-----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, E3oLdhQtenQAYK8Mhm7XtN6nm1oRIppFBIXTMPakNQyPnI6bLL2K8PyLv5QaAnuk 7z8K/Eq0tKCbjzzyz5YeZw== 0000950117-04-001770.txt : 20040507 0000950117-04-001770.hdr.sgml : 20040507 20040507092518 ACCESSION NUMBER: 0000950117-04-001770 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040403 FILED AS OF DATE: 20040507 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: 04787012 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 a37649.txt QUAKER FABRIC CORP. ================================================================================ 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. ================================================================================ 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 EX-31 2 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 officer 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 officer 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 the 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: May 7, 2004 17 EX-31 3 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 officer 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 officer 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 the 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: May 7, 2004 18 EX-32 4 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 April 3, 2004 (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: May 7, 2004 /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. 19 EX-32 5 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 April 3, 2004 (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: May 7, 2004 /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. 20 -----END PRIVACY-ENHANCED MESSAGE-----