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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JANUARY 4, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
QUAKER FABRIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-1933106
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
941 GRINNELL STREET
FALL RIVER, MASSACHUSETTS 02721
(ADDRESS PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (508) 678-1951
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of Class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. 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 March 31, 1997 was approximately $76.5 million.
As of April 1, 1997, 8,321,097 shares of Registrant's common stock, par
value $0.01 per share were outstanding.
Documents Incorporated by Reference
<TABLE>
<CAPTION>
Description of document Part of the Form 10-K
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<S> <C>
Portions of the Proxy Statement to be used in Part III (Item 10 through Item 13)
connection with the Registrant's 1997 Annual and Part IV
Meeting of Stockholders.
1996 Annual Report to Shareholders Part II (Item 5 through Item 8)
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Exhibit Index on Page 19
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PART I
ITEM 1. BUSINESS
OVERVIEW
Quaker is a leading designer, manufacturer and worldwide marketer of woven
upholstery fabrics for residential furniture and one of the largest producers of
Jacquard upholstery fabrics in the world. The Company is also a leading
developer and manufacturer of specialty yarns and management believes it is the
world's largest producer of chenille yarns, which Quaker both sells and uses in
the production of its fabrics. The Company's vertically integrated operations
provide Quaker with important design, cost and delivery advantages. The
Company's product line is one of the most comprehensive in the industry and
Quaker is well known for its broad range of Jacquard fabrics, including its
soft, velvet-like Jacquard chenilles. The Company's revenues have grown from
$123.4 million in 1992 to $198.9 million in 1996, a compound annual growth rate
("CAGR") of 12.7%.
Quaker has been producing upholstery fabric for over fifty years and is a
full-service supplier of Jacquard and plain woven upholstery fabric to the
furniture market. Quaker's current product line consists of over 3,000
traditional, contemporary, transitional and country fabric patterns intended to
meet the styling and design, color, texture, quality and pricing requirements of
promotional through middle to higher-end furniture manufacturers, and the
Company introduces approximately 700 new products to the market annually.
Management believes that Jacquard fabrics, with their detailed designs, provide
furniture manufacturers with more product differentiation opportunities than any
other fabric construction on the market. In addition, technological advances in
the speed and flexibility of the Jacquard loom have reduced the cost of
producing Jacquard fabrics, enabling them to compete more effectively with
prints, velvets, flocks, tufts and other plain woven products.
The Company sells its upholstery fabrics to over 600 domestic furniture
manufacturers, including virtually every significant domestic manufacturer of
upholstered furniture. Quaker also distributes its fabrics internationally. In
1996, fabric sales outside the United States of $35.7 million represented
approximately 20.2% of gross fabric sales. Quaker's October 1996 introduction of
its Whitaker Collection, a branded line of a select group of the Company's
better-end products, has resulted in incremental sales to a number of well known
higher-end furniture manufacturers. Management estimates that approximately 85%
of the Company's fabric sales in recent years have been manufactured to customer
order.
During the past five years, Quaker has invested more than $51 million in
new manufacturing equipment to expand its yarn and fabric production capacity,
increase productivity, improve product quality and produce the more complex
fabrics associated with the Company's successful penetration of the middle to
better-end segment of the upholstery fabric market. During 1997, Quaker plans to
spend approximately $17.9 million on additional manufacturing equipment to
accelerate the growth of its specialty yarn business, respond to anticipated
increases in demand for its fabric products, and achieve its marketing,
productivity, quality, service and financial objectives.
The Company produces all of its yarn and fabric products in its four
manufacturing plants in Fall River, Massachusetts, where Quaker has over one
million square feet of manufacturing space. In
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addition to distribution from the Company's facilities in Fall River, Quaker
maintains domestic distribution centers in High Point, North Carolina, Tupelo,
Mississippi, and Los Angeles, California. To provide better service to its
international customers, the Company also has a distribution center in Mexico
and maintains inventory in Holland.
HISTORY
On March 24, 1997, the Company consummated a public offering of 3,400,000
shares of Common Stock, of which 300,000 shares were issued and offered by the
Company and 3,100,000 shares were offered by selling stockholders (the
"Offering"). The price to the public per share of Common Stock was $13.50. In
connection with the Offering, one of the selling stockholders granted to the
underwriters an over-allotment option to buy up to 510,000 additional shares of
Common Stock, which option expires on April 17, 1997.
THE INDUSTRY
Total domestic upholstery fabric sales, exclusive of automotive
applications, are estimated to be approximately $2.0 billion annually.
Management estimates the size of the international fabric market to be at least
twice that of the domestic market. Due to the capital intensive nature of the
fabric manufacturing process and the importance of economies of scale in the
industry, the domestic industry is concentrated, with the top 15 upholstery
fabric manufacturers, including Quaker, accounting for over 80% of the total
market. Most of the largest U.S. fabric producers have expanded their export
sales, capitalizing on their size, distribution capabilities, technology
advantages and broad product lines. Management believes that over the last
several years furniture manufacturers have moved toward more highly styled
Jacquard fabrics, at the expense of less distinctive fabrics, such as flocks,
plaids, plains, prints, stripes, tufts and velvets. Within the Jacquard segment,
price is a more important competitive factor in the promotional-end of the
market than it is in the middle to better-end of the market, where fabric
styling and design considerations typically play a more important role.
Demand for upholstery fabric is a function of demand for upholstered
furniture. The upholstered furniture market has grown from $5.4 billion in 1991
to $7.4 billion in 1995. Total upholstered furniture demand is affected by
population growth and demographics, consumer confidence, disposable income,
geographic mobility, housing starts, and home sales. Although the domestic
residential furniture industry is cyclical, periods of decline have been
relatively brief, with industry shipments decreasing in only two years since
1975.
The upholstery fabric covering a sofa, chair, or other piece of furniture
is one of the most significant factors influencing a furniture buyer's
selection. Purchase decisions are based primarily on the consumer's evaluation
of aesthetics, comfort, durability, quality and price. As a result, the fabric
decisions a furniture manufacturer makes play a critical role in its ability to
gain a product differentiation advantage at the retail level.
Management believes the long-term outlook for the Company's upholstery
fabric sales will be influenced by certain trends:
(i) As "baby boomers" mature to the 35-64 year age group over the next decade,
they will be reaching their highest earnings power. This age group
includes the largest consumers of residential furniture.
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(ii) Consolidation in the furniture industry is resulting in fewer, but larger,
customers for upholstery fabric manufacturers. These larger customers
typically prefer to purchase their fabric requirements from a small number
of vendors able to provide a broad range of product choices, handle their
volume requirements and offer focused, customized service.
(iii) Homes are decorated more casually today than they were a decade ago,
resulting in a trend toward more comfortable furniture, as well as "motion
furniture." Historically, motion furniture was typically covered with less
expensive flock, plain, tufted or velvet fabrics. The development of
softer, more durable and highly styled Jacquards has allowed motion
furniture manufacturers to improve their profit margins by differentiating
their products.
(iv) Pushed by consumers demanding immediate product delivery, the furniture
industry has increased its focus on just-in-time manufacturing methods and
shorter delivery lead times.
(v) Both consumers and furniture manufacturers have placed increased emphasis
on product quality, enabling fabric manufacturers with effective quality
control systems to gain a competitive advantage.
(vi) Technological advances in the speed and flexibility of the Jacquard loom
have reduced the cost of producing Jacquard fabrics, enabling them to
compete more effectively with prints, velvets, flocks, tufts and other
plain woven products.
STRATEGY
Quaker's strategy to further its growth and financial performance
objectives includes:
Increasing Sales to the Middle to Better-End Segment. To capitalize on the
consolidation trend in the furniture industry, the Company has positioned itself
as a full-service supplier of Jacquard and plain woven fabrics by increasing the
breadth and depth of its product line. Sales of the Company's middle to
better-end fabrics, which the Company first began emphasizing in the early
1990s, have increased from $66.3 million, or 56.3% of total fabric sales in
1992, to $121.7 million, or 69.0% of total fabric sales in 1996, a CAGR of
16.4%.
Expanding International Sales. The Company has made worldwide distribution
of its upholstery fabrics a key component of its growth strategy. Quaker has
built an international sales and distribution network, dedicated significant
corporate resources to the development of fabrics to meet the specific styling
and design needs of its international customers, and put programs in place to
simplify the purchase of product from Quaker. As a result, the Company's
international sales have increased from $18.3 million in 1992 to $35.7 million
in 1996, a CAGR of 18.2%.
Capitalizing on the Growth of the Casual Furniture Segment. Based upon its
leading position in the Jacquard market and its own internally produced chenille
yarns, management believes Quaker is well positioned to benefit from the growth
of the casual furniture segment, where soft, durable, distinctive fabrics, such
as Quaker's Jacquard and other chenilles, are in increasing demand.
Penetrating Related Fabric Markets. Management believes the superior
styling and performance characteristics of the Company's fabrics provide
opportunities to penetrate markets related to Quaker's core residential fabric
business. The Company has specifically targeted the contract (office and
institutional) and recreational vehicle markets, where management believes
Quaker's Jacquard
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chenille fabrics will provide the Company with a clear product advantage. The
Company has also targeted additional sales to the decorative jobber
(distributors to the interior design trade) market, where management believes
the Company's recently introduced Whitaker Collection will have broad appeal.
Growing Specialty Yarn Sales. Quaker is a leading producer of specialty
yarns and management believes it is the world's largest producer of chenille
yarns. Sales of the Company's specialty yarns have increased from $7.8 million
in 1992 to $26.8 million in 1996, a CAGR of 36.2%. In addition to the popularity
of the Company's current line of specialty yarns, including its proprietary,
abrasion-resistant Ankyra chenille yarns, Quaker regularly creates innovative
new specialty yarns for use in the Company's fabrics and sale to the Company's
growing list of yarn customers. Quaker intends to increase sales by targeting
new markets and applications for its specialty yarns.
COMPETITIVE STRENGTHS
Management believes that the following competitive strengths distinguish
Quaker from its competitors and that these strengths serve as a solid foundation
for the Company's growth strategy:
Product Design and Development Capabilities. Management believes that
Quaker's reputation for design excellence and product leadership is, and will
continue to be, the Company's most important competitive strength.
Focus on Jacquard Fabrics. Management believes the detailed, copyrighted
designs of the Company's Jacquard fabrics have enabled it to compete primarily
based on superior styling and design, contributing to Quaker's strong gross
margin performance.
Broad Product Offering. The breadth and depth of Quaker's product line
enables the Company to be a full-service supplier of Jacquard and plain woven
fabrics to virtually every significant domestic manufacturer of upholstered
furniture.
Vertical Integration. Using Quaker's own specialty yarns in the
production of its fabrics provides the Company with significant design, cost
and delivery advantages.
State-of-the-Art Manufacturing Equipment. Management believes the
Company has one of the most modern, efficient and technologically advanced
manufacturing bases in the industry.
PRODUCTS
The Company offers a broad assortment of contemporary, traditional,
transitional and country fabrics to manufacturers of both promotional-end and
middle to better-end furniture at prices ranging from $2.50 to $18.00 per yard.
While most of the Company's fabrics are sold under the Quaker label, the Company
began marketing a select group of its middle to better-end fabrics under its
Whitaker label in October 1996. In 1996 the Company's promotional-end fabric
line and its middle to better-end fabric line had average gross sales prices of
$3.40 per yard and $4.43 per yard, respectively, compared to $3.35 and $4.27,
respectively, in 1995. The average gross sales price per yard of the Company's
fabrics was $4.05 in 1996, compared to $3.88 in 1995.
Quaker's product line consists of low to medium pick (from 6 through 14
picks per inch) woven fabrics, purchased primarily by manufacturers of
promotional-end furniture; and medium to
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high pick (from 15 through 60 picks per inch) woven fabrics, purchased primarily
by manufacturers of middle to higher-end furniture. In the textile industry,
"picks per inch" refers to the number of times the filling, or weft, yarn in a
fabric crosses the warp yarn in that fabric. Lower pick fabrics generally
require the use of bulkier filling yarns in order to effectively "fill" each
inch of space to be "covered" and, therefore, most lower pick fabrics have less
well-defined designs and a considerable amount of "texture" to them. Conversely,
the higher pick content of the Company's middle to better-end fabrics makes it
possible for these fabrics to have more well-defined design features and to
present a smoother, finer, more sophisticated appearance than its
promotional-end fabrics.
Quaker's product line is focused on fabrics with complex designs referred
to in the industry as "Jacquards," because of the special Jacquard equipment, or
heads, required to produce them, and also includes a broad assortment of
striped, plaid, and plain fabrics. All of Quaker's looms are equipped with
Jacquard heads. The use of these heads makes it possible to vary the pattern,
color, and texture of both the filling and warp yarns in a fabric. Fabrics
manufactured on looms without Jacquard heads have a much more limited range of
possible designs.
Quaker's product offerings are noted for their wide use of chenille yarns,
which have a soft, velvet-like feel. To take advantage of casual furniture
trends, and to capitalize on the rapid growth of the motion furniture market,
Quaker developed a soft chenille yarn with superior abrasion resistance to
compete effectively with flocks, velvets and tufted fabrics. The Company markets
the line of chenille fabrics it produces using these yarns under its Ankyra
label. Through a licensing agreement with Monsanto Company, a number of the
Company's Ankyra-based chenille fabrics, as well as certain other fabrics in its
line, have been "Wear-Dated" by Monsanto.
The Company has taken steps to expand both the breadth and depth of the
Company's product portfolio by increasing the number of fabrics designed to meet
the needs of manufacturers of middle to higher-end upholstered furniture
products, and expanding the number of fabrics and styles offered at each price
point and in each styling category to provide all of the Company's customers
with more product choices. Quaker's broad product line is very important from a
competitive standpoint. It enhances the ability of the Company's customers to
meet most of their fabric needs through one full-service supplier while, at the
same time, allowing them to purchase fabrics in a wide enough range of designs
to enable them to differentiate their own new lines of upholstered furniture
from those of their competitors. In 1996, to generate additional business from
manufacturers of higher-end upholstered furniture, the Company began offering a
select group of its middle to better-end products exclusively to those customers
under its Whitaker label. Sales of the Company's middle to better-end fabrics
have increased from $66.3 million, or 56.3% of total fabric sales in 1992, to
$121.7 million, or 69.0% of total fabric sales in 1996.
NEW PRODUCT DEVELOPMENT AND DESIGN
Although management believes fashion trends in the upholstery industry do
not change significantly from year to year, consumer tastes in upholstery fabric
do change over time. Therefore, it is important to identify emerging fashion
needs and to develop new products responsive to those needs. Management believes
Quaker's design staff has an established reputation for design excellence and
product leadership.
The Company's design department has overall responsibility for the
development of new upholstery fabric patterns for sale by the Company. Although
the Company purchases artwork from independent artists, the Company's staff of
professional designers and designer technicians creates the majority of the
designs on which the Company's fabric patterns are based and also determines the
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construction of those patterns. The design department uses state-of-the-art CAD
equipment to reduce the new product development cycle.
The development of each new fabric line requires four to five months. The
first step in the new product development process is the preparation of a
merchandising plan for the line. The Company's merchandising plans are based on
extensive input from Quaker's sales representatives, senior managers, and major
customers and provide both a broad outline of the number of new products to be
included within each major styling category (e.g., contemporary, traditional,
transitional, and country), as well as the number of new products to be created
for sale at each of the major price points within those styling categories.
In addition, because of the design, cost, and delivery advantages of
Quaker's vertically integrated manufacturing operations, substantial emphasis is
placed on making maximum use of the Company's internally produced yarns during
the fabric development process. After each new fabric merchandising plan is
developed, members of the Company's fabric design and yarn development staffs
meet to identify the design staff's yarn requirements for the Company's next
fabric line and many of Quaker's proprietary yarns trace their origins to this
design-driven process. Quaker's engineering and manufacturing staffs also play a
key role in the new product development process by reviewing each proposed new
product to evaluate its impact on the Company's raw material costs, equipment
utilization rates and quality performance. Although some plain, striped and
plaid fabrics remain in the Company's product line for 10 years or more, a
successful product typically has a life of two to three years.
Quaker's design staff also regularly creates custom patterns for customers
seeking to differentiate their products for distribution purposes, hit a certain
price point at the retail level, or meet a particular styling need in the market
they serve. These patterns, which are not part of Quaker's "open line," are
known in the industry as "Specials."
SALES AND MARKETING
UPHOLSTERY FABRICS
Net fabric sales during 1996 were $171.9 million, or approximately 86.4%
of the Company's net sales. The Company sells its upholstery fabrics to over 600
furniture manufacturers worldwide, including substantially all of the largest
domestic manufacturers of upholstered furniture. Fabric sales to the Company's
top 25 customers accounted for approximately 40.8% of 1996 net sales. None of
the Company's customers accounted for more than 5% of net sales during 1996.
The Company uses a direct marketing force of 19 sales representatives, two
of whom are based in Quaker's Mexico City distribution center, to market its
fabrics in the United States and Mexico. All such sales representatives are paid
on a commission basis and represent the Company exclusively. Quaker's fabrics
are distributed internationally through a network of 27 independent commissioned
agents appointed to represent the Company in Europe, the Far East, Australia,
New Zealand, the Middle East, and Central and South America. All agents located
outside the United States are supervised by the Company's staff of four
full-time export sales managers with offices at the Company's headquarters.
Quaker's United States customers market their products through two annual
national furniture industry trade shows held in April and October in High Point,
North Carolina, as well as through
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various regional shows. These shows provide most of Quaker's customers with the
opportunity to introduce their new furniture lines to their major retail
customers in a single setting. Quaker's design and marketing process is closely
linked to these trade shows. The Company develops two major lines for
introduction to the Company's customers at the Showtime Fabric Fairs held in
High Point in January and July of each year. Almost all major U.S. furniture
manufacturers attend Showtime to begin selecting fabric for the new lines of
sofas and other upholstered furniture products that they will exhibit at the
April and October High Point Furniture Markets. The Company also introduces two
less extensive lines in April and October of each year to respond to competitive
opportunities identified at the January and July Showtime trade shows.
Quaker also markets its fabrics at a number of trade shows regularly
attended by its export customers, including shows in Belgium, Dubai, Germany,
Italy, and Mexico, as well as certain trade shows in the United States aimed at
the international market. Foreign sales of fabric accounted for approximately
20.2% of Quaker's gross fabric sales during 1996.
In addition to distribution from the Company's facilities in Fall River,
Massachusetts, Quaker maintains four distribution centers from which its
customers may purchase the Company's products directly. These facilities are
located in Los Angeles, California; Mexico City, Mexico; High Point, North
Carolina; and Verona, Mississippi. The Company also maintains inventory in
Roosendaal, Holland.
SPECIALTY YARNS
Net yarn sales during 1996 were $25.7 million, or approximately 12.9% of
the Company's net sales. The Company designs, manufactures and markets several
types of specialty yarns, including fancy spun, fancy twisted, taslan, and
chenille. Quaker is a leading developer and manufacturer of specialty yarns and
management believes it is the world's largest producer of chenille yarn, a soft
pile yarn which produces a velvet-like fabric. Chenille yarns, and fabrics made
out of chenille yarns, have become increasingly popular over the past several
years, in part, as a result of the recent trend toward softer, more casual home
furnishings and apparel. The Company's specialty yarns are sold under the name
of Nortex Yarns to manufacturers of home furnishings products, principally
weavers of upholstery fabric, throws, afghans and other products, as well as
manufacturers of sweaters and other apparel. The Company has approximately 55
yarn customers.
Management believes the technical expertise of Quaker's yarn development
staff provides the Company with an important competitive advantage by enabling
Quaker to create and market innovative specialty yarns to meet its customers'
styling and performance criteria. For example, the creation of Quaker's line of
Ankyra chenille yarns was an important product breakthrough for both Quaker and
its yarn customers. Historically, chenille yarns have had difficulty meeting the
durability standards required for use in fabrics which are likely to be
subjected to heavy wear, such as car seats and certain home furnishings
products. Quaker's yarn development staff created a finished chenille yarn with
superior abrasion resistance and the Company was recently notified that the
United States Patent and Trademark Office had approved its application for
patent protection of the Company's Ankyra process.
Quaker's Ankyra technology has enabled the Company to expand the sale of
its chenille yarns to makers of end products for which both softness and
durability are important. Management believes that this will prove to be a
source of further growth in the Company's yarn sales. In addition, the Company
believes that a number of the other specialty yarns developed by Quaker's yarn
development
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technicians have significant revenue potential and that important market
opportunities exist for all of its specialty yarns outside the United States.
MANUFACTURING
All of Quaker's fabrics and yarns are manufactured at the Company's four
Fall River, Massachusetts manufacturing facilities and management estimates that
approximately 85% of the Company's fabric sales in recent years have been
manufactured to customer order. The Company's objective is to operate its
production facilities on a five to five and one half-day week, three-shift
schedule. However, during periods of heaviest demand, Quaker operates some or
all of its production areas on seven-day, three-shift schedules.
The Company's vertically integrated manufacturing process begins with the
production of specialty yarns, primarily for use in the production of the
Company's fabrics, but also for sale to manufacturers of home furnishings
products and apparel in the United States. Although the Company purchases all of
its commodity yarns, most of the Company's weft, or filling, yarn needs are met
through internal production. The next stage of the fabric manufacturing process
involves the preparation of beams of warp yarn. The beams are then sent to the
Company's weave rooms, where looms are used to weave the warp and filling yarns
together. The final steps in the fabric production process include the
application of a latex backing, to enhance the durability and performance
characteristics of the end product, as well as a stain-resistant finish upon
customer request, and a final product quality inspection prior to shipment to
the Company's customers.
Quaker has added approximately 200 new looms to its manufacturing base
since the 1989 Acquisition and the addition of these newer looms has increased
both production capacity and efficiency, without a proportionate increase in
labor costs. All of the Company's looms are equipped with Jacquard heads,
maximizing the Company's ability to design its products to meet customer needs,
without being limited by equipment-related design constraints.
The Company's fabrics are generally shipped directly to its customers on
an FOB Fall River or FOB warehouse basis. The Company also supplies its
distribution centers with an appropriate selection of fabrics for customers
needing immediate delivery.
During the past five years, the Company placed in service more than $51
million of new manufacturing equipment to increase capacity, improve
manufacturing efficiencies, and support the Company's marketing, quality and
delivery objectives. During 1997 the Company plans to purchase approximately
$17.9 million of manufacturing equipment. Management believes that during each
of the next several years additional capital equipment will be needed to meet
anticipated demand for the Company's products.
QUALITY ASSURANCE
Management believes that product quality is a significant competitive
factor in both the domestic and international fabric markets and has established
aggressive performance objectives for the Company in this area.
Quaker's quality initiatives include:
- The introduction of a revised group incentive program in certain of
its production departments to factor quality into the overall
compensation programs in these areas.
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- Inspection of all incoming raw materials to ensure they meet the
Company's product specifications and to provide prompt feedback to
vendors when defects are discovered so that corrective actions may be
undertaken immediately.
- The assignment of additional quality control staff to each of the
Company's weaving areas and to various other quality-critical
production departments to identify defects early in the manufacturing
process.
- A final quality inspection of the Company's yarn and fabric products
before they are released for shipment.
- The use of statistical process control reports to provide continuous
monitoring of the Company's performance against industry standards and
its own internal quality standards.
- Progress toward ISO 9001 certification.
In addition to these measures, the built-in quality control features and
more precise settings on the new production equipment the Company has placed in
service since 1990 have also played an important role in the Company's efforts
to provide defect-free products to its customers.
Primarily as a result of the Company-wide quality improvement program
implemented in early 1996, the Company's quality-related return rate, as a
percentage of total yards shipped, improved from 0.8% in 1995 to 0.6% in 1996,
and the Company's sales of second-quality fabric decreased by 45.3%, from $3.9
million in 1995 to $2.2 million in 1996.
TECHNOLOGY
As part of Quaker's overall strategy to improve productivity and achieve a
service advantage over its competitors, the Company strives to introduce new
technologies into its operations whenever possible. Quaker's efforts in this
area include: (i) the use of its MRP II system to provide computer support to
the Company's manufacturing operations; (ii) the use of CAD equipment to reduce
the time required to bring its new products to market, including the design of
"Specials"; (iii) the use of bar-coding systems to improve both the efficiency
of its own manufacturing operations and service to its customers; and (iv) the
use of electronic Jacquard heads and other production equipment equipped with
microprocessors to improve manufacturing efficiencies and reduce unit costs.
During 1996, the Company completed a comprehensive re-evaluation of its
data processing systems and developed a long-range information systems plan
intended to meet the Company's future management information needs and to
provide new and innovative technology solutions to the Company's customers. As a
result of this study, Quaker is in the process of upgrading its MRP II system to
an Enterprise Resource Planning ("ERP") system, with a full conversion to ERP
expected during 1998. Management believes that the installation of the Company's
new ERP system will enhance Quaker's ability to meet its quality and service
objectives by: (i) providing Quaker's customers with direct access to the system
to check the status of their orders; (ii) reducing delivery lead times by
improving the Company's ability to accurately forecast its raw material
requirements, provide better and more timely information to its vendors and
schedule its production operations more efficiently; and (iii) providing
computerized support to the Company's quality control system and ISO 9001
certification efforts.
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The Company's CAD equipment is used not only to develop new fabric designs
but also to prepare plastic Jacquard cards for use with the Company's mechanical
Jacquard heads, and computer disks for use with Quaker's newer electronic
Jacquard heads. These plastic cards and computer disks contain precise
instructions about the construction of the particular fabric pattern to be
woven; however, the use of computer disks substantially reduces the amount of
equipment downtime required for style changes, resulting in improved
manufacturing efficiencies. See "Business -- New Product Development and
Design."
The Company first introduced bar-coding technology in certain of its
operations in 1993. In 1997, Quaker plans to introduce bar-coding technology in
the balance of its manufacturing areas so that material movement can be traced
electronically from receiving to shipping.
Much of the new equipment Quaker has added to its manufacturing base over
the past five years is equipped with microprocessors and other electronic
controls. In particular, all the Jacquard heads purchased by the Company since
1993 are electronic, substantially reducing the amount of time it takes to
change from the production of one fabric pattern to the next, and contributing
to improved productivity in Quaker's manufacturing areas.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Quaker's raw materials consist principally of polypropylene, polyester,
acrylic, cotton and rayon fibers and yarns for use in its yarn manufacturing and
fabric weaving operations, and latex to backcoat its finished fabrics. In
addition, Quaker purchases commission dyeing services from various dyehouses
which dye, to the Company's specifications, certain of the yarns the Company
produces internally and purchases from other manufacturers. Substantially all of
the raw materials used by the Company are purchased from primary producers with
manufacturing operations in the United States. The Company is dependent upon
outside suppliers for its raw material needs, including dyeing services, and is
subject to price increases and delays in receiving these materials and services.
The Company's raw materials are predominantly petrochemical products and their
prices fluctuate with changes in the underlying market for petrochemicals in
general. Historically, the Company has been able to pass through a substantial
portion of any increases in its raw material costs; however, the Company
experienced significant increases in certain raw material prices in 1995 which
it was not able to pass through fully to its customers during 1995 and which
contributed to a reduction in the Company's 1995 gross margin.
Future price levels of raw materials will depend upon supply and demand
conditions, the general inflation rate, and overall economic conditions.
Although other sources are available, the Company currently procures
approximately one-half of its raw material components from two major industry
suppliers, one of which is the sole supplier of a filament yarn used in the
Company's chenille manufacturing operations. Generally, Quaker has not
experienced any significant difficulty in meeting its raw material needs,
expects that it will be able to obtain adequate amounts to meet future
requirements, and seeks to identify alternate sources for all critical raw
material components.
COMPETITION
The markets for the Company's products are highly competitive. Competitive
factors in the upholstery fabric business include product design, styling,
price, customer service and quality. Price is a more important competitive
factor in the promotional-end of the market than it is in the middle to
better-end of market, where competition is weighted more heavy toward fabric
styling and design considerations. Although the Company has experienced no
significant competition in the United States
11
<PAGE> 12
from imports to date, changes in foreign exchange rates or other factors could
make imported fabrics more competitive with the Company's products in the
future.
The Company's principal competitors include: Burlington House Upholstery
Division of Burlington Industries Inc., Culp, Inc., Joan Fabrics Corporation,
the Mastercraft Division of Collins & Aikman Corporation and Valdese Weavers,
Inc. Several of the companies with which the Company competes have greater
financial resources than the Company. The Company's products compete with other
upholstery fabrics and furniture coverings, including prints, flocks, tufts,
velvets and leather.
BACKLOG
As of January 4, 1997, the Company had orders pending for approximately
$29.1 million of fabric and yarn compared to $24.5 million as of December 30,
1995. The Company's backlog position at any given time may not be indicative of
the Company's long-term performance.
TRADEMARKS, PATENTS, COPYRIGHTS
The Company seeks copyright protection for all new fabric designs it
creates, and management believes that the copyrights owned by the Company serve
as a deterrent to those industry participants which might otherwise seek to
replicate the Company's unique fabric designs. In June 1995, the Company
introduced a new collection of fabrics featuring Quaker's proprietary Ankyra
chenille yarns. The Company has recently been notified that the United States
Patent and Trademark Office has approved its application for patent protection
of the proprietary manufacturing process developed by Quaker to produce these
yarns. Quaker has also filed an application with the United States Patent and
Trademark Office for registration of its Whitaker mark.
INSURANCE
The Company maintains general liability and property insurance. The costs
of insurance coverage vary generally and the availability of certain coverages
has fluctuated in recent years. While the Company believes that its present
insurance coverage is adequate for its current operations, there can be no
assurance that the coverage is sufficient for all future claims or will continue
to be available in adequate amounts or at reasonable rates.
EMPLOYEES
The Company is the largest manufacturer, and the second largest private
sector employer, in Fall River, Massachusetts. As of January 5, 1997, Quaker
employed 1,647 persons, including 1,339 production employees, 111 technical and
clerical employees, and 197 exempt employees and commissioned sales
representatives. The Company's employees are not represented by a labor union,
and management believes that employee relations are good.
12
<PAGE> 13
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT (See Item 10 herein)
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
---- --- -------- -------
<S> <C> <C>
Larry A. Liebenow........53 President, Chief Executive Officer, and Director 1989
Anthony Degomes..........56 Vice President - New Business Development 1991
James A. Dulude..........41 Vice President - Manufacturing 1990
Thomas J. Finneran.......57 Vice President - Sales 1982
Cynthia L. Gordan........49 Vice President, Secretary, and General Counsel 1989
Thomas Muzekari..........56 Vice President - Marketing 1996
Beatrice Spires..........35 Vice President - Styling and Design 1996
Paul J. Kelly............52 Vice President - Finance and Treasurer 1989
J. Duncan Whitehead......54 Vice President - Technology and Dev., and Yarn Sales 1990
</TABLE>
Larry A. Liebenow. Mr. Liebenow has served as President, Chief
Executive Officer, and a Director of the Company since September 1989. From
July 1983 until September 1989, Mr. Liebenow was Chairman of the Board and
President of Nortex International, Inc. ("Nortex International"). From
September 1971 to July 1983, Mr. Liebenow served as the Chief Operating
Officer of Grupo Pliana, S.A., a Mexican yarn and upholstery fabric
manufacturing concern.
Anthony Degomes. Mr. Degomes has been employed by the Company since
September 1989 and has served as Vice President - New Business Development
since March 1996. Mr. Degomes served as Vice President - Styling and Design
of the Company from September 1991 to March 1996. From December 1990 to
September 1991, Mr. Degomes served as the Company's Director of Styling and
Design. From September 1989 to November 1990, Mr. Degomes served as the Vice
President - Styling, Design and Development of the Company's Nortex
Division. From March 1984 to September 1989, Mr. Degomes served as the Vice
President in charge of Styling and Development for Nortex International.
James A. Dulude. Mr. Dulude has been employed by the Company since May
1986 and has served as Vice President - Manufacturing since August 1995. Mr.
Dulude served as Vice President - Purchasing, Planning and MIS from November
1990 to August 1995. Mr. Dulude served as the Company's Director of
Purchasing and Planning from May 1989 to November 1990, Director of Planning
and Scheduling from July 1988 to May 1989, and Director of Information
Systems from May 1986 to July 1988.
Thomas J. Finneran. Mr. Finneran has been employed by the Company
since January 1982, and has served as Vice President - Sales since March
1996. Mr. Finneran served as Vice President - Marketing from July 1988 to
March 1996 and Vice President - Sales from January 1982 to July 1988. From
1973 to January 1982, Mr. Finneran was responsible for sales and marketing of
velvets, Jacquard and dobbie product lines at Joan Fabrics Corporation.
Cynthia L. Gordan. Ms. Gordan has been employed by the Company since March
1988 and has served as Vice President, Secretary, and General Counsel of the
Company since March 1989. Ms. Gordan is also responsible for the Company's Risk
Management, Investor Relations and Human Resources functions. From April 1986 to
November 1987, Ms. Gordan served as a Senior Associate in the Corporate
Department of the Chicago law firm of Katten Muchin & Zavis. From November 1981
to April 1986, Ms. Gordan was employed by The General Electric Company where she
served first as
13
<PAGE> 14
the Vice President and General Counsel of General Electric's life, property, and
casualty insurance affiliates in Providence, Rhode Island, and later as the
strategic planner and acquisition specialist for a division of General Electric
Capital Corporation.
Paul J. Kelly. Mr. Kelly has served as Chief Financial Officer of the
Company since December 1989, and since November 1993 has also had responsibility
for working with industry and institutional analysts. From January 1988 to
December 1989, Mr. Kelly was the co-founder and President of International
Business Brokers and Consultants Ltd., a business broker and consulting firm.
From December 1977 to December 1987, Mr. Kelly served as Chief Financial Officer
of Ferranti Ocean Research Equipment, Inc., an international manufacturing
concern. From February 1973 to December 1977, he was a certified public
accountant with Arthur Andersen & Co.
Thomas Muzekari. Mr. Muzekari has served as Vice President - Marketing
since March 1996. From September 1989 until February 1996, Mr. Muzekari was
the Vice President - Marketing for Collins & Aikman's Velvet Division.
M. Beatrice Spires. Ms. Spires has been employed by the Company since
September 1995 and has served as Vice President - Styling and Design since
March 1996. From September 1995 to March 1996, Ms. Spires served as Quaker's
Director of Design. From July 1992 to September 1995, Ms. Spires was Vice
President - Merchandising for Collins & Aikman's Velvet Division. From
September 1991 to July 1992, Ms. Spires was Merchandising Manager at Collins
& Aikman.
J. Duncan Whitehead. Mr. Whitehead has served as Vice President -
Technology and Development, and Yarn Sales since August 1995. Mr. Whitehead
served as Vice President - Yarn Sales and Development from May 1990 to August
1995. From September 1989 to May 1990, Mr. Whitehead was the Vice President
- - Sales and Marketing for the Company's Nortex Division. From July 1983 to
September 1989, Mr. Whitehead served as Vice President of Sales and Marketing
for Nortex International.
The Company's President, Secretary, and Treasurer are elected annually by
the Board at its first meeting following the annual meeting of stockholders. All
other executive officers hold office until their successors are chosen and
qualified.
14
<PAGE> 15
ITEM 2. PROPERTIES
PROPERTIES
Quaker is headquartered in Fall River, Massachusetts where it currently
has four facilities, three used primarily for manufacturing purposes, including
warehouse space. The fourth facility houses the Company's executive,
administrative and design areas as well as certain manufacturing operations. The
Company has three distribution centers in the United States and one in Mexico.
The table below sets forth certain information relating to the Company's current
facilities:
<TABLE>
<CAPTION>
LOCATION STATUS PURPOSE BUILDING AREA(SF) OWNERSHIP
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Grinnell Street, Fall River...Active Manufacturing 728,000 Owned
Quequechan Street, Fall River.Active Manufacturing 244,000 Owned
Davol Street, Fall River......Active Offices/Warehouse 245,000 Owned
Ferry Street, Fall River......Active Manufacturing 193,000 Owned
Verona, Mississippi...........Active Distribution Center 20,000 Owned
City of Industry, California..Active Distribution Center 17,286 Leased(1)
Mexico City, Mexico...........Active Distribution Center 9,000 Leased(2)
High Point, North Carolina....Active Distribution Center 8,500 Leased(3)
</TABLE>
(1) Lease expires October 1, 2001.
(2) Lease expires February 5, 1997. The Company is in the process of
negotiating a renewal.
(3) Lease expires July 31, 2001.
The Company also maintains inventory at a public warehouse in Roosendaal,
Holland. Quaker has sales offices in Fall River, Massachusetts; Mexico City,
Mexico; Hickory and High Point, North Carolina; Chicago, Illinois; Tupelo,
Mississippi; and Los Angeles, California. All of the Company's sales offices,
except the one in Fall River, Massachusetts, are leased.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous federal, state, and local
laws and regulations pertaining to the discharge of materials into the
environment or otherwise relating to the protection of the environment. The
Company's facilities are located in industrial areas and, therefore, there is
the possibility of incurring environmental liabilities as a result of historic
operations at the Company's sites. Environmental liability can extend to
previously owned or leased properties, properties owned by third parties, and
properties currently owned or leased by the Company. Environmental liabilities
can also be asserted by adjacent landowners or other third parties in toxic tort
litigation. In addition, under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), and analogous
state statutes, liability can be imposed for the disposal of waste at sites
targeted for cleanup by federal and state regulatory authorities. Liability
under CERCLA is strict as well as joint and several. Further, certain of the
Company's manufacturing areas are subject to OSHA's "Comprehensive Cotton Dust
Standard." Environmental laws and regulations are subject to change in the
future, and any failure by the Company to comply with present or future laws or
regulations could subject it to future liabilities or interruption of production
which could have a material adverse effect on the Company. In addition, changes
in environmental regulations could restrict the Company's ability to expand its
facilities or require the Company to incur substantial unexpected other expenses
to comply with such regulations.
15
<PAGE> 16
In particular, the Company is aware of soil and groundwater contamination
relating to the use of certain underground fuel oil storage tanks at its Fall
River facilities. The Company has notified the Commonwealth of Massachusetts
regarding these releases. The Company's ultimate clean-up costs relating to
these underground storage tanks cannot be predicted with certainty at this time.
In addition, during the fourth quarter of 1993 the Company removed and
encapsulated asbestos at two of its facilities and the Company has an on-going
asbestos management program in place to appropriately maintain the asbestos that
remains present at its facilities. At Quaker's former facility in Claremont, New
Hampshire, it has been determined that there is oil-contaminated soil, as well
as groundwater contamination, resulting from a leak during the mid-1970s from an
underground fuel storage tank. The Company has agreed to indemnify the purchaser
for clean-up costs subject to certain limitations. The Company has also agreed
to indemnify the purchaser of the Company's former facility in Leominster,
Massachusetts, for certain environmental contingencies.
The Company has accrued reserves for environmental matters based on
information presently available. Based on this information and the Company's
established reserves, the Company does not believe that these environmental
matters will have a material adverse effect on either the Company's financial
condition or results of operations. However, there can be no assurance that
these reserves will be adequate or that the costs associated with environmental
matters will not increase in the future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
legal proceedings incidental to its business, which, in the opinion of
management, are immaterial in amount or are expected to be covered by the
Company's insurance carriers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information set forth under the captions "Summary Quarterly Financial
Data," and "Liquidity and Capital Resources" on pages 31 and 30, respectively,
of Quaker's 1996 Annual Report, filed as Exhibit 13 hereto, is incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data," on
page 12 of Quaker's 1996 Annual Report, filed as Exhibit 13 hereto, is
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth under the caption, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," on pages 26 to 30 of
Quaker's 1996 Annual Report, filed as Exhibit 13 hereto, is incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information set forth under the captions, "Consolidated Balance
Sheets," "Consolidated Statements of Income," "Consolidated Statements of
Changes in Stockholders' Equity," "Consolidated Statements of Cash Flows,"
"Summary Quarterly Financial Data," "Notes to Consolidated Financial
Statements," and "Report of Independent Public Accountants," on pages 13 to 25,
and 31 of Quaker's 1996 Annual Report, filed as Exhibit 13 hereto, is
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE> 18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the directors of the Company required by
this item will be included in the Company's definitive proxy statement for its
1997 Annual Meeting of Stockholders (the "Proxy Statement") to be filed pursuant
to Regulation 14A, and such information is incorporated herein by reference. The
information with respect to the executive officers of the Company required by
this item is set forth in Item 1A of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.
18
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Form 10-K
(i) Financial Statements (incorporated by reference, see Item 8)
Consolidated Balance Sheets -- January 4, 1997 and December 30, 1995
Consolidated Statements of Income -- For the years ended January 4, 1997,
and December 30, 1995
Consolidated Statements of Changes in Stockholders' Equity -- For the
years ended
January 4, 1997, December 30, 1995, and December 31, 1994
Consolidated Statements of Cash Flows -- For the years ended January 4,
1997,
December 30, 1995, and December 31, 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(ii) Financial Statement Schedules
The following financial statement schedule of the Company included
herein should be read in conjunction with the audited financial
statements incorporated by reference in this Form 10-K.
Schedule II - Valuation and Qualifying Accounts
All other schedules for the Company are omitted because either they
are not applicable or the required information is shown in the
financial statements or notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
3(i) - Certificate of Incorporation of the Company, as
amended.(1)
3(ii) - By-laws of the Company.(1)
10.1 - Loan and Security Agreement, dated as of October 31,
1990, between the Company and Continental Bank N.A., as
amended by Amendments Nos. 1 through 9 thereto.(1)
10.2 - Securities Purchase Agreement, dated April 13, 1993,
among the Company, MLGA Fund II, L.P. and MLGAL Partners,
as amended by Amendment No. 1 thereto.(1)
10.3 - Subscription Agreement, dated March 12, 1993, among the
Company and MLGA Fund II, L.P., Nortex Holdings, Inc.,
QFC Holdings Corporation, and Larry Liebenow.(1)
10.4 - Shareholders Agreement, dated March 12, 1993, by and
among the Company, Larry Liebenow, Ira Starr, and Sangwoo
Ahn.(1)
10.5 - Employment Agreement, dated as of March 12, 1993, between
the Company and Larry A. Liebenow.(1)
10.6 - Director Indemnification Contract, dated October 18,
1989, between the Company and Larry A. Liebenow.(1)
10.7 - Director Indemnification Contract, dated October 18,
1989, between the Company and Roberto Pesaro.(1)
10.8 - Director Indemnification Contract, dated April 15, 1992,
between the Company and Samuel A. Plum.(1)
10.9 - Director Indemnification Contract, dated May 2, 1991,
between the Company and Andrea Gotti-Lega.(1)
10.10 - Severance Contract, dated August 15, 1988, between the
Company and Thomas J. Finneran.(1)
10.11 - Severance Contract, dated May 26, 1989, between the
Company and James Dulude.(1)
10.12 - Severance Contract, dated December 1, 1988, between the
Company and Cynthia Gordan.(1)
19
<PAGE> 20
10.13 - Equipment Financing Lease Agreement, dated September 18,
1992, between QFR and United States Leasing
Corporation.(1)
10.14 - Equipment Financing Lease Agreement, dated September 29,
1992, between QFR and KeyCorp Leasing pursuant to a
Notice of Assignment from U.S. Leasing.(1)
10.15 - Equipment Financing Lease Agreement, dated February 16,
1989, between QFR and Key Financial Services, Inc.(1)
10.16 - Equipment Financing Lease Agreement, dated September 22,
1992, between QFR and Dana Commercial Credit Corporation
(Fleet National Bank).(1)
10.17 - Equipment Financing Lease Agreement, dated October 8,
1992, between QFR and Capital Associates International,
Inc.(1)
10.18 - Equipment Financing Loan Agreement, dated August 31,
1992, between QFR and HCFS Business Equipment
Corporation.(1)
10.19 - Equipment Financing Lease Agreement, dated September 13,
1991, between QFR and Sovran Leasing and Finance
Corp/NationsBanc Leasing Corp.(1)
10.20 - Equipment Financing Lease Agreement, dated December 18,
1990, between QFR and IBM Credit Corporation.(1)
10.21 - Equipment Financing Lease Agreement, dated May 5, 1993,
between QFR and The CIT Group.(1)
10.22 - Equipment Financing Lease Agreement, dated June 30, 1993,
between QFR and AT&T Commercial Finance Corporation.(1)
10.23 - Chicago, Illinois Showroom Lease, dated July 1, 1989,
between the Company and LaSalle National Bank,
Trustee.(1)
10.24 - Hickory, North Carolina Showroom Lease, dated June 15,
1993, between the Company and Hickory Furniture Mart,
Inc.(6)
10.25 - High Point, North Carolina Showroom Lease, dated November
6, 1991, between the Company and Market Square Limited
Partnership.(1)
10.26 - Los Angeles, California Showroom Lease, dated September
23, 1992, between the Company and The L.A. Mart.(1)
10.27 - Tupelo, Mississippi Showroom Lease, dated December 14,
1992, between the Company and Mississippi Furniture
Market, Inc.(6)
10.28 - Mexico City, Mexico Warehouse Lease, dated June 6, 1993,
between Quaker Fabric Mexico, S.A. de C.V. and Irene Font
Byrom.(1)
10.29 - Licensing Agreement, dated May 17, 1990, between the
Company as Licensee and General Electric Company.(1)
10.30 - Licensing Agreement, dated September 24, 1990, between
the Company as Licensee and Amoco Fabrics and Fibers
Company.(1)
10.31 - Software Licensing Agreement, dated October 29, 1987,
between the Company as Licensee and System Software
Associates.(1)
10.32 - Licensing Agreement, dated June 5, 1974, between the
Company and E.I. DuPont de Nemours & Company, Inc.(1)
10.33 - Licensing Agreement, dated October 17, 1988, between the
Company as Licensee and Monsanto Company.(1)
10.34 - Licensing Agreement, dated July 28, 1987, between the
Company as Licensee and Phillips Fibers Corporation.(1)
10.35 - Software Licensing Agreement, dated July 7, 1988, between
the Company as Licensee and Software 2000, Inc.(1)
10.36 - Licensing Agreement, dated February 1, 1977, between the
Company as Licensee and 3M.(1)
10.37 - Software Licensing Agreement, dated April 8, 1992,
between the Company as Licensee and Premenos
Corporation.(1)
10.38 - Software Licensing Agreement, dated March 19, 1993,
between the Company as Licensee and Sophis U.S.A.,
Inc.(1)
10.39 - Quaker Fabric Corporation 1993 Stock Option Plan and Form
of Option Agreement thereunder.(1)
10.40 - Option to Purchase Common Stock issued to Nortex
Holdings, Inc., effective April 13, 1993.(1)
10.41 - Amendment No. 1, dated as of October 25, 1993, to
Shareholders Agreement, dated March 12, 1993, by and
among the Company, Nortex Holdings, Inc., MLGA Fund II,
L.P., MLGAL Partners, W. Wallace McDowell, Jr., William
Ughetta, and Ira Starr.(1)
10.42 - Quaker Fabric Corporation Deferred Compensation Plan and
related Trust Agreement.(2)
10.43 - Form of Split Dollar Agreement with Senior Officers.(2)
20
<PAGE> 21
10.44 - Credit Agreement, dated as of June 29, 1994, by and among
the Company, The First National Bank of Boston, and
Continental Bank, N.A.(3)
10.45 - Equipment Schedule No. 5, dated as of September 14, 1994,
to Master Lease Agreement, dated as of May 5, 1993,
between QFR and the CIT Group/Equipment Financing,
Inc.(4)
10.46 - Commission and Sales Agreement, dated as of April 25,
1994, between QFR and Quaker Fabric Foreign Sales
Corporation.(4)
10.47 - Stock Option Agreement, dated as of July 28, 1995,
between the Company and Eriberto R. Scocimara.(5)
10.48 - Amended and Restated Credit Agreement, dated December 18,
1995, among the Company, QFR, Quaker Textile Corporation,
Quaker Fabric Mexico, S.A. de C.V., The First National
Bank of Boston, and Fleet National Bank.(5)
10.49 - Note Purchase and Private Shelf Agreement, dated December
18, 1995, among the Company, Prudential Insurance Company
of America, and Pruco Life Insurance Company.(5)
10.50 - Guarantee Agreement, dated as of December 18, 1995, among
the Company, The Prudential Insurance Company of America,
and Pruco Life Insurance Company.(5)
10.51 - Amendment Agreement No. 1, dated as of March 21, 1996, to
that certain Amended and Restated Credit Agreement, dated
as of December 18, 1995, among the Company, QFR, Quaker
Textile Corporation, Quaker Fabric Mexico, S.A. de C.V.,
The First National Bank of Boston, and Fleet National
Bank.(5)
10.52 - 1996 Stock Option Plan for Key Employees of QFR, dated
April 26, 1996.(6)
10.53 - Amendment Agreement No. 2, dated as of October 21, 1996,
to that certain Amended and Restated Credit Agreement,
dated as of December 18, 1995, among the Company, QFR,
Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de
C.V., The First National Bank of Boston, and Fleet
National Bank.(6)
10.54 - Software License Agreement dated October 31, 1996 between
the Company and System Software Associates Inc.(6)
10.55 - Medical Expense Reimbursement Plan.(6)
10.56 - High Point, North Carolina Warehouse Lease, dated April
1, 1996 between QFR and C&M Investments of High Point,
Inc.(6)
10.57 - Standard Industrial Lease Agreement, dated May 10, 1996,
between CIIF Associates II Limited Partnership and
QFR.(6)
10.58 - Rights Agreement dated March 4, 1997 between the Company
and The First National Bank of Boston relating to the
Company's Stockholder Rights Plan. (6)
10.59 - 1997 Stock Option Plan.(6)
10.60 - Amendment, dated as of February 24, 1997, to Employment
Agreement between the Company and Larry A. Liebenow.(6)
13 - 1996 annual report to security holders. Included in this
exhibit are those portions of the annual report to
security holders which are expressly incorporated by
reference in this filing.
21 - Subsidiaries. (5)
23 - Consent of Arthur Andersen LLP.
27 - Financial Data Schedule.
- ------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 33-69002, initially filed with the Securities and
Exchange Commission on September 17, 1993, as amended.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 1994.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 2, 1994.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 1995.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-21957, initially filed with the Securities and
Exchange Commission on February 25, 1997, as amended.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 31, 1997.
QUAKER FABRIC CORPORATION
By /s/ Larry A. Liebenow
--------------------------
LARRY A. LIEBENOW
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Larry A. Liebenow Chief Executive Officer, March 31, 1997
- -------------------------- President, and Director
(Larry A. Liebenow)
/s/ Paul J. Kelly Vice President -- Finance March 31, 1997
- -------------------------- (Chief Financial and
(Paul J. Kelly) Accounting Officer)
/s/ Sangwoo Ahn Chairman of the Board March 31, 1997
- --------------------------
(Sangwoo Ahn)
/s/ Perry J. Lewis Director March 31, 1997
- --------------------------
(Perry J. Lewis)
/s/ Eriberto R. Scocimara Director March 31, 1997
- --------------------------
(Eriberto R. Scocimara)
/s/ Ira Starr Director March 31, 1997
- --------------------------
(Ira Starr)
<PAGE> 23
SCHEDULE II
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1994, December 30, 1995 and January 4, 1997
(Dollars in thousands)
<TABLE>
<CAPTION> Net
Balance at Provisions Deductions Balance
Beginning Charged to from at end
Descriptions of Period Operations Allowances of Period
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Bad Debt Reserve ............................... $1,650 $1,417 $(1,883) $1,184
Sales Returns & Allowances Reserve ............. 400 4,938 (4,608) 730
Year Ended December 30, 1995
Bad Debt Reserve ............................... $1,184 $1,878 $(1,706) $1,356
Sales Returns & Allowances Reserve ............. 730 4,218 (4,319) 629
Year Ended January 4, 1997
Bad Debt Reserve ............................... $1,356 $ 921 $(1,002) $1,275
Sales Returns & Allowances Reserve ............. 629 4,923 (4,775) 777
</TABLE>
<PAGE> 1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL SCHEDULE TO THE CONSOLIDATED FINANCIAL STATEMENTS
To Quaker Fabric Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Quaker Fabric Corporation and
subsidiaries' Annual Report to Shareholders incorporated by reference in this
Form 10-K and have issued our report thereon dated February 11, 1997. Our audit
was made for the purpose of forming an opinion on those financial statements
taken as a whole. The schedule listed in the index in Item 14(a) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 11, 1997
<PAGE> 2
SELECTED FINANCIAL DATA
(In thousands, except per share and per yard data)
The following table sets forth certain consolidated financial and operating data
of the Company for the periods indicated, which data has been derived from the
Consolidated Financial Statements of the Company and the Notes thereto, which
have been audited by Arthur Andersen LLP, independent public accountants. This
selected financial and operating data should be read in conjunction with the
Consolidated Financial Statements, the Notes thereto and the other financial
information included herein.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------
January 4, December 30, December 31, January 1, January 2,
1997(1) 1995 1994 1994 1993(1)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $198,856 $173,487 $180,842 $ 147,867 $123,414
Cost of products sold................. 152,787 137,083 133,168 110,753 92,855
-------- -------- -------- --------- --------
Gross margin.......................... 46,069 36,404 47,674 37,114 30,559
Selling, general and administrative
expenses............................ 29,121 26,176 27,560 22,292 18,862
-------- -------- -------- --------- --------
Operating income...................... 16,948 10,228 20,114 14,822 11,697
Interest expense, net................. 4,092 3,898 3,863 4,936 4,148
Other expenses, net................... 77 98 34 299 479
-------- -------- -------- --------- --------
Income before provision
for income taxes and
extraordinary item.................. 12,779 6,232 16,217 9,587 7,070
Provision for income taxes............ 4,217 712 6,691 4,218 2,925
-------- -------- -------- --------- --------
Income before
extraordinary item.................. 8,562 5,520 9,526 5,369 4,145
Extraordinary item: loss on
extinguishment of debt.............. -- -- -- (2,550) --
Net income............................ 8,562 5,520 9,526 2,819 4,145
Preferred stock dividends............. -- -- -- 70 420
-------- -------- -------- --------- --------
Net income applicable to
common stock........................ $ 8,562 $ 5,520 $ 9,526 $ 2,749 $ 3,725
-------- -------- -------- --------- --------
Earnings per common share
before extraordinary item(2)........ $ 1.03 $ 0.67 $ 1.15 $ 0.75 $ 0.55
Extraordinary item.................... -- -- -- (0.30) --
-------- -------- -------- --------- --------
Earnings per common share(2).......... $ 1.03 $ 0.67 $ 1.15 $ 0.45 $ 0.55
-------- -------- -------- --------- --------
Weighted average shares
outstanding(2)...................... 8,332 8,293 8,301 8,536 8,536
-------- -------- -------- --------- --------
SELECTED OPERATING DATA:
EBITDA(3)............................. $ 24,569 $ 16,821 $ 25,920 $ 19,710 $ 15,597
Depreciation and amortization......... 7,437 6,462 5,603 5,019 4,379
Net capital expenditures(4)........... 11,979 13,165 18,727 10,558 5,186
Unit volume (in yards)................ 43,552 40,761 41,641 36,289 32,228
Average gross sales price per yard.... $ 4.05 $ 3.88 $ 4.06 $ 3.87 $ 3.66
BALANCE SHEET DATA:
Working capital....................... $ 32,620 $ 30,780 $ 30,994 $ 25,915 $ 14,477
Total assets.......................... 148,832 138,117 130,476 109,908 94,556
Long debt and capital leases.......... 42,235 45,118 43,845 35,172 46,747
Stockholders' equity.................. 66,572 57,850 52,589 43,574 18,431
</TABLE>
(1) The fiscal years ended January 2, 1993 and January 4, 1997 were 53-week
periods.
(2) Earnings per share for 1994, 1995 and 1996 is computed using the weighted
average number of common shares and common share equivalents outstanding during
the year. Earnings per share for 1992 and 1993 gives effect to the 1993
Recapitalization and the use of proceeds from the 1993 Offering as if both
events had occurred at the beginning of 1992.
(3)Represents income from continuing operations before extraordinary items plus
interest, taxes, depreciation, amortization and other non-cash expenses.
Although the Company has measured EBITDA consistently between the periods
presented, EBITDA as a measure of liquidity is not governed by GAAP, and, as
such, may not be comparable to other similarly titled measures of other
companies. The Company believes that EBITDA, while providing useful information,
should not be considered in isolation or as an alternative to either (i)
operating income determined in accordance with GAAP as an indicator of operating
performance or (ii) cash flows from operating activities determined in
accordance with GAAP as a measure of liquidity.
(4) Net capital expenditures reflect assets acquired by purchase and capital
lease.
12
<PAGE> 3
QUAKER
FABRIC
CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
January 4, December 30,
1997 1995
-------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................ $385 $ 200
Accounts receivable, less allowances of $2,052 and $1,985 at
January 4, 1997 and December 30, 1995 respectively,
for doubtful accounts and sales returns and allowances ......... 26,261 24,211
Inventories .......................................................... 27,737 23,156
Prepaid and refundable income taxes .................................. 694 1,702
Prepaid expenses and other current assets ............................ 2,837 2,371
-------------------------
Total current assets ..................................... 57,914 51,640
Property, plant and equipment, net of depreciation and amortization ........ 84,045 79,156
Other assets:
Goodwill, net of amortization ........................................ 6,397 6,589
Deferred financing costs ............................................. 322 461
Other assets ......................................................... 154 271
-------------------------
Total assets ............................................. $148,832 $138,117
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt .............................................. $ 951 $ 878
Current portion of capital lease obligations ......................... 1,532 1,249
Accounts payable ..................................................... 14,384 14,127
Accrued expenses and taxes ........................................... 8,427 4,606
-------------------------
Total current liabilities ................................ 25,294 20,860
Long-term debt, less current portion ....................................... 35,731 37,082
Capital lease obligations, less current portion ............................ 6,504 8,036
Deferred income taxes ...................................................... 11,649 10,523
Other long-term liabilities ................................................ 3,082 3,766
Commitments and contingencies
Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized, none issued ........ -- --
Stockholders' equity:
Commonstock, $.01 par value per share, 20,000,000 shares authorized;
8,021,097 shares issued and outstanding at January 4, 1997 and
December 30, 1995 .............................................. 80 80
Additional paid-in capital ........................................... 41,948 41,687
Retained earnings .................................................... 25,959 17,397
Cumulative translation adjustment .................................... (1,415) (1,314)
-------------------------
Total stockholders' equity ............................... 66,572 57,850
-------------------------
Total liabilities and stockholders' equity ............... $148,832 $138,117
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 4
QUAKER
FABRIC
CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands,
except per share amounts)
<TABLE>
<CAPTION>
Years Ended
---------------------------------------
January 4, December 30, December 31,
1997 1995 1994
---------------------------------------
<S> <C> <C> <C>
Net sales .......................................... $198,856 $173,487 $180,842
Cost of products sold .............................. 152,787 137,083 133,168
---------------------------------------
Gross margin ....................................... 46,069 36,404 47,674
Selling, general and administrative expenses 29,121 26,176 27,560
---------------------------------------
Operating income ................................... 16,948 10,228 20,114
Other expenses:
Interest expense, net ............................ 4,092 3,898 3,863
Other, net ....................................... 77 98 34
---------------------------------------
Income before provision for income taxes 12,779 6,232 16,217
Provision for income taxes ......................... 4,217 712 6,691
---------------------------------------
Net income ......................................... 8,562 5,520 9,526
=======================================
Earnings per common share .......................... $ 1.03 $ 0.67 $ 1.15
=======================================
Weighted average shares outstanding ................ 8,332 8,293 8,301
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 5
QUAKER
FABRIC
CORPORATION
AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands,
except share amounts)
<TABLE>
<CAPTION>
Additional Cumulative Total
Common Paid-in Retained Translation Stockholders'
Stock Capital Earnings Adjustment Equity
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ...................... $80 $41,143 $ 2,351 $ -- $ 43,574
Stock option compensation expense ....... -- 237 -- -- 237
Net income .............................. -- -- 9,526 -- 9,526
Foreign currency translation adjustment . -- -- -- (748) (748)
---------------------------------------------------------------------------
Balance, December 31, 1994 .................... $80 $41,380 $11,877 $(748) $ 52,589
Stock option compensation expense ....... -- 229 -- -- 229
Net income .............................. -- -- 5,520 -- 5,520
Issuance of 10,618 shares of common stock
under stock option plan ........... -- 78 -- -- 78
Foreign currency translation adjustment . -- -- -- (566) (566)
---------------------------------------------------------------------------
Balance, December 30, 1995 .................... $80 $41,687 $ 17,397 $(1,314) $57,850
Stock option compensation expense ....... -- 261 -- -- 261
Net income .............................. -- -- 8,562 -- 8,562
Foreign currency translation adjustment . -- -- -- (101) (101)
---------------------------------------------------------------------------
BALANCE, JANUARY 4, 1997 ...................... $80 $41,948 $ 25,959 $(1,415) $66,572
===========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
QUAKER
FABRIC
CORPORATION
AND
SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended
-----------------------------------
January 4, December 30, December 31,
1997 1995 1994
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................... $ 8,562 $ 5,520 $ 9,526
Adjustments to reconcile net income to
net cash provided by operating activities-
Depreciation and amortization .......................... 7,437 6,462 5,603
Stock option compensation expense ...................... 261 229 237
Deferred income taxes .................................. 1,126 (253) 1,546
Changes in operating assets and liabilities-
Accounts receivable .................................. (2,050) 1,398 (3,394)
Inventories .......................................... (4,581) (871) (4,970)
Prepaid expenses and other current assets ............ 657 (1,374) 231
Accounts payable and accrued expenses ................ 4,078 1,158 1,321
Other long-term liabilities .......................... (684) (245) 999
-----------------------------------
Net cash provided by operating activities .......... 14,806 12,024 11,099
-----------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment .............. (11,979) (13,165) (18,727)
Sale of equipment ....................................... -- 212 2,795
-----------------------------------
Net cash used for investing activities ............. (11,979) (12,953) (15,932)
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of short-term and long-term debt -- 34,500 33,900
Repayments of debt .................................... (1,278) (31,912) (27,128)
Repayments of capital leases .......................... (1,249) (1,171) (962)
Capitalization of financing costs ..................... (14) (135) (345)
Issuance of common stock under stock option plan ...... -- 78 --
-----------------------------------
Net cash provided (used) by financing activities .... (2,541) 1,360 5,465
Effect of exchange rates on cash .......................... (101) (566) (748)
-----------------------------------
Net increase (decrease) in cash and cash equivalents ...... 185 (135) (116)
Cash and cash equivalents, beginning of period ............ 200 335 451
-----------------------------------
Cash and cash equivalents, end of period .................. $ 385 $ 200 $ 335
Supplemental disclosure of cash flow information: ===================================
Cash paid for-
Interest ............................................ $ 3,916 $ 4,043 $ 3,787
Income taxes ........................................ $ 829 $ 1,881 $ 3,367
Supplemental schedule of non-cash investing
and financing activities:
Capital lease obligations incurred for
new equipment ..................................... $ -- $ -- $ 2,795
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands
except per share amounts)
QUAKER
FABRIC
CORPORATION
AND
SUBSIDIARIES
1 OPERATIONS
Quaker Fabric Corporation and subsidiaries (the "Company" or "Quaker") designs,
manufactures and markets woven upholstery fabrics for residential furniture
markets and specialty yarns for use in the production of its own fabrics and for
sale to manufacturers of home furnishings and other products.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Quaker Fabric Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
(b) Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 1 of each
year. The consolidated statements of income for the years ended January 4, 1997
contained 53 weeks while December 30, 1995 and December 31, 1994 contained 52
weeks.
(c) 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 consist of the following at January 4, 1997 and December 30, 1995:
<TABLE>
<CAPTION>
January 4, December 30,
1997 1995
----------------------------
<S> <C> <C>
Raw materials ........................ $11,127 $10,028
Work-in-process ...................... 8,421 8,087
Finished goods ....................... 8,280 5,591
----------------------------
Inventory at FIFO .................. 27,828 23,706
LIFO reserve ......................... 91 550
----------------------------
Inventory at LIFO .................. $27,737 $23,156
============================
</TABLE>
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation on property and equipment on a straight-line basis over their
estimated useful lives as follows:
Buildings and improvements ................................ 32-39 years
Machinery and equipment ................................... 5-20 years
Furniture and fixtures .................................... 10 years
Motor vehicles ............................................ 4-5 years
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated life of the assets or the remaining lease term.
(e) Goodwill
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired. Goodwill is amortized on a straight-line basis
over 40 years. Accumulated amortization is $1,314 and $1,121 at January 4, 1997
and December 30, 1995, respectively. Amortization expense was approximately $193
for both years. The Company's policy is to evaluate annually whether the useful
life of goodwill should be revised or whether the remaining balance has been
impaired. When evaluating impairment, the Company uses an estimate of future
operating income over the remaining goodwill life to measure whether the
goodwill is recoverable.
(f) Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
17
<PAGE> 8
(g) Deferred Financing Costs
Financing costs related to certain loans and capital leases have been
capitalized and are being amortized over the life of the related loan or capital
lease. Accumulated amortization was $313 and $159 as of January 4, 1997 and
December 30, 1995, respectively.
(h) Earnings Per Common Share
Earnings per common share for the years ended January 4, 1997, December 30, 1995
and December 31, 1994 are computed using the weighted average number of common
shares and common share equivalents outstanding during the year.
(i) Foreign Currency Translation
The assets and liabilities of the Company's Mexican operations are
translated at period-end exchange rates, and statement of income accounts are
translated at weighted average exchange rates. In 1996, 1995 and 1994, the
resulting translation adjustments are included in the consolidated balance sheet
as a separate component of equity, "Cumulative Translation Adjustment," and
foreign currency transaction gains and losses are included in the consolidated
statements of income. In 1997 Mexico has been designated a "highly inflationary
country" and accordingly, in the future the Company will record translation
gains and losses in the income statement rather than as a separate component of
equity.
(j) Impairment of long-lived assets
The Company periodically assesses the realizability of its long-lived assets in
accordance with statement of financial accounting standards No. 121." Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." Based on its review, the Company does not believe that any material
impairment of its long-lived assets has occurred.
(k) Use of Estimates in the Preparation of Financial Statements
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Operating results in the future could vary from the amounts derived from
management's estimates and assumptions.
(l) Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, current maturities of long term debt, accounts
payable, and long term debt. The carrying amount of these financial instruments
as of January 4, 1997, approximate fair value due to the short term nature of
these instruments and the recent nature of the amendments made to the Credit
Agreement.
3 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
January 4, December 30,
1997 1995
--------------------------
<S> <C> <C>
Land ............................................ $ 236 $ 236
Buildings and improvements ...................... 17,559 17,046
Leasehold improvements .......................... 309 283
Machinery and equipment ......................... 94,541 85,191
Furniture and fixtures .......................... 1,292 1,193
Motor vehicles .................................. 330 289
Construction in progress ........................ 1,899 470
--------------------------
116,166 104,708
Less -- Accumulated depreciation and amortization 32,121 25,552
--------------------------
$ 84,045 $ 79,156
==========================
</TABLE>
18
<PAGE> 9
Included in machinery and equipment is equipment under capital lease of $12,644
as of January 4, 1997 and December 30, 1995. The Company is depreciating the
equipment over economic useful lives of 15 to 20 years, which is greater than
the lease terms, because the Company intends to exercise its option to purchase
the equipment at the end of the initial lease terms at fair market value.
4 ACCRUED EXPENSES AND TAXES
Accrued expenses and taxes consisted of the following:
JANUARY 4, December 30,
1997 1995
------------------------
Accrued workers' compensation .......... $1,500 $1,230
Accrued medical insurance .............. 1,766 450
Accrued other, including taxes ......... 5,161 2,926
-----------------------
$8,427 $4,606
-----------------------
5 DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 4, December 30,
1997 1995
--------------------------
<S> <C> <C>
6.81% Series A Notes due December 15, 2002 ............................... $30,000 $30,000
Unsecured credit facility payable to several banks ....................... 4,000 4,400
9.73% Note payable in monthly principal and
interest installments of $81 through August
1999, secured by certain equipment .................................... 2,287 3,003
Notes payable in monthly principal installments of $13 plus interest until
July 1998 and $6 plus interest from August 1998 to
July 2000, interest at prime plus 1% (9.25% at January 4, 1997
and 9.75% at December 30, 1995), secured by certain equipment ........ 395 557
--------------------------
36,682 37,960
Less -- Current portion .................................................. 951 878
--------------------------
$35,731 $37,082
--------------------------
</TABLE>
The Series A Notes are unsecured and bear interest at a fixed rate of 6.81%
payable semiannually. The Series A Notes may be prepaid in whole or in part
prior to maturity, at the Company's option, subject to a yield maintenance
premium, as defined. Required principal payments of the Series A Notes are as
follows:
December 15, 1998 .........................................$ 2,500
December 15, 1999 ......................................... 8,500
December 15, 2000 ......................................... 8,500
December 15, 2001 ......................................... 8,000
December 15, 2002 ......................................... 2,500
-------
$30,000
=======
Under the terms of the Credit Agreement, the Company may borrow up to $50,000
through December 31, 2000. Advances made under the Credit Agreement bear
interest at either the prime rate or the Eurodollar (Libor) rate plus an
"Applicable Margin." The Applicable Margin on advances is adjusted quarterly
based on the Company's Leverage Ratio as defined in the Credit Agreement. The
Applicable Margin for Eurodollar (Libor) advances may range from 0.625% to 1.5%.
The Company is also required to pay certain fees including a commitment fee
which will vary based on the Company's Leverage Ratio. As of January 4, 1997,
the commitment fee is 0.375% of the unused portion of the Credit Agreement which
was $45,528, net of outstanding letters of credit. As of January 4, 1997, the
Company had $4,000 outstanding under the Credit Agreement at an effective
interest rate of 7.0%. As of December 30, 1995, the Company had $4,400
outstanding under the Credit Agreement at an effective interest rate of 6.9%.
The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement and the Series A Notes. Among other things,
the Credit Agreement and the Series A Notes require the Company to satisfy
certain financial tests and ratios (including interest coverage ratios, leverage
ratios, and net worth requirements). The Credit Agreement and the Series A Notes
also impose limitations on the Company's ability to
19
<PAGE> 10
incur additional indebtedness, create certain liens, incur capital lease
obligations, declare and pay dividends, make certain investments, make capital
expenditures, and purchase, merge or consolidate with or into any other
corporation. As of January 4, 1997, the Company is in full compliance with all
debt covenants.
As of January 4, 1997, debt principal payments for each of the next five fiscal
years and thereafter are as follows:
1997 ..................................................... $ 951
1998 ..................................................... 3,495
1999 ..................................................... 9,200
2000 ..................................................... 12,536
2001 ..................................................... 8,000
Thereafter ............................................... 2,500
-------
$36,682
=======
6 INCOME TAXES
Income before provision for income taxes and extraordinary item consists of:
<TABLE>
<CAPTION>
Years Ended
-------------------------------------
JANUARY 4, December 30, December 31,
1997 1995 1994
-------------------------------------
<S> <C> <C> <C>
Domestic ................................... $12,200 $ 6,184 $15,788
Foreign .................................... 579 48 429
-------------------------------------
$12,779 $ 6,232 $16,217
=====================================
</TABLE>
The following is a summary of the provision (benefit) for income taxes:
<TABLE>
<CAPTION>
Years Ended
---------------------------------------
JANUARY 4, December 30, December 31,
1997 1995 1994
---------------------------------------
<S> <C> <C> <C>
Federal
Current .................... $ 2,510 $ 725 $4,470
Deferred ................... 1,300 1,703 678
--------------------------------------
$ 3,810 $ 2,428 $5,148
--------------------------------------
State
Current .................... $ 573 $ 187 $ 675
Deferred ................... (166) (1,903) 840
--------------------------------------
$ 407 $(1,716) $1,515
--------------------------------------
Foreign
Current .................... $ -- $ -- $ --
Deferred ................... -- -- 28
--------------------------------------
$ -- $ -- $ 28
--------------------------------------
$ 4,217 $ 712 $6,691
======================================
</TABLE>
A reconciliation between the provision for income taxes before extraordinary
item computed at U.S. federal statutory rates and the amount reflected in the
accompanying consolidated statements of income is as follows:
<TABLE>
<CAPTION>
Years Ended
-----------------------------------
JANUARY 4, December 30, December 31,
1997 1995 1994
-----------------------------------
<S> <C> <C> <C>
Computed expected tax provision ............................... $ 4,345 $ 2,119 $ 5,676
Increase in taxes resulting from:
Amortization of goodwill ................................. 67 67 67
State income taxes, net of federal benefit ............... 583 385 1,354
Decrease in taxes resulting from:
State investment tax credits,
net of federal provision ............................... (319) (452) (369)
Reversal of state deferred taxes due to change in tax law,
net of federal provision ........................... -- (1,050) --
Foreign sales corporation benefit ........................ (245) (270) (150)
Other .................................................... (214) (87) 113
-----------------------------------
$ 4,217 $ 712 $ 6,691
===================================
</TABLE>
20
<PAGE> 11
At January 4, 1997, the Company had net operating loss carryforwards of
approximately $2,451 for federal income tax purposes available to offset future
taxable income. These carryforwards expire from 2001 to 2005. Additionally, the
Company has available for use $1,142 of tax credit carryforwards, of which
approximately $696 expire from 1999 to 2005. The remaining tax credit
carryforwards have no expiration dates. The timing and use of the net operating
loss carryforwards and the tax credit carryforwards are limited under federal
income tax legislation.
In November 1995, the Massachusetts legislature amended the apportionment
formula for corporate income tax purposes and adopted a single sales factor
formula. The effect of this new apportionment formula will be phased in over a
five year period beginning in 1996. In accordance with SFAS 109, the Company has
recorded the effect of this tax law change on deferred taxes as a reduction of
state deferred tax liability of $1,050, net of federal taxes, as of December 30,
1995.
The significant items comprising the domestic deferred tax asset/liability are
as follows:
<TABLE>
<CAPTION>
JANUARY 4, 1997 December 30, 1995
------------------------------------------------------
CURRENT LONG-TERM Current Long-term
------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Net operating loss carryforwards .......... $259 $599 $ 259 $ 889
Tax credit carryforwards .................. 191 951 773 1,660
Receivable reserves ....................... 718 -- 714 --
Other ..................................... 1,311 1,123 379 1,065
------------------------------------------------------
Total assets ........................ $ 2,479 $ 2,673 $ 2,125 $ 3,614
------------------------------------------------------
Liabilities:
Property basis differences ................ $ -- $(14,832) $ -- $(14,332)
Inventory basis differences ............... (1,2922) -- (1,427) --
------------------------------------------------------
Total liabilities ................... $ (1,292) $(14,832) $ (1,427) $(14,332)
------------------------------------------------------
Net assets (liabilities) ............ $ (1,187) $(12,159) $ 698 $(10,718)
------------------------------------------------------
</TABLE>
The significant items comprising the foreign deferred tax asset/liability are as
follows:
<TABLE>
<CAPTION>
JANUARY 4, 1997 December 30, 1995
--------------------------------------------
CURRENT LONG-TERM Current Long-term
--------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Net operating loss carryforwards .... $ -- $ 510 $ -- $195
Liabilities:
Inventory ........................... $(506) $ -- $(195) $--
--------------------------------------------
Net assets (liabilities) ............ $(506) $(510) $(195) $195
--------------------------------------------
</TABLE>
7 COMMITMENTS AND CONTINGENCIES
(a) LITIGATION AND ENVIRONMENTAL CLEANUP MATTERS
The Company is engaged in various claims and legal proceedings including certain
routine environmental cleanup matters. In the opinion of management, the final
resolution of these claims and proceedings is not expected to materially affect
the accompanying consolidated financial statements.
21
<PAGE> 12
(b) LEASES
The Company leases certain facilities and equipment under operating lease
agreements and capital lease agreements that expire at various dates from the
current year to the year 2002. As of January 4, 1997, the aggregate minimum
future commitments under leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
LEASES LEASES LEASES
----------------------------------
<S> <C> <C> <C>
1997 ................................. $2,145 $ 656 $ 2,801
1998 ................................. 1,651 426 2,077
1999 ................................. 2,240 330 2,570
2000 ................................. 1,094 209 1,303
2001 ................................. 2,080 104 2,184
Thereafter ........................... 725 -- 725
----------------------------------
$9,935 $1,725 $11,660
==================================
Less -- Amount representing interest.. 1,899
------
$8,036
Less -- Current portion .............. 1,532
------
$6,504
======
</TABLE>
Rent expense for the years ended January 4, 1997, December 30, 1995, and
December 31, 1994, was $1,276, $1,561, and $1,503, respectively.
(c) LETTERS OF CREDIT
In the normal course of its business activities, the Company is required under
certain contracts to provide letters of credit which may be drawn down in the
event the Company fails to perform under the contracts. As of January 4, 1997
and December 30, 1995, the Company has issued or agreed to issue letters of
credit totaling $472 and $639, respectively.
(d) EMPLOYMENT CONTRACT
The Company has an employment agreement, dated as of March 12, 1993 (the
Employment Agreement), with Larry A. Liebenow pursuant to which Mr. Liebenow
will continue to serve as President and Chief Executive Officer of the Company
on a full-time basis for the five-year period ending March 12, 1998, subject to
an automatic three-year extension, unless terminated by the Company upon one
year's prior notice. The Employment Agreement provides for an initial base
salary of $550, subject to such annual increases as may be determined by the
Board of Directors, as well as certain benefits and reimbursement of expenses.
If the Employment Agreement had terminated as of January 4, 1997, Mr. Liebenow
would have been entitled to receive $572 (in the event of a voluntary
termination or termination for cause) or $1,725 (in the event of a termination
for any other reason, and assuming the Company elected to make a lump-sum
payment).
(e) TRADE ACCEPTANCE
The Company is contingently liable to a bank for trade acceptances of $1,440 as
of January 4, 1997.
8 STOCK OPTIONS
In 1993, options to purchase a total of 635,795 shares of common stock were
granted to certain officers. The options vest over five years and are
exercisable for ten years. The difference of $1,186 between fair market value at
the grant date and the exercise price for these options is being charged to
compensation expense over five years. During 1995, options to purchase 5,000
shares of common stock were granted to a director of the Company. These options
vest over three years and are exercisable for ten years.
During 1996 options to purchase 94,000 shares of common stock were granted to
certain officers. These options vest over five years and are exercisable for ten
years. Options for 56,400 shares were granted at $4.12 per share and 37,600 were
granted at $2.06 per share. The fair market value of the common stock on the
grant date was $7.00 per share. The difference of $348 between the fair market
value at grant date and exercise price is being charged to compensation expense
over five years. However, these options and those in the preceding paragraph
vest immediately upon a change in control, as defined, of the Company.
22
<PAGE> 13
Also during 1996, the Company adopted the 1996 stock option plan for key middle
management employees. Options are granted at not less than fair market value,
vest over a five year period, and are exercisable for ten years. A total of
100,000 shares are reserved under this plan. During 1996, options for 48,000
shares were granted at $8.25 per share and options for 1,500 shares were
canceled.
During 1996, the Company recorded $261 as stock option compensation expense. The
following table summarizes all option activity as of January 4, 1997:
<TABLE>
<CAPTION>
NUMBER OF OPTION
SHARES PRICE
-------------------------
<S> <C>
Outstanding January 1, 1994 ............................. 635,795 $ 1.20- 4.12
Cancelled ...................................... (42,470) $ 2.06- 4.12
-------------------------
Outstanding December 31, 1994 ........................... 593,325 $ 1.20- 4.12
Granted ........................................ 5,000 $11.00
Exercised ...................................... (10,618) $ 4.12
-------------------------
Outstanding December 30, 1995 ........................... 587,707 $ 1.20-11.00
Granted ........................................ 142,000 $ 2.06- 8.25
Cancelled ...................................... (1,500) $ 8.25
-------------------------
Outstanding January 4, 1997 ............................. 728,207 $ 1.20-11.00
=========================
Exercisable January 4, 1997 ............................. 351,289
========
Weighted Average Option Price of Options Exercisable .... $ 2.01
========
Weighted Average Option Price of All Options ............ $ 2.60
========
</TABLE>
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation costs for those plans using
the method of accounting prescribed by APB Opinion 25. Entities electing to
remain with the accounting in APB Opinion 25 must make pro forma disclosures of
net income and, if presented, earnings per share as if the fair value based
method of accounting defined in SFAS 123 has been applied.
The Company has elected to account for its stock-based compensation plans under
APB Opinion 25. Had compensation cost for these plans been determined consistent
with FASB Statement No 123, the Company's net income and earnings per share
would not have been materially different from the amounts reported. Because the
Statement 123 method of accounting has not been applied to options granted prior
to January 1, 1995 the resulting pro forma compensation costs may not be
representative of that to be expected in future years.
Set forth below is a summary of options granted in 1995 and 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OPTIONS PER SHARE FAIR
EXERCISE PRICES OPTIONS EXERCISE PRICE REMAINING LIFE EXERCISABLE VALUE OF OPTIONS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.06 - $ 4.12 94,000 $ 3.30 10 Years 0 $5.95
$ 8.25 46,500 $ 8.25 10 Years 0 $6.31
$11.00 5,000 $11.00 9 Years 1,665 $6.24
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for the 1995 and 1996 grants: Risk free interest rate of 6.44%,
expected dividend yield at zero, expected lives of 10 years and expected
volatility of 60.1%.
9 EXPORT SALES
Export sales from the United States to unaffiliated customers were $30,100 in
1996, $19,500 in 1995, and $24,300 in 1994.
23
<PAGE> 14
10 EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On February 24, 1997, the Company's Board of Directors approved a new
Stockholder Rights Plan (The "Plan"). The Plan provides for the distribution of
one "Right" as a dividend on each outstanding share of the Company's common
stock. Each right allows for the purchase of 1/10 of a share of common stock.
Rights generally become exercisable upon certain triggering events involving the
acquisition of 15% or more of the Company's outstanding common stock. The plan
contains certain provisions that permit the rights holders to exercise their
rights at a discounted rate which could result in substantial dilution of an
acquirer's voting and economic interest in the Company. The Company's Board of
Directors, at its discretion, may allow offers for the Company's common stock to
take place without triggering the dilutive effects of the Plan's mechanisms.
Also on February 24, 1997, the Company's Board of Directors approved an
amendment to the President and Chief Executive Officer's employment agreement.
The amendment provides for Mr. Liebenow to continue to serve as President and
Chief Executive Officer of the Company on a full time basis through March 12,
2002, subject to an automatic three-year extension unless terminated by the
Company upon one year's prior notice. The amendment also provides for an initial
base salary of $600 (effective January 1, 1997) subject to annual increases as
may be determined by the Board of Directors, as well as certain benefits and
reimbursement expenses. If Mr. Liebenow's employment had terminated as of
February 24, 1997, Mr. Liebenow would have been entitled to receive $1,905.
Effective February 24, 1997, the Company established the 1997 Stock Option Plan
(subject to stockholder approval) in which officers and other key employees of
the Company may participate. Options granted under the 1997 Stock Option Plan
are non-qualified options. The 1997 Stock Option Plan provides for the issuance
of options to purchase up to 500,000 shares of common stock, subject to
adjustment under certain circumstances. Subject to stockholders approval, the
Board of Directors granted options to purchase 330,000 shares of common stock at
the fair market value per share on the date of stockholder approval.
24
<PAGE> 15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quaker Fabric Corporation:
We have audited the accompanying consolidated balance sheets of Quaker Fabric
Corporation (a Delaware corporation) and subsidiaries as of January 4, 1997 and
December 30, 1995, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years ended January 4,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quaker Fabric
Corporation and subsidiaries as of January 4, 1997 and December 30, 1995, and
the results of their operations and their cash flows for each of the three years
ended January 4, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 11, 1997
25
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements, including the Notes thereto included elsewhere in this
report.
GENERAL
Overview
Quaker has been producing upholstery fabrics for the home furnishings market for
more than 50 years. Today, Quaker is a leading designer, manufacturer and
worldwide marketer of woven upholstery fabrics for residential furniture markets
and one of the largest producers of Jacquard upholstery fabrics in the world.
Over the last five years, Quaker has achieved sales and net income (excluding
extraordinary items) growth in every year except 1995. Net sales and net income
have grown from $123.4 million and $3.7 million, respectively, in 1992 to $198.9
million and $8.6 million, respectively, in 1996.
During 1995, the Company reported a decrease in net sales and lower gross,
operating and net margins as a result of a convergence of economic, industry and
Company-specific factors. These factors caused the Company's net sales to
decline $7.3 million, to $173.5 million from $180.8 million in 1994. The Company
encountered poor market conditions in Mexico, Canada and the Middle East, each
of which is an important export market for the Company. As a result, 1995
foreign sales decreased by $10.7 million, or 31.6% below 1994 foreign sales
levels. This decline was partially offset by a $2.9 million increase in net yarn
sales, with domestic fabric sales essentially flat.
Significant price increases were also announced by several of the Company's most
important raw material suppliers in early 1995. Such price increases adversely
affected the Company's gross margin, particularly during the latter part of the
year, as the Company was unable to fully pass along these cost increases to
customers during 1995.
The Company generally produces goods to customer order and seeks to operate its
production areas on a five to five and one-half day week, three shift schedule.
During 1995, however, the Company experienced a number of sharp changes in its
order rates which required several significant adjustments in the Company's
production rates. These adjustments adversely affected equipment utilization
rates, quality performance and overtime costs, particularly during the fourth
quarter, contributing to the deterioration in the Company's 1995 gross margin.
In response to the challenges encountered during 1995, management developed a
comprehensive performance improvement plan designed to increase margins and
earnings by growing sales, reducing raw material costs and realizing
manufacturing efficiencies.
(i) To increase sales, the Company strengthened its marketing, merchandising,
design, distribution and new business development functions, expanded its
network of international sales agents, introduced a branded line of better-end
fabrics under its Whitaker label, developed products to meet the specific
styling and design needs of its international and jobber customers, continued to
broaden its product line, focused on opportunities to reduce delivery lead times
and improve customer service, identified new markets and applications for its
specialty yarn products and prepared to enter the contract (office and
institutional) market.
(ii) To reduce raw material costs, the Company identified alternate suppliers
for several of its key raw materials, employed more cost effective raw materials
in certain of its products and implemented a Company-wide program to reduce
waste.
(iii) To improve manufacturing efficiencies, the Company continued to pursue ISO
9001 certification, invested more than $10.8 million in new manufacturing
equipment in 1996 to eliminate bottlenecks and meet its quality objectives,
changed its new product development process to enhance coordination between the
Company's design and manufacturing areas, reduced set-up times, provided
additional training to the Company's managers and production area employees and
implemented a number of process improvements throughout the Company's
manufacturing areas.
Following management's implementation of the Company's 1996 performance
improvement plan, the Company's sales and profitability improved in comparison
to prior periods in each of the last three quarters of 1996.
26
<PAGE> 17
QUARTERLY OPERATING RESULTS
The following table sets forth certain condensed unaudited consolidated
statements of income data for the eight fiscal quarters ended January 4, 1997,
as well as certain data expressed as a percentage of the Company's total net
sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL 1996(1) FISCAL 1995(1)
---------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
---------------------------------------------------------------------------------------
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ................... $43,254 $51,025 $46,436 $58,141 $46,250 $41,068 $37,984 $48,185
Gross margin ................ 9,297 11,312 10,751 14,709 12,104 8,720 7,344 8,236
Gross margin percentage ..... 21.5% 22.2% 23.2% 25.3% 26.2% 21.2% 19.3% 17.1%
Operating income ............ 2,673 4,014 4,053 6,208 4,969 2,708 1,630 921
Operating income percentage . 6.2% 7.9% 8.7% 10.7% 10.7% 6.6% 4.3% 1.9%
Income before provision for
income taxes .............. $1,696 $2,972 $2,984 $5,127 $ 4,002 $1,715 $ 749 $ (234)
---------------------------------------------------------------------------------------
Net income .................. $1,136 $1,992 $1,999 $3,435 $ 2,495 $1,307 $ 498 $ 1,220
---------------------------------------------------------------------------------------
Earnings per common share ... $ 0.14 $ 0.24 $ 0.24 $ 0.41 $ 0.30 $ 0.16 $0.06 $ 0.15
---------------------------------------------------------------------------------------
</TABLE>
(1) The data reflected in this table has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this report.
While the Company's sales have historically not been subject to significant
seasonality, Quaker's net sales and gross margins are typically slightly
stronger in the second and fourth quarters. In 1995, however, management
believes that relatively poor conditions in both the domestic market and several
of the export markets important to the Company, as well as the Company-specific
factors discussed above, had a more pronounced effect on sales and profitability
than any seasonal variations.
The Company follows industry practice by closing its operating facilities for a
one-to-two week period during July of each year. In 1995 and 1996, this shutdown
period, and the resulting effect on sales, occurred in the third fiscal quarter.
In 1997, the first week of the annual shutdown period will occur in the second
fiscal quarter.
PRODUCT MIX
Over the past several years, Quaker has taken steps to expand both the breadth
and depth of the Company's product line by increasing the number of higher
margin, middle to better-end fabrics in its line and by expanding the number of
fabrics it offers at each price point and in each styling category. As a result,
the Company has added new manufacturers of higher-end furniture to its customer
base and positioned itself as a full service supplier of Jacquard and plain
woven fabrics to all of its customers. The following table sets forth certain
information relating to the changes that have occurred in the Company's product
mix and the average gross sales price of its fabrics since 1994:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------
Percent Percent Percent
of of of
Amount Sales Amount Sales Amount Sales
-----------------------------------------------------------
(in thousands, except per yard data)
<S> <C> <C> <C> <C> <C> <C>
Gross fabric sales (dollars):
Promotional-end fabrics ......... $ 54,716 31.0% $ 57,023 36.0% $ 59,763 35.3%
Middle to better-end fabrics .... 121,702 69.0 101,201 64.0 109,427 64.7
-----------------------------------------------------------
Gross fabric sales ............ $176,418 100.0% $158,224 100.0% $169,190 100.0%
-----------------------------------------------------------
Gross fabric sales (yards):
Promotional-end fabrics ......... 16,074 36.9% 17,042 41.8% 17,597 42.3%
Middle to better-end fabrics .... 27,478 63.1 23,719 58.2 24,044 57.7
-----------------------------------------------------------
Gross fabric sales ............ 43,552 100.0% 40,761 100.0% 41,641 100.0%
-----------------------------------------------------------
Average gross sales price per yard :
Promotional-end fabrics ......... $ 3.40 $ 3.35 $ 3.40
Middle to better-end fabrics .... 4.43 4.27 4.55
Average per yard - all fabrics .. 4.05 3.88 4.06
</TABLE>
27
<PAGE> 18
GEOGRAPHIC DISTRIBUTION OF SALES
To develop markets for upholstery fabric outside the United States, the Company
has placed substantial emphasis on building both direct exports from the United
States as well as sales from its Mexico City, Mexico distribution center and
from the inventory it maintains in Roosendaal, Holland. The Company's 1996
foreign sales were up by $12.5 million, or 54.0% above 1995. The following table
sets forth certain information about the changes which have occurred in the
geographic distribution of the Company's gross fabric sales since 1994:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------
Percent Percent Percent
of of of
Amount Sales Amount Sales Amount Sales
------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross fabric sales:
Domestic sales .................. $140,717 79.8% $135,037 85.3% $135,295 80.0%
Foreign sales(1) ................ 35,701 20.2 23,187 14.7 33,895 20.0
-----------------------------------------------------------
Gross fabric sales ........ $176,418 100.0% $158,224 100.0% $169,190 100.0%
-----------------------------------------------------------
</TABLE>
(1) Foreign sales consists of both direct exports from the United States as well
as sales from the Company's Mexico City distribution center and from the
inventory it maintains in Holland.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages of
the Company's net sales represented by certain income and expense items in the
Company's consolidated statements of income:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------
1996 1995 1994
------------------------------
<S> <C> <C> <C>
Net sales .............................................. 100.0% 100.0% 100.0%
Cost of products sold .................................. 76.8 79.0 73.6
------------------------------
Gross margin ........................................... 23.2 21.0 26.4
Selling, general and administrative expenses ........... 14.7 15.1 15.3
------------------------------
Operating income ....................................... 8.5 5.9 11.1
Interest expense, net .................................. 2.1 2.2 2.1
Other expenses, net .................................... - 0.1 -
------------------------------
Income before provisions for income taxes .............. 6.4 3.6 9.0
Provisions for income taxes ............................ 2.1 0.4 3.7
------------------------------
Net income ............................................. 4.3% 3.2% 5.3%
------------------------------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales for 1996 increased $25.4 million, or 14.6%, to $198.9
million from $173.5 million in 1995. Both gross fabric sales and gross yarn
sales were higher during the period. Gross fabric sales increased due to
increases in both domestic and foreign fabric sales. Gross fabric sales within
the United States increased 4.2%, to $140.7 million in 1996 from $135.0 million
in 1995. Foreign sales increased 54.0%, to $35.7 million in 1996 from $23.2
million in 1995. This increase was due to improved sales in Mexico, Canada and
the Middle East as well as increased penetration of other international markets.
Gross yarn sales increased 42.0%, to $26.8 million in 1996 from $18.8 million in
1995.
The gross volume of fabric sold increased 6.8%, to 43.6 million yards in 1996
from 40.8 million yards in 1995. The average gross sales price per yard
increased 4.4%, to $4.05 in 1996 from $3.88 in 1995. The increase was
principally due to a product shift to more middle to better-end fabrics. The
Company sold 15.8% more yards of middle to better-end fabrics and 5.7% fewer
yards of promotional-end fabrics in 1996 than in 1995. The average gross sales
price per yard of middle to better-end fabrics increased by 3.7%, to $4.43 in
1996 from $4.27 in 1995. The average gross sales price per yard of
promotional-end fabrics increased by 1.5%, to $3.40 in 1996 from $3.35 in 1995.
Gross Margin. The gross margin percentage for 1996 increased to 23.2% from 21.0%
for 1995. This percentage growth was primarily attributable to the Company's
performance improvement plan which resulted in increased domestic and
international sales of higher-margin, middle to better-end fabrics, improved
manufacturing efficiencies related to the acquisition of newer, more efficient
manufacturing equipment and more efficient use of the Company's existing
equipment, improved quality performance, decreased raw material costs, and the
effect of spreading overhead over a higher sales base.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $29.1 million in 1996 from $26.2 million in
1995 due to increases in sales commissions, labor and fringes, and sampling
expenses associated with the Company's higher net sales for the period. Selling,
general and administrative expenses as a percentage of net sales decreased to
14.7% in 1996 from 15.1% in 1995 due to a significant increase in net sales
without a corresponding increase in overhead.
28
<PAGE> 19
Interest Expense, Net. Interest expense increased to $4.1 million in 1996 from
$3.9 million in 1995. Lower debt levels were offset by higher commitment fees
associated with increased borrowing availability and other financing charges.
Effective Tax Rate. The effective tax rate increased to 33.0% in 1996 from 11.4%
in 1995. The reduced tax rate for 1995 reflects an adjustment recorded during
the fourth quarter as a result of tax law changes in Massachusetts enacted in
November 1995 which reduced the Company's future deferred tax liability. See
Note 6 of Notes to Consolidated Financial Statements included elsewhere in this
report.
Net Income. Net income for 1996 increased to $8.6 million, or $1.03 per share,
from $5.5 million, or $0.67 per share, for 1995. For a discussion of Earnings
Per Share, see Note 2(h) of Notes to Consolidated Financial Statements included
elsewhere in this report.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales for 1995 decreased $7.3 million or 4.1%, to $173.5 million
from $180.8 million in 1994. Gross fabric sales declined during the period,
while gross yarn sales increased. The decline in gross fabric sales was due
primarily to a decrease in foreign sales and essentially flat domestic fabric
sales. Foreign sales decreased 31.6%, to $23.2 million in 1995 from $33.9
million in 1994. This decrease was due to (i) a decline in sales into the
Mexican market resulting from the devaluation of the Mexican peso in December
1994 and the ensuing recession in Mexico and (ii) a reduction in the amount of
business the Company was able to do in Canada and the Middle East due to general
economic conditions in those markets. Gross fabric sales within the United
States remained approximately the same at $135.0 million. Gross yarn sales
increased 15.0%, to $18.8 million in 1995 from $16.4 million in 1994.
The gross volume of fabric sold decreased 2.1%, to 40.8 million yards for 1995
from 41.6 million yards for 1994. The average gross sales price per yard
declined 4.4%, to $3.88 for 1995 from $4.06 for 1994. This decrease was
principally due to a decrease in foreign sales, which have higher than average
selling prices and an increase in the volume of seconds sold in the off-quality
market. The Company sold 1.4% fewer yards of middle to better-end fabrics and
3.1% fewer yards of promotional-end fabrics in 1995 as in 1994. The average
gross sales price per yard of middle to better-end fabrics decreased by 6.2%, to
$4.27 in 1995 from $4.55 in 1994. The average gross sales price per yard of
promotional-end fabric decreased by 1.5%, to $3.35 in 1995 from $3.40 in 1994.
Gross Margin. The gross margin percentage for 1995 decreased to 21.0% from 26.4%
for 1994. The decrease in gross profit margin was primarily due to (i) lower
absorption of fixed overhead costs because of lower sales and production volume,
(ii) a reduction in the Company's manufacturing efficiencies and quality
performance, (iii) increased raw material prices which were not fully passed on
to customers during 1995, and (iv) a reduction in volume of foreign sales which
carry higher than average gross margins. During 1995, the Company experienced
sharp changes in order demand. Since finished goods generally are manufactured
to a specific customer order, these changes required significant decreases and
increases in the Company's production rates. These changes in production rates
adversely affected the Company's gross margin as manufacturing efficiencies and
quality performance suffered. Additionally, the Company incurred significant
costs (principally overtime) associated with increasing production rates during
the fourth quarter of 1995 to meet increased order demand.
Selling, General and Administrative Expense. Selling, general and administrative
expenses decreased to $26.2 million for 1995 from $27.6 million for 1994.
Selling, general and administrative expenses as a percentage of net sales
decreased to 15.1% in 1995 from 15.3% in 1994. The decrease in selling, general
and administrative expenses was primarily due to reductions in sales
commissions, freight and other variable costs related to the Company's lower
sales volume. The decrease as a percentage of net sales was due to a reduction
in fixed costs, such as expenses associated with the Company's Mexico City
distribution center.
Interest Expense, Net. Interest expense remained approximately the same, at $3.8
million each year, as interest rates in 1995 were slightly lower but borrowing
levels were slightly higher.
Effective Tax Rate. The effective tax rate decreased to 11.4% for 1995 from
41.3% for 1994. This decrease was partially attributable to tax benefits related
to the foreign sales corporation established by the Company during the second
quarter of 1994 and to lower state income taxes due to investment tax credits
associated with the Company's capital expenditure program. Additionally, the
reduced tax rate for 1995 reflects an adjustment recorded during the fourth
quarter as a result of tax law changes in Massachusetts enacted in November 1995
which reduced the Company's future deferred tax liability. See Note 6 of Notes
to Consolidated Financial Statements included elsewhere in this report.
Net Income. Net income for 1995 decreased to $5.5 million, or $0.67 per share,
from $9.5 million, or $1.15 per share, for 1994. For a discussion of "Earnings
Per Share," see Note 2(h) of Notes to Consolidated Financial Statements included
elsewhere in this report.
29
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and capital requirements
through a combination of internally generated funds, borrowings, and equipment
leasing. The Company's capital requirements have arisen principally in
connection with the purchase of equipment to expand production capacity and
improve the Company's quality and productivity performance and with an increase
in the Company's working capital needs related to its sales growth.
The primary source of the Company's liquidity and capital resources has been
operating cash flow. The Company's net cash provided by operating activities was
$11.1 million, $12.0 million and $14.8 million in 1994, 1995 and 1996,
respectively. The Company has supplemented its operating cash flow with
borrowings and equipment leases. Net borrowings (repayments) and equipment
leases were $5.5 million in 1994, $1.3 million in 1995 and $(2.5) million in
1996.
Over the last five years, the Company has placed in service new manufacturing
equipment with an aggregate cost of $51.0 million. Capital expenditures in 1995
and 1996 were $13.2 million and $12.0 million, respectively. Capital
expenditures during 1996 were funded by operating cash flow. Management
anticipates that capital expenditures will total approximately $17.9 million in
1997, consisting of $14.4 million primarily for new production equipment to
expand chenille yarn capacity, increase weaving capacity, and support the
Company's marketing, productivity, quality, service and financial performance
objectives and $3.5 million to upgrade the Company's management information
systems. Management believes that operating income and borrowings under the
Company's Credit Agreement, will provide sufficient funding for the Company's
capital expenditures and working capital needs for the foreseeable future.
As discussed in Note 5 of Notes to Consolidated Financial Statements, the
Company issued $30.0 million of 6.81% Series A Senior Notes due December 15,
2002 (the "Series A Notes") during 1995. Proceeds from the Series A Notes were
used to reduce borrowings under the Credit Agreement. The Series A Notes bear
interest at a fixed rate of 6.81% during the entire term, with no principal
payments due until December 15, 1998.
Additionally, the Company amended the Credit Agreement during 1995 to (i)
increase the revolving credit facility to $50.0 million, (ii) extend the
maturity date to December 31, 2000, and (iii) reduce the interest rate. As of
January 4, 1997, the Company had $4.0 million outstanding under the Credit
Agreement and unused availability of $45.5 million, net of outstanding letters
of credit.
The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement and the Series A Notes, including, but not
limited to, maintenance of certain financial tests and ratios (including
interest coverage ratios, net worth related ratios, and net worth requirements);
limitations on certain business activities of the Company; restrictions on the
Company's ability to declare and pay dividends, incur additional indebtedness,
create certain liens, incur capital lease obligations, make certain investments,
engage in certain transactions with stockholders and affiliates, make capital
expenditures in excess of certain specified amounts, and purchase, merge, or
consolidate with or into any other corporation. The Company is currently in
compliance with all of the affirmative and negative covenants in the Credit
Agreement and the Series A Notes and management believes the Company's continued
compliance will not prevent the Company from operating in the normal course of
business.
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, by reflecting the effects of inflation in the selling prices of
the new products it introduces each year and, to a lesser degree, by increasing
the selling prices of those products which have been included in the Company's
product line for more than one year.
FOREIGN CURRENCY TRANSLATION
All of the Company's sales are denominated in U.S. dollars except sales through
the Company's Mexico City distribution center. These sales are denominated in
pesos and are, therefore, subject to currency fluctuations. Accounts receivable
in pesos at January 4, 1997 were $1.7 million.
Mexico has been designated as a "highly inflationary country" for purposes of
applying Statement of Financial Standards No. 52, Foreign Currency Translation.
Accordingly, in 1997 the Company will record translation gains and losses in the
income statement rather than as a separate component of equity. See Note 2(i) of
Notes to Consolidated Financial Statements included elsewhere in this report.
30
<PAGE> 21
SUMMARY QUARTERLY FINANCIAL DATA
(UNAUDITED)
The following is a summary of the results of operations for each of the quarters
within the years ended January 4, 1997, and December 30, 1995.
In thousands, except per share data
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES ................... $43,254 $51,025 $46,436 $58,141
GROSS MARGIN ................ 9,297 11,312 10,751 14,709
OPERATING INCOME ............ 2,673 4,014 4,053 6,208
NET INCOME (LOSS) ........... 1,136 1,992 1,999 3,435
EARNINGS PER COMMON SHARE ... $ 0.14 $ 0.24 $ 0.24 $ 0.41
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................... $46,250 $41,068 $37,984 $48,185
Gross margin ................ 12,104 8,720 7,344 8,236
Operating income ............ 4,969 2,708 1,630 921
Net income (loss) ........... 2,495 1,307 498 1,220
Earnings per common share ... $ 0.30 $ 0.16 $ 0.06 $ 0.15
</TABLE>
The following summarizes common stock prices for the years ended January 4, 1997
and December 30, 1995.
<TABLE>
<CAPTION>
PRICE PER SHARE
1996 HIGH LOW
- ---------------------------------------------------------------
<S> <C> <C>
FIRST QUARTER ......................... $ 9.50 $ 5.69
SECOND QUARTER ........................ $ 9.75 $ 7.25
THIRD QUARTER ......................... $10.63 $ 7.00
FOURTH QUARTER ........................ $14.50 $ 9.25
</TABLE>
<TABLE>
<CAPTION>
Price per Share
1995 High Low
- ---------------------------------------------------------------
<S> <C> <C>
First Quarter ........................ $12.75 $10.25
Second Quarter ....................... $11.00 $ 7.50
Third Quarter ........................ $11.00 $ 7.75
Fourth Quarter ....................... $ 9.75 $ 8.25
</TABLE>
(1) The Company's common stock is traded over the counter and is quoted on the
Nasdaq National Market under the symbol "QFAB".
(2) The Company's stock began trading publicly on November 16, 1993 and
therefore, had no public market prior to that date.
(3) No dividends have been paid on the Company's common stock.
(4) As of March 25, 1997, there were approximately 48 record holders of common
stock.
(5) The Company's Credit Agreement and Series A Notes contain restrictive
covenants which limit the Company's ability to declare and pay dividends. Under
the most restrictive of these covenants, $10.6 million was available for the
payment of dividends as of January 4, 1997.
31
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated February 11, 1997 incorporated by reference or included in
this Form 10-K, into the Company's previously filed Registration Statements on
Form S-8 (File No. 33-88264) and Form S-3 (File No. 33-88236).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-04-1997
<PERIOD-START> DEC-31-1995
<PERIOD-END> JAN-04-1997
<CASH> 385
<SECURITIES> 0
<RECEIVABLES> 28,313
<ALLOWANCES> 2,052
<INVENTORY> 27,737
<CURRENT-ASSETS> 57,914
<PP&E> 116,166
<DEPRECIATION> 32,121
<TOTAL-ASSETS> 148,832
<CURRENT-LIABILITIES> 25,294
<BONDS> 44,718
0
0
<COMMON> 80
<OTHER-SE> 66,492
<TOTAL-LIABILITY-AND-EQUITY> 148,832
<SALES> 198,856
<TOTAL-REVENUES> 198,856
<CGS> 152,787
<TOTAL-COSTS> 152,787
<OTHER-EXPENSES> 77
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4092
<INCOME-PRETAX> 12,779
<INCOME-TAX> 4,217
<INCOME-CONTINUING> 8,562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,562
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
