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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 1, 1996, 8,021,097 shares of Registrant's Common Stock,
$0.01 par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------
June 29, December 30
1996 1995
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 262 $ 200
Accounts receivable, less allowances of $1,603 and $1,985 at
June 29, 1996 and December 30, 1995, respectively,
for doubtful accounts and sales returns and allowances 29,386 24,211
Inventories 23,547 23,156
Prepaid and refundable income taxes 978 1,702
Prepaid expenses and other current assets 2,226 2,371
--------- ---------
Total current assets 56,399 51,640
--------- ---------
Property, plant and equipment, net of depreciation and amortization
of $29,016 and $25,552 at June 29,1996
and December 30, 1995 respectively 82,611 79,156
--------- ---------
Other assets:
Goodwill, net of amortization 6,493 6,589
Deferred financing costs 404 461
Other assets 159 271
--------- ---------
Total assets $ 146,066 $ 138,117
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 914 $ 878
Current portion of capital lease obligations 1,290 1,249
Accounts payable 15,605 14,127
Accrued expenses 6,673 4,606
--------- ---------
Total current liabilities 24,482 20,860
--------- ---------
Long-term debt, less current portion 38,815 37,082
--------- ---------
Capital lease obligations, net of current portion 7,381 8,036
--------- ---------
Deferred income taxes 10,674 10,523
--------- ---------
Other long-term liabilities 3,626 3,766
--------- ---------
Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized. No shares issued and
outstanding. -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares authorized;
8,021,097 shares issued and outstanding as of
June 29, 1996 and December 30, 1995, respectively. 80 80
Additional paid-in capital 41,816 41,687
Retained earnings 20,525 17,397
Cumulative translation adjustment (1,333) (1,314)
--------- ---------
Total stockholders' equity 61,088 57,850
--------- ---------
Total liabilities and stockholders' equity $ 146,066 $ 138,117
========= =========
</TABLE>
1
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- ----------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
------------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $51,025 $41,068 $94,279 $87,318
Cost of products sold 39,713 32,348 73,670 66,494
------- ------- ------- -------
Gross margin 11,312 8,720 20,609 20,824
Selling, general and administrative expenses 7,298 6,012 13,922 13,147
------- ------- ------- -------
Operating income 4,014 2,708 6,687 7,677
Other expenses:
Interest expense, net 1,012 991 1,960 1,941
Other, net 30 2 59 19
------- ------- ------- -------
Income before provision for income taxes 2,972 1,715 4,668 5,717
Provision for income taxes 980 408 1,540 1,915
------- ------- ------- -------
Net income $ 1,992 $ 1,307 $ 3,128 $ 3,802
======= ======= ======= =======
Earnings per common share (Note 1) $ 0.24 $ 0.16 $ 0.38 $ 0.46
======= ======= ======= =======
Average shares outstanding (Note 1) 8,319 8,286 8,309 8,294
======= ======= ======= =======
</TABLE>
2
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months End
------------------ ---------------
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
-------- ------- -------- ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,992 $ 1,307 $ 3,128 $ 3,802
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 1,834 1,678 3,628 3,266
Deferred income taxes 285 220 453 330
Stock option compensation expense 66 55 128 117
Changes in operating assets and liabilities:
Accounts receivable (net) (3,990) 2,945 (5,175) 2,375
Inventories 30 4,091 (391) 1,869
Prepaid expenses and other assets (31) (75) 677 104
Accounts payable and accrued expenses 3,236 (5,399) 3,546 (5,076)
Other long-term liabilities (47) (100) (140) (202)
------- ------- ------- -------
Net cash provided by operating 3,375 4,722 5,854 6,585
------- ------- ------- -------
Cash flows from investing activities:
Net purchase of property, plant and equipment (3,639) (3,379) (6,915) (5,463)
------- ------- ------- -------
Net cash used for investing activities (3,639) (3,379) (6,915) (5,463)
------- ------- ------- -------
Cash flows from financing activities:
Repayments of capital leases (309) (290) (614) (576)
Repayment of term debt (218) (1,101) (431) (398)
Capitalization of financing costs (14)
Net borrowings on revolving line of credit 900 2,200
Proceeds from exercise of stock options 44
------- ------- ------- -------
Net cash provided by financing 373 (1,391) 1,141 (930)
------- ------- ------- -------
Effect of exchange rates on cash (31) 68 (18) (327)
Net decrease in cash and cash equivalents 78 20 62 (135)
Cash and cash equivalents, beginning of period 184 180 200 335
------- ------- ------- -------
Cash and cash equivalents, end of period $ 262 $ 200 $ 262 $ 200
======= ======= ======= =======
</TABLE>
3
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Quaker Fabric Corporation
and Subsidiaries (the "Company") as of June 29, 1996 and December 30, 1995 and
the results of their operations and cash flows for the three months and six
months ended June 29, 1996 and July 1, 1995. The unaudited consolidated
financial statements have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to those rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 30, 1995. Certain reclassifications have been made to the
prior year financial statements for consistent presentation with the current
year.
Earnings Per Common Share
Earnings per common share is computed using the weighted average number of
common shares and common share equivalents outstanding during the period. See
Note 2 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
Note 2 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the last-in, first-out
(LIFO) method.
Inventories at June 29, 1996 and December 30, 1995 consisted of the
following:
<TABLE>
<CAPTION>
June 29, December 30,
1996 1995
-------- -----------
(In thousands)
<S> <C> <C>
Raw materials $ 9,124 $ 10,028
Work in process 7,563 8,087
Finished goods 6,775 5,591
Inventory at FIFO 23,462 23,706
LIFO Reserve (85) 550
Inventory at LIFO $ 23,547 $ 23,156
======== ========
</TABLE>
4
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
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 1995" ended December 30, 1995 and "Fiscal
1996" will end January 4, 1997. The first six months of Fiscal 1995 and Fiscal
1996 ended July 1, 1995 and June 29, 1996, respectively.
Results of Operations - Quarterly Comparison
Net sales for the second three months of Fiscal 1996 increased $9.9
million, or 24.2%, to $51.0 million from $41.1 million for the second three
months of Fiscal 1995. The average gross sales price per yard increased 4.4%, to
$4.02 for the second three months of Fiscal 1996 from $3.85 for the second three
months of Fiscal 1995. This increase was principally due to an increase in
Foreign and Export sales which have a higher than average selling price and to a
higher percentage of middle to better-end fabric sales. The gross volume of
fabric sold increased 20.7% to 11.2 million yards for the second three months of
Fiscal 1996 from 9.3 million yards for the second three months of Fiscal 1995.
The Company sold 35.1% more yards of middle to better-end fabrics and 2.1% more
yards of promotional-end fabrics in the second three months of Fiscal 1996 than
in the second three months of Fiscal 1995. The average gross sales price per
yard of middle to better-end fabrics increased by 2.8% to $4.37 in the second
three months of Fiscal 1996 as compared to $4.25 in the second three months of
Fiscal 1995. The average gross sales price per yard of promotional-end fabric
increased by 2.1% to $3.41 in the second three months of Fiscal 1996 as compared
to $3.34 in the second three months of Fiscal 1995. Gross fabric sales within
the United States increased 16.1% to $35.8 million in the second three months of
Fiscal 1996 from $31.0 million in the second three months of Fiscal 1995.
Foreign and Export sales increased 87.8%, to $9.2 million in the second three
months of Fiscal 1996 from $4.9 million in the second three months of Fiscal
1995. This increase was due to improved demand in the Company's major export
markets. Gross yarn sales increased 12.2% to $7.2 million in the second three
months of Fiscal 1996 from $6.4 million in the same period of Fiscal 1995.
The gross margin percentage for the second three months of Fiscal 1996
increased to 22.2% as compared to 21.2% for the second three months of Fiscal
1995. The increase in gross profit margin was primarily due to (1) higher
production levels resulting in improved absorption of fixed manufacturing
overhead expenses and (2) increased operating performance. The increase in gross
profit margin was partially offset by competitive pricing pressures in our
domestic and foreign markets.
Selling, general and administrative expenses increased to $7.3 million for
the second three months of Fiscal 1996 from $6.0 million for the second three
months of Fiscal 1995. Selling, general and administrative expenses as a
percentage of net sales decreased to 14.3% in the second three months of Fiscal
1996 from 14.6% in the second three months of Fiscal 1995. The increase in
selling, general and administrative expenses was primarily due to increases in
sales commissions and labor and fringe benefits.
5
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Interest expense was $1.0 million for the second three months of Fiscal
1996, and Fiscal 1995. Lower interest rates on the Company's senior debt
facility was offset by higher levels of debt.
The effective tax rate was 33.0% for the second three months of Fiscal 1996
as compared to 23.8% for the second three months of Fiscal 1995. The tax rate
was reduced during the second quarter of Fiscal 1995 to adjust the year-to-date
income tax provision because of favorable outcomes of certain state tax issues.
See Note 7 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 30, 1995.
Net income for the second three months of Fiscal 1996 increased to $2.0
million, or $0.24 per share, from $1.3 million, or $0.16 per share, for the
second three months of Fiscal 1995. For a discussion of "Earnings Per Share,"
see Note 2 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 30, 1995.
.
Results of Operations - Six-month Comparison
Net sales for the first half of Fiscal 1996 increased $7.0 million or
8.0%, to $94.3 million from $87.3 million for the first half of Fiscal 1995. The
average gross sales price per yard increased 4.4%, to $4.05 for the first half
of Fiscal 1996 from $3.88 for the first half of Fiscal 1995. This increase was
principally due to an increase in Foreign and Export sales which have a higher
than average selling price. The gross volume of fabric sold increased 3.4%, to
20.9 million yards for the first half of Fiscal 1996 from 20.2 million yards for
the first half of Fiscal 1995. The Company sold 12.3% more yards of middle to
better-end fabrics and 8.5% fewer yards of promotional-end fabrics in the first
half of Fiscal 1996 than in the first half of Fiscal 1995. The average gross
sales price per yard of middle to better-end fabrics increased by 3.0% to $4.42
in the first half of Fiscal 1996 as compared to $4.29 in the first half of
Fiscal 1995. The average gross sales price per yard of promotional-end fabric
increased by 3.0%, to $3.43 in the first half of Fiscal 1996 as compared to
$3.33 in the first half of Fiscal 1995. Gross fabric sales within the United
States were $68.5 million in both the first half of Fiscal 1996 and the first
half of Fiscal 1995. Foreign and Export sales increased 61.3% to $16.0 million
in the first half of Fiscal 1996 from $9.9 million in the first half of Fiscal
1995. Gross yarn sales increased 8.2% to $11.9 million in the first half of
Fiscal 1996 from $11.0 million in the same period of Fiscal 1995.
The gross margin percentage for the first half of Fiscal 1996 decreased to
21.9% as compared to 23.8% for the first half of Fiscal 1995. The decrease in
the gross margin percentage was due to increased manufacturing costs in Fiscal
1996 as compared to Fiscal 1995 and by competitive pricing pressures in our
domestic and foreign markets.
Selling, general and administrative expenses increased to $13.9 million for
the first half of Fiscal 1996 from $13.1 million for the first half of Fiscal
1995. Selling, general and administrative expenses as a percentage of net sales
decreased to 14.8% in the first half of Fiscal 1996 from 15.1% in the first half
of Fiscal 1995. The increase in selling, general and administrative expenses was
primarily due to increases in sales commissions and labor and fringe benefits.
The decrease in selling, general and administrative expenses as a percentage of
net sales was due to a reduction in fixed expenses during the period such as
sampling expense and expenses of the Company's Mexican warehouse.
6
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The effective tax rate decreased to 33.0% for the first half of Fiscal
1996 from 33.5% for the first half of Fiscal 1995. The decrease in the effective
tax rate is due primarily to a reduction in the company's state income tax rate.
Net income for the first half of Fiscal 1996 decreased to $3.1 million, or
$0.38 per share, from $3.8 million, or $0.46 per share, for the first half of
Fiscal 1995. For a discussion of "Earnings Per Share," see Note 2 to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 30, 1995.
Liquidity and Capital Resources
The Company historically has financed its operations and capital
requirements through a combination of equipment leasing, borrowings, and
internally generated funds. The Company's capital requirements have arisen
principally in connection with expansion of the Company's production capacity,
the equipment modernization program the Company has been executing to reduce
manufacturing costs, and increased working capital needs arising out of the
growth in the Company's sales.
In December 1995, the Company amended its unsecured credit facility with
several banks (the "Credit Agreement") and increased the facility to $50.0
million. As of June 29, 1996, the Company had $6.6 million outstanding under the
Credit Agreement and unused availability of $42.8 million, net of outstanding
letters of credit. Management believes that this facility will provide
sufficient funding for the Company's capital expenditure and working capital
needs for the foreseeable future. For a discussion of the "Credit Agreement,"
see Note 5 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended December 30, 1995.
Net capital expenditures for the first half of Fiscal 1995 were $5.5
million. Capital expenditures during the first half of Fiscal 1996 used $6.9
million of cash. Capital expenditures were funded by cash generated from
operations and borrowing under the Credit Agreement. Management anticipates that
capital expenditures will be approximately $13.0 to $16.0 million in Fiscal 1996
and will include the acquisition of additional manufacturing equipment.
7
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 22, 1996, an annual meeting of the shareholders of the Company
was held at which directors were elected to serve until their successors shall
have been elected and shall have qualified and the appointment of the Company's
outside auditors for the year ended January 4, 1997 was ratified. The number of
votes cast for, against, or withheld/abstained and the number of broker
non-votes with regard to each nominee or matter are set forth below:
<TABLE>
<CAPTION>
Withheld Broker
For Against Abstained Non-votes
<S> <C> <C> <C> <C>
Election of directors:
Sangwoo Ahn 7,636,861 N/A 5,060 --
Perry J. Lewis 7,636,911 N/A 5,010 --
Larry A. Liebenow 7,635,161 N/A 6,760 --
Roberto Pesaro 7,636,911 N/A 5,010 --
Eriberto R. Scocimara 7,636,911 N/A 5,010 --
Ira Starr 7,635,711 N/A 6,210 --
Ratification of auditors 7,639,421 1,900 600 --
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits -
27.0 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the
three months ended June 29, 1996.
8
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: August 4, 1996 By: /s/ Paul J.Kelly
-------------------------- -----------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
9
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-START> DEC-31-1995
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-04-1997
<PERIOD-END> JUN-29-1996
<CASH> 262
<SECURITIES> 0
<RECEIVABLES> 29,386
<ALLOWANCES> 1,603
<INVENTORY> 23,547
<CURRENT-ASSETS> 56,399
<PP&E> 111,627
<DEPRECIATION> 29,016
<TOTAL-ASSETS> 146,066
<CURRENT-LIABILITIES> 24,482
<BONDS> 46,196
0
0
<COMMON> 80
<OTHER-SE> 61,008
<TOTAL-LIABILITY-AND-EQUITY> 146,066
<SALES> 94,279
<TOTAL-REVENUES> 94,279
<CGS> 73,670
<TOTAL-COSTS> 73,670
<OTHER-EXPENSES> 59
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,960
<INCOME-PRETAX> 4,668
<INCOME-TAX> 1,540
<INCOME-CONTINUING> 3,128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,128
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
