10-Q 1 a33172.txt QUAKER FABRIC CORPORATION ---------------------------------------------------------------------------- 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. ------------------------------------------------------------------------------- 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. 13 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 14