-----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, K6z2dUOI3rqCtUFh55bCW8w5Lm+ALOpsephCNvOEti+J9WhFddGosYjNgDwWgaAz S+jC2IAOdOYFuHnZg1oB9Q== 0000950117-03-001310.txt : 20030403 0000950117-03-001310.hdr.sgml : 20030403 20030403155946 ACCESSION NUMBER: 0000950117-03-001310 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030104 FILED AS OF DATE: 20030403 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07023 FILM NUMBER: 03638770 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-K 1 a34843.txt QUAKER FABRIC CORPORATION ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 4, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------- QUAKER FABRIC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------- DELAWARE 04-1933106 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 941 GRINNELL STREET FALL RIVER, MASSACHUSETTS 02721 (ADDRESS PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (508) 678-1951 ------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.01 (TITLE OF CLASS) 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, and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant, computed by reference to the closing sales price as quoted on NASDAQ on March 24, 2003 was approximately $77.7 million. As of March 24, 2003, 16,680,398 shares of Registrant's common stock, par value $0.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE:
DESCRIPTION OF DOCUMENT PART OF THE FORM 10-K ----------------------- --------------------- Portions of the Proxy Statement to be used Part III (Item 10 through Item 13) in connection with the Registrant's 2003 and Part IV Annual Meeting of Stockholders.
================================================================================ QUAKER FABRIC CORPORATION AND SUBSIDIARIES FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)
FISCAL FISCAL PERCENT 2002 2001 CHANGE ---- ---- ------ INCOME STATEMENT DATA Net sales............................................... $365,445 $331,105 10.4 % Gross profit............................................ 79,952 70,359 13.6 % Operating income........................................ 23,067 19,027 21.2 % Net income.............................................. 11,556 9,548 21.0 % SELECTED OPERATING DATA Depreciation and amortization........................... $ 17,826 $ 15,419 15.6 % Capital expenditures.................................... 32,094 32,644 (1.7)% Cash flow provided by operating activities.............. 29,094 23,551 23.5 % Fabric unit volume (in yards)........................... 63,847 56,718 12.6 % Weighted average gross sales price per yard of fabric... $ 5.57 $ 5.51 1.1 % BALANCE SHEET DATA Working capital......................................... $ 74,808 $ 72,598 3.0 % Total assets............................................ 288,686 273,684 5.5 % Total debt, less cash................................... 65,102 63,597 2.4 % Shareholders' equity.................................... 161,805 148,503 9.0 % PER SHARE DATA Net income per basic share.............................. $ 0.72 $ 0.61 18.0 % Net income per diluted share............................ $ 0.69 $ 0.58 19.0 % Book value per diluted share............................ $ 9.60 $ 9.00 6.7 % RATIOS Gross margin............................................ 21.9% 21.2% 3.3 % Operating margin........................................ 6.3% 5.7% 10.5 % Net income margin....................................... 3.2% 2.9% 10.3 % Current ratio........................................... 3.3 TO 1 3.1 to 1 6.5 % Net debt to total capitalization........................ 28.7% 30.0% (4.3)%
i TO OUR SHAREHOLDERS With new company records set at both the top and bottom lines, Quaker's overall performance last year was impressive. Net sales for the year of $365.4 million and net income of $11.6 million were up 10.4% and 21.0%, respectively, confirming that Quaker has what it takes to continue to outperform the industry. And, when viewed in the context of last year's difficult macroeconomic environment -- including significant weakness in the home furnishings sector, Quaker's 2002 results reflect the soundness of our core strategy -- a proven approach that is focused on the fundamentals -- consistently delivering great products and great service to our customers. Although our 2002 results were very solid overall, macroeconomic conditions deteriorated as the year progressed and the fourth quarter was definitely the weakest for us, with domestic fabric sales down 8.9% for the quarter and yarn sales off significantly. Demand for our products has picked up since the first of the year, however, with our average weekly incoming order rate so far this year running approximately 20% ahead of the fourteen-week fourth quarter. The company generated approximately $13.0 million of free cash flow during the fourth quarter, allowing us to reduce funded debt by approximately $13.3 million during the quarter -- and our balance sheet at year-end was very strong. Looking ahead, we are confident in Quaker's ability to compete vigorously, and we remain committed to increasing our sales, broadening our markets, improving our margin and financial performance and generating strong cash flows -- with installed capacity sufficient to allow for an increase in our production rates this year in comparison to 2002 and planned spending on capital projects currently expected to be in the $9.0 million range this year -- compared to about $32.0 million last year. Additionally, the Company is analyzing various financing alternatives in connection with the possible development of additional manufacturing and warehousing facilities in the Fall River area. During the balance of 2003, we will continue to emphasize our strong product line, and as the response we received earlier this year to our newest fabric line at important shows in Germany, San Francisco and High Point indicates -- we still set the standard in our industry when it comes to design and styling excellence -- and our delivery lead times remain among the best in the business. In addition, Quaker's commitment to the export market continues to be strategically important -- with our overall export sales during 2002 up about 16% from 2001 -- and we intend to keep aggressively pursuing our international program, including the development of new initiatives intended to allow us to enjoy the benefits of the various free trade agreements important to us, including the ones the US has almost completed with Singapore and Chile -- and the one currently being negotiated with Australia. Our efforts in both the contract and decorative home fashions markets are beginning to show some real results, and those initiatives will also play an important role in our strategy going forward. And our demonstrated leadership in product and technical innovation will allow us to consistently develop new products to meet the needs of a wide range of customers at price points throughout the market. With each of these components of our time-tested strategy in place, we believe we are solidly positioned to deliver value to our shareholders as economic conditions improve. Despite the challenging economic environment affecting every American business at the moment, we are quite optimistic about Quaker's prospects for sustained growth over the long-term. We remain the market leader and have the best product-service combination available on the market today. We are committed to keeping Quaker in a strong competitive position and agile enough to respond to new opportunities. Continuing to reinforce our solid balance sheet and low debt to total capitalization ratio is part of that effort. Our investments in plant, equipment and our most important resource -- our people -- are all in place, and we look forward to building on the strong foundation we have laid. Through the hard work of the entire Quaker team, we had a very solid 2002 and, as we begin 2003, we believe the company is strategically well-positioned to continue to be successful over the near term, and ii to really benefit when economic conditions begin to improve. Everyone at Quaker remains dedicated to increasing shareholder value over time, and we thank you for your continued support. Sincerely, Larry A. Liebenow Sangwoo Ahn Larry A. Liebenow Sangwoo Ahn President and Chief Executive Officer Chairman of the Board iii PART I ITEM 1. BUSINESS OVERVIEW Quaker is a leading designer, manufacturer and worldwide marketer of woven upholstery fabrics for residential furniture and one of the largest producers of Jacquard upholstery fabrics in the world. The Company is also a leading developer and manufacturer of specialty yarns, and management believes it is the world's largest producer of chenille yarns, which Quaker both sells and uses in the production of its fabrics. The Company's vertically integrated operations provide Quaker with important design, cost and delivery advantages. The Company's product line is one of the most comprehensive in the industry and Quaker is well known for its broad range of Jacquard fabrics, including its soft, velvet-like Jacquard chenilles. The Company's revenues in 2002 were $365.4 million. Quaker has been producing upholstery fabric for over fifty-five years and is a full-service supplier of Jacquard and plain woven upholstery fabric to the furniture market. Quaker's current product line consists of over 5,000 traditional, contemporary, transitional and country fabric patterns intended to meet the styling and design, color, texture, quality and pricing requirements of promotional through middle to higher-end furniture manufacturers, and the Company introduces approximately 1,000 new products to the market annually. Management believes that Jacquard fabrics, with their detailed designs, provide furniture manufacturers with more product differentiation opportunities than any other fabric construction on the market. The Company sells its upholstery fabrics to over 3,000 furniture manufacturers worldwide, including virtually every significant domestic manufacturer of upholstered furniture. Quaker also distributes its fabrics internationally. In 2002, fabric sales outside the United States of $48.8 million represented approximately 13.7% of gross fabric sales. Quaker's Whitaker'r' Collection, a branded line of a select group of the Company's better-end products, has resulted in incremental sales to a number of well-known higher-end furniture manufacturers. In 2001, the Company began marketing certain fabrics intended to meet the design, construction and pricing needs of its promotional-end customers under the Company's Davol'TM' brand name. Management estimates that approximately 65% of the Company's fabric sales are manufactured to customer order. During the past five years, Quaker has invested $120.3 million in new manufacturing equipment to expand its yarn and fabric production capacity, increase productivity, and improve product quality. During 2003, Quaker plans to spend approximately $9.0 million for new projects consisting principally of new manufacturing equipment to further its marketing, productivity, quality, service and financial objectives, and for IT programs. The Company produces its yarn and fabric products in its ten manufacturing plants in Fall River and Somerset, Massachusetts, where Quaker has nearly 2.0 million square feet of manufacturing and warehousing space. Quaker also has warehouse space in Brockton, Massachusetts. In addition to distribution from the Company's facilities in Fall River, Quaker maintains domestic distribution centers in High Point, North Carolina, Verona, Mississippi, and Los Angeles, California. To provide better service to its international customers, the Company also has a distribution center in Mexico and uses a third-party distribution company to provide warehousing services in Brazil. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, and all amendments to those reports will be made available free of charge through the Investor Relations section of the Company's Internet website (http://www.quakerfabric.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. THE INDUSTRY Total domestic upholstery fabric sales, exclusive of automotive applications, are estimated to be in excess of $2.5 billion annually. Management estimates the size of the international fabric market to be at least twice that of the domestic market. Due to the capital intensive nature of the fabric manufacturing process and the importance of economies of scale in the industry, the domestic industry is concentrated, with the top 14 upholstery fabric manufacturers, including Quaker, accounting for over 80% of the total 1 market. Management believes that Quaker is currently the sole large U.S. fabric producer that is continuing to demonstrate its long-term commitment to the international market by focusing on expanding its export sales. Within the Jacquard segment, price is a more important competitive factor in the promotional-end of the market than it is in the middle to better-end of the market, where fabric styling and design considerations typically play a more important role. Demand for upholstery fabric is a function of demand for upholstered furniture. The upholstered furniture market grew from $5.4 billion in 1991 to an estimated $10.7 billion in 2001. Total upholstered furniture demand is cyclical and is affected by population growth and demographics, consumer confidence, disposable income, geographic mobility, housing starts, and home sales. The upholstery fabric covering a sofa, chair, or other piece of furniture is one of the most significant factors influencing a furniture buyer's selection. Purchase decisions are based primarily on the consumer's evaluation of aesthetics, comfort, durability, quality and price. As a result, the fabric decisions a furniture manufacturer makes play a critical role in its ability to gain a product differentiation advantage at the retail level. Management believes the long-term outlook for the Company's upholstery fabric sales will be influenced by the following factors: (i) The furniture industry has been consolidating at both the retail and manufacturing levels for several years. As a result, fabric suppliers are required to deal with larger customers that require shorter delivery lead times, customer-specific inventory management programs, and additional information technology-based support services. Large integrated fabric suppliers have an advantage over smaller competitors because of their ability to offer a broader range of product choices and meet the volume, delivery and support service requirements of the large furniture manufacturers and retailers. (ii) The United States has shifted toward a more casual lifestyle, as evidenced by product shifts in the apparel and home furnishings industries. Management believes this has resulted in growing demand for less formal furniture upholstered with softer, more comfortable fabric. (iii) Pushed by consumers demanding immediate product delivery, the furniture industry has increased its focus on just-in-time manufacturing methods and shorter delivery lead times. (iv) Advances in the use and application of information technology throughout the industry supply chain can be anticipated to allow furniture industry manufacturers, suppliers and customers to share information more quickly and more effectively, resulting in reduced cycle times and greater transparency for end consumers who will be able to determine the status of their orders at each stage of the manufacturing process. Significant advances in the use of information technology in the sales and marketing function are also anticipated. (v) Both consumers and furniture manufacturers have placed increased emphasis on product quality, enabling fabric manufacturers with effective quality control systems to gain a competitive advantage. (vi) While demand levels over the near term may be adversely affected by weakness in both the domestic and global economies, a move by the baby boom generation toward more upscale furniture as they approach retirement age and additional demand generated by that same group's purchases of vacation and retirement homes can be expected to provide favorable longer term demand trends. (vii) Technological advances in the speed and flexibility of the Jacquard loom have reduced the cost of producing Jacquard fabrics, enabling them to compete more effectively with prints, velvets, flocks, tufts and other plain woven products. (viii) While at one time most of the largest U.S. fabric producers had leveraged their size and broad product lines to expand their export sales, management believes that Quaker alone continues to focus on international sales as a major strategic initiative. 2 (ix) Fabrics entering the United States from China and other low labor cost countries are resulting in increased price competition at the middle range of the upholstery fabric and upholstered furniture markets. In addition, competition in the middle to better-end segment of the market is being affected by upper-end fabric imports from Europe. (x) A 'cocooning' or 'nestbuilding' trend among Americans is resulting in an increased focus on home furnishings. STRATEGY Quaker's strategy to further its growth and financial performance objectives includes: Taking Domestic Market Share. To capitalize on the consolidation trend in the furniture industry, the Company has positioned itself as a full-service supplier of Jacquard and plain woven fabrics to the promotional and middle to better end of the market by offering a wide variety of fabric patterns at prices ranging from $2.40 to $39.00 per yard and by emphasizing superior customer service. Expanding International Sales. The Company has made worldwide distribution of its upholstery fabrics a key component of its strategy. Quaker has built an international sales and distribution network, dedicated significant corporate resources to the development of fabrics to meet the specific styling and design needs of its international customers, and put programs in place to simplify the purchase of product from Quaker, including the operation of a distribution facility in Mexico, and the utilization of the services of a third party distribution company in Brazil. The Company's international gross sales were $48.8 million in 2002. Penetrating Related Fabric Markets. Management believes the Company's styling and design expertise, as well as its ISO 9001-certified operations, provide opportunities to penetrate the contract and decorative top-of-the-bed markets, as well as increase Quaker's share of the interior decorator and recreational vehicle markets. Management believes Quaker's Ankyra'TM' chenille yarns and fabric finishing abilities will provide the Company with a product advantage in these markets. During 2001, the Company commenced its efforts to penetrate the home fashions industry by adding a design director and three additional designers to focus on pillows and decorative top-of-the-bed products. As part of these efforts, during 2002 the Company purchased 24 'double-wide' looms to support its entry into this market. Maintaining Specialty Yarn Sales. Quaker is a leading producer of specialty yarns, and management believes it is the world's largest producer of chenille yarns. Approximately 90% of the chenille yarn manufactured by the Company is used in the production of the Company's fabric. The balance is sold to home fashions accessories firms and upholstery weavers through Quaker's yarn sales division, Nortex Yarns. Gross sales of the Company's specialty yarns were $15.9 million in 2002. The Company's current line of specialty yarns includes over 55 different varieties of spun and chenille yarns, and Quaker's yarn design and development staff regularly creates innovative new specialty yarns for use in the Company's fabrics and sale to the Company's yarn customers. Pursuing Strategic Acquisition Opportunities. Although all of Quaker's growth to date has been the result of internal initiatives, the Company has evaluated a number of acquisition candidates in the past and plans to pursue appropriate acquisition opportunities in the future. An ideal acquisition candidate would either support the Company's new market development objectives, enhance its international position, or offer a unique and complementary product, manufacturing or technical capability. COMPETITIVE STRENGTHS Management believes that the following competitive strengths distinguish Quaker from its competitors and that these strengths serve as a solid foundation for the Company's long-term growth strategy: Product Design, Development and Technological Innovation Capabilities. Management believes that Quaker's reputation for design excellence, product leadership and technological development is, and will continue to be, the Company's most important competitive strength. 3 Financial Strength. With a strong financial position, including a low debt to total capital ratio, the Company has the ability to support research and development and targeted capital investment initiatives. Commitment to Customer Service. The Company is committed to offering its customers the best overall service levels in the industry. Management believes Quaker's current delivery lead times continue to be among the best in the industry. Broad Product Offering. The breadth and depth of Quaker's product line enables the Company to be a full-service supplier of Jacquard and plain woven fabrics to virtually every significant domestic manufacturer of upholstered furniture. Technological Expertise. Quaker is driven by innovation and is committed to exploring the development and use of new technology to meet its product development, customer service, operating and financial objectives. State-of-the-Art Manufacturing Equipment. Management believes the Company has one of the most modern, efficient and technologically advanced manufacturing bases in the industry. Focus on Jacquard Fabrics. Management believes the detailed, copyrighted designs of the Company's Jacquard fabrics have enabled it to compete primarily on the basis of superior styling and design, rather than price. Vertical Integration. Using Quaker's own specialty yarns in the production of its fabrics provides the Company with significant design, cost and delivery advantages. PRODUCTS The Company offers a broad assortment of contemporary, traditional, transitional and country fabrics to manufacturers of both promotional-end and middle to better-end furniture at prices ranging from $2.40 to $39.00 per yard. While most of the Company's fabrics have historically been sold under the Quaker label, the Company began marketing a select group of its middle to better-end fabrics under its Whitaker'r' label in October 1996. During 2001, the Company began marketing certain of its fabrics to its promotional-end customers under its Davol'TM' brand name. In 2002, the Company's promotional-end fabric line and its middle to better-end fabric line had average gross sales prices of $4.00 per yard and $6.43 per yard, respectively, compared to $3.95 and $6.15, respectively, in 2001. The weighted average gross sales price per yard of the Company's fabrics was $5.57 in 2002, compared to $5.51 in 2001. Quaker's product line is focused on fabrics with complex designs referred to in the industry as 'Jacquards,' because of the special Jacquard equipment, or heads, required to produce them, and also includes a broad assortment of striped, plaid, and plain fabrics. The vast majority of Quaker's looms are equipped with Jacquard heads. The use of these heads makes it possible to vary the pattern, color, and texture of both the filling and warp yarns in a fabric. While fabrics manufactured on looms without Jacquard heads have a much more limited range of possible designs, Quaker added thirty-six Dobby looms to its manufacturing base during 2001 to reduce the cost of manufacturing certain fabrics that do not require the use of Jacquard heads. During 2002, Quaker added 24 'double-wide' Jacquard looms to support the Company's entry into the decorative home fashions segment. Quaker's product offerings are noted for their use of chenille and other specialty yarns, which give the fabric a soft, velvet-like appearance and feel. To take advantage of the trend toward casually styled furniture, and to capitalize on the growth of the motion furniture segment, Quaker developed a soft chenille yarn with superior abrasion resistance to compete effectively with flocks, velvets and tufted fabrics. The Company markets the line of chenille fabrics it produces using these yarns under its Ankyra'TM' label. Through a licensing agreement with Solutia (f/k/a Monsanto), a number of the Company's Ankyra'TM'-based chenille fabrics, as well as certain other fabrics in its line, have been 'Wear-Dated' by Solutia. Management anticipates that chenille will remain a very important element in the Company's fabric designs and that it will continue to influence -- and be enhanced by -- Quaker's on-going development and use of additional new specialty yarns and manufacturing techniques and processes. In addition, the Company has recently developed a collection of spun yarn products, 4 including several distinctive boucles that Quaker's design staff is using to further the Company's styling and design objectives. Quaker's broad product line is very important from a competitive standpoint. It enhances the ability of the Company's customers to meet most of their fabric needs through one full-service supplier while, at the same time, allowing them to purchase fabrics in a wide enough range of designs to enable them to differentiate their own new lines of upholstered furniture from those of their competitors. To generate additional business from manufacturers of higher-end upholstered furniture, the Company offers a select group of its middle to better-end products under its Whitaker'r' label, and in 2001 the Company began marketing certain of its promotional-end products under its Davol'TM' brand name. Gross sales of the Company's middle to better-end fabrics were $264.2 million, or 74.4% of total gross fabric sales in 2002, with approximately 42.3% of those sales made under the Whitaker'r' label. During 2001, the Company added a new director to its design department, as well as three additional design professionals, to focus on pillows and decorative top-of-the-bed products, as part of the Company's efforts to enter the home fashions market and further diversify its product offerings. NEW PRODUCT DEVELOPMENT AND DESIGN Although management believes fashion trends in the upholstery industry do not change significantly from year to year, consumer tastes in upholstery fabric do change over time. Therefore, it is important to identify emerging fashion needs and to develop new products responsive to those needs. Management believes Quaker's design staff has an established reputation for design excellence and product leadership. The Company's design department has overall responsibility for the development of new upholstery fabric patterns for sale by the Company. Although the Company purchases artwork from independent artists, the Company's staff of professional designers and designer technicians creates the majority of the designs on which the Company's fabric patterns are based and also determines the construction of those patterns. The design department uses state-of-the-art Computer Aided Design ('CAD') equipment to reduce the length of the Company's new product development cycle. The development of each new fabric line requires six months. The first step in the new product development process is the preparation of a merchandising plan for the line. The Company's merchandising plans are based on extensive input from Quaker's sales representatives, senior managers, and major customers and provide both a broad outline of the number of new products to be included within each major styling category (e.g., contemporary, traditional, transitional, and country), as well as the number of new products to be created for sale at each of the major price points within those styling categories. During 2002, the Company enhanced its merchandising practices by developing a number of fabric collections reflecting a common theme, such as Sanctuary, Timeless Traditions, Romance, Home Sweet Home, Island Home, World Beat, Thoroughbred, Technicolor and Easy Living. In addition, because of the design, cost, and delivery advantages of Quaker's vertically integrated manufacturing operations, substantial emphasis is placed on making maximum use of the Company's internally produced yarns during the fabric development process. After each new fabric merchandising plan is developed, members of the Company's fabric design and yarn development staffs meet to identify the design staff's yarn requirements for the Company's next fabric line and many of Quaker's proprietary yarns trace their origins to this design-driven process. Quaker's product development, engineering and manufacturing staffs also play a key role in the new product development process by reviewing each proposed new product to evaluate its impact on the Company's raw material costs, equipment utilization rates and quality performance. Although a few plain, striped and plaid fabrics remain in the Company's product line for ten years or more, a successful product typically has a life of two to three years. Quaker's design staff also regularly creates custom patterns for customers seeking to differentiate their products for distribution purposes, hit a certain price point at the retail level, or meet a particular styling need in the market they serve. These patterns, which are not part of Quaker's 'open line,' are known in the industry as 'Specials.' 5 SALES AND MARKETING UPHOLSTERY FABRICS Net fabric sales during 2002 were $349.8 million, or approximately 95.7% of the Company's net sales. The Company sells its upholstery fabrics to over 3,000 furniture manufacturers worldwide, including substantially all of the largest domestic manufacturers of upholstered furniture. Fabric sales to the Company's top 25 customers accounted for approximately 44% of 2002 net sales. None of the Company's customers accounted for more than 7.3% of net sales during 2002. The Company uses a direct marketing force of 25 sales representatives, five of whom are based in Mexico, to market its fabrics in the United States, Canada and Mexico. All such sales representatives are paid on a commission basis and represent the Company exclusively. Quaker's fabrics are distributed internationally through a network of eleven exclusive sales representatives, including sales offices and showrooms in the United Kingdom, the United Arab Emirates, India, Singapore, and four exclusive sales agents in Brazil, where Quaker maintains a showroom and sales office in Sao Paulo. In addition, Quaker has appointed 10 independent commissioned sales agents to represent the Company in Europe, the Far East, Australia, New Zealand, the Middle East, Central and South America, Africa and Asia. All agents located outside the United States are supervised by Quaker's Vice President -- Sales. Quaker's United States customers market their products through two annual national furniture industry trade shows held in April and October in High Point, North Carolina, as well as through various regional shows. These shows provide most of Quaker's customers with the opportunity to introduce their new furniture lines to their major retail customers in a single setting. Quaker's design and marketing process is closely linked to these trade shows. The Company develops two major lines for introduction to the Company's customers at the Showtime Fabric Fairs held in High Point in January and July of each year. Almost all major U.S. furniture manufacturers attend Showtime to begin selecting fabric for the new lines of sofas and other upholstered furniture products that they will exhibit at the April and October High Point Furniture Markets. Quaker also markets its fabrics at a number of trade shows regularly attended by its export customers, including shows in Belgium, China, Dubai, Germany, Italy, Brazil and Mexico, as well as certain trade shows in the United States aimed at the international market. Foreign sales of fabric accounted for approximately 13.7% of Quaker's gross fabric sales during 2002. In addition to distribution from the Company's facilities in Fall River, Massachusetts, Quaker maintains five distribution centers from which its customers may purchase selected products from the Company's products directly. These facilities are located in Los Angeles, California; Mexico City, Mexico; High Point, North Carolina; Sao Paulo, Brazil; and Verona, Mississippi. SPECIALTY YARNS Net yarn sales during 2002 were $15.6 million, or approximately 4.3% of the Company's net sales. The Company designs, manufactures and markets several types of specialty yarns, including fancy spun, fancy twisted and chenille. Quaker is a leading developer and manufacturer of specialty yarns and management believes it is the world's largest producer of chenille yarn, a soft pile yarn which produces a velvet-like fabric. Chenille yarns, and fabrics made out of chenille yarns, are responsive to consumer demand for softer, more casual home furnishings and apparel. The Company's specialty yarns are sold under the name of Nortex Yarns to manufacturers of home furnishings products, principally weavers of upholstery fabric, throws, afghans and other products. The Company has approximately 45 yarn customers. Management believes the technical expertise of Quaker's yarn development staff provides the Company with an important competitive advantage by enabling Quaker to create and market innovative specialty yarns to meet its customers' styling and performance criteria. Historically, chenille yarns have had difficulty meeting the durability standards required for use in fabrics which are likely to be subjected to heavy wear. To address this problem, Quaker's yarn development staff created a finished chenille yarn with superior abrasion resistance, and in 1997 the United States Patent and Trademark Office issued a patent to protect the Company's Ankyra'TM' process. 6 MANUFACTURING The Company operates ten manufacturing facilities in Fall River and Somerset, Massachusetts, and management estimates that approximately 65% of the Company's fabric sales are manufactured to customer order. Management, in partnership with key customers, is utilizing forecasting techniques to significantly reduce delivery lead times. The Company's objective is to operate its production facilities on a three-shift, five to five and one half-day week schedule. However, during periods of heaviest demand, Quaker operates some or all of its production areas on seven-day, three-shift schedules and/or outsources a portion of its production requirements. During periods of weaker demand, the Company will decrease its production rates accordingly. The Company's vertically integrated manufacturing process begins with the production of specialty yarns, primarily for use in the production of the Company's fabrics, but also for sale to manufacturers of home furnishings products and apparel. Although the Company purchases all of its commodity yarns, most of the Company's weft, or filling, yarn needs are met through internal production. The next stage of the fabric manufacturing process involves the preparation of beams of warp yarn. The beams are then sent to the Company's weave rooms, where looms are used to weave the warp and filling yarns together. The final steps in the fabric production process include routing the fabric through various fabric finishing processes followed by the application of a latex backing, to enhance the durability and performance characteristics of the end product, as well as a stain-resistant finish upon customer request. Some of the Company's fabrics, including its Quaker Plush'r', Quaker Suede'TM', Quaker Silk'TM' and Quaker Ultra'TM' products, benefit from additional chemical and mechanical finishing processes designed to enhance their appearance, softness and/or performance characteristics. A final product quality inspection is conducted prior to shipment to the Company's customers. Quaker has added approximately 400 new looms to its manufacturing base since 1989. The vast majority of the Company's looms are equipped with Jacquard heads, maximizing the Company's ability to design its products to meet customer needs, without equipment-related design constraints. During 2000, the mechanical Jacquard heads on approximately 80 of the Company's older looms were replaced with electronic Jacquard heads to improve productivity, and another 26 mechanical heads were replaced with electronic heads during 2002. During 2001, the Company added 36 Dobby looms to reduce the cost of manufacturing certain fabrics not requiring the use of Jacquard heads, and during 2002 added 24 'double-wide' Jacquard looms to support the Company's entry into the decorative home fashions segment. The Company's fabrics are generally shipped directly to its customers on an FOB Fall River or FOB warehouse basis. The Company also supplies its distribution centers with an appropriate selection of fabrics for customers needing immediate delivery. During the past five years, the Company placed in service more than $120.3 million of new manufacturing equipment to increase capacity, improve manufacturing efficiencies, and support the Company's marketing, quality and delivery objectives. QUALITY ASSURANCE Management believes that product quality is a significant competitive factor in both the domestic and international fabric markets. Quaker's quality initiatives include: The use of incentive programs in certain of its production departments to factor quality into the overall compensation programs in these areas. Inspection of incoming raw materials to ensure they meet the Company's product specifications and to provide prompt feedback to vendors when defects are discovered so that corrective actions may be undertaken immediately. A final quality inspection of the Company's yarn and fabric products before they are released for shipment. Continuous monitoring of the Company's performance against industry standards and its own internal quality standards. 7 ISO 9001 certification of all of the Company's operations. During 2001, the Company received certification to the new ISO 9000: 2000 Quality Standard for ISO 9001. In addition to these measures, the built-in quality control features and more precise settings on the Company's newer production equipment also support the Company's efforts to provide defect-free products to its customers. The Company's quality-related return rate, as a percentage of total yards shipped was 0.5% in 2002 and 0.4% in 2001, and the Company's sales of second-quality fabric were $1.9 million in 2002 and $1.2 million in 2001. TECHNOLOGY As part of Quaker's overall strategy to improve productivity and achieve a service advantage over its competitors, the Company strives to introduce new technologies into its operations whenever possible. Quaker's efforts in this area include: (i) the use of its management information system to provide computer support to the Company's manufacturing operations; (ii) the use of CAD equipment to reduce the time required to bring its new products to market, including the design of 'Specials'; (iii) the use of bar-coding systems to improve both the efficiency of its own manufacturing operations and service to its customers; (iv) the use of electronic Jacquard heads and other production equipment equipped with microprocessors to improve manufacturing efficiencies and reduce unit costs; (v) the use of a heuristic advanced planning system to both support Quaker's delivery lead time objectives and improve productivity levels in Quaker's manufacturing areas; and (vi) the use of real-time process monitoring control systems to identify opportunities to improve manufacturing efficiencies. The Company's CAD equipment is used to develop new fabric designs and to prepare plastic Jacquard cards for use with the Company's mechanical Jacquard heads, and computer disks for use with Quaker's newer electronic Jacquard heads. These plastic cards and computer disks contain precise instructions about the construction of the particular fabric pattern to be woven. During 2001, the Company installed new CAD software, providing all of Quaker's design professionals with enhanced automated design support directly on their individual desktop computers. SOURCES AND AVAILABILITY OF RAW MATERIALS Quaker's raw materials consist principally of polypropylene, polyester, acrylic, cotton and rayon fibers and yarns for use in its yarn manufacturing and fabric weaving operations, and latex to backcoat its finished fabrics. In addition, Quaker purchases commission dyeing services from various dyehouses which dye, to the Company's specifications, certain of the yarns the Company produces internally or purchases from other manufacturers. Substantially all of the raw materials used by the Company are purchased from primary producers with manufacturing operations in the United States, however, certain of the Company's raw material requirements are purchased from non-U.S. based suppliers. The Company is dependent upon outside suppliers for its raw material needs, including dyeing services, and is subject to price increases and delays in receiving these materials and services. The Company's raw materials are predominantly petrochemical products and their prices fluctuate with changes in the underlying market for petrochemicals in general. In addition, the financial performance and/or condition of some textile industry suppliers has been hurt by the recent recession, increasing the risk of business failures and/or further consolidations among the Company's supplier population and the related risk of disruption to Quaker's operations. Although other sources are available, the Company currently procures approximately 30% of its raw material components from two major industry suppliers, one of which is the sole supplier of a filament yarn used in the Company's chenille manufacturing operations. Generally, Quaker has not experienced any significant difficulty in meeting its raw material needs, expects that it will be able to obtain adequate amounts to meet future requirements, and has identified alternate sources for all critical raw material components. A shortage or interruption in the supply of any critical component could have a material adverse effect on the Company. The Company's production operations are heavily reliant upon a consistent supply of energy, including electricity to power the Company's manufacturing equipment, natural gas to generate the heat 8 used in Quaker's finishing operations and oil to heat the Company's office areas. A significant shortage or interruption in the availability of these energy sources would likely have a material adverse effect on the Company's operations and financial performance. Beginning in the latter part of 2000, the Company began to experience rising energy costs. To help provide the Company with greater stability and to reduce the impact of rising energy costs, during 2001, Quaker entered into a contract to purchase its electrical power requirements at a fixed price over a three year period. COMPETITION The markets for the Company's products are highly competitive. Competitive factors in the upholstery fabric business include product design, styling, price, customer service and quality. Price is a more important competitive factor in the promotional-end of the market than it is in the middle to better-end of the market, where competition is weighted more heavily toward fabric styling and design considerations. Although the Company has experienced no significant competition in the United States from imported fabric to date, changes in foreign exchange rates or other factors could make imported fabrics more competitive with the Company's products in the future. Historically, fabric imported from China, India and other low labor cost countries suffered from relatively poor service levels and generally unsophisticated product designs, however, recent improvements in these areas have enhanced the competitive position of products imported from China. During 2002, the Company's yarn sales business continued to be adversely affected by diminished demand for products manufactured by the Company's domestic yarn customers. Management anticipates this condition will continue for the foreseeable future. The Company's principal competitors include: Berkshire Hathaway, Inc., Culp, Inc., Craftex Mills, Inc., Joan Fabrics Corporation and its Mastercraft Division, Sunbury Textile Mills, Inc., and Valdese Weavers, Inc. Several of the companies with which the Company competes may have greater financial resources than the Company. The Company's products compete with other upholstery fabrics and furniture coverings, including prints, flocks, tufts, velvets and leather. BACKLOG As of January 4, 2003, the Company had orders pending for approximately $26.1 million of fabric and yarn compared to $43.0 million as of December 29, 2001. The Company's backlog position at year-end 2002 was down considerably due to both significant reductions Quaker achieved in its delivery lead times and weakness in the Company's fourth quarter order rate. The Company's backlog position at any given time may not be indicative of the Company's long-term performance. TRADEMARKS, PATENTS, COPYRIGHTS The Company seeks copyright protection for all new fabric designs it creates, and management believes that the copyrights owned by the Company serve as a deterrent to those industry participants which might otherwise seek to replicate the Company's unique fabric designs. In June 1995, the Company introduced a new collection of fabrics featuring Quaker's proprietary Ankyra'TM' chenille yarns. In 1997, the United States Patent and Trademark Office issued a patent to the Company protecting the proprietary manufacturing process developed by Quaker to produce these yarns. The Company's Whitaker mark, as well as a logo form of the 'W' mark, is registered with the U.S. Patent and Trademark Office. During 2000, the Company's Quaker Plush mark also became registered with the U.S. Patent and Trademark Office. The Company has applications pending, with the U.S. Patent and Trademark Office to register its Davol mark and its Quaker Ultra mark. INSURANCE The Company maintains general liability and property insurance. The costs of insurance coverage vary generally and the availability of certain coverages can change. As a result of recent trends in the insurance market, including the effects of the events of September 11, 2001, the Company has experienced significant increases in the premium rates on its various insurance coverages and certain changes have been made in the insurance carriers used by the Company and in the terms and conditions 9 of some of the Company's insurance policies. While the Company believes that its present insurance coverage is adequate for its current operations, there can be no assurance that the coverage is sufficient for all future claims or will continue to be available in adequate amounts or at reasonable rates. EMPLOYEES The Company is the largest manufacturer, and the largest private sector employer, in Fall River, Massachusetts. As of January 4, 2003, Quaker employed 2,816 persons, including 2,282 production employees, 184 technical and clerical employees, and 350 exempt employees and commissioned sales representatives. The Company's employees are not represented by a labor union, and management believes that employee relations are good. The Company's operations are heavily dependent on the availability of labor in the Fall River, Massachusetts area. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT (See Item 10 herein) The executive officers of the Company are as follows:
OFFICER NAME AGE POSITION SINCE ---- --- -------- ----- Larry A. Liebenow................ 59 President, Chief Executive Officer, and Director 1989 James A. Dulude.................. 47 Vice President -- Manufacturing 1990 Cynthia L. Gordan................ 55 Vice President, Secretary, and General Counsel 1989 Mark R. Hellwig.................. 45 Vice President -- Supply Chain Management 1998 Carole E. Johnson................ 48 Vice President -- Marketing 2003 Paul J. Kelly.................... 58 Vice President -- Finance, Chief Financial 1989 Officer and Treasurer Thomas Muzekari.................. 62 Vice President -- Sales 1996 Beatrice Spires.................. 41 Vice President -- Design and Merchandising 1996 Norman J. Sturdevant............. 46 Vice President -- Chief Information Officer 2001 Duncan Whitehead................. 60 Vice President -- Research and Development 1990
Larry A. Liebenow. Mr. Liebenow has served as President, Chief Executive Officer, and a Director of the Company since September 1989. From July 1983 until September 1989, Mr. Liebenow was Chairman of the Board and President of Nortex International, Inc. ('Nortex International'). From September 1971 to July 1983, Mr. Liebenow served as the Chief Operating Officer of Grupo Pliana, S.A., a Mexican yarn and upholstery fabric manufacturing concern. James A. Dulude. Mr. Dulude has been employed by the Company since May 1986 and has served as Vice President -- Manufacturing since August 1995. Mr. Dulude served as Vice President -- Purchasing, Planning and MIS from November 1990 to August 1995. Mr. Dulude served as the Company's Director of Purchasing and Planning from May 1989 to November 1990, Director of Planning and Scheduling from July 1988 to May 1989, and Director of Information Systems from May 1986 to July 1988. Cynthia L. Gordan. Ms. Gordan has been employed by the Company since March 1988 and has served as Vice President, Secretary, and General Counsel of the Company since March 1989. Ms. Gordan is also responsible for the Company's Risk Management, Investor Relations and Human Resources functions. From April 1986 to November 1987, Ms. Gordan served as a Senior Associate in the Corporate Department of the Chicago law firm of Katten Muchin & Zavis. From November 1981 to April 1986, Ms. Gordan was employed by The General Electric Company where she served first as the Vice President and General Counsel of General Electric's life, property, and casualty insurance affiliates in Providence, Rhode Island, and later as the strategic planner and acquisition specialist for a division of General Electric Capital Corporation. Mark R. Hellwig. Mr. Hellwig has served as Vice President -- Supply Chain Management since October 1998. From January 1996 until October 1998, Mr. Hellwig was Director -- Supply Chain 10 Management for Solo Cup Company. From August 1993 to January 1996, Mr. Hellwig was Director -- Logistics at Solo Cup Company. From 1989 to 1993, Mr. Hellwig was with Deloitte and Touche LLP. Carole E. Johnson. Ms. Johnson has served as Vice President -- Marketing since March 2003. From June 1981 through December 2002, Ms. Johnson held positions of increasing responsibility with the Gillette Company, most recently as Vice President Business Services, Commercial Operations North America. Earlier positions at Gillette included Vice President Marketing Services, Commercial Operations North America (1991-2001), Vice President Global Business Management, Personal Care Products (1992-1998), Vice President Sales and Marketing, Personal Care Division USA (1991-1992), and Vice President Sales, Personal Care Division USA (1988-1991). Paul J. Kelly. Mr. Kelly has served as Vice President -- Finance, Chief Financial Officer and Treasurer of the Company since December 1989, and since November 1993 has also had responsibility for working with industry and institutional analysts. From January 1988 to December 1989, Mr. Kelly was the co-founder and President of International Business Brokers and Consultants Ltd., a business broker and consulting firm. From December 1977 to December 1987, Mr. Kelly served as Chief Financial Officer of Ferranti Ocean Research Equipment, Inc., an international manufacturing concern. From February 1973 to December 1977, he was a certified public accountant with Arthur Andersen & Co. Thomas H. Muzekari. Mr. Muzekari has served as Vice President -- Sales since March 2003, and was Vice President -- Sales and Marketing from October 1998 until March 2003, and Vice President -- Marketing from March 1996 until October 1998. From September 1989 until February 1996, Mr. Muzekari was the Vice President -- Marketing for Collins & Aikman's Velvet Division. From 1970 to September 1989, Mr. Muzekari held various management positions in both sales and marketing with Milliken and Company. M. Beatrice Spires. Ms. Spires has been employed by the Company since September 1995 and has served as Vice President -- Design and Merchandising since March 2003, and was Vice President -- Styling and Design from March 1996 until March 2003. From September 1995 to March 1996, Ms. Spires served as Quaker's Director of Design. From July 1992 to September 1995, Ms. Spires was Vice President -- Merchandising for Collins & Aikman's Velvet Division. From September 1991 to July 1992, Ms. Spires was Merchandising Manager at Collins & Aikman. Norman J. Sturdevant. Mr. Sturdevant has served as Vice President -- Chief Information Officer since August 2001. From August 1999 to April 2001, Mr. Sturdevant served as Vice President of Information Technology for Bausch & Lomb's Europe, Middle East and Africa Region. Prior to that, Mr. Sturdevant served in various director and manager-level information technology positions with Bausch & Lomb, Entex Information Services and Electronic Data Systems. Mr. Sturdevant served as an officer in the U.S. Navy from 1976 to 1984. Duncan Whitehead. Mr. Whitehead has served as Vice President -- Technology and Development, and Yarn Sales since August 1995. Mr. Whitehead served as Vice President -- Yarn Sales and Development from May 1990 to August 1995. From September 1989 to May 1990, Mr. Whitehead was the Vice President -- Sales and Marketing for the Company's Nortex Division. From July 1983 to September 1989, Mr. Whitehead served as Vice President of Sales and Marketing for Nortex International. The Company's President, Secretary, and Treasurer are elected annually by the Board at its first meeting following the annual meeting of stockholders. All other executive officers hold office until their successors are chosen and qualified. 11 ITEM 2. PROPERTIES PROPERTIES Quaker is headquartered in Fall River, Massachusetts where it currently has ten facilities, nine of which are used primarily for manufacturing and warehousing purposes. The tenth facility houses the Company's executive, administrative and design areas as well as certain manufacturing operations. In addition, the Company maintains a manufacturing facility in Somerset, Massachusetts and warehouse space in Brockton, Massachusetts. The Company has three distribution centers in the United States and one in Mexico. The table below sets forth certain information relating to the Company's current facilities:
BUILDING LOCATION STATUS PURPOSE AREA (SF) OWNERSHIP -------- ------ ------- --------- --------- Grinnell Street, Fall River................ Active Manufacturing 748,000 Owned Quequechan Street, Fall River.............. Active Manufacturing 244,000 Owned Davol Street, Fall River................... Active Offices/R&D 245,000 Owned Campanelli Drive, Brockton, MA............. Active Warehouse 217,000 Leased(1) Ferry Street, Fall River................... Active Manufacturing 193,000 Owned Brayton Avenue, Fall River................. Active Manufacturing 186,000 Owned Quarry Street, Fall River.................. Active Manufacturing 76,000 Owned Graham Road, Fall River.................... Active Manufacturing 52,000 Leased(2) Lewiston Street, Fall River................ Active Manufacturing 62,000 Leased(3) County Street, Somerset, MA................ Active Manufacturing 53,000 Leased(4) Jefferson Street, Fall River............... Active Manufacturing 26,000 Leased(5) Stevens Street, Fall River................. Active Manufacturing 39,000 Leased(6) Verona, Mississippi........................ Active Distribution Center 20,000 Owned City of Industry, California............... Active Distribution Center 17,000 Leased(7) Mexico City, Mexico........................ Active Distribution Center 9,000 Leased(8) High Point, North Carolina................. Active Distribution Center 9,000 Leased(9)
- --------- (1) Lease expires December 31, 2003, with two two-year renewal options (2) Lease expires July 31, 2007 (3) Lease expires March 29, 2004 (4) Lease expires May 20, 2003, with an option to purchase for $1,250,000 (5) Lease expires June 30, 2005 (6) Lease expires May 31, 2004 (7) Lease expires September 30, 2006 (8) Lease expires February 28, 2006 (9) Lease expires July 31, 2004 During 2000, the Company also started to maintain inventory at a third party warehouse provider in Sao Paulo, Brazil. Quaker has sales offices in Fall River, Massachusetts; Guadalajara and Mexico City, Mexico; Sharjah, United Arab Emirates; Cambridgeshire, England; Hickory and High Point, North Carolina; Chicago, Illinois; Tupelo, Mississippi; Los Angeles, California; and Sao Paulo, Brazil. All of the Company's sales offices, except the one in Fall River, Massachusetts, are leased. In late 1998 and early 1999, the Company purchased approximately 60 acres of undeveloped land in Fall River to allow for expansion of its operations. ENVIRONMENTAL MATTERS The Company's operations are subject to numerous federal, state, and local laws and regulations pertaining to the discharge of materials into the environment or otherwise relating to the protection of the environment. The Company's facilities are located in industrial areas and, therefore, there is the possibility of incurring environmental liabilities as a result of historic operations at the Company's sites. 12 Environmental liability can extend to previously owned or leased properties, properties owned by third parties, and properties currently owned or leased by the Company. Environmental liabilities can also be asserted by adjacent landowners or other third parties in toxic tort litigation. In addition, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ('CERCLA'), and analogous state statutes, liability can be imposed for the disposal of waste at sites targeted for cleanup by federal and state regulatory authorities. Liability under CERCLA is strict as well as joint and several. Environmental laws and regulations are subject to change in the future, and any failure by the Company to comply with present or future laws or regulations could subject it to future liabilities or interruption of production which could have a material adverse effect on the Company. In addition, changes in environmental regulations could restrict the Company's ability to expand its facilities or require the Company to incur substantial unexpected other expenses to comply with such regulations. In particular, the Company is aware of soil and groundwater contamination relating to the use of certain underground fuel oil storage tanks at its Fall River facilities. During 2001, the Company filed Response Action Outcome Statements (RAOs) and Activities and Use Limitations (AULs) with the Commonwealth of Massachusetts with respect to soil and groundwater contamination at two of its facilities. The AULs are intended to limit human access to the tainted soil and groundwater, close out the sites and end future regulatory reporting. In addition, during the fourth quarter of 1993 the Company removed and encapsulated asbestos at two of its facilities and the Company has an on-going asbestos management program in place to appropriately maintain the asbestos that remains present at its facilities. During the fourth quarter of 1998 and the first quarter of 1999 oil-contaminated soil resulting from a leak during the mid-1970s from an underground fuel storage tank at the Company's former facility in Claremont, New Hampshire, was removed and disposed of at an asphalt batching plant. In January 2003, the New Hampshire Department of Environmental Services issued a 'no further action required' letter with respect to this site, and a related escrow account originally established to cover Quaker's clean up cost indemnification obligations was closed out. The Company has also agreed to indemnify the purchaser of the Company's former facility in Leominster, Massachusetts, for certain environmental contingencies. Quaker has also determined that several localized areas of a sixty-acre parcel of land in Fall River owned by the Company contain surficial soil contamination from polyaromatic hydrocarbons ('PAHs') and lead, and are thus subject to the Massachusetts Superfund law. Over eighty percent of the contaminated soil exists under high-tension power lines. The site is currently undeveloped and was purchased by the Company during 1998-1999 to provide a location for the possible future development of a manufacturing and warehouse facility. The Company engaged the services of a Licensed Site Professional ('LSP') and filed the appropriate notices and reports with the Massachusetts Department of Environmental Protection. Following the determination of the vertical and lateral extent of the contamination and the nature of the soil contamination by the LSP, it was established that the site could be properly remediated by covering the contaminated soil with a one-foot depth of clean soil. This was completed during the second half of 2000. Subsequent soil sampling and laboratory analyses have confirmed that the areas of contamination have been properly remediated. Additional environmental assessment and remediation work at the site is anticipated, the final cost of which is currently uncertain. The Company acquired two additional manufacturing facilities during the second half of 2001. Prior to the Company's purchase, comprehensive environmental site assessments, including soil and groundwater analyses, were completed at both sites by an LSP. As a result of these assessments, an AUL has been filed with the Commonwealth of Massachusetts with respect to one of the sites. Further, although urban fill containing waste material, including coal and ash, was discovered at the other site, the Company has determined that the 'urban fill' exemption from the assessment and remediation requirements of the Massachusetts environmental regulations requires no further action by the Company with respect to this property. The Company has accrued reserves for environmental matters based on information presently available. Based on this information and the Company's established reserves, the Company does not believe that these environmental matters will have a material adverse effect on either the Company's 13 financial condition or results of operations. However, there can be no assurance that these reserves will be adequate or that the costs associated with environmental matters will not increase in the future. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings other than routine legal proceedings incidental to its business, which, in the opinion of management, are immaterial in amount or are expected to be covered by the Company's insurance carriers. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The following summarizes common stock prices for the years ended January 4, 2003 and December 29, 2001.
PRICE PER SHARE --------------- 2002 HIGH LOW ---- ---- --- FIRST QUARTER............................................... $12.64 $ 7.84 SECOND QUARTER.............................................. $15.50 $11.07 THIRD QUARTER............................................... $15.50 $ 5.81 FOURTH QUARTER.............................................. $ 7.54 $ 5.33 Price Per Share --------------- 2001 High Low ---- ---- --- First Quarter............................................... $ 9.13 $ 4.00 Second Quarter.............................................. $11.10 $ 7.30 Third Quarter............................................... $ 9.98 $ 6.21 Fourth Quarter.............................................. $ 8.55 $ 6.50
- --------- (1) The Company's common stock is traded over the counter and is quoted on the Nasdaq National Market under the symbol 'QFAB.' (2) No dividends have been previously paid on the Company's common stock. However, on March 3, 2003 the Board of Directors approved the payment of a cash dividend of $0.025 per common share payable on March 27, 2003 to shareholders of record on March 17, 2003. See Note 12 of Notes to Financial Statements. (3) As of March 24, 2003, there were approximately 81 record holders of common stock. (4) The Company's Credit Agreement, Senior Notes, and Series A Notes contain restrictive covenants which limit the Company's ability to declare and pay dividends. Under the most restrictive of these covenants, $28.9 million was available for the payment of dividends as of January 4, 2003. See Note 5 of Notes to Financial Statements. 15 EQUITY COMPENSATION PLAN INFORMATION (IN THOUSANDS)
NUMBER OF SECURITIES NUMBER OF REMAINING AVAILABLE SECURITIES TO BE WEIGHTED-AVERAGE FOR FUTURE ISSUANCE ISSUED UPON EXERCISE PRICE OF UNDER EQUITY EXERCISE OF OUTSTANDING COMPENSATION PLANS OUTSTANDING OPTIONS, (EXCLUDING OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED PLAN CATEGORY AND RIGHTS(A) RIGHTS(B) IN COLUMN A)(C) ------------- ------------- --------- --------------- Equity compensation plans approved by security holders........................ 1,937 $ 7.21 235 Equity compensation plans not approved by security holders........................ 1,501 4.76 229 -------- -------- -------- Total................................. 3,438 $ 6.14 464 -------- -------- -------- -------- -------- --------
EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS The Company granted options to acquire 555,538 shares of common stock (adjusted for stock splits), exercisable at a price of $0.80 per share, to Nortex Holdings, Inc. in April 1993 ('Nortex Option'). Options to acquire 66,665 shares are outstanding under the Nortex Option, which expires in April 2003. All options granted under the 1993 Stock Option Plan for certain Company officers are fully vested and currently cover 92,630 shares of common stock. When granted, the exercise price of the shares covered by the 1993 Stock Option Plan was $2.75 per share as to 60% of the shares granted and $1.37 per share as to 40% of the shares granted. The Company's 1996 Stock Option Plan for certain key employees currently covers 770,450 shares of common stock. Options granted under the 1996 Stock Option Plan vest over a five-year period beginning on the date of each grant. Options are issued at their fair market value at the date of grant, and the average exercise price for all options granted is $7.53 per share. Prior to their participation in the Company's 1997 Stock Option Plan in 2000, the Company's outside directors were awarded options pursuant to individual contracts. These options were issued at their fair market value at the date of grant, and the average exercise price for all such options granted is $9.20 per share. All options granted under these contracts are fully vested and currently cover a total of 82,500 shares of common stock. 16 ITEM 6. SELECTED FINANCIAL DATA QUAKER FABRIC CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS) The following table sets forth certain consolidated financial and operating data of the Company for the periods indicated. This selected financial and operating data should be read in conjunction with the Consolidated Financial Statements, the Notes thereto and the other financial information included herein.
FISCAL YEAR ENDED ------------------------------------------------------------------ JANUARY 4, DECEMBER 29, DECEMBER 30, JANUARY 1, JANUARY 2, 2003(1) 2001 2000 2000 1999 ------- ---- ---- ---- ---- INCOME STATEMENT DATA: Net sales.......................................... $365,445 $331,105 $302,985 $251,364 $253,297 Cost of products sold.............................. 285,493 260,746 234,859 202,503 201,631 -------- -------- -------- -------- -------- Gross profit....................................... 79,952 70,359 68,126 48,861 51,666 Selling, general and administrative expenses....... 56,885 50,532 46,450 40,591 37,677 Non-recurring charge(4)............................ 0 800 0 0 0 -------- -------- -------- -------- -------- Operating income................................... 23,067 19,027 21,676 8,270 13,989 Other expenses: Interest expense............................... 4,633 4,111 4,850 5,127 5,405 Other, net..................................... 91 10 (13) (46) (28) -------- -------- -------- -------- -------- Income before provision for income taxes........... 18,343 14,906 16,839 3,189 8,612 Provision for income taxes......................... 6,787 5,358 5,894 1,116 2,842 -------- -------- -------- -------- -------- Net income......................................... $ 11,556 $ 9,548 $ 10,945 $ 2,073 $ 5,770 -------- -------- -------- -------- -------- Earnings per common share(2) -- basic.............. $ 0.72 $ 0.61 $ 0.70 $ 0.13 $ 0.42 -------- -------- -------- -------- -------- Earnings per common share(2) -- diluted............ $ 0.69 $ 0.58 $ 0.68 $ 0.13 $ 0.40 -------- -------- -------- -------- -------- Weighted average shares outstanding(2) -- basic.... 16,022 15,762 15,705 15,664 13,861 -------- -------- -------- -------- -------- Weighted average shares outstanding(2) --diluted... 16,847 16,493 16,203 16,081 14,477 -------- -------- -------- -------- -------- SELECTED OPERATING DATA: Depreciation and amortization...................... $ 17,826 $ 15,419 $ 13,991 $ 13,202 $ 10,616 Net capital expenditures(3)........................ 32,094 32,644 17,143 19,030 41,487 Unit volume (in yards)............................. 63,847 56,718 53,380 48,036 50,397 Weighted average gross sales price per yard........ $ 5.57 $ 5.51 $ 5.30 $ 4.84 $ 4.54 BALANCE SHEET DATA: Working capital.................................... $ 74,808 $ 72,598 $ 66,538 $ 63,034 $ 72,694 Total assets....................................... 288,686 273,684 246,036 237,482 234,766 Long-term debt, net of current portion, and capitalized leases............................... 61,200 63,500 53,397 61,672 69,011 Stockholders' equity............................... $161,805 $148,503 $138,333 $127,278 $124,993
- --------- (1) The fiscal year ended January 4, 2003 was a 53-week period. (2) Earnings per share is computed using the weighted average number of common shares and common share equivalents outstanding during the year. (3) Net capital expenditures reflects assets acquired by purchase and capital lease. (4) Costs incurred related to a potential acquisition which was not completed. 17 QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
JANUARY 4, December 29, 2003 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents............................... $ 1,098 $ 600 Accounts receivable, less reserves of $1,826 and $1,712 at January 4, 2003 and December 29, 2001, respectively.......................................... 42,346 48,907 Inventories............................................. 50,407 47,993 Prepaid and refundable income taxes..................... 2,560 418 Deferred income taxes................................... 1,520 1,382 Production supplies..................................... 1,634 1,336 Prepaid insurance....................................... 2,130 1,316 Other current assets.................................... 6,250 5,082 -------- -------- Total current assets................................ 107,945 107,034 Property, plant and equipment, net (Note 3)................. 173,790 159,419 Other assets: Goodwill, net........................................... 5,432 5,432 Other assets............................................ 1,519 1,799 -------- -------- Total assets........................................ $288,686 $273,684 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations............ $ -- $ 697 Current portion of debt................................. 5,000 -- Accounts payable........................................ 15,559 23,269 Accrued expenses (Note 4)............................... 12,578 10,470 -------- -------- Total current liabilities........................... 33,137 34,436 Long-term debt (Note 5)..................................... 61,200 63,500 Deferred income taxes....................................... 30,643 25,260 Other long-term liabilities................................. 1,901 1,985 Commitments and contingencies (Note 7) 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; 16,146,026 and 15,825,196 shares issued and outstanding at January 4, 2003 and December 29, 2001, respectively....................... 161 158 Additional paid-in capital.............................. 87,668 84,230 Unearned compensation................................... (901) -- Retained earnings....................................... 76,964 65,408 Accumulated other comprehensive loss.................... (2,087) (1,293) -------- -------- Total stockholders' equity.......................... 161,805 148,503 -------- -------- Total liabilities and stockholders' equity.......... $288,686 $273,684 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial Statements. 18 QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEAR ENDED ---------------------------------------- JANUARY 4, December 29, December 30, 2003 2001 2000 ---- ---- ---- Net sales................................................ $365,445 $331,105 $302,985 Cost of products sold.................................... 285,493 260,746 234,859 -------- -------- -------- Gross profit............................................. 79,952 70,359 68,126 Selling, general and administrative expenses............. 56,885 50,532 46,450 Non-recurring charge (Note 11)........................... -- 800 -- -------- -------- -------- Operating income......................................... 23,067 19,027 21,676 Other expenses: Interest expense..................................... 4,633 4,111 4,850 Other net............................................ 91 10 (13) -------- -------- -------- Income before provision for income taxes................. 18,343 14,906 16,839 Provision for income taxes............................... 6,787 5,358 5,894 -------- -------- -------- Net income............................................... $ 11,556 $ 9,548 $ 10,945 -------- -------- -------- Earnings per common share -- basic....................... $ 0.72 $ 0.61 $ 0.70 -------- -------- -------- Earnings per common share -- diluted..................... $ 0.69 $ 0.58 $ 0.68 -------- -------- -------- Weighted average shares outstanding -- basic............. 16,022 15,762 15,705 -------- -------- -------- Weighted average shares outstanding -- diluted........... 16,847 16,493 16,203 -------- -------- --------
------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (AMOUNTS IN THOUSANDS)
FISCAL YEAR ENDED ---------------------------------------- JANUARY 4, December 29, December 30, 2003 2001 2000 ---- ---- ---- Net income............................................... $ 11,556 $ 9,548 $ 10,945 -------- -------- -------- Other comprehensive income (loss) Foreign currency translation adjustments............. (829) 106 (32) Unrealized gain (loss) on hedging instruments........ 35 (19) -- -------- -------- -------- Other comprehensive income (loss)................ (794) 87 (32) -------- -------- -------- Comprehensive income..................................... $ 10,762 $ 9,635 $ 10,913 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial Statements. 19 QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON COMMON PAID-IN UNEARNED RETAINED COMPREHENSIVE STOCKHOLDERS' SHARES STOCK CAPITAL COMPENSATION EARNINGS GAIN (LOSS) EQUITY ------ ----- ------- ------------ -------- ----------- ------ Balance, January 1, 2000........ 15,682 $157 $83,554 $ -- $44,915 $(1,348) $127,278 Net income.................. -- -- -- 10,945 -- 10,945 Proceeds from stock options exercised, including tax benefits.................. 1 -- 4 -- -- -- 4 Proceeds from employee stock purchase plan............. 34 -- 138 -- -- -- 138 Foreign translation adjustment................ -- -- -- -- (32) (32) ------ ---- ------- -------- ------- ------- -------- Balance, December 30, 2000...... 15,717 $157 $83,696 $ -- $55,860 $(1,380) $138,333 Net income.................. -- -- -- 9,548 -- 9,548 Proceeds from stock options exercised, including tax benefits.................. 85 1 405 -- -- -- 406 Proceeds from employee stock purchase plan............. 23 -- 129 -- -- -- 129 Foreign translation adjustment................ -- -- -- -- 106 106 Unrealized loss on hedging instruments............... -- -- -- -- (19) (19) ------ ---- ------- -------- ------- ------- -------- Balance, December 29, 2001...... 15,825 $158 $84,230 $ -- $65,408 $(1,293) $148,503 Net income.................. -- -- -- 11,556 -- 11,556 Proceeds from stock options exercised, including tax benefits.................. 301 3 2,244 -- -- -- 2,247 Proceeds from employee stock purchase plan............. 20 -- 162 -- -- -- 162 Unearned stock option compensation.............. -- 1,032 (1,032) -- -- -- Amortization of unearned compensation.............. -- -- 131 -- -- 131 Foreign translation adjustment................ -- -- -- -- (829) (829) Unrealized gain on hedging instruments............... -- -- -- -- 35 35 ------ ---- ------- -------- ------- ------- -------- BALANCE, JANUARY 4, 2003........ 16,146 $161 $87,668 $ (901) $76,964 $(2,087) $161,805 ------ ---- ------- -------- ------- ------- -------- ------ ---- ------- -------- ------- ------- --------
The accompanying notes are an integral part of these consolidated financial Statements. 20 QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FISCAL YEAR ENDED ---------------------------------------- JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Cash flows from operating activities: Net income........................................... $ 11,556 $ 9,548 $ 10,945 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization...................... 17,826 15,419 13,991 Amortization of unearned compensation.............. 131 -- -- Deferred income taxes.............................. 5,245 2,860 4,896 Tax benefit related to exercise of common stock options.......................................... 879 194 -- Changes in operating assets and liabilities -- Accounts receivable................................ 5,901 (6,172) (1,544) Inventories........................................ (2,643) (4,162) (2,941) Prepaid expenses and other assets.................. (4,115) 71 (789) Accounts payable and accrued expenses.............. (5,602) 5,987 432 Other long-term liabilities........................ (84) (194) (467) -------- -------- -------- Net cash provided by operating activities........ $ 29,094 $ 23,551 $ 24,523 -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment........... (32,094) (32,644) (17,143) -------- -------- -------- Cash flows from financing activities: Change in revolving credit facility.................. (2,300) 10,800 (6,300) Repayment of long-term debt.......................... -- -- (36) Repayments of capital lease obligations.............. (697) (1,975) (1,026) Proceeds from issuance of long-term debt............. 5,000 -- -- Capitalization of financing costs.................... (130) -- (20) Proceeds from exercise of common stock options and issuance of shares under the employee stock purchase plan...................................... 1,530 341 142 -------- -------- -------- Net cash provided by (used in) financing activities..................................... 3,403 9,166 (7,240) Effect of exchange rates on cash......................... 95 87 (32) -------- -------- -------- Net increase in cash..................................... 498 160 108 Cash and cash equivalents, beginning of period........... 600 440 332 -------- -------- -------- Cash and cash equivalents, end of period................. $ 1,098 $ 600 $ 440 -------- -------- -------- Supplemental disclosure of cash flow information: Cash paid for -- Interest......................................... $ 4,169 $ 4,197 $ 4,837 Income taxes..................................... $ 2,547 $ 1,683 $ 3,164
The accompanying notes are an integral part of these consolidated financial Statements. 21 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1. OPERATIONS Quaker Fabric Corporation and subsidiaries (the 'Company' or 'Quaker') designs, manufactures and markets woven upholstery fabrics primarily for residential furniture markets and specialty yarns for use in the production of its own fabrics and for sale to manufacturers of home furnishings and other products. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Quaker Fabric Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. (b) Fiscal Year. The Company's fiscal year ends on the Saturday nearest to January 1 of each year. The fiscal years ended December 29, 2001 and December 30, 2000 each contained 52 weeks, while the fiscal year ended January 4, 2003 contained 53 weeks. (c) Revenue Recognition. Revenue is recognized from product sales when earned as required by generally accepted accounting principles and in accordance with SAB 101, 'Revenue Recognition in Financial Statements.' Revenues are recognized when product shipment has occurred. At that time, the price is fixed and determinable and collectability is reasonably assured, title and risk of loss have transferred and all provisions agreed to in the arrangement necessary for customer acceptance have been fulfilled. (d) Cash and cash equivalents. Cash and cash equivalents includes cash on hand, demand deposits and short-term cash investments which are highly liquid in nature and have original maturities of three months or less. (e) Allowance for Doubtful Accounts and Sales Returns and Allowances. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current creditworthiness, as determined by management's review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that credit loss rates in the future will be consistent with those experienced in the past. The Company's accounts receivable are spread among approximately 1,000 customers and no single customer represents more than 6.0% of the accounts receivable balance at January 4, 2003. Management analyzes historical sales and quality returns, current economic trends, and the Company's quality performance when evaluating the adequacy of the reserve for sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the reserve for sales returns and allowances in any accounting period. The provision for sales returns and allowances is recorded as a reduction of sales. Material differences may result in the amount and timing of net sales for any period if management makes different judgments or uses different estimates. (f) 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 FIFO basis. Cost for financial 22 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) reporting purposes is determined by the last-in, first-out (LIFO) method. Inventories consist of the following at January 4, 2003 and December 29, 2001:
JANUARY 4, DECEMBER 29, 2003 2001 ---- ---- Raw materials........................................ $24,984 $20,816 Work-in-process...................................... 8,930 10,605 Finished goods....................................... 13,786 15,036 ------- ------- Inventory at FIFO................................ 47,700 46,457 LIFO adjustment...................................... 2,707 1,536 ------- ------- Inventory at LIFO................................ $50,407 $47,993 ------- ------- ------- -------
LIFO inventory values are higher than FIFO costs because current manufacturing costs are lower than the older historical costs used to value inventory on a LIFO basis. Approximately 65% of finished goods are produced upon receipt of a firm order. Management, in partnership with key customers, is utilizing forecasting techniques to significantly reduce delivery lead times. Management regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical information and estimated forecasts of product demand and raw material requirements for the next twelve months. (g) Property, Plant and Equipment. Property, plant and equipment are stated at cost. The Company provides for depreciation and amortization on property and equipment on a straight-line basis over their estimated useful lives as follows: Buildings and improvements.................................. 32-39 years Machinery and equipment..................................... 2-20 years Furniture and fixtures...................................... 5-10 years Motor vehicles.............................................. 4-5 years Leasehold improvements...................................... 1-15 years
Maintenance and repairs are charged to operations as incurred. When equipment and improvements are sold or otherwise disposed of, the asset's cost and accumulated depreciation are removed from the accounts, and the resulting gain or loss, if any, is included in the results of operations. Fully depreciated assets are removed from the accounts when they are no longer in use. (h) Impairment of Long-Lived Assets. The Company periodically considers whether there has been a permanent impairment in the value of its long-lived assets, primarily property and equipment in accordance with Financial Accounting Standards Board ('FASB') Statement No. 144 ('SFAS No. 144'), 'Accounting for the Impairment or Disposal of Long-Lived Assets.' The Company evaluates various factors, including current and projected future operating results and the undiscounted cash flows for any underperforming long-lived assets. To the extent that the estimated future undiscounted cash flows are less than the carrying amount of the asset, the asset is written down to its estimated fair market value and an impairment loss is recognized. The value of impaired long-lived assets is adjusted periodically based on changes in these factors. Based on its review, the Company does not believe that any material impairment of its long-lived assets has occurred. (i) Goodwill. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill was historically amortized on a straight-line basis over 40 years. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, 'Goodwill and Other Intangible Assets.' The Company has adopted the requirements of SFAS No. 142 effective December 30, 2001. SFAS No. 142 requires companies to test all goodwill for impairment at least annually and to cease amortization of this asset. Amortization expense was approximately $193 for each of the two fiscal years in the period ended December 29, 2001. At 23 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) January 4, 2003, the Company was not required to recognize any impairment. There can be no assurance goodwill will not be impaired in the future. (j) Income Taxes. The Company accounts for income taxes under SFAS No. 109, 'Accounting for Income Taxes.' This statement requires that the Company recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carryforwards to the extent they are realizable. A valuation allowance is recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. While management has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event management were to determine that the Company would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should management determine that the Company would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. The Company does not provide for United States income taxes on earnings of subsidiaries outside of the United States. The Company's intention is to reinvest these earnings permanently or to repatriate the earnings only when tax-effective to do so. Management believes that United States foreign tax credits would largely eliminate any United States taxes or offset any foreign withholding taxes. (k) 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.
JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Weighted average common shares outstanding....... 16,022 15,762 15,705 Dilutive potential common shares................. 825 731 498 ------ ------ ------ Weighted average common shares outstanding and dilutive potential common shares............... 16,847 16,493 16,203 ------ ------ ------ ------ ------ ------ Antidilutive options............................. 1,395 996 1,279 ------ ------ ------ ------ ------ ------
(l) Foreign Currency. The assets and liabilities of the Company's Mexican and Brazilian operations are translated at period-end exchange rates, and statement of income accounts are translated at weighted average exchange rates. The resulting translation adjustments are included in the consolidated balance sheet as a separate component of equity, 'Accumulated Other Comprehensive Loss,' and foreign currency transaction gains and losses are included with selling, general and administrative expenses in the consolidated statements of income. In accordance with SFAS No. 137, 'Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133,' the Company adopted SFAS No. 133, 'Accounting for Derivative Instruments and Hedging Activities' and SFAS No. 138 'Accounting for Certain Derivative Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,' (collectively, SFAS No. 133, as amended) effective in fiscal 2001. SFAS No. 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of operations, to the extent effective, and requires that the Company formally document, 24 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended, in part, allows special hedge accounting for fair value and cash flow hedges. The statement provides that the gain or loss on a derivative instrument designated and qualifying as a fair value hedging instrument, as well as the offsetting changes in the fair value of the hedged item attributable to the hedged risk, be recognized currently in earnings in the same accounting period. SFAS No. 133, as amended, provides that the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument be reported as a component of other comprehensive income and be reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The ineffective portion of a derivative's change in fair value is recognized currently through earnings regardless of whether the instrument is designated as a hedge. The Company enters into forward exchange contracts to hedge the fair value of foreign currency denominated intercompany accounts payable. The purpose of the Company's foreign currency hedging activities is to minimize, for a period of time, the unforeseen impact on the Company's results of operations of fluctuations in foreign exchange rates. At January 4, 2003, the Company had 6 forward contracts totaling $900, all maturing in less than six months, to exchange Brazilian reals and Mexican pesos for U.S. dollars. The Company has designated these contracts as fair value hedges intended to lock in the expected cash flows from the repayment of foreign currency denominated intercompany payables at the available forward rate at the inception of the contract. Changes in the fair value of the hedge instruments are recognized in earnings. At January 4, 2003, the fair value of these contracts resulted in an unrealized gain of $6. The Company also enters into forward exchange contracts to hedge the purchase of fixed assets denominated in foreign currencies. At January 4, 2003, the Company had one forward contract for $398 to hedge the purchase of equipment denominated in a foreign currency. The Company has designated this hedge as a cash flow hedge intended to reduce the risk of currency fluctuations from the time of order through delivery of the equipment. The fair value of this contract as of January 4, 2003 resulted in an unrealized gain of $16 which was recorded in other comprehensive income. In December 2001, the Company entered into a foreign currency swap in order to further provide an economic hedge against an additional portion of its currency risk in Mexico. The terms of the agreement call for the Company to swap 2.0 million Mexican pesos per month from April 2002 through March 2003 at a fixed rate of 9.13 pesos to the U.S. Dollar. The original notional amount of the contract was approximately $2,600, and the remaining notional amount as of January 4, 2003, is approximately $650. The Company must pay a floating interest rate on the outstanding notional amount of the contract. The interest rate is the Mexican Interbank Equilibrium Rate less 1.0%. The rate is reset every 28 days. The interest rate at January 4, 2003 is 7.75%. Unrealized gains and losses resulting from the impact of currency fluctuations on the value of this contract are recognized in earnings in the period when the exchange rates change. At January 4, 2003, an unrealized gain of $81 has been recorded on this currency swap. These derivative financial instruments are for risk management purposes only and are not used for trading or speculative purposes. (m) Use of Estimates in the Preparation of Financial Statements. The presentation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Operating results in the future could vary from the amounts derived from management's estimates and assumptions. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of income taxes, inventory reserves, accounts receivable reserves, and self insurance reserves. 25 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (n) Self-Insurance Reserves. The Company is self-insured for workers' compensation and medical insurance. Quaker has also purchased stop loss coverage for both types of risks in order to minimize the effect of a catastrophic level of claims. At the end of each accounting period, the reserves for incurred but not reported claims must be evaluated. Management evaluates claims experience on a regular basis in consultation with the Company's insurance advisors and makes adjustments to these reserves. Significant management judgments and estimates must be made and used in connection with evaluating the adequacy of self-insurance reserves. Material differences may result in the amount and timing of these costs for any period if management makes different judgments or uses different estimates. (o) Fair Value of Financial Instruments. The Company's financial instruments mainly consist of cash, accounts receivable, accounts payable, foreign currency financial instruments and long term debt. The carrying amounts of these financial instruments as of January 4, 2003 approximate their fair values due to the short term nature and terms of these instruments, and also the rates available to the Company for debt and foreign currency financial instruments with similar terms and remaining maturities. (p) Shipping and Handling Costs. In Fiscal 2000, the Company adopted Emerging Issues Task Force (EITF) Issue 00-10, 'Accounting for Shipping and Handling Fees and Costs' (EITF 00-10). At adoption, EITF 00-10 required the Company to classify amounts billed to a customer in a sales transaction related to shipping and handling as revenues and classify similar costs in a sales transaction as cost of goods sold. The net effect of the adoption of EITF 00-10 resulted in the Company reclassifying net shipping costs from 'selling, general and administrative' expenses to 'net sales' and 'cost of products sold' within the consolidated statements of income. Shipping and handling costs are not significant and therefore not separately disclosed. (q) Recently Issued Accounting Standards. In January 2003, the FASB issued Interpretation No. 46 ('FIN 46'), 'Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin ('ARB') No. 51 ('ARB 51').' The primary objectives of FIN 46 are to provide guidance on the identification of, and financial reporting for, entities for which control is achieved through means other than through voting rights; such entities are known as variable-interest entities (VIEs). FIN 46 provides guidance that determines (1) whether consolidation is required under (a) the 'controlling financial interest' model of ARB 51, 'Consolidated Financial Statements,' or (b) other existing authoritative guidance or, alternatively, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for VIEs which are created after January 31, 2003 and for all VIEs for the first fiscal year or interim period beginning after June 15, 2003. The Company has evaluated the provisions of FIN 46 and determined that this interpretation will have no effect on its consolidated financial statements. In December 2002, the FASB issued Statement No. 148 ('SFAS 148'), 'Accounting for Stock-Based Compensation.' SFAS 148 amends FASB issued Statement No. 123 ('SFAS 123'), 'Accounting for Stock-Based Compensation,' to provide alternative methods of transition for an entity that voluntarily adopts the accounting provisions of SFAS 123. SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The Company has elected to continue to account for our stock option plans under Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees,' as well as to provide disclosure of stock based compensation as outlined in SFAS 123 and as amended in SFAS 148. In November 2002, the FASB issued Interpretation No. 45 ('FIN 45'), 'Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, 26 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) and interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 44.' FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure provisions of FIN 45 and determined that this interpretation had no material effect on its consolidated financial statements. In June 2002, the FASB issued Statement No. 146 ('SFAS 146'), 'Accounting for Costs Associated with Exit or Disposal Activities.' This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 ('EITF 94-3'), 'Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring).' The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. (r) Stock option plans. As more fully described in Note 8, the Company has stock option plans in effect that provide for the grant of non-qualified stock options to directors, officers and employees of the Company. The Company applies APB Opinion 25, 'Accounting for Stock Issued to Employees,' and related interpretations in accounting for its stock option plans. The exercise price of stock options, set at the time of grant, is not less than the fair market value per share at the date of grant. Options have a term of 10 years and generally vest after 5 years. 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,' had been applied to the Company's stock option plans.
FISCAL YEAR ENDED ---------------------------------------- JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Net income, as reported.................. $11,556 $9,548 $10,945 Add: Stock-based employee compensation expense included in net income, net of related tax effects.................... 83 -- -- Less: Stock-based employee compensation expense determined under Black-Scholes option pricing model, net of related tax effects............................ 889 919 986 ------- ------ ------- Pro forma net income:.................... $10,750 $8,629 $ 9,959 ------- ------ ------- ------- ------ ------- Earnings per common share -- basic As reported.......................... $ 0.72 $ 0.61 $ 0.70 Pro forma............................ $ 0.67 $ 0.55 $ 0.64 Earnings per common share -- diluted As reported.......................... $ 0.69 $ 0.58 $ 0.68 Pro forma............................ $ 0.64 $ 0.52 $ 0.61
27 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
JANUARY 4, DECEMBER 29, 2003 2001 ---- ---- Land................................................. $ 4,280 $ 4,280 Buildings and improvements........................... 32,704 30,939 Leasehold improvements............................... 5,122 4,864 Machinery and equipment.............................. 232,423 201,116 Furniture and fixtures............................... 2,192 1,900 Motor vehicles....................................... 169 190 Construction in progress............................. 898 3,814 -------- -------- 277,788 247,103 Less -- Accumulated depreciation and amortization.... 103,998 87,684 -------- -------- $173,790 $159,419 -------- -------- -------- --------
Depreciation and amortization expense related to property, plant and equipment for the years ending January 4, 2003, December 29, 2001, and December 30, 2000 was $17,723, $15,154, and $13,723, respectively. 4. ACCRUED EXPENSES Accrued expenses consists of the following:
JANUARY 4, DECEMBER 29, 2003 2001 ---- ---- Payroll and fringe benefits.......................... $ 2,897 $ 2,635 Workers' compensation................................ 3,575 2,850 Vacation............................................. 2,580 1,664 Medical insurance.................................... 900 1,100 Interest............................................. 1,285 821 Other................................................ 1,341 1,400 ------- ------- $12,578 $10,470 ------- ------- ------- -------
5. DEBT Debt consists of the following:
JANUARY 4, DECEMBER 29, 2003 2001 ---- ---- 7.18% Senior Notes................................... $30,000 $30,000 7.09% Senior Notes................................... 15,000 15,000 7.56% Senior Notes................................... 5,000 -- Credit Agreement..................................... 16,200 18,500 ------- ------- 66,200 63,500 ------- ------- Less: current portion of debt........................ 5,000 -- ------- ------- $61,200 $63,500 ------- ------- ------- -------
On October 10, 1997, the Company issued $30,000 of 7.18% Senior Notes and $15,000 of 7.09% Senior Notes (the 'Senior Notes'). The Senior Notes are unsecured and bear interest at fixed rates of 7.18% and 7.09%, payable semiannually. The Senior Notes may be prepaid in whole or in part prior to 28 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) maturity, at the Company's option, subject to a yield maintenance premium, as defined. On February 14, 2002, the Company issued $5,000 of 7.56% Series A Notes (the 'Series A Notes'). The Series A Notes are unsecured and bear interest at a fixed interest 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 $45,000 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. Required principal payments of the Senior Notes are as follows:
7.18% NOTE 7.09% NOTE 7.56% NOTE ---------- ---------- ---------- October 10, 2003........................... $ -- $ 5,000 $ -- October 10, 2004........................... -- 5,000 -- October 10, 2005........................... -- 5,000 -- October 10, 2006........................... 15,000 -- -- October 10, 2007........................... 15,000 -- -- February 14, 2009.......................... -- -- 5,000 ------- ------- ------- $30,000 $15,000 $ 5,000 ------- ------- ------- ------- ------- -------
Under the terms of the unsecured credit facility (the 'Credit Agreement'), which was amended and restated on February 14, 2002, the Company may borrow up to $60,000 through January 31, 2007. Advances made under the Credit Agreement bear interest at either the prime rate plus 0.25% or the Eurodollar rate plus an 'Applicable Margin,' as determined by the Company. The Applicable Margin on advances is adjusted quarterly based on the Company's Leverage Ratio as defined in the Credit Agreement. The Applicable Margin for Eurodollar advances may range from 1.0% to 1.875%. The Company is also required to pay certain fees including a commitment fee which will vary based on the Company's Leverage Ratio. As of January 4, 2003, the commitment fee is 0.375% of the unused portion of the Credit Agreement which was $43,683, net of outstanding letters of credit of $117. As of January 4, 2003, the Company had $16,200 outstanding under the Credit Agreement at an effective interest rate of 3.77%. As of December 29, 2001, the Company had $18,500 outstanding under the Credit Agreement at an effective interest rate of 3.16%. The Company is required to comply with a number of affirmative and negative covenants under the Credit Agreement, the Senior Notes, and the Series A Notes. Among other things, the Credit Agreement, the Senior Notes and the Series A Notes require the Company to satisfy certain financial tests and ratios (including interest coverage ratios, leverage ratios, and net worth requirements). The Credit Agreement, the Senior Notes and the Series A Notes also impose limitations on the Company's ability to incur additional indebtedness, create certain liens, incur capital lease obligations, declare and pay dividends, make certain investments, and purchase, merge or consolidate with or into any other corporation. Under the most restrictive of these covenants $28.9 million was available for the payment of dividends as of January 4, 2003. As of January 4, 2003, the Company is in compliance with all debt covenants. As of January 4, 2003, total debt principal payments for each of the next five fiscal years and thereafter are as follows: 2003....................................................... $ 5,000 2004....................................................... 5,000 2005....................................................... 5,000 2006....................................................... 15,000 2007....................................................... 31,200 Thereafter................................................. 5,000 ------- $66,200 ------- -------
29 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 6. INCOME TAXES Income (loss) before provision for income taxes consists of:
FISCAL YEAR ENDED ---------------------------------------- JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Domestic......................................... $18,008 $15,193 $16,437 Foreign.......................................... 335 (287) 402 ------- ------- ------- $18,343 $14,906 $16,839 ------- ------- ------- ------- ------- -------
The following is a summary of the provision (benefit) for income taxes:
FISCAL YEAR ENDED ---------------------------------------- JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Federal Current...................................... $1,174 $2,235 $1,572 Deferred..................................... 4,774 2,265 3,618 ------ ------ ------ 5,948 4,500 5,190 ------ ------ ------ State Current...................................... 673 565 219 Deferred..................................... 49 130 345 ------ ------ ------ 722 695 564 ------ ------ ------ Foreign Current...................................... 203 86 34 Deferred..................................... (86) 77 106 ------ ------ ------ 117 163 140 ------ ------ ------ $6,787 $5,358 $5,894 ------ ------ ------ ------ ------ ------
A reconciliation between the provision for income taxes computed at U.S. federal statutory rates and the amount reflected in the accompanying consolidated statements of income is as follows:
FISCAL YEAR ENDED ---------------------------------------- JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Provision for income taxes at statutory rate..... $ 6,420 $5,217 $5,894 Increase in taxes resulting from: Amortization of goodwill..................... -- 67 67 State and foreign income taxes, net of federal benefit............................ 701 697 646 Valuation allowance.......................... 965 839 391 Decrease in taxes resulting from: State investment tax credits, net of federal provision.................................. (1,119) (978) (580) Extraterritorial income or foreign sales corporation benefit............................ (204) (179) (262) Other............................................ 24 (305) (262) ------- ------ ------ $ 6,787 $5,358 $5,894 ------- ------ ------ ------- ------ ------
30 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The Company has available for use $503 of federal tax credit carryforwards, which have no expiration dates. The timing and use of the tax credit carryforwards are limited under applicable federal income tax legislation. In addition, the Company has approximately $7,317 of state investment tax credit carryforwards. These state tax credits have no expiration date, however, the timing and use of these credits is limited under applicable state income tax legislation. The Company has provided a valuation allowance for a portion of certain state tax credits that may not be realized. The significant items comprising the deferred tax asset/liability are as follows:
JANUARY 4, 2003 DECEMBER 29, 2001 --------------------- --------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- Assets: Tax credit carryforwards.................. $ 680 $ 4,756 $ 361 $ 4,792 Receivable reserves....................... 626 -- 587 -- Accrued fringe benefits and workers' compensation............................ 935 1,300 1,611 -- Foreign net operating loss................ -- 143 -- -- Deferred compensation..................... -- 160 -- -- Other..................................... 281 1,256 100 1,647 ------- -------- ------- -------- Total assets.......................... 2,522 7,615 2,659 6,439 Valuation allowance................... -- (3,755) -- (3,169) ------- -------- ------- -------- Total assets, net of valuation allowance........................... 2,522 3,860 2,659 3,270 ------- -------- ------- -------- Liabilities: Property basis differences................ -- (34,503) -- (28,530) Inventory basis differences............... (1,002) -- (1,256) -- Other..................................... -- -- (21) -- ------- -------- ------- -------- Total liabilities..................... (1,002) (34,503) (1,277) (28,530) ------- -------- ------- -------- Net assets (liabilities).......... $ 1,520 $(30,643) $ 1,382 $(25,260) ------- -------- ------- -------- ------- -------- ------- --------
7. COMMITMENTS AND CONTINGENCIES (a) 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. (b) 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. 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. 31 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (c) Leases. The Company leases certain facilities and equipment under operating lease agreements expiring at various dates from the current year to the year 2010. As of January 4, 2003, the aggregate minimum future commitments under leases are as follows:
OPERATING LEASES ------ 2003...................................................... $3,224 2004...................................................... 1,499 2005...................................................... 1,119 2006...................................................... 890 2007...................................................... 471 Thereafter................................................ 205 ------ $7,408 ------ ------
Rent expense for operating leases for the years ended January 4, 2003, December 29, 2001 and December 30, 2000 was $3,903, $3,331, and $3,094, respectively. (d) Letters of Credit. In the normal course of its business activities, the Company is required under certain contracts to provide letters of credit which may be drawn down in the event the Company fails to perform under the contracts. As of January 4, 2003, the Company had issued or agreed to issue letters of credit totaling $117. (e) Employment Contract and Change-in-Control Agreements. In 1999, the Company's Board of Directors approved a second amendment to the President and Chief Executive Officer's Employment Agreement (the Employment Agreement). The Employment Agreement provides for Mr. Liebenow to continue to serve as President and Chief Executive Officer of the Company on a full-time basis through March 12, 2005, subject to an automatic three-year extension, unless terminated by the Company upon one year's prior notice and provides for certain payments to be made to Mr. Liebenow in the event of a change in control. The Employment Agreement provides for a base salary of $600, subject to such annual increases as may be determined by the Board of Directors, as well as certain benefits and reimbursement of expenses. If the Employment Agreement had terminated as of January 4, 2003, Mr. Liebenow would have been entitled to receive $1,980 (in the event of a voluntary termination, termination for cause or for any other reason). During 1999, the Company also entered into change-in-control agreements with the Company's other corporate officers. These agreements provide certain benefits to the Company's other officers in the event their employment with the Company is terminated as a result of a change-in-control as defined. The maximum contingent liability related to the change-in-control agreements is approximately $3.0 million. 8. STOCK OPTIONS The Company has several stock option plans (the Plans) in effect that provide for the granting of non-qualified stock options to directors, officers, and employees of the Company. Options under the Plans are generally granted at fair market value and vesting is determined by the Board of Directors. 32 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Stock Option Activity. A summary of the Company's stock option activity is as follows:
Fiscal Year Ended ------------------------------------------------------------------ JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVG. AVG. AVG. NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- Options outstanding, beginning of year............................. 3,047 $5.71 2,783 $5.28 1,976 $5.64 Granted............................ 701 $7.33 356 $8.30 834 $4.53 Exercised.......................... (301) $4.55 (85) $2.43 (1) $5.43 Forfeited.......................... (9) $6.66 (7) $4.61 (26) $8.98 Options outstanding, end of year... 3,438 $6.14 3,047 $5.71 2,783 $5.28 Options exercisable................ 1,972 $5.76 1,807 $5.15 1,500 $4.42 Options available for grant........ 464 -- 132 -- 258 -- Weighted average fair value per share of options granted......... -- $4.90 -- $4.80 -- $2.70
The following table summarizes information for options outstanding and exercisable at January 4, 2003:
Weighted Weighted Weighted Average Average Average Options Exercise Remaining Options Exercise Range of Prices Outstanding Price Life (in years) Exercisable Price - --------------- ----------- ----- --------------- ----------- ----- $ 0.80................ 556 $ 0.80 0.28 556 $ 0.80 $ 1.37................ 83 1.37 2.04 82 1.37 $ 2.75 -- 4.00................ 433 3.97 7.55 185 3.93 $ 4.25 -- 5.50................ 528 5.11 6.49 266 5.14 $ 7.25 -- 10.25................ 1,722 8.25 5.57 787 9.07 $13.00 -- 17.67................ 116 16.46 5.44 96 16.21 ----- ------ ---- ----- ------ 3,438 $ 6.14 4.23 1,972 $ 5.76 ----- ------ ---- ----- ------ ----- ------ ---- ----- ------
At its regular meeting in December 2001, the Company's Board of Directors granted options to purchase 160 shares of common stock at an exercise price of $8.30 per share to certain individuals subject to shareholder approval of an increase of 750 shares in the number of shares available for grant under the Plans. At the May 16, 2002 Annual Meeting, shareholder approval was received. Accordingly, the Company recorded an unearned compensation charge equal to the difference between the exercise price and the fair value on the date of shareholder approval of $1,032. During 2002, the Company recognized $131 of amortization of unearned compensation. Accounting for Stock Based Compensation. The Company discloses stock-based compensation information in accordance with SFAS 148 and SFAS 123. SFAS 148 provides additional transition guidance for companies that elect to voluntarily adopt the provisions of SFAS 123. SFAS 148 does not change the provisions of SFAS 123 that permit entities to continue to apply the intrinsic value method of APB 25. The Company has elected to continue to account for its stock option plans under APB 25 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. SFAS 123 does not apply to awards made prior to June 24, 1995, and so all pro forma disclosures include the effects of all options granted after June 24, 1995. Additional awards in future 33 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) years are anticipated. The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future expectations. Had compensation cost for awards granted in Fiscal 2002, Fiscal 2001 and Fiscal 2000 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth in SFAS No. 123, the effect on the Company's net income and earnings per common share would have been as follows:
Fiscal Year Ended ---------------------------------------- JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Net income As reported............................... $11,556 $9,548 $10,945 Pro forma................................. $10,750 $8,629 $ 9,959 Earnings per common share -- basic As reported............................... $ 0.72 $ 0.61 $ 0.70 Pro forma................................. $ 0.67 $ 0.55 $ 0.64 Earnings per common share -- diluted As reported............................... $ 0.69 $ 0.58 $ 0.68 Pro forma................................. $ 0.64 $ 0.52 $ 0.61
Pro forma compensation expense for options is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The Black-Scholes option-pricing model is used to estimate the fair value on the date of grant of each option grated after December 15, 1994. The following assumptions used for stock option grants and employee purchase right grants were as follows:
Fiscal Year Ended ---------------------------------------- JANUARY 4, DECEMBER 29, DECEMBER 30, 2003 2001 2000 ---- ---- ---- Expected volatility....................... 70.0% 50.0% 49.9% Risk-free interest rate................... 4.5% 5.0% 6.0% Expected life of options.................. 7 YEARS 7 years 7 years Expected dividends........................ -- -- --
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options with no vesting or transferability restrictions. In addition, option pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions used can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. Management has determined that the impact of the cash dividend declared on March 3, 2003, which is discussed in Note 12, did not have a material effect on pro forma compensation expense for 2002. 9. 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. 34 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Gross foreign and export sales from the United States to unaffiliated customers by major geographical area were as follows:
FISCAL YEAR ENDED ------------------------------------------ JANUARY 4, December 29, December 30, 2003 2001 2000 ---- ---- ---- North America (excluding USA).................. $30,347 $27,198 $25,336 Middle East.................................... 7,321 3,315 3,477 South America.................................. 2,916 3,325 1,524 Europe......................................... 4,752 4,741 5,324 All other areas................................ 3,493 3,678 5,628 ------- ------- ------- $48,829 $42,257 $41,289 ------- ------- ------- ------- ------- -------
Gross sales by product category are as follows:
FISCAL YEAR ENDED ------------------------------------------ JANUARY 4, December 29, December 30, 2003 2001 2000 ---- ---- ---- Fabric......................................... $355,341 $312,289 $282,846 Yarn........................................... 15,907 23,217 23,922 -------- -------- -------- $371,248 $335,506 $306,768 -------- -------- -------- -------- -------- --------
10. EMPLOYEE BENEFIT PLANS (reflects actual dollar and share amounts) The Company has established a 401(k) plan (the 401(k) Plan) for eligible employees of the Company who may contribute up to 15% of their annual salaries (up to $11,000 for 2002) to the 401(k) Plan. All contributions made by an employee are fully vested and are not subject to forfeiture. Each year the Company contributes on behalf of each participating employee an amount equal to 100% of the first $200 contributed by each employee and 25% of the next $800 contributed by such employee, for a maximum annual Company contribution of $400 per employee. The Company's matching contribution was $586,000, $483,000, and $397,000, in 2002, 2001, and 2000, respectively. An employee is fully vested in the contributions made by the Company upon his or her completion of five years of participation in the 401(k) Plan. Effective October 1, 1997, the Company established an Employee Stock Purchase Plan (the ESPP) under which a maximum of 100,000 shares of common stock may be purchased by eligible employees. All full-time employees of the Company, other than officers of the Company, are eligible to participate in the ESPP. The ESPP provides for quarterly 'purchase periods' within each of the Company's fiscal years. Shares are purchased through payroll deductions (of not less than 1% nor more than 10% of compensation as defined, or up to a maximum of $10,000 in a designated dollar amount per year.) The purchase price for shares is 85% of the fair market value of the common stock at the date of purchase. For Fiscal Years 2002, 2001, and 2000 the Company issued 19,899 shares, 22,984 shares, and 34,281 shares respectively, under the Plan. 11. NON-RECURRING CHARGE In July 2001, the Company's negotiations with a potential acquisition target were terminated. Costs incurred related to this potential acquisition were $800. As a result, a non-recurring, pre-tax charge of $800 ($500 after-tax or $0.03 per diluted share) was recorded in the third quarter of Fiscal 2001. 35 QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 12. SUBSEQUENT EVENTS On March 3, 2003, the Board of Directors approved a new dividend policy reflecting the Company's intention to pay dividends going forward, with the level of each dividend payment, if any, to be determined by the Board based on a number of factors, including the Company's financial performance, cash flows and cash requirements. Also on March 3, 2003, the Board approved and announced the payment of a cash dividend in an amount equal to $0.025 per common share payable March 27, 2003 to shareholders of record on March 17, 2003. On February 24, 2003, Nortex Holdings, Inc., a Delaware holding company owned by Larry Liebenow, Quaker Fabric's Chief Executive Officer, and Duncan Whitehead, Vice President-Research and Development, exercised options for 488,873 shares of Quaker common stock. These options were originally granted to Nortex Holdings in April 1993 in connection with the buy-out of a financial holding company's interest in Quaker and were nearing the end of their ten-year term. 13. SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the results of operations for each of the quarters within the years ended January 4, 2003 and December 29, 2001.
FIRST SECOND THIRD FOURTH 2002 QUARTER QUARTER QUARTER QUARTER ---- ------- ------- ------- ------- NET SALES............................................. $100,032 $101,931 $80,990 $82,492 GROSS MARGIN.......................................... 22,600 23,128 16,045 18,179 OPERATING INCOME...................................... 8,103 8,241 3,639 3,084 NET INCOME............................................ $ 4,428 $ 4,481 $ 1,492 $ 1,155 EARNINGS PER COMMON SHARE -- BASIC.................... $ 0.28 $ 0.28 $ 0.09 $ 0.07 EARNINGS PER COMMON SHARE -- DILUTED.................. $ 0.26 $ 0.26 $ 0.09 $ 0.07
First Second Third Fourth 2001 Quarter Quarter Quarter Quarter ---- ------- ------- ------- ------- Net sales............................................... $79,836 $84,637 $76,376 $90,256 Gross margin............................................ 17,319 17,785 15,213 20,042 Operating income........................................ 5,823 5,863 1,520 5,821 Net income.............................................. $ 3,073 $ 3,079 $ 331 $ 3,065 Earnings per common share -- basic...................... $ 0.20 $ 0.20 $ 0.02 $ 0.19 Earnings per common share -- diluted.................... $ 0.19 $ 0.19 $ 0.02 $ 0.19
- --------- (1) All quarters in 2002 and 2001 were 13 weeks except for the fourth quarter of 2002 which contained 14 weeks. (2) Earnings per common share for the quarters presented have each been calculated separately. Accordingly, quarterly amounts may not sum to the fiscal year amount presented. 36 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF QUAKER FABRIC CORPORATION: In our opinion, the accompanying consolidated balance sheet as of January 4, 2003 and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Quaker Fabric Corporation (the Company) and its subsidiaries at January 4, 2003 and the results of their operations and their cash flows for the fiscal year ended January 4, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 29, 2001, and for each of the two years in the period ended December 29, 2001 were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated February 4, 2002, except with respect to the matters discussed in Note 5 of those financial statements, as to which the date was February 14, 2002. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 17, 2003 (except with respect to the matters discussed in Note 12, as to which the date is March 3, 2003) 37 REPORT OF INDEPENDENT ACCOUNTANTS THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP TO QUAKER FABRIC CORPORATION: We have audited the accompanying consolidated balance sheets of Quaker Fabric Corporation (a Delaware corporation) and subsidiaries as of December 29, 2001 and December 30, 2000, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 29, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Quaker Fabric Corporation and subsidiaries as of December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts February 4, 2002 (except with respect to the matters discussed in Note 5, as to which the date is February 14, 2002) 38 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this report. GENERAL Overview. Quaker is a leading designer, manufacturer and worldwide marketer of woven upholstery fabrics and one of the largest producers of Jacquard upholstery fabrics in the world. The Company also manufactures specialty yarns, most of which are used in the production of the Company's fabric products. The balance is sold to manufacturers of home furnishings and other products. Overall demand levels in the upholstery fabric sector are a function of overall demand for household furniture, which is, in turn, affected by general economic conditions, population demographics, consumer confidence and disposable income levels, sales of new and existing homes and interest rates. Although both industry and macroeconomic conditions began to weaken in May of 2000 and continued to deteriorate throughout the balance of the year, the positive momentum in the Company's order rate that started during 1999 continued throughout 2000, culminating in record revenues for 2000 of $303.0 million and a dramatic increase in Quaker's bottom line profitability, with net income of $10.9 million. The Company also generated strong cash flows in 2000, allowing it to reduce debt by an additional $7.2 million and resulting in a net debt to capital ratio of approximately 28.4% at year-end. During 2001, Quaker once again demonstrated outstanding top line results, particularly when compared to the performance of the furniture sector as a whole, achieving record revenues of $331.1 million for the year, up 9.3%, with net income of $9.5 million, new orders up 18.5% during the fourth quarter versus the comparable period of 2000, and a production backlog at the end of 2001 of $43.0 million. The Company's order rate remained strong going into 2002, and Quaker's 2002 revenues of $365.4 million and net income of $11.6 million both set new company records. During the first half of 2002, Quaker's revenues were running at an annualized rate of approximately $400.0 million, however, global economic conditions deteriorated as the year progressed, ultimately resulting in a weak fourth quarter, with domestic fabric sales down 8.9% for the quarter and yarn sales off significantly. The Company's backlog position at year-end was also down considerably from $43.0 million in 2001 to $26.1 million at the end of 2002, due to both significant reductions Quaker achieved in its delivery lead times and weakness in the Company's fourth quarter order rate. During 2002, Quaker also further strengthened its balance sheet, with the Company generating approximately $13.0 million of free cash flow during the fourth quarter, thereby allowing Quaker to reduce funded debt by approximately $13.3 million during the quarter. Demand levels for the Company's products have increased since the start of 2003 compared to the fourth quarter of 2002. At this time, management believes that global economic conditions will remain relatively weak during 2003, resulting in a challenging business environment for Quaker, its suppliers and its customers. Uncertainty surrounding the global economic and geopolitical environment will likely continue to put pressure on the Company's fabric sales, including a significant reduction in overall demand in certain of its export markets over the near term. Additionally, continued softening in domestic demand for yarn products is expected to depress the Company's yarn revenues. Management nevertheless believes that the significant investments the Company has made in new product development, manufacturing equipment, new technology and market initiatives have positioned the Company to compete successfully and deliver a strong overall financial performance as business conditions improve. With a focus this year on generating free cash flow, management anticipates new spending on capital projects of approximately $9.0 million during 2003, compared to approximately $32.0 million during 2002. Additionally, the Company is analyzing various financing alternatives in connection with the possible development of additional manufacturing and warehousing facilities in the Fall River area. 39 Quarterly Operating Results. The following table sets forth certain condensed unaudited consolidated statements of income data for the eight fiscal quarters ended January 4, 2003, as well as certain data expressed as a percentage of the Company's total net sales for the periods indicated:
FISCAL 2002 FISCAL 2001 --------------------------------------- ------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- ------- ------- (in thousands, except per share data) Net sales............ $100,032 $101,931 $80,990 $82,492 $79,836 $84,637 $76,376 $90,256 Gross margin......... 22,600 23,128 16,045 18,179 17,319 17,785 15,213 20,042 Gross margin percentage......... 22.6% 22.7% 19.8% 22.0% 21.7% 21.0% 19.9% 22.2% Operating income..... 8,103 8,241 3,639 3,084 5,823 5,863 1,520 5,821 Operating income percentage......... 8.1% 8.1% 4.5% 3.7% 7.3% 6.9% 2.0% 6.4% Income before provision for income taxes....... 7,029 7,113 2,367 1,834 4,802 4,811 517 4,776 -------- -------- ------- ------- ------- ------- ------- ------- Net income........... $ 4,428 $ 4,481 $ 1,492 $ 1,155 $ 3,073 $ 3,079 $ 331 $ 3,065 -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Earnings per common share -- basic..... $ 0.28 $ 0.28 $ 0.09 $ 0.07 $ 0.20 $ 0.20 $ 0.02 $ 0.19 -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- ------- Earnings per common share -- diluted... $ 0.26 $ 0.26 $ 0.09 $ 0.07 $ 0.19 $ 0.19 $ 0.02 $ 0.19 -------- -------- ------- ------- ------- ------- ------- ------- -------- -------- ------- ------- ------- ------- ------- -------
- --------- The data reflected in this table has been derived from unaudited financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of such information when read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto contained elsewhere in this report. Fiscal year 2001 contained 52 weeks while fiscal year 2002 was 53 weeks. The fourth quarter of fiscal year 2002 contained 14 weeks. ------------------- The Company follows industry practice by closing its operating facilities for a one-to-two week period during July of each year. In 2002 and 2001, this shutdown period, and the resulting effect on sales, occurred in the third fiscal quarter. During 2003, the shutdown period, and the resulting effect on sales, will be split between the second and third fiscal quarters. Product Mix. By offering a broad assortment of fabrics at each price point and in each styling category, the Company has positioned itself as a full service supplier of Jacquard and plain woven fabrics to the upholstered furniture segment. While Quaker offers a full range of fabrics to its promotional-end customers, the Company's primary focus is on the development of products for the middle to upper-end of the market, where Quaker's design, technology and manufacturing expertise provide the Company with the greatest competitive advantage. Quaker's product line is divided into three distinct branded collections, with its Davol'TM', Quaker'TM', and Whitaker'r' Collections intended to meet the styling, design, quality and pricing needs of the promotional, middle to better, and better to upper ends of the market, respectively. 40 Geographic Distribution of Fabric Sales. To develop markets for upholstery fabric outside the United States, the Company has placed substantial emphasis on building both direct exports from the United States as well as sales from its distribution centers in Mexico and Brazil. The following table sets forth certain information about the changes which have occurred in the geographic distribution of the Company's gross fabric sales since 2000:
FISCAL YEAR --------------------------------------------------------------------- 2002 2001 2000 --------------------- --------------------- --------------------- PERCENT OF PERCENT OF PERCENT OF AMOUNT SALES AMOUNT SALES AMOUNT SALES ------ ----- ------ ----- ------ ----- (in thousands) Gross fabric sales (dollars): Domestic sales.............. $306,512 86.3% $270,032 86.5% $241,557 85.4% Foreign sales(1)............ 48,829 13.7 42,257 13.5 41,289 14.6 -------- ----- -------- ----- -------- ----- Gross fabric sales.......... $355,341 100.0% $312,289 100.0% $282,846 100.0% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
- --------- (1) Foreign sales consists of both direct exports from the United States as well as sales from the Company's distribution centers in Mexico and Brazil. CRITICAL ACCOUNTING ESTIMATES The following is a brief discussion of the more significant accounting estimates used by the Company. GENERAL The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to accounts receivable reserves, inventory valuation and inventory reserves, and self-insurance reserves. Actual amounts could differ significantly from these estimates. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS AND ALLOWANCES The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current creditworthiness, as determined by management's review of their current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that credit loss rates in the future will be consistent with those experienced in the past. The Company's accounts receivable are spread among more than 1,000 customers and no single customer represents more than 6.0% of the accounts receivable balance at January 4, 2003. Management analyzes historical sales and quality returns, current economic trends, and the Company's quality performance when evaluating the adequacy of the reserve for sales returns and allowances. Significant management judgments and estimates must be made and used in connection with establishing the reserve for sales returns and allowances in any accounting period. Material differences may result in the amount and timing of the Company's net sales for any period if management makes different judgments or uses different estimates. INVENTORIES Inventory is valued using the last-in, first-out (LIFO) method. Approximately 65% of finished goods are produced upon receipt of a firm order. Management, in partnership with key customers, is utilizing forecasting techniques to significantly reduce delivery lead times. Management regularly 41 reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on historical information and estimated forecasts of product demand and raw material requirements for the next twelve months. A significant increase in demand for the Company's products could result in a short-term increase in manufacturing costs, including but not limited to overtime and other costs related to capacity constraints in certain areas of the Company. A significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, assumptions used in determining management's estimates of future product demand may prove to be incorrect, in which case the provision required for excess and obsolete inventory would have to be adjusted in the future. If inventory is determined to be overvalued, the Company would be required to recognize such costs as cost of goods sold at the time of such determination. Therefore, although every effort is made to ensure the accuracy of management's forecasts of future product demand, any significant unanticipated changes in demand could have a significant impact on the value of the Company's inventory and the Company's reported operating results. SELF-INSURANCE RESERVES The Company is self-insured for workers' compensation and medical insurance. Quaker has also purchased stop loss coverage for both types of risks in order to minimize the effect of a catastrophic level of claims. At the end of each accounting period, the reserves for incurred but not reported claims must be evaluated. Management evaluates claims experience on a regular basis in consultation with the Company's insurance advisors and makes adjustments to these reserves. Significant management judgments and estimates must be made and used in connection with evaluating the adequacy of self-insurance reserves. Material differences may result in the amount and timing of these costs for any period if management makes different judgments or uses different estimates. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is depreciated over the estimated useful lives. Useful lives are based on management's estimates of the period that the assets will generate revenue. These assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Reductions in the useful lives of the Company's fixed assets would have an adverse impact on the Company's financial results. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, 'Accounting for Income Taxes.' This statement requires that the Company recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carryforwards to the extent they are realizable. A valuation allowance is recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. While management has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event management were to determine that the Company would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should management determine that the Company would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. The Company does not provide for United States income taxes on earnings of subsidiaries outside of the United States. The Company's intention is to reinvest these earnings permanently or to repatriate the earnings only when tax-effective to do so. Management believes that United States foreign tax credits would largely eliminate any United States taxes or offset any foreign withholding taxes. RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46 ('FIN 46'), 'Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 ('ARB 51').' The primary 42 objectives of FIN 46 are to provide guidance on the identification of, and financial reporting for, entities for which control is achieved through means other than through voting rights; such entities are known as variable-interest entities (VIEs). FIN 46 provides guidance that determines (1) whether consolidation is required under (a) the 'controlling financial interest' model of ARB 51, 'Consolidated Financial Statements,' or (b) other existing authoritative guidance, or alternatively, (2) whether the variable-interest model under FIN 46 should be used to account for existing and new entities. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for VIEs which are created after January 31, 2003 and for all VIEs for the first fiscal year or interim period beginning after June 15, 2003. The Company has evaluated the provisions of FIN 46 and determined that this interpretation will have no effect on its consolidated financial statements. In December 2002, the FASB issued Statement No. 148 ('SFAS 148'), 'Accounting for Stock-Based Compensation.' SFAS 148 amends FASB Statement No. 123 ('SFAS 123'), 'Accounting for Stock-Based Compensation,' to provide alternative methods of transition for an entity that voluntarily adopts the accounting provisions of SFAS 123. SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. The Company has elected to continue to account for our stock option plans under Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees,' as well as to provide disclosure of stock based compensation as outlined in SFAS 123, as amended by SFAS 148. In November 2002, the FASB issued Interpretation No. 45 ('FIN 45'), 'Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, and interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 44.' FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. FIN 45 is effective on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has adopted the disclosure provisions of FIN 45 and determined that this interpretation had no material effect on its consolidated financial statements. In June 2002, the FASB issued Statement No. 146 ('SFAS 146'), 'Accounting for Costs Associated with Exit or Disposal Activities.' This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 ('EITF 94-3'), 'Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring).' The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. RESULTS OF OPERATIONS FISCAL 2002 COMPARED TO FISCAL 2001 Net Sales. Net sales for 2002 increased $34.3 million, or 10.4%, to $365.4 million from $331.1 million in 2001. Gross fabric sales increased due to increases in both domestic and foreign fabric sales. Gross fabric sales within the United States increased 13.5%, to $306.5 million in 2002 from $270.0 million in 2001. Foreign sales increased 15.6%, to $48.8 million in 2002 from $42.3 million in 2001. This increase in foreign sales was due to improved sales in Mexico and Canada as well as increased penetration of other international markets. Gross yarn sales decreased 31.5%, to $15.9 million in 2002 from $23.2 million in 2001. The gross volume of fabric sold increased 12.6%, to 63.8 million yards in 2002 from 56.7 million yards in 2001. The weighted average gross sales price per yard increased 1.1%, to $5.57 in 2002 from 43 $5.51 in 2001. The Company sold 2.6% more yards of middle to better-end fabrics and 36.6% more yards of promotional-end fabrics in 2002 than in 2001. The average gross sales price per yard of middle to better-end fabrics increased by 4.6%, to $6.43 in 2002 from $6.15 in 2001. The average gross sales price per yard of promotional-end fabrics increased by 1.3%, to $4.00 in 2002 from $3.95 in 2001. Gross Margin. The gross margin percentage for 2002 increased to 21.9% as compared to 21.2% for 2001. Improvements in raw material yields on a per unit basis accounted for approximately $8.4 million in cost reductions compared to the prior year. Increased manufacturing capacity resulted in a drop in the Company's overtime requirements, reducing overtime costs by approximately $1.1 million. Distribution of revenues among the fiscal quarters also affects the incurrence of overtime. In 2002 record sales during the first half of the year resulted in significant overtime costs, while less overtime was incurred during the second half of the year because of lower demand for the Company's products. The production of second quality fabric increased during 2002, offsetting these margin improvements by approximately $2.4 million and fixed overhead costs increased by approximately $8.5 million as compared to 2001. All other variable costs increased by approximately $1.0 million. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $56.9 million in 2002 from $50.5 million in 2001. Selling, general and administrative expenses as a percentage of net sales were 15.6% and 15.3% in 2002 and 2001, respectively. The increase in selling, general and administrative expenses was due to higher variable costs, such as sales commissions, resulting from higher sales. Additionally, labor and related costs and sampling expenses were each up $2.2 million as compared to 2001. Interest Expense, Net. Interest expense increased to $4.6 million in 2002 from $4.1 million in 2001. Higher average levels of senior debt, partially offset by lower rates of interest were the primary reasons for the increase. Effective Tax Rate. The Company's effective tax rate was 37.0% for 2002 and 36.0% for 2001. The effective income tax rate is lower than the combined federal and state statutory rates due primarily to certain tax benefits related to extraterritorial income at the federal level and investment tax credits at the state level. The effective tax rate increased in 2002 principally due to lower federal tax credits. See Note 6 of the Notes to Consolidated Financial Statements included elsewhere in this report. Based upon existing tax laws and our operating plans for 2003, we anticipate the effective tax rate will be similar to 2002. FISCAL 2001 COMPARED TO FISCAL 2000 Net Sales. Net sales for 2001 increased $28.1 million, or 9.3%, to $331.1 million from $303.0 million in 2000. Gross fabric sales increased due to increases in both domestic and foreign fabric sales. Gross fabric sales within the United States increased 11.8%, to $270.0 million in 2001 from $241.6 million in 2000. Foreign sales increased 2.3%, to $42.3 million in 2001 from $43.1 million in 2000. This increase was due to improved sales in Mexico and Canada as well as increased penetration of other international markets. Gross yarn sales decreased 2.9%, to $23.2 million in 2001 from $23.9 million in 2000. The gross volume of fabric sold increased 6.3%, to 56.7 million yards in 2001 from 53.4 million yards in 2000. The weighted average gross sales price per yard increased 4.0%, to $5.51 in 2001 from $5.30 in 2000. The Company sold 1.6% more yards of middle to better-end fabrics and 31.3% more yards of promotional-end fabrics in 2001 than in 2000. The average gross sales price per yard of middle to better-end fabrics increased by 6.2%, to $6.15 in 2001 from $5.79 in 2000. The average gross sales price per yard of promotional-end fabrics increased by 5.9%, to $3.95 in 2001 from $3.73 in 2000. Gross Margin. The gross margin percentage for 2001 decreased to 21.2% as compared to 22.5% for 2000. The decrease was due to increased energy costs and raw material price increases. Also, as a consequence of uncertain market conditions in the furniture industry during the first half of the year, our customers changed their purchasing habits in terms of both the size and frequency of their orders. As a result, the Company's operating efficiencies were negatively affected by the need to produce a higher number of smaller customer orders. As order volume increased, particularly during the fourth quarter, the Company's overtime costs increased, adversely impacting the gross margin. Overtime costs 44 for 2001 were 21% higher than 2000 and overtime costs for the second half of 2001 were 48% higher than the second half of 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $50.5 million in 2001 from $46.5 million in 2000. Selling, general and administrative expenses as a percentage of net sales were 15.3% in both 2001 and 2000. The increase in selling, general and administrative expenses was due to higher variable costs, such as sales commissions, resulting from higher sales and increased costs associated with foreign sales operations, offset by lower sampling costs. Non-recurring Charge. In July 2001, the Company's negotiations with a potential acquisition target were terminated. Costs incurred related to this potential acquisition were $0.8 million. As a result, a non-recurring, pre-tax, charge of $0.8 million ($0.5 million after-tax or $0.03 per diluted share) was recorded in the third quarter of 2001. Interest Expense, Net. Interest expense decreased to $4.1 million in 2001 from $4.9 million in 2000. Lower average levels of senior debt and lower rates of interest were the primary reasons for the decrease. Effective Tax Rate. The Company's effective tax rate was 36.0% for 2001 and 35.0% for 2000. 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 effective tax rate increased in 2001 principally due to a lower tax benefit related to extraterritorial income. See Note 6 of the Notes to Consolidated Financial Statements included elsewhere in this report. LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations and capital requirements through a combination of internally generated funds, borrowings under the Credit Agreement (as hereinafter defined), and debt and equity offerings. The Company's capital requirements have arisen principally in connection with (i) the purchase of equipment to expand production capacity, introduce new technologies to broaden and differentiate the Company's products, and improve the Company's quality and productivity performance (ii) increases in the Company's working capital needs related to its sales growth, and (iii) investments in the Company's IT systems. 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 $29.1 million, $23.6 million and $24.5 million in 2002, 2001 and 2000 respectively. As necessary, the Company supplements its operating cash flow with borrowings. Net borrowings (repayments) were $2.0 million in 2002, $8.8 million in 2001 and ($7.4) million in 2000. Capital expenditures in 2002, 2001, and 2000 were $32.1 million, $32.6 million, and $17.1 million respectively. Capital expenditures during 2002 were funded by operating cash flow and borrowings. Management anticipates that capital expenditures for new projects will total approximately $9.0 million in 2003, consisting principally of $5.0 million for various manufacturing equipment, $2.0 million for IT projects and $2.0 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. As discussed in Note 5 of the Notes to Consolidated Financial Statements, 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 begin on October 10, 2003 with a final payment due October 10, 2007. Also 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 interest 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 45 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 unsecured Credit Agreement with a bank which expires January 31, 2007 (the Credit Agreement). As of January 4, 2003, the Company had $16.2 million outstanding under the Credit Agreement and unused availability of $43.7 million. See Note 5 of Notes to Consolidated Financial Statements included elsewhere in this report. The Company is required to comply with a number of affirmative and negative covenants 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 of the affirmative and negative covenants in the Credit Agreement and the Series A and Senior Notes and management believes the Company's continued compliance will not prevent the Company from operating in the normal course of business. The following table sets forth contractual obligations and commitments due as of January 4, 2003:
PAYMENTS DUE BY PERIOD (IN THOUSANDS) ----------------------------------------------------- LESS THAN AFTER CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS ----------------------- ----- ------ --------- --------- ------- Long-Term Debt.......................... $66,200 $5,000 $10,000 $46,200 $5,000 Operating Leases........................ 7,408 3,224 2,618 1,361 205 Letters of Credit....................... 117 117 -- -- -- ------- ------ ------- ------- ------ Total Contractual Cash Obligations....................... $73,725 $8,341 $12,618 $47,561 $5,205 ------- ------ ------- ------- ------ ------- ------ ------- ------- ------
The Company has historically not paid dividends, instead using earnings to fuel growth and capital equipment requirements. However, 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. Also on March 3, 2003, the Company announced the payment of a cash dividend in an amount equal to $0.025 per common share payable on March 27, 2003 to shareholders of record on March 17, 2003. The Company anticipates that free cash flow from operations will be sufficient to allow for the payment of regular quarterly dividends. 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 with 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 46 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 unanticipated. 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 customers' ordering patterns, and the effect of uncertainties in markets outside the U.S. (including Mexico and South America) in which the Company operates. ITEM 7A. 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 3.2% 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 Mexico and Brazil in local currency. Accordingly, in the absence of hedging activities whenever the U.S. dollar strengthens relative to the other major currencies, there is an adverse affect on the Company's results of operations, and alternatively, whenever the U.S. dollar weakens relative to the other major currencies, there is a positive affect on the Company's results of operations. It is the Company's policy to minimize, for a period of time, the unforeseen impact on its results of operations of fluctuations in foreign exchange rates by using derivative financial instruments to hedge the fair value of foreign currency denominated intercompany payables. The Company's primary foreign currency exposures in relation to the U.S. dollar are the Mexican peso and Brazilian real. At January 4, 2003, the Company had the following significant derivative financial instruments to hedge the anticipated cash flows from the repayment of foreign currency denominated intercompany payables outstanding:
NOTIONAL WEIGHTED AMOUNT IN AVERAGE NOTIONAL LOCAL CONTRACT AMOUNT IN FAIR TYPE OF INSTRUMENT CURRENCY CURRENCY RATE U.S. DOLLARS VALUE MATURITY ------------------ -------- -------- ---- ------------ ----- -------- Forward Contract............... Mexican Peso 6.0 million 10.35 $0.6 million $ 9,000 March 2003 Forward Contract............... Brazilian Real 2.6 million 3.46 $0.9 million $ (3,000) February 2003 Currency Swap.................. Mexican Peso 6.0 million 9.13 $0.6 million $ 89,000 March 2003
The Company estimated the change in the fair value of all derivative financial instruments assuming both a 10% strengthening and weakening of the U.S. dollar relative to all other major currencies. In the event of a 10% strengthening of the U.S. dollar, the change in fair value of all derivative financial instruments would result in approximately a $0.3 million unrealized gain; whereas a 10% weakening of the U.S. dollar would result in approximately a $0.3 million unrealized loss. INTEREST RATE RISK Approximately 75.5% 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. 47 Using a scenario analysis, the Company has evaluated the impact on all long-term maturities of changing the interest rate 10% from the rate levels that existed at January 4, 2003 and has determined that such a rate change would not have a material impact on the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required under Item 8 is included in Item 6. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the directors of the Company required by this item will be included in the Company's definitive proxy statement for its 2003 Annual Meeting of Stockholders (the 'Proxy Statement') to be filed pursuant to Regulation 14A, and such information is incorporated herein by reference. The information with respect to the executive officers of the Company required by this item is set forth in Item 1A of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be included in the Proxy Statement to be filed pursuant to Regulation 14A, and such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this item will be included in the Proxy Statement to be filed pursuant to Regulation 14A, and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be included in the Proxy Statement to be filed pursuant to Regulation 14A, and such information is incorporated herein by reference. 48 PART IV ITEM 14. CONTROLS AND PROCEDURES During the 90-day period prior to the filing date of this report, management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls or in other factors which could significantly affect internal controls subsequent to the date the Company carried out its evaluation. There were no significant deficiencies or material weaknesses identified in the evaluation and, therefore, no corrective actions were taken. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this Form 10-K (i) Financial Statements Consolidated Balance Sheets -- January 4, 2003 and December 29, 2001 Consolidated Statements of Income -- For the years ended January 4, 2003, December 29, 2001, and December 30, 2000 Consolidated Statements of Comprehensive Income -- For the years ended January 4, 2003, December 29, 2001, and December 30, 2000 Consolidated Statements of Changes in Stockholders' Equity -- For the years ended January 4, 2003, December 29, 2001, and December 30, 2000 Consolidated Statements of Cash Flows -- For the years ended January 4, 2003, December 29, 2001, and December 30, 2000 Notes to Consolidated Financial Statements Report of Independent Public Accountants (ii) Financial Statement Schedules The following financial statement schedule of the Company included herein should be read in conjunction with the audited financial statements incorporated by reference in this Form 10-K. Schedule II -- Valuation and Qualifying Accounts Report of Independent Accountants on Financial Statement Schedule. All other schedules for the Company are omitted because either they are not applicable or the required information is shown in the financial statements or notes thereto. (b) Reports on Form 8-K None. (c) Exhibits 3(i) -- Certificate of Incorporation of the Company, as amended.(1) 3(ii) -- By-laws of the Company.(1) 10.1 -- Loan and Security Agreement, dated as of October 31, 1990, between the Company and Continental Bank N.A., as amended by Amendments Nos. 1 through 9 thereto.(1) 10.2 -- Securities Purchase Agreement, dated April 13, 1993, among the Company, MLGA Fund II, L.P. and MLGAL Partners, as amended by Amendment No. 1 thereto.(1) 10.3 -- Subscription Agreement, dated March 12, 1993, among the Company and MLGA Fund II, L.P., Nortex Holdings, Inc., QFC Holdings Corporation, and Larry Liebenow.(1)
49 10.4 -- Shareholders Agreement, dated March 12, 1993, by and among the Company, Larry Liebenow, Ira Starr, and Sangwoo Ahn.(1) 10.5 -- Employment Agreement, dated as of March 12, 1993, between the Company and Larry A. Liebenow.(1) 10.6 -- Director Indemnification Contract, dated October 18, 1989, between the Company and Larry A. Liebenow.(1) 10.7 -- Director Indemnification Contract, dated October 18, 1989, between the Company and Roberto Pesaro.(1) 10.8 -- Director Indemnification Contract, dated April 15, 1992, between the Company and Samuel A. Plum.(1) 10.9 -- Director Indemnification Contract, dated May 2, 1991, between the Company and Andrea Gotti-Lega.(1) 10.10 -- Severance Contract, dated August 15, 1988, between the Company and Thomas J. Finneran.(1) 10.11 -- Severance Contract, dated May 26, 1989, between the Company and James Dulude.(1) 10.12 -- Severance Contract, dated December 1, 1988, between the Company and Cynthia Gordan.(1) 10.13 -- Equipment Financing Lease Agreement, dated September 18, 1992, between QFR and United States Leasing Corporation.(1) 10.14 -- Equipment Financing Lease Agreement, dated September 29, 1992, between QFR and KeyCorp Leasing pursuant to a Notice of Assignment from U.S. Leasing.(1) 10.15 -- Equipment Financing Lease Agreement, dated February 16, 1989, between QFR and Key Financial Services, Inc.(1) 10.16 -- Equipment Financing Lease Agreement, dated September 22, 1992, between QFR and Dana Commercial Credit Corporation (Fleet National Bank).(1) 10.17 -- Equipment Financing Lease Agreement, dated October 8, 1992, between QFR and Capital Associates International, Inc.(1) 10.18 -- Equipment Financing Loan Agreement, dated August 31, 1992, between QFR and HCFS Business Equipment Corporation.(1) 10.19 -- Equipment Financing Lease Agreement, dated September 13, 1991, between QFR and Sovran Leasing and Finance Corp/NationsBanc Leasing Corp.(1) 10.20 -- Equipment Financing Lease Agreement, dated December 18, 1990, between QFR and IBM Credit Corporation.(1) 10.21 -- Equipment Financing Lease Agreement, dated May 5, 1993, between QFR and The CIT Group.(1) 10.22 -- Equipment Financing Lease Agreement, dated June 30, 1993, between QFR and AT&T Commercial Finance Corporation.(1) 10.23 -- Chicago, Illinois Showroom Lease, dated July 1, 1989, between the Company and LaSalle National Bank, Trustee.(1) 10.24 -- Hickory, North Carolina Showroom Lease, dated June 15, 1993, between the Company and Hickory Furniture Mart, Inc.(6) 10.25 -- High Point, North Carolina Showroom Lease, dated November 6, 1991, between the Company and Market Square Limited Partnership.(1) 10.26 -- Los Angeles, California Showroom Lease, dated September 23, 1992, between the Company and The L.A. Mart.(1) 10.27 -- Tupelo, Mississippi Showroom Lease, dated December 14, 1992, between the Company and Mississippi Furniture Market, Inc.(6) 10.28 -- Mexico City, Mexico Warehouse Lease, dated June 6, 1993, between Quaker Fabric Mexico, S.A. de C.V. and Irene Font Byrom.(1) 10.29 -- Licensing Agreement, dated May 17, 1990, between the Company as Licensee and General Electric Company.(1) 10.30 -- Licensing Agreement, dated September 24, 1990, between the Company as Licensee and Amoco Fabrics and Fibers Company.(1)
50 10.31 -- Software Licensing Agreement, dated October 29, 1987, between the Company as Licensee and System Software Associates.(1) 10.32 -- Licensing Agreement, dated June 5, 1974, between the Company and E.I. DuPont de Nemours & Company, Inc.(1) 10.33 -- Licensing Agreement, dated October 17, 1988, between the Company as Licensee and Monsanto Company.(1) 10.34 -- Licensing Agreement, dated July 28, 1987, between the Company as Licensee and Phillips Fibers Corporation.(1) 10.35 -- Software Licensing Agreement, dated July 7, 1988, between the Company as Licensee and Software 2000, Inc.(1) 10.36 -- Licensing Agreement, dated February 1, 1977, between the Company as Licensee and 3M.(1) 10.37 -- Software Licensing Agreement, dated April 8, 1992, between the Company as Licensee and Premenos Corporation.(1) 10.38 -- Software Licensing Agreement, dated March 19, 1993, between the Company as Licensee and Sophis U.S.A., Inc.(1) 10.39 -- Quaker Fabric Corporation 1993 Stock Option Plan and Form of Option Agreement thereunder.(1) 10.40 -- Option to Purchase Common Stock issued to Nortex Holdings, Inc., effective April 13, 1993.(1) 10.41 -- Amendment No. 1, dated as of October 25, 1993, to Shareholders Agreement, dated March 12, 1993, by and among the Company, Nortex Holdings, Inc., MLGA Fund II, L.P., MLGAL Partners, W. Wallace McDowell, Jr., William Ughetta, and Ira Starr.(1) 10.42 -- Quaker Fabric Corporation Deferred Compensation Plan and related Trust Agreement.(2) 10.43 -- Form of Split Dollar Agreement with Senior Officers.(2) 10.44 -- Credit Agreement, dated as of June 29, 1994, by and among the Company, The First National Bank of Boston, and Continental Bank, N.A.(3) 10.45 -- Equipment Schedule No. 5, dated as of September 14, 1994, to Master Lease Agreement, dated as of May 5, 1993, between QFR and the CIT Group/Equipment Financing, Inc.(4) 10.46 -- Commission and Sales Agreement, dated as of April 25, 1994, between QFR and Quaker Fabric Foreign Sales Corporation.(4) 10.47 -- Stock Option Agreement, dated as of July 28, 1995, between the Company and Eriberto R. Scocimara.(5) 10.48 -- Amended and Restated Credit Agreement, dated December 18, 1995, among the Company, QFR, Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de C.V., The First National Bank of Boston, and Fleet National Bank.(5) 10.49 -- Note Purchase and Private Shelf Agreement, dated December 18, 1995, among the Company, Prudential Insurance Company of America, and Pruco Life Insurance Company.(5) 10.50 -- Guarantee Agreement, dated as of December 18, 1995, among the Company, The Prudential Insurance Company of America, and Pruco Life Insurance Company.(5) 10.51 -- Amendment Agreement No. 1, dated as of March 21, 1996, to that certain Amended and Restated Credit Agreement, dated as of December 18, 1995, among the Company, QFR, Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de C.V., The First National Bank of Boston, and Fleet National Bank.(5) 10.52 -- 1996 Stock Option Plan for Key Employees of QFR, dated April 26, 1996.(6) 10.53 -- Amendment Agreement No. 2, dated as of October 21, 1996, to that certain Amended and Restated Credit Agreement, dated as of December 18, 1995, among the Company, QFR, Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de C.V., The First National Bank of Boston, and Fleet National Bank.(6) 10.54 -- Software License Agreement dated October 31, 1996 between the Company and System Software Associates Inc.(6) 10.55 -- Medical Expense Reimbursement Plan.(6) 10.56 -- High Point, North Carolina Warehouse Lease, dated April 1, 1996 between QFR and C&M Investments of High Point, Inc.(6)
51 10.57 -- Standard Industrial Lease Agreement, dated May 10, 1996, between CIIF Associates II Limited Partnership and QFR.(6) 10.58 -- Rights Agreement dated March 4, 1997 between the Company and The First National Bank of Boston relating to the Company's Stockholder Rights Plan.(6) 10.59 -- 1997 Stock Option Plan.(6) 10.60 -- Amendment, dated as of February 24, 1997, to Employment Agreement between the Company and Larry A. Liebenow.(6) 10.61 -- Amendment No. 4, dated as of December 19, 1997 to the Amended and Restated Credit Agreement, dated as of December 18, 1995, by and among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de C.V., the Company, BankBoston and Fleet National Bank.(7) 10.62 -- Employee Stock Purchase Plan, dated as of October 1, 1997.(7) 10.63 -- Note Purchase Agreement dated October 10, 1997 among QFR, The Prudential Insurance Company of America, and Pruco Life Insurance Company.(7) 10.64 -- Guaranty Agreement, dated as of October 10, 1997, by the Company in favor of the Prudential Insurance Company of America and PrucoLife Insurance Company.(7) 10.65 -- Commercial Lease between QFR and Clocktower Enterprises, Inc., dated as of August 1, 1997.(7) 10.66 -- Lease between Robbins Manufacturing Co., Inc. and QFR, dated as of October 22, 1997.(7) 10.67 -- Lease between Tilly Realty Associates and QFR, dated as of December 9, 1997.(7) 10.68 -- Lease between 1 Lewiston Street, LLC and QFR, dated as of March 16, 1998.(7) 10.69 -- Purchase and Sale Agreement, dated August 7, 1998, between QFR and Rodney Realty Trust.(8) 10.70 -- Stock Option Agreement, dated as of October 19, 1998, between the Company and Mark R. Hellwig.(8) 10.71 -- Lease between ADAP, Inc. and QFR, dated as of December 11, 1998.(8) 10.72 -- Purchase and Sale Agreement, dated January 6, 1999, between QFR and Montaup Electric Company.(8) 10.73 -- Purchase and Sale Agreement, dated January 22, 1999, between QFR and Jefferson Realty Partnership.(8) 10.74 -- Amendment No. 6, dated as of March 26, 1999 to the Amended and Restated Credit Agreement, dated as of December 18, 1995, by and among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de C.V., the Company, BankBoston and Fleet National Bank.(8) 10.75 -- Amendment No. 1, dated as of March 26, 1999 to the Note Purchase Agreement dated as of October 10, 1997 among QFR, The Prudential Insurance Company of America, and Pruco Life Insurance Company.(8) 10.76 -- Purchase and Sale Agreement, dated May, 1999, between QFR and The Center for Child Care and Development, Inc.(9) 10.77 -- Tax Increment Financing Agreement, dated May 27, 1999, between the City of Fall River and QFR.(9) 10.78 -- Memorandum of Understanding, dated July 1, 1999, between the City of Fall River and QFR.(9) 10.79 -- Lease between Frank B. Peters, Jr. and QFR, dated as of June 15, 1999.(9) 10.80 -- Amendment No. 7, dated as of September 30, 1999 to the Amended and Restated Credit Agreement, dated as of December 18, 1995, by and among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de C.V., the Company, BankBoston and Fleet National Bank.(9) 10.81 -- Lease between Hamriyah Free Zone Authority and QFR, dated as of November 28, 1999.(9) 10.82 -- Form of change in control agreement, dated December 17, 1999, between the Company and each of its vice presidents.(9) 10.83 -- Agreement concerning change in control, dated December 17, 1999, between the Company and its controller.(9) 10.84 -- Amendment No. 1 to the Company's Deferred Compensation Plan, dated December 17, 1999.(9)
52 10.85 -- Amendment No. 1 to the Split Dollar Insurance Agreements between QFR and each of its officers.(9) 10.86 -- Amendment, dated as of December 17, 1999, to Employment Agreement between the Company and Larry A. Liebenow.(9) 10.87 -- 1999 Stock Purchase Loan Program and form of related Secured Promissory Note and Stock Pledge Agreement.(9) 10.88 -- Amendment No. 2, dated as of December 28, 1999 to the Note Purchase Agreement dated as of October 10, 1997 among QFR, The Prudential Insurance Company of America, and Pruco Life Insurance Company.(9) 10.89 -- Software License Agreement, dated December 29, 1999, between QFR as Licensee and Paragon Management Systems, Inc.(9) 10.90 -- Mexico City, Mexico Warehouse Lease, dated February 6, 2000, between Quaker Fabric Mexico, S.A. de C.V. and Irene Font Byrom.(10) 10.91 -- Amendment to the 1997 Stock Option Plan.(10) 10.92 -- Lease between Sayre A. Litchman and QFR, dated June 30, 2000.(10) 10.93 -- Software License Agreement dated April 30, 2001 between QFR and SSA Global Technologies, Inc.(11) 10.94 -- Purchase and Sale Agreement, dated June 29, 2001, between QFR and Whaling Mfg. Co., Inc.(11) 10.95 -- High Point, North Carolina Warehouse Lease Extension Agreement, dated July 29, 2001, between QFR and Bresmiro Associates, LLC.(11) 10.96 -- Purchase and Sale Agreement, dated September 4, 2001, between QFR and Charles McAnsin Associates, LP.(11) 10.97 -- Los Angeles Warehouse First Amendment to Standard Industrial Lease Agreement, dated September 24, 2001, between QFR and CIIF Associates II, LP.(11) 10.98 -- Energy Supply Agreement, dated December 4, 2001, between QFR and Select Energy, Inc.(11) 10.99 -- Second Amended and Restated Credit Agreement, dated February 14, 2002, among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de C.V., the Company, and Fleet National Bank.(11) 10.100 -- Note Purchase and Private Shelf Agreement, dated February 14, 2002, between QFR and The Prudential Insurance Company of America.(11) 10.101 -- Form of stock option agreement between the Company and outside directors, prior to participation in the 1997 Stock Option Plan. 10.102 -- Natural Gas Service Terms Agreement, dated May 20, 2002, between QFR and AllEnergy Gas and Electric Marketing Company, L.L.C. 10.103 -- Form of extension of change in control agreement, dated December 13, 2002, between the Company, each of its vice presidents, and its controller. 10.104 -- Form of indemnification agreement, dated December 13, 2002, between the Company and each of its directors and officers. 10.105 -- Software License Agreement dated December 31, 2002 between QFR and SPSS, Inc. 10.106 -- Mexico City, Mexico Warehouse Lease, dated February 6, 2003, between Quaker Fabric Mexico, S.A. de C.V. and Irene Font Byrom. 10.107 -- Amendment No. 1 to Software License Agreement, dated February 24, 2003, between QFR and Adexa, Inc. 21 -- Subsidiaries.(5) 23 -- Consent of PricewaterhouseCoopers LLP.
- --------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 33-69002, initially filed with the Securities and Exchange Commission on September 17, 1993, as amended. (2) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 1994. (footnotes continued on next page) 53 (footnotes continued from previous page) (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 2, 1994. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995. (6) Incorporated by reference to the Company's Registration Statement on Form S-1, Registration No. 333-21957, initially filed with the Securities and Exchange Commission on February 25, 1997, as amended. (7) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999. (9) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2000. (10) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. (11) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001. 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 31, 2003. QUAKER FABRIC CORPORATION By: /s/ LARRY A. LIEBENOW .................................. LARRY A. LIEBENOW CHIEF EXECUTIVE OFFICER, PRESIDENT, AND DIRECTOR Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ LARRY A. LIEBENOW Chief Executive Officer, President, and April 2, 2003 ......................................... Director (LARRY A. LIEBENOW) /s/ PAUL J. KELLY Vice President -- Finance (Chief April 2, 2003 ......................................... Financial and Accounting Officer) (PAUL J. KELLY) /s/ SANGWOO AHN Chairman of the Board April 2, 2003 ......................................... (SANGWOO AHN) /s/ JERRY I. PORRAS Director April 2, 2003 ......................................... (JERRY I. PORRAS) /s/ ERIBERTO R. SCOCIMARA Director April 2, 2003 ......................................... (ERIBERTO R. SCOCIMARA)
55 CERTIFICATIONS I, Larry A. Liebenow, certify that: 1. I have reviewed this annual report on Form 10-K 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 any 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 annual 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 annual 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-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the 'Evaluation Date'); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ LARRY A. LIEBENOW .................................. LARRY A. LIEBENOW CHIEF EXECUTIVE OFFICER Date: April 2, 2003 56 I, Paul J. Kelly, certify that: 1. I have reviewed this annual report on Form 10-K 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 any 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 annual 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 annual 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-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures 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 annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the 'Evaluation Date'); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. By: /s/ PAUL J. KELLY .................................. PAUL J. KELLY CHIEF FINANCIAL OFFICER Date: April 2, 2003 57 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with this annual report on Form 10-K of Quaker Fabric Corporation for the annual period ended January 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: April 2, 2003 /s/ LARRY A. LIEBENOW ...................................... LARRY A. LIEBENOW CHIEF EXECUTIVE OFFICER CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 In connection with this annual report on Form 10-K of Quaker Fabric Corporation for the annual period ended January 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: April 2, 2003 /s/ PAUL J. KELLY ................................. PAUL J. KELLY CHIEF EXECUTIVE OFFICER 58 SCHEDULE II QUAKER FABRIC CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 29, 2001, AND JANUARY 4, 2003 (DOLLARS IN THOUSANDS)
NET BALANCE AT PROVISIONS DEDUCTIONS BALANCE BEGINNING CHARGED TO FROM AT END DESCRIPTIONS OF PERIOD OPERATIONS ALLOWANCES OF PERIOD ------------ --------- ---------- ---------- --------- Year Ended December 30, 2000 Bad Debt Reserve............................... $1,032 $ 957 $ (938) $1,051 Sales Returns & Allowances Reserve............. $ 723 $4,276 $(4,177) $ 822 Year Ended December 29, 2001 Bad Debt Reserve............................... $1,051 $1,019 $(1,621) $ 449 Sales Returns & Allowances Reserve............. $ 822 $4,682 $(4,241) $1,263 Year Ended January 4, 2003 Bad Debt Reserve............................... $ 449 $ 725 $ (546) $ 628 Sales Returns & Allowances Reserve............. $1,263 $5,848 $(5,913) $1,198
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Quaker Fabric Corporation: Our audit of the consolidated financial statements referred to in our report dated February 17, 2003 (except with respect to the matters discussed in Note 12, as to which the date is March 3, 2003) appearing in the 2002 Annual Report on Form 10-K of Quaker Fabric Corporation also included an audit of the financial statement schedule listed in Item 15(a)(ii) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. The financial statement schedule of the Company as of and for the years ended December 29, 2001 and December 30, 2000 was audited by other independent accountants who have ceased operations. Those independent Accountants stated in a report dated February 4, 2002, that the schedule presented fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 17, 2003 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE TO THE CONSOLIDATED FINANCIAL STATEMENTS THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in this Form 10-K, and have issued our report thereon dated February 4, 2002 (except with respect to the matters discussed in Note 5, as to which the date is February 14, 2002). Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index in item 14(a) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts February 4, 2002 GENERAL INFORMATION DIRECTORS SANGWOO AHN, Chairman Partner Morgan Lewis Githens & Ahn LARRY A. LIEBENOW President and CEO Quaker Fabric Corporation DR. JERRY I. PORRAS, Lane Professor of Organizational Behavior and Change, Emeritus Stanford University Graduate School of Business ERIBERTO R. SCOCIMARA President and Chief Executive Officer Hungarian-American Enterprise Fund COMMITTEES AUDIT COMMITTEE Sangwoo Ahn Jerry I. Porras Eriberto R. Scocimara STOCK OPTION COMMITTEE Sangwoo Ahn Jerry I. Porras Eriberto R. Scocimara COMPENSATION COMMITTEE Sangwoo Ahn Jerry I. Porras Eriberto R. Scocimara NOMINATING COMMITTEE Sangwoo Ahn Jerry I. Porras Eriberto R. Scocimara OFFICERS LARRY A. LIEBENOW President and Chief Executive Officer MICHAEL E. COSTA Controller JAMES A. DULUDE Vice President Manufacturing CYNTHIA L. GORDAN Vice President, Secretary and General Counsel MARK R. HELLWIG Vice President Supply Chain Management CAROLE E. JOHNSON Vice President Marketing PAUL J. KELLY Vice President -- Finance, Treasurer and Chief Financial Officer THOMAS H. MUZEKARI Vice President Sales BEATRICE SPIRES Vice President Design and Merchandising NORMAN J. STURDEVANT Vice President and Chief Information Officer DUNCAN WHITEHEAD Vice President Research and Development CORPORATE DATA CORPORATE OFFICE Quaker Fabric Corporation 941 Grinnell Street Fall River, Massachusetts 02721 (508) 678-1951 ANNUAL MEETING 10:00 a.m., May 23, 2003 Quaker Fabric Corporation 1082 Davol Street Fall River, Massachusetts 02720 TRANSFER AGENT AND REGISTRAR Equiserve Trust Company, N.A. P.O. Box 43010 Providence, RI 02940-3010 (781) 575-3120 http://www.equiserve.com NASDAQ: QFAB INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP One International Place Boston, Massachusetts 02110 LEGAL COUNSEL Proskauer Rose LLP 1585 Broadway New York, New York 10036 STATEMENT OF DIFFERENCES ------------------------ The trademark symbol shall be expressed as ............................. 'TM' The registered trademark symbol shall be expressed as .................. 'r' EX-10 3 ex10-101.txt EXHIBIT 10.101 EXHIBIT 10.101 STOCK OPTION AGREEMENT AGREEMENT, dated as of ______________________ , between Quaker Fabric Corporation, a Delaware corporation (the "Company"), and __________________(the "Grantee"). W I T N E S S E T H In consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties hereto agree as follows: 1. Grant of Options. Subject to the provisions of this Agreement, the Company hereby grants to the Grantee the option (the "Option") to purchase all or any part of the number of shares of the Company's common stock, par value $0.01 per share (the "Common Stock") set forth on Schedule A at the price per share and on the other terms set forth on Schedule A. 2. Restrictions. The exercise of the Option shall be subject to the requirement that if at any time the Board of Directors of the Company (the "Board") shall determine in good faith that (i) the registration or qualification of the shares of Common Stock subject or related thereto under any state or federal law, or (ii) the consent or approval of any government regulatory body is necessary or desirable as a condition of, or in connection with, such exercise or the delivery or purchase of shares pursuant thereto, then in any such event, such exercise shall not be effective unless such registration, qualification, consent, approval, or agreement shall have been effected or obtained free of any conditions not acceptable to the Board. 3. Shares Subject to this Agreement. The Common Stock to be purchased under this Agreement shall be shares of authorized but unissued shares of Common Stock and may be unissued shares or reacquired shares, as the Board may from time to time determine. Subject to adjustment as provided in paragraph 10 hereof, the aggregate number of shares to be delivered under this Agreement shall not exceed _______ shares of Common Stock. 4. Term of the Option. The Option granted hereunder may be exercised, subject to the provisions of paragraph 9 hereof, until [three years from the date of grant]. 5. Option Exercise Price. The price at which shares of Common Stock may be purchased upon exercise of the Option shall be [closing price on date of grant] per share, subject to adjustment as provided in paragraph 10 hereof. 6. Vesting; Exercise of Option. a. The Option granted hereunder shall vest in three cumulative installments on each of the first through third anniversaries of [date of grant]. The vested portion of the Option shall be exercisable in whole or in part at any time, or from time to time prior to the expiration of the Option; provided that the election to exercise the Option shall be made in accordance with applicable federal and state laws and regulations. b. No shares shall be delivered pursuant to the exercise of the vested portion of the Option, in whole or in part, until payment in full of the Option price is received by the Company in cash and until payment in cash of any applicable withholding taxes is received by the Company. The vested portion of the Option may be exercised by filing a written notice of exercise with the Secretary of the Company. The notice of exercise shall be accompanied by a representation or agreement of the Grantee to the Company to the effect that such shares are being acquired for investment and not with a view to the resale or distribution thereof or such other documentation as may be required by the Company, unless in the opinion of counsel to the Company, such representation, agreement, or documentation is not necessary. Upon receipt by the Company of notice of exercise of all or part of any exercisable portion of the Option, together with the appropriate exercise price and any other documentation which may be required under this Agreement, the Grantee or his or her legal representative, legatee, or distributee, as the case may be, shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to such holder. c. The Option may not at any time be exercised with respect to a fractional share. 7. Acceleration of Vesting. The Option granted hereunder shall automatically be vested and immediately exercisable in full upon the approval by the stockholders of the Company of an agreement to merge or consolidate with or into another corporation (if the Company is not the 2 survivor of such merger or consolidation) or an agreement to sell, lease, exchange, or otherwise dispose of all or substantially all of the Company's property and assets (including a plan of liquidation). 8. Transfer of Option and Common Stock. a. The Option granted under this Agreement may not be transferred except by will or the laws of descent and distribution and, during the lifetime of the Grantee, may be exercised only by the Grantee, or by the Grantee's legal guardian or representative. b. Shares of Common Stock issued upon the exercise of the Option granted hereunder may not be disposed of by the Grantee until six months have elapsed from the date the Option was granted. c. Shares issued upon the exercise of the Option may not be sold, transferred, or otherwise disposed of unless (i) there is in effect a registration statement under the Act with respect to such shares covering such transfer or disposition, or (ii) the holder furnishes to the Company an opinion of counsel or other evidence, in each case satisfactory to the Company in its sole discretion, that an exemption from the registration requirements of the Securities Exchange Act of 1934, as amended from time to time (the "Act"), is available with respect to such transfer or disposition. Certificates representing the shares of Common Stock issued upon exercise of the Option granted under this Agreement shall bear appropriate legends to such effect. The Company will prepare and file with the Securities and Exchange Commission a registration statement on Form S-8 or any successor or similar form relating to the shares of Common Stock which may be issued upon the exercise of the Option granted under this Agreement and will use its best efforts to cause such registration statement to become effective as soon as practicable and to maintain the effectiveness of such registration statement so long as this Agreement remains in effect. 9. Termination of Directorship. a. Except as specifically provided in this paragraph 9, the Option granted hereunder shall be exercisable only if the Grantee has maintained continuous status as a director of the Company since the date of this Agreement. In the event the Grantee's directorship is terminated for any reason except by the Company with cause, the portion of the Option held by the Grantee which was otherwise exercisable on the date of the termination of the directorship shall expire unless exercised by the Grantee, or in the case of death or Disability, by his heirs, legatees, or personal representatives, within a period of three months after the date of termination of the directorship. In no event, however, shall the Option be exercisable after [ten years from date of grant]. The Option shall not be exercisable after termination of the Grantee's directorship if the termination is by the Company with cause. 3 b. The Board may, if it determines that to do so would be in the Company's best interests, provide for the exercise of any portion of the Option which would otherwise terminate upon termination of Grantee's directorship for any reason, upon such terms and conditions as the Board determines to be appropriate. c. For purposes of this Agreement, Disability shall mean that, as a result of incapacity due to physical or mental illness, the Grantee shall be unable to perform his duties as a director of the Company for more than six consecutive months. 10. Anti-Dilution Provisions. The number and kind of securities purchasable upon the exercise of the Option and the Option price shall be subject to adjustment from time to time as follows: a. In case the Company shall hereafter (i) pay a dividend or make a distribution on the outstanding shares of the Common Stock payable in shares of the Common Stock, (ii) subdivide the outstanding shares of the Common Stock into a greater number of shares, (iii) combine the outstanding shares of the Common Stock into a lesser number of shares, or (iv) issue by reclassification of the Common Stock any shares of the Company, the holder of the Option shall thereafter be entitled, upon exercise, to receive the number and kind of shares which, if such Option had been exercised immediately prior to the happening of such event, the holder would have owned upon such exercise and been entitled to receive upon such dividend, distribution, subdivision, combination, or reclassification. Such adjustment shall become effective on the day next following (x) the record date of such dividend or distribution, or (y) the day upon which such subdivision, combination, or reclassification shall become effective. b. In case the Company shall hereafter consolidate or merge into or with another corporation and the Company is not the surviving entity, or in case the Company shall sell, lease, or convey to any other person or persons all or substantially all the property and assets of the Company, the holder shall thereafter be entitled, upon exercise, to receive the kind and amount of shares of stock, other securities, cash, and property receivable upon such consolidation, merger, sale, lease, or conveyance by a holder of the number of shares of Common Stock which might have been purchased upon exercise of the Option immediately prior to such consolidation, merger, sale, lease, or conveyance, and shall have no other conversion rights. In any such event, effective provision shall be made in the certificate or articles of incorporation of the resulting or surviving corporation, in any contracts of sale, lease, and conveyance or otherwise so that, so far as appropriate and as nearly as reasonably may be, the provisions set forth herein for the protection of the rights of the holder shall thereafter be made applicable. c. In the event that at any time, as a result of an adjustment made pursuant to this paragraph 10, a holder shall become entitled to receive upon exercise of the Option cash, property, or securities other than Common Stock, then references to Common 4 Stock in this paragraph 10 shall be deemed to apply, so far as appropriate and as nearly as may be, to such cash, property, or other securities. d. Any adjustment in the number of shares shall apply proportionately to only the unexercised portion of the Option granted hereunder. If fractions of a share would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares. e. Whenever the number or kind of securities purchasable upon the exercise of the Option or the exercise price of the Option shall be adjusted as required by the provisions of this paragraph 10, the Company shall forthwith file with its Secretary or Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted number or kind of securities purchasable upon exercise of the Option and the adjusted exercise price thereof determined as herein provided and setting forth in reasonable detail such facts as shall be necessary to show the reason for and the manner of computing such adjustments. Each such officer's certificate shall be made available at all reasonable times for inspection by the holder, and the Company shall, forthwith after such adjustment, mail by certified mail a copy of such certificate to the holder. f. So long as the Option shall be outstanding, if the Company shall propose to take any action that would cause an adjustment to be made pursuant to this paragraph 10, the Company shall mail by certified mail to the holder, at least 15 days prior to the day on which such adjustment would become effective, a notice setting forth in reasonable detail the action to be so taken. 11. Notices. Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Company at its principal executive offices, Attention: Secretary and to the Grantee at the address set forth on Schedule A or at such other address as either party may hereafter designate in writing to the other. 12. Effect of Agreement. Except as otherwise provided hereunder, this Agreement shall be binding upon and shall inure to the benefit of any successor or successors of the Company. 13. Laws Applicable to Construction. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Delaware, as applied to contracts executed in and performed wholly within the State of Delaware. 5 14. Replacement of Agreement. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction, or mutilation of this Agreement and (in the case of loss, theft, or destruction) of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Agreement, the Company will execute and deliver a new Agreement, which shall constitute an additional contractual obligation on the part of the Company, whether or not this Agreement so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. 15. Headings. The headings of paragraphs herein are included solely for convenience of reference and shall not affect the meaning or interpretation of any of the provisions of this Agreement. 16. Amendment. This Agreement may not be modified, amended, or waived in any manner except by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of this Agreement shall not operate or be construed as a waiver of any other provision of this Agreement, or of any subsequent breach by such party of a provision of this Agreement. 17. Reservation and Status of Shares. The Company hereby agrees that at all times there shall be reserved for issuance and delivery upon exercise of the Option granted such number of shares of its Common Stock as shall be required for issuance and delivery upon the exercise of the Option, and that such shares, when issued in accordance with the terms of the Option, shall be validly issued, fully paid, and non-assessable. All shares issued upon exercise of the Option shall have been listed on each national securities exchange on which any shares of Common Stock are listed, or if the Common Stock is not listed on a national securities exchange, shall have been approved for quotation on the NASDAQ National Market System if any shares of Common Stock are so approved. The Company covenants and agrees that it will from time to time take all such action as may be necessary to assure that the par value per share of the Common Stock is at all times equal to or less than the then effective exercise price of the Option. 6 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by a duly authorized officer and the Grantee has hereunto set his hand. QUAKER FABRIC CORPORATION By: ------------------------------------ Name: Larry A. Liebenow Title: President ATTEST: - --------------------------------- Secretary GRANTEE --------------------------------------- Name: 7 Schedule A to Stock Option Agreement Grantee's Name and Address: Grantee's Social Security Number: Number of Options: ______ shares of Common Stock. Exercise Price: As provided in Paragraph 5 of this Agreement. Vesting: As provided in Paragraphs 6 and 7 of this Agreement. Expiration of Options: As provided in Paragraphs 4 and 9 of this Agreement. 8 EX-10 4 ex10-102.txt EXHIBIT 10.102 EXHIBIT 10.102 ALLENERGY GAS & ELECTRIC MARKETING COMPANY, L.L.C NATURAL GAS SERVICE TERMS DATED 5/20/02 These Natural Gas Service Terms ("Service Terms") concern the sale and purchase of natural gas ("gas") and are agreed to by AllEnergy Gas & Electric Marketing Company, L.L.C. ("AllEnergy") and Quaker Fabrics ("Buyer"). Buyer and AllEnergy may be referred to individually as "Party" or collectively as "Parties". 1. Definitions 1. "Natural Gas Sales Agreement" ("Agreement") shall mean the attachment which identifies the relevant information, including pricing, term and type of supply, applicable to a specific transaction between AllEnergy and Buyer. 2. "Full Gas Requirements" shall mean Buyer's total energy usage which could be supplied by AllEnergy under Buyer's local distribution company (LDC) rate schedule specified in the Agreement. 3. "Delivery Point(s)" shall mean the city gate(s) of Buyer's LDC. 4. "Firm Service" shall mean that AllEnergy will deliver or arrange for the delivery of Buyer's Full Gas Requirements to the Delivery Point(s) each and every day during the term of the Agreement. Absent a Force Majeure event or written consent from Buyer, AllEnergy will not have the right to interrupt or reduce the delivery of gas. 5. "Recallable Service" shall mean that AllEnergy will have the right to interrupt or reduce the delivery of gas to the Delivery Point(s) on a number of days as specified in the Agreement. AllEnergy will deliver or arrange for the delivery of Buyer's Full Gas Requirements to the Delivery Point(s) on all other days during the term of the Agreement. 6. "Interruptible Service" shall mean that AllEnergy will make best efforts to deliver or arrange for the delivery of Buyer's Full Gas Requirements to the Delivery Point(s) each and every day but maintains the right to interrupt or reduce the delivery of gas on any day during the term of the Agreement. 7. "Maximum Daily Quantity (MDQ)" shall mean the highest volume of gas to be delivered by AllEnergy on any day during the term of the Agreement. 2. Service - Buyer will purchase its Full Gas Requirements for the accounts listed in the Agreement from AllEnergy at the Delivery Point(s) on a firm, recallable or interruptible basis as specified in the Agreement and defined in Section 1 of these Service Terms. AllEnergy will serve as agent for Buyer in accordance with the policies and procedures of Buyer's LDC in order to provide coordination functions, including, but not limited to, nominating, scheduling and balancing. Buyer will utilize AllEnergy as its sole gas supplier during the term of the Agreement and will not utilize an alternate fuel unless a Force Majeure event occurs or there is an interruption of service by Buyer's LDC or AllEnergy. AllEnergy will be responsible for any and all costs arising out of its failure to fulfill its obligations hereunder, including all costs incurred in enforcing the Agreement as well as penalties imposed by Buyer's LDC for failing to deliver. Buyer will be responsible for any penalties imposed by AllEnergy or Buyer's LDC for failing to purchase and pay for gas as contemplated hereby or to discontinue the use of gas when so advised by AllEnergy or Buyer's LDC. Buyer agrees to continue using gas for all the uses and processes reflected in the historical usage information provided to AllEnergy. 3. Interruption Notice - On any day AllEnergy chooses to interrupt or reduce the delivery of gas in accordance with Recallable or Interruptible Service, AllEnergy will provide notice to Buyer at least twelve (12) hours prior to 8:00 a.m. eastern time on such day. 4. Delivery Point, Title and Taxes - AllEnergy will deliver or arrange for the delivery of Buyer's Full Gas Requirements to the Delivery Point(s) indicated in the Agreement. Title will pass from AllEnergy to Buyer at the Delivery Point(s). AllEnergy warrants good title to the gas sold and delivered to Buyer. Buyer will be responsible for all transportation and service charges imposed by Buyer's LDC relative to the delivery of gas from the Delivery Point(s) to Buyer's facilities. The Sales Price listed in the Agreement includes all taxes that are imposed on the gas prior to the Delivery Point(s). All sales, excise or other taxes which are imposed with respect to the sale of gas to Buyer or which are incurred after the Delivery Point(s) will be billed separately to Buyer. If Buyer is exempt from such taxes, Buyer is responsible for identifying and requesting any exemption from the collection of the tax(es) by filing appropriate documentation with AllEnergy. 5. Payment - AllEnergy will bill Buyer each month for all gas delivered for Buyer's accounts listed in the Agreement as well as any penalties or cashouts assessed in accordance with Section 2 of these Service Terms. Bills are due and payable upon receipt. If Buyer fails to pay a bill within ten (10) days of issuance, Buyer will pay accrued interest of 1.5% per month on the unpaid balance. Buyer agrees to pay $10.00 per occurrence for all returned checks, and to reimburse AllEnergy for all costs AllEnergy reasonably incurs to collect past due amounts from Buyer. Subject to applicable regulatory requirements, AllEnergy may terminate Buyer's service without further notice if Buyer fails to pay amounts due in a timely manner, fails to meet AllEnergy's credit requirements and/or seeks protection under any bankruptcy or insolvency laws. 6. Nominations - Six (6) business days prior to the beginning of each month of deliveries during the term of the Agreement, Buyer will notify AllEnergy via fax with Buyer's estimated gas volume requirements for the upcoming month. During each month, Buyer will notify AllEnergy with any significant changes to the original estimate so that deliveries can be adjusted accordingly. AllEnergy will be responsible for any imbalance penalties assessed by Buyer's LDC provided Buyer advises AllEnergy of significant changes to the original usage estimate and such penalties are not a result of Buyer's failure to discontinue the use of gas when so advised by AllEnergy or Buyer's LDC. In no month, shall AllEnergy's obligation to deliver gas to the Delivery Point(s) exceed the MDQ multiplied by the number of days in the month. 7. Force Majeure - In the event that either Party is rendered unable, wholly or in part, to perform its obligations under these Service Terms and/or the Agreement due to events not reasonably anticipated or within the control of either Party, such as, but not limited to, acts of God, government regulations, changes in law or utility practices, tariffs, etc., both Parties agree that such non-performance shall be excused. 8. Assignment - Buyer may assign these Service Terms together with the Agreement to a third party with the prior written consent of AllEnergy. AllEnergy may assign these Service Terms together with the Agreement to a third party with Buyer's prior written consent or to an affiliate without Buyer's consent. Any required consents shall not be withheld unreasonably by either Party. 9. Conflicting Terms and Conditions - If the terms and conditions of the Agreement conflict with these Service Terms, then the Parties will abide by the obligations and responsibilities outlined in the Agreement. 10. Liability - Buyer and AllEnergy agree that any liability to each other will be limited to direct damages. Neither Party will be liable for incidental, consequential, punitive, or indirect damages, lost profits or lost business in tort, contract or otherwise. This limitation excludes claims of gross negligence and/or willful misconduct. 11. Notices - Notices and correspondence should be sent to:
AllEnergy Buyer --------- ----- AllEnergy Gas & Electric Marketing Company, L.L.C. Quaker Fabrics 95 Sawyer Road 941 Grinnell St Waltham, MA 02453 Fall River, MA 02721 Telephone: (781) 906-2000 Attention: Gus Antonucci Fax: (781) 906-2001 Telephone: 508 678-1951 Fax: _______________
12. Miscellaneous - These Service Terms together with the Agreement constitute the entire agreement and understanding between Buyer and AllEnergy, and supersede any and all prior agreements or understandings. Neither Party will have any obligation under these Service Terms until an Agreement is executed by Buyer and AllEnergy. Upon execution of the Agreement by both Parties, AllEnergy will be obligated to sell and Buyer will be obligated to purchase gas in accordance with these Service Terms and the Agreement. These Service Terms and the Agreement shall be governed under the internal laws (and not the conflict laws) of the Commonwealth of Massachusetts and may not be amended except by written agreement between both Parties. In the event that any portion of these Service Terms or the Agreement is deemed invalid, void or otherwise unenforceable by a court of law, the remaining portions shall otherwise be fully enforceable. Customer represents and warrants to AllEnergy that the execution, delivery and performance of the Agreement does not conflict with, result in the breach of, constitute (with or without due notice or lapse of time or both) a default under, or require any notice, consent, or waiver under any contract, agreement, or other arrangement to which Customer is a party or by which Customer is bound. AllEnergy Gas & Electric Marketing Company, L.L.C. Buyer: Quaker Fabrics By: By: --------------------------------------- ----------------------- Name: Name: ------------------------------------- --------------------- Title: Director - Sales Title: -------------------- Date: Date: ------------------------------------- -------------------- [LOGO OF ALLENERGY] NATURAL GAS SALES AGREEMENT - -------------------------------------------------------------------------------- 1. Term - This Natural Gas Sales Agreement ("Agreement") shall be in effect for an initial term of Twelve (12) month(s) beginning on November 1, 2002 and concluding on October 1, 2003. It shall continue in effect thereafter for successive one month periods unless either Party provides thirty (30) days written notice to the other Party that the Agreement is not to be extended. Upon or in anticipation of termination or expiration of this Agreement, should Buyer receive a bona fide third party offer for the sale of gas, it will promptly present such offer to AllEnergy which shall have the option to either match the terms of such offer and continue to sell Buyer's requirements of gas, or reject such offer and cease the sale of gas upon the date scheduled for such termination or expiration. Additionally, if during the term of this Agreement, Buyer's LDC, the Public Utility Commission or other applicable regulatory authority implements a change to existing transportation programs that would materially impact AllEnergy's cost of service, AllEnergy will have the right to adjust the sales price either higher or lower. 2. Sales Price - Unless Buyer requests a price to be locked-in for the commodity portion, as detailed in the paragraph below, the price to be paid by Buyer to AllEnergy for all natural gas purchased and sold hereunder during the period of November 1, 2002 through October 1, 2003 at the contractual Delivery Point(s) shall be the sum of the Last Day Settlement Price for Natural Gas on the New York Mercantile Exchange (NYMEX) for each month plus $ 1.12 per dekatherm (dth). Buyer shall have the right during the term of this Agreement to lock-in the price for any or all month(s) by notifying AllEnergy of Buyer's desire to do so. In order to lock-in a price for such month(s), Buyer shall provide AllEnergy with a notice which shall identify the month(s) in which Buyer desires to consider a lock-in. AllEnergy will then provide the price that it is willing to lock-in. If Buyer wishes to lock-in at the price quoted by AllEnergy, Buyer shall immediately inform AllEnergy, and AllEnergy will issue a confirming Lock-In Notice, specifying the month(s), volume(s) and price(s), which have been locked-in. Buyer acknowledges and agrees that AllEnergy shall have no obligation to provide a price lock-in if Buyer is not current in payment of AllEnergy invoices or if Buyer fails to meet AllEnergy's credit requirements. It is understood and agreed that Buyer may request a lock-in price up to 12 noon EST of the third business day before expiration of the applicable NYMEX contract otherwise the above indexed pricing (NYMEX plus) mechanism prevails. (Current NYMEX expiration dates will be supplied by AllEnergy upon request.) 3. Delivery Point - Fall River CityGate 4. Type of Supply - AllEnergy will provide FIRM Service to the Deliver Point. 5. Maximum Daily Quantity - ___________________ 6. LDC Rate Schedule - T-53 7. Buyer's Facilities Facility Name and Address LDC Account Number Gas Meter # Quaker Fabrics 0810844 26399 941 Grinnell St Fall River, MA 02721 Facility Name and Address LDC Account Number Gas Meter # Quaker Fabrics 0000011400 009591 1450 Brayton Ave Fall River, MA 02721 The Natural Gas Service Terms dated 5/20/02 are incorporated herein and are a part of this Agreement. AllEnergy Gas & Electric Marketing Company, L.L.C. Buyer: Quaker Fabrics By: By: ----------------------------------- -------------------------- Name: Name: --------------------------------- ------------------------ Title: Director - Sales Title: ----------------------- Date: Date: --------------------------------- ------------------------ - -------------------------------------------------------------------------------- EX-10 5 ex10-103.txt EXHIBIT 10.103 EXHIBIT 10.103 AMENDMENT TO CHANGE IN CONTROL AGREEMENT AMENDMENT NO. 1, dated as of December 13, 2002, to the Change in Control Agreement dated December 17, 1999, between QUAKER FABRIC CORPORATION, a corporation incorporated under the laws of Delaware with its principal office at 941 Grinnell Street, Fall River, Massachusetts 02721 (the "Company") and _________________, residing at _____________________ (the "Executive"). WHEREAS, the Company and the Executive entered into the Change in Control Agreement (the "Agreement") to induce the Executive to remain with the Company, and to reinforce and encourage the Executive's continued attention and dedication, when faced with the possibility of a Change in Control in the Company; and WHEREAS, the parties wish to amend certain of the terms of the Agreement as set forth herein in order to provide the Executive with the benefits afforded by this Agreement for an additional three year period. NOW, THEREFORE, the Company and the Executive agree as follows: 1. Paragraph 1 of the Agreement is amended to extend the term of the Agreement for an additional three-year period, beginning December 17, 2003. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first written above. QUAKER FABRIC CORPORATION By -------------------- Name: -------------------- Title: -------------------- EXECUTIVE Signature: -------------------- Name: -------------------- Address: -------------------- ------------------------------- EX-10 6 ex10-104.txt EXHIBIT 10.104 EXHIBIT 10.104 INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT made and entered into as of the ____ day of ___________, 2002 (this "Agreement"), by and between QUAKER FABRIC CORPORATION, a Delaware corporation (the "Company"), and ___________________ (the "Indemnitee"): WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as executive officers, directors or in other capacities unless they are provided with adequate protection through insurance and indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of such corporations; WHEREAS, the difficulties of obtaining adequate insurance and uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons; WHEREAS, the Board of Directors of the Company has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; WHEREAS, this Agreement is a supplement to and in furtherance of the Certificate of Incorporation and the By-laws of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of the Indemnitee thereunder; WHEREAS, each of the Certificate of Incorporation and By-laws of the Company and the Delaware director indemnification statute is nonexclusive and therefore contemplates that contracts may be entered into with respect to indemnification of a Delaware corporation's directors, officers and employees; and WHEREAS, the Indemnitee is willing to serve or to continue to serve for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and the Indemnitee do hereby covenant and agree as follows: Section 1. Services by Indemnitee. The Indemnitee agrees to serve as a director and/or executive of the Company. The Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or other obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue the Indemnitee in any such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries) and the Indemnitee. The Indemnitee specifically acknowledges that the Indemnitee's employment with the Company (or any of its subsidiaries), if any, is at will, and the Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between the Indemnitee and the Company (or any of its subsidiaries), other applicable formal severance policies duly adopted by the Company or, with respect to service as a director of the Company, by the Company's Certificate of Incorporation and By-laws and the General Corporation Law of the State of Delaware. Notwithstanding the foregoing, this Agreement shall remain in full force and effect as provided in Section 13 hereof after the Indemnitee has ceased to serve as an officer, director, agent or employee of the Company. Section 2. Indemnification. The Company shall indemnify the Indemnitee to the fullest extent permitted by applicable law in effect on the date hereof or as such laws may from time to time be amended. Without diminishing the scope of the indemnification provided by this Section 2, the rights of indemnification of the Indemnitee provided hereunder shall include but shall not be limited to those rights set forth hereinafter, except to the extent expressly prohibited by applicable law. Section 3. Action, Suit or Proceeding Other Than an Action or Suit by or in the Right of the Company. The Indemnitee shall be entitled to the indemnification rights provided in this Section 3 if he or she was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature, other than an action by or in the right of the Company, by reason of the fact that he or she is or was, either prior to or after the execution of this Agreement, a director, officer, employee, agent or fiduciary of the Company or is or was, either prior to or after the execution of this Agreement, serving at the request of the Company as a director, officer, employee, agent or fiduciary of any other entity or by reason of any action alleged to have been taken or omitted by him or her, either prior to or after the execution of this Agreement, in any such capacity. Pursuant to this Section 3, the Indemnitee shall be indemnified against all costs, charges, expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding (including, but not limited to, the investigation, defense or appeal thereof), if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful. Section 4. Action or Suit by or in the Right of the Company. The Indemnitee shall be entitled to the indemnification rights provided in this Section 4 if he or she is a person who was or is made a party or is threatened to be made a party to any threatened, pending or completed action or suit brought by or in the right of the Company to procure a judgment in its favor by reason of the fact that he or she is or was or has agreed to become, either prior to or after the execution of this Agreement, a director, officer, employee, agent or fiduciary of the Company or is or was, either prior to or after the execution of this Agreement, serving at the request of the Company as a director, officer, employee, agent or fiduciary of any other entity or by reason of 2 any action alleged to have been taken or omitted by him or her, either prior to or after the execution of this Agreement, in any such capacity. Pursuant to this Section 4, the Indemnitee shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection with such action or suit (including, but not limited to, the investigation, defense, settlement or appeal thereof) if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that no such indemnification shall be made in respect of any claim, issue or matter as to which applicable law expressly prohibits such indemnification by reason of an adjudication of liability of the Indemnitee to the Company, unless, and only to the extent that, the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnification for such expenses and costs as such court shall deem proper. Section 5. Indemnification for Costs, Charges and Expenses of Successful Party. Notwithstanding the other provisions of this Agreement and in addition to the rights to indemnification set forth in Sections 3 and 4 hereof, to the extent that the Indemnitee has served as a witness on behalf of the Company or has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice or the settlement of an action without admission of liability, in defense of any action, suit or proceeding referred to in Sections 3 and 4 hereof, or in defense of any claim, issue or matter therein, or upon appeal from any such action, suit or proceeding, he or she shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or her or on his or her behalf in connection therewith. Section 6. Partial Indemnification. In addition to the rights to indemnification set forth in Sections 3 and 4 hereof, if the Indemnitee is only partially successful in the defense, investigation, settlement or appeal of any action, suit, investigation or proceeding described in Section 3 or 4 hereof, and as a result is not entitled under Section 3, 4 or 5 hereof to indemnification by the Company for the total amount of the expenses (including attorneys' fees), costs, judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred by him or her, the Company shall nevertheless indemnify the Indemnitee, as a matter of right pursuant to Section 5 hereof, to the extent that the Indemnitee has been partially successful. Section 7. Determination of Entitlement to Indemnification. Upon written request by the Indemnitee for indemnification pursuant to Section 3 or 4 hereof, the entitlement of the Indemnitee to indemnification pursuant to the terms of this Agreement shall be determined by the following person or persons who shall be empowered to make such determination: (a) by a majority vote of the Disinterested Directors (as hereinafter defined), even if less than a quorum of the Board of Directors; or (b) if there are no such Disinterested Directors or if a majority of the Disinterested Directors so directs, by Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to the Indemnitee; or (c) if so directed by the Board of Directors, by the stockholders. Independent Counsel shall be selected by the Board of Directors and approved by the Indemnitee. Upon failure of the Board so to select Independent Counsel or upon failure of the Indemnitee so to approve Independent Counsel, Independent Counsel shall be selected by the Chancellor of the State of Delaware or such other person as the Chancellor shall designate to make such selection. Such determination 3 of entitlement to indemnification shall be made not later than 60 days after receipt by the Company of a written request for indemnification. Such request shall include documentation or information that is necessary for such determination and which is reasonably available to the Indemnitee. Any costs or expenses (including attorneys' fees) incurred by the Indemnitee in connection with his or her request for indemnification hereunder shall be borne by the Company. The Company hereby indemnifies and agrees to hold the Indemnitee harmless therefrom irrespective of the outcome of the determination of the Indemnitee's entitlement to indemnification. If the person making such determination shall determine that the Indemnitee is entitled to indemnification as to part (but not all) of the application for indemnification, such person shall reasonably prorate such partial indemnification among such claims, issues or matters. Section 8. Presumptions and Effect of Certain Proceedings. The General Counsel and Secretary of the Company shall, promptly upon receipt of the Indemnitee's request for indemnification, advise in writing the Board of Directors or such other person or persons empowered to make the determination as provided in Section 7 that the Indemnitee has made such request for indemnification. Upon making such request for indemnification, the Indemnitee shall be presumed to be entitled to indemnification hereunder and the Company shall have the burden of proof in the making of any determination contrary to such presumption. If the person or persons so empowered to make such determination shall have failed to make the requested indemnification within 60 days after receipt by the Company of such request, the requisite determination of entitlement to indemnification shall be deemed to have been made and the Indemnitee shall be absolutely entitled to such indemnification, absent actual and material fraud in the request for indemnification. The termination of any action, suit, investigation or proceeding described in Section 3 or 4 hereof by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself: (a) create a presumption that the Indemnitee did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, that the Indemnitee had reasonable cause to believe that his or her conduct was unlawful; or (b) otherwise adversely affect the rights of the Indemnitee to indemnification except as may be provided herein. Section 9. Advancement of Expenses and Costs. All reasonable expenses and costs incurred by the Indemnitee (including attorneys' fees, costs of bonds, retainers and advances of disbursements and required of the Indemnitee) shall be paid by the Company in advance of the final disposition of such action, suit or proceeding at the request of the Indemnitee within 20 days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time. The Indemnitee's entitlement to such expenses shall include those incurred in connection with any proceeding by the Indemnitee seeking an adjudication or award in arbitration pursuant to this Agreement. Such statement or statements shall reasonably evidence the expenses and costs incurred by him or her in connection therewith and shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay such amount if it is ultimately determined that the Indemnitee is not entitled to be indemnified against such expenses and costs by the Company as provided by this Agreement or otherwise. 4 Section 10. Remedies of Indemnitee in Cases of Determination not to Indemnify or to Advance Expenses. In the event that a determination is made that the Indemnitee is not entitled to indemnification hereunder or if payment has not been timely made following a determination of entitlement to indemnification pursuant to Sections 7 and 8, or if expenses are not advanced pursuant to Section 9, the Indemnitee shall be entitled to a final adjudication in an appropriate court of the State of Delaware or any other court of competent jurisdiction of his or her entitlement to such indemnification or advance. Alternatively, the Indemnitee at his or her option may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association, such award to be made within 60 days following the filing of the demand for arbitration. The Company shall not oppose the Indemnitee's right to seek any such adjudication or award in arbitration or any other claim. Such judicial proceeding or arbitration shall be made de novo and the Indemnitee shall not be prejudiced by reason of a determination (if so made) that he or she is not entitled to indemnification. If a determination is made or deemed to have been made pursuant to the terms of Section 7 or Section 8 hereof that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination and is precluded from asserting that such determination has not been made or that the procedure by which such determination was made is not valid, binding and enforceable. The Company further agrees to stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this agreement and is precluded from making any assertion to the contrary. If the court or arbitrator shall determine that the Indemnitee is entitled to any indemnification hereunder, the Company shall pay all reasonable expenses (including attorneys' fees) and costs actually incurred by the Indemnitee in connection with such adjudication or award in arbitration (including, but not limited to, any appellate proceedings). Section 11. Other Rights to Indemnification. The indemnification and advancement of expenses (including attorneys' fees) and costs provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may now or in the future be entitled under any provision of any agreement, any provision of the Certificate of Incorporation or By-laws of the Company, any vote of stockholders or Disinterested Directors, any provision of law, or otherwise. Section 12. Attorneys' Fees and Other Expenses To Enforce Agreement. In the event that the Indemnitee is subject to or intervenes in any proceeding in which the validity or enforceability of this Agreement is at issue or seeks an adjudication or award in arbitration to enforce his or her rights under, or to recover damages for breach of, this Agreement, the Indemnitee, if he or she prevails in whole or in part in such action, shall be entitled to recover from the Company and shall be indemnified by the Company against, any actual expenses for attorneys' fees and disbursements reasonably incurred by him or her. Section 13. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the Indemnitee has ceased to occupy any of the positions or have any of the relationships described in Sections 3 and 4 of this Agreement; and (b) the final termination of all pending or threatened actions, suits, proceedings or investigations with respect to the Indemnitee. Notwithstanding the foregoing, this Agreement shall terminate and the Indemnitee shall have no further rights under this Agreement, including but not limited to any rights to indemnification or advancement of expenses, upon the commencement, directly or indirectly, by or on behalf of the Indemnitee, of any suit or proceeding against the Company 5 other than (i) a suit or proceeding seeking a final adjudication of the Indemnitee's right to indemnification under Section 10 of this Agreement or (ii) a suit or proceeding seeking indemnification or contribution from the Company where the Company is or may be liable for all or part of a claim against the Indemnitee or (iii) a class action where the Indemnitee is not a class representative. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of the Indemnitee and his or her spouse, assigns, heirs, devises, executors, administrators or other legal representatives. Section 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 15. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. Section 16. Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 17. Definitions. For purposes of this Agreement: (a) "Disinterested Director" shall mean a director of the Company who is not or was not a party to the action, suit, investigation or proceeding in respect of which indemnification is being sought by the Indemnitee. (b) "Independent Counsel" shall mean a law firm or a member of a law firm that neither is presently nor in the past five years has been retained to represent: (i) the Company or the Indemnitee in any matter material to either such party, or (ii) any other party to the action, suit, investigation or proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee's right to indemnification under this Agreement. Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of 6 any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 19. Notice by the Indemnitee. The Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter which may be subject to indemnification covered hereunder, either civil, criminal or investigative. Section 20. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) if delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to the Indemnitee, to: [Name] [Address] (b) If to the Company, to: Quaker Fabric Corporation 941 Grinnell Street Fall River, Massachusetts 02721 Attn: General Counsel and Secretary or to such other address as may have been furnished to the Indemnitee by the Company or to the Company by the Indemnitee, as the case may be. Section 21. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without giving effect to rules governing the conflict of laws. Section 22. Entire Agreement. This Agreement sets forth the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all existing agreements between them concerning such subject matter. 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. QUAKER FABRIC CORPORATION By ---------------------------------- Name: Title: ------------------------------------ INDEMNITEE 8 EX-10 7 ex10-105.txt EXHIBIT 10.105 EXHIBIT 10.105 [LOGO] Perpetual Software SPSS Inc. Sales Telephone 800.543.2185 License Agreement 233 South Wacker Drive Sales Fax 312.651.3668 Chicago, IL 60606-6307 312.651.3000 SPSS Inc. ("SPSS"), a ____ corporation with a place of business at the address set forth above, and Quaker Fabric Corporation of Fall River, a Massachusetts corporation with a place of business at the address set forth above ("LICENSEE") agree as follows: 1. Grant and Schedules 1.1 (a) SPSS grants to LICENSEE and its Affiliates a worldwide, non-exclusive, paid-up, perpetual, irrevocable license to use, load, execute, display, perform, reproduce, configure and operate the computer software products specified in SCHEDULE A attached hereto or subsequently executed by the parties (hereinafter the "SOFTWARE"). (b) SCHEDULE A, as amended from time to time by the written agreement of the parties, which is made a part hereof with the same effect as if each and every provision thereof were set forth in full herein, also provides details of any other conditions related to the license granted hereunder and any other matters that are in addition to those set forth in this Agreement. In the event of any inconsistencies between the terms of this Agreement and any SCHEDULE hereto, the terms and conditions in a given SCHEDULE hereto shall take precedence over the terms and conditions in this Agreement. (c) For purposes of this Agreement, the term "Affiliates" means, with respect to any party, any other entity Controlling, Controlled by or under common Control with such party, where the term "Control" and its derivatives means possessing, directly or indirectly, ownership of fifty percent (50%) or more of the voting securities of an entity. 1.2 SPSS will provide the SOFTWARE to the site designated by LICENSEE within five (5) days of the Effective Date or for any subsequent purchase within five (5) days of the Effective Date of the applicable Schedule. 1.3 LICENSEE may from time to time order other software products from SPSS pursuant to this Agreement and the appropriate SCHEDULE, and if such orders are accepted in writing by SPSS, these products shall be considered to be included in the definition of SOFTWARE. LICENSEE may submit subsequent orders for other products SPSS makes available under this Agreement. 1.4 LICENSEE may make and operate a reasonable number of copies of Client and Server SOFTWARE for operations, archival and backup purposes, in each case subject to compliance with the license terms for such SOFTWARE set forth in SCHEDULE A hereto. All copies of SOFTWARE shall remain subject to all terms of this Agreement, and shall include the copyright notice and any other proprietary notice set forth on the electronic copy of the SOFTWARE delivered by SPSS to LICENSEE, and at a minimum shall include the following: "Copyright SPSS Inc. ______ (year) Licensed Property of SPSS Inc. All rights reserved" This notice must appear internally in machine-readable form on each electronic copy of the SOFTWARE. LICENSEE further agrees to complete the customization process described in the documentation before making any copies of the SOFTWARE. 1.5 SPSS will provide to LICENSEE one (1) electronic copy of the printed manual with the master copy of the SOFTWARE delivered in accordance with Section 1.2 above. LICENSEE shall have the right to make a reasonable number of copies of the manual and LICENSEE and its Affiliates shall have the right to use such manual in connection with the license granted in Section 1.1 above. 1.6 Except as expressly set forth herein, SPSS retains all title and ownership rights to the SOFTWARE, including all copies duplicated by LICENSEE under this Agreement. 1.7 LICENSEE may permit use of and access to the SOFTWARE under this Agreement by LICENSEE's or its Affiliates' (a) third party consultants, agents, outsourcers and other contractors who are acting on behalf of or providing services to LICENSEE or its Affiliates, or (b) through the SOFTWARE's web-enabled interfaces, LICENSEE'S customers, vendors, suppliers or other business partners who have a need to access or exchange data with the SOFTWARE in order to view and generate reports and data (collectively, "Authorized Third Parties"). In each case, LICENSEE shall require that such third parties accessing or using the SOFTWARE comply with the relevant restrictions contained herein. 2. Maintenance 2.1 SPSS will provide LICENSEE with on-going maintenance (as described in this Section 2) of the SOFTWARE (and all subsequent releases thereof) ("Maintenance") for the Maintenance Term described in Section 3.3 hereof. 2.2 Maintenance, as used in this Agreement, includes (i) SPSS's provision to LICENSEE of all enhancements, upgrades, new releases, corrections and improvements to the SOFTWARE and manuals, when and if developed by SPSS or its Affiliates and as otherwise set forth in SCHEDULE C attached hereto, (ii) SOFTWARE error or deficiency correction as further described below and in SCHEDULE C attached hereto; and (iii) technical assistance via the telephone or email to LICENSEE's designated support representative as further described below and in SCHEDULE C attached hereto. Maintenance shall cover the current and one (1) prior release of the SOFTWARE, provided that in no case shall SPSS discontinue Maintenance for any release of the SOFTWARE sooner than 12 months following its delivery to LICENSEE. Unless otherwise specified in this Agreement or in SCHEDULE C, maintenance does not cover hardware, operating system, network or third party software not provided by SPSS. Any troubleshooting by SPSS in relation to such third party items will, with the prior written agreement of LICENSEE, be considered Consulting Services and be charged for and treated in accordance with Section 6 below. 2.3 SPSS shall be required to provide technical support only to the technical support and information technology personnel of LICENSEE. 2.4 SPSS and LICENSEE shall execute concurrently with this Agreement a "preferred beneficiary" source code escrow agreement with DSI Technology Escrow Services (the "Escrow Agent"), and such escrow agreement is attached hereto as SCHEDULE D (the "Escrow Agreement"), for the deposit of the Source Code Form (as defined below) of the SOFTWARE into escrow no later than five days following the execution hereof. SPSS hereby grants to LICENSEE a worldwide, perpetual, irrevocable, royalty-free, paid-up right and license, to (a) use, execute, load, copy, modify, prepare derivative works, display and perform all or a portion of the Source Code Form of the SOFTWARE to support, correct and enhance the SOFTWARE for the internal business purposes of LICENSEE and its Affiliates; and (b) compile such Source Code Form (including modifications thereto and derivative works thereof) into object code form and use and execute such object code for the internal business purposes of LICENSEE and its Affiliates. As specified in the Escrow Agreement, the LICENSEE shall be entitled to access the Source Code Form of the SOFTWARE only upon the occurrence of one or more of the following events triggering release of the Source Code Form of the SOFTWARE: (i) SPSS's material breach of its, maintenance or support obligations, which breach is not cured within thirty (30) days following notification thereof by LICENSEE; (ii) the termination of this Agreement by LICENSEE pursuant to Section 5.2(b) hereof, (iii) SPSS's failure to continue to do business in the ordinary course, (iv) SPSS becomes or is declared insolvent or bankrupt, is the subject of any proceedings relating to its liquidation, insolvency or for the appointment of a receiver or similar officer for it, makes an assignment for the benefit of all or substantially all of its creditors or enters into an agreement for the composition, extension or readjustment of all or substantially all of its obligations, or (v) SPSS fails to provide an update of the SOFTWARE which is compatible with a new version of the IBM OS400 operating system within one year following IBM's general release of such new version (collectively, "Release Conditions"). As used above, for purposes of this Agreement, the term "Source Code Form" shall means a form of software code in which a computer program's logic is easily deduced by a human being with reasonable skill in the art. Notwithstanding the foregoing, this Section 2.4 shall not apply to "Essbase/400" software licensed by SPSS from Hyperion Solutions Corporation, provided, however, that in the event of the occurrence of any Release Condition as set forth above, LICENSEE shall have the right to procure licenses, support and other services directly from Hyperion Solutions Corporation for use in connection with SOFTWARE, and SPSS shall secure on behalf of LICENSEE a credit with Hyperion Solutions Corporation (or its Affiliate, as the case may be) in an amount equal to amounts paid by LICENSEE to SPSS for "Essbase" software maintenance. 2.5 During the Maintenance Term, SPPS shall make available to LICENSEE the training courses for the SOFTWARE in accordance with SCHEDULE E attached hereto and at the prices set forth therein. 3. Payments 3.1 Subject to the terms and conditions hereof, LICENSEE agrees to pay SPSS the License Fees specified in SCHEDULE A within one hundred and twenty (120) days from the Effective Date, provided that the SOFTWARE is not returned by LICENSEE to SPSS or this Agreement is not terminated by LICENSEE as a result of SPSS's breach of its warranty obligations prior to such 120th day and fails to cure the breach of warranty obligation in accordance with the cure period set forth in Section 5.2a. In addition, LICENSEE shall pay SPSS such amounts shown in each Statement of Work and/or Services Authorization Form for Consulting Services within sixty (60) days from the date that LICENSEE accepts the relevant deliverables or services. SPSS shall render invoices in accordance with the schedule set forth in each such Statement of Work and/or Services Authorization Form for Consulting Services. All amounts are non-refundable except where otherwise indicated in this Agreement or as provided by law. 3.2 If LICENSEE orders and SPSS accepts a subsequent order per Section 1.3, then LICENSEE agrees to pay the applicable licensee fees for the SOFTWARE within sixty (60) days from the date of LICENSEE's acceptance of such SOFTWARE. 3.3 (a) LICENSEE shall pay fees ("Maintenance Fees") in respect of the Maintenance services as set forth in this Section 3.3. SPSS shall provide Maintenance to LICENSEE for every period for which LICENSEE pays Maintenance Fees as set forth in this Section 3.3. The initial period for which SPSS shall provide Maintenance to LICENSEE, and LICENSEE shall pay the Maintenance Fees set forth in Section 3.3(b) below, shall be for the period starting upon the Effective Date and ending upon the first anniversary thereafter (the "Initial Period"). Thereafter, SPSS' obligation to provide Maintenance, and LICENSEE's obligation to pay the corresponding Maintenance Fees for such Maintenance, shall automatically renew for additional successive terms of one (1) year upon expiration of the Initial Period and each anniversary of the expiration of the Initial Period (the Initial Period, and each such annual period, are hereinafter referred to individually as an "Annual Maintenance Period", and collectively, the "Maintenance Term"), unless written notice of non-renewal of Maintenance is provided to SPSS by LICENSEE at least forty-five (45) days prior to the next renewal date. (b) For the Initial Period, the Maintenance Fee shall be $25,400. Thereafter, the annual Maintenance Fee shall be $31,750, subject to increase by SPSS upon written notice to LICENSEE not less than sixty (60) days prior to the expiration of the then-current Annual Maintenance Period at a rate not to exceed a percentage equal to the published U.S. Bureau of Labor Statistics consumer price index (all cities' average) for the immediately preceding calendar year. (c) LICENSEE shall have the right to reinstate maintenance services following its election not to renew maintenance at any time, provided, however, that if LICENSEE elects to resume Maintenance for the SOFTWARE following non-renewal, LICENSEE shall pay in advance a reinstatement fee equal to ten percent (10%) of the Maintenance Fees that otherwise would have become due for each year in which LICENSEE elected not to receive Maintenance, plus a pro-rated portion of the Maintenance Fee due for the balance of the next Annual Maintenance Period. 3.4 All payments are exclusive of any tariffs, duties or taxes imposed or levied by any government or governmental agency. LICENSEE shall be liable for payment of all such taxes, however designated, levied or based on LICENSEE's possession or use of the SOFTWARE or on this Agreement, including without limitation, state or local sales, use, value-added and personal property tax, but excluding any tax on the net income of SPSS. 3.5 Notwithstanding anything to the contrary in this Agreement, to the extent that SPSS is late in delivering or providing to LICENSEE any product or service that SPSS is required to deliver or make available to LICENSEE hereunder, the time for performance of LICENSEE's obligations hereunder related to such product or service, including payment obligations, shall be extended for a corresponding period of time. 4. Restricted Use 4.1 The Server SOFTWARE may be installed and operated under this Agreement only on computer servers which are owned, controlled or leased by LICENSEE or its Affiliates or authorized third parties. 4.2 LICENSEE agrees to use the SOFTWARE only the internal requirements of LICENSEE or its Affiliates and not for commercial timesharing, rental, or service bureau use. 4.3 Subject to the software escrow provisions set forth in Section 2.5 hereof, LICENSEE agrees not (a) to create, or attempt to create, or authorize or help others to create the source code from the SOFTWARE furnished pursuant to this Agreement, or (b) to reverse engineer or decompile the SOFTWARE. 5. Term And Termination 5.1 This Agreement shall commence on the date hereof and continue in effect indefinitely, unless earlier terminated in accordance with this Section 5. 5.2 (a) If either party materially defaults in the performance of any of its duties or obligations under this Agreement, which default is not cured within 30 days after written notice is given to the defaulting party specifying such default, the party not in default may, by giving written notice thereof to the defaulting party, terminate this Agreement as of the date of receipt by the defaulting party of such notice. (b) Subject to Title 11, United States Code, if either party becomes or is declared insolvent or bankrupt, is the subject of any proceedings relating to its liquidation, insolvency or for the appointment of a receiver or similar officer for it, makes an assignment for the benefit of all or substantially all of its creditors or enters into an agreement for the composition, extension or readjustment of all or substantially all of its obligations, then the other party may, by giving written notice thereof to such party, terminate this Agreement as of a date specified in such notice of termination. (c) LICENSEE shall have the right to terminate this Agreement as set forth in 7.2, if SPSS fails to cure in the timeframe set forth in Section 5.2a above, and 8.4. 5.3 Upon termination of this Agreement by SPSS pursuant to Section 5.2(a) or 5.2(b) above, LICENSEE shall pay promptly any undisputed fees which may be due. Notwithstanding anything to the contrary, this Section 5.3 and the following additional Sections and Articles shall survive the termination of this Agreement for any reason: 1.1, 1.4, 1.5, 1.6, 1.7, 2.1 through 2.5, 3.1, 3.3, 3.4, 4.1 through 4.4, 6.2, 7 and 8. For the avoidance of doubt, once LICENSEE has paid the full amount of the License Fee specified in SCHEDULE A, the licenses granted to LICENSEE in Section 1.1 hereof and SCHEDULE A hereto and all related rights hereunder shall become irrevocable and will survive any termination of this Agreement for any reason other than termination by LICENSEE under Section 7.2, and SPSS shall have no right to terminate such licenses for any reason. 6. Consulting Services 6.1 From time to time during the term of this Agreement as mutually agreed by the parties, SPSS may provide LICENSEE certain Consulting Services such as development of SOFTWARE customizations, training and the like. For each Consulting Services project the parties will agree in advance a written Statement of Work and/or Services Authorization Form (each, a "Statement of Work"), which will contain a description of the Consulting Services to be performed, a description of and specifications for the deliverables to be provided to LICENSEE as a result of such Consulting Services ("Deliverables"), an estimated timeline, fees, and all additional terms that are applicable to the project. A Statement of Work must be signed by both parties prior to SPSS beginning the project and it may only be modified by a change order signed by both parties. Each Statement of Work (including any executed change order) shall be deemed a part of this Agreement. In the event of any conflict between the terms of this Agreement and a Statement of Work, the terms of the Statement of Work shall prevail. In the event that any Statement of Work contains one or more fee estimates, the parties agree that in no event shall the actual fees charged by SPSS to LICENSEE for the completion of the work set forth therein exceed one hundred and ten percent (110%) of such fee estimates unless LICENSEE is requesting work to be performed that is different than what is set forth in the particular Statement of Work. 6.2 Except as otherwise agreed in a Statement of Work on a case-by-case basis, LICENSEE shall own all right, title and interest (including, without limitation, all patents, copyrights, trade secrets, and other intellectual property) in and to all Deliverables, and any ideas, know-how and programs which may be developed by SPSS or a subcontractor as a result of the provision of Consulting Services to LICENSEE hereunder. SPSS hereby agrees to assign to LICENSEE and, at the request of SPSS, shall execute and deliver to LICENSEE without further consideration, such documents, assignments and instruments required by LICENSEE in order to evidence and effect the foregoing assignments. Notwithstanding anything to the contrary herein, SPSS and its personnel shall be free to use and employ the generalized skills and expertise resulting from its provision of the Consulting Services. 6.3 SPSS shall discuss in good faith with LICENSEE the availability, if any, of maintenance and support services for any Deliverables proposed to be provided under a Statement of Work. If agreed in a Statement of Work on a case-by-case basis, SPSS shall provide Maintenance for the Deliverables provided to LICENSEE under Statements of Work hereunder. The foregoing shall not be construed to limit or modify in any way the obligation of SPSS to provide Maintenance with respect to the SOFTWARE. 6.4 Either party may terminate a Statement of Work if the other party fails to cure its material breach thereof within thirty (30) days after written notice from the other party of such breach. In addition, LICENSEE may terminate a Statement of Work at any time without cause with thirty (30) days prior written notice to SPSS. Upon early termination of a Statement(s) of Work by LICENSEE without cause, LICENSEE shall pay to SPSS all amounts due to SPSS for work performed by SPSS through the date of termination. Termination of a Statement(s) of Work shall not constitute a basis for SPSS's termination of this Agreement under Section 5 hereof. Upon the termination of this Agreement, all Statements of Work shall automatically terminate. 6.5 All Deliverables shall be subject to the testing and acceptance procedures of in the applicable Statement of Work (if any). Upon acceptance by LICENSEE pursuant to the Statement of Work or, if the Statement of Work does not contain acceptance testing procedures, upon delivery to LICENSEE, Deliverables shall be considered to constitute "SOFTWARE" for all purposes hereunder. 6.6 SPSS shall perform all Consulting Services in a timely, professional and workmanlike manner in accordance with the relevant Statement(s) of Work and the highest standards prevailing in the industry. All Deliverables provided under the Statements of Work shall, for a period of one hundred and eighty (180) days from their delivery to LICENSEE, operate substantially in accordance with the specifications and descriptions set forth in the Statement of Work and their documentation, and without material error or interruption, provided that the Deliverables are operated substantially in accordance with their documentation. 6.7 In the event that the Deliverables do not comply with the warranties set forth herein, SPSS upon notification from LICENSEE will begin the process of duplicating the error and, if it is an error in the Deliverable that causes the deliverable to be in breach of the warranty set forth in Section 6.6 above, begin the process of correcting such error. SPSS shall correct such non-compliance within the timeframes set forth in Section 5.2a above. If SPSS fails to provide corrected Deliverables to LICENSEE within such timeframes, LICENSEE may terminate the Statement of Work and return the Deliverables to SPSS for a full refund of all amounts paid by LICENSEE under the Statement of Work. 7. Warranties 7.1 SPSS hereby represents and warrants to LICENSEE that: (a) SPSS has all right, title, interest and authority necessary in order to grant the licenses and rights granted herein; (b) The SOFTWARE as delivered to LICENSEE (including Deliverables) does not, to SPSS's knowledge, infringe, and LICENSEE's use of the SOFTWARE in accordance with this Agreement will not, to SPSS's knowledge, infringe, any patent, copyright, trademark or other intellectual property right of any third party, nor constitute a misappropriation of any trade secret; no claim has been brought or threatened against SPSS or its Affiliates or suppliers alleging any of the foregoing; and (c) SPSS will ensure that the SOFTWARE, including any additional elements, updates, enhancements, upgrades or other modifications delivered to LICENSEE hereunder, does not contain any (i) program code or programming instruction or set of instructions intentionally designed to disrupt, disable, harm, interfere with or otherwise adversely affect computer programs, data files or operations; or (ii) other code typically described as a virus or by similar terms, including Trojan horse, worm or backdoor. 7.2 (a) SPSS represents and warrants to LICENSEE that the SOFTWARE will, for a period of two hundred ten (210) days from the Effective Date, operate substantially in accordance with the specifications and descriptions set forth in SCHEDULE B attached hereto and its documentation (collectively, the "Specifications"), and without material error or interruption, provided that the SOFTWARE is operated substantially in accordance with its documentation. (b) In the event that the SOFTWARE does not comply with the warranties set forth herein, SPSS upon notification from LICENSEE will begin the process of duplicating the error and, if it is an error in the SOFTWARE that causes the SOFTWARE to be in breach of the warranty set forth in 7.2a, begin the process of correcting such error. SPSS shall correct such non-compliance within the timeframes set forth in Section 5.2a above. If SPSS fails to provide corrected SOFTWARE to LICENSEE within such timeframe, LICENSEE may terminate this Agreement and return the SOFTWARE to SPSS for a full refund of all amounts paid by LICENSEE hereunder. 7.3 SPSS warrants that all Maintenance services and other services provided under this Agreement shall be provided in a timely, professional and workmanlike manner in accordance with the highest standards prevailing in the industry. 7.4 (a) EXCEPT FOR THE WARRANTIES PROVIDED IN THIS AGREEMENT, THERE ARE NO WARRANTIES EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, AND ALL SUCH WARRANTIES ARE EXPRESSLY DISCLAIMED. (b) EXCEPT FOR (I) SPSS'S INDEMNIFICATION OBLIGATIONS WITH RESPECT TO THIRD PARTY CLAIMS UNDER SECTION 7.5 HEREOF, (II) A BREACH BY SPSS OF SECTION 8.6 HEREOF, OR (III) PROPERTY DAMAGE OR PHYSICAL INJURY OR DEATH, IN NO EVENT SHALL EITHER PARTY BE RESPONSIBLE FOR ANY INDIRECT OR CONSEQUENTIAL DAMAGES OR LOST PROFITS, EVEN IF SUCH PARTY HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. (c) EXCEPT FOR (I) SPSS'S INDEMNIFICATION OBLIGATIONS WITH RESPECT TO THIRD PARTY CLAIMS UNDER SECTION 7.5 HEREOF, (II) A BREACH BY SPSS OF SECTION 8.6 HEREOF, OR (III) PROPERTY DAMAGE OR PHYSICAL INJURY OR DEATH, NEITHER PARTY'S LIABILITY ARISING OUT OF THIS AGREEMENT SHALL IN ANY EVENT EXCEED THE AGGREGATE AMOUNT OF LICENSE AND OTHER FEES PAID OR PAYABLE HEREUNDER PLUS $100,000. 7.5 (a) SPSS agrees to indemnify, defend, and hold harmless LICENSEE and its officers, directors, employees, agents, Authorized Third Parties and Affiliates (the "Indemnified Parties") from and against any and all third party claims, demands, costs, actions, costs, damages, settlements and liabilities (including all reasonable attorneys' fees and court costs) of any kind whatsoever, arising directly or indirectly out of claims that any use of the SOFTWARE or any Deliverables in accordance with this Agreement infringe on the intellectual property rights of a third party or constitutes a misappropriation of the trade secrets of a third party, or has caused any other injury to any third party. LICENSEE shall provide SPSS with prompt notice of any such claim or action. SPSS shall have sole control over the defense or settlement of any such claim, provided that LICENSEE may participate in the defense of any claim through its own counsel, and at its own expense. SPSS shall not agree to any settlement of any such claim that does not include a complete release of LICENSEE from all liability with respect thereto or that imposes any liability, obligation or restriction on LICENSEE with the prior written consent of LICENSEE. (b) SPSS shall have no obligation for any claim of infringement arising from (i) the modification of the SOFTWARE by LICENSEE without SPSS prior approval, where such infringement would not have arisen but for such modification; or (ii) any combination of the SOFTWARE with products not supplied by LICENSOR and not contemplated by the Specifications, where such infringement would not have arisen but for such combination. (c) In the event that any SOFTWARE is held in a suit or proceeding to infringe any intellectual property rights of a third party (or constitute the misappropriation of a trade secret of a third party) and the use of such SOFTWARE is enjoined, or LICENSEE has an objective basis for believing that the SOFTWARE is likely to be found to infringe or constitute a misappropriation, or likely to be enjoined, then SPSS shall, at its expense, either (i) secure for LICENSEE the right to continue using the SOFTWARE, or (ii) replace or modify the SOFTWARE so that it becomes non-infringing; provided, however, if (i) and (ii) are not reasonably practicable, SPSS shall refund to LICENSEE all amounts paid hereunder for the affected SOFTWARE, provided, however, that such refund shall be subject to reduction on a straight line depreciation basis over a period of five (5) years starting as of the date that the most recent infringing version of the SOFTWARE is provided to LICENSEE. 8. General Provisions 8.1 LICENSEE agrees that this Agreement may not be assigned and that SOFTWARE may not be transferred or sublicensed without the prior written consent of SPSS which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, that LICENSEE shall have the right to assign any of its rights and obligations under this Agreement without the consent or approval of SPSS (i) to an entity which acquires all or substantially all of the assets of LICENSEE relating to the subject matter hereof, or (ii) to any subsidiary or Affiliate or successor in a merger, acquisition, restructuring or reorganization of LICENSEE, provided that such assignee assumes in writing LICENSEE's obligations hereunder. 8.2 LICENSEE grants SPSS the right to engage an independent third party consultant reasonably acceptable to LICENSEE to conduct, at SPSS's sole expense, a reasonable audit during normal business hours upon no less than thirty (30) days prior written notice to LICENSEE once per calendar year to verify that LICENSEE is using the SOFTWARE pursuant to the provisions of this Agreement. LICENSEE agrees to allow SPSS reasonable access to LICENSEE's premises and to use commercially reasonable efforts to cooperate in the conduct such an audit. 8.3 This agreement together with all SCHEDULE(s) attached hereto (the "Agreement") supersedes all prior agreements, proposals, representations and communications between the parties relating to the subject matter herein. In the case of conflict between this Agreement and purchase orders issued for the SOFTWARE, the terms of this Agreement shall prevail. 8.4 SPSS shall not be liable for delays or nonperformance of this Agreement to the extent caused by fires, accidents or other force majeure events beyond the control of SPSS; provided, however, that if SPSS fails to comply with the terms and conditions of this Agreement for a period of thirty (30) days or more as a result of one or more force majeure events, LICENSEE shall have the right to terminate this Agreement upon written notice to SPSS. 8.5 SPSS shall have no right to use LICENSEE's name in marketing, advertising and public relations material without LICENSEE's prior written consent, on a case-by-case basis. 8.6 (a) Each party shall hold strictly confidential and shall not disclose to any third party the terms and conditions of this Agreement. In addition, SPSS understands that this Agreement and SPSS' licenses, services and other activities hereunder shall involve access to confidential, proprietary or trade secret information or materials of LICENSEE (or its affiliates, licensors, suppliers, vendors, clients, customers or any other third party to whom LICENSEE owes a duty of confidentiality), in whatever form, tangible or intangible, whether disclosed or provided to SPSS before or after the execution of this Agreement (collectively, "Proprietary Information"). (b) SPSS agrees during the term of this Agreement and thereafter that it (i) shall take all steps reasonably necessary to hold LICENSEE's Proprietary Information in trust and confidence; (ii) shall use Proprietary Information only for the benefit of LICENSEE (and not for the benefit of SPSS or any third party), (iii) shall not use Proprietary Information in any manner or for any purpose not expressly set forth in this Agreement; (iv) shall reproduce such Proprietary Information only to the extent reasonably required to fulfill SPSS's obligations hereunder; and (v) shall not disclose, deliver, provide, disseminate or otherwise make available, directly or indirectly, any Proprietary Information to any third party. SPSS may disclose Proprietary Information only to SPSS's employees and agents who have a need to know such Proprietary Information, and who are each obligated by a written agreement to comply with confidentiality provisions no less restrictive than those set forth in this Agreement. SPSS shall take the same degree of care that it uses to protect its own confidential and proprietary information of similar nature and importance (but in no event less than reasonable care) to protect the confidentiality and avoid the unauthorized use, disclosure, publication, or dissemination of Proprietary Information. (c) The foregoing obligations in Section 8.6(b) shall not apply to any Proprietary Information to the extent SPSS can prove such Proprietary Information (a) is or has become generally known other than by any act or omission of SPSS; or (b) was rightfully known by SPSS prior to the time of first disclosure to SPSS. In addition, SPSS may use or disclose Proprietary Information to the extent SPSS is legally compelled to disclose such Proprietary Information, provided that SPSS shall use reasonable efforts to give advance notice of such compelled disclosure to LICENSEE, and shall cooperate with LICENSEE in connection with any efforts to prevent or limit the scope of such disclosure and/or use of the Proprietary Information. 8.7 If a part of this Agreement is held unenforceable or invalid or prohibited under law, it shall be deleted from this Agreement and shall not affect the enforceability of the other parts of this Agreement. 8.8 This Agreement shall be interpreted under the laws of the Commonwealth of Massachusetts of the United States of America. With respect to claims initiated by LICENSEE, both parties hereby irrevocably consent to the non-exclusive jurisdiction of the courts of the Commonwealth of Massachusetts. With respect to claims initiated by SPSS, both parties hereby irrevocably consent to the non-exclusive jurisdiction of the courts of the State of Illinois. IN WITNESS WHEREOF, the parties, through their authorized representatives, have executed this Agreement as of the date last written below ("Effective Date"). For Quaker Fabric Corporation of Fall River (LICENSEE) For SPSS Inc Signature: Signature: ------------------------------------ ---------------------------------- Printed Name: Printed Name: ------------------------------------ ---------------------------------- Title: Title: ------------------------------------ ---------------------------------- Date: Date: ------------------------------------ ----------------------------------
SCHEDULES TO SOFTWARE LICENSE AGREEMENT The following Schedules are hereby incorporated into this Software License Agreement: SCHEDULE A SOFTWARE AND LICENSE FEES SCHEDULE B SPECIFICATIONS SCHEDULE C MAINTENANCE AND PERFORMANCE METRICS SCHEDULE D SOURCE CODE ESCROW AGREEMENT SCHEDULE E TRAINING SCHEDULE A SOFTWARE AND LICENSE FEES SCHEDULE A LICENSEE and SPSS agree that the use of the SOFTWARE products listed in this Schedule A shall be subject to the terms and conditions of the Software License Agreement attached or previously executed between the parties. 1. Definitions For the purposes of this Schedule and the Software License Agreement, the term listed below shall have the following meaning: 1.1 "AUTHORIZED END-USER" shall mean any person who is affiliated with LICENSEE or its Affiliates or Authorized Third Parties as (i) a full-time or part-time employee; or (ii), a full-time or part-time faculty member; or (iii) a third party contractor while working on LICENSEE'S business. 2. Additional License Grant Terms 2.1 Where appropriate the SOFTWARE is referred to as CLIENT SOFTWARE or SERVER SOFTWARE. SOFTWARE covered by a Per-Seat License or a Concurrent User License is referred to as CLIENT SOFTWARE. SOFTWARE covered by a Server License is referred to as SERVER SOFTWARE. In addition to the license terms set froth in Software License Agreement to which this Schedule A is attached, the following terms apply to the specific types of licenses described below: 2.1.1 Per-Seat License With respect to each item of SOFTWARE designated in this Schedule A as having a "Per-Seat License" (if any), the license is limited to use and operation on as many specific client computers as indicated in the Schedule. Each per-seat license is exclusively dedicated for the use of a single AUTHORIZED END-USER on one specific client computer accessing the SERVER SOFTWARE (to be licensed separately) on a server. 2.1.2 Concurrent User License With respect to each item of SOFTWARE designated in this Schedule A as having a "Concurrent User License", the license is limited to use and operation on an unspecified number of computers located in any office of the LICENSEE or any of its Affiliates or Authorized Third Parties (whether or not in the United States) accessing the SERVER SOFTWARE (to be licensed separately) on a server (as defined in Section 2.1.3 below), provided that the total number of client computers which may access the server to use the SERVER SOFTWARE at the same time is limited to the number of clients specified in this Schedule A. Such limit of concurrent users may in no way be circumvented through the use of third party interface or multiplexing software or in any other manner whatsoever. 2.1.3 Server License With respect to each item of SOFTWARE designated in this Schedule A as having a "Server License", the license is limited to use and operation on a single server with a single or multiple CPU or on one or more designated logical partition within a server with a single or multiple CPU for the use by AUTHORIZED END-USERS. The installation on further partitions within a server, or on one or more different servers with similar processing capability, shall not require the purchase of any additional licenses. 2.2 If LICENSEE is licensing the products "Analyzer" and "Essbase" or "Warehouse Builder" or if LICENSEE is purchasing a Project License, the following additional terms apply to such products only: 2.2.1 If LICENSEE is licensing both "Analyzer" and "Essbase", LICENSEE is granted a free one (1) seat License to use "Warehouse Manager", the SOFTWARE necessary to add databases for use in "Analyzer". The right to use the free License for "Warehouse Manager" is strictly limited to the addition of databases for use in "Analyzer" and to the use of the User Setting function ("Analyzer Designer"). Except as otherwise set forth herein, any use of "Warehouse Manager" beyond this restricted use needs a separate, fully payable license. 2.2.2 If LICENSEE is licensing "Warehouse Builder", either the source or the target server must be designated as the control server. The number of AS/400 servers on which the Warehouse Builder software may be installed shall be as set forth on the attached schedule, and shall be without reference to the number of processors included in any machine. 2.3 SOFTWARE is installed on a computer or workstation when it is loaded into temporary memory (i.e. RAM) or installed into permanent memory (e.g. hard disk, CD-ROM, or other storage device) of that computer or workstation. However installation of the CLIENT SOFTWARE on a network server for the sole purpose of internal distribution within LICENSEE and/or its Affiliates shall not constitute use for which a separate license is required, provided LICENSEE has a separate license for each computer or workstation to which the CLIENT SOFTWARE is distributed. 2.4 This Section shall only apply if LICENSEE is licensing the "Strategy" SOFTWARE or IBM DB2/OLAP SOFTWARE. That SOFTWARE contains technology from IBM Corporation called DAV4J (hereinafter "Program"). Program contains contributions from IBM and many other sources (hereinafter "Contributors"). The terms of the Agreement to which this SCHEDULE is appended shall apply to LICENSEE's use of Program, except for the following: (i) SPSS and the Contributors effectively disclaim all warranties and conditions, express and implied, including warranties or conditions of title and non-infringement, and implied warranties or conditions of merchantability and fitness for a particular purpose; (ii) SPSS and the Contributors disclaim all liability for damages, including direct, indirect, special, incidental, and consequential damages, such as lost profits. To receive a copy of the Program source code and a description of the changes that SPSS made to the Program source code, LICENSEE should refer to the URL location on the SPSS web site "Strategy" Support Web Site, indicated in the "Strategy" Support Documentation. The foregoing shall not diminish SPSS's obligation to provide Maintenance Services with respect to the full SOFTWARE package provided to LICENSEE, including the Program.
Address: Coordinator: Organization: Quaker Fabric Corporation Name: Mr. Robert B. Myers Address: 941 Grinnell Street Title and Director of Information Technology P.O.BOX 2139 email bmyers@quakerfabric.com Fall River, MA 02721 address: Invoice Address if different: Shipping Address if different:
- --------------------------------------------------------------------------------------------------------------- License/ License Fees Operating Service Unit List License (Excluding shipping SOFTWARE System Type. Quantity Fee and taxes) - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Query/Report Writer Conc 10 $ 14,000.00 - --------------------------------------------------------------------------------------------------------------- Enterprise Reporting Server 1 $ 28,000.00 - --------------------------------------------------------------------------------------------------------------- Essbase/400 server Server 1 $ 25,000.00 - --------------------------------------------------------------------------------------------------------------- ShowCase Analyzer server 1-way 1 $ 15,000.00 - --------------------------------------------------------------------------------------------------------------- Essbase/400 users/seats Conc 5 $ 15,750.00 - --------------------------------------------------------------------------------------------------------------- ShowCase Analyzer users/seats Conc 5 $ 7,000.00 - --------------------------------------------------------------------------------------------------------------- Warehouse Builder DB2/400 Server 1 $ 17,500.00 - --------------------------------------------------------------------------------------------------------------- Warehouse Builder BPCS Source Server 2 $ 8,000.00 - --------------------------------------------------------------------------------------------------------------- Warehouse Manager 1-way 3 $ 13,500.00 - --------------------------------------------------------------------------------------------------------------- Financial Deployment Accelerator Server 1 N/C - --------------------------------------------------------------------------------------------------------------- Sales Deployment Accelerator Server 1 N/C - --------------------------------------------------------------------------------------------------------------- Warehouse Builder NT/Oracle Source Server Unlimited N/C - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Annual Support and Maintenance $ 31,750.00 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Server Licenses can run on multiple CPUs at no additional charge. - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- TOTAL $175,500.00 ===========
- -------------------------------------------------------------------------------------- The following information is necessary to generate a password for the system: - -------------------------------------------------------------------------------------- AS/400 Serial # Model Number & Feature Code OS Version - -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
Agreed by Agreed by LICENSEE: SPSS Inc: ---------------------------- ------------------------------- Authorized Signature Authorized Signature Printed Name: Printed Name: Title: Date: Title: Date: SCHEDULE B SPECIFICATIONS STRATEGY Overview SPSS Solutions Group Product Overview Warehouse Manager Warehouse Manager helps day-to-day management of your data warehouse or production database. By using this single, integrated solution, with an interface similar to that of Microsoft'r' Explorer'TM', your system administrators can manage and monitor warehouse security and access, data simplification, resource allocation, and other aspects of your warehouse. The warehouse manager product allows the administrator to grant or revoke authority from library level, table level, column level and row level by individual users or group of users. Query The Query component of SPSS Solutions Group STRATEGY allows your organization to access data, whether it is contained in transactional, operational or ERP systems or centralized in data marts or a data warehouse. Query lets your company's end-users probe data without direct IT assistance. Query improves productivity by allowing users to access both relational and multidimensional databases and download information into familiar desktop applications, including Microsoft'r' Excel, Lotus'r' 1-2-3 and Microsoft'r' Word. Use of this product will allow different users who have the same security level that are querying the same data to obtain consistent results. Report Writer Report Writer helps end-users create reports of their data analyses. Drag-and-drop features, graphics and other elements make report design intuitive for the beginner, while powerful query and calculation capabilities enable more advanced users to design specialized reports. With Report Writer, end-users can carry out scheduled or ad hoc data analysis. And since Query is fully integrated into Report Writer, they receive unmatched access to your underlying data. If you create a canned report in Report Writer, different users, who have the same security level, can use Query to access the same data and show the same results by using the canned report created in Report Writer. Enterprise Reporting Allows your organization to save reports run by Query or other STRATEGY front-end tools and refresh these reports either on a regular schedule or as needed. You can distribute reports over the web. And end-users can even probe data dynamically over the web. Warehouse Builder Warehouse Builder transforms and simplifies your online transaction processing data into information for end-users. It enables your organization to create data marts or a data warehouse and automatically populate relational tables or multidimensional cubes. Warehouse Builder also provides for the replication of operational data from one system to another. This tool is a main reason why you can bring your enterprise wide data together in one centralized location - the AS/400. Warehouse Builder can pull from data sources such as, other AS/400s, Oracle, SQL Server, Lotus Notes and Domino, MS Access, and MS Excel Essbase for Online Analytical Processing (OLAP) With Essbase/400, your company gains the power to share and analyze current data to support the planning and forecasting activities. Industry-leading Essbase technologies deliver give your organization the ability to perform not only historical data analysis but also budgeting and planning, "what if" analyses. Analyzer Analyzer allows your company's end-users to access multidimensional and relational data stores, analyze that information and even "drill through" to the underlying detailed data. They can easily display information as charts, spreadsheets, or custom reports. This powerful viewer sorts, ranks, filters, calculates and graphs data for deeper understanding at a glance. Analyzer allows users to store and manage these views, making it possible to share information throughout the enterprise. Analyzer for the Web Brings the power of Analyzer to your company's intranet. Operating over common Internet browsers, such as Microsoft'r' Internet Explorer or Netscape'r' Navigator, Analyzer for the Web allows users to create, store and manage graphical views of data, which can then be shared electronically throughout the enterprise. SCHEDULE C MAINTENANCE AND PERFORMANCE METRICS SPSS will make available to LICENSEE updates, maintenance and support services as set forth below with respect to the SOFTWARE, and any release thereof delivered by SPSS to LICENSEE hereunder. I. UPDATES Updates, error corrections and new releases of the Software shall be provided to LICENSEE in electronic form, when and if they are made available by SPSS. If SPSS cannot provide an update, error correction or new release via electronic form, SPSS will send such upgrade in the format available. II. SUPPORT as set forth below. Introduction This document describes the support and standards of support provided by SPSS Inc to LICENSEE. SPSS Inc is committed to providing a high level of support to ensure that LICENSEE will realize the complete value of their investment in SPSS products. This agreement is intended to guarantee that users receive an acceptable level of response to their needs and to ensure common expectations of quality and timeframes for support provided by the SPSS Support organization. The Support organization's goal is: o Timely and effective technical support of SPSS products to enable our customers to realize the full value of their investment in SPSS products. This level of support will be provided throughout LICENSEE for all supported hardware and software configurations. Supported Technology SPSS Inc will provide support to LICENSEE for those SPSS features and/or products that LICENSEE has covered under a current maintenance contract. SPSS will be unable to provide support for operating system releases not supported by the manufacturer. Customer Service Service Access: All requests for technical support should be directed to SPSS Inc, Technical Support. SPSS Technical Support services are accessible via: o Phone o Email Problem Priority: All support requests will be assigned a tracking number by SPSS which will be provided to the LICENSEE support requestor. At the time a problem is reported, the requestor will be asked to provide an assessment of the impact the problem is having on LICENSEE . The following designations will be used to assign problem severity based on the information provided by LICENSEE: o Severity 1 - Critical problem. Application or significant module unavailable or the results produced by application are erroneous as result of error in the application. No acceptable workaround available. o Severity 2 - High Impact. Function limited or workaround difficult to implement. o Severity 3 - Low Impact. Cosmetic change such as screen wording or a typographical error. Hours of Operation: SPSS Technical Support is available 9:00am to 5:00pm CST, Monday through Friday except for nationally recognized holidays, President's Day, Christmas Eve Day and the Friday after Thanksgiving. Service Measures: Problems:
----------------------------------------------------------------------- Severity Reporting Method Response ----------------------------------------------------------------------- 1,2,3 Telephone 100% - 4 business hours ----------------------------------------------------------------------- 1,2,3 Email 100% - 4 business hours -----------------------------------------------------------------------
Defects:
---------------------------------------- Priority Estimated Correction Times* ---------------------------------------- 1 Bypass or fix within 24 hours ---------------------------------------- 2 Bypass or fix within 30 days ---------------------------------------- 3 Bypass or fix in next release ----------------------------------------
* "Bypass or fix" means that substantial functionality has been restored to the SOFTWARE with no material impact on LICENSEE's ability to use or access the SOFTWARE. For priority 1 errors, SPSS shall use best efforts to meet the estimated correction times set forth above. Problem Updates:
--------------------------------------------------------- Severity Frequency --------------------------------------------------------- 1 Every 4 hours and upon request by LICENSEE --------------------------------------------------------- 2 Daily (unless otherwise mutually agreed upon) --------------------------------------------------------- 3 Weekly (unless otherwise mutually agreed upon) ---------------------------------------------------------
SPSS will also make available to LICENSEE access to an online knowledgebase. This online system can be accessed any time of the day or week. Patches: Fixes to reported product problems will be made available to LICENSEE on the SPSS Technical Support web site. The fixes will be available for downloading and installation. Quality: All SPSS releases are tested by a Quality Assurance Test Team. Individual emergency patches (for high severity problems) generally will not have the same level of testing prior to being made available to LICENSEE. In these cases, SPSS will work with LICENSEE to assist in making an informed decision on installing the emergency patch. Emergency Situations: In the event of a severe problem with the SPSS software, LICENSEE will contact SPSS support via one of the communication channels and inform SPSS that this problem is considered to be severe. In addition, it is strongly recommended that for serious problems, LICENSEE contact the Manager of Technical Support and apprise the manager of the situation. The Manager of Support will work closely with LICENSEE management to resolve the issue in as expeditious a manner possible and minimize the impact of the problem on LICENSEE's business operations. Customer Responsibilities: LICENSEE agrees to maintain their systems on a supported release of SPSS software. In addition, they will not attempt to make modifications to the existing code without prior approval from SPSS. Any modifications to the software will not be supported without prior arrangement. In some cases it may become necessary to remotely connect to LICENSEE system(s) to collect diagnostic information. If such a circumstance arises, SPSS Support will work with LICENSEE's management to arrange for such connection. LICENSEE agrees to provide reasonable access to their system(s) for such problem resolution. All information obtained by SPSS as a result of access to LICENSEE's systems or otherwise through performance of Maintenance Services shall constitute Proprietary Information of LICENSEE. Problem Escalation Escalation Procedure - In the event SPSS has responded to LICENSEE's request but has been unable to provide either a temporary or permanent resolution or a plan for so doing within a twenty four (24) hour timeframe for a Severity Level 1 situation, Licensee should notify the SPSS's Support Manager to inform him/her of the situation and the SPSS Support Manager and LICENSEE shall meet via the phone to discuss the situation If after 48 hours the situation is still unresolved, the LICENSEE should notify the Vice President of Global Support and inform him of the situation and meet with him via the phone to discuss the situation The SPSS Support Manager, and if necessary, Vice President of Global Support will remain involved in any Severity 1 situations that get reported to them in accordance with this paragraph. SCHEDULE D SOURCE CODE ESCROW AGREEMENT AND THIRD PARTY BENEFICIARY FORM MASTER PREFERRED ESCROW AGREEMENT Master Number ___________________ This agreement "Agreement" is effective _____________, 20___ among DSI Technology Escrow Services, Inc. ("DSI"), ______________________________________ ("Depositor") and any additional party signing the Acceptance Form attached to this Agreement ("Preferred Beneficiary"), who collectively may be referred to in this Agreement as the parties ("Parties"). A. Depositor and Preferred Beneficiary have entered or will enter into a license agreement, development agreement, and/or other agreement regarding certain proprietary technology of Depositor (referred to in this Agreement as "the License Agreement"). B. Depositor desires to avoid disclosure of its proprietary technology except under certain limited circumstances. C. The availability of the proprietary technology of Depositor is critical to Preferred Beneficiary in the conduct of its business and, therefore, Preferred Beneficiary needs access to the proprietary technology under certain limited circumstances. D. Depositor and Preferred Beneficiary desire to establish an escrow with DSI to provide for the retention, administration and controlled access of certain proprietary technology materials of Depositor. E. The parties desire this Agreement to be supplementary to the License Agreement pursuant to 11 United States [Bankruptcy] Code, Section 365(n). ARTICLE 1 -- DEPOSITS 1.1 Obligation to Make Deposit. Upon the signing of this Agreement by the parties, including the signing of the Acceptance Form, and Exhibit D naming the Deposit Account, Depositor shall deliver to DSI the proprietary technology and other materials ("Deposit Materials") required to be deposited by the License Agreement or, if the License Agreement does not identify the materials to be deposited with DSI, then such materials will be identified on Exhibit A. If Exhibit A is applicable, it is to be prepared and signed by Depositor and Preferred Beneficiary. DSI shall have no obligation with respect to the preparation, signing or delivery of Exhibit A. 1.2 Identification of Tangible Media. Prior to the delivery of the Deposit Materials to DSI, Depositor shall conspicuously label for identification each document, magnetic tape, disk, or other tangible media upon which the Deposit Materials are written or stored. Additionally, Depositor shall complete Exhibit B to this Agreement by listing each such tangible media by the item label description, the type of media and the quantity. Exhibit B shall be signed by Depositor and delivered to DSI with the Deposit Materials. Unless and until Depositor makes the initial deposit with DSI, DSI shall have no obligation with respect to this Agreement, except the obligation to notify the parties regarding the status of the account as required in Section 2.2 below. 1.3. Escrow Account Name Identification. Subject to this Section 1, and at the time Depositor makes the initial deposit with DSI in accordance with Section 1.2 above, Depositor shall complete and sign Exhibit D naming the initial account upon which the Deposit Materials are written or stored. Any new deposits referencing new account names made subsequent to the signing of this Agreement, intended by the Depositor to be held in a separate account and maintained separately from the initial account, but made a part of this Agreement, shall be provided for by the Depositor on Exhibit E, and Exhibit E shall be signed by the Depositor and DSI. 1.4 Acceptance of Deposit. When DSI receives the Deposit Materials, DSI will conduct a deposit inspection. At completion of the deposit inspection, if DSI determines that the labeling of the tangible media matches the item descriptions and quantity on Exhibit B, DSI will date and sign Exhibit B and mail a copy thereof to Depositor and Preferred Beneficiary. If DSI determines that the labeling does not match the item descriptions or quantity on Exhibit B, DSI will (a) note the discrepancies in writing on Exhibit B; (b) date and sign Exhibit B with the exceptions noted; and (c) mail a copy of Exhibit B to Depositor and Preferred Beneficiary. DSI's acceptance of the deposit occurs upon the signing of Exhibit B by DSI. Delivery of the signed Exhibit B to Preferred Beneficiary is Preferred Beneficiary's notice that the Deposit Materials have been received and accepted by DSI. Other than DSI's inspection of the Deposit Materials, DSI shall have no obligation to the accuracy, completeness, functionality, performance or non-performance of the Deposit Materials. 1.5. Depositor's Representations. Depositor represents as follows: a. Depositor lawfully possesses all of the Deposit Materials deposited with DSI; b. With respect to all of the Deposit Materials, Depositor has the right and authority to grant to DSI and Preferred Beneficiary the rights as provided in this Agreement; c. As of the effective date of this Agreement and thereafter, the Deposit Materials will not be the subject of a lien or encumbrances that will prohibit, limit, or alter the rights and obligations of DSI under this Agreement; d. The Deposit Materials consist of the proprietary technology and other materials identified either in the License Agreement or Exhibit A, as the case may be; and e. The Deposit Materials are readable and useable in their current form or, if any portion of the Deposit Materials is encrypted, the decryption tools and decryption keys have also been deposited. 1.6 Verification. Upon receipt of a written request from Preferred Beneficiary, DSI and Preferred Beneficiary may enter into a separate proposal agreement pursuant to which DSI will agree, upon certain terms and conditions, to inspect the Deposit Materials for the purpose of verifying its accuracy, completeness, sufficiency and quality ("Verification Proposal Agreement"). Depositor shall reasonably cooperate with DSI by providing its facilities, computer software systems, and technical and support personnel for verification whenever reasonably necessary. If a verification is elected after the Deposit Materials have been delivered to DSI, then only DSI, or at DSI's election, an independent contractor or company selected by DSI, may perform the verification. 1.7 Deposit Updates. Unless otherwise provided by the License Agreement, Depositor shall update the Deposit Materials within sixty (60) days of each release of a new version of the product, which is subject to the License Agreement. Such updates will be added to the existing deposit. All deposit updates shall be listed on a new Exhibit B and the new Exhibit B shall be signed by Depositor. Each Exhibit B will be held and maintained separately within the escrow account. An independent record will be created which will document the activity for each Exhibit B. The processing of all deposit updates shall be in accordance with Sections 1.2 through 1.6 above. All references in this Agreement to the Deposit Materials shall include the initial Deposit Materials and any updates. 1.8 Removal of Deposit Materials. The Deposit Materials may be removed and/or exchanged only on written instructions signed by Depositor and Preferred Beneficiary, or as otherwise provided in this Agreement. ARTICLE 2 -- CONFIDENTIALITY AND RECORD KEEPING 2.1 Confidentiality. DSI shall have the obligation to reasonably protect the confidentiality of the Deposit Materials. Except as provided in this Agreement or any subsequent agreement between the Parties, DSI shall not disclose, transfer, make available, or use the Deposit Materials. DSI shall not disclose the terms of this Agreement to any third party. If DSI receives a subpoena or any other order from a court or other judicial tribunal pertaining to the disclosure or release of the Deposit Materials, DSI will immediately notify the parties to this Agreement unless prohibited by law. It shall be the responsibility of Depositor and/or Preferred Beneficiary to challenge any such order; provided, however, that DSI does not waive its rights to present its position with respect to any such order. DSI will not be required to disobey any order from a court or other judicial tribunal including, but not limited to, notices delivered pursuant to 7.6 below. 2.2 Status Reports. DSI will issue to Depositor and Preferred Beneficiary a report profiling the account history semi-annually. ARTICLE 3 -- RIGHT TO MAKE COPIES 3.1 Right to Make Copies. DSI shall have the right to make copies of the Deposit Materials as reasonably necessary to perform this Agreement. DSI shall copy all copyright, nondisclosure, and other proprietary notices and titles contained on the Deposit Materials onto any copies made by DSI. With all Deposit Materials submitted to DSI, Depositor shall provide any and all instructions as may be necessary to duplicate the Deposit Materials including but not limited to the hardware and/or software needed. Any copying expenses incurred by DSI as a result of a request to copy will be borne by the party requesting the copies. Alternatively, DSI may notify Depositor requiring its reasonable cooperation in promptly copying the Deposit Materials in order for DSI to perform this Agreement. ARTICLE 4 -- RELEASE OF DEPOSIT 4.1 Release Conditions. As used in this Agreement, "Release Condition" shall mean the existence with correction of an of the following conditions for a period of thirty (30) days: a. Entry of an order as to Depositor under Title 11 of the United States Code b. The making by Depositor of a general assignment for the benefit of creditors c. The appointment of a general receiver or trustee in bankruptcy of Depositor's business d. Action by Depositor under any state insolvency or similar law for the purpose of Depositor's bankruptcy, reorganization or liquidation. 4.2 Filing For Release. If Preferred Beneficiary believes in good faith that a Release Condition has occurred, Preferred Beneficiary may provide to DSI written notice of the occurrence of the Release Condition and a request for the release of the Deposit Materials. Within five (5) business days of receipt of a written notice, DSI shall provide a copy of the notice to Depositor. DSI will promptly notify the Parties unless DSI acknowledges or discovers independently, or through the Parties, its need for additional documentation or information in order to comply with this section. Such need for additional documentation or information may extend the time period for DSI's performance under this section. 4.3 Contrary Instructions. From the date DSI mails the notice requesting release of the Deposit Materials, Depositor shall have ten (10) business days to deliver to DSI contrary instructions ("Contrary Instructions"). Contrary Instructions shall mean the written representation by Depositor that a Release Condition has not occurred or has been cured. Upon receipt of Contrary Instructions, DSI shall send a copy to Preferred Beneficiary by commercial express mail. Additionally, DSI shall notify both Depositor and Preferred Beneficiary that there is a dispute to be resolved pursuant to the Section 7.4. Subject to Section 5.2 of this Agreement, DSI will continue to store the Deposit Materials without release pending (a) joint instructions from Depositor and Preferred Beneficiary; (b) dispute resolution pursuant to Section 7.4; or (c) order from a court of competent jurisdiction. 4.4 Release of Deposit. If DSI does not receive Contrary Instructions from the Depositor, DSI is authorized to release the Deposit Materials to the Preferred Beneficiary or, if more than one beneficiary is registered to the deposit, to release a copy of the Deposit Materials to the Preferred Beneficiary. However, DSI is entitled to receive any fees due DSI before making the release. Any copying expenses will be chargeable to Preferred Beneficiary. Upon any such release, the escrow arrangement will terminate as it relates to the Depositor and Preferred Beneficiary involved in the release. 4.5 Right to Use Following Release. Unless otherwise provided in the License Agreement, upon release of the Deposit Materials in accordance with this Article 4, Preferred Beneficiary shall have the right to use the Deposit Materials for the sole purpose of continuing the benefits afforded to Preferred Beneficiary by the License Agreement. Preferred Beneficiary shall be obligated to maintain the confidentiality of the released Deposit Materials. ARTICLE 5 -- TERM AND TERMINATION 5.1 Term of Agreement. The initial term of this Agreement is for a period of one (1) year. Thereafter, this Agreement shall automatically renew from year-to-year unless (a) Depositor and Preferred Beneficiary jointly instruct DSI in writing that the Agreement is terminated; (b) DSI instructs Depositor and Preferred Beneficiary in writing ninety (90) days after its renewal date that the Agreement is terminated for nonpayment in accordance with Section 5.2; or (c) DSI reserves the right to terminate this Agreement, for any reason, other than nonpayment, by providing Depositor and Preferred Beneficiary sixty (60) days written notice of its intent to terminate this Agreement. If the Deposit Materials are subject to another escrow agreement with DSI, DSI reserves the right, after the initial one year term, to adjust the anniversary date of the Agreement to match the then prevailing anniversary date of such other escrow arrangements. 5.2 Termination for Nonpayment. In the event of the nonpayment of fees owed to DSI, DSI shall provide written notice of delinquency to the parties to this Agreement affected by such delinquency. Any such party shall have the right to make the payment to DSI to cure the default. If the past due payment is not received in full by DSI within one (1) month of the date of such notice, then at any time thereafter DSI shall have the right to terminate this Agreement to the extent it relates to the delinquent party by sending written notice of termination to such affected parties. DSI shall have no obligation to take any action under this Agreement so long as any payment due to DSI remains unpaid. 5.3 Disposition of Deposit Materials Upon Termination. Subject to the foregoing termination provisions, and upon termination of this Agreement, DSI shall destroy, return, or otherwise deliver the Deposit Materials in accordance with Depositor's instructions. If there are no instructions, DSI may, at its sole discretion, destroy the Deposit Materials or return them to Depositor. DSI shall have no obligation to destroy or return the Deposit Materials if the Deposit Materials are subject to another escrow agreement with DSI or have been released to the Preferred Beneficiary in accordance with Section 4.4. 5.4 Survival of Terms Following Termination. Upon termination of this Agreement, the following provisions of this Agreement shall survive: a. Depositor's Representations (Section 1.5); b. The obligations of confidentiality with respect to the Deposit Materials; c. The obligation to pay DSI any fees and expenses due; d. The provisions of Article 7; and e. Any provisions in this Agreement which specifically state they survive the termination of this Agreement. ARTICLE 6 -- DSI'S FEES 6.1 Fee Schedule. DSI is entitled to be paid its standard fees and expenses applicable to the services provided. DSI shall notify the party responsible for payment of DSI's fees at least sixty (60) days prior to any increase in fees. For any service not listed on DSI's standard fee schedule, DSI will provide a quote prior to rendering the service, if requested. 6.2 Payment Terms. DSI shall not be required to perform any service, including release of any Deposit Materials under Article 4, unless the payment for such service and any outstanding balances owed to DSI are paid in full. Fees are due upon receipt of a signed contract or receipt of the Deposit Materials whichever is earliest. If invoiced fees are not paid, DSI may terminate this Agreement in accordance with Section 5.2. ARTICLE 7 -- LIABILITY AND DISPUTES 7.1 Right to Rely on Instructions. DSI may act in reliance upon any instruction, instrument, or signature reasonably believed by DSI to be genuine. DSI may assume that any employee of a party to this Agreement who gives any written notice, request, or instruction has the authority to do so. DSI will not be required to inquire into the truth or evaluate the merit of any statement or representation contained in any notice or document. DSI shall not be responsible for failure to act as a result of causes beyond the reasonable control of DSI. 7.2 Indemnification. Depositor and Preferred Beneficiary each agree to indemnify, defend and hold harmless DSI from any and all claims, actions, damages, arbitration fees and expenses, costs, attorney's fees and other liabilities ("Liabilities") incurred by DSI relating in any way to this escrow arrangement except where it is adjudged that DSI acted with gross negligence or willful misconduct. 7.3 Limitation of Liability. In no event will DSI be liable for any incidental, indirect, special, exemplary, punitive or consequential damages, including, but not limited to, damages (including loss of data, revenue, and/or profits) costs or expenses (including legal fees and expenses), whether foreseeable or unforeseeable, that may arise out of or in connection with this Agreement; and in no event shall the collective liability of DSI exceed ten times the fees paid under this Agreement. The foregoing limitation of liability does not apply with respect to any acts of gross negligence, personal injury claims, property damage claims (excluding the Deposit), or intellectual property infringement ("Exclusions"). With the exception of the Exclusions, DSI shall in no event be liable for any incidental, punitive, special, indirect or consequential damages. 7.4 Dispute Resolution. Any dispute relating to or arising from this Agreement shall be submitted to, and settled by arbitration by a single arbitrator chosen by the Chicago Regional Office of the American Arbitration Association in accordance with the Commercial Rules of the American Arbitration Association. The arbitrator shall apply Illinois law. Unless otherwise agreed by Depositor and Preferred Beneficiary, arbitration will take place in Chicago, Illinois, U.S.A. Any court having jurisdiction over the matter may enter judgment on the award of the arbitrator. Service of a petition to confirm the arbitration award may be made by First Class mail or by commercial express mail, to the attorney for the party or, if unrepresented, to the party at the last known business address. If, however, Depositor and/or Preferred Beneficiary refuses to submit to arbitration, the matter shall not be submitted to arbitration and DSI may submit the matter to any court of competent jurisdiction. Any costs of arbitration incurred by DSI, including reasonable attorney's fees and costs, shall be divided equally and paid by Depositor and Preferred Beneficiary. 7.5 Controlling Law. This Agreement is to be governed and construed in accordance with the laws of the State of Illinois, without regard to its conflict of law provisions. 7.6 Notice of Requested Order. If any party intends to obtain an order from the arbitrator or any court of competent jurisdiction, which may direct DSI to take, or refrain from taking any action, that party shall: a. Give DSI at least five (5) business days prior notice of the hearing; b. Include in any such order that, as a precondition to DSI's obligation, DSI be paid in full for any past due fees and be paid for the reasonable value of the services to be rendered pursuant to such order; and c. Ensure that DSI not be required to deliver the original (as opposed to a copy) of the Deposit Materials if DSI may need to retain the original in its possession to fulfill any of its other escrow duties. ARTICLE 8 -- GENERAL PROVISIONS 8.1 Entire Agreement. This Agreement, which includes the Acceptance Form and Exhibits A, B, C, D and E described herein, embodies the entire understanding among all of the parties with respect to its subject matter and supersedes all previous communications, representations or understandings, either oral or written. DSI is not a party to the License Agreement between Depositor and Preferred Beneficiary and has no knowledge of any of the terms or provisions of any such License Agreement. DSI's only obligations to Depositor or Preferred Beneficiary are as set forth in this Agreement. No amendment or modification of this Agreement shall be valid or binding unless signed by all the parties hereto, except that Exhibit A need not be signed by DSI, Exhibit B need not be signed by Preferred Beneficiary, Exhibit C need not be signed by any party, Exhibit D need not be signed by Preferred Beneficiary or DSI and the Acceptance Form need only be signed by the parties identified therein. 8.2 Notices. All notices, invoices, payments, deposits and other documents and communications shall be given to the parties at the addresses specified in the attached Exhibit C and Acceptance Form. It shall be the responsibility of the parties to notify each other as provided in this Section in the event of a change of address. The parties shall have the right to rely on the last known address of the other parties. Any correctly addressed notice or last known address of the other parties that is relied on herein that is refused, unclaimed, or undeliverable because of an act or omission of the party to be notified as provided herein shall be deemed effective as of the first date that said notice was refused, unclaimed, or deemed undeliverable by the postal authorities by mail, through messenger or commercial express delivery services. Unless otherwise provided in this Agreement, all documents and communications may be delivered by First Class mail. 8.3 Severability. In the event any provision of this Agreement is found to be invalid, voidable or unenforceable, the parties agree that unless it materially affects the entire intent and purpose of this Agreement, such invalidity, voidability or unenforceability shall affect neither the validity of this Agreement nor the remaining provisions herein, and the provision in question shall be deemed to be replaced with a valid and enforceable provision most closely reflecting the intent and purpose of the original provision. 8.4 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties. However, DSI shall have no obligation in performing this Agreement to recognize any successor or assign of Depositor or Preferred Beneficiary unless DSI receives clear, authoritative and conclusive written evidence of the change of parties. 8.5 Waiver. Any term of this Agreement may be waived by the party entitled to the benefits thereof, provided that any such waiver must be in writing and signed by the party against whom the enforcement of the waiver is sought. No waiver of any condition, or breach of any provision of this Agreement, in any one or more instances, shall be deemed to be a further or continuing waiver of such condition or breach. Delay or failure to exercise any right or remedy shall not be deemed the waiver of that right or remedy. 8.6 Regulations. Depositor and Preferred Beneficiary are responsible for and warrant compliance with all applicable laws, rules and regulations, including but not limited to customs laws, import, export, and re-export laws and government regulations of any country from or to which the Deposit Materials may be delivered in accordance with the provisions of this Agreement. 8.7 Attorney's Fees. In any litigation or other proceeding by which one party either seeks to enforce its rights under this Agreement (whether in contract, tort, or both) or seeks declaration of any rights or obligations under this Agreement, the prevailing party who has proven in court by court decree, judgment or arbitrator's decision that the other party has materially breached its representation and/or warranty under this Agreement shall be awarded reasonable attorneys' fees, together with any costs and expenses, to resolve the dispute and to enforce final judgement. 8.8 No Third Party Rights. This Agreement is made solely for the benefit of the Parties to this Agreement and their respective permitted successors and assigns, and no other person or entity shall have or acquire any right by virtue of this Agreement unless otherwise agreed to by all the parties hereto. 8.9 Authority to Sign. Each of the Parties herein represents and warrants that the execution, delivery, and performance of this Agreement has been duly authorized and signed by a person who meets statutory or other binding approval to sign on behalf of its business organization as named in this Agreement. 8.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. DSI Technology Escrow Services, Inc. - ---------------------------------------- Depositor By: By: ------------------------------------ --------------------------------- Name: Name: ---------------------------------- ------------------------------- Title: Title: --------------------------------- ------------------------------ Date: Date: ---------------------------------- ------------------------------- EXHIBIT A MATERIALS TO BE DEPOSITED Account Number ______________________ Depositor represents to Preferred Beneficiary that Deposit Materials delivered to DSI shall consist of the following: - --------------------------------------- -------------------------------------- Depositor Preferred Beneficiary By: By: ----------------------------------- ---------------------------------- Name: Name: --------------------------------- -------------------------------- Title: Title: -------------------------------- ------------------------------- Date: Date: --------------------------------- -------------------------------- EXHIBIT B DESCRIPTION OF DEPOSIT MATERIALS Depositor Company Name _________________________________________________________ Account Number _________________________________________________________________ Product Name _________________________________ Version _________________________ (Product Name will appear as Exhibit B Name on Account History report) DEPOSIT MATERIAL DESCRIPTION: Quantity Media Type & Size Label Description of Each Separate Item _________ Disk 3.5" or ____ _________ DAT tape ____mm _________ CD-ROM _________ Data cartridge tape ____ _________ TK 70 or ____ tape _________ Magnetic tape ____ _________ Documentation _________ Other __________________ PRODUCT DESCRIPTION: Environment ____________________________________________________________________ DEPOSIT MATERIAL INFORMATION: Is the media or are any of the files encrypted? Yes / No If yes, please include any passwords and the decryption tools. Encryption tool name _____________________ Version _____________________________ Hardware required ______________________________________________________________ Software required ______________________________________________________________ Other required information _____________________________________________________ I certify for Depositor that the DSI has inspected and accepted above described Deposit Materials the above materials have been transmitted to DSI: (any exceptions are noted above): Signature Signature --------------------------- ----------------------------- Print Name Print Name -------------------------- ---------------------------- Date Date Accepted -------------------------------- ------------------------- Exhibit B# ---------------------------- EXHIBIT C DESIGNATED CONTACT Master Number ______________________ Notices, deposit material returns and Invoices to Depositor should be communications to Depositor should addressed to: be addressed to: Company Name: _________________________ _____________________________________ Address: ______________________________ _____________________________________ ______________________________ _____________________________________ ______________________________ _____________________________________ Designated Contact: ___________________ Contact: ____________________________ Telephone: ____________________________ _____________________________________ Facsimile: ____________________________ P.O.#, if required: _________________ E-mail: _______________________________ Verification Contact: _________________ Telephone/E-mail: _____________________ _______________________________________ Requests to change the designated contact should be given in writing by the designated contact or an authorized employee. DSI has two Operations Centers to All invoice fee remittances to DSI service you. Agreements, Deposit should be addressed to: Materials and notices to DSI should be addressed to: (select location) Attn: Client Services DSI Technology Escrow Services, Inc. 9265 Sky Park Court, Suite 202 PO Box 45156 San Diego, CA 92123 San Francisco, CA 94145-0156 Telephone: (858) 499-1600 Facsimile: (858) 694-1919 E-mail: clientservices@dsiescrow.com or Date: ___________________________ Attn: Client Services 2100 Norcross Parkway, Suite 150 Norcross, GA 30071 Telephone: 770-239-9200 Facsimile: 770-239-9201 E-mail: clientservices@dsiescrow.com EXHIBIT D NAME OF INITIAL ACCOUNT Account Number ______________________________________ _______________________________ ("Depositor") has entered into a Master Preferred Escrow Agreement with DSI Technology Escrow Services, Inc. ("DSI"). Pursuant to that Agreement, Depositor may deposit certain Deposit Materials with DSI. The initial account will be referenced by the following name: ______________________________________________________________. - --------------------------------------- Depositor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Date: --------------------------------- EXHIBIT E ADDITIONAL ESCROW ACCOUNT TO MASTER PREFERRED ESCROW AGREEMENT Master Number _________________________ New Account Number ______________________ _______________________________ ("Depositor") has entered into a Master Preferred Escrow Agreement with DSI Technology Escrow Services, Inc. ("DSI"). Pursuant to that Agreement, Depositor may deposit certain Deposit Materials with DSI. Depositor desires that new Deposit Materials be held in a separate account and be maintained separately from the initial account. By execution of this Exhibit E, DSI will establish a separate account for the new Deposit Materials. The new account will be referenced by the following name: _____________________________. Depositor hereby agrees that all terms and conditions of the existing Master Preferred Escrow Agreement previously entered into by Depositor and DSI will govern this account. The termination or expiration of any other account of Depositor will not affect this account. DSI Technology Escrow Services, Inc. - ---------------------------------------- Depositor By: By: ----------------------------------- --------------------------------- Name: Name: --------------------------------- ------------------------------- Title: Title: -------------------------------- ------------------------------ Date: Date: --------------------------------- ------------------------------- PREFERRED BENEFICIARY ACCEPTANCE FORM Account Number ______________________ Depositor, Preferred Beneficiary and DSI Technology Escrow Services, Inc. ("DSI"), hereby acknowledge that ___________________________ is the Preferred Beneficiary referred to in the Master Preferred Escrow Agreement effective ___________, 20__ with DSI as the escrow agent and ___________________ as the Depositor. Preferred Beneficiary hereby agrees to be bound by all provisions of such Agreement. Depositor hereby enrolls Preferred Beneficiary to the following account(s): Account Name Account Number _______________________________________ _____________________________________ _______________________________________ _____________________________________ _______________________________________ _____________________________________ Notices and communications to Preferred Beneficiary should be addressed to: Invoices should be addressed to: Company Name: _________________________ _____________________________________ Address: ______________________________ _____________________________________ ______________________________ _____________________________________ ______________________________ _____________________________________ Designated Contact: ___________________ Contact: ____________________________ Telephone: ____________________________ _____________________________________ Facsimile:_____________________________ P.O.#, if required:__________________ E-mail: _____________________________ - --------------------------------------- ------------------------------------- Preferred Beneficiary Depositor By: By: ----------------------------------- --------------------------------- Name: Name: --------------------------------- ------------------------------- Title: Title: -------------------------------- ------------------------------ Date: Date: --------------------------------- ------------------------------- DSI Technology Escrow Services, Inc. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Date: --------------------------------- PREFERRED BENEFICIARY ACCEPTANCE FORM Account Number ________________ Depositor, Preferred Beneficiary and DSI Technology Escrow Services, Inc. ("DSI"), hereby acknowledge that Quaker Fabrics is the Preferred Beneficiary referred to in the Master Preferred Escrow Agreement ("Agreement") effective December 20, 2002 with DSI as the escrow agent and SPSS Inc. as the Depositor. Preferred Beneficiary hereby agrees to be bound by all provisions of such Agreement. By signing below, the parties agree that the release conditions set forth in the Master Preferred Escrow Agreement shall be replaced with the following conditions: (i) SPSS Inc.'s material breach of its maintenance or support obligations, which breach is not cured within thirty (30) days following notification thereof by Quaker Fabrics ; (ii) the termination of the License Agreement entered into by SPSS Inc. and Quaker Fabrics, dated December 31, 2002, (hereinafter "Licensed Agreement"), which a copy has been provided to DSI Technology Escrow Services, Inc. pursuant to Section 5.2(b) of the License Agreement, (iii) SPSS Inc.'s failure to continue to do business in the ordinary course, (iv) SPSS Inc. becomes or is declared insolvent or bankrupt, is the subject of any proceedings relating to its liquidation, insolvency or for the appointment of a receiver or similar officer for it, makes an assignment for the benefit of all or substantially all of its creditors or enters into an agreement for the composition, extension or readjustment of all or substantially all of its obligations, or (v) SPSS Inc. fails to provide an update of the software licensed under the License Agreement with a new version of the IBM OS400 operating system within one year following IBM's general release of such new version (collectively, "Release Conditions"). Notices and communications to Invoices should be addressed to: Preferred Beneficiary should be addressed to: Company Name: Address: Designated Contact: Contact: Telephone: Telephone: Facsimile: P.O.# if required: SPSS Inc. Quaker Fabrics Depositor Preferred Beneficiary By: By: ----------------------------------- --------------------------------- Name: Name: --------------------------------- ------------------------------- Title: Title: -------------------------------- ------------------------------ Date: Date: --------------------------------- ------------------------------- DSI Technology Escrow Services, Inc. By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- Date: --------------------------------- SCHEDULE E TRAINING Training Courses Here is a listing of SPSS Solutions Group training courses offered in North America. Each course will have a detailed course description, the dates and locations offered, and the cost for participating. The courses are divided into three categories End User, Business Analyst and IT Professional. End User Training ShowCase'r' Analyzer'TM' Training- 1 day $500.00 This class provides end user training on Analyzer, a component of the STRATEGY suite of business intelligence products. Training will emphasize the use of Analyzer functions for performing the following tasks: o Accessing data in a multidimensional database using the Analyzer Windows application o Creating ad-hoc reports to conduct trend, financial, sales, and "what if" analyses o Creating reports that include pivoting, traffic-lighting, sorting, ranking, filtering, and calculations o Designing customized forms and pinboards for viewing data o Accessing data in a multidimensional database from a Web browser o Accessing relational data in special structures called data models and lookups ShowCase'r''TM' Query Training- 2 days $1000.00 This class provides comprehensive end user training for Query, a component of the STRATEGY suite of business intelligence products. The class begins with learning basic query building skills, and ends with publishing queries as reports. Learning experiences include creating joins, adding variables and prompts, and creating new columns and conditions with SQL functions. Query can use certain Microsoft Windows'r' applications as alternate data viewers and provides add-in features for Microsoft'r' Excel'TM' and Lotus 1-2-3'r' spreadsheets. These add-in features can add additional functionality to your existing spreadsheet applications. Sharing and publishing queries and reports through a client/server environment using STRATEGY's Enterprise Reporting is also introduced. ShowCase'r''TM' Advanced Query Training- 2 days $1000.00 This class begins with defining expressions and building complex conditions using SQL. Extensive time will be spent using the Query add-ins with Microsoft Excel. The student will learn how to work with Structured Query Language (SQL) to create Subselects and Unions. The use of dates and the data storage of dates are discussed, as well as porting data from multiple data sources, and the use of the SQL functions in a complex expression. Available resources and error handling will be discussed. Sharing and publishing of queries using the STRATEGY Enterprise Reporting feature are introduced. The class presents information from an advanced end-user perspective through presentation and hands-on learning experiences. End User Training (cont.) ShowCase'r''TM' Report Writer Training- 1 day $500.00 This class provides comprehensive end user training for Report Writer'TM'. Report Writer is a data presentation tool that utilizes Query for data retrieval. This class emphasizes using Report Writer functions and will not cover learning the basic query building skills. Instead, this Report Writer class will integrate the user-friendly ShowCase Query interface and incorporate GUI report writing capabilities for formatting and analysis. This is accomplished with the use of columnar reports, crosstab reports, form reports, label reports, charting and graphics to enhance the look of a query. Report Writer features are also emphasized through creating complex derived fields with macros. Business Analyst Training Microsoft'r' Excel'TM' for Essbase'r' Training- 1 day $600.00 This class provides comprehensive training for business analysts and end users. The processes of accessing and analyzing data maintained in Essbase multidimensional databases using Microsoft Excel are emphasized. The following functionality of Essbase Microsoft Excel Add-ins is presented: basic data access using ad hoc reporting, advanced data retrieval, and formal reports and charts. Basic data access techniques introduce the student to common Essbase terminology, logging on to the Essbase server, basic data retrieval methods, and configuring add-in environment options. Users will be able to create quick, customized reports that can be used for analysis and reporting. Advanced data access focuses on customizing specific data selection and filtering techniques by using member selection options and the database query functions. Finally, students will learn how to create more formal or permanent reports, which include spreadsheet formulas and charts based on Essbase data. The class addresses topics through lecture and provides hands-on exercises to reinforce the learning points. IT Professional Training ShowCase'r''TM' Enterprise Reporting Training- 1 day $500.00 This course covers the installation and configuration of ShowCase Enterprise Reporting'TM' from the ground up. Topics include server setup, client needs, the configuration of enterprise servers, managing security, and troubleshooting. End-user functionality is also emphasized. The class addresses topics through lecture and provides hands-on exercises to reinforce the learning points. IT Professional Training (cont.) ShowCase'r''TM' Warehouse Manager Training- 1 day $500.00 This class provides comprehensive technical training on the Warehouse Manager'TM' product and on the Data Views function in Query'TM'. Warehouse Manager training emphasizes the use of Warehouse Manager functions for performing the following tasks: o Managing server options and settings required for STRATEGY functions o Creating and managing iSeries (AS/400) user profiles o Allocating and managing iSeries resources for users of Query and Report Writer'TM' o Setting security values for controlling access to iSeries objects and STRATEGY applications o Managing licenses for STRATEGY products o Creating alias names for iSeries objects o Running pre-built STRATEGY reports and auditing STRATEGY usage The Data Views training focuses on using Query to create SQL views on the iSeries. Lab exercises are included to reinforce the learning experience ShowCase'r''TM' Warehouse Builder Training- 1 day $500.00 Warehouse Builder allows IT professionals to move operational data from iSeries (AS/400) transaction databases to an iSeries data warehouse server. While Warehouse Builder may be used for simple data replication, it also may be used to cleanse and transform data, summarize data, and track transaction history information at transfer time. Additionally, Warehouse Builder may be used to automatically load and calculate Essbase for iSeries or other multidimensional databases. Warehouse Builder integrates STRATEGY Query's graphical user interface for selection of tables, rows, and columns to transfer. It enables users to build expressions, to create aggregated files, to create indexes on the target system, to define SQL statements for execution on the source or target system either before or after a transfer, to append information to existing target tables, to add timestamps to rows moved during a distribution, and to call other user programs. Users define how and when to move data by combining transfers into distribution sets, scheduling the distribution sets to execute by time or event, and defining the order of distributions within a set. Developed by product specialists and professional instructors, this class provides comprehensive, technical training for IT professionals using Warehouse Builder. The creation of complex source and target distribution definitions and the creation and execution of distribution sets are emphasized. Lab exercises are included to reinforce the learning points. Also included is information about distribution performance issues, which facilitates the building of "resource effective" distributions. IT Professional Training (cont.) ShowCase'r' Introduction to Essbase'r' Training- 3 days $1,800.00 The basic class provides comprehensive, technical training for IT professionals. The processes of building, maintaining, and managing multidimensional databases are emphasized. The following functionality of Essbase iSeries is presented: the structure of an Essbase database, Application Manager, generation of Essbase outlines and rule files, Attribute Dimensions, Formula Editor, calc scripts, and data navigation. Warehouse Builder'TM' is discussed in the class as an aid to the development of multidimensional databases. Warehouse Builder may be used to automatically load and calculate Essbase or other multidimensional databases. Warehouse Builder integrates STRATEGY Query's graphical user interface for selection of tables, rows, and columns to transfer. End users may also examine Essbase databases using the Microsoft Excel and Lotus 1-2-3 add-ins shipped with Essbase or using Analyzer'TM'. In addition, Essbase includes a set of modules that allows users to translate, analyze, and report foreign financial data. The class addresses topics through lecture and provides hands-on exercises to reinforce the learning points. ShowCase Training Calendar
- -------------------------------------------------------------------------------- Date Event Location - -------------------------------------------------------------------------------- 9/9/02-9/10/02 Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/11/02 Report Writer Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/12/02-9/13/02 Advanced Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/16/02-9/18/02 Introduction to Essbase Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/19/02 Analyzer Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/20/02 Excel for Essbase Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/23/02-9/24/02 Query Training San Francisco, California - -------------------------------------------------------------------------------- 9/23/02 Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/25/02 Report Writer Training San Francisco, California - -------------------------------------------------------------------------------- 9/25/02 Warehouse Manager Training Chicago, Illinois - -------------------------------------------------------------------------------- 9/26/02-9/27/02 Advanced Query Training San Francisco, California - -------------------------------------------------------------------------------- 9/26/02 Advanced Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 10/7/02-10/8/02 Query Training Orlando, Florida - -------------------------------------------------------------------------------- 10/9/02 Report Writer Training Orlando, Florida - -------------------------------------------------------------------------------- 10/10/02-10/11/02 Advanced Query Training Las Vegas, Nevada - -------------------------------------------------------------------------------- 10/14/02-10/15/02 Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 10/15/02 Analyzer Training Chicago, Illinois - -------------------------------------------------------------------------------- 10/16/02 Report Writer Training Chicago, Illinois - -------------------------------------------------------------------------------- 10/17/02-10/18/02 Advanced Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 10/21/02-10/23/02 Introduction to Essbase Training Chicago, Illinois - -------------------------------------------------------------------------------- 10/24/02 Analyzer Training Chicago, Illinois - -------------------------------------------------------------------------------- 11/4/02-11/5/02 Query Training Las Vegas, Nevada - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 11/6/02 Report Writer Training Las Vegas, Nevada - -------------------------------------------------------------------------------- 11/7/02-11/8/02 Advanced Query Training Las Vegas, Nevada - -------------------------------------------------------------------------------- 11/11/02-11/12/02 Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 11/13/02 Report Writer Training Chicago, Illinois - -------------------------------------------------------------------------------- 11/14/02-11/15/02 Advanced Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 11/18/02-11/20/02 Introduction to Essbase Training Chicago, Illinois - -------------------------------------------------------------------------------- 11/21/02 Analyzer Training Chicago, Illinois - -------------------------------------------------------------------------------- 11/22/02 Enterprise Reporting Training Chicago, Illinois - -------------------------------------------------------------------------------- 12/9/02-12/10/02 Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 12/11/02 Report Writer Training Chicago, Illinois - -------------------------------------------------------------------------------- 12/12/02-12/13/02 Advanced Query Training Chicago, Illinois - -------------------------------------------------------------------------------- 12/16/02-12/18/02 Introduction to Essbase Training Chicago, Illinois - -------------------------------------------------------------------------------- 12/19/02 Analyzer Training Chicago, Illinois - -------------------------------------------------------------------------------- 12/20/02 Excel for Essbase Training Chicago, Illinois - --------------------------------------------------------------------------------
EX-10 8 ex10-106.txt EXHIBIT 10.106 EXHIBIT 10.106 (Original document in Spanish) AGREEMENT TO MODIFY LEASE CONTRACT THIS MODIFYING AGREEMENT IS SIGNED ON THE 6TH OF FEBRUARY, 2003 BETWEEN MRS. IRENE FONT BYROM (THE LESSOR) AND QUAKER FABRIC DE MEXICO, S.A. DE C.V. (THE LESSEE), ACCORDING TO THE FOLLOWING DECLARATIONS AND CLAUSES: D E C L A R A T I O N S I. On the 6th of June, 1993, the Lessor and Lessee signed a lease contract (the "Lease Contract") on the building located at 41 Calle Urbina, Parque Industrial Naucalpan, Naucalpan, Estado de Mexico 53489, with the purpose of making it into a warehouse and offices for the Lessee. Said Lease Contract is hereby incorporated by reference. II. The Lessor and the Lessee wish to modify and amend in writing the said Lease Agreement as described below in the following clauses. III. The representatives of the parties have the authority to sign this agreement, authority that has not been revoked as of this date. By virtue of the aforesaid, the above mentioned parties hereby agree to the following: C L A U S E S FIRST, the parties agree to modify the Second and Third Clauses of the Lease Contract to state as follows: SECOND. It is stipulated that the rent of the Lease for the period for the 6th of February, 2003 to the 5th of February, 2004, shall be the monthly amount of $62,730.04 (SIXTY-TWO THOUSAND SEVEN HUNDRED AND THIRTY PESOS 04/100 M. N.), plus 15% of the Aggregate Value Tax and the Lessee will Retain 10% as stated by the Treasury Department and Public Credit and the Retention of 10% as stated by the Tax Laws to the Aggregate Value. The Lessee shall pay the Lessor the rent within the first five days of each month, maintaining as the place of payment the property which is the subject of this contract, in the terms of Article 2427. The Lessee agrees that he is obligated to pay the lease in full every month, even in the event that he is only using the facility for a single day, the Lessee will obtain a corresponding receipt, which will be the only legal means to prove the rent payment. Both parties agree, despite the duration of the Lease Contract, that the rental amount of the building will vary annually, in the same proportion or percentage that varies the inflation of that year. The Lessee will pay a monthly interest rate of 2% in the event that he does not pay rent in a timely manner on the agreed lease, which will be calculated starting on the last day of the month during which he is obligated to pay. When the Lessee pays the monthly rent with a check and the check comes back to the Lessor, the right to charge 20% of the value of the returned document in accordance with Article 193 of the General Law of Titles and Credit Operations. The Lessee may not keep the lease from the Lessor under any circumstances and under any judicial or extra judicial title, nor for lack of maintenance or repairs that the Lessor is obligated to do, but will pay in full and on the stipulated date, in case the Lessee for any reason deposits the lease payment, he will be obliged to inform the Lessor within five days of where it is and continue to make the payments at the same place. THIRD. The present contract is valid for a determined period of time, the terms of the Lease is three years, which begins on February 6, 2003 and concludes on February 5, 2006, in the understanding that the first year of the lease is obliged to both parties, but the Lessor will be able to terminate it upon presentation of a written letter to the Lessee with 60 days of notice. Once the lease is ended, the Lessee is obligated to vacate and return the property to the Lessor, being also obligated for payment of the conventional penalty which is mentioned on subsection (b) of the Fifth Clause of this contract, if the obligation is not met. SECOND. Through this document, the Lessee and the Lessor agree, recognize and accept that all terms and conditions of the Lease Contract that have not been expressly modified or eliminated on this Modifying Agreement will stay in effect and will take full effect. In witness of which, the parties have agreed to this Modifying Agreement through their respective authorized representatives on the 6th of February of the year 2003. THE LESSOR THE LESSEE MR. MIGUEL M. GARCIA LOPEZ MARIA TERESA FUSTAGUERAS MRS. IRENE FONT BYROM'S QUAKER FABRIC MEXICO, S.A. LEGAL REPRESENTATIVE DE C.V.'S LEGAL REPRESENTATIVE EX-10 9 ex10-107.txt EXHIBIT 10.107 [ADEXA LOGO] EXHIBIT 10.107 AMENDMENT NO. 1 TO SOFTWARE LICENSE AGREEMENT THIS AMENDMENT NO. 1 is made on the ____ day of February, 2003 by and between ADEXA, INC., (formerly Paragon Management Systems, Inc., and hereinafter referred to as "Adexa") and QUAKER FABRIC CORPORATION OF FALL RIVER (hereinafter referred to as "Licensee"). WHEREAS, on December 29, 1999, Adexa and Licensee entered into a Software License Agreement (hereinafter referred to as the "Agreement"); WHEREAS, in consideration of the mutual benefits to be derived by the parties, Adexa and Licensee desire to amend the Agreement at this time upon the following terms and conditions. 1. Section 3, paragraph 3.1 License, is hereby modified by adding the following at the end of the paragraph; "Both parties acknowledge and agree that the license granted to Licensee under this Agreement is "perpetual" and is "irrevocable" except for material breaches of the terms of this Agreement. It is further agreed that upon Licensee's written notice of a transfer of the Software to another identified Facility and/or Designated Computer for hardware upgrade purposes, Adexa shall issue Licensee an additional license key within five (5) days of receipt of notice at no additional charge, so long as the Software is removed from the prior Designated Computer." 2. In the event of any conflicts between this Amendment and the terms and conditions of the Agreement, the terms and conditions of this Amendment shall take precedence. 3. All other terms and conditions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first indicated hereinabove. LICENSEE ADEXA By: By: ------------------------------- ------------------------------ Name: Name: ------------------------------- ------------------------------ Title: Title: ------------------------------- ------------------------------ Date: Date: ------------------------------- ------------------------------ 1 of 1 EX-23 10 ex23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-99141) of Quaker Fabric Corporation of our report dated February 17, 2003 (except with respect to the matters discussed in Note 12, as to which the date is March 3, 2003) and our report dated February 17, 2003 on the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts April 3, 2003 -----END PRIVACY-ENHANCED MESSAGE-----