-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IubqGwOFj/SdA18lWWRuSWoqXjopPrrurdAllu11kDjG74FOVmqLJphKwgFWYmlT n8z8lK6+XvPQuK8eSzkOsA== 0000950117-03-004732.txt : 20031107 0000950117-03-004732.hdr.sgml : 20031107 20031107101727 ACCESSION NUMBER: 0000950117-03-004732 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20031004 FILED AS OF DATE: 20031107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUAKER FABRIC CORP /DE/ CENTRAL INDEX KEY: 0000103341 STANDARD INDUSTRIAL CLASSIFICATION: BROADWOVEN FABRIC MILS, MAN MADE FIBER & SILK [2221] IRS NUMBER: 041933106 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07023 FILM NUMBER: 03983796 BUSINESS ADDRESS: STREET 1: 941 GRINNELL ST. CITY: FALL RIVER STATE: MA ZIP: 02721 BUSINESS PHONE: 5086781951 MAIL ADDRESS: STREET 1: 941 GRINNELL ST CITY: FALL RIVER STATE: MA ZIP: 02721 FORMER COMPANY: FORMER CONFORMED NAME: VERTIPILE INC DATE OF NAME CHANGE: 19870811 10-Q 1 a36429.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 October 4, 2003 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 November 6, 2003, 16,779,568 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 amounts)
October 4, January 4, 2003 2003 ----------- ---------- (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents $ 595 $ 1,098 Accounts receivable, less reserves of $1,900 and $1,826 at October 4, 2003 and January 4, 2003, respectively 49,417 42,346 Inventories 47,023 50,407 Prepaid and deferred income taxes 3,101 4,080 Production supplies 1,607 1,634 Prepaid insurance 1,322 2,130 Other current assets 6,466 6,250 -------- --------- Total current assets 109,531 107,945 Property, plant and equipment, net 166,044 173,790 Other assets: Goodwill 5,432 5,432 Other assets 1,863 1,519 -------- -------- Total assets $282,870 $288,686 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of debt $ 5,000 $ 5,000 Accounts payable 16,896 15,559 Accrued expenses 14,874 12,578 -------- -------- Total current liabilities 36,770 33,137 Long-term debt 45,000 61,200 Deferred income taxes 32,272 30,643 Other long-term liabilities 2,360 1,901 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; 16,769,619 and 16,146,026 shares issued and outstanding as of October 4, 2003 and January 4, 2003, respectively 168 161 Additional paid-in capital 88,719 87,668 Unearned compensation (747) (901) Retained earnings 80,364 76,964 Accumulated other comprehensive loss (2,036) (2,087) -------- -------- Total stockholders' equity 166,468 161,805 -------- -------- Total liabilities and stockholders' equity $282,870 $288,686 ======== ========
The accompanying notes are an integral part of these consolidated financial statements 1 QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATE (Amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended -------------------- --------------------- Oct. 4, Sep. 28, Oct. 4, Sep. 28, 2003 2002 2003 2002 ---- ---- ---- ---- (Unaudited) (Unaudited) Net sales $80,765 $80,990 $244,876 $282,953 Cost of products sold 62,922 64,945 193,581 221,180 ------- ------- -------- -------- Gross profit 17,843 16,045 51,295 61,773 Selling, general and administrative expenses 13,581 12,406 41,130 41,790 ------- ------- -------- -------- Operating income 4,262 3,639 10,165 19,983 Other expenses: Interest expense 968 1,196 3,028 3,404 Other, net (5) 76 84 70 ------- ------- -------- -------- Income before provision for income taxes 3,299 2,367 7,053 16,509 Provision for income taxes 1,122 875 2,398 6,108 ------- ------- -------- -------- Net income $ 2,177 $ 1,492 $ 4,655 $ 10,401 ======= ======= ======== ======== Earnings per common share - basic (Note 1) $ 0.13 $ 0.09 $ 0.28 $ 0.65 ======= ======= ======== ======== Earnings per common share - diluted (Note 1) $ 0.13 $ 0.09 $ 0.28 $ 0.62 ======= ======= ======== ======== Dividends per common share $ 0.025 $ --- $ 0.075 $ --- ======= ======= ======== ======== Weighted average shares outstanding - basic (Note 1) 16,769 16,112 16,636 15,981 ======= ======= ======== ======== Weighted average shares outstanding - diluted (Note 1) 16,986 16,890 16,900 16,899 ======= ======= ======== ========
- -------------------------------------------------------------------------------- QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands)
Three Months Ended Nine Months Ended -------------------- --------------------- Oct. 4, Sep. 28, Oct. 4, Sep. 28, 2003 2002 2003 2002 ---- ---- ---- ---- (Unaudited) (Unaudited) Net income $2,177 $1,492 $4,655 $10,401 ------- ------- -------- ------- Other income (loss) Foreign currency translation adjustments (131) (644) 51 (885) Unrealized loss on hedging instruments (8) (8) ------- ------- -------- ------- Other compensation income (loss) (131) (652) 51 (893) ------- ------- -------- ------- Comprehensive income $2,046 $ 840 $4,706 $ 9,508 ======= ======= ====== =======
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)
Nine Months Ended ------------------------------ Oct. 4, Sep. 28, 2003 2002 -------- -------- (Unaudited) Cash flows from operating activities: Net income $ 4,655 $ 10,401 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,410 12,406 Amortization of unearned compensation 154 77 Deferred income taxes 1,629 3,705 Tax benefit related to exercise of common stock options 402 908 Changes in operating assets and liabilities: Accounts receivable (7,135) (2,558) Inventories 3,400 (7,604) Prepaid expenses and other assets 1,213 (1,009) Accounts payable and accrued expenses 3,633 (4,170) Other long-term liabilities 459 106 -------- -------- Net cash provided by operating activities 22,820 12,262 -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (6,623) (28,015) -------- -------- Cash flows from financing activities: Change in revolving credit facility (16,200) 11,000 Repayments of capital lease obligations -- (697) Proceeds from exercise of common stock options and issuance of shares under the employee stock purchase plan 656 1,495 Proceeds from issuance of long-term debt -- 5,000 Capitalization of deferred financing costs -- (130) Cash dividends (1,255) -- -------- -------- Net cash provided by (used in) financing activities (16,799) 16,668 -------- -------- Effect of exchange rates on cash 99 (227) -------- -------- Net increase (decrease) in cash (503) 688 Cash and cash equivalents, beginning of period 1,098 600 -------- -------- Cash and cash equivalents, end of period $ 595 $ 1,288 ======== ========
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 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 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 nine months ended October 4, 2003 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 4, 2003. 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 Nine Months Ended ------------------------ ------------------------ Oct. 4, Sep. 28, Oct. 4, Sep. 28, 2003 2002 2003 2002 ------ ------ ------ ------ (In thousands) Weighted average common shares outstanding 16,769 16,112 16,636 15,981 Dilutive potential common shares 217 778 264 918 ------ ------ ------ ------ Weighted average common shares outstanding and dilutive potential common shares 16,986 16,890 16,900 16,899 ====== ====== ====== ====== Antidilutive options 1,838 541 1,838 403 ====== ====== ====== ======
4 Reclassifications Certain reclassifications have been made to the Fiscal 2002 balances to conform to the current year presentations. 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 by the last-in, first-out (LIFO) method. Inventories at October 4, 2003 and January 4, 2003 consisted of the following:
October 4, January 4, 2003 2003 ------- ------- Raw materials $19,565 $24,984 Work-in-process 9,370 8,930 Finished goods 14,936 13,786 ------- ------- Inventory at FIFO 43,871 47,700 LIFO adjustment 3,152 2,707 ------- ------- Inventory at LIFO $47,023 $50,407 ======= =======
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 Gross foreign and export sales from the United States to unaffiliated customers by major geographical area were as follows:
Three Months Ended Nine Months Ended ----------------------- ----------------------- Oct. 4, Sep. 28, Oct. 4, Sep. 28, 2003 2002 2003 2002 ------ ------- ------- ------- (In thousands) North America (excluding USA) $5,717 $7,235 $18,055 $22,760 Middle East 1,441 2,022 2,573 4,855 South America 578 775 1,774 2,284 Europe 1,022 1,051 3,014 3,651 All Other 1,162 877 2,988 2,643 ------ ------- ------- ------- $9,920 $11,960 $28,404 $36,193 ====== ======= ======= =======
Gross sales by product category are as follows:
Three Months Ended Nine Months Ended ----------------------- ----------------------- Oct. 4, Sep. 28, Oct. 4, Sep. 28, 2003 2002 2003 2002 ------ ------- ------- ------- (In thousands) Fabric $79,083 $78,476 $239,540 $273,934 Yarn 2,465 3,970 7,712 13,149 Other 319 262 908 679 ------- ------- -------- -------- $81,867 $82,708 $248,160 $287,762 ======= ======= ======== ========
Note 4 - ACCOUNTING FOR STOCK-BASED COMPENSATION Accounting for Stock-Based Compensation. The Company has elected to continue to account for its stock option plans under APB 25 and related interpretations as well as to provide disclosure of stock based compensation as outlined in SFAS 123 as amended by SFAS 148. SFAS 123 requires disclosure of pro forma net income, EPS and other information as if the fair value method of accounting for stock options and other equity instruments described in SFAS 123 had been adopted. The following table illustrates the effect on net income and earnings per share as if the Black-Scholes fair value method described in SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, had been applied to the Company's stock option plans. 6
Three Months Ended Nine Months Ended ------------------ ----------------- Oct. 4, Sep. 28, Oct. 4, Sep. 28, 2003 2002 2003 2002 ---- ---- ---- ---- (In thousands) (In thousands) -------------- -------------- (Unaudited) (Unaudited) Net income, as reported $2,177 $1,492 $4,655 $10,401 Add: Stock-based employee compensation expense included in net income, net of related tax effects 37 33 102 49 Less: Stock-based employee compensation expense determined under Black-Scholes option pricing model, net of related tax effects 265 255 793 716 ------ ------ ------ ------ Pro forma net income (loss): $1,949 $1,270 $3,964 $9,734 ====== ====== ====== ====== Earnings per common share - basic As reported $0.13 $0.09 $0.28 $0.65 Pro forma $0.12 $0.08 $0.24 $0.61 Earnings per common share - diluted As reported $0.13 $0.09 $0.28 $0.62 Pro forma $0.11 $0.08 $0.23 $0.58
Note 5 - 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. The ultimate resolution of these actions is not expected to have a material impact on the results of operations or financial position of the Company. In addition, during the third quarter, 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 statements until these gain contingencies are resolved through the eventual disposition with the respective tax authorities. Note 6 - POTENTIAL ASSET IMPAIRMENT Due primarily to a continued trend of declining yarn sales, the Company has temporarily idled certain yarn manufacturing equipment for an estimated period through the fourth quarter of 2004. This equipment has a net book value of approximately $1.3 million and continues to be depreciated. Management believes this equipment will be needed to support the Company's future fabric business. In conjunction with this action, management performed an impairment analysis in accordance with SFAS No.144. Based on management's estimates, the expected 7 future cash flows generated by this equipment are not less than the carrying value of the equipment as of October 4, 2003 and, therefore, no impairment was recognized. 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 2002" was a 53 week period ended January 4, 2003 and "Fiscal 2003" will be a 52 week period ending January 3, 2004. The first nine months of Fiscal 2002 and Fiscal 2003 ended September 28, 2002 and October 4, 2003, respectively. The Company typically shuts down operations for vacation and annual maintenance during the first two weeks in July. As a result of the shut down and the Company's fiscal calendar, the third quarter of 2003 contained 12 operating weeks versus 11 weeks in the prior year period. The first nine months of 2003 and 2002 contained 37 operating weeks. 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 nine months of 2003 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 4, 2003. Results of Operations - Quarterly Comparison - --------------------- Net sales for the third quarter of 2003 decreased $0.2 million or 0.3%, to $80.8 million from $81.0 million for the third quarter of 2002. The overall weighted average gross sales price per yard decreased 0.4%, to $5.70 for the third quarter of 2003 from $5.72 for the third quarter of 2002. The average gross sales price per yard of middle to better-end fabrics increased by 1.2%, to $6.67 in the third quarter of 2003 as compared to $6.59 in the third quarter of 2002. The average gross sales price per yard of promotional-end fabric was $4.13 in the third quarter of 2003 as compared to $4.03 in the third quarter of 2002. The gross volume of fabric sold increased 1.2%, to 13.9 million yards for the third quarter of 2003 from 13.7 million yards for the third quarter of 2002. Middle to better-end fabrics represented 72.3% of fabric sales during the third quarter of 2003 compared to 76.2% in the third quarter of 2002. The Company sold 5.5% fewer yards of middle to better-end fabrics and 14.3% more yards of promotional-end fabrics in the third quarter of 2003 than in the third quarter of 2002. The decline in middle to better-end fabrics is primarily attributable to the 17% decline in foreign and export sales which primarily consist of middle to better-end fabrics as well as the success of fabrics targeted to the promotional category. The Company's new order rate increased approximately 39% during the third quarter of 2003 as compared to the third quarter of 2002, and the Company's backlog increased by approximately 5%, to $30.2 million at the end of the third quarter of 2003 as compared to $28.8 million at the end of the third quarter of 2002. 8 Gross fabric sales within the United States increased 4.0%, to $69.2 million in the third quarter of 2003 from $66.5 million in the third quarter of 2002. Foreign and Export sales decreased 17.1%, to $9.9 million in the third quarter of 2003 from $12.0 million in the third quarter of 2002. Gross yarn sales decreased 37.9%, to $2.5 million in the third quarter of 2003 from $4.0 million in the same period of 2002. The gross profit margin for the third quarter of 2003 increased to 22.1%, as compared to 19.8% for the third quarter of 2002. The increase in the gross margin percentage resulted primarily from lower fixed costs per unit attributable to higher production volumes and improved manufacturing operations, which resulted in lower costs. Selling, general and administrative expenses increased to $13.6 million for the third quarter of 2003 from $12.4 million for the third quarter of 2002. Selling, general and administrative expenses as a percentage of net sales increased to 16.8% in the third quarter of 2003 from 15.3% in the third quarter of 2002. The increase in selling, general and administrative expenses both as a percentage of sales and in absolute dollars, when compared to the third quarter of 2002 was due to the elimination in the third quarter of 2002 of a $1.1 million reserve established with respect to the Company's Fiscal 2002 performance-based variable compensation program. No provision has been made with respect to this compensation program for the nine months of Fiscal 2003. Interest expense was $1.0 million for the third quarter of 2003 and $1.2 million for the third quarter of 2002. Lower levels of variable rate debt and lower variable interest rates in the third quarter of 2003 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 tax rate was 37% for 2002 and the first quarter of 2003. In the second quarter of 2003, the Company adjusted the estimated annual effective tax rate for 2003 downward to 34%. This reduction in the tax rate is due to lower levels of projected income for 2003 reducing the effective statutory federal tax rate from 35% to approximately 34% and an increased estimated benefit to the tax rate from the Extraterritorial Income Exclusion. 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. 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. The ultimate resolution of these actions is not expected to have a material impact on the results of operations or financial position of the Company. In addition, during the third quarter, 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 statements until these gain contingencies are resolved through the eventual disposition with the respective tax authorities. 9 Net income for the third quarter of 2003 increased to $2.2 million or $0.13 per common share-diluted, from $1.5 million or $0.09 per common share-diluted for the third quarter of 2002. Results of Operations - Nine-month Comparison - --------------------- Net sales for the first nine months of 2003 decreased $38.1 million or 13.5%, to $244.9 million from $283.0 million for the first nine months of 2002. The overall weighted average gross sales price per yard increased 0.9%, to $5.62 for the first nine months of 2003 from $5.57 for the first nine months of 2002. The average gross sales price per yard of middle to better-end fabrics increased by 2.8%, to $6.59 in the first nine months of 2003 as compared to $6.41 in the first nine months of 2002. The average gross sales price per yard of promotional-end fabric was $4.07 in the first nine months of 2003 as compared to $4.01 in the first nine months of 2002. The gross volume of fabric sold decreased 13.3%, to 42.6 million yards for the first nine months of 2003 from 49.2 million yards for the first nine months of 2002. Middle to better-end fabrics represented 72.0% of fabric sales during the first nine months of 2003 compared to 74.7% in the first nine months of 2002. The Company sold 18.0% fewer yards of middle to better-end fabrics and 4.6% fewer yards of promotional-end fabrics in the first nine months of 2003 than in the first nine months of 2002. The decline in middle to better-end fabrics is primarily attributable to the 22% decline in foreign and export sales which primarily consist of middle to better-end fabrics as well as the success of fabrics targeted to the promotional category. The Company's new order rate declined approximately 3% during the first nine months of 2003 as compared to the first nine months of 2002, and the Company's backlog increased by approximately 5%, to $30.2 million at the end of the first nine months of 2003 as compared to $28.8 million at the end of the first nine months half of 2002. The decline in the new order rate occurred in the first half of 2003 as compared to 2002. The Company's new order rate increased approximately 39% during the third quarter of 2003 as compared to the third quarter of 2002. Gross fabric sales within the United States decreased 11.2%, to $211.1 million in the first nine months of 2003 from $237.8 million in the first nine months of 2002. Foreign and Export sales decreased 21.5%, to $28.4 million in the first nine months of 2003 from $36.2 million in the first nine months of 2002. Gross yarn sales decreased 41.3%, to $7.7 million in the first nine months of 2003 from $13.1 million in the same period of 2002. The decline in domestic and international sales is primarily attributable to political and economic issues that adversely affected the demand for furniture and upholstery fabric. The gross profit margin for the first nine months of 2003 decreased to 20.9%, as compared to 21.8% for the first nine months of 2002. Due to a decline in orders during the first nine months of 2003, the Company adjusted its production rates to levels consistent with the lower order rates and during the second quarter of 2003 reduced inventory positions. The decrease in the gross margin percentage resulted primarily from higher fixed costs per unit attributable to lower production volumes, as well as fairly significant period over period increases in energy, insurance and depreciation costs, partially offset by improved manufacturing operations. Selling, general and administrative expenses decreased to $41.1 million for the first nine months of 2003 from $41.8 million for the first nine months of 2002. Selling, general and administrative expenses as a percentage of net sales increased to 16.8% in the first nine months of 2003 from 14.8% in the first nine months of 2002. The net increase in selling, general and 10 administrative expenses as a percentage of sales was due to lower sales volume in combination with higher sampling expenses and higher professional fees. Interest expense decreased to $3.0 million for the first nine months of 2003 from $3.4 million in the same period of 2002. Lower levels of variable rate debt in the first nine months of 2003 and lower interest rates resulted in the decline. The Company provides for income taxes on an interim basis, using an estimated annual effective income tax rate. The Company's estimated tax rate was 37% for 2002 and the first quarter of 2003. In the second quarter of 2003, the Company adjusted the estimated annual effective tax rate for 2003 downward to 34%. This reduction in the tax rate is due to lower levels of projected income for 2003 reducing the effective statutory federal tax rate from 35% to approximately 34% and an increased estimated benefit to the tax rate from the Extraterritorial Income Exclusion. 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. 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. The ultimate resolution of these actions is not expected to have a material impact on the results of operations or financial position of the Company. In addition, during the third quarter, 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 statements until these gain contingencies are resolved through the eventual disposition with the respective tax authorities. Net income for the first nine months of 2003 decreased to $4.7 million, or $0.28 per common share-diluted, from $10.4 million or $0.62 per common share-diluted, for the first nine months of 2002. 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 has been operating cash flow. The Company's net cash provided by operating activities was $22.8 million and $12.3 million in the first nine months of 2003 and 2002, respectively. As necessary, the Company 11 supplements its operating cash flow with borrowings. Net borrowings (repayments) were ($16.2) million in the first nine months of 2003 and $15.3 million in the first nine months of 2002. Capital expenditures in the first nine months of 2003 and 2002 were $6.6 million and $28.0 million, respectively. Capital expenditures during the first nine months of 2003 were funded by operating cash flow. Management anticipates that capital expenditures for new projects will total approximately $10.0 million in 2003, consisting principally of $5.0 million for various manufacturing equipment, $2.0 million for IT projects, $1.1 million to acquire a previously leased manufacturing facility and $1.9 million for various other capital projects. Additionally, the Company is analyzing several financing alternatives in connection with the possible development of additional manufacturing and warehousing facilities in the Fall River area. 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 bear interest at a fixed rate of 7.09% on $15.0 million and 7.18% on $30.0 million. 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. The Company also has a $60.0 million Credit Agreement with a bank which expires January 31, 2007 (the Credit Agreement). As of October 4, 2003, the Company had no loan outstanding under the Credit Agreement and unused availability of $59.9 million. See Note 5 of Notes to Consolidated Financial Statements included in the Company's 2002 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. 12 The Company has historically not paid dividends, instead using earnings to fuel growth and capital equipment requirements. On March 3, 2003, the Company's Board of Directors adopted a new dividend policy reflecting Quaker's intention to pay quarterly dividends going forward, with the level of each dividend payment, if any, to be determined by Quaker's Board of Directors based on a number of factors, including the Company's financial performance, cash flows and cash requirements. 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 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. 13 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 2.8% 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 October 4, 2003, the Company had the following derivative financial instruments to hedge the anticipated cash flows from the repayment of foreign currency denominated intercompany payables outstanding:
Notional Weighted Notional Amount in Average Amount in Type of Local Contract U.S. Fair Instrument Currency Currency Rate Dollars Value Maturity ---------- -------- -------- ---- ------- ----- -------- Forward Contract Mexican Peso 60.0 million 11.09 $5.4 million $ 242,000 Dec. 2004 Forward Contract Brazilian Real 1.4 million 3.18 $0.5 million $ (36,000) Nov. 2003
14 Interest Rate Risk All 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 October 4, 2003 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(c) 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. 15 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 July 24, 2003, in which the Company furnished a press release announcing its second quarter results for the period ending July 5, 2003. 16 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: November 4, 2003 By: /s/ Paul J. Kelly ---------------- --------------------- Paul J. Kelly Vice President - Finance and Treasurer (Principal Financial Officer) 17 EX-31 3 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION I, Larry A. Liebenow, certify that: 1. I have reviewed this report on Form 10-Q of Quaker Fabric Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Larry A. Liebenow --------------------- Larry A. Liebenow Chief Executive Officer Date: November 4, 2003 EX-31 4 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION I, Paul J. Kelly, certify that: 1. I have reviewed this report on Form 10-Q of Quaker Fabric Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Paul J. Kelly ----------------- Paul J. Kelly Chief Financial Officer Date: November 4, 2003 EX-32 5 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with this quarterly report on Form 10-Q of Quaker Fabric Corporation for the quarterly period ended October 4, 2003 (the "Periodic Report"), I, Larry A. Liebenow, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: : November 4, 2003 /s/ Larry A. Liebenow ---------------- --------------------- Larry A. Liebenow Chief Executive Officer This certification is being furnished as an exhibit to the Report pursuant to Exchange Act Rule 13a-14 and Item 601 of Regulation S-K and 18 United States Code Section 1350 and not as a document "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certificate shall not be deemed incorporated by reference into any of the Company's filings under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference. EX-32 6 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with this quarterly report on Form 10-Q of Quaker Fabric Corporation for the quarterly period ended October 4, 2003 (the "Periodic Report"), I, Paul J. Kelly, Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 4, 2003 /s/ Paul J. Kelly ------------------- ----------------- Paul J. Kelly Chief Financial Officer This certification is being furnished as an exhibit to the Report pursuant to Exchange Act Rule 13a-14 and Item 601 of Regulation S-K and 18 United States Code Section 1350 and not as a document "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. This certificate shall not be deemed incorporated by reference into any of the Company's filings under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----