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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of August 12, 2002, 16,139,781 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, except per share and share amounts)
June 29, December 29,
2002 2001
--------------------- -----------------
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 1,377 $ 600
Accounts receivable, less reserves of $1,851 and $1,712 at
June 29, 2002 and December 29, 2001, respectively 53,874 48,907
Inventories 55,288 47,993
Prepaid and refundable income taxes 1,889 1,800
Production supplies 1,371 1,336
Prepaid insurance 928 1,316
Other current assets 6,151 5,082
--------- ---------
Total current assets 120,878 107,034
Property, plant and equipment, net 171,514 159,419
Other assets:
Goodwill, net 5,432 5,432
Other assets 1,799 1,799
--------- ---------
Total assets $299,623 $273,684
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 191 $ 697
Accounts payable 23,264 23,269
Accrued expenses 10,736 10,470
--------- ---------
Total current liabilities 34,191 34,436
Long-term debt 75,800 63,500
Deferred income taxes 28,376 25,260
Other long-term liabilities 2,001 1,985
Commitments and contingencies
Redeemable preferred stock:
Series A convertible, $0.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized, none issued -- --
Stockholders' equity:
Common stock, $0.01 par value per share, 40,000,000 shares authorized;
16,080,515 and 15,825,196 shares issued and outstanding as of
June 29, 2002 and December 29, 2001, respectively 161 158
Additional paid-in capital 86,311 84,230
Retained earnings 74,317 65,408
Accumulated other comprehensive loss (1,534) (1,293)
--------- ---------
Total stockholders' equity 159,255 148,503
--------- ---------
Total liabilities and stockholders' equity $299,623 $273,684
========= =========
The accompanying notes are an integral part of these consolidated financial statements
1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
---------------------- ------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
(Unaudited)
Net sales $ 101,931 $ 84,637 $ 201,963 $ 164,473
Cost of products sold 78,803 66,852 156,235 129,369
--------- --------- --------- ---------
Gross profit 23,128 17,785 45,728 35,104
Selling, general and administrative expenses 14,887 11,922 29,384 23,418
--------- --------- --------- ---------
Operating income 8,241 5,863 16,344 11,686
Other expenses:
Interest expense 1,139 1,041 2,208 2,058
Other, net (11) 11 (6) 15
--------- --------- --------- ---------
Income before provision for income taxes 7,113 4,811 14,142 9,613
Provision for income taxes 2,632 1,732 5,233 3,461
--------- --------- --------- ---------
Net income $ 4,481 $ 3,079 $ 8,909 $ 6,152
========= ========= ========= =========
Earnings per common share - basic (Note 1) $ 0.28 $ 0.20 $ 0.56 $ 0.39
========= ========= ========= =========
Earnings per common share - diluted (Note 1) $ 0.26 $ 0.19 $ 0.53 $ 0.38
========= ========= ========= =========
Weighted average shares outstanding - basic (Note 1) 15,972 15,733 15,915 15,729
========= ========= ========= =========
Weighted average shares outstanding - diluted (Note 1) 17,063 16,588 16,904 16,328
========= ========= ========= =========
Note: Earnings per common share amounts for the quarters and for the six month
periods presented have each been calculated separately. Accordingly, quarterly
amounts may not add to the six month period amounts.
-----------------------------------------------------
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended Six Months Ended
--------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------- ------- ------- -------
(Unaudited)
Net income $ 4,481 $ 3,079 $ 8,909 $ 6,152
Foreign currency translation adjustment (243) 115 (241) 119
Derivative instrument adjustment 50 16 0 (9)
------- ------- ------- -------
Comprehensive income $ 4,288 $ 3,210 $ 8,668 $ 6,262
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements
2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
---------------------------------------
June 29, June 30,
2002 2001
------------------ -------------
(Unaudited)
Cash flows from operating activities:
Net income $ 8,909 $ 6,152
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 8,582 7,470
Stock option compensation expense 26 --
Deferred income taxes 3,116 1,724
Tax benefit related to exercise of common stock options
and stock option compensation expense 733 --
Changes in operating assets and liabilities:
Accounts receivable (4,967) (5,333)
Inventories (7,295) (1,768)
Prepaid expenses and other assets (716) 167
Accounts payable and accrued expenses 261 (2,245)
Other long-term liabilities 16 (71)
-------- --------
Net cash provided by operating activities 8,665 6,096
Cash flows from investing activities:
Purchase of property, plant and equipment (20,636) (6,656)
-------- --------
Cash flows from financing activities:
Change in revolving credit facility 7,300 2,300
Repayments of capital leases obligations (506) (1,648)
Proceeds from exercise of common stock options and
issuance of shares under the employee stock purchase plan 1,325 96
Proceeds from issuance of long-term debt 5,000 --
Capitalization of deferred financing costs (130) --
-------- --------
Net cash provided by financing activities 12,989 748
-------- --------
Effect of exchange rates on cash (241) 110
-------- --------
Net increase in cash 777 298
Cash, beginning of period 600 440
-------- --------
Cash, end of period $ 1,377 $ 738
======== ========
The accompanying notes are an integral part of these consolidated financial statements
3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts)
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 (Company) as of June 29, 2002 and December 29, 2001 and the
results of their operations and cash flows for the six months ended June 29,
2002 and June 30, 2001.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 accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to those rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
Operating results for the six months ended June 29, 2002 are not necessarily
indicative of the results expected for the full fiscal year or any future
period. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 29, 2001.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period. For
diluted earnings 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 to weighted average common
shares outstanding and dilutive potential common shares.
Three Months Ended Six Months Ended
------------------- ----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Weighted average common shares outstanding 15,972 15,733 15,915 15,729
Dilutive potential common shares 1,091 855 989 599
------ ------ ------ ------
Weighted average common shares outstanding
and dilutive potential common shares 17,063 16,588 16,904 16,328
====== ====== ====== ======
Antidilutive options 86 591 334 705
====== ====== ====== ======
4
Note 2 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the last-in, first-out
(LIFO) method.
Inventories at June 29, 2002 and December 29, 2001 consisted of the
following:
June 29, December 29,
2002 2001
---- ----
Raw materials $ 20,933 $ 20,816
Work-in-process 13,122 10,605
Finished goods 18,904 15,036
--------- ---------
Inventory at FIFO 52,959 46,457
LIFO adjustment 2,329 1,536
--------- ---------
Inventory at LIFO $ 55,288 $ 47,993
======== =========
LIFO inventory values are higher than FIFO costs because current
manufacturing costs are lower than the older historical costs used to value
inventory on a LIFO basis.
Note 3 - SEGMENT REPORTING
The Company operates as a single business segment consisting of sales
of two products, upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.
Gross foreign and export sales from the United States to unaffiliated
customers by major geographical area were as follows:
Three Months Ended Six Months Ended
------------------------- ---------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
North America (excluding USA) $ 8,617 $ 7,520 $15,525 $13,897
Middle East 815 784 2,833 2,041
South America 737 1,107 1,509 1,794
Europe 1,511 1,204 2,600 2,340
All Other 1,121 976 1,766 1,860
------- ------- ------- --------
$12,801 $11,591 $24,233 $21,932
======= ======= ======= ========
5
Gross sales by product category are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Fabric $ 97,842 $78,004 $195,458 $154,028
Yarn 5,571 7,609 9,179 12,290
------- ------ -------- --------
$103,413 $85,613 $204,637 $166,318
======== ======= ======== ========
Note 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." The Company has adopted the requirements of SFAS No. 142
effective December 30, 2001. SFAS No. 142 requires companies to test all
goodwill for impairment at least annually and to cease amortization of this
asset. Amortization expense was approximately $96 for the six months ended June
30, 2001. The provisions of SFAS No.142 apply to all goodwill regardless of when
it was acquired. At June 29, 2002, the Company does not believe that the
carrying value of goodwill has been impaired.
In October 2001, the FASB issued SFAS No.144, "Accounting for the
Impairment or Disposal of Long-lived Assets," which superceded SFAS No. 121 and
aspects of APB Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," with respect to
discontinued operations. The Company has adopted the requirements of SFAS No.
144 effective December 30, 2001. The adoption of SFAS No. 144 did not have any
impact on the Company's financial position or results of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year is a 52 or 53 week period ending on the
Saturday closest to January 1. "Fiscal 2001" was a 52 week period ended December
29, 2001. "Fiscal 2002" will be a 53 week period ending January 4, 2003. The
first six months of Fiscal 2001 and Fiscal 2002 ended June 30, 2001 and June 29,
2002, respectively.
Critical Accounting Policies
The Company considered the disclosure requirements of Financial
Reporting Release No. 60 regarding critical accounting policies and Financial
Reporting Release No. 61 regarding liquidity and capital resources, certain
trading activities and related party/certain other disclosures, and concluded
that there were no material changes during the first six months of
6
2002 that would warrant further disclosure beyond those matters previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 29, 2001.
Results of Operations -Quarterly Comparison
Net sales for the second quarter of 2002 increased $17.3 million or
20.4%, to $101.9 million from $84.6 million for the second quarter of 2001. The
overall average gross sales price per yard decreased 0.5%, to $5.43 for the
second quarter of 2002 from $5.46 for the second quarter of 2001. The average
gross sales price per yard of middle to better-end fabrics increased by 3.5%, to
$6.28 in the second quarter of 2002 as compared to $6.07 in the second quarter
of 2001. The average gross sales price per yard of promotional-end fabric
increased by 1.8%, to $3.98 in the second quarter of 2002 as compared to $3.91
in the second quarter of 2001. The gross volume of fabric sold increased 26.2%,
to 18.0 million yards for the second quarter of 2002 from 14.3 million yards for
the second quarter of 2001. Middle to better-end fabrics represented 72.9% of
fabric sales during the second quarter of 2002 compared to 79.9% in the second
quarter of 2001. The Company sold 10.6% more yards of middle to better-end
fabrics and 66.0% more yards of promotional-end fabrics in the second quarter of
2002 than in the second quarter of 2001.
Gross fabric sales within the United States increased 28.0%, to $85.0
million in the second quarter of 2002 from $66.4 million in the second quarter
of 2001. Foreign and Export sales increased 10.4%, to $12.8 million in the
second quarter of 2002 from $11.6 million in the second quarter of 2001. Gross
yarn sales decreased 26.8%, to $5.6 million in the second quarter of 2002 from
$7.6 million in the same period of 2001.
The gross profit margin for the second quarter of 2002 increased to
22.7%, as compared to 21.0% for the second quarter of 2001. The increase in the
gross margin percentage was primarily due to an increase in the absorption of
fixed costs by higher production volume and improved consumption of raw material
components, partially offset by increases in manufacturing overtime costs.
Selling, general and administrative expenses increased to $14.9 million
for the second quarter of 2002 from $11.9 million for the second quarter of
2001. Selling, general and administrative expenses as a percentage of net sales
increased to 14.6% in the second quarter of 2002 from 14.1% in the second
quarter of 2001. The increase in selling, general and administrative expenses
was due to higher variable costs, such as sales commissions, resulting from
higher sales, increased costs associated with foreign operations; higher
sampling expenses and increased staffing costs.
Interest expense increased to $1.1 million for the second quarter of
2002 from $1.0 million for the second quarter of 2001 mainly due to higher
average levels of senior debt.
The Company provides for income taxes on an interim basis, using the
estimated annual effective income tax rate. The Company's estimated tax rate was
37.0% for the second quarter of 2002 and 36.0% for the second quarter of 2001.
The effective income tax rate is lower than the combined federal and state
statutory rates, due primarily to certain tax benefits related to
extraterritorial income at the federal level and investment tax credits at the
state level.
7
Net income for the second quarter of 2002 increased to $4.5 million or
$0.26 per common share-diluted, from $3.1 million or $0.19 per common
share-diluted for the second quarter of 2001.
Results of Operations - Six-month Comparison
Net sales for the first half of 2002 increased $37.5 million or 22.8%,
to $202.0 million from $164.5 million for the first half of 2001. The overall
average gross sales price per yard remained constant at $5.51 for the first half
of both 2002 and 2001. The average gross sales price per yard of middle to
better-end fabrics increased by 4.1%, to $6.34 in the first half of 2002 as
compared to $6.09 in the first half of 2001. The average gross sales price per
yard of promotional-end fabric increased by 2.3%, to $4.01 in the first half of
2002 as compared to $3.92 in the first half of 2001. The gross volume of fabric
sold increased 26.9%, to 35.5 million yards for the first half of 2002 from 28.0
million yards for the first half of 2001. Middle to better-end fabrics
represented 74.1% of fabric sales during the first half of 2002 compared to
81.0% in the first half of 2001. The Company sold 11.5% more yards of middle to
better-end fabrics and 69.1% more yards of promotional-end fabrics in the first
half of 2002 than in the first half of 2001.
Gross fabric sales within the United States increased 29.6%, to $171.2
million in the first half of 2002 from $132.1 million in the first half of 2001.
Foreign and Export sales increased 10.5%, to $24.2 million in the first half of
2002 from $21.9 million in the first half of 2001. Gross yarn sales decreased
25.3%, to $9.2 million in the first half of 2002 from $12.3 million in the same
period of 2001. This decrease in yarn sales is principally due to the effect
imported apparel products has had on demand for apparel and other products
manufactured by the Company's domestic yarn customers as well as lower demand
for yarn from other domestic mills.
The gross profit margin for the first half of 2002 increased to 22.6%,
as compared to 21.3% for the first half of 2001. The increase in the gross
margin percentage was primarily due to an increase in the absorption of fixed
costs by higher production volume and improved consumption of raw material
components, partially offset by increases in manufacturing overtime costs.
Selling, general and administrative expenses increased to $29.4 million
for the first half of 2002 from $23.4 million for the first half of 2001.
Selling, general and administrative expenses as a percentage of net sales
increased to 14.5% in the first half of 2002 from 14.2% in the first half of
2001. The net increase in selling, general and administrative expenses was due
to higher variable costs, such as sales commissions, resulting from higher
sales, increased costs associated with foreign operations; higher sampling
expenses and higher staffing costs.
Interest expense increased to $2.2 million for the first half of 2002
from $2.1 million for the first half of 2001 mainly due to higher average levels
of senior debt.
The Company provides for income taxes on an interim basis, using the
estimated annual effective income tax rate. The Company's estimated tax rate was
37.0% for the first half of 2002 and 36.0% for the first half of 2001. The
effective income tax rate is lower than the combined federal and state statutory
rates due primarily to certain tax benefits related to extraterritorial income
at the federal level and investment tax credits at the state level.
8
Net income for the first half of 2002 increased to $8.9 million, or
$0.53 per common share-diluted, from $6.2 million or $0.38 per common
share-diluted, for the first half of 2001.
Liquidity and Capital Resources
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
under the Credit Agreement (as hereinafter defined), and debt and equity
offerings. The Company's capital requirements have arisen principally in
connection with (i) the purchase of equipment to expand production capacity;
introduce new technologies to broaden and differentiate the Company's products
and improve the Company's quality and productivity performance, (ii) increases
in the Company's working capital needs related to its sales growth, and (iii)
investments in the Company's IT systems.
Cash flows from operating activities in the first six months of 2001
and 2002 were $6.1 million and $8.7 million, respectively. The improvements in
cash flows from operations were due to higher levels of net income, depreciation
and amortization, and deferred taxes as compared to the prior period. These
improvements were partially offset by higher working capital requirements in
fiscal 2002 as compared to fiscal 2001.
Capital expenditures in the first six months of 2001 and 2002 were $6.7
million and $20.6 million, respectively. Capital expenditures were funded by
operating cash flow and borrowings. Management anticipates that capital
expenditures for new projects will total approximately $42.0 million in 2002,
including approximately $28.0 million for new production equipment to expand the
Company's manufacturing capacity, $4.0 million for equipment related to the
manufacture of top-of-the-bed products, $8.0 million to cover the initial phases
of developing the 60 acre site on which the Company plans to build a new
manufacturing facility, and $2.0 million of other capital expenditures.
Management believes that operating income and borrowings under the Credit
Agreement (as hereinafter defined) will provide sufficient funding for the
Company's capital expenditures and working capital needs for the foreseeable
future.
The Company issued $45.0 million of Senior Notes due October 2005 and
2007 (the Senior Notes) during 1997. The Senior Notes are unsecured and 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.
On February 14, 2002, the Company issued $5.0 million of 7.56% Series A
Notes due February 2009 (the "Series A Notes"). The Series A Notes are unsecured
and bear interest at a fixed rate of 7.56%, 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. In addition and also
on February 14, 2002, the Company entered into a $45.0 million non-committed
Shelf Note agreement with an insurance company pursuant to which the Company may
issue additional senior notes prior to February 14, 2005 with maturity dates of
up to ten years.
The Company also has a $60.0 million Credit Agreement with a bank which
expires January 31, 2007 (the Credit Agreement). As of June 29, 2002, the
Company had $25.8 million outstanding under the Credit Agreement and unused
availability of $34.1 million. See Note 5 of
9
Notes to Consolidated Financial Statements included in the Company's 2001 Annual
Report on Form 10-K.
The Company is required to comply with a number of affirmative and
negative convenants under the Credit Agreement, the Senior Notes, 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, and purchase, merge, or consolidate with or into
any other corporation. The Company is currently in compliance with all the
affirmative and negative convenants in the Credit Agreement, the Senior Notes,
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, and by reflecting the effects of inflation in
the selling prices of the new products it introduces each year.
Cautionary Statement Regarding Forward-Looking Information
Statements contained in this report, as well as oral statements made by
the Company that are prefaced by the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "designed" and
similar expressions, are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company's
future operating plans, business strategy, results of operations and financial
position. These statements are based on the Company's current expectations and
estimates as to prospective events and circumstances about which the Company can
give no firm assurance. Further, any forward-looking statement speaks only as of
the date on which such statement is made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made. As it is not
possible to predict every new factor that may emerge, forward-looking statements
should not be relied upon as a prediction of the Company's actual future
financial condition or results. These forward-looking statements like any
forward-looking statements, involve risks and uncertainties that could cause
actual results to differ materially from those projected or anticipated. Such
risks and uncertainties include product demand and market acceptance of the
Company's products, regulatory uncertainties, the effect of economic conditions,
the impact of competitive products and pricing, foreign currency exchange rates,
changes in customer ordering patterns, and the effect of uncertainties in
markets outside the U.S. (including Mexico and South America) in which the
Company operates.
10
Quantitative and Qualitative Disclosures about Market Risk
(In thousands)
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
Quantitative and Qualitative Disclosures About Market Risk
The Company's exposures relative to market risk are due to foreign
currency risk and interest rate risk.
Foreign currency risk
Approximately 3.5% of the Company's revenues are generated outside the
U.S. from sales which are not denominated in U.S. dollars. Foreign currency risk
arises because the Company engages in business in certain foreign countries in
local currency. Accordingly, in the absence of hedging activities whenever the
U.S. dollar strengthens relative to the other major currencies, there is an
adverse affect on the Company's results of operations, and alternatively,
whenever the U.S. dollar weakens relative to the other major currencies, there
is a positive affect on the Company's results of operations.
It is the Company's policy to minimize, for a period of time, the
unforeseen impact on its results of operations of fluctuations in foreign
exchange rates by using derivative financial instruments to hedge the fair value
of foreign currency denominated intercompany payables. The Company's primary
foreign currency exposures in relation to the U.S. dollar are the Mexican peso
and Brazilian real.
At June 29, 2002, the Company has the following significant derivative
financial instruments to hedge the anticipated cash flows from the repayment of
foreign currency denominated intercompany payables outstanding:
Notional Weighted
Amount in Average Notional Amount
Local Currency Contract in U.S. Dollars
Type of Instrument Currency -------------- Rate --------------- Fair Value Maturity
------------------ -------- ---- ---------- --------
Forward Contract Mexican Peso 6.0 million 9.30 $0.6 million $ 50,000 Sep. 2002
Forward Contract Brazilian Real 1.9 million 2.69 $0.7 million $ 69,000 Nov. 2002
Currency Swap Mexican Peso 18.0 million 9.13 $2.0 million $155,000 Mar. 2003
11
Interest Rate Risk
Approximately 64% of the Company's long-term debt is at fixed rates.
Accordingly, a change in interest rates has an insignificant effect on the
Company's interest expense. The fair value of the Company's long-term debt,
however, would change in response to interest rate movements due to its fixed
rate nature.
The Company has evaluated the impact on all long-term maturities of
changing the interest rate 10% from the rate levels that existed at June 29,
2002 and has determined that such a rate change would not have a material impact
on the Company.
12
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 16, 2002, an annual meeting of the shareholders of the Company
was held at which directors were elected to serve until their successors shall
have been elected and shall have qualified and an amendment to the Company's
1997 Stock Option Plan to increase the number of shares of common stock reserved
for issuance to 2,250,000 was ratified. The number of votes cast for, against,
or withheld/abstained and the number of broker non-votes with regard to each
nominee or matter are set forth below:
Withheld/ Broker
For Against Abstained Non-votes
---- --------- ------------- ------------
Election of directors:
Sangwoo Ahn 12,775,323 N/A 1,707,964 -
Larry A. Liebenow 10,806,550 N/A 3,676,737 -
Jerry I. Porras 12,774,798 N/A 1,708,489 -
Eriberto R. Scocimara 12,775,323 N/A 1,707,964 -
Ratification of an
amendment to 1997
Stock Option Plan 7,332,888 4,837,894 31,808 2,280,697
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
1. Statement regarding compliance with 18 U.S.C. section
1350.
(B) The Company filed a report on Form 8-K on June 19, 2002
to report that on June 14, 2002, the Audit Committee of the Board of Directors
of the Company dismissed its independent accountants, Arthur Andersen LLP, and
engaged PricewaterhouseCoopers LLP as its new independent accountants as of June
14, 2002.
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: August 12, 2002 By: /s/ Paul J. Kelly
--------------------------- ---------------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
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