<PAGE> 1
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 5, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 GRINNELL STREET, FALL RIVER, MASSACHUSETTS 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 5, 1997, 8,321,097 shares of Registrant's Common Stock,
$0.01 par value, were outstanding.
- --------------------------------------------------------------------------------
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
July 5, January 4,
1997 1997
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 284 $ 385
Accounts receivable, less allowances of $2,003 and $2,052 at
July 5,1997 and January 4, 1997, respectively,
for doubtful accounts and sales returns and allowances 25,692 26,261
Inventories 28,808 27,737
Prepaid and refundable income taxes 715 694
Prepaid expenses and other current assets 2,127 2,837
--------- ---------
Total current assets 57,626 57,914
--------- ---------
Property, plant and equipment, net of depreciation and amortization
of $34,591 and $32,121 at July 5, 1997
and January 4, 1997, respectively 90,061 84,045
--------- ---------
Other assets:
Goodwill, net of amortization 6,302 6,397
Deferred financing costs 274 322
Other assets 198 154
--------- ---------
Total assets $ 154,461 $ 148,832
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 990 $ 951
Current portion of capital lease obligations 1,451 1,532
Accounts payable 11,096 14,384
Accrued expenses 5,761 8,427
--------- ---------
Total current liabilities 19,298 25,294
--------- ---------
Long-term debt, less current portion 38,226 35,731
--------- ---------
Capital lease obligations, net of current portion 5,929 6,504
--------- ---------
Deferred income taxes 12,434 11,649
--------- ---------
Other long-term liabilities 2,853 3,082
--------- ---------
Redeemable preferred stock:
Series A convertible, $.0l par value share, liquidation preference
$1,000 per share, 50,000 shares authorized. No shares issued and
outstanding -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares authorized;
8,321,097 and 8,021,097 shares issued and outstanding as of
July 5, 1997 and January 4, 1997, respectively 83 80
Additional paid-in capital 45,783 41,948
Retained earnings 31,270 25,959
Cumulative translation adjustment (1,415) (1,415)
--------- ---------
Total stockholders' equity 75,721 66,572
--------- ---------
Total liabilities and stockholders' equity $ 154,461 $ 148,832
========= =========
</TABLE>
1
<PAGE> 3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
July 5, June 29, July 5, June 29,
1997 1996 1997 1996
------- ------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $52,475 $51,025 $105,673 $94,279
Cost of products sold 39,469 39,713 79,568 73,670
------- ------- -------- -------
Gross margin 13,006 11,312 26,105 20,609
Selling, general and administrative expenses 7,986 7,298 16,454 13,922
------- ------- -------- -------
Operating income 5,020 4,014 9,651 6,687
Other expenses:
Interest expense, net 820 1,012 1,695 1,960
Other, net 19 30 28 59
------- ------- -------- -------
Income before provision for income taxes 4,181 2,972 7,928 4,668
Provision for income taxes 1,380 980 2,617 1,540
------- ------- -------- -------
Net income $ 2,801 $ 1,992 $ 5,311 $ 3,128
======= ======= ======== =======
Earnings per common share (Note 1) $ 0.32 $ 0.24 $ 0.62 $ 0.38
======= ======= ======== =======
Average shares outstanding (Note 1) 8,743 8,319 8,596 8,309
======= ======= ======== =======
</TABLE>
2
<PAGE> 4
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- -----------------------
July 5, June 29, July 5, June 29,
1997 1996 1997 1996
------- ------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,801 $ 1,992 $ 5,311 $ 3,128
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,374 1,834 4,343 3,628
Deferred income taxes 414 285 785 453
Stock option compensation expense 0 66 571 128
Changes in operating assets and liabilities:
Accounts receivable (net) 1,443 (3,990) 569 (5,175)
Inventories (297) 30 (1,071) (391)
prepaid expenses and other current assets (193) (31) 646 677
Accounts payable and accrued expenses (5,092) 3,236 (5,954) 3,546
Other long-term liabilities (74) (47) (229) (140)
------- ------- -------- -------
Net cash provided by operating activities 1,376 3,375 4,971 5,854
------- ------- -------- -------
Cash flows from investing activities:
Net purchase of property, plant and equipment (7,777) (3,639) (10,217) (6,915)
------- ------- -------- -------
Net cash used for investing activities (7,777) (3,639) (10,217) (6,915)
------- ------- -------- -------
Cash flows from financing activities:
Repayments of capital leases (331) (309) (656) (614)
Net borrowings from revolving line of credit 7,000 900 3,000 2,200
Repayments of term debt (235) (218) (466) (431)
Proceeds from issuance of common stock,
net of offering expenses (8) 0 3,267 0
Capitalization of finance cost 0 0 0 (14)
------- ------- -------- -------
Net cash provided by financing activities 6,426 373 5,145 1,141
------- ------- -------- -------
Effect of exchange rates on cash 0 (31) 0 (18)
Net decrease in cash and cash equivalents 25 78 (101) 62
Cash and cash equivalents, beginning of period 259 184 385 200
------- ------- -------- -------
Cash and cash equivalents, end of period $ 284 $ 262 $ 284 $ 262
======= ======= ======== =======
</TABLE>
3
<PAGE> 5
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect
all normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Quaker Fabric Corporation
and Subsidiaries (the "Company") as of July 5, 1997 and January 4, 1997 and the
results of their operations and cash flows for the three months ended July 5,
1997 and June 29, 1996. The unaudited consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to those rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended January 4, 1997.
Certain reclassifications have been made to the prior year financial statements
for consistent presentation with the current year.
EARNINGS PER COMMON SHARE
Earnings per common share is computed using the weighted average number
of common shares and common share equivalents outstanding during the period. See
Note 2 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended January 4, 1997.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock. This statement is effective for fiscal years ending after December 15,
1997 and early adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. The Company will adopt
this statement for its fiscal year ending January 3, 1998 and does not believe
that the effect of the adoption of this standard on the Company's earnings per
share results would be materially different from the amounts presented in the
accompanying statements of income.
4
<PAGE> 6
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTE 2 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the last-in, first-out
(LIFO) method.
Inventories at July 5,1997 and January 4,1997 consisted of the
following:
<TABLE>
<CAPTION>
JULY 5, JANUARY 4,
1997 1997
------- -------
(In thousands)
<S> <C> <C>
Raw materials $10,740 $11,127
Work in process 9,264 8,421
Finished goods 8,895 8,280
------- -------
Inventory at FIFO 28,899 27,828
LIFO Reserve 91 91
------- -------
Inventory at LIFO $28,808 $27,737
======= =======
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year is a 52 or 53 week period ending on the
Saturday closest to January 1. "Fiscal 1996" ended January 4, 1997 and "Fiscal
1997" will end January 3, 1998. The first six months of Fiscal 1996 and Fiscal
1997 ended June 29, 1996 and July 5, 1997, respectively.
RESULTS OF OPERATIONS- Quarterly Comparison
Net sales for the second three months of Fiscal 1997 increased $1.4
million or 2.8%, to $52.5 million from $51.0 million for the second three months
of Fiscal 1996. The second quarter of Fiscal 1997 was one week shorter than
Fiscal 1996 due to the timing of the annual vacation shutdown. The average gross
sales price per yard increased 4.2%, to $4.19 for the second three months of
Fiscal 1997 from $4.02 for the second three months of Fiscal 1996. This increase
was principally due to an increase in Foreign and Export sales which have a
higher than average selling price, and to an increase in the average selling
price of middle to better-end fabric sales. The gross volume of fabric sold
decreased 2.6%, to 10.9 million yards for the second three months of Fiscal 1997
from 11.2 million yards for the second three months of Fiscal 1996. The Company
sold 4.5% fewer yards of middle to better-end fabrics and 0.6% more yards of
promotional-end fabrics in the second three months of Fiscal 1997 than in the
second three
5
<PAGE> 7
months of Fiscal 1996. The average gross sales price per yard of middle to
better-end fabrics increased by 7.6%, to $4.70 in the second three months of
Fiscal 1997 as compared to $4.37 in the second three months of Fiscal 1996.
The average gross sales price per yard of promotional-end fabric
decreased by 1.2%, to $3.37 in the second three months of Fiscal 1997 as
compared to $3.41 in the second three months of Fiscal 1996. Gross fabric sales
within United States increased 0.3% to $35.9 million in the second three months
of Fiscal 1997 from $35.8 million in the second three months of Fiscal 1996.
Foreign and Export sales increased 6.9%, to $9.8 million in the second three
months of Fiscal 1997 from $9.2 million in the first three months of Fiscal
1996. Gross yarn sales increased 10.9%, to $8.0 million in the second three
months of Fiscal 1997 from $7.2 million in the same period of Fiscal 1996.
The gross margin percentage for the second three months of Fiscal 1997
increased to 24.8% as compared to 22.2% for the second three months of Fiscal
1996. The increase in gross profit margin percentage was primarily due to 1.)
lower manufacturing costs resulting from improved manufacturing efficiencies and
2.) improved manufacturing quality performance resulting in a decrease in sales
of second quality fabric.
Selling, general and administrative expenses increased to $8.0 million
for the second three months of Fiscal 1997 from $7.3 million for the second
three months of Fiscal 1996. Selling, general and administrative expenses as a
percentage of net sales increased to 15.2% in the second three months of Fiscal
1997 from 14.3% in the second three months of Fiscal 1996. The increase in
selling, general and administrative expenses was primarily due to increases in
labor and fringe benefits, including continued expansion of the Company's design
staff, increased fabric sampling, and expenses associated with the development
of an initial fabric line to support the Company's entry into the contract
market.
Interest expense was $0.8 million for the second three months of Fiscal
1997, and $1.0 million for the second three months of Fiscal 1996. Lower levels
of borrowing on the Company's senior debt and lower interest on capital leases
and term debt were the primary reasons for the decrease.
The effective tax rate was 33.0% for the second three months of Fiscal
1997, and Fiscal 1996.
Net income for the second three months of Fiscal 1997 increased to $2.8
million, or $0.32 per share, from $2.0 million, or $0.24 per share, for the
second three months of Fiscal 1996. For a discussion of "Earnings Per Share,"
see Note 2 to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended January 4, 1997.
RESULTS OF OPERATIONS - Six-month Comparison
Net sales for the first half of Fiscal 1997 increased $11.4 million or
12.1%, to $105.7 million from $94.3 million for the first half of Fiscal 1996.
The first half of Fiscal 1997 was one week shorter than Fiscal 1996 due to the
timing of the annual vacation shutdown. The average gross sales price per yard
increased 4.2%, to $4.22 for the first half of Fiscal 1997 from $4.05 for the
first half of Fiscal 1996. This increase was principally due to an increase in
Foreign and
6
<PAGE> 8
Export sales which have a higher than average selling price and to a higher
percentage of middle to better-end fabric sales.
The gross volume of fabric sold increased 4.8%, to 21.9 million yards
for the first half of Fiscal 1997 from 20.9 million yards for the first half of
Fiscal 1996. The Company sold 7.6% more yards of middle to better-end fabrics
and 0.4% more yards of promotional-end fabrics in the first half of Fiscal 1997
than in the first half of Fiscal 1996. The average gross sales price per yard of
middle to bettering fabrics increased by 6.3% to $4.70 in the first half of
Fiscal 1997 as compared to $4.42 in the first half of Fiscal 1996. The average
gross sales price per yard of promotional fabric decreased by 1.2%, to $3.39 in
the first half of Fiscal 1997 as compared to $3.43 in the first half of Fiscal
1996. Gross fabric sales within the United States were $74.8 million the first
half of Fiscal 1997 an increase of 9.1% over the first half 1996 gross fabric
sales of $68.5 million. Foreign and Export sales increased 11.0% to $17.8
million in the first half of Fiscal 1997 from $16.0 million in the first half of
Fiscal 1996. Gross yarn sales increased 29.2% to $15.3 million in the first half
of Fiscal 1997 from $11.9 million in the same period of Fiscal 1996.
The gross margin percentage for the first half of Fiscal 1997 increased
to 24.7% as compared to 21.9% for the first half of Fiscal 1996. The increase in
the gross margin percentage was due to 1.) increase sales volume in the
higher-margin middle to better-end and foreign/export fabric categories 2.)
lower manufacturing costs resulting from improved manufacturing efficiencies,
and 3.) improved manufacturing quality performance resulting in a decrease in
sales of second quality fabric.
Selling, general and administrative expenses increased to $16.5 million
for the first half of Fiscal 1997 from $13.9 million for the first half of
Fiscal 1996. Selling, general and administrative expenses as a percentage of net
sales increased to 15.6% in the first half of Fiscal 1997 from 14.8% in the
first half of Fiscal 1996. The increase in selling, general and administrative
expenses was primarily due to increases in sales commissions, labor and fringe
benefits, fabric sampling expenses, continued expansion of the design staff, and
costs associated with the development of an initial fabric line to support the
Company's entry into the contract market. A $480 thousand, non-cash increase in
stock option amortization expense, due to complete vesting of certain stock
options as a result of the 1997 Offering (as hereinafter defined), increased
selling, general and administrative expenses as a percentage of net sales by
0.5%.
Interest expense decreased to $1.7 million for the first half of Fiscal
1997 from $2.0 million in the first half of Fiscal 1996. Lower levels of senior
debt financing, and lower capital lease and term debt obligations were the
primary reasons.
The effective tax rate was 33.0% for the first half of Fiscal 1997, and
Fiscal 1996.
Net income for the first half of Fiscal 1997 increased to $5.3
million, or $0.62 per share, from $3.1 million, or $0.38 per share, for the
first half of Fiscal 1996. For a discussion of "Earnings Per Share," see Note 2
to the Consolidated Financial Statements included in the Company's Annual Report
on Form 1O-K for the year ended January 4, 1997.
7
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
and equipment leasing. The Company's capital requirements have arisen
principally in connection with expansion of the Company's production capacity,
the equipment modernization program the Company has been executing to reduce
manufacturing costs, and increased working capital needs associated with the
growth of the Company's sales.
In December 1995, the Company amended its unsecured credit facility
with several banks (the "Credit Agreement") and increased the facility to $50.0
million. As of July 5, 1997, the Company had $7.0 million outstanding under the
Credit Agreement and had unused availability of $42.7 million, net of
outstanding letters of credit. For a discussion of the "Credit Agreement," see
Note 5 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended January 4, 1997.
On March 24, 1997, the Company completed a public offering of 3.4
million shares of its common stock, of which 3.1 million shares were sold by
selling stockholders and 0.3 million were sold by the Company (the "1997
Offerings"). The proceeds to the Company from the 1997 Offering were
approximately $3.3 million, net of offering expenses.
Net capital expenditures for the first half of Fiscal 1996 were $6.9
million. Capital expenditures during the first half of Fiscal 1997 used $10.2
million of cash. Capital expenditures during the first half of Fiscal 1997 were
funded by internally generated cash flows. The Company recently announced plans
to move forward with a $35.0 million capacity expansion program, of which
approximately $16.0 million is expected to be spent in Fiscal 1997. This
increases the total anticipated capital expenditures for Fiscal 1997 to $38.0
million. Capital expenditures will consist primarily of additional manufacturing
equipment to support anticipated demand for the Company's fabric and yarn.
Capital expenditures will be funded through internally generated cash, borrowing
under the Credit Agreement, and the proceeds from the 1997 Offering. Management
believes that the Company will have sufficient funding resources to meet its
working capital and capital expenditure needs.
THIS DOCUMENT CONTAINS "FORWARD LOOKING STATEMENTS," AS THAT TERM IS DEFINED IN
THE FEDERAL SECURITIES LAWS. THE READER IS CAUTIONED THAT SUCH STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND THAT, AS A RESULT OF VARIOUS FACTORS,
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED. FOR A FURTHER
DISCUSSION OF THESE FACTORS, SEE THE COMPANY'S 1996 FORM 10-K.
8
<PAGE> 10
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 2l, 1997, an annual meeting of the shareholders of the Company
was held at which directors were elected to serve until their successors shall
have been elected and shall have qualified, the appointment of the Company's
outside auditors for the year ended January 3, 1998 was ratified, and the 1997
Stock Option Plan, which provides for the grant to Company officers and other
key employees options to purchase up to 500,000 shares of the Company's Common
Stock, was ratified. The number of votes cast for, against, or
withheld/abstained and the number of broker non-votes with regard to each
nominee or matter are set form below:
<TABLE>
<CAPTION>
Withheld Broker
For Against Abstained Non-votes
--- ------- --------- ---------
Election of directors:
<S> <C> <C> <C> <C>
Sangwoo Ahn 7,346,374 N/A 486,525 --
Larry A. Liebenow 7,346,374 N/A 486,525 --
Jerry I. Porras 7,350,874 N/A 482,025 --
Eriberto R. Scocimara 7,267,874 N/A 565,025 --
Ratification of auditors 7,816,249 8,550 8,100 --
Ratification of 1997
Stock Option Plan 5,123,477 1,344,795 56,913 1,307,714
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27.0 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the three
months ended July 5, 1997.
9
<PAGE> 11
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: August 7, 1997 By: /s/ Paul J. Kelly
------------------------------ --------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> JAN-04-1997
<PERIOD-END> JUL-05-1997
<CASH> 284
<SECURITIES> 0
<RECEIVABLES> 25692
<ALLOWANCES> 2003
<INVENTORY> 28808
<CURRENT-ASSETS> 57626
<PP&E> 124652
<DEPRECIATION> 34591
<TOTAL-ASSETS> 154461
<CURRENT-LIABILITIES> 19298
<BONDS> 44155
0
0
<COMMON> 83
<OTHER-SE> 75638
<TOTAL-LIABILITY-AND-EQUITY> 154461
<SALES> 105673
<TOTAL-REVENUES> 105673
<CGS> 79568
<TOTAL-COSTS> 79568
<OTHER-EXPENSES> 28
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1695
<INCOME-PRETAX> 7928
<INCOME-TAX> 2617
<INCOME-CONTINUING> 5311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5311
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
