credit agreement with Bank of America, N.A. (the "Bank") and two other lenders
(the "2006 Revolving Credit Agreement"). Quaker's obligations to the revolving
credit lenders are secured by all of the Company's assets, with a junior
interest in Quaker's real estate and machinery and equipment. Simultaneously,
Quaker entered into two (2) senior secured term loans in the aggregate amount of
$24,600, with GB Merchant Partners, LLC as Agent for the term loan lenders (the
"2006 Term Loan Agreement"). The two term loans consist of a $12,500 real estate
loan and a $12,100 equipment loan (the "Real Estate Term Loan" and the
"Equipment Term Loan", respectively, and together, the "Term Loans"). The Term
Loans are secured by all of the Company's assets, with a first priority security
interest in the Company's machinery and equipment and real estate.
9
The proceeds of the Term Loans were used to: (i) repay, in full, all
outstanding obligations under the term loan previously provided by the Bank
pursuant to the terms of Quaker's May 18, 2005 senior secured credit facility
with the Bank (the "2005 Credit Agreement"), (ii) reduce Quaker's obligations to
the Bank under the revolving credit portion of the 2005 Credit Agreement by
approximately $8,900, (iii) fund a $1,000 environmental escrow account required
by the Term Loan Lenders to cover certain environmental site assessment and
remediation expenses potentially arising out of environmental conditions at the
various parcels of real estate serving as collateral for Quaker's obligations to
the Term Loan Lenders, and (iv) pay for approximately $2,600 of transaction and
related costs required by the Bank and the Term Loan Lenders to be paid at the
Closing, including fees to the various lenders of approximately $1,500 and
professional and consulting fees of approximately $1,100.
Both the 2006 Revolving Credit Agreement and the 2006 Term Loan
Agreement have maturity dates of May 17, 2010, and the 2006 Revolving Credit
Agreement and the 2006 Term Loan Agreement are together referred to in this
report as the "2006 Loan Agreements."
Advances to Quaker under the 2006 Revolving Credit Facility are limited
to a formula based on Quaker's accounts receivable and inventory minus an
"Availability Reserve" (and such other reserves as the Bank may establish from
time to time in its reasonable credit judgment.) Advances bear interest at the
prime rate plus 1.25% or LIBOR (London Interbank Offered Rate) plus 2.75%. As of
March 31, 2007, the weighted average interest rate of the advances outstanding
was 9.1%
Pursuant to the terms of the 2006 Term Loan Agreement, mandatory
prepayments of the Real Estate and Equipment Term Loans are required as Quaker
sells the assets securing those loans pursuant to the terms of the restructuring
plan Quaker has in place (the "Restructuring Plan"). Following the sale in 2008
of the last parcel of real estate contemplated by the Restructuring Plan,
amortization of the Real Estate Term Loan would be at the rate of $1,100 per
year, payable at the rate of $100 per month in each month other than July. In
addition, in the event sales of certain parcels of real estate are not
consummated on or before the dates assumed for such sales in the Restructuring
Plan, Quaker would be responsible for making Late Sale Amortization Payments (as
defined in the 2006 Term Loan Agreement) at the rate of $150 per month until
such payments equal 92.5% of the net proceeds the Term Loan Lenders would have
received on the sale of such real estate. Mandatory prepayments of the Equipment
Term Loan and the Real Estate Term Loan are also required in the event of
Equipment Appraisal and/or Real Property Appraisal Shortfalls, respectively (as
defined in the 2006 Term Loan Agreement). The Term Loans bear Interest at the
LIBOR rate plus 7.75% and is payable monthly. As of March 31, 2007, the interest
rate on the Term Loans was 13.07%.
In addition, both the 2006 Revolving Credit Agreement and the 2006 Term
Loan Agreement contain a "springing" Fixed Charge Coverage Ratio covenant with
which Quaker would need to comply in the event Quaker's "Excess Availability"
under the 2006 Revolving Credit Agreement were to fall below $500,000 at any
time. We are currently in compliance with the "Excess Availability" covenant,
however, as discussed below, in the absence of appropriate amendments to the
2006 Loan Agreements, management believes that the Company could fail to satisfy
this covenant during the third quarter of this year. The 2006 Loan Agreements
also include cross-default provisions, customary reporting obligations and
certain affirmative and negative covenants including, but not limited to,
restrictions on dividend payments, capital expenditures, indebtedness, liens and
acquisitions and investments.
On December 1, 2006, the Company and the other parties to the 2006 Term
Loan Agreement entered into Amendment No. 1, effective as of December 1, 2006,
to the 2006 Term Loan Agreement (the "Amendment") to: (i) place certain
restrictions on the terms and conditions on which the Company may agree to sell
excess machinery and equipment going forward, including restrictions on the
Company's ability to agree to the payment of the purchase price for such
equipment over time and the minimum price at which such equipment may be sold,
and (ii) acknowledge and consent to the Company's sale of certain machinery and
equipment no longer needed to support the Company's operations for $2,100,
payable in six (6) equal monthly installments of $315 each, beginning January
15, 2007, and a deposit of $210, paid upon execution of the contract. Pursuant
to the terms of the 2006 Revolving Credit Agreement, Bank of America, N.A.
consented to the Amendment.
10
As of March 31, 2007, there were $32,747 of loans outstanding,
including $11,203 of loans outstanding under the 2006 Revolving Credit Agreement
and $21,544 of loans outstanding under the 2006 Term Loan. On March 31, 2007,
unused Availability was $2,404, net of the $4,400 Availability Reserve, and the
Company had approximately $4,080 of letters of credit outstanding.
The Company's ability to meet its current obligations is dependent on:
(i) its access to trade credit, (ii) its operating cash flow and (iii) its
Availability under the 2006 Revolving Credit Agreement, which is a function of
Eligible Accounts Receivable, Eligible Inventory, and the Availability Reserve
as those terms are defined in the 2006 Revolving Credit Agreement. Availability
is typically lowest during the third quarter of each fiscal year principally due
to: (i) the seasonality of the Company's business and (ii) the negative effects
of the Company's annual two-week July shutdown period on sales and cash.
Increases in the Availability Reserve reduce Availability and thus the Company's
ability to borrow. In like manner, decreases in the Availability Reserve
increase Availability and thus the Company's ability to borrow. The Company
manages its inventory levels, accounts payable and capital expenditures to
provide adequate resources to meet its operating needs, maximize its cash flow
and reduce the need to borrow under the 2006 Revolving Credit Agreement.
However, its cash position may be adversely affected by factors it cannot
completely control, including but not limited to, a reduction in incoming order
rates, production rates, sales, and accounts receivable, as well as delays in
receipt of payment of accounts receivable and limitations of trade credit.
Further, very short lead times and volatility in the Company's order rate make
it difficult for management to predict near term revenues and to adjust the
Company's cost structure rapidly enough to keep pace with an unanticipated
decline in sales. The Company is seeking to dispose of certain production
equipment and manufacturing and warehousing facilities no longer needed as a
result of the consolidation of some of its facilities.
Weakness in the retail furniture sector led to lower than anticipated
orders and sales during fiscal April of 2007. This has resulted in a reduction
in the Company's ability to borrow under the terms of the 2006 Revolving Credit
Agreement, increasing management's need to manage the Company's cash position
carefully and increasing the Company's reliance on trade credit to fund its
operating needs. Based on fiscal April net sales and projected net sales for
fiscal May, we believe that, in the absence of appropriate amendments to the
2006 Loan Agreements, our cash flow from operations and our ability to borrow
under our 2006 Revolving Credit Agreement could be insufficient to meet our
liquidity needs during the third quarter of Fiscal 2007. Accordingly, the
Company intends to engage in discussions with its lenders with respect to the
need for such amendments now. There can be no assurance that the Company will be
able to obtain agreement to such amendments from its lenders on terms acceptable
to the Company or at all. We are also pursuing a number of other transactions in
an effort to maintain adequate liquidity, but there is significant uncertainty
as to whether we will be successful in our efforts to complete such other
transactions.
In addition, pursuant to the terms of the 2006 Term Loan, the lender
has the right to conduct annual re-appraisals of the Company's real estate and
semi-annual re-appraisals of the Company's machinery and equipment. The Company
has been notified that the lender intends to conduct such a re-appraisal of the
Company's machinery and equipment during the second quarter of fiscal 2007. In
the event of an "Equipment Appraisal Shortfall," as that term is defined in the
2006 Term Loan, the Company would be required to make a cash payment to the
lender in an amount equal to the amount by which the aggregate outstanding
principal amount of the Equipment Term Loan exceeds seventy percent 70% of the
net orderly liquidation value of the equipment established through the
re-appraisal process. The outcome of the current re-appraisal process is
uncertain, however, in the absence of appropriate waivers from the lenders, the
Company's failure to make such a payment would result in a default under the
2006 Term Loans - and because of the cross-default provision in the 2006 Loan
Agreements, a related default under the 2006 Revolving Credit Agreement.
In the absence of appropriate amendments to the 2006 Loan Agreements,
the Company could need additional financing to maintain adequate liquidity. No
assurance can be given as to when or whether an agreement may be entered into
with any other financing source which would result in cash funds being available
to the Company on terms acceptable to the Company or at all. If the Company were
unable to generate sufficient additional cash by entering into a financing
agreement with any other financing source, a number of material adverse effects
could be experienced by the Company, including but not limited to, vendors
refusing to ship materials to the Company, the need to make further headcount
reductions and take additional cost cutting initiatives, and other potential
adverse impacts.
11
In addition to the above, our need to manage cash carefully and the
significant operating losses we have experienced make us more vulnerable to
economic downturns, adverse industry conditions or catastrophic external events,
limit our ability to withstand competitive pressures, and reduce our flexibility
in planning for, or responding to, changing business and economic conditions.
8. STOCK OPTIONS
The Company has several stock option plans (the "Plans") in effect that
provide for the granting of non-qualified stock options and other equity-based
incentives to directors, officers, and employees of the Company. Options under
the Plans are granted at fair market value and vesting is determined by the
Board of Directors.
STOCK OPTION ACTIVITY. A summary of the Company's stock option activity
is as follows:
Three Months ended Fiscal Year Ended
------------------------------------------------------------------------------------
March 31, December 30, December 31,
2007 2006 2005
---------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
------------ -------------- --------------- ------------ --------------- ----------
Options outstanding, beginning of period... 2,548 $ 7.75 3,007 $ 7.57 3,147 $ 7.58
Granted.................................... 169 $ 1.13 -- -- -- --
Exercised.................................. -- -- (51) $ 1.37 -- --
Forfeited.................................. (29) $ 6.97 (408) $ 7.20 (140) $ 7.79
---------- ----------- ------------
Options outstanding, end of period......... 2,688 $ 7.34 2,548 $ 7.75 3,007 $ 7.57
Options exercisable........................ 2,522 $ 7.75 2,548 $ 7.75 3,007 $ 7.57
Options available for grant................ 2 ,042 -- 2,182 -- 1,766 --
Weighted average fair value per share of
options granted......................... -- $ 1.13 -- $ -- -- $ --
The following table summarizes information for options outstanding and
exercisable at March 31, 2007:
Weighted Weighted Weighted
Average Average Average
Options Exercise Remaining Options Exercise
Range of Prices Outstanding Price Life (in years) Exercisable Price
- ----------------- -------------------- ------------------ ------------------ ----------------- -------------
$ 0 -- 1.13......... 166 1.13 9.8 -- --
$ 3.54 -- 5.30......... 424 4.22 3.4 424 4.22
$ 5.31 -- 7.07......... 634 6.44 4.7 634 6.44
$ 7.08 -- 8.84......... 595 8.02 3.6 595 8.02
$ 8.85 --10.60......... 785 9.63 3.5 785 9.63
$ 12.37 --14.14......... 30 13.00 1.3 30 13.00
$ 15.90 --17.67......... 54 17.67 1.2 54 17.67
----------- ---------- ---- ------ ---------
2,688 $ 7.34 4.1 2,522 $ 7.75
=========== ========== ==== ====== =========
At its regular meeting in December 2001, the Company's Board of
Directors granted options to purchase 160 shares of common stock at an exercise
price of $8.30 per share to certain individuals subject to shareholder approval
of an increase of 750 shares in the number of shares available for grant under
the Plans. At the May 16, 2002 Annual Meeting, shareholder approval was
received. Accordingly, the Company recorded an unearned compensation charge
equal to the difference between the exercise price and the fair value on the
date of shareholder approval of $1,032. During 2006 and 2005, the Company
recognized $0 and $488 of amortization of unearned compensation, respectively.
12
On December 12, 2003, pursuant to the terms of the Company's 1997 Stock
Option Plan, the Company's Board of Directors granted to Mr. Liebenow, the
Company's President and CEO, options covering 90 shares of common stock, 10
shares of which were subject to shareholder approval at the Company's 2004
Annual Meeting of Shareholders, which approval was received. This option grant
is exercisable for a period of ten years from the grant date, has an exercise
price of $9.12 per share, the fair market value of the Company's common stock on
December 12, 2003, and originally vested over a five year period. Pursuant to a
decision made on December 16, 2005 by the Company's Board of Directors, this
option grant is now fully vested.
On December 16, 2005, the Board of Directors approved the acceleration
of vesting of all outstanding unvested stock options previously awarded to its
employees (including its executive officers) under the Company's equity
compensation plans. The acceleration of vesting became effective on December 16,
2005 for stock options outstanding as of such date. On such date, the closing
market price was $2.60. Options to purchase an aggregate of approximately 565
shares of common stock (of which options to purchase an aggregate of 393 shares
of common stock are held by executive officers of the Company) were accelerated
on December 16, 2005. The exercise prices of the options range from $7.04 to
$9.12. Under the recently issued Financial Accounting Standards Board Statement
No. 123R, "Share-Based Payment" ("SFAS 123R"), the Company was required to apply
the expense recognition provisions under SFAS 123R beginning January 2, 2006.
The decision to accelerate the vesting of these stock options, all of which are
at exercise prices higher than current market price, was made because (i) there
is no perceived value in these options to the employees involved, and (ii) there
are no employee retention ramifications.
On January 17, 2007, the Company granted options to purchase 169 shares
of common stock at an exercise price of $1.13, which was the fair market value
at date of grant. These options vest at the end of one year and are exercisable
for ten years. The fair market value of the options using the Black-Scholes
option pricing model is $80.
ACCOUNTING FOR STOCK-BASED COMPENSATION. Prior to January 1, 2006 the
Company accounted for its stock option plans under APB 25 as well as provided
disclosure of stock-based compensation as outlined in Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation,"
("SFAS 123") as amended by Financial Accounting Standards Board Statement
No.148, "Accounting for Stock-Based Compensation Transition and Disclosure,"
("SFAS 148"). SFAS 123 required disclosure of pro forma net income, EPS and
other information as if the fair value method of accounting for stock options
and other equity instruments described in SFAS 123 had been adopted. The Company
adopted Financial Accounting Standards Board Statement No. 123R "Share Based
Payment" ("SFAS 123R") effective January 1, 2006 using the modified prospective
method. No unvested stock options were outstanding as of December 31, 2005. No
stock options were granted and no modifications to outstanding options were made
during the year ended December 30, 2006.
The Black-Scholes option-pricing model is used to estimate the fair
value on the date of grant of each option granted after December 15, 1994. The
assumptions used for stock option grants and employee stock purchase right
grants were as follows:
Three Months Ended Fiscal Year Ended
-------------------------------------------------------------------
March 31, December 30, December 31,
2007 2006 2005
-------------------------- ------------------- -----------------
Expected volatility.................................. 56% N/A N/A
Risk-free interest rate.............................. 4.75% N/A N/A
Expected life of options............................. 3 Years N/A N/A
Expected dividends................................... N/A N/A N/A
13
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options with no vesting or
transferability restrictions. In addition, option pricing models require the
input of highly subjective assumptions, including expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options and because changes in
the subjective input assumptions used can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
9. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION. In the ordinary course of business, the Company is party
to various types of litigation. The Company believes it has meritorious defenses
to all claims and in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position, results of
operations or liquidity.
(B) During 2003, the Company entered into agreements with the
Massachusetts Department of Environmental Protection (the "MADEP") to install
air pollution control equipment on three of the stacks at one of its
manufacturing facilities located in Fall River. The control equipment is
intended to ensure that emissions from the stacks do not exceed the 0% opacity
limit set forth in the Company's operating permit for air emissions. Management
anticipates that the costs associated with the acquisition and installation of
the control equipment will total approximately $900,000. The equipment itself
was scheduled to be fully installed over a three year period beginning in 2003.
By March 2006, the required pollution control equipment had been installed on
two of the three stacks. The Company has reached an agreement with the MADEP
extending the date by which the equipment required on the third stack must be
installed to October 2007.
The Company accrues for estimated costs associated with known
environmental matters when such costs are probable and can be reasonably
estimated. The actual costs to be incurred for environmental remediation may
vary from estimates, given the inherent uncertainties in evaluating and
estimating environmental liabilities, including the possible effects of changes
in laws and regulations, the stage of the remediation process and the magnitude
of contamination found as the remediation progresses. Environmental due
diligence reviews conducted by the Company's lenders in connection with Quaker's
November 2006 refinancing transaction identified certain regulatory compliance
obligations which the Company failed to meet in a timely fashion. These reviews
also indicated the need for additional environmental site assessment work at
certain of the Company's facilities, raising the possibility that the Company
will be required to incur additional future remediation expenses should further
environmental conditions requiring remediation be identified during this
process. The Company has accrued reserves for environmental matters based on
information presently available, and management believes these reserves to be
adequate. Accordingly, management believes the ultimate disposition of known
environmental matters will not have a material adverse effect on the liquidity,
capital resources, business or consolidated financial position of the Company,
however, there can be no assurance that established reserves will prove to be
adequate or that the costs associated with environmental matters will not
increase in the future.
10. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." This statement requires that the Company recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
and carry forwards to the extent they are realizable. A valuation allowance is
recorded to reduce the Company's deferred tax assets to the amount that is more
likely than not to be realized. The Company does not provide for United States
income taxes on earnings of subsidiaries outside of the United States. The
Company's intention is to reinvest these earnings permanently. Management
believes that United States foreign tax credits would largely eliminate any
United States taxes or offset any foreign withholding taxes.
The Company determines its periodic income tax expense based upon the
current period income and the estimated annual effective tax rate for the
Company. The rate is revised, if necessary, as of the end of each successive
interim period during the fiscal year to the Company's best current estimate of
its annual effective tax rate.
14
The Company adopted FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), on January 1, 2007. As a result of the
implementation of FIN 48, we recognized no adjustment in the liability for
unrecognized income tax benefits. At the adoption date of January 1, 2007, we
had $400 of unrecognized tax benefits. If recognized, these benefits would have
no impact on our effective tax rate because the Company has Net Operating Losses
and other tax credit carry forwards which it has not benefited due to
uncertainties regarding the Company's ability to generate sufficient taxable
income in the future. These unrecognized tax benefits would be offset by
valuation allowances.
The Company is subject to U.S federal income tax as well as income taxes
in multiple state and foreign jurisdictions. There are currently no federal
examinations in progress. The Company is no longer subject to IRS examination of
its federal tax returns prior to 2003, although carry forward attributes that
were generated during 2000-2002 may still be adjusted upon examination if they
are used in a future period. There are currently no state examinations in
progress. The Company is no longer subject to state examination for years prior
to 2003, however carry forward attributes in Massachusetts that were generated
in 1994-2002 may still be adjusted upon examination if they are used in a future
period. Subsidiaries of the Company file income tax returns in Mexico and
Brazil. There are currently no examinations being conducted in either Mexico or
Brazil. The Company is no longer subject to examination in Mexico or Brazil for
years prior to 2001.
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of tax expense. This policy did not
change as a result of the adoption of FIN 48. For the quarter ended March 31,
2007, the Company did not recognize any accrued interest and penalties in the
consolidated statement of operations or consolidated balance sheet.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS 157 establishes a common definition of fair value, provides a
framework for measuring fair value under accounting principles generally
accepted in the United States and expands disclosure requirements about fair
value measurements. SFAS 157 is effective for us as of January 1, 2008. The
Company is currently evaluating the impact, if any, the adoption of SFAS 157
will have on its financial position and results of operations.
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 2006" WAS A 52 WEEK PERIOD ENDED DECEMBER
30, 2006 AND "FISCAL 2007" WILL BE A 52 WEEK PERIOD ENDING DECEMBER 29, 2007.
THE FIRST THREE MONTHS OF FISCAL 2006 AND FISCAL 2007 ENDED APRIL 1, 2006 AND
MARCH 3L, 2007, RESPECTIVELY.
CRITICAL ACCOUNTING POLICIES
Our Critical Accounting Policies are disclosed in Management's Discussion
and Analysis and Note 1 to the Consolidated Financial Statements in our Form
10-K for Fiscal 2006. These policies describe the significant accounting
estimates and policies used in the preparation of our Consolidated Financial
Statements. Preparation of our financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. We believe the most complex and sensitive
judgments result primarily from the need to make estimates about the effects of
matters that are inherently uncertain. Actual results in these areas could
differ from management's estimates. As discussed below and in Note 10 to the
Condensed Consolidated Financial Statements, we have adopted the provisions of
Financial Accounting Standards Board (FASB) Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" on January 1, 2007. Other than these changes,
there have been no significant changes in our critical accounting estimates
during the first three months of 2007.
In the ordinary course of business there is inherent uncertainty in
quantifying our income tax positions. We assess our income tax positions and
record tax benefits for all years subject to examination based upon management's
evaluation of the facts, circumstances, and information available at the
reporting date. For those tax positions where it is more likely than not that a
tax benefit will be sustained, we have recorded the largest amount of tax
benefit with a greater than 50 percent likelihood of being realized upon
ultimate settlement with a taxing authority that has full knowledge of all
relevant information. For those income tax positions where it is not more likely
than not that a tax benefit will be sustained, no tax benefit has been
recognized in the financial statements.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS 157 establishes a common definition of fair value, provides a
framework for measuring fair value under accounting principles generally
accepted in the United States and expands disclosure requirements about fair
value measurements. SFAS 157 is effective for us as of January 1, 2008. The
Company is currently evaluating the impact, if any, the adoption of SFAS 157
will have on its financial position and results of operations.
GENERAL
OVERVIEW. Quaker is a leading supplier of woven upholstery fabrics. To
complement the Company's U.S. production capability and to generate incremental
sales, during the second half of 2005, Quaker began building a global fabric
sourcing capability. This global fabric sourcing capability primarily involves
the development of commercial relationships with a limited number of carefully
chosen offshore fabric mills and is intended to allow the Company to recapture
the share of the domestic residential market it has lost to foreign imports
since Quaker's sales peaked at $365.4 million during Fiscal 2002. The most
important of these commercial relationships is with a large, fully integrated
fabric mill in Hangzhou, China. Quaker also manufactures specialty yarns, most
of which are used in the production of the Company's fabric products. The
balance is sold to manufacturers of craft yarns, home furnishings and other
products.
Overall demand levels in the upholstery fabric sector are a function of
overall demand for household furniture, which is, in turn, affected by general
economic conditions, population demographics, new household formations, consumer
confidence and disposable income levels, sales of new and existing homes and
interest rates.
Competition in the industry is intense, from both domestic fabric mills
and fabric mills located outside the U.S. manufacturing products for sale into
the U.S. market. In addition, there has been a recent and significant increase
in imports of both furniture coverings and fully upholstered furniture into the
U.S. market, with industry data indicating that sales of imported fabrics in
both roll and "kit," i.e., cut and sewn, form represented approximately 42% of
total U.S. fabric sales during 2004, up from 29% in 2003 and 11% in 2002.
Management believes that this trend has continued and estimates that imported
fabrics currently represent approximately 60% of total U.S. fabric sales.
The Company's fabric products compete with other furniture coverings,
including leather, suede, microdenier "faux suede," prints, tufts, flocks and
velvets, for consumer acceptance. Consumer tastes in upholstered furniture
coverings are somewhat cyclical and do change over time, sometimes rapidly, with
various coverings gaining or losing share depending on changes in home
furnishing trends and the amount of retail floor space allocated to various
upholstered furniture product categories at any given time. For example, leather
furniture and furniture covered with microdenier faux suede products, primarily
imported in roll and "kit" (i.e., cut and sewn) form from low labor cost
countries, particularly China, have enjoyed strong demand over the past few
years, primarily at the expense of woven fabrics, such as the Jacquards and
other woven fabrics Quaker manufactures. In some retail furniture stores, these
products may occupy as much as 50% of the floor space allocated to upholstered
furniture products.
Competitive factors in the industry include product design, product
pricing, customer service and quality. Competition from lower cost imported
products has increased, particularly from those products coming into the United
States from China.
Management considers such factors as incoming customer order rates, size
of production backlog, manufacturing efficiencies, product mix and price points
in evaluating the Company's financial condition and operating performance.
Incoming orders during the first three months of 2007 were down approximately
27.5% compared to the first three months of 2006. The total backlog of fabric
and yarn products at the end of the first three months of 2007 was $9.5 million,
down $3.7 million compared to that of a year ago, with the dollar value of the
yarn backlog down $0.8 million or 60.0% and the dollar value of the fabric
backlog down $2.9 million or 24.6%.
16
RESULTS OF OPERATIONS - Quarterly Comparison
NET SALES. Net sales for the first quarter of 2007 decreased $13.7
million, or 29.6%, to $32.6 million from $46.3 million in the first quarter of
2006. Net fabric sales within the United States decreased 32.8%, to $25.6
million in the first quarter of 2007 from $38.2 million in first quarter of
2006, as a result of continued competition from leather, microdenier faux suede
and other furniture coverings being imported into the U.S. in roll and "kit"
form, primarily from low labor cost countries in Asia, particularly China. Net
foreign sales of fabric decreased 9.8%, to $5.9 million in the first quarter of
2007 from $6.5 million in the first quarter of 2006. This decrease in foreign
sales was due primarily to lower sales in Canada. Canadian furniture
manufacturers sell furniture into both the United States and Canadian markets
where strong competition from imported faux suede fabrics and leather continued
during 2007 and contributed to a more difficult competitive environment. Sales
to the Middle East were also down due to unrest in the area. Net yarn sales
decreased to $1.0 million in the first quarter of 2007 from $1.5 million in the
first quarter of 2006, with the decrease in 2007 principally due to weakness in
the craft yarn industry.
The gross volume of fabric sold decreased 32.1%, to 5.0 million yards in
the first quarter of 2007 from 7.3 million yards in the first quarter of 2006.
The weighted average gross sales price per yard increased 3.8%, to $6.29 in the
first quarter of 2007 from $6.06 in the first quarter of 2006 as a result of
product mix changes. The Company sold 25.5% fewer yards of middle to better-end
fabrics and 44.5% fewer yards of promotional-end fabrics in the first quarter of
2007 than in the first quarter of 2006. The average gross sales price per yard
of middle to better-end fabrics decreased 1.8%, to $7.00 in the first quarter of
2007 from $7.13 in the first quarter of 2006. The average gross sales price per
yard of promotional-end fabrics increased by 10.8%, to $4.49 in the first
quarter of 2007 from $4.05 in the first quarter of 2006.
GROSS MARGIN. The gross margin percentage for the first quarter of 2007
decreased to 11.1% as compared to 11.8% for the first quarter of 2006. Slightly
higher raw material and labor costs contributed approximately 50 basis points to
the decline and the 29.6% drop in net sales caused fixed expenses to increase
relative to sales by about 20 basis points.
RESTRUCTURING CHARGES. During the three month period ended March 31,
2007, the Company reported restructuring charges of $0.3 million. This consisted
of $0.2 million of consulting and refinancing fees, plant consolidation, lease,
and occupancy costs and $0.1 million of employee termination costs. During the
three month period ended April 1, 2006 the Company reported restructuring
charges of $0.6 million. This consisted of $0.3 million of consulting and
refinancing fees and $0.3 million of termination costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $7.1 million in the first quarter of 2007
as compared to $10.0 million in the first quarter of 2006, primarily due to
lower sales commissions as a result of lower sales and a decrease in payroll
costs attributable to staffing reductions, and lower sampling expense. Selling,
general and administrative expenses as a percentage of net sales were 21.9% and
21.7% in the first quarter of 2007 and in the first quarter of 2006,
respectively. Selling, general and administrative expenses were higher as a
percentage of net sales due to lower sales.
INTEREST EXPENSE. Interest expense increased to $1.0 million in the first
quarter of 2007 from $0.8 million in the first quarter of 2006, primarily due to
debt with higher interest rates.
EFFECTIVE TAX RATE. The Company's effective tax rate was a provision of
1.7% in the first quarter of 2007 compared to a benefit of 35.0% in the first
quarter of 2006. The tax benefit rate in 2007 is limited because the Company has
benefited the maximum amount of its losses allowable against its remaining
deferred tax liabilities. The tax provision of 1.7% consists of certain minimum
taxes required in certain states and foreign taxes on the Company's foreign
subsidiaries.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, debt and
equity offerings and borrowings under its financing agreements, including its
2006 Revolving Credit Agreement, as hereinafter defined. The Company's current
capital requirements are related to the execution of Quaker's restructuring
plan. (See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General--Recent Developments in the Company's Annual
Report on Form 10-K for the year ended December 30, 2006.)
Consistent with the Company's restructuring plan, a key 2007 objective
is to stabilize revenues from Quaker's core domestic residential business while
simultaneously working to generate incremental sales from the new product and
new market initiatives the Company has been pursuing. These initiatives include
the development of fabrics designed by Quaker for manufacture outside the U.S.
through strategic relationships put in place with various offshore fabric mills.
These offshore sourcing programs are intended to allow Quaker to supplement the
woven fabrics in its product line with other upholstery products, such as
velvets and faux suedes, that the Company does not have the equipment to make
itself and to allow the Company to recapture at least a portion of the domestic
residential business it has lost to imported products over the past several
years. Simultaneously, Quaker intends to generate revenues based on its U.S.
production by continuing to aggressively develop other products that for both
strategic and economic reasons are best produced in our Fall River-based
manufacturing facilities. These include Quaker's relatively new outdoor fabric
and contract furniture programs, which are intended to build revenues by
leveraging the Company's technological expertise to expand the markets it
serves, as well as fabrics for those domestic and international residential
customers in need of a strong U.S.-based fabric mill to meet their requirements
for high quality, innovative products with relatively short delivery lead times.
On the cost reduction front, Quaker will be continuing to consolidate its Fall
River manufacturing operations into fewer facilities, actively marketing its
excess real estate and other excess assets, improving its quality performance
and productivity levels and being increasingly innovative and flexible--while at
the same time seeking to keep operating costs as low as possible and to maximize
operating cash flows through careful inventory control.
To complete the restructuring of our business, Quaker will need to make
significant investment in the development of new commercial relationships and in
the development, production, marketing and sale of new products. This investment
is critical in order to maintain and grow our business. However, we cannot
guarantee that the capital needed to achieve this will be available or that we
will be successful in our strategic initiatives. If we are not successful,
management is prepared to take various actions which may include, but not be
limited to, further reductions in our expenditures for internal and external new
product development and in overhead expenses. These actions, should they become
necessary, may result in a significant reduction in the size of our operations.
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 $0.8 million and $1.5 million in the first quarter of
2007 and 2006, respectively. During the first quarter of Fiscal 2007, the
Company received an advanced payment of $1.3 million on the sale of certain
manufacturing equipment. This transaction increased accrued expenses as of March
31, 2007 and therefore increased cash provided by operating activities. Cash
provided by operating activities decreased during the first quarter of 2007 as
compared to the first quarter of 2006 due principally to higher operating
losses.
Capital expenditures in the first quarter of 2007 and 2006 were $0.1
million and $0.2 million, respectively. Capital expenditures during the first
quarter of 2007 were funded by operating cash flow and borrowings under the
Company's 2006 Revolving Credit Agreement. Management anticipates that capital
expenditures for new projects will not exceed $3.0 million in 2007, consisting
principally of facilities-related and information technology expenditures.
Capital expenditures are restricted under the 2006 Revolving Credit Agreement
and may not exceed $12.0 million in Fiscal 2007. During the first quarter of
2007, the Company generated $1.3 million from the disposition of fixed assets.
The proceeds from these asset sales were used to reduce the term loan debt under
the 2006 Term Loan Agreement, as hereinafter defined.
18
Debt consists of the following:
March 31, December 30,
2007 2006
------------------- ----------------
(In thousands)
Senior Secured Revolving Credit Facility....................................... $ 11,203 $ 9,480
Term Loans payable by May 2010................................................. 21,544 24,240
------------------- ----------------
Total Debt..................................................................... $ 32,747 $ 33,720
Less: Current Portion of Senior Secured Revolving Credit Facility.......... 11,203 9,480
Current Portion of Term Loans......................................... 1,800 1,800
------------------- ----------------
Total Long-Term Debt........................................................... $ 19,744 $ 22,440
=================== ================
On November 9, 2006, Quaker Fabric Corporation of Fall River
("Quaker"), a wholly-owned subsidiary of Quaker Fabric Corporation (the
"Company"), entered into a $25.0 million amended and restated senior secured
revolving credit agreement with Bank of America, N.A. (the "Bank") and two other
lenders (the "2006 Revolving Credit Agreement"). Quaker's obligations to the
revolving credit lenders are secured by all of the Company's assets, with a
junior interest in Quaker's real estate and machinery and equipment.
Simultaneously, Quaker entered into two (2) senior secured term loans in the
aggregate amount of $24.6 million, with GB Merchant Partners, LLC as Agent for
the term loan lenders (the "2006 Term Loan Agreement"). The two term loans
consist of a $12.5 million real estate loan and a $12.1 million equipment loan
(the "Real Estate Term Loan" and the "Equipment Term Loan", respectively, and
together, the "Term Loans"). The Term Loans are secured by all of the Company's
assets, with a first priority security interest in the Company's machinery and
equipment and real estate.
The proceeds of the Term Loans were used to: (i) repay, in full, all
outstanding obligations under the term loan previously provided by the Bank
pursuant to the terms of Quaker's May 18, 2005 senior secured credit facility
with the Bank (the "2005 Credit Agreement"), (ii) reduce Quaker's obligations to
the Bank under the revolving credit portion of the 2005 Credit Agreement by
approximately $8.9 million, (iii) fund a $1.0 million environmental escrow
account required by the Term Loan Lenders to cover certain environmental site
assessment and remediation expenses potentially arising out of environmental
conditions at the various parcels of real estate serving as collateral for
Quaker's obligations to the Term Loan Lenders, and (iv) pay for approximately
$2.6 million of transaction and related costs required by the Bank and the Term
Loan Lenders to be paid at the Closing, including fees to the various lenders of
approximately $1.5 million and professional and consulting fees of approximately
$1.1 million.
Both the 2006 Revolving Credit Agreement and the 2006 Term Loan
Agreement have maturity dates of May 17, 2010, and the 2006 Revolving Credit
Agreement and the 2006 Term Loan Agreement are together referred to in this
report as the "2006 Loan Agreements."
Advances to Quaker under the 2006 Revolving Credit Facility are limited
to a formula based on Quaker's accounts receivable and inventory minus an
"Availability Reserve" (and such other reserves as the Bank may establish from
time to time in its reasonable credit judgment.) Advances bear interest at the
prime rate plus 1.25% or LIBOR (London Interbank Offered Rate) plus 2.75%. As of
March 31, 2007, the weighted average interest rate of the advances outstanding
was 9.1%.
Pursuant to the terms of the 2006 Term Loan Agreement, mandatory
prepayments of the Real Estate and Equipment Term Loans are required as Quaker
sells the assets securing those loans pursuant to the terms of the restructuring
plan Quaker has in place (the "Restructuring Plan"). Following the projected
sale in 2008 of the last parcel of real estate contemplated by the Restructuring
Plan, amortization of the Real Estate Term Loan would be at the rate of $1.1
million per year, payable at the rate of $100,000 per month in each month other
than July. In addition, in the event sales of certain parcels of real estate are
not consummated on or before the dates assumed for such sales in the
Restructuring Plan, Quaker would be responsible for making Late Sale
Amortization Payments (as defined in the 2006 Term Loan Agreement) at the rate
of $150,000 per month until such payments equal 92.5% of the net proceeds the
Term Loan Lenders would have received on the sale of such real estate. Pursuant
to the terms of the 2006 Term Loan Agreement, Late Sale Amortization Payments
are currently being made. Mandatory prepayments of the Equipment Term Loan and
the Real Estate Term Loan are also required in the event of Equipment Appraisal
and/or Real Property Appraisal Shortfalls, respectively (as defined in the 2006
Term Loan Agreement). The Term Loans bear interest at the LIBOR rate plus 7.75%,
payable monthly. As of March 31, 2007, the interest rate on the Term Loans was
13.07%.
19
In addition, both the 2006 Revolving Credit Agreement and the 2006 Term
Loan Agreement contain a "springing" Fixed Charge Coverage Ratio covenant with
which Quaker would need to comply in the event Quaker's "Excess Availability"
under the 2006 Revolving Credit Agreement were to fall below $500,000 at any
time. We are currently in compliance with the "Excess Availability" covenant,
however, as discussed below, in the absence of appropriate amendments to the
2006 Loan Agreements, management believes that the Company could fail to satisfy
this covenant during the third quarter of this year. The 2006 Loan Agreements
also include cross-default provisions, customary reporting obligations and
certain affirmative and negative covenants including, but not limited to,
restrictions on dividend payments, capital expenditures, indebtedness, liens and
acquisitions and investments.
On December 1, 2006, the Company and the other parties to the 2006 Term
Loan Agreement entered into Amendment No. 1, effective as of December 1, 2006,
to the 2006 Term Loan Agreement (the "Amendment") to: (i) place certain
restrictions on the terms and conditions on which the Company may agree to sell
excess machinery and equipment going forward, including restrictions on the
Company's ability to agree to the payment of the purchase price for such
equipment over time and the minimum price at which such equipment may be sold,
and (ii) acknowledge and consent to the Company's sale of certain machinery and
equipment no longer needed to support the Company's operations for $2.1 million,
payable in six (6) equal monthly installments of $315,000 each, beginning
January 15, 2007, and a deposit of $210,000 paid upon execution of the contract.
Pursuant to the terms of the 2006 Revolving Credit Agreement, Bank of America,
N.A. consented to the Amendment.
The Company's ability to meet its current obligations is dependent on:
(i) its access to trade credit, (ii) its operating cash flow and (iii) its
Availability under the 2006 Revolving Credit Agreement, which is a function of
Eligible Accounts Receivable, Eligible Inventory, and the Availability Reserve
as those terms are defined in the 2006 Revolving Credit Agreement. Availability
is typically lowest during the third quarter of each fiscal year principally due
to: (i) the seasonality of the Company's business and (ii) the negative effects
of the Company's annual two-week July shutdown period on sales and cash.
Increases in the Availability Reserve reduce Availability and thus the Company's
ability to borrow. In like manner, decreases in the Availability Reserve
increase Availability and thus the Company's ability to borrow. The Company
manages its inventory levels, accounts payable and capital expenditures to
provide adequate resources to meet its operating needs, maximize its cash flow
and reduce the need to borrow under the 2006 Revolving Credit Agreement.
However, its cash position may be adversely affected by factors it cannot
completely control, including but not limited to, a reduction in incoming order
rates, production rates, sales, and accounts receivable, as well as delays in
receipt of payment of accounts receivable and limitations of trade credit.
Further, very short lead times and volatility in the Company's order rate make
it difficult for management to predict near term revenues and to adjust the
Company's cost structure rapidly enough to keep pace with an unanticipated
decline in sales. The Company is seeking to dispose of certain production
equipment and manufacturing and warehousing facilities no longer needed as a
result of the consolidation of some of its facilities.
Weakness in the retail furniture sector led to lower than anticipated
orders and sales during fiscal April of 2007. This has resulted in a reduction
in the Company's ability to borrow under the terms of the 2006 Revolving Credit
Agreement, increasing management's need to manage the Company's cash position
carefully and increasing the Company's reliance on trade credit to fund its
operating needs. Based on fiscal April net sales and projected net sales for
fiscal May, we believe that, in the absence of appropriate amendments to the
2006 Loan Agreements, our cash flow from operations and our ability to borrow
under our 2006 Revolving Credit Agreement could be insufficient to meet our
liquidity needs during the third quarter of Fiscal 2007. Accordingly, the
Company intends to engage in discussions with its lenders with respect to the
need for such amendments now. There can be no assurance that the Company will be
able to obtain agreement to such amendments from its lenders on terms acceptable
to the Company or at all. We are also pursuing a number of other transactions in
an effort to maintain adequate liquidity, but there is significant uncertainty
as to whether we will be successful in our efforts to complete such other
transactions.
In addition, pursuant to the terms of the 2006 Term Loan, the lender
has the right to conduct annual re-appraisals of the Company's real estate and
semi-annual re-appraisals of the Company's machinery and equipment. The Company
has been notified that the lender intends to conduct such a re-appraisal of the
Company's machinery and equipment during the second quarter of fiscal 2007. In
the event of an "Equipment Appraisal Shortfall," as that term is defined in the
2006 Term Loan, the Company would be required to make a cash payment to the
lender in an amount equal to the amount by which the aggregate outstanding
principal amount of the Equipment Term Loan exceeds seventy percent 70% of the
net orderly liquidation value of the equipment established through the
re-appraisal process. The outcome of the current re-appraisal process is
uncertain, however, in the absence of appropriate waivers from the lenders, the
Company's failure to make such a payment would result in a default under the
2006 Term Loans - and because of the cross-default provision in the 2006 Loan
Agreements, a related default under the 2006 Revolving Credit Agreement.
20
In the absence of appropriate amendments to the 2006 Loan Agreements,
the Company could need additional financing to maintain adequate liquidity. No
assurance can be given as to when or whether an agreement may be entered into
with any other financing source which would result in cash funds being available
to the Company on terms acceptable to the Company or at all. If the Company were
unable to generate sufficient additional cash by entering into a financing
agreement with any other financing source, a number of material adverse effects
could be experienced by the Company, including but not limited to, vendors
refusing to ship materials to the Company, the need to make further headcount
reductions and take additional cost cutting initiatives, and other potential
adverse impacts.
In addition to the above, our need to manage cash carefully and the
significant operating losses we have experienced make us more vulnerable to
economic downturns, adverse industry conditions or catastrophic external events,
limit our ability to withstand competitive pressures, and reduce our flexibility
in planning for, or responding to, changing business and economic conditions.
As of March 31, 2007, there were $32.7 million of loans outstanding,
including $11.2 million of loans outstanding under the 2006 Revolving Credit
Agreement and $21.5 million of loans outstanding under the 2006 Term Loan. On
March 31, 2007, unused Availability was $2.4 million, net of the $4.4 million
Availability Reserve, and the Company had approximately $4.1 million of letters
of credit outstanding.
As of May 11, 2007, there were $33.7 million of loans outstanding,
including $12.9 million of loans outstanding under the 2006 Revolving Credit
Agreement and $20.8 million of loans outstanding under the 2006 Term Loan. On
May 11, 2007, unused Availability was $2.5 million, net of the $4.4 million
Availability Reserve, and the Company had approximately $4.0 million of letters
of credit outstanding.
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, and by reflecting the effects of inflation in
the selling prices of the new products it introduces each year. However,
increases during 2005 in oil prices resulted in significant increases in the
Company's energy and raw material costs, primarily as a result of the
substantial number of raw materials used by the Company that are petroleum
derivatives, e.g., polypropylene, acrylic. Despite an across the board price
increase effected by the Company during the first half of 2005, and a $0.15 per
yard temporary surcharge effected in October, 2005, intense competition in the
industry has impaired the Company's ability to pass cost increases of any kind
along to its customers.
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: the Company's ability to
comply with the terms of the financing documents to which it is a party, the
Company's ability to generate sufficient Eligible Accounts Receivable and
Eligible Inventory, net of the Availability Reserve (all as defined in the 2006
Revolving Credit Agreement) to maintain adequate Availability to meet its
liquidity needs, product demand and market acceptance of the Company's products,
regulatory uncertainties, the effect of economic conditions, the impact of
competitive products and pricing, including, but not limited to, imported
furniture and furniture coverings sold into the U.S. domestic market, foreign
currency exchange rates, changes in customers' ordering patterns, and the effect
of uncertainties in markets outside the U.S. (including Mexico and South
America) in which the Company operates.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposures relative to market risk are due to foreign
exchange risk and interest rate risk.
FOREIGN CURRENCY RISK
Approximately 7.7% of the Company's revenues are generated outside the
U.S. from sales which are not denominated in U.S. dollars. Foreign currency risk
arises because the Company engages in business in Mexico and Brazil in local
currency. Accordingly, in the absence of hedging activities, whenever the U.S.
dollar strengthens relative to the other major currencies, there is an adverse
affect on the Company's results of operations, and alternatively, whenever the
U.S. dollar weakens relative to the other major currencies, there is a positive
affect on the Company's results of operations.
It had been the Company's policy to minimize, for a period of time, the
unforeseen impact on its results of operations of fluctuations in foreign
exchange rates by using derivative financial instruments to hedge the fair value
of foreign currency denominated intercompany payables. The Company's primary
foreign currency exposures in relation to the U.S. dollar are the Mexican peso
and the Brazilian real.
At March 31, 2007, the Company had no derivative financial instruments
to hedge the anticipated cash flows from the repayment of foreign currency
denominated intercompany payables outstanding.
INTEREST RATE RISK
The Company is exposed to market risk from changes in interest rates on
debt. The Company's exposure to interest rate risk consists of floating rate
debt based on either Prime or London Interbank Offered Rate ("LIBOR") rates,
plus an "Applicable Margin" under the Company's 2006 Loan Agreements. As of
March 31, 2007, there was $11.2 million of borrowings outstanding under 2006
Revolving Credit Agreement and $21.5 million of borrowings outstanding under the
2006 Term Loan Agreement at floating rates, including some LIBOR loans.
Increases in short-term interest rates will increase the Company's interest
expense. Based upon the balances outstanding as of March 31, 2007, an increase
of 100 basis points in interest rates would increase annual interest expense by
approximately $384,000.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
Our management, with the participation of our Chief Executive Officer,
or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act), as of March 31,
2007. Based on this evaluation, our CEO and CFO concluded that, as of March 31,
2007, our disclosure controls and procedures were (1) designed to ensure that
material information relating to us, including our consolidated subsidiaries, is
made known to our CEO and CFO by others within those entities, particularly
during the period in which this report was being prepared and (2) effective, in
that they provide reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
22
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
Implementation of the Company's restructuring plan, particularly during
the fourth quarter of 2006, has resulted in staffing reductions in virtually
every functional area of the Company, including those areas responsible for key
controls integral to the operation of the Company's internal controls over
financial reporting, such as our finance and accounting, information technology
("IT"), and purchasing areas. In some cases, a single individual has assumed
responsibility for work previously handled by one or more former Company
employees, resulting in decrease in our ability to provide for appropriate
segregation of duties and in some areas, employees with less experience handling
duties previously handled by more experienced staff members. Also, due to
constraints in our IT department, systems needed to support the Company's
relatively new offshore sourcing initiatives have not been fully developed,
requiring the use of alternate manual procedures, which by their nature increase
the risk of human error. And, due to recent increases in the complexity of the
payment terms and practices affecting our vendor and cash management programs,
manual procedures are also being used more frequently by our accounts payable
staff. Mitigating these changes is the fact that all corporate administrative
functions are centralized in a single location and management oversight with
respect to each functional area is very strong, with most key management
personnel bringing both significant professional experience and significant
years of service at the Company to the task. While management believes that
these recent changes in our internal control over financial reporting
environment have not materially affected the quality of our internal controls
over financial reporting, there can be no assurance that we will be able to
conclude in the future that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act. No other
changes in our internal control over financial reporting occurred during the
fiscal quarter ended March 31, 2007 that has materially effected, or is
reasonably likely to materially affect our internal control system over
financial reporting.
23
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no material change to the matters discussed in Part I,
Item 3 - Legal Proceedings in the Company's Annual Report on Form 10-K for the
year ended December 30, 2006 as filed with the Securities and Exchange
Commission on March 31, 2007.
ITEM 1A. RISK FACTORS
The Company has concluded that there were no material changes during the
first three months of 2007 that would warrant further disclosure beyond those
matters discussed in Part 1, Item 1A - Risk Factors in the Company's Annual
Report on Form 10-K for the year ended December 30, 2006 as filed with the
Securities and Exchange Commission on March 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(A) Exhibits
31.1 Certification by the Chief Executive Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant
to section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
24
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 15, 2007 By: /S/ PAUL J. KELLY
------------ -------------------------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer (Principal Financial Officer)
25