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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 April 3, 2004
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 7, 2004, 16,819,818 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 share information)
April 3, January 3,
2004 2004
----------- ----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,955 $ 5,591
Accounts receivable, less reserves of $2,304 and $2,089 at
April 3, 2004 and January 3, 2004, respectively 47,902 44,374
Inventories 47,294 43,987
Prepaid and deferred income taxes 1,053 1,038
Production supplies 1,686 1,727
Prepaid insurance 1,710 2,132
Other current assets 6,964 7,842
-------- --------
Total current assets 117,564 106,691
Property, plant and equipment, net 160,287 162,293
Other assets:
Goodwill 5,432 5,432
Other assets 1,857 1,862
-------- --------
Total assets $285,140 $276,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 5,000 $ 5,000
Accounts payable 17,477 14,386
Accrued expenses 15,704 13,137
-------- --------
Total current liabilities 38,181 32,523
Long-term debt 40,000 40,000
Deferred income taxes 32,663 31,634
Other long-term liabilities 2,706 2,616
Commitments and contingencies (Note 5)
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;
16,814,668 and 16,795,818 shares issued and outstanding as of
April 3, 2004 and January 3, 2004, respectively 168 168
Additional paid-in capital 89,007 88,870
Unearned compensation (643) (695)
Retained earnings 85,162 83,228
Other accumulated comprehensive loss (2,104) (2,066)
-------- --------
Total stockholders' equity 171,590 169,505
-------- --------
Total liabilities and stockholders' equity $285,140 $276,278
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Three Months Ended
------------------
Apr. 3, Apr. 5,
2004 2003
------- -------
(Unaudited)
Net sales $84,384 $90,225
Cost of products sold 65,689 71,258
------- -------
Gross profit 18,695 18,967
Selling, general and administrative expenses 14,025 14,251
------- -------
Operating income 4,670 4,716
Other expenses:
Interest expense 847 1,069
Other expenses (income) (16) (24)
------- -------
Income before provision for income taxes 3,839 3,671
Provision for income taxes 1,401 1,358
------- -------
Net income $ 2,438 $ 2,313
======= =======
Earnings per common share - basic $ 0.15 $ 0.14
======= =======
Earnings per common share - diluted $ 0.14 $ 0.14
======= =======
Dividends per common share $ 0.030 $ 0.025
======= =======
Weighted average shares outstanding - basic 16,810 16,416
======= =======
Weighted average shares outstanding - diluted 17,307 16,764
======= =======
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
Three Months Ended
------------------
Apr. 3, Apr. 5,
2004 2003
------- -------
(Unaudited)
Net income $2,438 $2,313
------ ------
Other comprehensive loss
Foreign currency translation adjustments (3) (35)
Unrealized loss on hedging instruments (35) (18)
------ ------
Other comprehensive loss (38) (53)
------ ------
Comprehensive income $2,400 $2,260
====== ======
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)
Three Months Ended
------------------
Apr. 3, Apr. 5,
2004 2003
-------- -------
(Unaudited)
Cash flows from operating activities:
Net income $ 2,438 $ 2,313
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 4,870 4,943
Amortization of unearned compensation 52 48
Deferred income taxes 1,029 916
Tax benefit related to exercise of common stock options 29 397
Changes in operating assets and liabilities:
Accounts receivable (3,515) (6,384)
Inventories (3,305) (980)
Prepaid expenses and other assets 1,318 2,292
Accounts payable and accrued expenses 5,658 4,129
Other long-term liabilities 90 68
-------- -------
Net cash provided by operating activities 8,664 7,742
-------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,851) (1,882)
-------- -------
Cash flows from financing activities:
Change in revolving credit facility -- (6,000)
Proceeds from exercise of common stock options and
issuance of shares under the employee stock purchase plan 108 491
Cash dividends (504) (417)
-------- -------
Net cash used in financing activities (396) (5,926)
-------- -------
Effect of exchange rates on cash (53) 21
-------- -------
Net increase (decrease) in cash 5,364 (45)
Cash and cash equivalents, beginning of period 5,591 1,098
-------- -------
Cash and cash equivalents, end of period $ 10,955 $ 1,053
======== =======
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, results of operations and
cash flows for the interim periods presented. The unaudited consolidated
financial statements have been prepared pursuant to the instructions to Form
10-Q and Rule 10-01 of regulation S-X 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 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 three
months ended April 3, 2004 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
January 3, 2004.
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
------------------
Apr. 3, Apr. 5,
2004 2003
------- -------
(In thousands)
Weighted average common shares outstanding 16,810 16,416
Dilutive potential common shares 497 348
------ ------
Weighted average common shares outstanding and dilutive
potential common shares 17,307 16,764
====== ======
Antidilutive options 493 1,838
====== ======
4
Note 2 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. A standard cost system is used and approximates
cost on a first-in, first-out (FIFO) basis. Cost for financial reporting
purposes is determined using the last-in, first-out (LIFO) method.
Inventories at April 3, 2004 and January 3, 2004 consisted of the
following:
April 3, January 3,
2004 2004
-------- ----------
Raw materials $19,820 $19,714
Work-in-process 8,827 7,709
Finished goods 14,758 12,484
------- -------
Inventory at FIFO 43,405 39,907
LIFO adjustment 3,889 4,080
------- -------
Inventory at LIFO $47,294 $43,987
======= =======
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.
5
Net sales to unaffiliated customers by major geographical area were as
follows:
Three Months Ended
------------------
Apr. 3, Apr. 5,
2004 2003
-------- -------
(In thousands)
United States $75,238 $81,009
Canada 3,441 3,720
Mexico 2,338 2,422
Middle East 689 453
South America 678 596
Europe 1,111 1,042
All Other 889 983
------- -------
$84,384 $90,225
======= =======
Net sales by product category are as follows:
Three Months Ended
------------------
Apr. 3, Apr. 5,
2004 2003
------- -------
(In thousands)
Fabric $77,960 $86,872
Yarn 6,012 2,988
Other 412 365
------- -------
$84,384 $90,225
======= =======
Note 4 - ACCOUNTING FOR STOCK-BASED COMPENSATION
Accounting for Stock-Based Compensation. The Company follows Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), in accounting for its employee stock option and employee stock
purchase plans, rather than the fair value method of accounting provided under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under APB No. 25, the Company accounts for its
employee stock options using the intrinsic value method. Under this method the
Company does not recognize compensation expense on stock options granted to
employees when the exercise price of each option is equal to the market price of
the underlying stock on the date of the grant.
6
The following pro forma information presents the Company's net income and
basic and diluted net income per share for the three months ended April 3, 2004
and April 5, 2003 as if compensation cost had been measured under the fair value
method of SFAS No. 123, "Accounting for Stock Based Employee Compensation," for
the employee stock option and employee stock purchase plans. The Company
utilizes the Black-Scholes option pricing model to estimate the fair value of
options.
Three Months Ended
------------------
Apr. 3, Apr. 5,
2004 2003
------- -------
(In thousands)
(Unaudited)
Net income, as reported $2,438 $2,313
Add: Stock-based employee compensation
expense included in net income, net of
related tax effects 33 30
Less: Stock-based employee compensation
expense determined under the fair value
method, net of related tax effects (295) (252)
------ ------
Pro forma net income (loss): $2,176 $2,091
====== ======
Earnings per common share - basic
As reported $ 0.15 $ 0.14
Pro forma $ 0.13 $ 0.13
Earnings per common share - diluted
As reported $ 0.14 $ 0.14
Pro forma $ 0.13 $ 0.12
Note 5 - COMMITMENTS AND CONTINGENCIES
(a) Income Taxes. The Company is currently challenging tax assessments from
the Internal Revenue Service for the years 1997-1999 and from the Massachusetts
Department of Revenue for the years 1993-1998. In addition, during the third
quarter of 2003, the Company filed amended tax returns for these and subsequent
years to claim approximately $3,500 of federal and state research and
development credits. Audits of these amended returns commenced during October
2003. There is significant uncertainty surrounding the amount and timing of the
benefit that will be ultimately realized. The Company believes that it has a
supportable basis for claiming these credits, but the amounts are subject to
ongoing audits by federal and state authorities. Accordingly, the Company has
not reflected the potential benefits of these credits in its financial
statements for these or subsequent years. No benefit will be recognized in the
financial statements until these gain contingencies are resolved through the
eventual disposition with the respective tax authorities.
7
(b) Litigation. In the ordinary course of business, the Company is party to
various types of litigation. The Company believes it has meritorious defenses to
all claims and in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position, results of
operations or liquidity.
(c) Environmental Cleanup Matters. The Company accrues for estimated costs
associated with known environmental matters when such costs are probable and can
be reasonably estimated. The actual costs to be incurred for environmental
remediation may vary from estimates, given the inherent uncertainties in
evaluating and estimating environmental liabilities, including the possible
effects of changing laws and regulations, the stage of the remediation process
and the magnitude of contamination found as the remediation progresses. During
2003, the Company entered into agreements with the Massachusetts Department of
Environmental Protection to install air pollution control equipment at one of
its manufacturing plants in Fall River, Massachusetts. Management anticipates
that the costs associated with the acquisition and installation of the equipment
will total approximately $900 over a three-year period, which began in 2003.
Management believes the ultimate disposition of known environmental matters will
not have a material adverse effect on the liquidity, capital resources, business
or consolidated financial position of the Company.
Note 6 - INCOME TAXES
The Company determines its periodic income tax expense based upon the
current period income and the estimated annual effective tax rate for the
Company. The rate is revised, if necessary, as of the end of each successive
interim period during the fiscal year to the Company's best current estimate of
its annual effective tax rate.
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 2003" was a 52 week period ended January 3, 2004
and "Fiscal 2004" will be a 52 week period ending January 1, 2005. The first
three months of Fiscal 2003 and Fiscal 2004 ended April 5, 2003 and April 3,
2004, 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 three months of 2004 that would
warrant further disclosure beyond those matters previously disclosed in the
Company's Annual Report on Form 10-K for the year ended January 3, 2004.
8
General
Quaker is a leading designer, manufacturer and worldwide marketer of a
broad range of woven upholstery fabrics which it sells at various price points
primarily to manufacturers of residential furniture. The Company is also a
leading developer and manufacturer of specialty yarns. Approximately 11.0% of
the Company's revenues during the first quarter of 2004 were attributable to
fabrics sold outside the United States and approximately 65.0% of Quaker's
fabrics are manufactured to customer order.
Competition in the industry is intense, from both domestic fabric mills and
fabric mills located outside the U.S. manufacturing products for sale into the
U.S. market. Management believes that competition in the U.S. domestic market is
likely to further intensify following the January 1, 2005 expiration of the
quotas imposed under the Uruguay Round Agreement on Textiles and Clothing on
textile and apparel products coming into the U.S. The Company's fabric products
compete with other furniture coverings, including leather, suede, prints, tufts,
flocks and velvets, for consumer acceptance. Consumer tastes in upholstered
furniture coverings are somewhat cyclical and do change over time, with various
coverings gaining or losing share depending on changes in home furnishing
trends. For example, leather and suede furniture has enjoyed growing popularity
over the past few years, to some extent at the expense of woven fabrics, such as
the Jacquards and other woven fabrics Quaker manufactures. As a result, overall
domestic demand for furniture covered with woven upholstery products is
currently somewhat weaker than demand for other types of furniture, including
furniture covered with leather and suede products. In addition, company sales
into some foreign markets have been hurt by market-specific geopolitical and
macroeconomic factors reducing aggregate demand in these locations.
Competitive factors in the industry include product design, product
pricing, customer service and quality. Recent improvements in service levels and
product design have enhanced the competitive position of lower cost imported
products, particularly those products coming into the United States from China.
Management considers such factors as incoming customer order rates, size of
production backlog, manufacturing efficiencies, product mix and price points in
evaluating the Company's financial condition and operating performance. Incoming
fabric orders during the first quarter of 2004 were down approximately 13.5%
compared to the first quarter of 2003, with the incoming order rate for the
first four weeks of fiscal April 2004 trailing the incoming order rate for the
comparable period of 2003 by approximately 8.0%. Although the total backlog of
fabric and yarn products at the end of the first quarter of 2004 was similar to
that of a year ago, the dollar value of the yarn backlog was up $3.6 million or
309.7%, while the dollar value of the fabric backlog was down $4.2 million or
16.5%. Management will continue to aggressively pursue its core strategy of
building profitable volume by providing the market with the best products and
service.
Results of Operations - Quarterly Comparison
Net sales for the first quarter of 2004 decreased $5.8 million or 6.5%, to
$84.4 million from $90.2 million for the first quarter of 2003. Net fabric sales
within the United States decreased 11.3%, to $69.2 million in the first quarter
of 2004 from $78.0 million in the first quarter of 2003, primarily due to
increased competition from leather and lower priced imported sueded products,
which primarily affected the promotional fabric category. In addition, overall
domestic furniture demand appears to be lagging the U.S. economic recovery as a
whole, with the upholstered furniture category trailing aggregate demand for
furniture. The overall weighted
9
average sales price per yard increased 2.4%, to $5.64 for the first quarter of
2004 from $5.51 for the first quarter of 2003 due to a slight shift in product
mix to middle to better-end fabrics. Foreign and Export sales were essentially
the same at approximately $9.0 million for both quarters. Net yarn sales
increased 101.3%, to $6.0 million in the first quarter of 2004 from $3.0 million
in the same period of 2003. This improvement in the yarn sales segment is due to
the penetration of new markets, particularly the craft yarn category developed
by capitalizing on Quaker's patented technology.
The Company's dollar value of incoming orders during the first quarter of
2004 decreased approximately 13.5% compared to the first quarter of 2003. The
dollar value of the backlog decreased by approximately 2.0%, to $25.8 million at
the end of the first quarter of 2004 as compared to $26.3 million at the end of
the same period in 2003, with the dollar value of the fabric backlog down 16.5%
and the dollar value of the yarn backlog up 309.7%.
The gross profit margin for the first quarter of 2004 increased to 22.2%
from 21.0% in the first quarter of 2003. This improvement in gross margin was
achieved, despite lower production levels and is primarily attributable to
improved operating efficiencies and stable raw material costs.
Selling, general and administrative expenses decreased to $14.0 million in
the first quarter of 2004 from $14.3 million in the first quarter of 2003. Lower
costs were incurred in the first quarter of 2004 as compared to the first
quarter of 2003 in several semi-variable expense categories, such as
expenditures for research and development and certain wage and fringe benefit
expenses. Selling, general and administrative expenses as a percentage of net
sales increased to 16.6% in the first quarter of 2004 from 15.8% in the first
quarter of 2003. This increase as a percentage of net sales was due to lower net
sales in the first quarter of 2004 compared to the same period in 2003.
Interest expense was $0.8 million for the first quarter of 2004 and $1.1
million for the first quarter of 2003. Lower levels of both variable and fixed
rate debt in the first quarter of 2004 resulted in the decline in interest
expense.
The Company provides for income taxes on an interim basis, using an
estimated annual effective income tax rate. The Company's estimated annual
effective tax rate was 36.5% for the first quarter of 2004 and 37.0% for the
first quarter of 2003. The estimated annual 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.
The Company is currently challenging tax assessments from the Internal
Revenue Service for the years 1997-1999 and from the Massachusetts Department of
Revenue for the years 1993-1998. In addition, during the third quarter of Fiscal
2003 the Company filed amended tax returns for these and subsequent years to
claim approximately $3.5 million of federal and state research and development
credits. Audits of these amended returns commenced during October 2003. There is
significant uncertainty surrounding the amount and timing of the benefit that
will be ultimately realized. The Company believes that it has a supportable
basis for claiming these credits, but the amounts are subject to ongoing audits
by federal and state authorities. Accordingly, the Company has not reflected the
potential benefits of these credits in its financial statements for these or
subsequent years. No benefit will be recognized in the financial
10
statements until these gain contingencies are resolved through the eventual
disposition with the respective tax authorities.
Net income for the first quarter of 2004 increased to $2.4 million or $0.14
per common share-diluted, from $2.3 million or $0.14 per common share-diluted
for the first quarter of 2003.
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 information technology systems.
The primary source of the Company's liquidity and capital resources in
recent years has been operating cash flow. The Company's net cash provided by
operating activities was $8.7 million and $7.7 million in the first three months
of 2004 and 2003, respectively. As necessary, the Company supplements its
operating cash flow with borrowings. Net repayments were $0.0 million in the
first three months of 2004 and $6.0 million in the first three months of 2003.
Capital expenditures in the first three months of 2004 and 2003 were $2.9
million and $1.9 million, respectively. Capital expenditures during the first
three months of 2004 were funded by operating cash flow. Management anticipates
that capital expenditures for new projects will total approximately $14.8
million in 2004, consisting of approximately $8.7 million for various
manufacturing equipment, $2.7 million for IT projects, and $3.4 million for
various other capital projects. 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. The Senior
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. Annual principal
payments began on October 10, 2003 with a final payment due October 10, 2007.
Annual principal payment amounts are three payments of $5.0 million beginning in
2003, followed by two payments of $15.0 million beginning in 2006.
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.
11
The Company also has a $60.0 million Credit Agreement with a bank which
expires January 31, 2007 (the Credit Agreement). As of April 3, 2004, the
Company had no loans outstanding under the Credit Agreement and unused
availability of $59.8 million. See Note 5 of Notes to Consolidated Financial
Statements included in the Company's 2003 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 Series A Notes, and the Senior
Notes and management believes the Company's continued compliance will not
prevent the Company from operating in the normal course of business.
No dividends were paid on the Company's common stock prior to Fiscal 2003,
with earnings used instead to fund strategic investments and capital expenditure
requirements. During the first quarter of 2003, the Board of Directors adoped a
new dividend policy. This policy provides for future dividends to be declared at
the discretion of the Board of Directors, based on the Board's quarterly
evaluation of the Company's results of operations, cash requirements, financial
conditions and other factors deemed relevant by the Board. In the first quarters
of 2004 and 2003, the Company paid cash dividends of $504 thousand or $0.03 per
common share and $417 thousand or $0.025 per common share, respectively. On
April 19, 2004, the Board of Directors declared a cash dividend of $0.03 per
common share payable on May 19, 2004 to shareholders of record on May 5, 2004.
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 plans of operations,
business strategy, results of operations and financial position. These
statements are based on the Company's current expectations and estimates as to
prospective
12
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 exchange
risk and interest rate risk.
Foreign currency risk
Approximately 2.7% 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 the Brazilian real.
At April 3, 2004, the Company had the following derivative financial
instruments to hedge the anticipated cash flows from the repayment of foreign
currency denominated intercompany payables outstanding:
13
Notional Weighted Notional
Amount in Average Amount in Fair Value
Type of Local Contract U.S. Gain
Instrument Currency Currency Rate Dollars (Losses) Maturity
- ---------------------- -------------- ------------ -------- ------------ ---------- ---------
Forward Contracts Mexican Peso 40.0 million 11.35 $3.5 million $ 24,000 Jan. 2005
Capped Forward Options Mexican Peso 44.0 million 11.52 $3.8 million $ 20,000 Dec. 2005
Forward Contracts Brazilian Real 0.8 million 3.10 $0.3 million $(15,000) May 2004
The Capped Forward Options are agreements to sell Mexican pesos at the
fixed rate of $11.52, as long as the spot rate at the maturity of each contract
is $12.70 or less.
Interest Rate Risk
All of the Company's outstanding 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 April 3,
2004 and has determined that such a rate change would not have a material impact
on the Company.
Item 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation
of the Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such term
is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by this
report. Based on such evaluation, management has concluded that, as of the end
of the period covered by this report, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic filings under the Exchange
Act. In addition, management has evaluated and concluded that during the most
recent fiscal quarter covered by this report, there has not been any change in
the Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
14
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
31.1 Certification by the Chief Executive Officer pursuant to section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification by the Chief Financial Officer pursuant to section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification by the Chief Executive Officer pursuant to section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to section
906 of the Sarbanes-Oxley Act of 2002.
(B) The Company filed a report on Form 8-K on February 19, 2004, in which
the Company furnished a press release announcing its Fiscal 2003 and
fourth quarter results for the period ending January 3, 2004.
15
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 7, 2004 By: /s/ Paul J. Kelly
---------------------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer (Principal Financial Officer)
16