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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of May 4, 1998, 8,401,407 shares of Registrant's Common Stock, $0.01 par
value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 567 $ 234
Accounts receivable, less allowances of $1,659 and $1,479 at
April 4, 1998 and January 3, 1998, respectively,
for doubtful accounts and sales returns and allowances 34,504 32,996
Inventories 37,944 32,176
Prepaid income taxes 33 25
Prepaid expenses and other current assets 4,044 4,688
-------- --------
Total current assets 77,092 70,119
-------- --------
Property, plant and equipment, net of depreciation and amortization
of $40,170 and $37,709 at April 4, 1998
and January 3, 1998, respectively 111,158 101,307
-------- --------
Other assets:
Goodwill, net of amortization 6,154 6,204
Deferred financing costs 227 251
Other assets 221 207
-------- --------
Total assets $194,852 $178,088
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 994 $ 995
Current portion of capital lease obligations 1,185 1,167
Accounts payable 17,679 18,203
Accrued expenses 9,583 7,120
-------- --------
Total current liabilities 29,441 27,485
-------- --------
Long-term debt, less current portion 60,287 47,436
-------- --------
Capital lease obligations, net of current portion 5,034 5,336
-------- --------
Deferred income taxes 14,041 13,771
-------- --------
Other long-term liabilities 1,788 1,747
-------- --------
Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized. No shares issued and
outstanding. -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares authorized;
8,401,407 and 8,400,684 shares issued and outstanding as of
April 4, 1998 and January 3, 1998, respectively 84 84
Additional paid-in capital 46,584 46,572
Retained earnings 39,008 37,072
Cumulative translation adjustment (1,415) (1,415)
-------- --------
Total stockholders' equity 84,261 82,313
-------- --------
Total liabilities and stockholders' equity $194,852 $178,088
======== ========
</TABLE>
1
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
April 4, April 5,
1998 1997
------------------------
(Unaudited)
<S> <C> <C>
Net sales $62,730 $53,198
Cost of products sold 49,139 40,099
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Gross margin 13,591 13,099
Selling, general and administrative expenses 9,398 8,468
------- -------
Operating income 4,193 4,631
Other expenses:
Interest expense, net 1,200 875
Other, net 15 9
------- -------
Income before provision for income taxes 2,978 3,747
Provision for income taxes 1,042 1,237
------- -------
Net income $ 1,936 $ 2,510
======= =======
Earnings per common share - basic (Note 1) $ 0.23 $ 0.31
======= =======
Weighted average shares outstanding - basic (Note 1) 8,401 8,064
======= =======
Earnings per common share - diluted (Note 1) $ 0.22 $ 0.30
======= =======
Weighted average shares outstanding - diluted (Note 1) 8,848 8,471
======= =======
</TABLE>
2
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
April 4, April 5,
1998 1997
------------------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,936 $ 2,510
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,535 1,969
Deferred income taxes 270 371
Stock option compensation expense 0 571
Changes in operating assets and liabilities:
Accounts receivable (net) (1,508) (874)
Inventories (5,768) (774)
Prepaid expenses and other assets 622 839
Accounts payable and accrued expenses 1,939 (862)
Other long-term liabilities 41 (155)
-------- -------
Net cash provided by operating activities 67 3,595
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Cash flows from investing activities:
Net purchase of property, plant and equipment (12,312) (2,440)
-------- -------
Net cash used for investing activities (12,312) (2,440)
-------- -------
Cash flows from financing activities:
Repayments of capital leases (284) (325)
Net borrowings (repayments of) revolving line of credit 13,100 (4,000)
Repayments of term debt (250) (231)
Proceeds from issuance of common stock, net of offering expenses 0 3,275
Proceeds from exercise of common stock options 12 0
-------- -------
Net cash (used) provided by financing activities 12,578 -1,281
-------- -------
Net increase (decrease) in cash 333 -126
Cash and cash equivalents, beginning of period 234 385
-------- -------
Cash and cash equivalents, end of period $ 567 $ 259
======== =======
</TABLE>
3
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Quaker Fabric Corporation
and Subsidiaries (the "Company") as of April 4, 1998 and January 3, 1998 and the
results of their operations and cash flows for the three months ended April 4,
1998 and April 5, 1997. 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 3, 1998.
Certain reclassifications have been made to the prior year financial statements
for consistent presentation with the current year.
Earnings Per Common Share
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share," effective December 15, 1997. Basic income per
common share is computed by dividing net income by the weighted average number
of common shares outstanding during the period. For diluted income per share,
the denominator also includes dilutive outstanding stock options determined
using the treasury stock method. The following table reconciles weighted average
common shares outstanding and dilutive potential common shares.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
April 4, April 5,
1998 1997
----- -----
<S> <C> <C>
Weighted average common shares outstanding 8,401 8,064
Diluted potential common shares 447 407
----- -----
Weighted average common shares outstanding
and dilutive potential common shares 8,848 8,471
----- -----
----- -----
</TABLE>
4
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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 April 4, 1998 and January 3, 1998 consisted of the
following:
<TABLE>
<CAPTION>
April 4, January 3,
1998 1998
--------- --------
(In thousands)
<S> <C> <C>
Raw materials $ 15,779 $ 14,430
Work in process 12,393 9,917
Finished goods 10,035 8,092
--------- --------
Inventory at FIFO 38,207 32,439
LIFO Reserve 263 263
--------- --------
Inventory at LIFO $ 37,944 $ 32,176
--------- --------
--------- --------
</TABLE>
Note 3 - NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, 'Reporting Comprehensive Income.' SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components (e.g. foreign currency translation adjustments and
unrealized gains and losses on certain marketable securities). 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. Mexico has been
designated as a 'highly inflationary country' for purposes of applying
Statement of Financial Accounting Standards No. 52. Foreign Currency
Translation. Accordingly, in 1997 and 1998 the Company recorded translation
gains and losses in the income statement rather than as a separate component
of equity. The Company's total comprehensive earnings for the three month
periods ended April 5, 1997 and April 4, 1998 were the same as reported net
income for those periods.
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 1997" ended January 3, 1998 and "Fiscal
1998" will end January 2, 1999. The first three months of Fiscal 1997 and Fiscal
1998 ended April 5, 1997 and April 4, 1998, respectively.
Results of Operations
Net sales for the first three months of Fiscal 1998 increased $9.5 million
or 17.9%, to $62.7 million from $53.2 million for the first three months of
Fiscal 1997. The average gross sales price per yard increased 6.1%, to $4.52 for
the first three months of Fiscal 1998 from $4.26 for the first three months of
Fiscal 1997. 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 increased 11.0%, to 12.2 million yards for the first three
months of Fiscal 1998 from 11.0 million yards for the first three months of
Fiscal 1997. The Company sold 13.0% more yards of middle to better-end fabrics
and 7.1% more yards of promotional-end fabrics in the first three months of
Fiscal 1998 than in the first three months of Fiscal 1997. The average gross
sales price per yard of middle to better-end fabrics increased by 7.2%, to $5.04
in the first three months of Fiscal 1998 as compared to $4.70 in the first three
months of Fiscal 1997. The average gross sales price per yard of promotional-end
fabric increased by 2.3%, to $3.49 in the first three months of Fiscal 1998 as
compared to $3.41 in the first three months of Fiscal 1997.
5
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Gross fabric sales within the United States increased 16.6% to $45.3
million in the first three months of Fiscal 1998 from $38.9 million in the first
three months of Fiscal 1997. Foreign and Export sales increased 27.0%, to $10.2
million in the first three months of Fiscal 1998 from $8.0 million in the first
three months of Fiscal 1997. Gross yarn sales increased 19.2%, to $8.8 million
in the first three months of Fiscal 1998 from $7.4 million in the same period of
Fiscal 1997.
The gross margin percentage for the first three months of Fiscal 1998
decreased to 21.7% as compared to 24.6% for the first three months of Fiscal
1997. The decrease in gross profit margin was primarily due to 1.) lower
operating efficiencies and other period costs associated with the implementation
of an aggressive capacity expansion plan involving the installation of more than
$50 million of new manufacturing equipment between the beginning of the third
quarter of 1997 and the end of the second quarter of 1998 and 2.) heavy overtime
expenses associated with operating almost all of the Company's manufacturing
areas on a six and one-half day per week schedule, to meet customer demand.
Selling, general and administrative expenses increased to $9.4 million for
the first three months of Fiscal 1998 from $8.5 million for the first three
months of Fiscal 1997. The increase in selling, general and administrative
expenses was primarily due to an increase in labor and fringe benefits, yarn
development expenses, continued expansion of the design staff and period costs
associated with the Company's entry into the contract market. Selling, general
and administrative expenses as a percentage of net sales decreased to 15.0% in
the first three months of Fiscal 1998 from 15.9% in the first three months of
Fiscal 1997. The decrease in selling, general and administrative expenses as a
percentage of net sales was due to the $480 non cash increase in stock option
amortization expense made in the first quarter of 1997. This charge was due to
the complete vesting of certain stock options as a result of the stock offering
during the first quarter of 1997. Adjusting for this charge would have resulted
in selling, general and administrative expenses as a percentage of net sales of
15.0% in the first three months of Fiscal 1997.
Interest expense increased to $1.2 million for the first three months of
Fiscal 1998 from $0.9 million for the first three months of Fiscal 1997. Higher
levels of senior debt and higher interest rates on the senior debt financing
were the reasons.
The effective tax rate was 35.0% for the first three months of Fiscal 1998,
and 33.0% for the first three months of Fiscal 1997.
Net income for the first three months of Fiscal 1998 decreased to $1.9
million, or $0.22 per common share-diluted, from $2.5 million, or $0.30 per
common share-diluted, for the first three months of Fiscal 1997. 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 3, 1998.
6
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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 1997, the Company amended its $50 million unsecured credit
facility with several banks (the "Credit Agreement") to extend its maturity to
December 31, 2002. As of April 4, 1998, the Company had an outstanding balance
of $14.8 million under the Credit Agreement and had unused availability of $35.1
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 3, 1998.
The Company issued $45.0 million of Senior Notes due October 2005 and 2007
(the "Senior Notes") during 1997. Proceeds from the Senior Notes were used to
replace the 6.81% Series A Notes and reduce borrowing under the Credit
Agreement. The Senior Notes bear interest at a fixed rate of 7.09% on $15.0
million and 7.18% on $30.0 million. Annual principal payments begin on October
10, 2003 with a final payment due October 10, 2007. For a discussion of the
"Senior Notes," see Note 5 to the consolidated financial statements included in
the Company's Annual Report 10-K for the year ended January 3, 1998.
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 300,000 were sold by the Company (the "1997 Offering"). The
proceeds to the Company from the 1997 Offering were approximately $3.3 million,
net of offering expenses.
Net capital expenditures for the first three months of Fiscal 1997 were
$2.4 million. Capital expenditures during the first three months of Fiscal 1998
used $12.3 million of cash. Capital expenditures for 1998 were funded primarily
by use of the Company's Senior Bank Credit Facility. Management anticipates that
capital expenditures will total approximately $54.0 million in 1998, including
approximately $45.0 million, primarily for new production equipment to expand
chenille yarn manufacturing capacity, increase weaving capacity, and support the
Company's marketing, productivity, quality, service and financial performance
objectives. Management believes that operating income and borrowing under the
Credit Agreement, will provide sufficient funding for the Company's capital
expenditures and working capital needs for the foreseeable future.
7
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27.0 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the
three months ended April 4, 1998.
8
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: May 11, 1998 By: /s/ Paul J. Kelly
--------------- ----------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
9
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> APR-04-1998
<CASH> 567
<SECURITIES> 0
<RECEIVABLES> 34,504
<ALLOWANCES> 1,659
<INVENTORY> 37,944
<CURRENT-ASSETS> 77,092
<PP&E> 151,328
<DEPRECIATION> 40,170
<TOTAL-ASSETS> 194,852
<CURRENT-LIABILITIES> 29,441
<BONDS> 65,321
0
0
<COMMON> 84
<OTHER-SE> 84,177
<TOTAL-LIABILITY-AND-EQUITY> 194,852
<SALES> 62,730
<TOTAL-REVENUES> 62,730
<CGS> 49,139
<TOTAL-COSTS> 49,139
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,200
<INCOME-PRETAX> 2,978
<INCOME-TAX> 1,042
<INCOME-CONTINUING> 1,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,936
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
