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Tax Increment Financing Agreement - QUAKER FABRIC CORP /DE/ - 3-30-2000

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Tax Increment Financing Agreement - QUAKER FABRIC CORP /DE/ - 3-30-2000 Powered By Docstoc
					TAX INCREMENT FINANCING AGREEMENT CITY OF FALL RIVER, MASSACHUSETTS AND QUAKER FABRIC CORPORATION OF FALL RIVER This agreement is made this 27th day of May 1999, by and between: City of Fall River, a municipal corporation duly organized under the laws of the Commonwealth of Massachusetts, having a principal place of business at One Government Center, Fall River, Massachusetts, 02722, acting through its Tax Increment Financing (TIF) Board (hereinafter called the "CITY"); and Quaker Fabric Corporation of Fall River, a corporation with a principal place of business at 941 Grinnell Street, Fall River, Massachusetts, acting through LARRY LIEBENOW, ITS PRESIDENT (hereinafter called the "COMPANY"). WHEREAS, the COMPANY is the largest employer in the CITY and a leading manufacturer of woven upholstery fabrics for furniture markets in the United States and abroad; and WHEREAS, the COMPANY wishes to build a major manufacturing and warehousing plant in Fall River at a site to be purchased by the COMPANY at 994 Jefferson Street/Bleachery Pond located within Fall River's Bleachery Pond Economic Opportunity Area (hereinafter referred to as the "FACILITY") and obtain certain tax exemptions from the CITY for said FACILITY; and WHEREAS, the CITY is willing to grant said tax exemptions in return for a guarantee of capital investment at the FACILITY and employment opportunities for local workers; and WHEREAS, the COMPANY has embarked upon a strategy of significant capital investment in plant and equipment and job creation in Fall River; NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties do mutually agree as follows: A. THE COMPANY'S OBLIGATIONS 1. The COMPANY shall build an expandable (+/-) 358,200 square foot manufacturing and warehousing facility at 994 Jefferson Street/Bleachery Pond (hereinafter referred to as the "SITE") to expand the COMPANY's production and distribution operations.

TIF Agreement - Quaker Fabric Corporation of Fall River . . . Page 2 2. The COMPANY shall invest approximately $50 million in the FACILITY, employ in the CITY an additional seven hundred (700) permanent full-time workers by December 31, 2005, and retain the current two thousand three hundred fifty (2,350) employee level. The COMPANY shall agree to operate a business and provide best faith efforts to maintain the level of jobs described as long as the TIF Agreement is in place. 3. The COMPANY shall cooperate with Job Training Partnership Act programs and the Division of Employment and Training of the Commonwealth of Massachusetts, the Bristol County Training Consortium and other agencies, as appropriate, in seeking to fill vacancies at the COMPANY from the local community. The COMPANY shall commit to a policy of making all good faith efforts to hire qualified Fall River residents for any employment opportunities that become available at the FACILITY. 4. The COMPANY shall make all good faith efforts to use local subcontractors for the construction of the new FACILITY. The COMPANY shall also make all good faith efforts to use local contractors and subcontractors for any future repairs or renovations to the FACILITY.

TIF Agreement - Quaker Fabric Corporation of Fall River . . . Page 2 2. The COMPANY shall invest approximately $50 million in the FACILITY, employ in the CITY an additional seven hundred (700) permanent full-time workers by December 31, 2005, and retain the current two thousand three hundred fifty (2,350) employee level. The COMPANY shall agree to operate a business and provide best faith efforts to maintain the level of jobs described as long as the TIF Agreement is in place. 3. The COMPANY shall cooperate with Job Training Partnership Act programs and the Division of Employment and Training of the Commonwealth of Massachusetts, the Bristol County Training Consortium and other agencies, as appropriate, in seeking to fill vacancies at the COMPANY from the local community. The COMPANY shall commit to a policy of making all good faith efforts to hire qualified Fall River residents for any employment opportunities that become available at the FACILITY. 4. The COMPANY shall make all good faith efforts to use local subcontractors for the construction of the new FACILITY. The COMPANY shall also make all good faith efforts to use local contractors and subcontractors for any future repairs or renovations to the FACILITY. 5. If the COMPANY decides to sell the FACILITY or the business or to otherwise transfer control of the FACILITY or business and/or the operations therein, the COMPANY shall make good faith efforts to give the CITY at least sixty (60) days prior notice of said sale or transfer. This agreement is non-transferable. Said notice shall be given by certified mail, return receipt requested, to the Mayor of the City of Fall River, One Government Center, Fall River, Massachusetts, 02722. 6. The COMPANY shall provide the CITY with a quarterly report beginning at the end of the quarter immediately following Project Certification and for each subsequent quarter thereafter. Said report shall contain the following information: (1) employment levels at the COMPANY at the beginning and end of the reporting period; (2) number of Fall River residents employed at the COMPANY at the beginning and end of the reporting period; (3) utilization of local contractors and subcontractors during the reporting period; (4) supplies/materials purchased locally during the reporting period; (5) the COMPANY's financial contribution to the city (i.e., property taxes, motor vehicle excise taxes, water and sewer fees) for the reporting period. Said quarterly report shall be given to the Mayor of the City of Fall River, President of the Fall River City Council, Fall River City Clerk, Fall River Assessor, and Jobs for Fall River, Inc., One Government Center, Fall River, MA, 02722. Jobs for Fall River, Inc. shall be responsible for monitoring job creation activities and compliance with the terms and conditions set forth in this agreement.

TIF Agreement - Quaker Fabric Corporation of Fall River . . . Page 3 B. THE CITY'S OBLIGATIONS 1. The CITY shall grant a Tax Increment Financing exemption to the COMPANY in accordance with Massachusetts General Laws, Chapter 23A, Section 3E, Chapter 40, Section 59, and Chapter 59, Section 5. Said exemption shall be granted on the building or buildings to be constructed at the SITE, and all expansions and modifications thereof. Said exemption shall be valid for a period of twenty (20) consecutive years, beginning with fiscal year 2000 (July 1, 1999) and ending with fiscal year 2019 (June 30, 2019). Said exemption schedule is as follows:
Term Years 1 - 16 Years 17 - 20 Year 21 Exemption 100% 75% 0% Taxes Due 0% 25% 100%

C. OTHER CONSIDERATIONS 1. If the COMPANY fails to meet or maintain employment goals or comply with the other terms of this Agreement, the CITY may request revocation of the TIF Agreement by the Economic Assistance Coordinating

TIF Agreement - Quaker Fabric Corporation of Fall River . . . Page 3 B. THE CITY'S OBLIGATIONS 1. The CITY shall grant a Tax Increment Financing exemption to the COMPANY in accordance with Massachusetts General Laws, Chapter 23A, Section 3E, Chapter 40, Section 59, and Chapter 59, Section 5. Said exemption shall be granted on the building or buildings to be constructed at the SITE, and all expansions and modifications thereof. Said exemption shall be valid for a period of twenty (20) consecutive years, beginning with fiscal year 2000 (July 1, 1999) and ending with fiscal year 2019 (June 30, 2019). Said exemption schedule is as follows:
Term Years 1 - 16 Years 17 - 20 Year 21 Exemption 100% 75% 0% Taxes Due 0% 25% 100%

C. OTHER CONSIDERATIONS 1. If the COMPANY fails to meet or maintain employment goals or comply with the other terms of this Agreement, the CITY may request revocation of the TIF Agreement by the Economic Assistance Coordinating Council, in accordance with Commonwealth of Massachusetts Regulations 402 CMR, Sections 2.01 - 2.18, as amended. Executed as a sealed instrument as of the day and year first above written.
Tax Increment Financing Board, City of Fall River Quaker Fabric Corporation of Fall River

/s/ Edward M. Lambert, Jr. -------------------------------------Mayor Edward M. Lambert, Jr., Chairman

/s/ [ILLEGIBLE] --------------------------------------Name: PRESIDENT AND CEO ---------------------------------------

Title:

MEMORANDUM OF UNDERSTANDING BETWEEN THE CITY OF FALL RIVER AND QUAKER FABRIC CORPORATION OF FALL RIVER The City of Fall River (the "City") and Quaker Fabric Corporation of Fall River (the "Company") hereby enter into this Memorandum of Understanding to set forth their respective and mutual undertakings in connection with the purchase of and construction of an expandable manufacturing facility and distribution warehouse (the "Facility") on an approximate 60-acre industrially zoned site in the southeastern end of Fall River (the "Site") and to increase employment in the City by as many as 700 jobs. A. The City agrees that it will: 1. Identify appropriate federal and state grant funds to complete the "structural mitigation" work necessary to improve traffic conditions for residents in the Brayton Avenue/Jefferson Street area and facilitate access to the project site in accordance with the "Traffic and Access Study" as prepared by Vanasse Hangen Brustlin, Inc. and

MEMORANDUM OF UNDERSTANDING BETWEEN THE CITY OF FALL RIVER AND QUAKER FABRIC CORPORATION OF FALL RIVER The City of Fall River (the "City") and Quaker Fabric Corporation of Fall River (the "Company") hereby enter into this Memorandum of Understanding to set forth their respective and mutual undertakings in connection with the purchase of and construction of an expandable manufacturing facility and distribution warehouse (the "Facility") on an approximate 60-acre industrially zoned site in the southeastern end of Fall River (the "Site") and to increase employment in the City by as many as 700 jobs. A. The City agrees that it will: 1. Identify appropriate federal and state grant funds to complete the "structural mitigation" work necessary to improve traffic conditions for residents in the Brayton Avenue/Jefferson Street area and facilitate access to the project site in accordance with the "Traffic and Access Study" as prepared by Vanasse Hangen Brustlin, Inc. and in accordance with the Section 61 findings for the facility under the Massachusetts Environmental Policy Act, all such mitigation work to be completed no later than August 2001. In the event that the City fails to secure appropriate federal and state grant funds for the above referenced improvements, the City shall initiate and complete such work at its sole cost and expense. 2. Identify appropriate federal and state grant funds and assume the cost of designing and constructing the new roadways needed to improve access to both "the Site" itself and to the businesses already located in the immediate vicinity, all as set forth on Exhibit A attached, including but not limited to a "perimeter road" ringing the cluster of businesses already operating in the Bleachery Pond area and benefitting both the project site and other businesses as well, such new roadways to be completed no later than August 2001. In the event that the City fails to secure appropriate federal and state grant funds for the above referenced improvements, the City shall initiate and complete such work at its sole cost and expense. 3. Work with the Economic Assistance Coordinating Council to "certify" this project in accordance with the Massachusetts Economic Development Incentive Program guidelines which will enable the Company to become eligible for a 5% State Investment Tax Credit (ITC) on "anything tangible and depreciable" (i.e., plant and equipment). 4. Certify, as part of Massachusetts Economic Development Incentive Program, a local Tax Increment Financing (TIF) plan which will provide the Company with a property tax exemption based upon the percentage of value added through new construction for a period of twenty years based upon a formula set forth in the TIF Agreement of May 27, 1999 by and between the City and the Company.

Memorandum of Understanding Page 2 B. The Company agrees it will: 1. Begin site development improvements no later than the Fall of 1999
and proceed with the construction of an approximately 358,200 s/f building thereafter so as to accommodate an opening prior to December 31, 2001.

2. Purchase an approximate 60-acre industrially zoned site (the "Site") and invest $50.0 million in new plant and equipment at the Site, including the construction of an expandable fabric manufacturing facility and distribution warehouse (the "Facility"), and to increase employment in the City by as many as 700 jobs between the date of

Memorandum of Understanding Page 2 B. The Company agrees it will: 1. Begin site development improvements no later than the Fall of 1999
and proceed with the construction of an approximately 358,200 s/f building thereafter so as to accommodate an opening prior to December 31, 2001.

2. Purchase an approximate 60-acre industrially zoned site (the "Site") and invest $50.0 million in new plant and equipment at the Site, including the construction of an expandable fabric manufacturing facility and distribution warehouse (the "Facility"), and to increase employment in the City by as many as 700 jobs between the date of this Agreement and December 31, 2005. 3. Secure all necessary federal, state and local permits, including project subdivision plan, pertaining to the siting and construction of said "Facility." 4. Maintain its current level of 2,350 employees and, by virtue of the construction of the new "Facility," increase its employment in the City by 640 - 700 jobs by December 31, 2005. Said job creation will consist of 140 - 200 new jobs by December 31, 2001, 250 new jobs by December 31, 2002 and an additional 250 new jobs by December 31, 2005. 5. Maintain manufacturing and/or distribution processes in all Fall River properties currently owned by Quaker Fabric Corporation. 6. Work with the City of Fall River to seek federal and state grants to facilitate the infrastructure improvements necessary to implement the construction of the Facility.
Dated: The City of Fall River by: Edward M. Lambert, Jr. -----------------------------------Edward M. Lambert, Jr. Mayor

Dated: July 1, 1999 Quaker Fabric Corporation of Fall River by: [ILLEGIBLE] Name: PRESIDENT AND CEO Title:

NORTH CAROLINA LEASE CATAWBA COUNTY THIS LEASE AGREEMENT, made and entered into this 15 day of June, 1999, by and between FRANK B. PETERS, JR., a resident of Guilford County, North Carolina, (hereinafter called "Landlord") and QUAKER FABRIC CORPORATION OF FALL RIVER, 941 Grinnell Street, Fall River, Massachusetts 02721 (hereinafter called "Tenant").

NORTH CAROLINA LEASE CATAWBA COUNTY THIS LEASE AGREEMENT, made and entered into this 15 day of June, 1999, by and between FRANK B. PETERS, JR., a resident of Guilford County, North Carolina, (hereinafter called "Landlord") and QUAKER FABRIC CORPORATION OF FALL RIVER, 941 Grinnell Street, Fall River, Massachusetts 02721 (hereinafter called "Tenant"). W I T N E S S E T H: That in consideration of the mutual covenants hereinafter contained, the parties hereto agree as follows: The Landlord hereby leases to the Tenant, and the Tenant hereby leases from the Landlord, a portion of the property located at 1270 25th St. Place S.E., Hickory, North Carolina, known as the Resource Center (herein the "Complex") being further identified as Unit E, containing approximately 2,354 square feet (includes Tenant's share of common area allocation) of the building consisting of the Resource Center. The Tenant's usable area (exclusive of common areas) is more particularly described on the attached Exhibit "A" (the "Premises"). ARTICLE 1 TERM 1.1 Term. Unless changed or sooner canceled or terminated as provided for herein, the term hereof shall be for the period of five (5) years beginning on July 1, 1999 (Beginning Date) and ending on June 30, 2004. 1.2 Option. Landlord hereby grants Tenant an option to extend the term of this lease for five (5) additional years (July 1, 2004 to June 30, 2009) upon the same terms and conditions except Base Rent for such option term shall be Three Thousand One Hundred Thirty-nine and No/100 Dollars ($3,139.00) per month ($37,668.00) per annum, herein "Annual Rent" if this option is made applicable); provided, however, this Option shall not be effective if Tenant defaults under any lease provision which default is not timely cured within the time herein provided or if Tenant fails to notify Landlord in writing of its exercise of this option at least one hundred twenty (120) days prior to the expiration of the original term. ARTICLE 2 POSSESSION If for any cause beyond Landlord's control Landlord shall be unable to give Tenant possession of the premises on the date provided herein for the beginning of the term hereof, all rights and remedies of both Landlord and Tenant hereunder shall be suspended until possession can be delivered. The premises shall be delivered to Tenant by Landlord "As Is". No further improvements shall be required to be made by Landlord unless otherwise provided herein. The Premises are currently under reconstruction with anticipated occupancy on the Beginning Date. Landlord will provide the Premises in the condition hereinafter specified with additional up fitting to be by Tenant at its expense: 1. 2x2 lay-in white standard ceilings installed. 2. Tenant demising walls ready for paint or wall covering to be provided by Tenant. 3. 400 amp service to the Premises, together with separate meter. 4. HVAC system installed with main trunk lines in place, extension to individual rooms or offices is responsibility of Tenant. ARTICLE 3

EXAMINATION OF PREMISES Upon commencement of the term hereof, Tenant shall examine the premises before taking possession; and Tenant's entry into possession shall constitute evidence that as of the date thereof the premises were in good order and satisfactory condition, unless Tenant notifies Landlord in writing within thirty (30) days of the commencement of the term of any particular problems with the premises that are the Landlord"s responsibility in accordance with the terms hereof. ARTICLE 4 LIENS Should mechanics', materialmen's or other liens or claims thereof, be filed against the premises by reason of Tenant's acts or omissions or because of a claim against Tenant, Tenant shall cause the lien to be canceled and discharged of record by bond or otherwise within ten (10) days after receipt of notice from Landlord. Should Tenant fail to cause such lien to be so discharged or bonded, Tenant shall be in

default hereunder; and Landlord may exercise any or all remedies available to Landlord pursuant to this lease, or in lieu thereof, Landlord may at its option discharge the same by paying the amount claimed to be due, and Tenant shall pay to Landlord on demand the amount so paid and all costs and expenses incurred by Landlord including reasonable attorney's fees in processing such discharge. ARTICLE 5 PROVISIONS FOR RENT 5.1 Base Rent. Tenant shall pay to Landlord as Base Rent for the premises, in monthly installments in advance upon the Beginning Date and upon the first day of each calendar month thereafter during the term of this Agreement the following sums: From the Beginning Date for the 60 months of the term of this lease $2,452.08 per month ($29,424.96 per annum, herein "Annual Rent"); Said rent shall be payable without demand. Tenant shall pay such rent to Landlord at its offices in the Complex or at such other place as Landlord may from time to time direct. In the event that the Beginning Date is other than the first day of a calendar month, then the monthly rent for such period less than a full month shall be prorated and payable along with the first full month's rent on or before the Beginning Date. Rent during any option term, if applicable, shall be as provided in Article I of this lease. 5.2 Additional Rent. (a) Landlord shall pay all real estate taxes, assessments and other governmental levies against the Complex (hereinafter referred to as "Real Estate Taxes") except as hereinafter provided. Commencing with the first calendar year following the year 2000 (2000 being hereinafter referred to as the "Base Year"), if the amount of the real estate taxes levied or assessed against the Complex shall exceed the real estate taxes assessed in the Base Year, Tenant shall pay as additional rent that portion of such excess which is equal to the product obtained by multiplying said excess by a fraction, the numerator of which shall be the number of Square Feet in the demised premises and the denominator of which shall be the number of square feet leasable in the Buildings included in the tax listing. (b) Landlord shall pay the premium required to maintain a satisfactory fire policy, with extended coverage endorsement, on the Complex which includes the Premises as required by Article 26. Commencing in the first calendar year of this Lease Agreement after the calendar year 2000 (2000 hereinafter referred to as the "Base Year"), if the amount of the annual premium for such coverage shall exceed the annual premium for the Base Year, Tenant shall pay as additional rent that portion of such excess which is equal to the product obtained by multiplying said excess by a fraction, the numerator of which shall be the number of Square Feet in the Premises leased to Tenant and the denominator of which shall be the number of square feet leasable in the Complex covered by the policy that includes the Premises leased to Tenant.

default hereunder; and Landlord may exercise any or all remedies available to Landlord pursuant to this lease, or in lieu thereof, Landlord may at its option discharge the same by paying the amount claimed to be due, and Tenant shall pay to Landlord on demand the amount so paid and all costs and expenses incurred by Landlord including reasonable attorney's fees in processing such discharge. ARTICLE 5 PROVISIONS FOR RENT 5.1 Base Rent. Tenant shall pay to Landlord as Base Rent for the premises, in monthly installments in advance upon the Beginning Date and upon the first day of each calendar month thereafter during the term of this Agreement the following sums: From the Beginning Date for the 60 months of the term of this lease $2,452.08 per month ($29,424.96 per annum, herein "Annual Rent"); Said rent shall be payable without demand. Tenant shall pay such rent to Landlord at its offices in the Complex or at such other place as Landlord may from time to time direct. In the event that the Beginning Date is other than the first day of a calendar month, then the monthly rent for such period less than a full month shall be prorated and payable along with the first full month's rent on or before the Beginning Date. Rent during any option term, if applicable, shall be as provided in Article I of this lease. 5.2 Additional Rent. (a) Landlord shall pay all real estate taxes, assessments and other governmental levies against the Complex (hereinafter referred to as "Real Estate Taxes") except as hereinafter provided. Commencing with the first calendar year following the year 2000 (2000 being hereinafter referred to as the "Base Year"), if the amount of the real estate taxes levied or assessed against the Complex shall exceed the real estate taxes assessed in the Base Year, Tenant shall pay as additional rent that portion of such excess which is equal to the product obtained by multiplying said excess by a fraction, the numerator of which shall be the number of Square Feet in the demised premises and the denominator of which shall be the number of square feet leasable in the Buildings included in the tax listing. (b) Landlord shall pay the premium required to maintain a satisfactory fire policy, with extended coverage endorsement, on the Complex which includes the Premises as required by Article 26. Commencing in the first calendar year of this Lease Agreement after the calendar year 2000 (2000 hereinafter referred to as the "Base Year"), if the amount of the annual premium for such coverage shall exceed the annual premium for the Base Year, Tenant shall pay as additional rent that portion of such excess which is equal to the product obtained by multiplying said excess by a fraction, the numerator of which shall be the number of Square Feet in the Premises leased to Tenant and the denominator of which shall be the number of square feet leasable in the Complex covered by the policy that includes the Premises leased to Tenant. (c) In any calendar year that the tenancy of the Tenant is for less than the full calendar year, the additional rent due under Article 5.2(a) and or (b) hereof shall be adjusted and prorated so that the Tenant's share of said sum shall bear the same percentage that the period less than the full calendar year bears to the full calendar year. (d) Such additional rent due under Article 5.2(a) and or (b) shall be due and payable immediately on demand. ARTICLE 6 USE OF PREMISES The Premises are to be used and occupied by Tenant solely for the operation of a fabric showroom and offices incident thereto. Tenant will not use or permit, or suffer the use of, the Premises for any other business or purpose. Tenant shall conduct its business upon the Premises under the name or trade name of Tenant or any of its duly licensed and authorized trade name(s) and under no other name except such as Landlord shall approve in writing.

ARTICLE 7 OPERATION OF BUSINESS (a) Tenant, at all times, shall fully and promptly comply with all laws, ordinances, orders and regulations of any governmental authority having jurisdiction of the Premises, including but not limited to, such as shall relate to the character, and manner of operation of the business conducted in or at the Premises. Tenant shall abide by, obey, and comply with all rules and regulations which from time to time may be promulgated by Landlord with regard to the activities of the businesses in the Complex insofar as said rules and regulations pertain to the disposal of trash, delivery of equipment and supplies, signage, employee parking, and, in general, the general welfare of all the businesses in the Complex. Landlord shall use its best efforts to enforce these same rules upon all other tenants in the Complex. (b) Tenant shall conduct and operate its business in a manner in keeping with the dignity and reputation of the Complex and shall make all reasonable effort to work harmoniously with the other tenants in the Complex and without limiting the generality of the foregoing, Tenant shall not permit, allow, or cause any public or private auction sales to be conducted in or at the Premises or the adoption or use of 2

any sales promotion device or practice that shall tend to mislead or deceive the public or which directly or indirectly would tend to detract from or impair the reputation or dignity of said business, the Premises, the Complex, or the general reputation or dignity of the business of others conducted in the Complex. Landlord shall use its best efforts to enforce these same rules upon all other tenants in the Complex. ARTICLE 8 CARE OF PREMISES AND TRASH REMOVAL (a) Tenant shall not permit, allow, or cause any act or deed to be performed or any practice to be adopted or followed in or about the Premises which would cause or be likely to cause any injury or damage to any person or the Premises or the Complex. Tenant shall not permit, allow or cause any noxious, disturbing or offensive odors, fumes, lights or gases, or any smoke, dust, steam or vapors, or any loud or disturbing noise, sound or vibrations to originate in order to be emitted from the Premises. Tenant, at all times, shall keep the Premises in a neat and orderly condition and shall keep the entryways and delivery areas adjoining the Premises clean and free from rubbish and dirt. Tenant shall keep the Premises clean and free of rodents, bugs and vermin. Tenant shall not use or permit the use of any portion of the Premises as sleeping or living quarters or as lodging rooms, or use the same for any illegal purposes. Tenant shall not permit, allow or cause the sinks, toilets, or urinals in the Premises to be used for any purpose except that for which they were designed and installed. Tenant shall maintain the windows in a clean, neat and orderly condition, and shall keep the glass thereof clean, and shall store all trash, rubbish and garbage within the Premises until such time as same is properly disposed of in accordance with applicable laws, rules and regulations. Tenant shall keep the Premises sufficiently heated to prevent freezing of water in pipes and fixtures. Landlord shall use its best efforts to enforce these same rules upon all other tenants in the Complex. (b) Tenant either through the use of such facilities therefore as may be available to other tenants in the Complex, or otherwise, shall provide for the prompt and regular removal thereof for disposal outside the area of the Complex of all trash, waste, rubbish or garbage and Tenant shall not burn or otherwise dispose of any trash, waste, rubbish or garbage in or about the Premises of the Complex. Tenant shall pay at its sole cost and expense all charges for the removal of and storage of any trash, waste, rubbish or garbage attributable to the Premises. However, in the event Landlord elects to provide facilities for trash removal and storage, Tenant agrees to utilize said facilities under rules and regulations designated by Landlord, and if the cost of such services shall be billed to Landlord and are not separately allocated to the Tenant, the amount thereof shall be reasonably pro rated with Tenant's share being based on the relationship between the square footage of the Premises to the total square footage available for lease in the Complex; and Tenant shall pay the Landlord upon demand as additional rental hereunder its prorata share, calculated as indicated, of such cost. ARTICLE 9 INSTALLATION AND REMOVAL OF TRADE FIXTURES

any sales promotion device or practice that shall tend to mislead or deceive the public or which directly or indirectly would tend to detract from or impair the reputation or dignity of said business, the Premises, the Complex, or the general reputation or dignity of the business of others conducted in the Complex. Landlord shall use its best efforts to enforce these same rules upon all other tenants in the Complex. ARTICLE 8 CARE OF PREMISES AND TRASH REMOVAL (a) Tenant shall not permit, allow, or cause any act or deed to be performed or any practice to be adopted or followed in or about the Premises which would cause or be likely to cause any injury or damage to any person or the Premises or the Complex. Tenant shall not permit, allow or cause any noxious, disturbing or offensive odors, fumes, lights or gases, or any smoke, dust, steam or vapors, or any loud or disturbing noise, sound or vibrations to originate in order to be emitted from the Premises. Tenant, at all times, shall keep the Premises in a neat and orderly condition and shall keep the entryways and delivery areas adjoining the Premises clean and free from rubbish and dirt. Tenant shall keep the Premises clean and free of rodents, bugs and vermin. Tenant shall not use or permit the use of any portion of the Premises as sleeping or living quarters or as lodging rooms, or use the same for any illegal purposes. Tenant shall not permit, allow or cause the sinks, toilets, or urinals in the Premises to be used for any purpose except that for which they were designed and installed. Tenant shall maintain the windows in a clean, neat and orderly condition, and shall keep the glass thereof clean, and shall store all trash, rubbish and garbage within the Premises until such time as same is properly disposed of in accordance with applicable laws, rules and regulations. Tenant shall keep the Premises sufficiently heated to prevent freezing of water in pipes and fixtures. Landlord shall use its best efforts to enforce these same rules upon all other tenants in the Complex. (b) Tenant either through the use of such facilities therefore as may be available to other tenants in the Complex, or otherwise, shall provide for the prompt and regular removal thereof for disposal outside the area of the Complex of all trash, waste, rubbish or garbage and Tenant shall not burn or otherwise dispose of any trash, waste, rubbish or garbage in or about the Premises of the Complex. Tenant shall pay at its sole cost and expense all charges for the removal of and storage of any trash, waste, rubbish or garbage attributable to the Premises. However, in the event Landlord elects to provide facilities for trash removal and storage, Tenant agrees to utilize said facilities under rules and regulations designated by Landlord, and if the cost of such services shall be billed to Landlord and are not separately allocated to the Tenant, the amount thereof shall be reasonably pro rated with Tenant's share being based on the relationship between the square footage of the Premises to the total square footage available for lease in the Complex; and Tenant shall pay the Landlord upon demand as additional rental hereunder its prorata share, calculated as indicated, of such cost. ARTICLE 9 INSTALLATION AND REMOVAL OF TRADE FIXTURES Tenant shall not install in or about the Premises any interior or exterior lighting or plumbing fixtures, steps, partitions, walls, fences, shades, or awnings, or make any structural changes or alterations in or to any part of the Premises or penetrate the floor slab of the Premises without the prior written consent of Landlord. All trade fixtures used in the Premises supplied and installed at the sole cost and expense of Tenant shall at all times be and remain in the property of Tenant, and the latter shall have the right to remove the same from the Premises at any time during the term hereof, provided that Tenant, at its sole cost and expense, shall repair or reimburse Landlord for the cost of repairing any and all damage to the Premises resulting from the removal thereof; provided, further, that if Tenant does not remove the same prior to the termination of the term hereof, Landlord may, at its election at any time after the termination of the term hereof remove all or any part of said trade fixtures from the Premises and store the same or remove all or part thereof and dispose of the same in any manner Landlord may see fit, all at Tenant's expense. The provisions of the foregoing sentence, however, shall not apply in any manner to any fixtures installed as part of Tenant's work or in replacement or repair thereof which has been approved by Landlord as herein required. Notwithstanding the foregoing, Tenant reserves the right to remove the can lighting; however, the track shall remain. ARTICLE 10 MOVING OF HEAVY OBJECTS AND USE OF Premises FOR STORAGE Tenant shall be liable for the cost of any damage to the Premises of the Complex which shall result from the

movement of heavy objects in or to or from the Premises. Tenant shall not unduly overload the floor or any part of the Premises and heavy objects stored or used therein shall be stored and placed only at such place or location as Landlord, if it so elects, shall designate. ARTICLE 11 SIGNS AND ADVERTISING MATTER Tenant shall not place or suffer to be placed on the exterior of the Premises or on the exterior or interior of any window thereof any sign, awning, canopy, marquee, advertising matter, decoration, lettering or other thing of any kind without the prior written consent of Landlord. Tenant shall not permit, allow or cause to be used in or at the Premises any advertising media or device such as phonographs, radio, public address systems, sound production or reproduction devices, mechanical or moving display devices, motion pictures, television devices, excessively bright lights, changing, flashing, flickering or moving lights or lighting devices, or any similar devices, the effect of which shall be visible or audible from the exterior of the Premises. In this connection, Tenant 3

acknowledges that the Premises are a part of an integrated business community and agrees that control of all signs by Landlord is essential to the maintenance of uniformity, propriety and the aesthetic values in or pertaining to the Complex. Landlord agrees to use its best efforts to similarly restrict other tenants in the Complex. ARTICLE 12 LOCATIONS OF SIGNS Tenant shall not permit, erect or install, maintain, paint or display on any exterior door, wall or window of Premises any exterior or interior sign, lettering, placard, decoration, advertising media or advertising material of any kind whatsoever without the prior written consent of Landlord. Tenant shall and at its own expense furnish and install prior to the opening of Tenant's business at an appropriate location designated by Landlord on the exterior of said Premises an identification sign of design, content, form and material in accordance with Landlord's requirements for the Complex and in conformance with local governing codes. Prior to the manufacture and procurement of any sign, Tenant shall first submit to the Landlord working drawings and obtain from the Landlord written approval of said working drawings. Landlord's design criteria shall be furnished Tenant no later than thirty (30) days prior to the scheduled opening of Tenant's business. Tenant shall at all times after the erection of any such sign by Tenant, or by Landlord as the case may be, maintain such sign in good condition. In the event Tenant fails to operate and maintain said sign, the Landlord may at its discretion, provide the maintenance and operation for said sign and charge Tenant Landlord's cost plus fifteen percent (15%). ARTICLE 13 USE OF NAMES AND PICTURES OF PREMISES OR THE COMPLEX Tenant shall not have or acquire any property right or interest in or to any name or distinctive designation which may become identified or associated with the business to be conducted in or at the Premises if such name or distinctive designation shall contain as a part thereof the name or any reference to the Premises, the Complex or any part or combination of part of any of the same, but all property rights and rights of use of such name or distinctive designation shall be and remain the property of Landlord. ARTICLE 14 COMMON FACILITIES (a) The term "Common Facilities" as used in this lease shall mean and refer to those facilities within the Complex for the nonexclusive use of Tenant in common with other authorized users, driveways, areas of ingress and egress, sidewalks, and other pedestrian ways, planted areas together with plants and planting thereon, and areas containing signs, pylons or structures constructed thereon. (b) It is expressly understood and agreed that the term "Common Facilities" shall not in any manner be deemed to refer to any portion of the Premises leased to Tenant hereunder, or any of the space leased or held or to be held

acknowledges that the Premises are a part of an integrated business community and agrees that control of all signs by Landlord is essential to the maintenance of uniformity, propriety and the aesthetic values in or pertaining to the Complex. Landlord agrees to use its best efforts to similarly restrict other tenants in the Complex. ARTICLE 12 LOCATIONS OF SIGNS Tenant shall not permit, erect or install, maintain, paint or display on any exterior door, wall or window of Premises any exterior or interior sign, lettering, placard, decoration, advertising media or advertising material of any kind whatsoever without the prior written consent of Landlord. Tenant shall and at its own expense furnish and install prior to the opening of Tenant's business at an appropriate location designated by Landlord on the exterior of said Premises an identification sign of design, content, form and material in accordance with Landlord's requirements for the Complex and in conformance with local governing codes. Prior to the manufacture and procurement of any sign, Tenant shall first submit to the Landlord working drawings and obtain from the Landlord written approval of said working drawings. Landlord's design criteria shall be furnished Tenant no later than thirty (30) days prior to the scheduled opening of Tenant's business. Tenant shall at all times after the erection of any such sign by Tenant, or by Landlord as the case may be, maintain such sign in good condition. In the event Tenant fails to operate and maintain said sign, the Landlord may at its discretion, provide the maintenance and operation for said sign and charge Tenant Landlord's cost plus fifteen percent (15%). ARTICLE 13 USE OF NAMES AND PICTURES OF PREMISES OR THE COMPLEX Tenant shall not have or acquire any property right or interest in or to any name or distinctive designation which may become identified or associated with the business to be conducted in or at the Premises if such name or distinctive designation shall contain as a part thereof the name or any reference to the Premises, the Complex or any part or combination of part of any of the same, but all property rights and rights of use of such name or distinctive designation shall be and remain the property of Landlord. ARTICLE 14 COMMON FACILITIES (a) The term "Common Facilities" as used in this lease shall mean and refer to those facilities within the Complex for the nonexclusive use of Tenant in common with other authorized users, driveways, areas of ingress and egress, sidewalks, and other pedestrian ways, planted areas together with plants and planting thereon, and areas containing signs, pylons or structures constructed thereon. (b) It is expressly understood and agreed that the term "Common Facilities" shall not in any manner be deemed to refer to any portion of the Premises leased to Tenant hereunder, or any of the space leased or held or to be held for lease by Landlord for the operation of business or for offices. ARTICLE 15 USE OF COMMON FACILITIES Subject to the provisions of this lease, Landlord hereby grants to Tenant, its subtenants, licensees, concessionaires, suppliers, business invitees, customers, agents, representatives and employees, but only during the term of this lease, the nonexclusive right, in common with others duly authorized by Landlord, to use the Common Facilities and the various portions thereof, respectively for the uses and purposes designated therefor by Landlord. It shall be the duty of Tenant to keep said Common Facilities free and clear of any obstructions, barricades or barriers placed or created by Tenant or resulting from Tenant's operations or use of the Premises. ARTICLE 16 CONTROL OF COMMON FACILITIES The Common Facilities shall be subject to the exclusive management and control of Landlord. Landlord shall have the right from time to time to reasonably designate, relocate and limit the use of particular areas or portions of the Common Facilities and to construct or permit the construction of additional buildings thereon, to add additional area to the Common Facilities, and to establish, promulgate and enforce such reasonable rules and

regulations concerning the Common Facilities as it may deem necessary or advisable for the proper and efficient management, operation, maintenance, and use thereof, and Tenant shall comply with the same. Landlord shall have the right to make changes in the Common Facilities or any part thereof wherever, in its opinion, it shall be desirable and for the best interests of the Complex, including, without limitation, the changes in the location and relocation of driveways, entrances, exits, vehicular parking spaces, the direction and flow of traffic, the setting apart of prohibited areas, the exclusion of employee parking therefrom as Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of the Common Facilities, and removing area from the Common Facilities, provided Tenant and its customers shall have reasonable ingress, egress and regress to and from the Premises. Notwithstanding the foregoing, Landlord agrees to allocate to Tenant five parking spaces to be designated for usage by Tenant; however, the policing of such spaces shall be the responsibility of Tenant. 4

ARTICLE 17 MAINTENANCE AND OPERATION OF COMMON FACILITIES Landlord shall throughout the term of this lease maintain the Common Facilities in good order, condition and repair. Landlord shall, as a minimum, keep the Common Facilities open to the general public from the hours of 8:00 A.M. to 5:00 P.M. each normal business day. ARTICLE 18 MANAGEMENT AGREEMENTS FOR COMMON FACILITIES At any time, hereafter, Landlord shall have the right to employ any person, firm or corporation to operate and maintain the Common Facilities or any part or parts thereof or any particular function or functions operated in connection therewith, on such terms and conditions and for such time as Landlord shall, in its sole judgment, deem reasonable and proper. Any such employment agreement shall require the operator to be bound by, and to perform all obligations of the Landlord relative to the part or parts of the maintenance and operation of the Common Facilities to be undertaken by such operator. ARTICLE 19 MAINTENANCE AND REPAIRS Landlord, at its sole cost and expense, shall maintain and keep in reasonable repair the roof, foundation, and exterior and supporting walls of the building, provided, however, that the cost of any such repairs required as the result of the negligent or willful act of Tenant, or any subtenant or concessionaire of Tenant or any customer, licensee, agent, servant or employee of any of them, shall be borne by Tenant. ARTICLE 20 TENANT'S OBLIGATIONS Tenant, at its sole cost and expense, whether the same shall be the property of Tenant or Landlord, shall promptly repair and replace, as necessary, and at all times maintain the Premises in good condition, including fixtures, equipment, electrical fixtures and equipment, electrical installations, plumbing, plumbing equipment and fixtures, all ceilings, all interior walls, all floors, all hardware, all interior painting or decorations of every kind, and all door and window screens, and promptly replace all broken or damages glass, including window glass and plate glass; and Tenant, at its sole cost and expense, whether the same shall be the property of Tenant or Landlord, shall promptly repair and replace, as necessary, and at all times maintain in good condition all signs and all heating units and air conditioning equipment serving said Premises wherever located, and regardless of whether inside or outside of the building. Notwithstanding the foregoing, any repair to the plumbing, electrical and/or HVAC system servicing the demised Premises in excess of $1000.00 shall be regarded as a "major repair" and the responsibility of Landlord but only for the portion of such repair bill in excess of $1000.00. The Tenant shall be responsible for the first $1000.00 of the costs of any such repair. For purposes of this agreement, a "major repair" shall mean a repair which in each instance requires an expenditure for parts costing in excess of One Thousand Dollars ($1000). For purposes of this Article, routine maintenance and service on the plumbing, electrical and HVAC system servicing the demised Premises, regardless of the amount of such routine

ARTICLE 17 MAINTENANCE AND OPERATION OF COMMON FACILITIES Landlord shall throughout the term of this lease maintain the Common Facilities in good order, condition and repair. Landlord shall, as a minimum, keep the Common Facilities open to the general public from the hours of 8:00 A.M. to 5:00 P.M. each normal business day. ARTICLE 18 MANAGEMENT AGREEMENTS FOR COMMON FACILITIES At any time, hereafter, Landlord shall have the right to employ any person, firm or corporation to operate and maintain the Common Facilities or any part or parts thereof or any particular function or functions operated in connection therewith, on such terms and conditions and for such time as Landlord shall, in its sole judgment, deem reasonable and proper. Any such employment agreement shall require the operator to be bound by, and to perform all obligations of the Landlord relative to the part or parts of the maintenance and operation of the Common Facilities to be undertaken by such operator. ARTICLE 19 MAINTENANCE AND REPAIRS Landlord, at its sole cost and expense, shall maintain and keep in reasonable repair the roof, foundation, and exterior and supporting walls of the building, provided, however, that the cost of any such repairs required as the result of the negligent or willful act of Tenant, or any subtenant or concessionaire of Tenant or any customer, licensee, agent, servant or employee of any of them, shall be borne by Tenant. ARTICLE 20 TENANT'S OBLIGATIONS Tenant, at its sole cost and expense, whether the same shall be the property of Tenant or Landlord, shall promptly repair and replace, as necessary, and at all times maintain the Premises in good condition, including fixtures, equipment, electrical fixtures and equipment, electrical installations, plumbing, plumbing equipment and fixtures, all ceilings, all interior walls, all floors, all hardware, all interior painting or decorations of every kind, and all door and window screens, and promptly replace all broken or damages glass, including window glass and plate glass; and Tenant, at its sole cost and expense, whether the same shall be the property of Tenant or Landlord, shall promptly repair and replace, as necessary, and at all times maintain in good condition all signs and all heating units and air conditioning equipment serving said Premises wherever located, and regardless of whether inside or outside of the building. Notwithstanding the foregoing, any repair to the plumbing, electrical and/or HVAC system servicing the demised Premises in excess of $1000.00 shall be regarded as a "major repair" and the responsibility of Landlord but only for the portion of such repair bill in excess of $1000.00. The Tenant shall be responsible for the first $1000.00 of the costs of any such repair. For purposes of this agreement, a "major repair" shall mean a repair which in each instance requires an expenditure for parts costing in excess of One Thousand Dollars ($1000). For purposes of this Article, routine maintenance and service on the plumbing, electrical and HVAC system servicing the demised Premises, regardless of the amount of such routine maintenance and service, shall be the sole and exclusive responsibility of the Tenant unless such service necessitates a major repair as herein defined. Notwithstanding the foregoing, any repairs to the plumbing, electrical and/or HVAC system servicing the Premises in excess of One Thousand Dollars ($1,000) during any lease year (July 1 to June 30 during the lease term) shall be the responsibility of Landlord but only for the portion of such repair bills in the aggregate exceeding One Thousand Dollars ($1,000) during any lease year. ARTICLE 21 UTILITIES Tenant shall pay, at its sole cost and expense, all charges for gas, electricity, and telephone service attributable to the Premises, and all other services or utilities used in, upon, or about the Premises by Tenant or any of its subtenants, licensees, or concessionaires during the term hereof, including cost of installation of meters. Landlord shall pay for water consumed on or about the Premises, however, Tenant agrees to pay any extraordinary usage resulting from the failure of Tenant to repair promptly any defective plumbing system in the Premises.

Notwithstanding the foregoing, if any such services or utilities shall be billed to Landlord and are not separately metered to the Premises (such as water), the amount thereof shall be reasonably prorated by Landlord; and Tenant shall pay to Landlord upon demand as additional rental hereunder that amount which bears the same relationship to the total charges therefor as the number of square feet of floor area in the Premises bears to the total number of square feet of floor area leased or held for lease in the area covered by such combined charges. ARTICLE 22 INTERRUPTION OR FAILURE OF UTILITIES Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility service being furnished the Complex or the Premises, and no such failure or interruption shall entitle Tenant to terminate this lease. 5

ARTICLE 23 TENANT'S PUBLIC LIABILITY INSURANCE Tenant shall, at all times during the term hereof, at its sole cost and expense, procure and maintain in force and effect a policy or policies of comprehensive public liability insurance issued by an insurance carrier approved by Landlord, insuring against loss, damage, or liability for injury to or death of persons and loss or damage to property occurring from any cause whatsoever in, upon or about the said Premises. Such liability insurance shall be in amounts of not less than $1,000,000.00 for Combined Single Unit Bodily Injury and Property Damage. Tenant and Landlord shall be the named insureds under each such policy of insurance. ARTICLE 24 TENANT'S OTHER INSURANCE Tenant shall, at all times during the term hereof, at its sole cost and expense, procure and maintain in force and effect standard form of fire with extended coverage insurance covering Tenant's property and its merchandise, and the personal property of others in Tenant's possession, in, upon, or about the Premises. Such insurance shall be in an amount adequate to cover the cost of replacement. ARTICLE 25 CERTIFICATES OF INSURANCE A certificate issued by the insurance carrier for each policy of insurance required to be maintained by Tenant under the provisions of this lease shall be delivered to Landlord on or before the commencement date hereof and thereafter, as to policy renewals, within thirty (30) days prior to the expiration of the term of each such policy. Each of said certificates of insurance and each such policy of insurance required to be maintained by Tenant hereunder shall express evidence as to insurance coverage as required by this lease (including an express waiver of rights of subrogation thereunder as required hereunder) and shall contain an endorsement or provision requiring not less than twenty (20) days written notice to Landlord prior to the cancellation, diminution in the perils insured against, or reduction of the amount of coverage of the particular policy in question. ARTICLE 26 LANDLORD'S INSURANCE Landlord at all times during the term hereof shall procure and maintain in force and effect fire and extended coverage insurance on the Complex (building, common area, land and improvements) to such extent as it deems advisable and in its best interests (but not in excess of the full replacement cost of the Complex). ARTICLE 27 INCREASE IN PREMIUMS Tenant shall not do or suffer to be done, or keep or suffer to be kept, anything in, upon, or about the Premises which contravenes Landlord's fire or extended coverage insurance, boiler insurance, casualty insurance, or liability insurance or which shall prevent Landlord from securing any such policies in companies acceptable to

ARTICLE 23 TENANT'S PUBLIC LIABILITY INSURANCE Tenant shall, at all times during the term hereof, at its sole cost and expense, procure and maintain in force and effect a policy or policies of comprehensive public liability insurance issued by an insurance carrier approved by Landlord, insuring against loss, damage, or liability for injury to or death of persons and loss or damage to property occurring from any cause whatsoever in, upon or about the said Premises. Such liability insurance shall be in amounts of not less than $1,000,000.00 for Combined Single Unit Bodily Injury and Property Damage. Tenant and Landlord shall be the named insureds under each such policy of insurance. ARTICLE 24 TENANT'S OTHER INSURANCE Tenant shall, at all times during the term hereof, at its sole cost and expense, procure and maintain in force and effect standard form of fire with extended coverage insurance covering Tenant's property and its merchandise, and the personal property of others in Tenant's possession, in, upon, or about the Premises. Such insurance shall be in an amount adequate to cover the cost of replacement. ARTICLE 25 CERTIFICATES OF INSURANCE A certificate issued by the insurance carrier for each policy of insurance required to be maintained by Tenant under the provisions of this lease shall be delivered to Landlord on or before the commencement date hereof and thereafter, as to policy renewals, within thirty (30) days prior to the expiration of the term of each such policy. Each of said certificates of insurance and each such policy of insurance required to be maintained by Tenant hereunder shall express evidence as to insurance coverage as required by this lease (including an express waiver of rights of subrogation thereunder as required hereunder) and shall contain an endorsement or provision requiring not less than twenty (20) days written notice to Landlord prior to the cancellation, diminution in the perils insured against, or reduction of the amount of coverage of the particular policy in question. ARTICLE 26 LANDLORD'S INSURANCE Landlord at all times during the term hereof shall procure and maintain in force and effect fire and extended coverage insurance on the Complex (building, common area, land and improvements) to such extent as it deems advisable and in its best interests (but not in excess of the full replacement cost of the Complex). ARTICLE 27 INCREASE IN PREMIUMS Tenant shall not do or suffer to be done, or keep or suffer to be kept, anything in, upon, or about the Premises which contravenes Landlord's fire or extended coverage insurance, boiler insurance, casualty insurance, or liability insurance or which shall prevent Landlord from securing any such policies in companies acceptable to Landlord or which shall cause an increase in the rate payable by Landlord from that existing at the beginning of the term hereof. If, however, during the term hereof, as a result of any act or neglect of Tenant, its invitees, agents, employees, or representatives, or the nature of the business conducted in or at the Premises, Landlord's fire and extended coverage insurance rate, boiler insurance rate, casualty insurance or liability insurance rate shall be increased over the rate existing at the beginning of the term for such type of insurance, in addition to all other remedies Landlord may have hereunder, Tenant, upon demand, shall pay to Landlord, as an additional charge, a sum equal to the increase in the cost of each such type of insurance coverage caused by such activities of Tenant which activities resulted in an increase in said insurance rate. In addition, Tenant shall be responsible for a portion of insurance premium increases incurred by Landlord as provided in Article 5.2(b) hereof. ARTICLE 28 WAIVER OF SUBROGATION

(a) Landlord releases Tenant, to the extent of Landlord's insurance coverage on the Complex from any liability for loss or damage caused by fire to any of the Complex even if such fire or other casualty should be brought about by the default or negligence of Tenant or its subtenants or concessionaires or the agents or employees of any of them; provided that this release shall be in effect only with respect to loss or damage occurring during the time that Landlord's policies for fire and extended coverage insurance contain a clause to the effect that this release shall not affect the right of Landlord to recover under such policies. Landlord will request each insurance company writing fire and extended coverage insurance policies covering the Complex to include a clause but only so long as it is includable without extra cost or, extra cost is chargeable therefor, only so long as Tenant pays for extra cost. If extra cost is chargeable therefor, Landlord will advise Tenant of such extra cost, and Tenant at its election may pay the same, but shall have no obligations to do so. (b) Tenant releases Landlord, to the extent of Tenant's insurance coverage on its property on the Premises, from any liability for loss or damage caused by fire or any of the extended coverage perils included in Tenant's insurance policies covering its property on the Premises even if such fire or other 6

casualty should be brought about the default or negligence of Landlord, its agents, or employees; provided that this release shall be in effect only with respect to loss or damage occurring during the time that Tenant's policies for fire and extended coverage insurance contain a clause to the effect that this release shall not affect the right of Tenant to recover under such policies. Tenant will request each insurance company writing fire and extended coverage insurance policies covering its property on the Premises to include such a clause but only so long as it is includable without extra cost or, if extra cost is chargeable therefor, Tenant will advise Landlord of such extra cost, and Landlord at its election may pay the same, but shall have no obligation to do so. ARTICLE 29 INDEMNIFICATION Tenant will indemnify Landlord against and save it harmless from any and all claims, actions, damages, liability, and expense in connection with loss of life, personal injury, or damage to property arising from or out of any occurrence in, upon or at the Premises, or the occupancy or use by Tenant of the Premises or any part thereof, or occasioned wholly or in part by an act or omission of Tenant, its subtenants, or concessionaires, or the agents, servants, contractors, employees, invitees, or licensees of any of them. Tenant will further reimburse Landlord for all reasonable attorneys' fees incurred by Landlord in defending any such claim or action. ARTICLE 30 NONLIABILITY OF LANDLORD Landlord shall not be responsible or liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining Premises or any part of the Premises adjacent to or connected with the Premises hereby leased or any part of the Complex or any persons transacting any business in the Complex or present in the Complex for any purpose or for any loss or damage resulting to Tenant or its property from burst, stopped or leaking water, gas, sewer, sprinkler, or steam pipes or plumbing fixtures or from any failure of or defect in any electric line, circuit or facility. ARTICLE 31 DAMAGE OR DESTRUCTION If at any time after the execution of this lease, the Premises, or any portion thereof, should be damaged or destroyed by any casualty insured under any fire and extended coverage insurance policy or policies required on the part of Landlord to be maintained hereunder, Landlord shall forthwith and immediately commence to repair and restore the Premises so far as practicable to the condition the Premises were in immediately prior to such damage or destruction, and Landlord shall complete the same within a reasonable time, and the rent from the time of such damage or destruction until the completion of repair and restoration shall be equitably abated in proportion to the extent and value of the space which is unusable during said period for the purpose of operating Tenant's business. Tenant agrees to notify Landlord in writing not less than thirty (30) days prior to the date Tenant opens for

casualty should be brought about the default or negligence of Landlord, its agents, or employees; provided that this release shall be in effect only with respect to loss or damage occurring during the time that Tenant's policies for fire and extended coverage insurance contain a clause to the effect that this release shall not affect the right of Tenant to recover under such policies. Tenant will request each insurance company writing fire and extended coverage insurance policies covering its property on the Premises to include such a clause but only so long as it is includable without extra cost or, if extra cost is chargeable therefor, Tenant will advise Landlord of such extra cost, and Landlord at its election may pay the same, but shall have no obligation to do so. ARTICLE 29 INDEMNIFICATION Tenant will indemnify Landlord against and save it harmless from any and all claims, actions, damages, liability, and expense in connection with loss of life, personal injury, or damage to property arising from or out of any occurrence in, upon or at the Premises, or the occupancy or use by Tenant of the Premises or any part thereof, or occasioned wholly or in part by an act or omission of Tenant, its subtenants, or concessionaires, or the agents, servants, contractors, employees, invitees, or licensees of any of them. Tenant will further reimburse Landlord for all reasonable attorneys' fees incurred by Landlord in defending any such claim or action. ARTICLE 30 NONLIABILITY OF LANDLORD Landlord shall not be responsible or liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining Premises or any part of the Premises adjacent to or connected with the Premises hereby leased or any part of the Complex or any persons transacting any business in the Complex or present in the Complex for any purpose or for any loss or damage resulting to Tenant or its property from burst, stopped or leaking water, gas, sewer, sprinkler, or steam pipes or plumbing fixtures or from any failure of or defect in any electric line, circuit or facility. ARTICLE 31 DAMAGE OR DESTRUCTION If at any time after the execution of this lease, the Premises, or any portion thereof, should be damaged or destroyed by any casualty insured under any fire and extended coverage insurance policy or policies required on the part of Landlord to be maintained hereunder, Landlord shall forthwith and immediately commence to repair and restore the Premises so far as practicable to the condition the Premises were in immediately prior to such damage or destruction, and Landlord shall complete the same within a reasonable time, and the rent from the time of such damage or destruction until the completion of repair and restoration shall be equitably abated in proportion to the extent and value of the space which is unusable during said period for the purpose of operating Tenant's business. Tenant agrees to notify Landlord in writing not less than thirty (30) days prior to the date Tenant opens for business in the Premises of the actual cost of all permanent leasehold improvements and betterments installed or to be installed by Tenant in the Premises (whether same have been paid for entirely or partially by Tenant), but exclusive of Tenant's personal property, moveable trade fixtures and contents. Similar notifications shall be given to Landlord not less than thirty (30) days prior to the commencement of any proposed alterations, additions or improvements to the Premises by Tenant (if same are permitted under the terms of this lease) subsequent to the initial construction of the Premises. If Tenant fails to comply with the foregoing provisions, any loss or damage Landlord shall sustain by reason thereof shall be borne by Tenant and shall be paid immediately by Tenant upon receipt of a bill therefor and evidence of such loss; and, in addition to any other rights or remedies reserved by Landlord under this lease, Landlord's obligation to repair, replace and/or rebuild the Premises to the condition in which they existed prior to such loss. In either case, Tenant shall pay the cost of such restoration. In the event the Premises shall be untenantable, the Annual Rent and other sums payable hereunder shall abate to the extent of proceeds actually received by Landlord under any rent insurance policy. No damage or deduction to the Premises shall allow Tenant to surrender possession of the Premises nor affect Tenant's liability for the payment of rent or any other covenant herein contained, except as may be specifically provided in this lease.

Notwithstanding anything else to the contrary contained in this Section or elsewhere in this lease, Landlord, at its option, may terminate this lease on thirty (30) days notice to Tenant if-(a) the Premises and/or building in which the Premises are located shall be damaged or destroyed as a result of an occurrence which is not covered by Landlord's insurance; or (b) the Premises shall be damaged or destroyed during the last two (2) years of the term or the last 25% of the term, whichever is greater, and, in such event, the Tenant also shall have the option to terminate this lease on thirty (30) days written notice to Landlord; or (c) any or all of the building or common areas of the Complex are damaged (whether or not the Premises are damaged) to such an extent that, in the sole judgment of Landlord, the Complex cannot be operated as an economically viable unit. Tenant shall give to Landlord prompt written notice of any damage to or destruction of any portion 7

of the Premises resulting from fire or other casualty. ARTICLE 32 NEGLIGENCE OR WILLFUL ACT Any of the foregoing provisions to the contrary notwithstanding, if the Premises are damaged or destroyed by any casualty resulting, in whole or in part, from the negligence or from the willful act of Tenant or any subtenant or concessionaire of Tenant or any agent, servant, employee, licensee, or invitee of any of them, there shall not be any abatement of rent because of said casualty, and, in addition, Tenant shall be required promptly to repair said damage at its own expense unless the Premises are damaged or destroyed by a casualty insured under any fire and extended coverage insurance policy or policies required on the part of Landlord to be maintained hereunder. ARTICLE 33 DISCLAIMER OF INSURANCE PROCEEDS Tenant shall have no interest in or claim to any portion of the proceeds of any insurance maintained by Landlord hereunder. ARTICLE 34 CONTINUATION OF BUSINESS Tenant agrees at all times after any damage to or destruction of Premises, or any portion thereof, to continue the operation of its business therein to the extent practicable from the standpoint of good business, and in the event Landlord is required or elects to repair such damage or destruction to the Premises under any of the foregoing provisions, Tenant shall not be entitled to any damages by reason of any inconvenience or loss sustained by Tenant as a result thereof. ARTICLE 35 CONDEMNATION OF PREMISES If the whole or any part of the Premises shall be taken for a public or quasi-public use or purpose under power of eminent domain, the term of this lease shall terminate as of the date actual physical possession thereof shall be so taken. ARTICLE 36 CONDEMNATION OF COMMON FACILITIES If any portion of the Common Facilities in the Complex shall be taken for a public or quasi-public use of purpose under the power of eminent domain and such taking deprives Tenant, its subtenants, licensees, concessionaires, business invitees, customers, suppliers, agents, representatives, or employees of reasonable ingress and egress to

of the Premises resulting from fire or other casualty. ARTICLE 32 NEGLIGENCE OR WILLFUL ACT Any of the foregoing provisions to the contrary notwithstanding, if the Premises are damaged or destroyed by any casualty resulting, in whole or in part, from the negligence or from the willful act of Tenant or any subtenant or concessionaire of Tenant or any agent, servant, employee, licensee, or invitee of any of them, there shall not be any abatement of rent because of said casualty, and, in addition, Tenant shall be required promptly to repair said damage at its own expense unless the Premises are damaged or destroyed by a casualty insured under any fire and extended coverage insurance policy or policies required on the part of Landlord to be maintained hereunder. ARTICLE 33 DISCLAIMER OF INSURANCE PROCEEDS Tenant shall have no interest in or claim to any portion of the proceeds of any insurance maintained by Landlord hereunder. ARTICLE 34 CONTINUATION OF BUSINESS Tenant agrees at all times after any damage to or destruction of Premises, or any portion thereof, to continue the operation of its business therein to the extent practicable from the standpoint of good business, and in the event Landlord is required or elects to repair such damage or destruction to the Premises under any of the foregoing provisions, Tenant shall not be entitled to any damages by reason of any inconvenience or loss sustained by Tenant as a result thereof. ARTICLE 35 CONDEMNATION OF PREMISES If the whole or any part of the Premises shall be taken for a public or quasi-public use or purpose under power of eminent domain, the term of this lease shall terminate as of the date actual physical possession thereof shall be so taken. ARTICLE 36 CONDEMNATION OF COMMON FACILITIES If any portion of the Common Facilities in the Complex shall be taken for a public or quasi-public use of purpose under the power of eminent domain and such taking deprives Tenant, its subtenants, licensees, concessionaires, business invitees, customers, suppliers, agents, representatives, or employees of reasonable ingress and egress to and from the Complex or the Premises, or if such taking reduces the area of the customer vehicular parking portions of the Common Facilities by an amount in excess of twenty percent (20%), then, and in either such event, Tenant shall have the right, within thirty (30) days after the date of such actual taking, to cancel and terminate this lease by giving Landlord written notice of its election to do so; provided, however, that Tenant shall have no such right to cancel or terminate this lease if Landlord promptly takes steps to restore reasonable means of ingress and egress or (as the case may be) to restore the customer vehicular parking portions of the Common Facilities to not less than eighty percent (80%) of their area immediately prior to such taking by substituting thereof additions to or portions of the Complex or lands reasonable adjacent to the Complex and complete such restoration within a reasonable period of time thereafter in light of the then existing circumstances. ARTICLE 37 DAMAGES AWARDED All damages awarded or other sums paid on account of any condemnation of taking under the power of eminent domain of the Premises, the Common Facilities or the Complex or any portion or portions thereof, shall belong to and shall be the sole property of Landlord, whether such damages or other sums are awarded as compensation for loss or diminution in value of the leasehold, or for the fee of the Premises, or otherwise.

Tenant in no event shall have any claim whatsoever against Landlord for loss or diminution in value of the leasehold or for the value of any unexpired term of this lease, Tenant hereby expressly waiving any such right or claim; provided, however, that Tenant shall be entitled to receive from the condemning authority any award or portion thereof made for the taking of any of Tenant's property (hereinabove described) under the power of eminent domain, and for damages thereto caused thereby and for any cost to which Tenant might be put in removing Tenant's property. ARTICLE 38 VOLUNTARY SALE A voluntary sale of all or any part of the Premises or of the Complex by Landlord to any public or quasi-public body, agency or person, corporate or otherwise, having the power of eminent domain, either under threat of condemnation or while condemnation proceedings are pending, shall be deemed to 8

be a taking under the power of eminent domain. ARTICLE 39 AD VALOREM TAXES The Landlord shall pay all ad valorem taxes and assessments (except those described in the next succeeding paragraph) which may be levied, accessed, or charged against the demised Premises subject however to the provisions of Article 5.2(a) providing for a portion of tax increases over those charged during the Base Year to be paid by Tenant. Tenant shall pay all ad valorem taxes accessed against any office equipment, fixtures, goods, and other personal property which it may install or store in the leased Premises, and all licenses required in the operation of its business. ARTICLE 40 ASSIGNMENT AND SUBLETTING Tenant shall not assign or in any manner transfer this lease or any estate, interest or benefit therein or sublet the Premises or any part or parts thereof or permit the use of the same or any part thereof by anyone other than Tenant without the prior written consent of Landlord which consent will not be unreasonably withheld. This prohibition against assigning or subletting shall be construed to include a prohibition against any assignment or subletting by operation of law; provided, however, a merger or other consolidation shall not require Landlord"s approval provided such successor-in-interest has a net wroth (calculated in accordance with generally accepted accounting principles) at least equal to that of Tenant as of the date of the execution of this Agreement. Consent by Landlord to any assignment or transfer of interest under this lease, or subletting of the Premises or any part thereof shall be limited to the instance stated in such written consent and shall not constitute a release, waiver or consent to any other assignment, transfer or interest, or subletting; and notwithstanding any such assignment, transfer or interest, or subletting, Tenant shall continue liable for the performance of Tenant's obligations under this lease. If Landlord consents to any transfer, assignment or subletting, that consent shall not be effective unless and until Tenant gives to Landlord such information as to the financial responsibility and standing of the proposed assignee or subtenant as Landlord may reasonably require, and the transferee, assignee or sublessee delivers to Landlord a written agreement in form and substance satisfactory to Landlord pursuant to which such transferee, assignee or sublessee assumes all of the obligations and liabilities of Tenant under this lease. ARTICLE 41 DEFAULT The happening of any one or more of the following listed events shall constitute a breach of this lease on the part of Tenant, namely: (a) The commencement in any court or tribunal of any proceeding, voluntary or involuntary, to declare Tenant insolvent or unable to pay its debts.

be a taking under the power of eminent domain. ARTICLE 39 AD VALOREM TAXES The Landlord shall pay all ad valorem taxes and assessments (except those described in the next succeeding paragraph) which may be levied, accessed, or charged against the demised Premises subject however to the provisions of Article 5.2(a) providing for a portion of tax increases over those charged during the Base Year to be paid by Tenant. Tenant shall pay all ad valorem taxes accessed against any office equipment, fixtures, goods, and other personal property which it may install or store in the leased Premises, and all licenses required in the operation of its business. ARTICLE 40 ASSIGNMENT AND SUBLETTING Tenant shall not assign or in any manner transfer this lease or any estate, interest or benefit therein or sublet the Premises or any part or parts thereof or permit the use of the same or any part thereof by anyone other than Tenant without the prior written consent of Landlord which consent will not be unreasonably withheld. This prohibition against assigning or subletting shall be construed to include a prohibition against any assignment or subletting by operation of law; provided, however, a merger or other consolidation shall not require Landlord"s approval provided such successor-in-interest has a net wroth (calculated in accordance with generally accepted accounting principles) at least equal to that of Tenant as of the date of the execution of this Agreement. Consent by Landlord to any assignment or transfer of interest under this lease, or subletting of the Premises or any part thereof shall be limited to the instance stated in such written consent and shall not constitute a release, waiver or consent to any other assignment, transfer or interest, or subletting; and notwithstanding any such assignment, transfer or interest, or subletting, Tenant shall continue liable for the performance of Tenant's obligations under this lease. If Landlord consents to any transfer, assignment or subletting, that consent shall not be effective unless and until Tenant gives to Landlord such information as to the financial responsibility and standing of the proposed assignee or subtenant as Landlord may reasonably require, and the transferee, assignee or sublessee delivers to Landlord a written agreement in form and substance satisfactory to Landlord pursuant to which such transferee, assignee or sublessee assumes all of the obligations and liabilities of Tenant under this lease. ARTICLE 41 DEFAULT The happening of any one or more of the following listed events shall constitute a breach of this lease on the part of Tenant, namely: (a) The commencement in any court or tribunal of any proceeding, voluntary or involuntary, to declare Tenant insolvent or unable to pay its debts. (b) The appointment by any court or under any law of a receiver, trustee, or other custodian of the property, assets or business of Tenant. (c) The assignment by Tenant of all or any part of its property or assets for the benefit of creditors. (d) The levy or execution, attachment, or taking of property, assets, or the leasehold interest of Tenant by process of law or otherwise in satisfaction of any judgment, debt or claims. (e) The failure of Tenant to perform fully and promptly any act required of it in the performance of this lease or to comply otherwise with any term or provision thereof other than those requiring the payment of rent or other charges. (f) The failure of Tenant to pay any rent or other payment or charge payable under this lease agreement for a period of ten (10) days after the same is due and payable.

Upon the happening of any event of default described under the provisions of paragraphs (a) through (e), and the failure of Tenant to cure or remove the same within ten (10) days after written notice of such default given to Tenant by Landlord or upon the happening of any one type of event of default described in paragraphs (a) through (e), both inclusive, on three or more occasions in any period of twelve (12) consecutive months during the term (regardless of whether said events of default shall have been cured or removed) Landlord, if it shall so elect, may (without prejudice to any other remedies which Landlord may have as provided by law) terminate the term hereof and if Landlord shall exercise such right of election, the same shall be effective as of the date of the event of default upon written notice of Landlord's election given by Landlord to Tenant at any time after the date of such event of default, or Landlord, if it shall so elect, may terminate Tenant's right to possession or occupancy only, without terminating the term of the lease. Upon any termination of the term hereof, whether by lapse of time or otherwise, or upon any termination of Tenant's right to possession or occupancy of the Premises without terminating the term hereof, Tenant shall surrender possession and vacate the Premises and deliver possession thereof to Landlord; and Tenant hereby grants to Landlord full and free license to enter into and upon the Premises 9

in such event and with or without process of law to repossess the Premises and to expel or remove Tenant and any others who may be occupying the Premises and to remove therefrom any and all property using for such purpose such force as may be necessary without being guilty of or liable for trespass, eviction for forcible entry or detainer and without relinquishing Landlord's right to rent or any other right given to Landlord hereunder or by operation of law. Except as otherwise expressly provided in this lease, Tenant hereby expressly waives the service and demand for the payment of rent or for possession of the Premises or to re-enter the Premises, including and every form of demand and notice prescribed by any statute or other law. If Landlord shall elect to terminate Tenant's right to possession only as above provided, without terminating the term hereof, Landlord at its option may enter into the Premises, remove Tenant's property and other evidence of tenancy and take and hold possession thereof without such entry and possession terminating the term hereof or otherwise releasing Tenant in whole or in part from its obligation to pay the rent herein reserved for the full term hereof. Upon and after entry into possession without termination of the term hereof, Landlord may relet the Premises or any part for the account of Tenant to any person, firm or corporation other than Tenant for such rent, for such time, and upon such terms as Landlord in its sole discretion shall determine. If any rent collected by Landlord upon such reletting for Tenant's account is not sufficient to pay monthly the full amount of the rent herein reserved (including rent, and all other charges of any type which Tenant has agreed are in this lease) and not theretofore paid by Tenant, together with the costs incurred by Landlord in connection with the reletting of the Premises including advertising and broker's commission as well as all costs of repairs, alterations, redecoration or remodeling, Tenant shall pay to Landlord the amount of each monthly deficiency upon demand, and if the rent so collected from such reletting is more than sufficient to pay the full amount of the rent reserved hereunder, together with the aforementioned costs, Landlord, at the end of the stated term hereof, shall apply any surplus to the extent thereof to the discharge of any obligation of Tenant to Landlord under the terms of this lease, and any balance then remaining shall belong go Landlord. Any suit or proceeding brought to collect any deficiency or rent shall not prejudice or preclude in any way the right of the Landlord to collect any deficiencies thereafter arising by similar suit or proceeding. ARTICLE 42 INTEREST Whenever this lease refers to "Interest", same shall be computed at a rate equal to (i) the Average Prime Rate (as hereinafter defined) plus four percent (4%), or (ii) twelve percent (12%), which is greater. If, however, payment of interest at such rate by Tenant (or by the tenant then in possession having succeeded to the Tenant's interest in accordance with the terms of this lease) should be unlawful, that is, violative of usury statutes or otherwise, then "interest" shall, as against such party, be computed at the maximum lawful rate payable by such party. "Average Prime Rate" shall mean the average of the prime rate being charged by NationsBank, or its successor, for the quarter (January - March, April - June, July - September, October - December) immediately prior to the time in question.

in such event and with or without process of law to repossess the Premises and to expel or remove Tenant and any others who may be occupying the Premises and to remove therefrom any and all property using for such purpose such force as may be necessary without being guilty of or liable for trespass, eviction for forcible entry or detainer and without relinquishing Landlord's right to rent or any other right given to Landlord hereunder or by operation of law. Except as otherwise expressly provided in this lease, Tenant hereby expressly waives the service and demand for the payment of rent or for possession of the Premises or to re-enter the Premises, including and every form of demand and notice prescribed by any statute or other law. If Landlord shall elect to terminate Tenant's right to possession only as above provided, without terminating the term hereof, Landlord at its option may enter into the Premises, remove Tenant's property and other evidence of tenancy and take and hold possession thereof without such entry and possession terminating the term hereof or otherwise releasing Tenant in whole or in part from its obligation to pay the rent herein reserved for the full term hereof. Upon and after entry into possession without termination of the term hereof, Landlord may relet the Premises or any part for the account of Tenant to any person, firm or corporation other than Tenant for such rent, for such time, and upon such terms as Landlord in its sole discretion shall determine. If any rent collected by Landlord upon such reletting for Tenant's account is not sufficient to pay monthly the full amount of the rent herein reserved (including rent, and all other charges of any type which Tenant has agreed are in this lease) and not theretofore paid by Tenant, together with the costs incurred by Landlord in connection with the reletting of the Premises including advertising and broker's commission as well as all costs of repairs, alterations, redecoration or remodeling, Tenant shall pay to Landlord the amount of each monthly deficiency upon demand, and if the rent so collected from such reletting is more than sufficient to pay the full amount of the rent reserved hereunder, together with the aforementioned costs, Landlord, at the end of the stated term hereof, shall apply any surplus to the extent thereof to the discharge of any obligation of Tenant to Landlord under the terms of this lease, and any balance then remaining shall belong go Landlord. Any suit or proceeding brought to collect any deficiency or rent shall not prejudice or preclude in any way the right of the Landlord to collect any deficiencies thereafter arising by similar suit or proceeding. ARTICLE 42 INTEREST Whenever this lease refers to "Interest", same shall be computed at a rate equal to (i) the Average Prime Rate (as hereinafter defined) plus four percent (4%), or (ii) twelve percent (12%), which is greater. If, however, payment of interest at such rate by Tenant (or by the tenant then in possession having succeeded to the Tenant's interest in accordance with the terms of this lease) should be unlawful, that is, violative of usury statutes or otherwise, then "interest" shall, as against such party, be computed at the maximum lawful rate payable by such party. "Average Prime Rate" shall mean the average of the prime rate being charged by NationsBank, or its successor, for the quarter (January - March, April - June, July - September, October - December) immediately prior to the time in question. ARTICLE 43 LATE PAYMENTS AND ATTORNEY'S FEES Should Tenant fail to pay when due any installment of Annual Rent, Percentage Rent or any other sum payable to Landlord under the terms of this lease, then Interest shall accrue from and after the date on which any such sum shall be due and payable, and such Interest together with a Late Charge of $25.00 to cover the extra expenses involved in handling such delinquency shall be paid by Tenant to Landlord at the time of payment of the delinquent sum. In addition, in the event that the Tenant shall fail to pay any sum due under this lease or shall otherwise be in default hereunder, then the Tenant shall be responsible for and shall pay all attorney's fees and other expenses reasonably incurred by the Landlord in connection therewith. If Landlord shall be in default hereunder and Tenant prevails in any legal action it may file to cure or recover damages for such default, Tenant shall be entitled to attorney fees and other expenses reasonably incurred in connection therewith. In either case, attorney fees shall be based upon regular hourly rates for the attorney(s) performing such services. ARTICLE 44 SECURITY DEPOSIT Tenant has deposited with Landlord the sum of $2,452.08 as a "Security Deposit", the receipt of which is hereby

acknowledged. Said deposit shall be held by Landlord without liability for interest as security for the faithful performance by Tenant of all the terms of this lease by said Tenant to be observed and performed. The security deposit shall not be mortgaged, assigned, transferred or encumbered by Tenant without the written consent of Landlord and any such act on the part of Tenant shall be without force and effect and shall not be binding upon the Landlord. ARTICLE 45 USE OF FUNDS If any of the rents herein reserved or any other sum payable by Tenant to Landlord shall be overdue and unpaid or should Landlord make payments on behalf of the Tenant, or Tenant shall fail to 10

perform any of the terms of this lease, then Landlord may, at its option and without prejudice to any other remedy which Landlord may have on account thereof, appropriate and apply said entire security deposit or so much thereof as may be necessary to compensate Landlord toward the payment of rent or additional rent or loss or damage sustained by Landlord due to such breach on the part of Tenant; and Tenant shall forthwith upon demand restore said security to the original sum deposited. Should Tenant comply with all of said terms and promptly pay all of the rentals as they fall due and all other sums payable by Tenant to Landlord, said deposit shall be returned in full to Tenant at the end of the term or applied against the last month's rental due, in the discretion of Landlord. ARTICLE 46 BANKRUPTCY In the event of bankruptcy or other debtor-creditor proceeding against Tenant, such security deposit shall be deemed to be applied first to the payment of rent and other charges due Landlord for all periods prior to the filing of such proceedings. ARTICLE 47 TRANSFER Landlord may deliver the funds deposited hereunder by Tenant to the purchaser of Landlord's interest in the Premises in the event that such interest be sold and thereupon Landlord shall be discharged from any further liability with respect to such deposit, and this provision shall also apply to any subsequent transferees. ARTICLE 48 SALE OR ASSIGNMENT It is agreed that Landlord may at any time assign or transfer its interest as Landlord in and to this lease, or any part thereof, and may at any time sell or transfer its interest in the fee of the Premises, or its interest in and to the whole or any portion of the Premises. ARTICLE 49 ATTORNMENT Tenant hereby agrees to attorn to any assignee, transferee or purchaser of Landlord from and after the date of notice to Tenant of such assignment, transfer or sale, in the same manner and with the same force and affect as though this lease were made, in the first instance, by and between Tenant and such assignee, transferee or purchaser. In the event of the exercise of the power of sale under, or the foreclosure of, any deed of trust, mortgage or other encumbrance placed by Landlord against all or any portion of the Premises, Tenant shall upon such sale or foreclosure of any such deed of trust, mortgage or other encumbrance, and shall recognize the purchaser or judgment creditor as the Landlord under the lease. ARTICLE 50 SUBORDINATION Tenant agrees upon request of Landlord to subordinate this lease and its rights hereunder to the lien of any

perform any of the terms of this lease, then Landlord may, at its option and without prejudice to any other remedy which Landlord may have on account thereof, appropriate and apply said entire security deposit or so much thereof as may be necessary to compensate Landlord toward the payment of rent or additional rent or loss or damage sustained by Landlord due to such breach on the part of Tenant; and Tenant shall forthwith upon demand restore said security to the original sum deposited. Should Tenant comply with all of said terms and promptly pay all of the rentals as they fall due and all other sums payable by Tenant to Landlord, said deposit shall be returned in full to Tenant at the end of the term or applied against the last month's rental due, in the discretion of Landlord. ARTICLE 46 BANKRUPTCY In the event of bankruptcy or other debtor-creditor proceeding against Tenant, such security deposit shall be deemed to be applied first to the payment of rent and other charges due Landlord for all periods prior to the filing of such proceedings. ARTICLE 47 TRANSFER Landlord may deliver the funds deposited hereunder by Tenant to the purchaser of Landlord's interest in the Premises in the event that such interest be sold and thereupon Landlord shall be discharged from any further liability with respect to such deposit, and this provision shall also apply to any subsequent transferees. ARTICLE 48 SALE OR ASSIGNMENT It is agreed that Landlord may at any time assign or transfer its interest as Landlord in and to this lease, or any part thereof, and may at any time sell or transfer its interest in the fee of the Premises, or its interest in and to the whole or any portion of the Premises. ARTICLE 49 ATTORNMENT Tenant hereby agrees to attorn to any assignee, transferee or purchaser of Landlord from and after the date of notice to Tenant of such assignment, transfer or sale, in the same manner and with the same force and affect as though this lease were made, in the first instance, by and between Tenant and such assignee, transferee or purchaser. In the event of the exercise of the power of sale under, or the foreclosure of, any deed of trust, mortgage or other encumbrance placed by Landlord against all or any portion of the Premises, Tenant shall upon such sale or foreclosure of any such deed of trust, mortgage or other encumbrance, and shall recognize the purchaser or judgment creditor as the Landlord under the lease. ARTICLE 50 SUBORDINATION Tenant agrees upon request of Landlord to subordinate this lease and its rights hereunder to the lien of any mortgage, deed of trust, or other encumbrances, together with any conditions, renewals, extensions or replacements thereof, now or hereafter placed, charged or enforced against the Landlord's interest in the lease and the leasehold estate thereby created, the Premises or the land, building or improvements included therein or of which the Premises are a part, or any portion or portions thereof, and to execute and deliver (but without cost to Tenant) at any time and from time to time upon demand by Landlord such documents as may be required to effectuate such subordination, and in the event that Tenant shall fail, neglect or refuse to execute and deliver any such document within ten (10) days after receipt of written notice so to do and the receipt by Tenant of the document to be executed by it, Tenant hereby appoints Landlord, its successors and assigns, the attorney-in-fact of Tenant irrevocably to execute and deliver any and all documents for and on behalf of Tenant; provided, however, that Tenant shall not be required to effectuate such subordination, nor shall Landlord be authorized to effect such subordination on behalf of Tenant, unless the mortgagee or trustee named in such mortgage, deed of trust, or other encumbrance shall first agree in writing, for the benefit of Tenant, that so long as Tenant is not in default under any of the provisions, covenants or conditions of this lease nor any of the rights of Tenant hereunder shall be terminated or modified or be subject to termination or modification except as herein otherwise provided,

nor shall Tenant's possession of the Premises be disturbed or interfered with, by any trustee's sale or by any action or proceeding to foreclose said mortgage, deed of trust or other encumbrances. ARTICLE 51 ACKNOWLEDGMENT OF LEASE Tenant agrees that at any time, or from time to time, at reasonable intervals within ten (10) days after written request by Landlord, Tenant will execute, acknowledge, and deliver to Landlord or to such other party as may be designated by Landlord, a certificate stating that this lease in full force and effect, and has not been modified, supplemented, or amended in any way, except as indicated in such certificate; that all conditions and agreements under this lease to be performed by Landlord have been satisfied or performed, except as set forth in said certificate; that there are no existing defenses or offsets; except as 11

indicated on said certificate; that Tenant has not paid any rental in advance, except as indicated in said certificate; that Tenant is not in default in the payment of rent or any of the other obligations required of Tenant under this lease; and that Tenant has paid basic rentals and percentage rentals as of the date set forth in this certificate. ARTICLE 52 NOTICES Any notice provided herein shall be deemed sufficient and to have been duly served if the same shall be in writing and mailed postage prepaid addressed as follows: If intended for Landlord, to Landlord at: Frank B. Peters, Jr. P. O. Box 1349 High Point, North Carolina 27261 or to such other address as Landlord may from time to time direct. If intended for Tenant, to Tenant at:

Quaker Fabric Corporation of Fall River 941 Grinnell Street Fall River, Massachusetts 02721 or to such other address as Tenant may from time to time direct in writing delivered to Landlord. ARTICLE 53 HOLDING OVER In the event Tenant remains in possession of the Premises after the expiration of the term hereof and without the execution of a new lease, Tenant thereby shall not acquire any right, title or interest in or to the Premises; provided, however, that at the option of Landlord, by written notice of the exercise thereof given to Tenant within thirty (30) days next following the last day of the term hereof or any extension thereof, Tenant as a result of such holding over thereby shall be deemed to have renewed this lease for the further period of the term herein provided, and if Landlord shall not exercise the option above described, Tenant as a result of such holding over, shall occupy the Premises as a tenant at will, and in either event subject to all the conditions, provisions, and obligations of this lease insofar as the same shall then be applicable to whichever of such tenancies shall result. ARTICLE 54 NONWAIVER The acceptance of rentals and fees by Landlord for any period or periods after a default of any of the terms, covenants and conditions herein contained to be performed, kept and observed by Tenant shall not be deemed a

indicated on said certificate; that Tenant has not paid any rental in advance, except as indicated in said certificate; that Tenant is not in default in the payment of rent or any of the other obligations required of Tenant under this lease; and that Tenant has paid basic rentals and percentage rentals as of the date set forth in this certificate. ARTICLE 52 NOTICES Any notice provided herein shall be deemed sufficient and to have been duly served if the same shall be in writing and mailed postage prepaid addressed as follows: If intended for Landlord, to Landlord at: Frank B. Peters, Jr. P. O. Box 1349 High Point, North Carolina 27261 or to such other address as Landlord may from time to time direct. If intended for Tenant, to Tenant at:

Quaker Fabric Corporation of Fall River 941 Grinnell Street Fall River, Massachusetts 02721 or to such other address as Tenant may from time to time direct in writing delivered to Landlord. ARTICLE 53 HOLDING OVER In the event Tenant remains in possession of the Premises after the expiration of the term hereof and without the execution of a new lease, Tenant thereby shall not acquire any right, title or interest in or to the Premises; provided, however, that at the option of Landlord, by written notice of the exercise thereof given to Tenant within thirty (30) days next following the last day of the term hereof or any extension thereof, Tenant as a result of such holding over thereby shall be deemed to have renewed this lease for the further period of the term herein provided, and if Landlord shall not exercise the option above described, Tenant as a result of such holding over, shall occupy the Premises as a tenant at will, and in either event subject to all the conditions, provisions, and obligations of this lease insofar as the same shall then be applicable to whichever of such tenancies shall result. ARTICLE 54 NONWAIVER The acceptance of rentals and fees by Landlord for any period or periods after a default of any of the terms, covenants and conditions herein contained to be performed, kept and observed by Tenant shall not be deemed a waiver of any rights on the part of Landlord to terminate this lease for any other failure or for the continued failure by Tenant so to perform, keep or observe the terms, conditions or covenants hereof to be performed, kept and observed by it. No waiver by Landlord of any of the terms of this agreement to be kept, performed and observed by Tenant shall be construed to be or act as a waiver by Landlord of any subsequent default on the part of Tenant. ARTICLE 55 MEMORANDUM OF LEASE If either Tenant or Landlord request of the other the execution of a Memorandum of Lease for recording purposes, the requesting party shall cause said document to be prepared, and both Landlord and Tenant agree to execute said Memorandum of Lease so long as said agreement contains only a description of the leased Premises, term of lease and incorporates this lease by reference. ARTICLE 56

IDENTITY OF INTEREST The execution of this lease or the performance of any act pursuant to the provisions thereof shall not be deemed or construed to have the effect of creating between Landlord and Tenant the relationship of principal or agent or of partnership or of joint venture and the relationship between them shall be that only of Landlord and Tenant. ARTICLE 57 JOINT AND SEVERAL LIABILITY The word "Tenant" as used herein shall include all persons, firms, associations and corporations named in the first paragraph of this lease and all such persons, firms, associations and corporations shall 12

be jointly and severally liable for the performance of all obligations to be performed by Tenant under this lease. The foregoing to the contrary notwithstanding, the word "Tenant", shall be construed to mean and refer to each of such persons, firms, associations or corporations individually so that the occurrence of any of the events described to any one of them shall constitute an "Event of Default". ARTICLE 58 PRONOUNS AND PLURAL REFERENCES Unless the context requires otherwise, when referring to the Tenant, the singular as used therein shall be construed as plural when more than one is the Tenant, and the neuter shall be construed as masculine when the Tenant is masculine, as feminine when the Tenant is feminine and to both when the Tenant is plural and includes both masculine and feminine. ARTICLE 59 INSPECTION OF Premises Landlord, its agents, servants and employees shall have the right to enter all parts of the Premises during business hours to inspect the same and enforce and carry out any provision of this lease. ARTICLE 60 SURRENDER OF Premises On the expiration date or other termination of the term or the Tenant's right of possession, Tenant shall quit and surrender the demised Premises, broom clean and in good condition and repair, together with all alterations, fixtures, heating and air conditioning equipment, installations, additions and improvements which may have been made in or attached on or to the demised Premises. Upon surrender, Tenant shall remove his trade fixtures, and Tenant shall repair any damage to the demised Premises caused thereby. Landlord may require Tenant to restore the demised Premises so that the demised Premises shall be as they were on the commencement date except for ordinary wear and tear. Any personal property of the Tenant which shall remain in the Premises after the expiration or termination of the term or the Tenant's right of possession shall be deemed to have been abandoned by the Tenant and may be retained by the Landlord as its property or disposed of in such manner as Landlord may see fit; any proceeds from the sale thereof shall belong to the Landlord. ARTICLE 61 PARTIAL INVALIDITY If any term, provision, covenant or condition of this lease should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of this lease shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. ARTICLE 62 BINDING EFFECT

be jointly and severally liable for the performance of all obligations to be performed by Tenant under this lease. The foregoing to the contrary notwithstanding, the word "Tenant", shall be construed to mean and refer to each of such persons, firms, associations or corporations individually so that the occurrence of any of the events described to any one of them shall constitute an "Event of Default". ARTICLE 58 PRONOUNS AND PLURAL REFERENCES Unless the context requires otherwise, when referring to the Tenant, the singular as used therein shall be construed as plural when more than one is the Tenant, and the neuter shall be construed as masculine when the Tenant is masculine, as feminine when the Tenant is feminine and to both when the Tenant is plural and includes both masculine and feminine. ARTICLE 59 INSPECTION OF Premises Landlord, its agents, servants and employees shall have the right to enter all parts of the Premises during business hours to inspect the same and enforce and carry out any provision of this lease. ARTICLE 60 SURRENDER OF Premises On the expiration date or other termination of the term or the Tenant's right of possession, Tenant shall quit and surrender the demised Premises, broom clean and in good condition and repair, together with all alterations, fixtures, heating and air conditioning equipment, installations, additions and improvements which may have been made in or attached on or to the demised Premises. Upon surrender, Tenant shall remove his trade fixtures, and Tenant shall repair any damage to the demised Premises caused thereby. Landlord may require Tenant to restore the demised Premises so that the demised Premises shall be as they were on the commencement date except for ordinary wear and tear. Any personal property of the Tenant which shall remain in the Premises after the expiration or termination of the term or the Tenant's right of possession shall be deemed to have been abandoned by the Tenant and may be retained by the Landlord as its property or disposed of in such manner as Landlord may see fit; any proceeds from the sale thereof shall belong to the Landlord. ARTICLE 61 PARTIAL INVALIDITY If any term, provision, covenant or condition of this lease should be held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of this lease shall continue in full force and effect and shall in no way be affected, impaired or invalidated thereby. ARTICLE 62 BINDING EFFECT The provisions of this lease shall be binding upon Landlord, its successors and assigns and upon Tenant, its successors and assigns or if Tenant is an individual, upon his heirs, executors, administrators and assigns. ARTICLE 63 ENTIRE AGREEMENT This lease embodies the entire agreement between Landlord and Tenant relative to the subject matter hereof and no representation or agreements, oral or otherwise, between the parties not embodied herein or attached hereto shall be of any force and effect. This lease shall not be modified, changed or altered in any respect except by a writing signed on behalf of Landlord, and properly signed on behalf of Tenant. IN WITNESS WHEREOF, the parties hereto have executed this Lease Agreement under the respective seals as of the day and year first above written.

LANDLORD: F. B. Peters, Jr. (SEAL) Frank B. Peters, Jr. TENANT: Quaker Fabric Corporation of Fall River (Corporate Seal) By: [ILLEGIBLE] (Title) Vice President

SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT Seventh Amendment dated as of September 30, 1999 (the "Amendment"), by and between (a) QUAKER FABRIC CORPORATION OF FALL RIVER, a Massachusetts corporation (the "Company"), QUAKER TEXTILE CORPORATION, a Massachusetts corporation ("Quaker Textile") and QUAKER FABRIC MEXICO, S.A. de C.V., a Mexican corporation ("Quaker Mexico", and along with the Company and Quaker Textile, the "Borrowers"), (b) QUAKER FABRIC CORPORATION, a Delaware corporation (the "Parent"), (c) the banks (collectively, the "Banks") listed on the signature pages hereto, and (d) BANKBOSTON, N.A. (f/k/a The First National Bank of Boston) as agent (the "Agent") for the Banks, amending certain provisions of the Amended and Restated Credit Agreement dated as of December 18, 1995 (as amended and in effect from time to time, the "Credit Agreement") by and between the Borrowers, the Parent, the Banks and the Agent. Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein. WHEREAS, the Borrowers, the Parent and the Banks have agreed to modify certain terms and conditions of the Credit Agreement as specifically set forth in this Amendment; NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 'SS'1. Amendment to Section 5 of the Credit Agreement. Section 5.23(b) of the Credit Agreement is hereby amended in its entirety to read as follows: "(b) Debt Service Coverage Ratio. The Parent and the Company shall not permit the Debt Service Coverage Ratio, calculated as of the last day of each fiscal quarter of the Parent and its Subsidiaries, to be less than (A) 1.00 to 1.00 for the period of four consecutive fiscal quarters ending October 2, 1999, (B) 1.00 to 1.00 for the period of four consecutive fiscal quarters ending January 1, 2000, (C) 1.25 to 1.00 for the period of four consecutive fiscal quarters ending April 1, 2000 and (D) 1.50 to 1.00 for each period of four consecutive fiscal quarters ending after April 1, 2000." 'SS'2. Conditions to Effectiveness. This Amendment shall not become effective until the Agent receives the following: (a) a counterpart of this Amendment, executed by the each of the Borrowers, the Parent and the Majority Banks; and

-2(b) an amendment fee of $20,000 paid by the Borrowers to the Agent for the pro rata account of each Bank based on such Bank's Commitment percentage.

SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT Seventh Amendment dated as of September 30, 1999 (the "Amendment"), by and between (a) QUAKER FABRIC CORPORATION OF FALL RIVER, a Massachusetts corporation (the "Company"), QUAKER TEXTILE CORPORATION, a Massachusetts corporation ("Quaker Textile") and QUAKER FABRIC MEXICO, S.A. de C.V., a Mexican corporation ("Quaker Mexico", and along with the Company and Quaker Textile, the "Borrowers"), (b) QUAKER FABRIC CORPORATION, a Delaware corporation (the "Parent"), (c) the banks (collectively, the "Banks") listed on the signature pages hereto, and (d) BANKBOSTON, N.A. (f/k/a The First National Bank of Boston) as agent (the "Agent") for the Banks, amending certain provisions of the Amended and Restated Credit Agreement dated as of December 18, 1995 (as amended and in effect from time to time, the "Credit Agreement") by and between the Borrowers, the Parent, the Banks and the Agent. Terms not otherwise defined herein which are defined in the Credit Agreement shall have the same respective meanings herein as therein. WHEREAS, the Borrowers, the Parent and the Banks have agreed to modify certain terms and conditions of the Credit Agreement as specifically set forth in this Amendment; NOW, THEREFORE, in consideration of the mutual agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 'SS'1. Amendment to Section 5 of the Credit Agreement. Section 5.23(b) of the Credit Agreement is hereby amended in its entirety to read as follows: "(b) Debt Service Coverage Ratio. The Parent and the Company shall not permit the Debt Service Coverage Ratio, calculated as of the last day of each fiscal quarter of the Parent and its Subsidiaries, to be less than (A) 1.00 to 1.00 for the period of four consecutive fiscal quarters ending October 2, 1999, (B) 1.00 to 1.00 for the period of four consecutive fiscal quarters ending January 1, 2000, (C) 1.25 to 1.00 for the period of four consecutive fiscal quarters ending April 1, 2000 and (D) 1.50 to 1.00 for each period of four consecutive fiscal quarters ending after April 1, 2000." 'SS'2. Conditions to Effectiveness. This Amendment shall not become effective until the Agent receives the following: (a) a counterpart of this Amendment, executed by the each of the Borrowers, the Parent and the Majority Banks; and

-2(b) an amendment fee of $20,000 paid by the Borrowers to the Agent for the pro rata account of each Bank based on such Bank's Commitment percentage. 'SS'3. Representations and Warranties. The representations and warranties of the Borrowers and the Parent contained in the Credit Agreement were true and correct when made and continue to be true and correct on and as of the date hereof as if made on the date hereof except to the extent of changes resulting from transactions contemplated or permitted by the Credit Agreement and to the extent that such representations and warranties relate expressly to an earlier date. No Default or Event of Default has occurred and is continuing. 'SS'4. Ratification, Etc. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to the Security Documents, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby.

-2(b) an amendment fee of $20,000 paid by the Borrowers to the Agent for the pro rata account of each Bank based on such Bank's Commitment percentage. 'SS'3. Representations and Warranties. The representations and warranties of the Borrowers and the Parent contained in the Credit Agreement were true and correct when made and continue to be true and correct on and as of the date hereof as if made on the date hereof except to the extent of changes resulting from transactions contemplated or permitted by the Credit Agreement and to the extent that such representations and warranties relate expressly to an earlier date. No Default or Event of Default has occurred and is continuing. 'SS'4. Ratification, Etc. Except as expressly amended hereby, the Credit Agreement and all documents, instruments and agreements related thereto, including, but not limited to the Security Documents, are hereby ratified and confirmed in all respects and shall continue in full force and effect. The Credit Agreement and this Amendment shall be read and construed as a single agreement. All references in the Credit Agreement or any related agreement or instrument to the Credit Agreement shall hereafter refer to the Credit Agreement as amended hereby. 'SS'5. No Waiver. Nothing contained herein shall constitute a waiver of, impair or otherwise affect any Obligations, any other obligation of the Borrowers or the Parent or any rights of the Agent or the Banks consequent thereon. 'SS'6. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original but which together shall constitute one and the same instrument. 'SS'7. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS (WITHOUT REFERENCE TO CONFLICT OF LAWS).

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written. QUAKER FABRIC CORPORATION OF FALL RIVER By: Paul Kelly Title: Vice President Finance QUAKER TEXTILE CORPORATION By: Paul Kelly Title: Vice President Finance QUAKER FABRIC MEXICO, S.A. de C.V. By: Paul Kelly Title: Vice President Finance QUAKER FABRIC CORPORATION By: Paul Kelly Title: Vice President Finance BANKBOSTON, N.A., (f/k/a The First National Bank of Boston) as Agent, as Issuing Bank and as a Bank

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written. QUAKER FABRIC CORPORATION OF FALL RIVER By: Paul Kelly Title: Vice President Finance QUAKER TEXTILE CORPORATION By: Paul Kelly Title: Vice President Finance QUAKER FABRIC MEXICO, S.A. de C.V. By: Paul Kelly Title: Vice President Finance QUAKER FABRIC CORPORATION By: Paul Kelly Title: Vice President Finance BANKBOSTON, N.A., (f/k/a The First National Bank of Boston) as Agent, as Issuing Bank and as a Bank By: Title: FLEET NATIONAL BANK By: Title:

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written. QUAKER FABRIC CORPORATION OF FALL RIVER By: Title: QUAKER TEXTILE CORPORATION By: Title: QUAKER FABRIC MEXICO, S.A. de C.V. By:

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as a document under seal as of the date first above written. QUAKER FABRIC CORPORATION OF FALL RIVER By: Title: QUAKER TEXTILE CORPORATION By: Title: QUAKER FABRIC MEXICO, S.A. de C.V. By: Title: QUAKER FABRIC CORPORATION By: Title: BANKBOSTON, N.A., (f/k/a The First National Bank of Boston) as Agent, as Issuing Bank and as a Bank By: Christopher S. Allen Title: Director FLEET NATIONAL BANK By: Title:

WAREHOUSE OFFICE LEASE HAMRIYAH FREE ZONE AUTHORITY QUAKER FABRIC CORPORATION OF FALL RIVER DATED 28TH NOVEMBER, 1999

INDEX CLAUSE SECTION 1 DEFINITIONS AND INTERPRETATION 1. 2. DEFINITIONS........................................................ INTERPRETATION..................................................... SECTION 2 GRANT OF LEASE 3. GRANT, RIGHTS AND OTHER MATTERS.................................... 9 6 8 PAGE

WAREHOUSE OFFICE LEASE HAMRIYAH FREE ZONE AUTHORITY QUAKER FABRIC CORPORATION OF FALL RIVER DATED 28TH NOVEMBER, 1999

INDEX CLAUSE SECTION 1 DEFINITIONS AND INTERPRETATION 1. 2. DEFINITIONS........................................................ INTERPRETATION..................................................... SECTION 2 GRANT OF LEASE 3. GRANT, RIGHTS AND OTHER MATTERS.................................... 3.1 Demise and Term.............................................. 3.2 Covenants, easements etc.................................... 3.3 No implied easements........................................ 3.4 Encroachments and easements................................. 3.5 Covenants relating to other property........................ 3.6 Rights of entry by Landlord................................. 3.7 Landlord's Covenants........................................ 3.8 Terms of entry by Landlord.................................. 3.9 Inventory................................................... SECTION 3 FINANCIAL PROVISIONS 4. RENTS............................................................. 4.1 Tenant's obligation to pay.................................. 4.2 Dates of payment of Principal Rent.......................... 4.3 Method of payment of Principal Rent......................... 4.4 Dates of payment of Outstanding Rent........................ 4.5 No right of set-off......................................... RENT REVIEW....................................................... 5.1 Review...................................................... 5.2 Memoranda of reviewed rent.................................. INTEREST.......................................................... 6.1 Interest on late payments................................... 6.2 Interest on refused payments................................ OUTGOINGS......................................................... 7.1 Tenant's obligation to pay.................................. 7.2 Costs of utilities etc...................................... 7.3 Common facilities........................................... 12 12 12 12 12 12 13 13 13 13 13 13 14 14 14 14 9 9 10 10 10 10 10 11 11 11 6 8 PAGE

5.

6.

7.

8. 9.

..................................................................

14

LANDLORD'S COSTS................................................... 14 SECTION 4 REPAIRS, ALTERATIONS AND SIGNS

10. 11.

REPAIRS............................................................ 15 YIELD UP........................................................... 15 11.1 Reinstatement of Premises.................................... 15 11.2 Yielding up in good repair................................... 16 COMPLIANCE WITH NOTICES............................................ 16

12.

INDEX CLAUSE SECTION 1 DEFINITIONS AND INTERPRETATION 1. 2. DEFINITIONS........................................................ INTERPRETATION..................................................... SECTION 2 GRANT OF LEASE 3. GRANT, RIGHTS AND OTHER MATTERS.................................... 3.1 Demise and Term.............................................. 3.2 Covenants, easements etc.................................... 3.3 No implied easements........................................ 3.4 Encroachments and easements................................. 3.5 Covenants relating to other property........................ 3.6 Rights of entry by Landlord................................. 3.7 Landlord's Covenants........................................ 3.8 Terms of entry by Landlord.................................. 3.9 Inventory................................................... SECTION 3 FINANCIAL PROVISIONS 4. RENTS............................................................. 4.1 Tenant's obligation to pay.................................. 4.2 Dates of payment of Principal Rent.......................... 4.3 Method of payment of Principal Rent......................... 4.4 Dates of payment of Outstanding Rent........................ 4.5 No right of set-off......................................... RENT REVIEW....................................................... 5.1 Review...................................................... 5.2 Memoranda of reviewed rent.................................. INTEREST.......................................................... 6.1 Interest on late payments................................... 6.2 Interest on refused payments................................ OUTGOINGS......................................................... 7.1 Tenant's obligation to pay.................................. 7.2 Costs of utilities etc...................................... 7.3 Common facilities........................................... 12 12 12 12 12 12 13 13 13 13 13 13 14 14 14 14 9 9 10 10 10 10 10 11 11 11 6 8 PAGE

5.

6.

7.

8. 9.

..................................................................

14

LANDLORD'S COSTS................................................... 14 SECTION 4 REPAIRS, ALTERATIONS AND SIGNS

10. 11.

REPAIRS............................................................ 15 YIELD UP........................................................... 15 11.1 Reinstatement of Premises.................................... 15 11.2 Yielding up in good repair................................... 16 COMPLIANCE WITH NOTICES............................................ 16 12.1 Tenant to remedy breaches of covenant........................ 16 ALTERATIONS AND IMPROVEMENTS....................................... 13.1 No alterations............................................... 13.2 No alterations to Landlord's fixtures........................ 13.3 Non-structural alterations................................... 13.4 Demountable partitioning..................................... 13.5 Covenants by Tenant.......................................... 16 16 16 17 17 17

12.

13.

14.

SIGNS AND ADVERTISEMENTS........................................... 17

8. 9.

..................................................................

14

LANDLORD'S COSTS................................................... 14 SECTION 4 REPAIRS, ALTERATIONS AND SIGNS

10. 11.

REPAIRS............................................................ 15 YIELD UP........................................................... 15 11.1 Reinstatement of Premises.................................... 15 11.2 Yielding up in good repair................................... 16 COMPLIANCE WITH NOTICES............................................ 16 12.1 Tenant to remedy breaches of covenant........................ 16 ALTERATIONS AND IMPROVEMENTS....................................... 13.1 No alterations............................................... 13.2 No alterations to Landlord's fixtures........................ 13.3 Non-structural alterations................................... 13.4 Demountable partitioning..................................... 13.5 Covenants by Tenant.......................................... 16 16 16 17 17 17

12.

13.

14.

SIGNS AND ADVERTISEMENTS........................................... 17 SECTION 5 USE

15.

USE OF PREMISES.................................................... 15.1 Permitted use................................................ 15.2 Tenant not to leave Premises unoccupied...................... 15.3 Details of keyholders........................................ 15.4 Keys ........................................................

17 17 18 18 18

16. 17.

USE RESTRICTIONS................................................... 18 EXCLUSION OF WARRANTY AS TO USER................................... 18 17.1 No warranty by Landlord...................................... 18 SECTION 6 DISPOSALS

18.

ASSIGNMENT AND UNDERLETTING........................................ 18 SECTION 7 LEGAL REQUIREMENTS

19.

STATUTORY REQUIREMENTS............................................. 19

19.1 20.

Tenant to refrain from certain acts.......................... 19 19 19 19 19

COMPLIANCE WITH FREE ZONE RULES AND REGULATIONS.................... 20.1 General Compliance........................................... 20.2 Compliance with Licence...................................... 20.3 Tenant to comply with statutes...............................

21. 22.

LEGAL NOTICES...................................................... 19 FIRE PRECAUTIONS AND EQUIPMENT..................................... 20 22.1 Compliance with requirements................................. 20 22.2 Access to be kept clear...................................... 20 DEFECTIVE PREMISES................................................. 20 SECTION 8 INSURANCE

23.

24.

INSURANCE PROVISIONS............................................... 24.1 Insurance of personal belongings............................. 24.2 Insurance becoming void...................................... 24.3 Requirements of insurers..................................... 24.4 Notice by Tenant.............................................

20 21 21 21 21

19.1 20.

Tenant to refrain from certain acts.......................... 19 19 19 19 19

COMPLIANCE WITH FREE ZONE RULES AND REGULATIONS.................... 20.1 General Compliance........................................... 20.2 Compliance with Licence...................................... 20.3 Tenant to comply with statutes...............................

21. 22.

LEGAL NOTICES...................................................... 19 FIRE PRECAUTIONS AND EQUIPMENT..................................... 20 22.1 Compliance with requirements................................. 20 22.2 Access to be kept clear...................................... 20 DEFECTIVE PREMISES................................................. 20 SECTION 8 INSURANCE

23.

24.

INSURANCE PROVISIONS............................................... 24.1 Insurance of personal belongings............................. 24.2 Insurance becoming void...................................... 24.3 Requirements of insurers..................................... 24.4 Notice by Tenant............................................. SECTION 9 DEFAULT OF TENANT AND RIGHTS OF RE-ENTRY

20 21 21 21 21

25.

DEFAULT OF TENANT.................................................. 25.1 Re-entry..................................................... 25.2 Events of default............................................ 25.3 Tenant's right to terminate.................................. SECTION 10 MISCELLANEOUS

22 22 22 23

26. 27. 28. 29. 30. 31. 32.

QUIET ENJOYMENT.................................................... 23 EXCLUSION OF IMPLIED COVENANTS BY LANDLORD......................... 23 RELETTING NOTICES.................................................. 23 SECURITY........................................................... 24 DISCLOSURE OF INFORMATION.......................................... 24 INDEMNITY.......................................................... 24 REPRESENTATIONS.................................................... 24

33. 34. 35.

EFFECT OF WAIVER................................................... 24 NOTICES............................................................ 25 GOVERNING LAW...................................................... 25

SCHEDULE 1: EXCEPTIONS AND RESERVATIONS.................................. 26 SCHEDULE 2: USE RESTRICTIONS............................................. 28

THIS LEASE is made on the 28th day of November, 1999 BETWEEN:(1) HAMRIYAH FREE ZONE AUTHORITY of P.O. Box 1377, Sharjah, United Arab Emirates (the "Landlord"); and QUAKER FABRIC CORPORATION OF FALL RIVER, 941 Grinnell Street, Fall River, MA 02721, United States of America (the "Tenant").

(2)

WITNESSES as follows:-

33. 34. 35.

EFFECT OF WAIVER................................................... 24 NOTICES............................................................ 25 GOVERNING LAW...................................................... 25

SCHEDULE 1: EXCEPTIONS AND RESERVATIONS.................................. 26 SCHEDULE 2: USE RESTRICTIONS............................................. 28

THIS LEASE is made on the 28th day of November, 1999 BETWEEN:(1) HAMRIYAH FREE ZONE AUTHORITY of P.O. Box 1377, Sharjah, United Arab Emirates (the "Landlord"); and QUAKER FABRIC CORPORATION OF FALL RIVER, 941 Grinnell Street, Fall River, MA 02721, United States of America (the "Tenant").

(2)

WITNESSES as follows:-

SECTION 1 DEFINITIONS AND INTERPRETATION 1. DEFINITIONS In this Lease, unless the context requires otherwise, the following expressions shall have the following meanings:1.1 "Outstanding Rent" means all sums referred to in Clause 6, and all sums which are recoverable as rent in arrear or stated in this Lease to be due to the Landlord; 1.2 "Adjoining Property" means any land and/or buildings adjoining or neighbouring the Premises; 1.3 "Conduits" means all drains, pipes, gullies, gutters, sewers, ducts, mains, channels, subways, wires, cables, conduits, flues and any other conducting media of whatsoever nature; 1.4 Left blank 1.5 "Environmental Regulations" means the Implementing Rules and Regulations relating to waste disposal and other such matters issued by HFZ Authority (as amended from time to time) and the Free Zone Circulars issued pursuant thereto from time to time; 1.6 "Free Zone" means Hamriyah Free Zone established pursuant to Sharjah Emiri Decree No 6 of 1995; 1.7 "Free Zone Circulars" means the circulars issued from time to time by the Free Zone pursuant to the Implementing Rules and Regulations; -61.8 1.9 "HFZ Authority" means Hamriyah Free Zone Authority; "Implementing Rules and Regulations" means the Implementing Rules and Regulations issued by HFZ Authority (as the same may be amended from time to time) pursuant to Sharjah Emiri Decree No 6 of 1995; "Initial Rent" means the sum of UAE Dirhams 40,000/- (Dhs. Forty thousand only ) per annum for the offices attached to the 416 Sq.m Hamriyah Free Zone Warehouse as described in the Annex to this Lease; "Landlord" means the person for the time being entitled to the reversion immediately expectant on the determination of the Term; "this Lease" means this Lease, all Schedules and Annexes hereto, and any

1.10

1.11

1.12

THIS LEASE is made on the 28th day of November, 1999 BETWEEN:(1) HAMRIYAH FREE ZONE AUTHORITY of P.O. Box 1377, Sharjah, United Arab Emirates (the "Landlord"); and QUAKER FABRIC CORPORATION OF FALL RIVER, 941 Grinnell Street, Fall River, MA 02721, United States of America (the "Tenant").

(2)

WITNESSES as follows:-

SECTION 1 DEFINITIONS AND INTERPRETATION 1. DEFINITIONS In this Lease, unless the context requires otherwise, the following expressions shall have the following meanings:1.1 "Outstanding Rent" means all sums referred to in Clause 6, and all sums which are recoverable as rent in arrear or stated in this Lease to be due to the Landlord; 1.2 "Adjoining Property" means any land and/or buildings adjoining or neighbouring the Premises; 1.3 "Conduits" means all drains, pipes, gullies, gutters, sewers, ducts, mains, channels, subways, wires, cables, conduits, flues and any other conducting media of whatsoever nature; 1.4 Left blank 1.5 "Environmental Regulations" means the Implementing Rules and Regulations relating to waste disposal and other such matters issued by HFZ Authority (as amended from time to time) and the Free Zone Circulars issued pursuant thereto from time to time; 1.6 "Free Zone" means Hamriyah Free Zone established pursuant to Sharjah Emiri Decree No 6 of 1995; 1.7 "Free Zone Circulars" means the circulars issued from time to time by the Free Zone pursuant to the Implementing Rules and Regulations; -61.8 1.9 "HFZ Authority" means Hamriyah Free Zone Authority; "Implementing Rules and Regulations" means the Implementing Rules and Regulations issued by HFZ Authority (as the same may be amended from time to time) pursuant to Sharjah Emiri Decree No 6 of 1995; "Initial Rent" means the sum of UAE Dirhams 40,000/- (Dhs. Forty thousand only ) per annum for the offices attached to the 416 Sq.m Hamriyah Free Zone Warehouse as described in the Annex to this Lease; "Landlord" means the person for the time being entitled to the reversion immediately expectant on the determination of the Term; "this Lease" means this Lease, all Schedules and Annexes hereto, and any document which is supplemental to it, whether or not it is expressly stated to be so; "Permitted Use" means subject to obtaining all necessary approvals from the landlord and other authorities, if any, the office may be used for a Commercial Project which includes for the import, export and distribution of Woven Upholstery Fabric; "Plan/s" means the plan/s or numbered HFZA-WH-1K-08/2 - 001, annexed to this Lease; "Premises" means the office attached to Hamriyah Free Zone Warehouse shown on the Plan numbered HFZA-WH-1K-08/2 - 001 annexed to this Lease and each

1.10

1.11

1.12

1.13

1.14

1.15

1.8 1.9

"HFZ Authority" means Hamriyah Free Zone Authority; "Implementing Rules and Regulations" means the Implementing Rules and Regulations issued by HFZ Authority (as the same may be amended from time to time) pursuant to Sharjah Emiri Decree No 6 of 1995; "Initial Rent" means the sum of UAE Dirhams 40,000/- (Dhs. Forty thousand only ) per annum for the offices attached to the 416 Sq.m Hamriyah Free Zone Warehouse as described in the Annex to this Lease; "Landlord" means the person for the time being entitled to the reversion immediately expectant on the determination of the Term; "this Lease" means this Lease, all Schedules and Annexes hereto, and any document which is supplemental to it, whether or not it is expressly stated to be so; "Permitted Use" means subject to obtaining all necessary approvals from the landlord and other authorities, if any, the office may be used for a Commercial Project which includes for the import, export and distribution of Woven Upholstery Fabric; "Plan/s" means the plan/s or numbered HFZA-WH-1K-08/2 - 001, annexed to this Lease; "Premises" means the office attached to Hamriyah Free Zone Warehouse shown on the Plan numbered HFZA-WH-1K-08/2 - 001 annexed to this Lease and each and every part of the office, including:(a) any Conduits in, on, under or over and exclusively serving them, except those of any utility company; all landlord's fixtures, fittings, plant, machinery, apparatus and equipment now or after the date of this Lease in or upon the same; and any additions, alterations and improvements.

1.10

1.11

1.12

1.13

1.14

1.15

(b)

(c) 1.16

"Prescribed Rate" means three per cent (3%) per annum above the Prime Rate; "Prime Rate" means the base rate for the time being of UAE Central Bank or some other bank nominated from time to time by the Landlord or, in the event of base rate being abolished, such other comparable rate of interest as the Landlord shall reasonably specify;

1.17

-71.18 1.19 1.20 1.21 "Principal Rent" means the rent payable under clause 4.1.1; "Rent Commencement Date" means 1st December, 1999; "Rents" means the sums payable by the Tenant under clause 4; "Review Date" means 1st December, 2004 and "Relevant Review Date" shall be construed accordingly; "Revised Rent" means the rent as determined by the Landlord on a Relevant Review Date; "Tenant" means the party named as "Tenant" in this Lease and includes the Tenant's successors in title and assigns and, in the case of an individual, his personal representatives; "Term" means the term of years specified in clause 3.1; "Term Commencement Date" means 1st December, 1999; "UAE" means United Arab Emirates; "UAE Dirhams" means the lawful currency of the UAE;

1.22

1.23

1.24 1.25 1.26 1.27

1.18 1.19 1.20 1.21

"Principal Rent" means the rent payable under clause 4.1.1; "Rent Commencement Date" means 1st December, 1999; "Rents" means the sums payable by the Tenant under clause 4; "Review Date" means 1st December, 2004 and "Relevant Review Date" shall be construed accordingly; "Revised Rent" means the rent as determined by the Landlord on a Relevant Review Date; "Tenant" means the party named as "Tenant" in this Lease and includes the Tenant's successors in title and assigns and, in the case of an individual, his personal representatives; "Term" means the term of years specified in clause 3.1; "Term Commencement Date" means 1st December, 1999; "UAE" means United Arab Emirates; "UAE Dirhams" means the lawful currency of the UAE; "Utilities" means water, soil, steam, air, electricity, radio, television, telegraphic, telephone, telecommunications and other services and supplies of whatsoever nature; and "Working Day" means any day, other than a Friday, on which clearing banks in Sharjah are open to the public for the transaction of business. INTERPRETATION Unless there is something in the subject or context inconsistent with the same:-

1.22

1.23

1.24 1.25 1.26 1.27 1.28

1.29

2.

2.1

every covenant by a party comprising more than one person shall be deemed to be made by such party jointly and severally; words importing persons shall include firms, companies and corporations and vice versa;

2.2

-82.3 any covenant by the Tenant not to do any act or thing shall include an obligation not to permit or suffer such act or thing to be done; any reference to the right of the Landlord to have access to, or to enter, the Premises shall be construed as extending to all persons authorised by the Landlord, including agents, professional advisers, contractors, workmen and others; any reference to a law (whether specifically named or not) shall include any amendment or re-enactment of it for the time being in force, and all instruments, orders, notices, regulations, directions, by-laws, permissions and plans for the time being made, issued or given under it, or deriving validity from it; all agreements and obligations by any party contained in this Lease (whether or not expressed to be covenants) shall be deemed to be, and shall be construed as, covenants by such party; the words "including" and "include" shall be deemed to be followed by the words "without limitation"; the titles or headings appearing in this Lease are for reference only and shall not affect its construction; all dates herein shall be construed with reference to and in accordance with the Gregorian Calendar but not otherwise; and any reference to a clause schedule or annex shall mean a clause or annex

2.4

2.5

2.6

2.7

2.8

2.9

2.10

2.3

any covenant by the Tenant not to do any act or thing shall include an obligation not to permit or suffer such act or thing to be done; any reference to the right of the Landlord to have access to, or to enter, the Premises shall be construed as extending to all persons authorised by the Landlord, including agents, professional advisers, contractors, workmen and others; any reference to a law (whether specifically named or not) shall include any amendment or re-enactment of it for the time being in force, and all instruments, orders, notices, regulations, directions, by-laws, permissions and plans for the time being made, issued or given under it, or deriving validity from it; all agreements and obligations by any party contained in this Lease (whether or not expressed to be covenants) shall be deemed to be, and shall be construed as, covenants by such party; the words "including" and "include" shall be deemed to be followed by the words "without limitation"; the titles or headings appearing in this Lease are for reference only and shall not affect its construction; all dates herein shall be construed with reference to and in accordance with the Gregorian Calendar but not otherwise; and any reference to a clause schedule or annex shall mean a clause or annex schedule of this Lease. SECTION 2 GRANT OF LEASE

2.4

2.5

2.6

2.7

2.8

2.9

2.10

3. 3.1

GRANT, RIGHTS AND OTHER MATTERS Demise and Term In consideration of the rents, covenants and agreements reserved by, and contained in, this Lease to be paid and performed by the Tenant, the Landlord leases the Premises to the Tenant from and including the Term Commencement Date for the term of one year paying the Rents to the Landlord in accordance with Clause 4.

-9-

3.2 Covenants, easements etc This Lease is granted subject to any rights, easements, reservations, privileges, covenants, restrictions, stipulations and other matters of whatever nature affecting the Premises; provided, however, that none of the above shall materially disrupt, interfere with or otherwise limit or affect the tenancy and other rights granted to the Tenant hereunder including but without limitation the rights to quiet enjoyment further described in Clause 26. 3.3 No implied easements Nothing contained in this Lease except those related to the quiet enjoyment of the Premises for performing the Permitted Use, all such easements, rights or privileges required to provide the Tenant access to the Premises in connection with undertaking the Permitted Use thereon, including all rights of ingress and egress thereto, and the nonexclusive use of the common areas and facilities of the Free Zone, shall confer on, or grant to, the Tenant any easement, right or privilege, other than any expressly granted by this Lease. 3.4 Encroachments and easements The Tenant shall not stop up or obstruct any of the windows or lights belonging to the Premises and shall not permit any new window, light, opening, doorway, passage, Conduit or other encroachment or easement to be made or acquired into, on or over the Premises or any part of them. If any person shall attempt to make or

3.2 Covenants, easements etc This Lease is granted subject to any rights, easements, reservations, privileges, covenants, restrictions, stipulations and other matters of whatever nature affecting the Premises; provided, however, that none of the above shall materially disrupt, interfere with or otherwise limit or affect the tenancy and other rights granted to the Tenant hereunder including but without limitation the rights to quiet enjoyment further described in Clause 26. 3.3 No implied easements Nothing contained in this Lease except those related to the quiet enjoyment of the Premises for performing the Permitted Use, all such easements, rights or privileges required to provide the Tenant access to the Premises in connection with undertaking the Permitted Use thereon, including all rights of ingress and egress thereto, and the nonexclusive use of the common areas and facilities of the Free Zone, shall confer on, or grant to, the Tenant any easement, right or privilege, other than any expressly granted by this Lease. 3.4 Encroachments and easements The Tenant shall not stop up or obstruct any of the windows or lights belonging to the Premises and shall not permit any new window, light, opening, doorway, passage, Conduit or other encroachment or easement to be made or acquired into, on or over the Premises or any part of them. If any person shall attempt to make or acquire any encroachment or easement whatsoever, the Tenant shall give written notice of that fact to the Landlord immediately after it shall come to the notice of the Tenant and, at the request of the Landlord but at the cost of the Tenant, adopt such means as may be reasonably required by the Landlord for preventing any encroachment or the acquisition of any easement. 3.5 Covenants relating to other property Nothing contained in, or implied by, this Lease shall give the Tenant the benefit of, or the right to enforce or prevent the release or modification of, any covenant or agreement entered into by any tenant of the Landlord in respect of any property not comprised in this Lease. 3.6 Rights of entry by Landlord 3.6.1 The Tenant shall permit the Landlord with all necessary materials and appliances to enter and remain on the Premises:-10-

(a) to examine the condition of the Premises and to take details of the Landlord's fixtures in them; (b) to exercise any of the rights excepted and reserved by this Lease; and (c) for any other purpose connected with the interest of the Landlord in the Premises, including valuing or disposing of the Landlord's interest in them. 3.6.2 In the event of any emergency whatsoever at the Free Zone and if required by the Landlord, the Tenant shall allow free entry on and across the Premises for personnel of the Landlord and other persons authorised by the Landlord and for any emergency personnel. 3.7 Landlord's Covenants Covenants on the part of the Landlord are covenants to do or not to do that which is covenanted for so long only as the Landlord remains entitled to the reversion immediately expectant on the determination of the Term. 3.8 Terms of entry by Landlord In exercising any of the rights mentioned in Clause 3.6, the Landlord or the person exercising the right shall:-

(a) to examine the condition of the Premises and to take details of the Landlord's fixtures in them; (b) to exercise any of the rights excepted and reserved by this Lease; and (c) for any other purpose connected with the interest of the Landlord in the Premises, including valuing or disposing of the Landlord's interest in them. 3.6.2 In the event of any emergency whatsoever at the Free Zone and if required by the Landlord, the Tenant shall allow free entry on and across the Premises for personnel of the Landlord and other persons authorised by the Landlord and for any emergency personnel. 3.7 Landlord's Covenants Covenants on the part of the Landlord are covenants to do or not to do that which is covenanted for so long only as the Landlord remains entitled to the reversion immediately expectant on the determination of the Term. 3.8 Terms of entry by Landlord In exercising any of the rights mentioned in Clause 3.6, the Landlord or the person exercising the right shall:3.8.1 give to the Tenant reasonable prior notice that the right to be exercised and shall only exercise it at reasonable times (except in an emergency, when no notice need be given and when it can be exercised at any time); 3.8.2 cause as little inconvenience as practicable to the Tenant or any other permitted occupier of any part of the Premises; and 3.8.3 make good, as soon as practicable and to the reasonable satisfaction of the Tenant, any damage caused to the Premises. 3.9 Left blank. -11-

SECTION 3 FINANCIAL PROVISIONS 4. RENTS 4.1 Tenant's obligation to pay The Tenant covenants to pay to the Landlord at all times during the Term:4.1.1 yearly, and proportionately for any fraction of a year, the Initial Rent and from and including each Rent Review Date, such yearly rent as shall become payable under Clause 5; 4.1.2 the Insurance Charges; and 4.1.3 the Outstanding Amount. 4.2 Dates of payment of Principal Rent The Principal Rent shall be paid in one annual instalment in advance on the Rent Commencement Date.

SECTION 3 FINANCIAL PROVISIONS 4. RENTS 4.1 Tenant's obligation to pay The Tenant covenants to pay to the Landlord at all times during the Term:4.1.1 yearly, and proportionately for any fraction of a year, the Initial Rent and from and including each Rent Review Date, such yearly rent as shall become payable under Clause 5; 4.1.2 the Insurance Charges; and 4.1.3 the Outstanding Amount. 4.2 Dates of payment of Principal Rent The Principal Rent shall be paid in one annual instalment in advance on the Rent Commencement Date. 4.3 Method of payment of Principal Rent The Principal Rent shall be paid in such manner as the Landlord may, from time to time, determine so that the Landlord shall receive full value in cleared funds on the date when payment is due. 4.4 Dates of payment of Insurance Charges and Outstanding Amount The Insurance Charges and Outstanding Amount shall be paid on demand, the first payment of the Insurance Charge being on Term Commencement Date. 4.5 No right of set-off The Tenant shall not exercise any rights of set-off, deduction, abatement or counterclaim which it may have to reduce its liability for Rents. -12-

5. RENT REVIEW 5.1 Review The Principal Rent shall be reviewed at each Review Date and from and including each Review Date the Principal Rent shall equal the Revised Rent. 5.2 Memoranda of reviewed rent Within ten (10) Working Days after the Revised Rent has been determined, memoranda recording that fact shall be prepared by the Landlord or its solicitors and shall be signed by or on behalf of the Landlord and the Tenant and annexed to this Lease and its counterpart. The parties shall each bear their own costs in relation to the preparation and signing of such memoranda. 6. INTEREST 6.1 Interest on late payments Without prejudice to any other right, remedy or power contained in this Lease or otherwise available to the Landlord, if any of the Rents (whether formally demanded or not) or any other sum of money payable to the Landlord by the Tenant under this Lease shall not be paid so that the Landlord receives full value in cleared

5. RENT REVIEW 5.1 Review The Principal Rent shall be reviewed at each Review Date and from and including each Review Date the Principal Rent shall equal the Revised Rent. 5.2 Memoranda of reviewed rent Within ten (10) Working Days after the Revised Rent has been determined, memoranda recording that fact shall be prepared by the Landlord or its solicitors and shall be signed by or on behalf of the Landlord and the Tenant and annexed to this Lease and its counterpart. The parties shall each bear their own costs in relation to the preparation and signing of such memoranda. 6. INTEREST 6.1 Interest on late payments Without prejudice to any other right, remedy or power contained in this Lease or otherwise available to the Landlord, if any of the Rents (whether formally demanded or not) or any other sum of money payable to the Landlord by the Tenant under this Lease shall not be paid so that the Landlord receives full value in cleared funds:6.1.1 in the case of the Principal Rent, on the date when payment is due (or, if the due date is not a Working Day, the next Working Day after the due date); or 6.1.2 in the case of any other Rents or sums, within five (5) Working Days of the date when payment is due the Tenant shall pay interest on such Rents and/or sums at the Prescribed Rate from and including the date when payment was due to the date of payment to the Landlord (both before and after any judgment). 6.2 Interest on refused payments Without prejudice to any other right, remedy or power contained in this Lease or otherwise available to the Landlord, if the Landlord shall decline to accept any of the Rents so as not to waive any existing breach or alleged breach of covenant, the Tenant shall pay interest on such Rent at the Prescribed Rate -13-

from and including the date when payment was due (or, where applicable, would have been due if demanded on the earliest date on which it could have been demanded) to the date when payment is accepted by the Landlord. 7. OUTGOINGS 7.1 Intentionally left blank. 7.2 Costs of utilities etc. The Tenant shall pay all charges in respect of any water, electricity, telephone, telefax or fax services incurred by the Tenant and levied from time to time. 7.3 Common facilities Intentionally left blank. 8. Intentionally left blank.

from and including the date when payment was due (or, where applicable, would have been due if demanded on the earliest date on which it could have been demanded) to the date when payment is accepted by the Landlord. 7. OUTGOINGS 7.1 Intentionally left blank. 7.2 Costs of utilities etc. The Tenant shall pay all charges in respect of any water, electricity, telephone, telefax or fax services incurred by the Tenant and levied from time to time. 7.3 Common facilities Intentionally left blank. 8. Intentionally left blank. 9. LANDLORD'S COSTS Within ten (10) Working Days of written demand, the Tenant shall pay, or indemnify the Landlord against, all reasonable costs, fees, charges, disbursements and expenses properly incurred by the Landlord, including those payable to solicitors, counsel, surveyors, architects and bailiffs:9.1 in relation to, or in contemplation of, the preparation and service of all notices and schedules relating to any wants of repair, whether served during or after the expiration of the Term (but relating in all cases only to such wants of repair which accrued not later than the expiration or earlier determination of the Term); 9.2 in connection with the recovery or attempted recovery of arrears of rent or other sums due from the Tenant, or in procuring the remedying of the breach of any covenant by the Tenant; 9.3 in relation to any application for consent required or made necessary by this Lease (such costs to include reasonable management fees and expenses) whether or not it is granted (except in cases where the Landlord is obliged not to withhold its consent unreasonably and the withholding of its consent is held to be unreasonable), or the application is withdrawn; and -14-

9.4 in connection with the settling, amending and termination of this Lease and the costs of disbursements of the Landlord's agents incurred in connection with the approval of the Tenant's plans and specifications and any amendment thereto. SECTION 4 REPAIRS, ALTERATIONS AND SIGNS 10. REPAIRS The Tenant shall at all times during the Term of this Lease keep the interior of the Premises including all fixtures and fittings therein and the furniture in good and tenantable repair, normal wear and tear excepted, and shall make good and pay for, on demand, all damage including accidental damage howsoever caused by the Tenant to the Premises, to any person therein or to the furniture or to any article provided by the Landlord and not to remove any of the furniture or any article provided by the Landlord from the Premises. 11. YIELD UP
11.1 Reinstatement of Premises Immediately prior to the expiration or earlier determination of the Term, the Tenant shall at its cost:-

9.4 in connection with the settling, amending and termination of this Lease and the costs of disbursements of the Landlord's agents incurred in connection with the approval of the Tenant's plans and specifications and any amendment thereto. SECTION 4 REPAIRS, ALTERATIONS AND SIGNS 10. REPAIRS The Tenant shall at all times during the Term of this Lease keep the interior of the Premises including all fixtures and fittings therein and the furniture in good and tenantable repair, normal wear and tear excepted, and shall make good and pay for, on demand, all damage including accidental damage howsoever caused by the Tenant to the Premises, to any person therein or to the furniture or to any article provided by the Landlord and not to remove any of the furniture or any article provided by the Landlord from the Premises. 11. YIELD UP
11.1 Reinstatement of Premises Immediately prior to the expiration or earlier determination of the Term, the Tenant shall at its cost:11.1.1 replace any of the Landlord's fixtures and fittings which shall be missing, damaged or destroyed, normal wear and tear excepted, with new ones of similar kind and quality or (at the option of the Landlord) pay to the Landlord the cost of replacing any of them; 11.1.2 remove from the Premises any sign, writing or painting of the name or business of the Tenant or any occupier of them and all Tenant's fixtures, fittings, furniture and effects and make good, normal wear and tear excepted, to the reasonable satisfaction of the Landlord, all damage caused by such removal; 11.1.3 if so required by the Landlord, but not otherwise, remove and make good any alterations or additions made to the Premises during the Term, and well and substantially reinstate the Premises in such manner as the Landlord shall direct and to the Landlord's reasonable satisfaction, reasonable wear and tear excepted.

-1511.2 Yielding up in good repair At the expiration or earlier determination of the Term, the Tenant shall quietly yield up the Premises to the Landlord in good and substantial repair and condition, normal wear and tear excepted, and in accordance with the covenants by the Tenant contained in this Lease. 12. 12.1 COMPLIANCE WITH NOTICES Tenant to remedy breaches of covenant Whenever the Landlord shall give written notice to the Tenant of any defects, wants of repair or breaches of covenant, the Tenant shall, within sixty (60) days of such notice, or sooner if requisite, make good such defects or wants of repair and remedy the breach of covenant to the reasonable satisfaction of the Landlord. 13. 13.1 ALTERATIONS AND IMPROVEMENTS The Tenant shall not carry out any alterations or improvements in the Premises without the prior written consent of the Landlord and at any time during the currency of the Lease upon reasonable notice (save in the case of emergency) given by the Landlord permit the Landlord or its agent full and unhindered access to the Premises for the purpose of:13.1.1 cleaning the same; or

11.2

Yielding up in good repair At the expiration or earlier determination of the Term, the Tenant shall quietly yield up the Premises to the Landlord in good and substantial repair and condition, normal wear and tear excepted, and in accordance with the covenants by the Tenant contained in this Lease.

12. 12.1

COMPLIANCE WITH NOTICES Tenant to remedy breaches of covenant Whenever the Landlord shall give written notice to the Tenant of any defects, wants of repair or breaches of covenant, the Tenant shall, within sixty (60) days of such notice, or sooner if requisite, make good such defects or wants of repair and remedy the breach of covenant to the reasonable satisfaction of the Landlord.

13. 13.1

ALTERATIONS AND IMPROVEMENTS The Tenant shall not carry out any alterations or improvements in the Premises without the prior written consent of the Landlord and at any time during the currency of the Lease upon reasonable notice (save in the case of emergency) given by the Landlord permit the Landlord or its agent full and unhindered access to the Premises for the purpose of:13.1.1 cleaning the same; or 13.1.2 inspecting the Premises and repairing any damage; or 13.1.3 viewing the Premises in the company of other prospective tenants. The Tenant shall not hold or seek to hold the Landlord or its agents responsible for any damage to any person or loss of property or goods; provided however, that the Landlord shall be responsible and liable to the Tenant for any damage to any person or loss of property or goods arising out of access by the Landlord or its agents to the Premises or their activities in the Premises.

13.2

No alterations to landlord's fixtures The Tenant shall not make any alteration or addition to any of the Landlord's fixtures or to any of the Conduits in the Premises without the prior written consent of the Landlord.

-1613.3 Non-structural alterations The Tenant shall not make any alteration or addition of a non-structural nature to the Premises without the prior written consent of the Landlord. 13.4 Demountable partitioning The Tenant shall not install, alter or remove demountable partitioning in the Premises without the prior written consent of the Landlord. 13.5 Covenants by Tenant The Tenant shall enter into such covenants as the Landlord may require regarding the execution of any works to which the Landlord consents under this Clause, and the reinstatement of the Premises at the end or earlier determination of the Term. 14. SIGNS AND ADVERTISEMENTS The Tenant shall not erect or display on the exterior of the Premises or in the windows of them so as to be visible from the exterior, any advertisement, poster, notice, pole, flag, aerial, satellite dish or any other sign or thing, without the prior written approval of the Landlord to the size, style and position and the materials to be used. SECTION 5

13.3

Non-structural alterations The Tenant shall not make any alteration or addition of a non-structural nature to the Premises without the prior written consent of the Landlord.

13.4

Demountable partitioning The Tenant shall not install, alter or remove demountable partitioning in the Premises without the prior written consent of the Landlord.

13.5

Covenants by Tenant The Tenant shall enter into such covenants as the Landlord may require regarding the execution of any works to which the Landlord consents under this Clause, and the reinstatement of the Premises at the end or earlier determination of the Term.

14.

SIGNS AND ADVERTISEMENTS The Tenant shall not erect or display on the exterior of the Premises or in the windows of them so as to be visible from the exterior, any advertisement, poster, notice, pole, flag, aerial, satellite dish or any other sign or thing, without the prior written approval of the Landlord to the size, style and position and the materials to be used. SECTION 5 USE

15. 15.1

USE OF PREMISES Permitted use The Tenant shall not use the Premises or any part of them except for the Permitted Use.

-1715.2 Tenant not to leave Premises unoccupied The Tenant shall not leave the Premises continuously unoccupied for more than thirty (30) consecutive days without notifying the Landlord and providing, or paying for, such caretaking or security arrangements as the Landlord shall reasonably require in order to protect the Premises from vandalism, theft or unlawful occupation. 15.3 Details of keyholders The Tenant shall ensure that, at all times, the Landlord has particulars of the name, home address and home telephone number of at least two keyholders of the Premises. 15.4 Keys The Landlord shall give keys to the Premises to the Tenant. The Tenant shall provide the Landlord with a set of keys to the Premises to enable the Landlord or its agents and others authorised by the Landlord to enter the Premises for security purposes or in cases of emergency. 16. USE RESTRICTIONS The Tenant shall perform and observe the obligations set out in Schedule 2. 17. 17.1 EXCLUSION OF WARRANTY AS TO USER Intentionally left blank SECTION 6 DISPOSALS 18. ASSIGNMENT AND UNDERLETTING

15.2

Tenant not to leave Premises unoccupied The Tenant shall not leave the Premises continuously unoccupied for more than thirty (30) consecutive days without notifying the Landlord and providing, or paying for, such caretaking or security arrangements as the Landlord shall reasonably require in order to protect the Premises from vandalism, theft or unlawful occupation.

15.3

Details of keyholders The Tenant shall ensure that, at all times, the Landlord has particulars of the name, home address and home telephone number of at least two keyholders of the Premises.

15.4

Keys The Landlord shall give keys to the Premises to the Tenant. The Tenant shall provide the Landlord with a set of keys to the Premises to enable the Landlord or its agents and others authorised by the Landlord to enter the Premises for security purposes or in cases of emergency.

16.

USE RESTRICTIONS The Tenant shall perform and observe the obligations set out in Schedule 2.

17. 17.1

EXCLUSION OF WARRANTY AS TO USER Intentionally left blank SECTION 6 DISPOSALS

18. 18.1

ASSIGNMENT AND UNDERLETTING The Tenant shall not assign, charge, underlet or part with possession or share the occupation of, or permit any person to occupy, or create any trust in respect of the Tenant's interest in, the whole or any part of the Premises.

-18-

SECTION 7 LEGAL REQUIREMENTS 19. STATUTORY REQUIREMENTS
19.1 Tenant to refrain from certain acts The Tenant shall not do, or omit to be done, in or near the Premises, any act or thing by reason of which the Landlord may, under any law, incur or have imposed upon it, or become liable to pay, any damages, compensation, costs, charges, expenses or penalty. 20. 20.1 COMPLIANCE WITH FREE ZONE RULES AND REGULATIONS General Compliance The Tenant shall comply in all respects with all Implementing Rules and Regulations issued by HFZ Authority (as amended from time to time) and all Free Zone Circulars issued pursuant thereto and shall indemnify the Landlord on demand against all actions, proceedings, claims, demands, losses, expenses, damages and liability whatsoever in respect of any non-compliance. 20.2 Compliance with Licence The Tenant shall obtain and pay for during each year of the Term a Licence and all other approvals and consents necessary to operate in the Free Zone. The Tenant shall comply in all respects with the terms of the licences held by the Tenant and shall indemnify the Landlord on demand

SECTION 7 LEGAL REQUIREMENTS 19. STATUTORY REQUIREMENTS
19.1 Tenant to refrain from certain acts The Tenant shall not do, or omit to be done, in or near the Premises, any act or thing by reason of which the Landlord may, under any law, incur or have imposed upon it, or become liable to pay, any damages, compensation, costs, charges, expenses or penalty. 20. 20.1 COMPLIANCE WITH FREE ZONE RULES AND REGULATIONS General Compliance The Tenant shall comply in all respects with all Implementing Rules and Regulations issued by HFZ Authority (as amended from time to time) and all Free Zone Circulars issued pursuant thereto and shall indemnify the Landlord on demand against all actions, proceedings, claims, demands, losses, expenses, damages and liability whatsoever in respect of any non-compliance. 20.2 Compliance with Licence The Tenant shall obtain and pay for during each year of the Term a Licence and all other approvals and consents necessary to operate in the Free Zone. The Tenant shall comply in all respects with the terms of the licences held by the Tenant and shall indemnify the Landlord on demand against all actions, proceedings, claims, demands, losses, costs, expenses, damages and liability whatsoever in respect of any non compliance. 20.3 Tenant to comply with statutes The Tenant shall, at its expense, comply in all material respects with all laws, decrees, regulations and orders, whether governmental, municipal, local or otherwise from time to time in force, now in force or which may after the date of this Lease, be in force relating to the Premises or the business being carried on from time to time at the Premises and shall indemnify the Landlord on demand against all actions, proceedings, claims, demands, losses, expenses, damages and liability whatsoever in respect of any non compliance. 21. LEGAL NOTICES

-19-

The Tenant shall:21.1 within five (5) Working Days (or sooner if necessary having regard to the requirements of the notice or order in question or the time limits stated in it) of receipt of any notice or order or proposal for a notice or order given to the Tenant and relevant to the Premises or any occupier of them by any government department, local, public or other competent authority or court of competent jurisdiction, provide the Landlord with a true copy of it and any further particulars required by the Landlord; 21.2 without delay, take all necessary steps to comply with the notice or order so far as the same is the responsibility of the Tenant; and 21.3 at the request of the Landlord but at the cost of the Tenant, make or join with the Landlord in making such objection, complaint, representation or appeal against or in respect of any such notice, order or proposal as the Landlord shall deem expedient. 22. FIRE PRECAUTIONS AND EQUIPMENT

The Tenant shall:21.1 within five (5) Working Days (or sooner if necessary having regard to the requirements of the notice or order in question or the time limits stated in it) of receipt of any notice or order or proposal for a notice or order given to the Tenant and relevant to the Premises or any occupier of them by any government department, local, public or other competent authority or court of competent jurisdiction, provide the Landlord with a true copy of it and any further particulars required by the Landlord; 21.2 without delay, take all necessary steps to comply with the notice or order so far as the same is the responsibility of the Tenant; and 21.3 at the request of the Landlord but at the cost of the Tenant, make or join with the Landlord in making such objection, complaint, representation or appeal against or in respect of any such notice, order or proposal as the Landlord shall deem expedient. 22. FIRE PRECAUTIONS AND EQUIPMENT
22.1 Compliance with requirements The Tenant shall comply with the requirements and recommendations of the insurers of the Premises and the requirements of the Landlord so long as the same are notified in advance to the Tenant in writing in relation to fire precautions affecting the Premises. 22.2 Access to be kept clear The Tenant shall not obstruct the access to, or means of working, any fire fighting appliances or the means of escape from the Premises in case of fire or other emergency. 23. DEFECTIVE PREMISES Immediately upon becoming aware of the same, the Tenant shall give written notice to the Landlord of any defect in the Premises and shall display and maintain in the Premises all notices which the Landlord may, from time to time, reasonably require to be displayed in relation to any such matters. SECTION 8 INSURANCE

-20-

24. INSURANCE PROVISIONS
24.1 Insurance of personal belongings It shall be the responsibility of the Tenant to insure all the personal belongings and effects brought by the Tenant into the Premises against loss theft or damage and the Landlord shall not in any way or at any time acquire any responsibility for any loss theft or damage of such personal belongings or effects howsoever occasioned either through the neglect fault or misconduct of any servant agent or employee of the Landlord or otherwise. 24.2 Insurance becoming void The Tenant shall not do, or omit to do:24.2.1 anything which could cause any policy of insurance covering the Premises or any Adjoining Property owned by the Landlord as long as the same are notified in advance to the Tenant in writing to become wholly or partly void or voidable; or 24.2.2 anything whereby any abnormal or loaded premium may become payable in respect of the policy as long as the conditions related thereto

24. INSURANCE PROVISIONS
24.1 Insurance of personal belongings It shall be the responsibility of the Tenant to insure all the personal belongings and effects brought by the Tenant into the Premises against loss theft or damage and the Landlord shall not in any way or at any time acquire any responsibility for any loss theft or damage of such personal belongings or effects howsoever occasioned either through the neglect fault or misconduct of any servant agent or employee of the Landlord or otherwise. 24.2 Insurance becoming void The Tenant shall not do, or omit to do:24.2.1 anything which could cause any policy of insurance covering the Premises or any Adjoining Property owned by the Landlord as long as the same are notified in advance to the Tenant in writing to become wholly or partly void or voidable; or 24.2.2 anything whereby any abnormal or loaded premium may become payable in respect of the policy as long as the conditions related thereto are notified in advance to the Tenant, unless the Tenant has previously notified the Landlord and agreed to pay the increased premium and, in any event, the Tenant shall pay to the Landlord on written demand all expenses incurred by the Landlord in renewing any such policy. 24.3 Requirements of insurers The Tenant shall, at all times, comply with any requirements and recommendations of the insurers of the Premises so far as the same are notified in advance to the Tenant. 24.4 Notice by Tenant The Tenant shall give notice to the Landlord immediately on the happening of any event or thing which might affect any insurance policy relating to the Premises so long as the requirements of such insurance are notified in advance to the Tenant.

-21-

SECTION 9 DEFAULT OF TENANT AND RIGHTS OF RE-ENTRY 25. DEFAULT OF TENANT
25.1 Re-entry Without prejudice to any other right, remedy or power contained in this Lease or otherwise available to the Landlord, on or at any time after the happening of any of the events mentioned in clause 25.2, the Landlord may re-enter the Premises or any part of them in the name of the whole, and the Term shall then end, but without prejudice to any reasonable claim which the Landlord may have against the Tenant for any previous breach of covenant or sum previously accrued due. 25.2 Events of default The events referred to in clause 25.1 are the following:25.2.1 if the Rents or any part of them shall be unpaid for ten (10) Working Days after becoming payable (whether formally demanded or not); or 25.2.2 if any of the covenants by the Tenant contained in this Lease shall

SECTION 9 DEFAULT OF TENANT AND RIGHTS OF RE-ENTRY 25. DEFAULT OF TENANT
25.1 Re-entry Without prejudice to any other right, remedy or power contained in this Lease or otherwise available to the Landlord, on or at any time after the happening of any of the events mentioned in clause 25.2, the Landlord may re-enter the Premises or any part of them in the name of the whole, and the Term shall then end, but without prejudice to any reasonable claim which the Landlord may have against the Tenant for any previous breach of covenant or sum previously accrued due. 25.2 Events of default The events referred to in clause 25.1 are the following:25.2.1 if the Rents or any part of them shall be unpaid for ten (10) Working Days after becoming payable (whether formally demanded or not); or 25.2.2 if any of the covenants by the Tenant contained in this Lease shall not be materially performed and observed; or 25.2.3 if the Tenant, for the time being, (being a body corporate):(a) calls, or a nominee on its behalf calls, a meeting of any of its creditors; or shall enter into liquidation whether compulsory or voluntarily; or

(b)

(c) takes any steps to wind itself up; or (d) shall cease for any reason to maintain its corporate existence. 25.2.4 left blank; 25.2.5 if analogous proceedings or events to those referred to in this Clause shall be instituted or occur in relation to the Tenant, for the time being; or -22-

25.2.6 if the Tenant, for the time being, suffers any distress or execution to be levied on the Premises which is not discharged in full within twenty one (21) days after the levy has been made; or becomes unable to pay its debts as and when they fall due; or 25.2.7 if the Tenant, for the time being, is in breach of Clause 20 of this Lease. 25.3 The Tenant shall be entitled to terminate the Lease upon any breach or default of this Lease by the Landlord and the failure of the Landlord to cure the same within 30 days after notice of thereof from Tenant, upon which the Tenant shall be entitled to prorata reimbursement of the payments made pursuant to Clause 4 of this Lease or otherwise. The Tenant shall also be entitled to all other reasonable relief. SECTION 10 MISCELLANEOUS 26. QUIET ENJOYMENT The Landlord covenants with the Tenant that the Tenant, paying the Rents and performing and observing the covenants on the part of the Tenant contained in this Lease, shall and may peaceably hold and enjoy the Premises during the Term without any interruption by the Landlord or any person lawfully claiming through, under, or in

25.2.6 if the Tenant, for the time being, suffers any distress or execution to be levied on the Premises which is not discharged in full within twenty one (21) days after the levy has been made; or becomes unable to pay its debts as and when they fall due; or 25.2.7 if the Tenant, for the time being, is in breach of Clause 20 of this Lease. 25.3 The Tenant shall be entitled to terminate the Lease upon any breach or default of this Lease by the Landlord and the failure of the Landlord to cure the same within 30 days after notice of thereof from Tenant, upon which the Tenant shall be entitled to prorata reimbursement of the payments made pursuant to Clause 4 of this Lease or otherwise. The Tenant shall also be entitled to all other reasonable relief. SECTION 10 MISCELLANEOUS 26. QUIET ENJOYMENT The Landlord covenants with the Tenant that the Tenant, paying the Rents and performing and observing the covenants on the part of the Tenant contained in this Lease, shall and may peaceably hold and enjoy the Premises during the Term without any interruption by the Landlord or any person lawfully claiming through, under, or in trust for it. 27. EXCLUSION OF IMPLIED COVENANTS BY LANDLORD Any covenants on the part of the Landlord which would otherwise be implied by law are hereby expressly excluded. 28. RELETTING NOTICES The Tenant shall permit the Landlord, at all reasonable times during the last two (2) months of the Term, to enter the Premises and affix and retain, without interference, on any suitable parts of them (but not so as materially to affect the access of light or air to the Premises) notices for reletting them and the Tenant shall not remove or obscure such notices and shall permit all persons with the written authority of the Landlord to view the Premises at all reasonable hours in the daytime, upon prior appointment having been made. -23-

29. SECURITY The Tenant shall strictly observe and abide by and use its best endeavours to ensure that employees of the Tenant and visitors to the Premises strictly observe and abide by the rules and regulations from time to time laid down by the landlord for the security of the Free Zone and all applicable traffic and safety regulations. 30. DISCLOSURE OF INFORMATION Intentionally left blank. 31. INDEMNITY The Tenant and the Landlord shall mutually keep each other fully indemnified from and against all actions, proceedings, claims, demands, losses, costs, expenses, damages and liability arising in any way directly or indirectly out of:31.1 any act, omission, neglect or default of the Tenant/Landlord or any persons in the Premises expressly or impliedly with the Tenant's/Landlord's authority; or 31.2 any breach of any covenant by the Tenant /Landlord contained in this Lease. 32. REPRESENTATIONS

29. SECURITY The Tenant shall strictly observe and abide by and use its best endeavours to ensure that employees of the Tenant and visitors to the Premises strictly observe and abide by the rules and regulations from time to time laid down by the landlord for the security of the Free Zone and all applicable traffic and safety regulations. 30. DISCLOSURE OF INFORMATION Intentionally left blank. 31. INDEMNITY The Tenant and the Landlord shall mutually keep each other fully indemnified from and against all actions, proceedings, claims, demands, losses, costs, expenses, damages and liability arising in any way directly or indirectly out of:31.1 any act, omission, neglect or default of the Tenant/Landlord or any persons in the Premises expressly or impliedly with the Tenant's/Landlord's authority; or 31.2 any breach of any covenant by the Tenant /Landlord contained in this Lease. 32. REPRESENTATIONS The Tenant acknowledges that this Lease has not been entered into in reliance, wholly or partly, on any statement or representation made by, or on behalf of, the Landlord, except any such statement or representation that is expressly set out in this Lease. 33. EFFECT OF WAIVER Each covenant by the Tenant/Landlord shall remain in full force even though the Tenant /Landlord may have waived or released it temporarily or waived or released (temporarily or permanently, revocably or irrevocably) a similar covenant affecting other property belonging to the Landlord/Tenant. -24-

34. NOTICES All correspondence shall be sent to the parties at the address set out below or such addresses as may be notified by the parties: Hamriyah Free Zone Authority PO Box 1377 Sharjah United Arab Emirates Tel: 9716-5263333 Fax: 9716-5263555 QUAKER FABRIC CORPORATION OF FALL RIVER 941 Grinnell Street Fall River, MA 02721 United States of America Tel: 508-678-1951 Fax: 508-678-2656

34. NOTICES All correspondence shall be sent to the parties at the address set out below or such addresses as may be notified by the parties: Hamriyah Free Zone Authority PO Box 1377 Sharjah United Arab Emirates Tel: 9716-5263333 Fax: 9716-5263555 QUAKER FABRIC CORPORATION OF FALL RIVER 941 Grinnell Street Fall River, MA 02721 United States of America Tel: 508-678-1951 Fax: 508-678-2656 Any such notice, communication or demand given shall be deemed to have been received at the time of confirmed delivery. 35. GOVERNING LAW This Lease shall be governed by and construed in accordance with the laws in force from time to time in the Emirate of Sharjah. IN WITNESS whereof the parties hereto have caused this Lease to be duly executed the day and year first before written. -25-

SCHEDULE 1: EXCEPTIONS AND RESERVATIONS 1. There are excepted and reserved to the Landlord and the tenants and occupiers of any Adjoining Property and all other persons authorised by the Landlord or having similar rights:1.1 the right to the passage and running of the Utilities through any relevant Conduits which are now, or may at any time be in, under, or over the Premises; 1.2 the right to enter the Premises in order to:1.2.1 inspect, clean, maintain, repair, connect, remove, lay, renew, relay, replace, alter or execute any works whatsoever to, or in connection with, any of the Conduits or any other services; 1.2.2 execute repairs, decorations, alterations or any other works, and to make installations to, any Adjoining Property; or 1.2.3 do anything which the Landlord may do under this Lease. 1.3 the right to erect scaffolding for the purpose of repairing or cleaning any building now, or after the date of this Lease, erected on any Adjoining Property, or in connection with the exercise of any of the rights mentioned in this Schedule even though such scaffolding may temporarily restrict the access to, or enjoyment or use of, the Premises;

SCHEDULE 1: EXCEPTIONS AND RESERVATIONS 1. There are excepted and reserved to the Landlord and the tenants and occupiers of any Adjoining Property and all other persons authorised by the Landlord or having similar rights:1.1 the right to the passage and running of the Utilities through any relevant Conduits which are now, or may at any time be in, under, or over the Premises; 1.2 the right to enter the Premises in order to:1.2.1 inspect, clean, maintain, repair, connect, remove, lay, renew, relay, replace, alter or execute any works whatsoever to, or in connection with, any of the Conduits or any other services; 1.2.2 execute repairs, decorations, alterations or any other works, and to make installations to, any Adjoining Property; or 1.2.3 do anything which the Landlord may do under this Lease. 1.3 the right to erect scaffolding for the purpose of repairing or cleaning any building now, or after the date of this Lease, erected on any Adjoining Property, or in connection with the exercise of any of the rights mentioned in this Schedule even though such scaffolding may temporarily restrict the access to, or enjoyment or use of, the Premises; 1.4 any rights of light, air, support, protection and shelter or other easements and rights now, or after the date of this Lease, belonging to, or enjoyed by, any Adjoining Property; 1.5 full right and liberty at any time after the date of this Lease to raise the height of, or make any alterations or additions or execute any other works to, any buildings on any Adjoining Property, or to erect any new buildings of any height on any Adjoining Property in such manner as the Landlord or the person exercising the right shall think fit and even though they may obstruct, affect or interfere with the amenity of, or access to, the Premises or the passage of light and air to the Premises, but not so that the Tenant's use and occupation of them is materially affected; 1.6 the right:1.6.1 to build on to or into any boundary or party wall of the Premises; -26-

1.6.2 after giving not less than seven (7) days written notice, to enter the Premises to place and lay in, under or on them such footings for any intended party structure or party wall with such foundations for it as the Landlord may reasonably think necessary; 1.6.3 for that purpose, to excavate the Premises along the line of the junction between the Premises and any Adjoining Property; and 1.6.4 to keep and maintain those footings and foundations. -27-

SCHEDULE 2: USE RESTRICTIONS 1. Dangerous materials and use of machinery The Tenant shall not:-

1.6.2 after giving not less than seven (7) days written notice, to enter the Premises to place and lay in, under or on them such footings for any intended party structure or party wall with such foundations for it as the Landlord may reasonably think necessary; 1.6.3 for that purpose, to excavate the Premises along the line of the junction between the Premises and any Adjoining Property; and 1.6.4 to keep and maintain those footings and foundations. -27-

SCHEDULE 2: USE RESTRICTIONS 1. Dangerous materials and use of machinery The Tenant shall not:1.1 keep in the Premises any article or thing which is or may become combustible, dangerous, explosive, inflammable, offensive or radio-active, or which might increase the risk of fire explosion; 1.2 keep or operate in the Premises any machinery which is unduly noisy or causes vibration, or which is likely to disturb any owner or occupier of any Adjoining Property. 2. Overloading floors and services The Tenant shall not:2.1 overload the floors of the Premises nor suspend any excessive weight from any ceiling, roof, stanchion, structure of wall of them nor overload any Utility in or serving them; 2.2 do anything which may subject the Premises to any strain beyond that which they are designed to bear (with due margin for safety), and shall pay to the Landlord, on written demand, any expense reasonably incurred by the Landlord in obtaining the opinion of a qualified structural engineer as to whether the structure of the Premises is being, or is about to be, overloaded; 2.3 exceed the weight limits prescribed for any lift in the Premises. 3. Discharge into Conduits The Tenant shall not discharge into any Conduit any oil or grease or any noxious or deleterious effluent or substance which may cause an obstruction or might be or become a source of danger, or which might damage any Conduit or the drainage system of the Premises -28-

or any Adjoining Property or which in the Landlord's opinion is detrimental to the use and development of the Free Zone. 4. Disposal of refuse The Tenant shall not deposit on any part of the Premises any refuse, rubbish or trade empties of any kind other than in proper receptacles, and shall not burn any refuse or rubbish on the Premises. The Tenant shall ensure that all waste of whatsoever nature is treated prior to disposal in a manner approved by the Landlord. The Tenant shall keep the Premises free from pollution of any kind. 5. Obstruction of common areas

SCHEDULE 2: USE RESTRICTIONS 1. Dangerous materials and use of machinery The Tenant shall not:1.1 keep in the Premises any article or thing which is or may become combustible, dangerous, explosive, inflammable, offensive or radio-active, or which might increase the risk of fire explosion; 1.2 keep or operate in the Premises any machinery which is unduly noisy or causes vibration, or which is likely to disturb any owner or occupier of any Adjoining Property. 2. Overloading floors and services The Tenant shall not:2.1 overload the floors of the Premises nor suspend any excessive weight from any ceiling, roof, stanchion, structure of wall of them nor overload any Utility in or serving them; 2.2 do anything which may subject the Premises to any strain beyond that which they are designed to bear (with due margin for safety), and shall pay to the Landlord, on written demand, any expense reasonably incurred by the Landlord in obtaining the opinion of a qualified structural engineer as to whether the structure of the Premises is being, or is about to be, overloaded; 2.3 exceed the weight limits prescribed for any lift in the Premises. 3. Discharge into Conduits The Tenant shall not discharge into any Conduit any oil or grease or any noxious or deleterious effluent or substance which may cause an obstruction or might be or become a source of danger, or which might damage any Conduit or the drainage system of the Premises -28-

or any Adjoining Property or which in the Landlord's opinion is detrimental to the use and development of the Free Zone. 4. Disposal of refuse The Tenant shall not deposit on any part of the Premises any refuse, rubbish or trade empties of any kind other than in proper receptacles, and shall not burn any refuse or rubbish on the Premises. The Tenant shall ensure that all waste of whatsoever nature is treated prior to disposal in a manner approved by the Landlord. The Tenant shall keep the Premises free from pollution of any kind. 5. Obstruction of common areas The Tenant shall not do anything as a result of which any forecourt, path, road or other area over which the Tenant may have rights of access or use may be damaged, or their fair use by others may be obstructed in any way and shall not park any vehicle on any road or open area forming part of the Premises [other than in any approved parking area]. 6. Prohibited uses The Tenant shall not use the Premises for any public or political meeting, or public exhibition or public entertainment, show or spectacle; or for any dangerous, noisy, noxious or offensive business, occupation or trade; or for any illegal or immoral purpose; or for residential or sleeping purposes; or for betting, gambling, gaming or wagering; or as a betting office; or as a club; or for the sale of any beer, wines or spirits; or for any

or any Adjoining Property or which in the Landlord's opinion is detrimental to the use and development of the Free Zone. 4. Disposal of refuse The Tenant shall not deposit on any part of the Premises any refuse, rubbish or trade empties of any kind other than in proper receptacles, and shall not burn any refuse or rubbish on the Premises. The Tenant shall ensure that all waste of whatsoever nature is treated prior to disposal in a manner approved by the Landlord. The Tenant shall keep the Premises free from pollution of any kind. 5. Obstruction of common areas The Tenant shall not do anything as a result of which any forecourt, path, road or other area over which the Tenant may have rights of access or use may be damaged, or their fair use by others may be obstructed in any way and shall not park any vehicle on any road or open area forming part of the Premises [other than in any approved parking area]. 6. Prohibited uses The Tenant shall not use the Premises for any public or political meeting, or public exhibition or public entertainment, show or spectacle; or for any dangerous, noisy, noxious or offensive business, occupation or trade; or for any illegal or immoral purpose; or for residential or sleeping purposes; or for betting, gambling, gaming or wagering; or as a betting office; or as a club; or for the sale of any beer, wines or spirits; or for any auction. 7. Nuisance The Tenant shall not:7.1 do anything in the Premises which may be or become a nuisance, or which may cause annoyance, damage, disturbance or inconvenience to, the Landlord or any owner or occupier of any Adjoining Property, or which may be injurious to amenity, character, tone or value of the Premises; 7.2 play any musical instrument, or use any loudspeaker, radio, tape recorder, record or compact disc player or similar apparatus in such a manner as to be audible outside the Premises; -29-

7.3 place outside any building on the Premises or expose from any windows of them any articles, goods or things of any kind. -30-

SIGNED for and on behalf of HAMRIYAH FREE ZONE AUTHORITY by ........................................ Mr. Tariq Bin Faisal Al Qassimi (Chairman) in the presence of:

7.3 place outside any building on the Premises or expose from any windows of them any articles, goods or things of any kind. -30-

SIGNED for and on behalf of HAMRIYAH FREE ZONE AUTHORITY by ........................................ Mr. Tariq Bin Faisal Al Qassimi (Chairman) in the presence of: ........................................ Mr. Saeed Bardan (Witness) SIGNED for and on behalf of QUAKER FABRIC CORPORATION OF FALL RIVER by Mark Edwin Bisch ..................................... Mr. Mark Edwin Bisch ( Negotiator ) in the presence of: Valsara Janinik ........................................ Valsara Janinik (Witness)

AGREEMENT Agreement made as of the ___ day of December, 1999, by and 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"). W I T N E S S E T H: WHEREAS, the Company believes that the establishment and maintenance of a sound and vital management of the Company and its affiliates is essential to the protection and enhancement of the interests of the Company and its stockholders; WHEREAS, the Company also recognizes that the possibility of a Change in Control of the Company (as defined in Exhibit A attached hereto), with the attendant uncertainties and risks, might result in the departure or distraction of key employees of the Company to the detriment of the Company; and

SIGNED for and on behalf of HAMRIYAH FREE ZONE AUTHORITY by ........................................ Mr. Tariq Bin Faisal Al Qassimi (Chairman) in the presence of: ........................................ Mr. Saeed Bardan (Witness) SIGNED for and on behalf of QUAKER FABRIC CORPORATION OF FALL RIVER by Mark Edwin Bisch ..................................... Mr. Mark Edwin Bisch ( Negotiator ) in the presence of: Valsara Janinik ........................................ Valsara Janinik (Witness)

AGREEMENT Agreement made as of the ___ day of December, 1999, by and 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"). W I T N E S S E T H: WHEREAS, the Company believes that the establishment and maintenance of a sound and vital management of the Company and its affiliates is essential to the protection and enhancement of the interests of the Company and its stockholders; WHEREAS, the Company also recognizes that the possibility of a Change in Control of the Company (as defined in Exhibit A attached hereto), with the attendant uncertainties and risks, might result in the departure or distraction of key employees of the Company to the detriment of the Company; and WHEREAS, the Company has determined that it is appropriate to take steps to induce key employees to remain with the Company, and to reinforce and encourage their continued attention and dedication, when faced with the possibility of a Change in Control in the Company. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto

AGREEMENT Agreement made as of the ___ day of December, 1999, by and 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"). W I T N E S S E T H: WHEREAS, the Company believes that the establishment and maintenance of a sound and vital management of the Company and its affiliates is essential to the protection and enhancement of the interests of the Company and its stockholders; WHEREAS, the Company also recognizes that the possibility of a Change in Control of the Company (as defined in Exhibit A attached hereto), with the attendant uncertainties and risks, might result in the departure or distraction of key employees of the Company to the detriment of the Company; and WHEREAS, the Company has determined that it is appropriate to take steps to induce key employees to remain with the Company, and to reinforce and encourage their continued attention and dedication, when faced with the possibility of a Change in Control in the Company. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Term. This Agreement shall commence on the date hereof and shall expire on the earliest of: (i) three (3) years from the date hereof, subject to the right of the Board of Directors of the Company (the "Board") and the Executive to extend it, provided that if a Change in Control takes place prior to three (3) years from the date hereof, this Agreement shall continue until one (1) year after the Change in Control regardless of whether such one (1) year period ends before or after the end of such three (3) year period; (ii) the date of the Executive's death, retirement or termination of employment (voluntarily or involuntarily) with the Company prior to a Change in Control other than as a result of a termination by the Company without Cause (as defined below) or by the Executive for Good Reason (as defined below); or (iii) ninety-one (91) days after a termination by the Company without Cause or by the Executive for Good Reason provided that a Change in Control has not occurred within ninety (90) days from the date of the Executive's termination of employment. Notwithstanding anything in this Agreement to the contrary, if the Company becomes obligated to make any payment to the Executive pursuant to the terms hereof at or prior to the expiration of this Agreement, then this Agreement shall remain in effect for all purposes until all of the Company's obligations hereunder are fulfilled. Further, the provisions of Sections 4, 9 and 15 hereunder shall survive and remain in effect notwithstanding the termination of this Agreement, the termination of the Executive's employment or any breach or repudiation or alleged breach or repudiation by the Company of this Agreement or any one or more of its terms. 1

2. Termination Following Change in Control. If a Change in Control occurs and the Executive's employment with the Company is terminated by the Company without Cause or by the Executive for Good Reason at any time during the period beginning on the date of the Change in Control and ending one (1) year after the date of such Change in Control, then the Executive shall be entitled to the amounts provided in Section 3 upon such termination. In addition, notwithstanding the foregoing, in the event the Executive is terminated without Cause or terminates employment for Good Reason within ninety (90) days prior to the occurrence of a Change in Control, such termination shall, upon the occurrence of a Change in Control, be deemed to be covered under this Agreement and the Executive shall be entitled to the amounts provided under Section 3 hereof. The foregoing terms shall have the following meanings: (i) Termination for Good Reason. For purposes of this Agreement, termination for Good Reason shall mean a termination by the Executive effected by a written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to

2. Termination Following Change in Control. If a Change in Control occurs and the Executive's employment with the Company is terminated by the Company without Cause or by the Executive for Good Reason at any time during the period beginning on the date of the Change in Control and ending one (1) year after the date of such Change in Control, then the Executive shall be entitled to the amounts provided in Section 3 upon such termination. In addition, notwithstanding the foregoing, in the event the Executive is terminated without Cause or terminates employment for Good Reason within ninety (90) days prior to the occurrence of a Change in Control, such termination shall, upon the occurrence of a Change in Control, be deemed to be covered under this Agreement and the Executive shall be entitled to the amounts provided under Section 3 hereof. The foregoing terms shall have the following meanings: (i) Termination for Good Reason. For purposes of this Agreement, termination for Good Reason shall mean a termination by the Executive effected by a written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence of any of the following events without the Executive's express written consent: (A) any material diminution in the Executive's duties and responsibilities, authority, or title, except in each case in connection with the termination of the Executive's employment for Cause or as a result of the Executive's death, or temporarily as a result of the Executive's illness or other absence, or, if after a Change in Control, the assignment to the Executive of duties and responsibilities materially inconsistent with the position held by the Executive immediately prior to the Change in Control; (B) a reduction in the Executive's annual base salary; (C) a relocation of: (x) the Executive's principal business location to an area outside a fifty (50) mile radius of the Executive's current principal business location, (y) the Executive's principal business location to a location which is more than 70 miles from the Executive's principal residence, or (z) the Company's headquarters to a location that is not substantially the same as the Executive's current principal business location; (D) failure of the Company to continue in effect any health and welfare plan, employee benefit plan, pension plan, fringe benefit plan or compensation plan in which the Executive (and eligible dependents) are participating immediately prior to such Change in Control, unless the Executive (and eligible dependents) are permitted to participate in other plans providing the Executive (and eligible dependents) with substantially comparable benefits at no greater after-tax cost to the Executive (and eligible dependents), or the taking of any action by the Company which would adversely affect the Executive's (and eligible dependents) participation in or reduce Executive's (and eligible dependents) benefits under any such plan; (E) a material breach by the Company of any other agreement with the Executive without proper justification that remains uncured for ten (10) days after written notice of such breach is given to the Company; or (F) failure of any successor (as defined in Section 10 herein) to assume in writing the obligations hereunder. (ii) Cause. As used herein, the term "Cause" shall mean: (A) willful insubordination to a board resolution after a written demand for substantial performance is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has not substantially performed his duties or responsibilities; (B) breach of Section 9(a) of this Agreement after a written demand for substantial performance is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has breached this Agreement; (C) acts or omissions 2

intentionally and materially inimical to the Company after a written demand for cessation of such conduct is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has engaged in such conduct and the injury to the Company; (D) gross negligence, after written demand for cessation of such conduct is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has engaged in such conduct; or (E) conviction of a crime involving moral turpitude. Cause shall also mean a Disability of the Executive. Disability shall mean the Executive's disability pursuant to the Company's Long-term Disability Plan (the "LTD Plan"), provided that the Executive is eligible for and receiving benefits under the LTD Plan. The Executive's continued employment for a period of up to sixty (60) days after the occurrence of any act or failure to act constituting Good Reason hereunder shall not constitute consent to, or a waiver of rights with respect to, any such act or failure to act. 3. Compensation on Change in Control Termination. If pursuant to

intentionally and materially inimical to the Company after a written demand for cessation of such conduct is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has engaged in such conduct and the injury to the Company; (D) gross negligence, after written demand for cessation of such conduct is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has engaged in such conduct; or (E) conviction of a crime involving moral turpitude. Cause shall also mean a Disability of the Executive. Disability shall mean the Executive's disability pursuant to the Company's Long-term Disability Plan (the "LTD Plan"), provided that the Executive is eligible for and receiving benefits under the LTD Plan. The Executive's continued employment for a period of up to sixty (60) days after the occurrence of any act or failure to act constituting Good Reason hereunder shall not constitute consent to, or a waiver of rights with respect to, any such act or failure to act. 3. Compensation on Change in Control Termination. If pursuant to Section 2 the Executive is entitled to amounts and benefits under this Section 3, the Company shall, subject to Section 4, pay and provide to the Executive: (A) a lump sum amount, payable within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to (i) one and one-half (1 1/2) times the highest annual base salary paid by the Company to the Executive at any time prior to the Change in Control, and (ii) one and one-half (1 1/2) times the annual bonus paid, or required to be paid, by the Company to the Executive for the year preceding the year in which the Change in Control occurs; (B) a lump sum amount, payable within ten (10) days after such termination (or if such termination occurred prior to a Change in Control within ten (10) days after the Change in Control) equal to (i) any incurred but unreimbursed business expenses for the period prior to termination payable in accordance with the Company's policies, and (ii) any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to the Executive but not yet paid ("Accrued Benefits"); (C) any other amounts or benefits due under the then applicable employee benefit, equity or incentive plans of the Company applicable to the Executive as shall be determined and paid in accordance with such plans; (D) job outplacement at a level and of a type appropriate for senior-level executives in an amount not to exceed $20,000; (E) payment by the Company of the premiums for the Executive (except in the case of Executive's death) and Executive's dependents' health and welfare coverage (including, without limitation, medical, dental, life insurance and disability coverage) for one and one-half (1 1/2) years from the date of termination of Executive's employment under the Company's health and welfare plans which cover the senior executives of the Company or materially similar benefits ("Continuation Coverage"), subject to Executive's payment of customary premiums (if any) in effect prior to the Change in Control; and (F) upon the occurrence of a Change in Control, full and immediate vesting of all stock options held by the Executive. Payments under (E) above may, at the discretion of the Company, be made by continuing the Executive's participation in the plan as a terminee or by covering the Executive and the Executive's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent the Executive incurs tax that the Executive would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, the Executive shall receive from the Company an additional grossed up payment in the amount necessary so that the Executive will have no additional cost for 3

receiving such items or any additional payment. Notwithstanding anything herein to the contrary, the Executive (and his eligible dependents) shall retain all rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and such COBRA continuation coverage shall be available to the Executive (and his eligible dependents) at the expiration of the Continuation Coverage described herein. 4. Limitation on Payments. (a) In the event that the Executive shall become entitled to the payments and/or benefits provided by Section 3 or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed) the Company shall pay to the Executive at the time specified in subsection (d) below an

receiving such items or any additional payment. Notwithstanding anything herein to the contrary, the Executive (and his eligible dependents) shall retain all rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and such COBRA continuation coverage shall be available to the Executive (and his eligible dependents) at the expiration of the Continuation Coverage described herein. 4. Limitation on Payments. (a) In the event that the Executive shall become entitled to the payments and/or benefits provided by Section 3 or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed) the Company shall pay to the Executive at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. Notwithstanding the foregoing provisions of this Section 4 to the contrary, if it shall be determined that the Executive is entitled to a Gross-up Payment, but the Company Payments do not exceed one hundred ten percent (110%) of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Company Payments would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Executive and the Company Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants (the "Accountants") such Total Payments (in whole or in part), (A) do not constitute "parachute payments," (B) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or (C) are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local 4

taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Executive's

taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Executive's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (d) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which subjects the Executive to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code Section 1274(b)(2)(B) of the Code), subject to further payments pursuant to subsection (c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the event subjecting the Executive to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (e) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 4, the Executive shall permit the Company to control issues related to this Section 4 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree, the Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the 5

representative of the Company to accompany him, and the Executive and his representative shall cooperate with the Company and its representative. (f) The Company shall be responsible for all charges of the Accountants. 5. Notice of Termination. After a Change in Control, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice provided to the Executive not less than thirty (30) days prior to the date of termination (except in the case of a termination for Cause, which shall be provided to the Executive not less than fourteen (14) days prior to the date of termination, as specified below), which shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without: (i) advance written

representative of the Company to accompany him, and the Executive and his representative shall cooperate with the Company and its representative. (f) The Company shall be responsible for all charges of the Accountants. 5. Notice of Termination. After a Change in Control, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice provided to the Executive not less than thirty (30) days prior to the date of termination (except in the case of a termination for Cause, which shall be provided to the Executive not less than fourteen (14) days prior to the date of termination, as specified below), which shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without: (i) advance written notice provided to the Executive not less than fourteen (14) days prior to the date of termination setting forth the Company's intention to consider terminating the Executive including a statement of the date of termination and the specific detailed basis for such consideration for Cause; (ii) an opportunity of the Executive, together with his counsel, to be heard before the Board during the fourteen (14) day period ending on the date of termination; (iii) a duly adopted resolution of the Board stating that in accordance with the provisions of the next to the last sentence of this Section 5, that the actions of the Executive constituted Cause and the basis thereof; and (iv) a written determination provided by the Board setting forth the acts and omissions that form the basis of such termination of employment. Any determination by the Board hereunder shall be made by the affirmative vote of at least a two-thirds majority of the members of the Board (other than the Executive if the Executive is a member of the Board). Any purported termination of employment of the Executive by the Company which does not meet each substantive and procedural requirement of this Section 5 shall be treated for all purposes under this Agreement as a termination of employment without Cause. Upon a termination for Cause, the Company shall pay the Executive the Accrued Benefits. 6. Date of Termination. "Date of termination," with respect to any purported termination of the Executive's employment after a Change in Control, shall mean the date specified in the Notice of Termination which, in the case of a termination by the Company, shall not be less than thirty (30) days prior to the date of termination (except it shall not be less than fourteen (14) days in the case of a termination for Cause, and not less than five (5) days nor more than sixty (60) days in the case of a termination by the Executive for Good Reason). In the event of Notice of Termination by the Company, the Executive may treat such notice as having a date of termination at any date between the date of the receipt of such notice and the date of termination indicated in the Notice of Termination by the Company; provided, that the Executive must give the Company written notice of the date of termination if he or she deems it to have occurred prior to the date of termination indicated in the notice. 7. No Duty to Mitigate/Set-off. The Company agrees that if the Executive's employment with the Company is terminated pursuant to this Agreement during the term of this Agreement, the Executive shall not be required to seek other employment or to attempt in any way 6

to reduce any amounts payable to the Executive by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive or benefit provided to the Executive as the result of employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against the Executive. 8. Service with Subsidiaries. For purposes of this Agreement, employment by a subsidiary of the Company shall be deemed to be employment by the Company and references to the Company shall include all such entities and the Company and all such entities shall be jointly and severally responsible for the payment obligations hereunder. 9. Confidentiality; Insurance. (a) The Executive shall not at any time during the term of this Agreement, or thereafter, directly or indirectly, for any reason whatsoever, communicate or disclose to any unauthorized person, firm or corporation, or use for the Executive's own account, without the prior written consent of the Board, any

to reduce any amounts payable to the Executive by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive or benefit provided to the Executive as the result of employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any setoff, counterclaim, recoupment, defense or other right which the Company may have against the Executive. 8. Service with Subsidiaries. For purposes of this Agreement, employment by a subsidiary of the Company shall be deemed to be employment by the Company and references to the Company shall include all such entities and the Company and all such entities shall be jointly and severally responsible for the payment obligations hereunder. 9. Confidentiality; Insurance. (a) The Executive shall not at any time during the term of this Agreement, or thereafter, directly or indirectly, for any reason whatsoever, communicate or disclose to any unauthorized person, firm or corporation, or use for the Executive's own account, without the prior written consent of the Board, any proprietary processes, trade secrets or other confidential data or information of the Company and its related and affiliated companies concerning their businesses or affairs, accounts, products, services or customers, it being understood, however, that the obligations of this Section shall not apply to the extent that the aforesaid matters (i) are disclosed in circumstances in which the Executive is legally required to do so, or (ii) become known to and available for use by the public or generally known in the Company's industry, other than by the Executive's wrongful act or omission. (b) The Company shall continue to cover the Executive under any director and officer insurance maintained for directors and officers of the Company or any affiliate at the highest level so maintained for other officers or directors or, if greater, at the level maintained by the Company immediately prior to a Change in Control, with regard to action or inaction while an officer or director. 10. Successors; Binding Agreement. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree in writing to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. This Agreement is personal to the Executive and neither this Agreement nor any rights hereunder may be assigned by the Executive. 7

11. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement constitutes the entire Agreement between the parties hereto pertaining to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. All references to any law shall be deemed also to refer to any successor provisions to such laws. 12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, or sent by registered mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, or, if mailed, five days after the date of deposit in the United States mails:

11. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement constitutes the entire Agreement between the parties hereto pertaining to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. All references to any law shall be deemed also to refer to any successor provisions to such laws. 12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, or sent by registered mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, or, if mailed, five days after the date of deposit in the United States mails: (i) If to the Company, to:

Quaker Fabric Corporation 941 Grinnell Street Fall River, Massachusetts 02721 Attention: General Counsel (ii) If to the Executive, to his or her last shown address on the books of the Company. Any party may by notice given in accordance with this Section to the other parties, designate another address or person for receipt of notices hereunder. 14. Separability. If any provisions of this Agreement shall be declared to be invalid or unenforceable, in whole or in part, such invalidity or unenforceability shall not affect the remaining provisions hereof which shall remain in full force and effect. 15. Legal Fees. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred in connection with any dispute concerning payments, benefits and other entitlements to which the Executive may have under this Agreement; provided, however, the Company shall be reimbursed by the Executive for the fees and expenses advanced in the event the Executive's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. The Company shall pay to the Executive interest at the prime lending rate as announced from time to time by Fleet National Bank (or any successor) on all or any part of any amount to be 8

paid to the Executive hereunder that is not paid when due. The prime rate for each calendar quarter shall be the prime rate in effect on the first day of the calendar quarter. 16. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive, equity or other plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other currently existing plan, agreement as to employment or severance from employment with the Company or statutory entitlements. Amounts that are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company, at or subsequent to the date of termination shall be payable in accordance with such plan or program, except as otherwise specifically provided herein. 17. Not an Agreement of Employment. This is not an agreement assuring employment and, subject to any other

paid to the Executive hereunder that is not paid when due. The prime rate for each calendar quarter shall be the prime rate in effect on the first day of the calendar quarter. 16. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive, equity or other plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other currently existing plan, agreement as to employment or severance from employment with the Company or statutory entitlements. Amounts that are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company, at or subsequent to the date of termination shall be payable in accordance with such plan or program, except as otherwise specifically provided herein. 17. Not an Agreement of Employment. This is not an agreement assuring employment and, subject to any other agreement between the Executive and the Company, the Company reserves the right to terminate the Executive's employment at any time with or without cause, subject to the payment provisions hereof if such termination is after, or within ninety (90) days prior to a Change in Control, as defined herein. The Executive acknowledges that he is aware that he shall have no claim against the Company hereunder or for deprivation of the right to receive the amounts hereunder as a result of any termination that does not specifically satisfy the requirements hereof. 18. Governing Law. This Agreement shall be construed, interpreted, and governed in accordance with the laws of the State of Delaware without reference to rules relating to conflicts of law. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and the Executive has hereunto set his hand as of the date first set forth above. QUAKER FABRIC CORPORATION
By: Name: Title: ____________________________________ ____________________________________ ____________________________________

EXECUTIVE Name: ____________________________________ Title: ____________________________________ 9

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A.

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to Nortex Holdings, Inc., or Larry Liebenow (or his estate, beneficiaries or heirs) or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company or Nortex Holdings, Inc. at the time of such sale. 10

AGREEMENT Agreement made as of the ___ day of December, 1999, by and 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 MICHAEL E. COSTA, residing at 206 High Street, Rochester, MA 02770 (the "Executive"). W I T N E S S E T H: WHEREAS, the Company believes that the establishment and maintenance of a sound and vital management of the Company and its affiliates is essential to the protection and enhancement of the interests of the Company and its stockholders; WHEREAS, the Company also recognizes that the possibility of a Change in Control of the Company (as defined in Exhibit A attached hereto), with the attendant uncertainties and risks, might result in the departure or distraction of key employees of the Company to the detriment of the Company; and

AGREEMENT Agreement made as of the ___ day of December, 1999, by and 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 MICHAEL E. COSTA, residing at 206 High Street, Rochester, MA 02770 (the "Executive"). W I T N E S S E T H: WHEREAS, the Company believes that the establishment and maintenance of a sound and vital management of the Company and its affiliates is essential to the protection and enhancement of the interests of the Company and its stockholders; WHEREAS, the Company also recognizes that the possibility of a Change in Control of the Company (as defined in Exhibit A attached hereto), with the attendant uncertainties and risks, might result in the departure or distraction of key employees of the Company to the detriment of the Company; and WHEREAS, the Company has determined that it is appropriate to take steps to induce key employees to remain with the Company, and to reinforce and encourage their continued attention and dedication, when faced with the possibility of a Change in Control in the Company. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto hereby agree as follows: 1. Term. This Agreement shall commence on the date hereof and shall expire on the earliest of: (i) three (3) years from the date hereof, subject to the right of the Board of Directors of the Company (the "Board") and the Executive to extend it, provided that if a Change in Control takes place prior to three (3) years from the date hereof, this Agreement shall continue until one (1) year after the Change in Control regardless of whether such one (1) year period ends before or after the end of such three (3) year period; (ii) the date of the Executive's death, retirement or termination of employment (voluntarily or involuntarily) with the Company prior to a Change in Control other than as a result of a termination by the Company without Cause (as defined below) or by the Executive for Good Reason (as defined below); or (iii) ninety-one (91) days after a termination by the Company without Cause or by the Executive for Good Reason provided that a Change in Control has not occurred within ninety (90) days from the date of the Executive's termination of employment. Notwithstanding anything in this Agreement to the contrary, if the Company becomes obligated to make any payment to the Executive pursuant to the terms hereof at or prior to the expiration of this Agreement, then this Agreement shall remain in effect for all purposes until all of the Company's obligations hereunder are fulfilled. Further, the provisions of Sections 4, 9 and 15 hereunder shall survive and remain in effect notwithstanding the termination of this Agreement, the termination of the Executive's employment or any breach or repudiation or alleged breach or repudiation by the Company of this Agreement or any one or more of its terms. 1

2. Termination Following Change in Control. If a Change in Control occurs and the Executive's employment with the Company is terminated by the Company without Cause or by the Executive for Good Reason at any time during the period beginning on the date of the Change in Control and ending one (1) year after the date of such Change in Control, then the Executive shall be entitled to the amounts provided in Section 3 upon such termination. In addition, notwithstanding the foregoing, in the event the Executive is terminated without Cause or terminates employment for Good Reason within ninety (90) days prior to the occurrence of a Change in Control, such termination shall, upon the occurrence of a Change in Control, be deemed to be covered under this Agreement and the Executive shall be entitled to the amounts provided under Section 3 hereof. The foregoing terms shall have the following meanings: (i) Termination for Good Reason. For purposes of this Agreement, termination for Good Reason shall mean a termination by the Executive effected by a written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to

2. Termination Following Change in Control. If a Change in Control occurs and the Executive's employment with the Company is terminated by the Company without Cause or by the Executive for Good Reason at any time during the period beginning on the date of the Change in Control and ending one (1) year after the date of such Change in Control, then the Executive shall be entitled to the amounts provided in Section 3 upon such termination. In addition, notwithstanding the foregoing, in the event the Executive is terminated without Cause or terminates employment for Good Reason within ninety (90) days prior to the occurrence of a Change in Control, such termination shall, upon the occurrence of a Change in Control, be deemed to be covered under this Agreement and the Executive shall be entitled to the amounts provided under Section 3 hereof. The foregoing terms shall have the following meanings: (i) Termination for Good Reason. For purposes of this Agreement, termination for Good Reason shall mean a termination by the Executive effected by a written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence of any of the following events without the Executive's express written consent: (A) any material diminution in the Executive's duties and responsibilities, authority, or title, except in each case in connection with the termination of the Executive's employment for Cause or as a result of the Executive's death, or temporarily as a result of the Executive's illness or other absence, or, if after a Change in Control, the assignment to the Executive of duties and responsibilities materially inconsistent with the position held by the Executive immediately prior to the Change in Control; (B) a reduction in the Executive's annual base salary; (C) a relocation of: (i) the Executive's principal business location to an area outside a fifty (50) mile radius of the Executive's current principal business location, or (ii) the Executive's principal business location to a location which is more than 70 miles from the Executive's principal residence; (D) failure of the Company to continue in effect any health and welfare plan, employee benefit plan, pension plan, fringe benefit plan or compensation plan in which the Executive (and eligible dependents) are participating immediately prior to such Change in Control, unless the Executive (and eligible dependents) are permitted to participate in other plans providing the Executive (and eligible dependents) with substantially comparable benefits at no greater after-tax cost to the Executive (and eligible dependents), or the taking of any action by the Company which would adversely affect the Executive's (and eligible dependents) participation in or reduce Executive's (and eligible dependents) benefits under any such plan; (E) a material breach by the Company of any other agreement with the Executive without proper justification that remains uncured for ten (10) days after written notice of such breach is given to the Company; or (F) failure of any successor (as defined in Section 10 herein) to assume in writing the obligations hereunder. (ii) Cause. As used herein, the term "Cause" shall mean: (A) willful insubordination to a board resolution after a written demand for substantial performance is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has not substantially performed his duties or responsibilities; (B) breach of Section 9(a) of this Agreement after a written demand for substantial performance is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has breached this Agreement; (C) acts or omissions intentionally and materially inimical to the Company after a written demand for cessation of such conduct is delivered to the Executive by the Company, which demand specifically identifies the 2

manner in which the Company believes that the Executive has engaged in such conduct and the injury to the Company; (D) gross negligence, after written demand for cessation of such conduct is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has engaged in such conduct; or (E) conviction of a crime involving moral turpitude. Cause shall also mean a Disability of the Executive. Disability shall mean the Executive's disability pursuant to the Company's Long-term Disability Plan (the "LTD Plan"), provided that the Executive is eligible for and receiving benefits under the LTD Plan. The Executive's continued employment for a period of up to sixty (60) days after the occurrence of any act or failure to act constituting Good Reason hereunder shall not constitute consent to, or a waiver of rights with respect to, any such act or failure to act. 3. Compensation on Change in Control Termination. If pursuant to Section 2 the Executive is entitled to amounts and benefits under this Section 3, the Company shall, subject to

manner in which the Company believes that the Executive has engaged in such conduct and the injury to the Company; (D) gross negligence, after written demand for cessation of such conduct is delivered to the Executive by the Company, which demand specifically identifies the manner in which the Company believes that the Executive has engaged in such conduct; or (E) conviction of a crime involving moral turpitude. Cause shall also mean a Disability of the Executive. Disability shall mean the Executive's disability pursuant to the Company's Long-term Disability Plan (the "LTD Plan"), provided that the Executive is eligible for and receiving benefits under the LTD Plan. The Executive's continued employment for a period of up to sixty (60) days after the occurrence of any act or failure to act constituting Good Reason hereunder shall not constitute consent to, or a waiver of rights with respect to, any such act or failure to act. 3. Compensation on Change in Control Termination. If pursuant to Section 2 the Executive is entitled to amounts and benefits under this Section 3, the Company shall, subject to Section 4, pay and provide to the Executive: (A) a lump sum amount, payable within ten (10) days after such termination (or, if such termination occurred prior to a Change in Control, within ten (10) days after the Change in Control) equal to (i) fifty percent (50%) of the highest annual base salary paid by the Company to the Executive at any time prior to the Change in Control, and (ii) fifty percent (50%) of the annual bonus paid, or required to be paid, by the Company to the Executive for the year preceding the year in which the Change in Control occurs; (B) a lump sum amount, payable within ten (10) days after such termination (or if such termination occurred prior to a Change in Control within ten (10) days after the Change in Control) equal to (i) any incurred but unreimbursed business expenses for the period prior to termination payable in accordance with the Company's policies, and (ii) any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to the Executive but not yet paid ("Accrued Benefits"); (C) any other amounts or benefits due under the then applicable employee benefit, equity or incentive plans of the Company applicable to the Executive as shall be determined and paid in accordance with such plans; (D) payment by the Company of the premiums for the Executive (except in the case of Executive's death) and Executive's dependents' health and welfare coverage (including, without limitation, medical, dental, life insurance and disability coverage) for six (6) months from the date of termination of Executive's employment under the Company's health and welfare plans which cover the senior executives of the Company or materially similar benefits ("Continuation Coverage"), subject to Executive's payment of customary premiums (if any) in effect prior to the Change in Control; and (E) upon the occurrence of a Change in Control, full and immediate vesting of all stock options held by the Executive. Payments under (D) above may, at the discretion of the Company, be made by continuing the Executive's participation in the plan as a terminee or by covering the Executive and the Executive's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent the Executive incurs tax that the Executive would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, the Executive shall receive from the Company an additional grossed up payment in the amount necessary so that the Executive will have no additional cost for receiving such items or any additional payment. Notwithstanding anything herein to the contrary, the Executive (and his eligible dependents) shall retain all rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and 3

such COBRA continuation coverage shall be available to the Executive (and his eligible dependents) at the expiration of the Continuation Coverage described herein. 4. Limitation on Payments. (a) In the event that the Executive shall become entitled to the payments and/or benefits provided by Section 3 or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed) the Company shall pay to the Executive at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any federal, state, and local

such COBRA continuation coverage shall be available to the Executive (and his eligible dependents) at the expiration of the Continuation Coverage described herein. 4. Limitation on Payments. (a) In the event that the Executive shall become entitled to the payments and/or benefits provided by Section 3 or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed) the Company shall pay to the Executive at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. Notwithstanding the foregoing provisions of this Section 4 to the contrary, if it shall be determined that the Executive is entitled to a Gross-up Payment, but the Company Payments do not exceed one hundred ten percent (110%) of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Company Payments would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Executive and the Company Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants (the "Accountants") such Total Payments (in whole or in part), (A) do not constitute "parachute payments," (B) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code or (C) are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Gross-up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, the Executive shall repay to the Company, at the time that the amount of such 4

reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Executive's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed

reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by the Executive if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Company shall not exceed the interest received or credited to the Executive by such tax authority for the period it held such portion. Executive and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Executive's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (d) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which subjects the Executive to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code Section 1274(b)(2)(B) of the Code), subject to further payments pursuant to subsection (c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the event subjecting the Executive to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (e) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 4, the Executive shall permit the Company to control issues related to this Section 4 (at its expense), provided that such issues do not potentially materially adversely affect the Executive, but the Executive shall control any other issues. In the event the issues are interrelated, the Executive and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree, the Executive shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, the Executive shall permit the representative of the Company to accompany him, and the Executive and his representative shall cooperate with the Company and its representative. 5

(f) The Company shall be responsible for all charges of the Accountants. 5. Notice of Termination. After a Change in Control, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice provided to the Executive not less than thirty (30) days prior to the date of termination (except in the case of a termination for Cause, which shall be provided to the Executive not less than fourteen (14) days prior to the date of termination, as specified below), which shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without: (i) advance written notice provided to the Executive not less than fourteen (14) days prior to the date of termination setting forth the Company's intention to consider terminating the Executive including a statement of the date of termination and the specific detailed basis for such consideration for Cause; (ii) an opportunity of the Executive, together with his counsel, to be heard before the Board during the fourteen (14) day period ending on the date of termination; (iii) a duly adopted resolution of the Board stating that in accordance with the provisions of the next to the last

(f) The Company shall be responsible for all charges of the Accountants. 5. Notice of Termination. After a Change in Control, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 13. For purposes of this Agreement, a "Notice of Termination" shall mean a notice provided to the Executive not less than thirty (30) days prior to the date of termination (except in the case of a termination for Cause, which shall be provided to the Executive not less than fourteen (14) days prior to the date of termination, as specified below), which shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without: (i) advance written notice provided to the Executive not less than fourteen (14) days prior to the date of termination setting forth the Company's intention to consider terminating the Executive including a statement of the date of termination and the specific detailed basis for such consideration for Cause; (ii) an opportunity of the Executive, together with his counsel, to be heard before the Board during the fourteen (14) day period ending on the date of termination; (iii) a duly adopted resolution of the Board stating that in accordance with the provisions of the next to the last sentence of this Section 5, that the actions of the Executive constituted Cause and the basis thereof; and (iv) a written determination provided by the Board setting forth the acts and omissions that form the basis of such termination of employment. Any determination by the Board hereunder shall be made by the affirmative vote of at least a two-thirds majority of the members of the Board (other than the Executive if the Executive is a member of the Board). Any purported termination of employment of the Executive by the Company which does not meet each substantive and procedural requirement of this Section 5 shall be treated for all purposes under this Agreement as a termination of employment without Cause. Upon a termination for Cause, the Company shall pay the Executive the Accrued Benefits. 6. Date of Termination. "Date of termination," with respect to any purported termination of the Executive's employment after a Change in Control, shall mean the date specified in the Notice of Termination which, in the case of a termination by the Company, shall not be less than thirty (30) days prior to the date of termination (except it shall not be less than fourteen (14) days in the case of a termination for Cause, and not less than five (5) days nor more than sixty (60) days in the case of a termination by the Executive for Good Reason). In the event of Notice of Termination by the Company, the Executive may treat such notice as having a date of termination at any date between the date of the receipt of such notice and the date of termination indicated in the Notice of Termination by the Company; provided, that the Executive must give the Company written notice of the date of termination if he or she deems it to have occurred prior to the date of termination indicated in the notice. 7. No Duty to Mitigate/Set-off. The Company agrees that if the Executive's employment with the Company is terminated pursuant to this Agreement during the term of this Agreement, the Executive shall not be required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by the Executive or benefit provided to the Executive as the result of 6

employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive. 8. Service with Subsidiaries. For purposes of this Agreement, employment by a subsidiary of the Company shall be deemed to be employment by the Company and references to the Company shall include all such entities and the Company and all such entities shall be jointly and severally responsible for the payment obligations hereunder. 9. Confidentiality; Insurance. (a) The Executive shall not at any time during the term of this Agreement, or thereafter, directly or indirectly, for any reason whatsoever, communicate or disclose to any unauthorized person, firm or corporation, or use for the Executive's own account, without the prior written consent of the Board, any proprietary processes, trade secrets or other confidential data or information of the Company and its related and affiliated companies concerning their businesses or affairs, accounts, products, services or customers, it being

employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive. 8. Service with Subsidiaries. For purposes of this Agreement, employment by a subsidiary of the Company shall be deemed to be employment by the Company and references to the Company shall include all such entities and the Company and all such entities shall be jointly and severally responsible for the payment obligations hereunder. 9. Confidentiality; Insurance. (a) The Executive shall not at any time during the term of this Agreement, or thereafter, directly or indirectly, for any reason whatsoever, communicate or disclose to any unauthorized person, firm or corporation, or use for the Executive's own account, without the prior written consent of the Board, any proprietary processes, trade secrets or other confidential data or information of the Company and its related and affiliated companies concerning their businesses or affairs, accounts, products, services or customers, it being understood, however, that the obligations of this Section shall not apply to the extent that the aforesaid matters (i) are disclosed in circumstances in which the Executive is legally required to do so, or (ii) become known to and available for use by the public or generally known in the Company's industry, other than by the Executive's wrongful act or omission. (b) The Company shall continue to cover the Executive under any director and officer insurance maintained for directors and officers of the Company or any affiliate at the highest level so maintained for other officers or directors or, if greater, at the level maintained by the Company immediately prior to a Change in Control, with regard to action or inaction while an officer or director. 10. Successors; Binding Agreement. In addition to any obligations imposed by law upon any successor to the Company, the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree in writing to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. This Agreement is personal to the Executive and neither this Agreement nor any rights hereunder may be assigned by the Executive. 11. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition 7

or provision shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement constitutes the entire Agreement between the parties hereto pertaining to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. All references to any law shall be deemed also to refer to any successor provisions to such laws. 12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, or sent by registered mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, or, if mailed, five days after the date of deposit in the United States mails: (i) If to the Company, to:

or provision shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement constitutes the entire Agreement between the parties hereto pertaining to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. All references to any law shall be deemed also to refer to any successor provisions to such laws. 12. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 13. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, or sent by registered mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, or, if mailed, five days after the date of deposit in the United States mails: (i) If to the Company, to:

Quaker Fabric Corporation 941 Grinnell Street Fall River, Massachusetts 02721 Attention: General Counsel (ii) If to the Executive, to his or her last shown address on the books of the Company. Any party may by notice given in accordance with this Section to the other parties, designate another address or person for receipt of notices hereunder. 14. Separability. If any provisions of this Agreement shall be declared to be invalid or unenforceable, in whole or in part, such invalidity or unenforceability shall not affect the remaining provisions hereof which shall remain in full force and effect. 15. Legal Fees. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred in connection with any dispute concerning payments, benefits and other entitlements to which the Executive may have under this Agreement; provided, however, the Company shall be reimbursed by the Executive for the fees and expenses advanced in the event the Executive's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. The Company shall pay to the Executive interest at the prime lending rate as announced from time to time by Fleet National Bank (or any successor) on all or any part of any amount to be paid to the Executive hereunder that is not paid when due. The prime rate for each calendar quarter shall be the prime rate in effect on the first day of the calendar quarter. 16. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive, equity or other 8

plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other currently existing plan, agreement as to employment or severance from employment with the Company or statutory entitlements. Amounts that are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company, at or subsequent to the date of termination shall be payable in accordance with such plan or program, except as otherwise specifically provided herein. 17. Not an Agreement of Employment. This is not an agreement assuring employment and, subject to any other agreement between the Executive and the Company, the Company reserves the right to terminate the Executive's employment at any time with or without cause, subject to the payment provisions hereof if such termination is after, or within ninety (90) days prior to a Change in Control, as defined herein. The Executive acknowledges that

plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other currently existing plan, agreement as to employment or severance from employment with the Company or statutory entitlements. Amounts that are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company, at or subsequent to the date of termination shall be payable in accordance with such plan or program, except as otherwise specifically provided herein. 17. Not an Agreement of Employment. This is not an agreement assuring employment and, subject to any other agreement between the Executive and the Company, the Company reserves the right to terminate the Executive's employment at any time with or without cause, subject to the payment provisions hereof if such termination is after, or within ninety (90) days prior to a Change in Control, as defined herein. The Executive acknowledges that he is aware that he shall have no claim against the Company hereunder or for deprivation of the right to receive the amounts hereunder as a result of any termination that does not specifically satisfy the requirements hereof. 18. Governing Law. This Agreement shall be construed, interpreted, and governed in accordance with the laws of the State of Delaware without reference to rules relating to conflicts of law. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and the Executive has hereunto set his hand as of the date first set forth above. QUAKER FABRIC CORPORATION
By: Name: Title: ____________________________________ ____________________________________ ____________________________________

EXECUTIVE Name: ____________________________________ Title: ____________________________________ 9

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity;

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to Nortex Holdings, Inc., or Larry Liebenow (or his estate, beneficiaries or heirs) or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company or Nortex Holdings, Inc. at the time of such sale. 10

AMENDMENT NUMBER ONE TO THE QUAKER FABRIC CORPORATION DEFERRED COMPENSATION PLAN WHEREAS, Quaker Fabric Corporation (the "Corporation") maintains Quaker Fabric Corporation Deferred Compensation Plan, effective as of July 16, 1992 (the "Plan"); WHEREAS, the Corporation may amend the Plan by action of its board of directors (the "Board"); and WHEREAS, the Board deems it advisable to amend the Plan. NOW, THEREFORE, pursuant to Article IX of the Plan, the Plan is hereby amended, as follows: 1. Section 4.1 of the Plan is hereby amended by adding the following language to the end thereof:

AMENDMENT NUMBER ONE TO THE QUAKER FABRIC CORPORATION DEFERRED COMPENSATION PLAN WHEREAS, Quaker Fabric Corporation (the "Corporation") maintains Quaker Fabric Corporation Deferred Compensation Plan, effective as of July 16, 1992 (the "Plan"); WHEREAS, the Corporation may amend the Plan by action of its board of directors (the "Board"); and WHEREAS, the Board deems it advisable to amend the Plan. NOW, THEREFORE, pursuant to Article IX of the Plan, the Plan is hereby amended, as follows: 1. Section 4.1 of the Plan is hereby amended by adding the following language to the end thereof: "Notwithstanding the foregoing, upon the occurrence of a Change in Control (as defined in Exhibit A), the Participant shall receive from the Corporation the Supplemental Retirement Benefit in the form of a single lump sum payment in an amount equal to the credit balance of the Retirement Account on the date of the Change in Control divided by a decimal equal to one minus the Corporation's marginal tax rate for the year preceding the year of the Change in Control; such marginal rate to be set by the Board immediately prior to the Change in Control. Such single lump sum shall be paid on the Change in Control or as soon as practicable thereafter, but no later than ten (10) days from the date of the Change in Control." 2. Section 4.2 of the Plan is hereby amended in its entirety to read as follows: "Payment on Termination of the Participant's Employment Before Meeting Age or Service Requirements. If the Participant's Termination of Employment occurs before the Participant has completed five (5) years of Plan Participation or before attaining age 55, the Participant shall receive from the Corporation the Supplemental Retirement Benefit in the form of a single lump sum payment in an amount equal to the credit balance of the Retirement Account on the date of his or her Termination of Employment multiplied by the applicable percentage set forth in Appendix B. Notwithstanding the foregoing, upon the occurrence of a Change in Control, the Participant shall receive from the Corporation the Supplemental 1

Retirement Benefit in the form of a single lump sum payment in an amount equal to the credit balance of the Retirement Account on the date of the Change in Control, multiplied by the applicable percentage set forth in Appendix B, which product shall then be divided by a decimal equal to one minus the Corporation's marginal tax rate for the year preceding the year of the Change in Control; such marginal rate to be set by the Board immediately prior to the Change in Control. Such single lump sum shall be paid on the Change in Control or as soon as practicable thereafter, but no later than ten (10) days from the date of the Change in Control." 3. The first paragraph of Section 4.3 of the Plan is hereby amended by adding the following language to the end thereof: "Notwithstanding the foregoing, upon the occurrence of a Change in Control, the Beneficiary(ies) shall receive from the Corporation the Survivor's Benefit in the form of a single lump sum payment in an amount equal to the credit balance of the Participant's Retirement Account on the date of the Change in Control divided by a decimal equal to one minus the Corporation's marginal tax rate for the year preceding the year of the Change in Control; such marginal rate to be set by the Board immediately prior to the Change in Control. Such single lump sum shall be paid on the Change in Control or as soon as practicable thereafter, but no later than ten (10) days from the date of the Change in Control." 4. The last paragraph of Section 4.3 of the Plan is hereby amended in its entirety to read as follows:

Retirement Benefit in the form of a single lump sum payment in an amount equal to the credit balance of the Retirement Account on the date of the Change in Control, multiplied by the applicable percentage set forth in Appendix B, which product shall then be divided by a decimal equal to one minus the Corporation's marginal tax rate for the year preceding the year of the Change in Control; such marginal rate to be set by the Board immediately prior to the Change in Control. Such single lump sum shall be paid on the Change in Control or as soon as practicable thereafter, but no later than ten (10) days from the date of the Change in Control." 3. The first paragraph of Section 4.3 of the Plan is hereby amended by adding the following language to the end thereof: "Notwithstanding the foregoing, upon the occurrence of a Change in Control, the Beneficiary(ies) shall receive from the Corporation the Survivor's Benefit in the form of a single lump sum payment in an amount equal to the credit balance of the Participant's Retirement Account on the date of the Change in Control divided by a decimal equal to one minus the Corporation's marginal tax rate for the year preceding the year of the Change in Control; such marginal rate to be set by the Board immediately prior to the Change in Control. Such single lump sum shall be paid on the Change in Control or as soon as practicable thereafter, but no later than ten (10) days from the date of the Change in Control." 4. The last paragraph of Section 4.3 of the Plan is hereby amended in its entirety to read as follows: "Notwithstanding the foregoing, the Corporation shall have the option, in the sole discretion of the Board, to pay to the Participant's Beneficiary(ies) the Survivor's Benefit in the form of a single lump sum payment equal to the credit balance of the Participant's Retirement Account on the last day of the month in which is included the date of the Participant's death, divided by a decimal equal to one minus the Corporation's marginal tax rate for the year of the Participant's death; such marginal rate to be estimated by the Board." 5. Section 5.1 of the Plan is hereby amended in its entirety to read as follows: "Benefits on Disability. If the Participant's Termination of Employment is on account of Disability (as defined herein), then the Participant will not be entitled to receive any benefits under this Agreement on account of such Disability, except as expressly provided herein. The Participant's Retirement Account will, however, continue to be credited with contributions pursuant to Section 3.2 (assuming that his base salary had continued unchanged from the rate of base salary being paid to him at the time of his disability) and interest credits pursuant to Section 3.3, as if there had not been a Termination of the Participant's Employment until the earlier of the following: (i) the Participant's attainment of 2

age 55 and completion of five (5) years of Plan Participation (taking into account each year that the Company credits contributions hereunder as an additional year of Plan Participation); (ii) the Participant's death; or (iii) the occurrence of a Change in Control (each of (i), (ii) and (iii) being a "Disability Payment Event"). Upon the occurrence of a Disability Payment Event, the Participant shall be entitled to those benefits under Article IV to which the Participant would have been entitled if the Termination of Employment had occurred on the date of the Disability Payment Event. Disability shall mean the Participant's disability pursuant to the Company's Long-term Disability Plan (the "LTD Plan"), provided that the Participant is eligible for, and receiving benefits under, the LTD Plan." 6. Article VI is hereby amended by adding the following new Section 6.2 to the end thereof: "6.2 Change in Control. In the event that a Change in Control shall occur prior to the Participant's or Beneficiary's (as applicable) receipt of all amounts payable under this Plan, any amounts due or remaining to be paid under the Plan shall be paid to such Participant or, if applicable, to or among such Beneficiary or Beneficiaries in a single lump sum payment in an amount equal to any remaining amount of the credit balance of the Retirement Account on the date of the Change in Control divided by a decimal equal to one minus the Corporation's marginal tax rate for the year preceding the year of the Change in Control; such marginal rate to be set by the Board immediately prior to the Change in Control. Such single lump sum shall be paid on the Change in Control or as soon as practicable thereafter, but no later than ten (10) days from the date of the Change in

age 55 and completion of five (5) years of Plan Participation (taking into account each year that the Company credits contributions hereunder as an additional year of Plan Participation); (ii) the Participant's death; or (iii) the occurrence of a Change in Control (each of (i), (ii) and (iii) being a "Disability Payment Event"). Upon the occurrence of a Disability Payment Event, the Participant shall be entitled to those benefits under Article IV to which the Participant would have been entitled if the Termination of Employment had occurred on the date of the Disability Payment Event. Disability shall mean the Participant's disability pursuant to the Company's Long-term Disability Plan (the "LTD Plan"), provided that the Participant is eligible for, and receiving benefits under, the LTD Plan." 6. Article VI is hereby amended by adding the following new Section 6.2 to the end thereof: "6.2 Change in Control. In the event that a Change in Control shall occur prior to the Participant's or Beneficiary's (as applicable) receipt of all amounts payable under this Plan, any amounts due or remaining to be paid under the Plan shall be paid to such Participant or, if applicable, to or among such Beneficiary or Beneficiaries in a single lump sum payment in an amount equal to any remaining amount of the credit balance of the Retirement Account on the date of the Change in Control divided by a decimal equal to one minus the Corporation's marginal tax rate for the year preceding the year of the Change in Control; such marginal rate to be set by the Board immediately prior to the Change in Control. Such single lump sum shall be paid on the Change in Control or as soon as practicable thereafter, but no later than ten (10) days from the date of the Change in Control." IN WITNESS WHEREOF, the undersigned has caused this Amendment to be executed this ________ day of December, 1999. QUAKER FABRIC CORPORATION By: ________________________________________ Title: _____________________________________ 3

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to Nortex Holdings, Inc., or Larry Liebenow (or his estate, beneficiaries or heirs) or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company or Nortex Holdings, Inc. at the time of such sale. 4

AMENDMENT TO SPLIT DOLLAR INSURANCE AGREEMENT AMENDMENT NO. 1, dated as of December ___, 1999, to the Split Dollar Insurance Agreement dated , 1993, between QUAKER FABRIC CORPORATION OF FALL RIVER, a corporation duly organized and existing under the laws of Massachusetts (the "Corporation"), and _____________ (the "Employee"). W I T N E S S E T H: WHEREAS, the Corporation and the Employee entered into a Split Dollar Insurance Agreement (the "Agreement") to assist the Employee in providing protection for the beneficiaries of his choice in the event of the Employee's death; WHEREAS, the Corporation has applied for, and is the owner of, New England Variable Life Insurance Company insurance policy no. ________ with a guaranteed minimum death benefit of $___________ (the

AMENDMENT TO SPLIT DOLLAR INSURANCE AGREEMENT AMENDMENT NO. 1, dated as of December ___, 1999, to the Split Dollar Insurance Agreement dated , 1993, between QUAKER FABRIC CORPORATION OF FALL RIVER, a corporation duly organized and existing under the laws of Massachusetts (the "Corporation"), and _____________ (the "Employee"). W I T N E S S E T H: WHEREAS, the Corporation and the Employee entered into a Split Dollar Insurance Agreement (the "Agreement") to assist the Employee in providing protection for the beneficiaries of his choice in the event of the Employee's death; WHEREAS, the Corporation has applied for, and is the owner of, New England Variable Life Insurance Company insurance policy no. ________ with a guaranteed minimum death benefit of $___________ (the "Policy"), which policy insures the life of the Employee; WHEREAS, the Corporation has assigned its entire interest in the Policy to the Quaker Fabric Corporation Deferred Compensation Trust (the "Trust") pursuant to the Trust Agreement by and between the Company and State Street Bank and Trust Company, as Trustee (the "Trust Agreement") under the Quaker Fabric Corporation Deferred Compensation Plan (the "Deferred Compensation Plan"), for the purpose of accumulating the amounts needed to pay benefits under the Deferred Compensation Plan; and WHEREAS, the parties wish to amend certain of the terms of the Agreement as set forth in this Amendment. NOW, THEREFORE, the Company, the Trust and the Employee agree as follows: 1. The last sentence of Section 1.2 of the Agreement is hereby amended to read as follows: "If the Employee terminates employment with the Corporation for any reason other than death or Disability (as defined herein), the Trust shall then automatically and immediately become the sole beneficiary of the Policy." 2. Section 1.2 of the Agreement is hereby further amended by adding the following language to the end thereof: 1

" 'Disability' shall mean the Employee's disability pursuant to the Corporation's Long-term Disability Plan (the "LTD Plan"), provided that the Employee is eligible for, and receiving benefits under, the LTD Plan." 3. Section 1.3 of the Agreement is hereby amended in its entirety to read as follows: "The Trust shall be the beneficiary of the Policy in an amount equal to the Policy's aggregate net cash surrender value, as calculated immediately prior to the Employee's death, with respect to any death benefit payable under Article III hereof; and an amount equal to the aggregate death benefit of the Policy less the aggregate net cash surrender value paid to the Trust (the "Excess Death Benefit") shall be paid directly to the beneficiary(ies) designated by the Employee." 4. Section 3.1 of the Agreement is hereby amended in its entirety to read as follows: "In the event of the Employee's death while he is either employed by the Corporation or Disabled, the Trust shall be the beneficiary of the Policy in an amount equal to the Policy's aggregate net cash surrender value, as calculated immediately prior to the Employee's death; and an amount equal to the Excess Death Benefit (as defined in Section 1.3) shall be paid directly to the beneficiary(ies) designated by the Employee. In the event of the death of the Employee before he designates a beneficiary or if all named beneficiaries are deceased, such Excess Death Benefit shall be paid directly to the Employee's estate." 5. Section 5.1 of the Agreement is hereby amended by adding the following sentence to the end thereof:

" 'Disability' shall mean the Employee's disability pursuant to the Corporation's Long-term Disability Plan (the "LTD Plan"), provided that the Employee is eligible for, and receiving benefits under, the LTD Plan." 3. Section 1.3 of the Agreement is hereby amended in its entirety to read as follows: "The Trust shall be the beneficiary of the Policy in an amount equal to the Policy's aggregate net cash surrender value, as calculated immediately prior to the Employee's death, with respect to any death benefit payable under Article III hereof; and an amount equal to the aggregate death benefit of the Policy less the aggregate net cash surrender value paid to the Trust (the "Excess Death Benefit") shall be paid directly to the beneficiary(ies) designated by the Employee." 4. Section 3.1 of the Agreement is hereby amended in its entirety to read as follows: "In the event of the Employee's death while he is either employed by the Corporation or Disabled, the Trust shall be the beneficiary of the Policy in an amount equal to the Policy's aggregate net cash surrender value, as calculated immediately prior to the Employee's death; and an amount equal to the Excess Death Benefit (as defined in Section 1.3) shall be paid directly to the beneficiary(ies) designated by the Employee. In the event of the death of the Employee before he designates a beneficiary or if all named beneficiaries are deceased, such Excess Death Benefit shall be paid directly to the Employee's estate." 5. Section 5.1 of the Agreement is hereby amended by adding the following sentence to the end thereof: "In the event of a Change in Control (as defined in Exhibit A), this Agreement shall remain in full force and effect and shall not be extinguished until all obligations to the Employee under the Deferred Compensation Plan are fully satisfied in accordance with the provisions thereunder; and this Agreement shall inure to the benefit of, and be enforceable by, the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees." 2

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: _______________________________ STATE STREET BANK AND TRUST COMPANY By: __________________________________ Name: ________________________________ Title: _______________________________ Employee: ____________________________ Address: _____________________________ 3

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: _______________________________ STATE STREET BANK AND TRUST COMPANY By: __________________________________ Name: ________________________________ Title: _______________________________ Employee: ____________________________ Address: _____________________________ 3

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation

EXHIBIT A A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; (ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holdings, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to Nortex Holdings, Inc., or Larry Liebenow (or his estate, beneficiaries or heirs) or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company or Nortex Holdings, Inc. at the time of such sale. 4

AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT NO. 2, dated as of December , 1999, to the Employment Agreement dated as of March 12, 1993, between QUAKER FABRIC CORPORATION, a Delaware corporation with its principal office at 941 Grinnell Street, Fall River, Massachusetts 02721 (the "Company"), and LARRY LIEBENOW, residing at 66 Cooke Street, Providence, Rhode Island 02906 ("Employee"). W I T N E S S E T H: WHEREAS, Employee has been employed by the Company as its President and Chief Executive Officer pursuant to an Employment Agreement, dated as of March 12, 1993 (the "Employment Agreement"); WHEREAS, the Company wishes to continue the employment of Employee as President and Chief Executive Officer of the Company and Employee desires to continue such employment; and WHEREAS, the parties wish to amend certain of the terms of the Employment Agreement as set forth in this

AMENDMENT TO EMPLOYMENT AGREEMENT AMENDMENT NO. 2, dated as of December , 1999, to the Employment Agreement dated as of March 12, 1993, between QUAKER FABRIC CORPORATION, a Delaware corporation with its principal office at 941 Grinnell Street, Fall River, Massachusetts 02721 (the "Company"), and LARRY LIEBENOW, residing at 66 Cooke Street, Providence, Rhode Island 02906 ("Employee"). W I T N E S S E T H: WHEREAS, Employee has been employed by the Company as its President and Chief Executive Officer pursuant to an Employment Agreement, dated as of March 12, 1993 (the "Employment Agreement"); WHEREAS, the Company wishes to continue the employment of Employee as President and Chief Executive Officer of the Company and Employee desires to continue such employment; and WHEREAS, the parties wish to amend certain of the terms of the Employment Agreement as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants and mutual promises herein contained, and other good and valuable consideration, it is hereby covenanted and agreed by and between the parties hereto as follows: 1. Section 6(a) of the Employment Agreement is hereby amended by adding the following language to the end thereof: "In addition, the Company shall pay or provide to Employee any incurred but unreimbursed business expenses for the period prior to termination payable in accordance with the Company's policies, any base salary, bonus, vacation pay or other deferred compensation accrued or earned under law or in accordance with the Company's policies applicable to Employee but not yet paid and any other amounts or benefits due under any applicable employee benefit, equity or incentive plans (the "Accrued Benefits")." 2. Section 6(b) of the Employment Agreement is hereby amended by adding the following language to the end thereof: 1

"In addition, the Company shall pay or provide to Employee the Accrued Benefits." 3. Section 6(c) of the Employment Agreement is hereby amended in its entirety to read as follows: "Upon termination of employment of Employee for any other reason including, without limitation, a termination of employment without cause (other than pursuant to Section 2(b)(v)), Employee shall be entitled to receive: (i) a lump sum payment equal to three (3) times the highest annual Base Salary paid by the Company to Employee at any time prior to the Change in Control and three (3) times the annual bonus paid, or required to be paid, by the Company to the Employee for the year preceding the year in which the termination occurs; (ii) any Accrued Benefits; (iii) payment by the Company of the premiums for Employee (except in the case of Employee's death) and Employee's dependents' health and welfare coverage (including, without limitation, medical, dental, life insurance and disability coverage) for twelve (12) months from the date of termination of Employee's employment under the Company's health and welfare plans which cover the Employee or materially similar benefits ("Continuation Coverage"), subject to Employee's payment of customary premiums in effect prior to the Change in Control. Payments under (iii) above may, at the discretion of the Company, be made by continuing Employee's participation in the plan as a terminee or by covering Employee and Employee's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent Employee incurs tax that Employee would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Employee shall receive from the Company an additional grossed up payment in the amount necessary so that Employee will have no additional cost for receiving such items or any additional

"In addition, the Company shall pay or provide to Employee the Accrued Benefits." 3. Section 6(c) of the Employment Agreement is hereby amended in its entirety to read as follows: "Upon termination of employment of Employee for any other reason including, without limitation, a termination of employment without cause (other than pursuant to Section 2(b)(v)), Employee shall be entitled to receive: (i) a lump sum payment equal to three (3) times the highest annual Base Salary paid by the Company to Employee at any time prior to the Change in Control and three (3) times the annual bonus paid, or required to be paid, by the Company to the Employee for the year preceding the year in which the termination occurs; (ii) any Accrued Benefits; (iii) payment by the Company of the premiums for Employee (except in the case of Employee's death) and Employee's dependents' health and welfare coverage (including, without limitation, medical, dental, life insurance and disability coverage) for twelve (12) months from the date of termination of Employee's employment under the Company's health and welfare plans which cover the Employee or materially similar benefits ("Continuation Coverage"), subject to Employee's payment of customary premiums in effect prior to the Change in Control. Payments under (iii) above may, at the discretion of the Company, be made by continuing Employee's participation in the plan as a terminee or by covering Employee and Employee's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent Employee incurs tax that Employee would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Employee shall receive from the Company an additional grossed up payment in the amount necessary so that Employee will have no additional cost for receiving such items or any additional payment. Notwithstanding anything herein to the contrary, Employee (and his eligible dependents) shall retain all rights under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and such COBRA continuation coverage shall be available to Employee (and his eligible dependents) at the expiration of the Continuation Coverage described herein." 4. Section 6(d) of the Employment Agreement is hereby amended by deleting the phrase "(or in the case of installment payments, shall commence)." 5. A new subsection 6(e) and (f) is hereby added to the Employment Agreement to read as follows: "(e) Upon termination of employment by the Company without cause or by Employee for Good Reason (as defined in Exhibit A), during the period beginning on the date of the Change in Control (as defined in Exhibit A) and ending one (1) 2

year after the date of such Change in Control, then Employee shall be entitled to receive: (i) a lump sum payment equal to three times the highest annual Base Salary paid by the Company to Employee at any time prior to the Change in Control and three (3) times the annual bonus paid, or required to be paid, by the Company to Employee for the year preceding the year in which the Change in Control occurs; (ii) any Accrued Benefits; (iii) Continuation Coverage for a period of three (3) years, subject to Employee's payment of customary premiums in effect prior to the Change in Control; (iv) upon the occurrence of a Change in Control, full and immediate vesting of all stock options held by Employee; and (v) job outplacement at a level and of a type appropriate for seniorlevel executives in an amount not to exceed $20,000. Payments under (iii) above may, at the discretion of the Company, be made by continuing Employee's participation in the plan as a terminee or by covering Employee and Employee's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent Employee incurs tax that Employee would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Employee shall receive from the Company an additional grossed up payment in the amount necessary so that Employee will have no additional cost for receiving such items or any additional payment. Notwithstanding anything herein to the contrary, Employee (and his eligible dependents) shall retain all rights under COBRA and such COBRA continuation coverage shall be available to Employee (and his eligible dependents) at the expiration of the Continuation Coverage described herein. In addition, notwithstanding the foregoing, in the event Employee is terminated without cause or terminates employment for Good Reason within ninety (90) days prior to the occurrence of a Change of Control, such termination shall, upon the occurrence of a Change in Control, be deemed to be covered under this section of the Employment Agreement and Employee shall be entitled to all payments and benefits provided hereunder reduced by any amounts otherwise received by the Executive in connection with his

year after the date of such Change in Control, then Employee shall be entitled to receive: (i) a lump sum payment equal to three times the highest annual Base Salary paid by the Company to Employee at any time prior to the Change in Control and three (3) times the annual bonus paid, or required to be paid, by the Company to Employee for the year preceding the year in which the Change in Control occurs; (ii) any Accrued Benefits; (iii) Continuation Coverage for a period of three (3) years, subject to Employee's payment of customary premiums in effect prior to the Change in Control; (iv) upon the occurrence of a Change in Control, full and immediate vesting of all stock options held by Employee; and (v) job outplacement at a level and of a type appropriate for seniorlevel executives in an amount not to exceed $20,000. Payments under (iii) above may, at the discretion of the Company, be made by continuing Employee's participation in the plan as a terminee or by covering Employee and Employee's dependents under substitute arrangements, provided that, notwithstanding anything herein to the contrary, to the extent Employee incurs tax that Employee would not have incurred as an active employee as a result of the aforementioned coverage or the benefits provided thereunder, Employee shall receive from the Company an additional grossed up payment in the amount necessary so that Employee will have no additional cost for receiving such items or any additional payment. Notwithstanding anything herein to the contrary, Employee (and his eligible dependents) shall retain all rights under COBRA and such COBRA continuation coverage shall be available to Employee (and his eligible dependents) at the expiration of the Continuation Coverage described herein. In addition, notwithstanding the foregoing, in the event Employee is terminated without cause or terminates employment for Good Reason within ninety (90) days prior to the occurrence of a Change of Control, such termination shall, upon the occurrence of a Change in Control, be deemed to be covered under this section of the Employment Agreement and Employee shall be entitled to all payments and benefits provided hereunder reduced by any amounts otherwise received by the Executive in connection with his termination of employment. "(f) Notwithstanding anything herein to the contrary, all payments payable upon any termination shall be made as soon as practicable following such termination, but in no event later than ten (10) days after such termination (or, if such termination occurred within ninety (90) days prior to a Change in Control, all payments shall be made as soon as practicable following the Change in Control, but in no event later than ten (10) days after the Change in Control)." 6. A new Section 9 is hereby added to the Employment Agreement to read as follows: "9. (a) In the event that the Employee shall become entitled to the payments and/or benefits provided by Section 6 or any other amounts (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any person whose actions result in a change of ownership covered by 3

Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed) the Company shall pay to Employee at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. (b) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants (the "Accountants") such Total Payments (in whole or in part), (A) do not constitute "parachute payments," (B) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code" or (C) are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code.

Section 280G(b)(2) of the Code or any person affiliated with the Company or such person) as a result of a Change of Control (collectively the "Company Payments"), and such Company Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code (and any similar tax that may hereafter be imposed) the Company shall pay to Employee at the time specified in subsection (d) below an additional amount (the "Gross-up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Company Payments and any federal, state, and local income or payroll tax upon the Gross-up Payment provided for by this paragraph (a), but before deduction for any federal, state, and local income or payroll tax on the Company Payments, shall be equal to the Company Payments. (b) For purposes of determining whether any of the Company Payments and Gross-up Payments (collectively the "Total Payments") will be subject to the Excise Tax and determining the amount of such Excise Tax: (i) the Total Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Code Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless and except to the extent that, in the opinion of the Company's independent certified public accountants appointed prior to any change in ownership (as defined under Code Section 280G(b)(2)) or tax counsel selected by such accountants (the "Accountants") such Total Payments (in whole or in part), (A) do not constitute "parachute payments," (B) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code" or (C) are otherwise not subject to the Excise Tax; and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) For purposes of determining the amount of the Gross-up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence for the calendar year in which the Company Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes if paid in such year. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder at the time the Gross-up Payment is made, Employee shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the prior Gross-up Payment attributable to such reduction (plus the portion of the Gross-up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the portion of the Gross-up Payment being repaid by Employee if such repayment results in a reduction in Excise Tax or a federal, state and local income tax deduction), plus interest on the 4

amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to Employee, and interest payable to the Company shall not exceed the interest received or credited to Employee by such tax authority for the period it held such portion. Employee and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Employee's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (d) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which subjects Employee to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Employee on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code

amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Gross-up Payment to be refunded to the Company has been paid to any federal, state and local tax authority, repayment thereof (and related amounts) shall not be required until actual refund or credit of such portion has been made to Employee, and interest payable to the Company shall not exceed the interest received or credited to Employee by such tax authority for the period it held such portion. Employee and the Company shall mutually agree upon the course of action to be pursued (and the method of allocating the expense thereof) if Employee's claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants or the Internal Revenue Service to exceed the amount taken into account hereunder at the time the Gross-up Payment is made (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-up Payment), the Company shall make an additional Gross-up Payment in respect of such excess (plus any interest or penalties payable with respect to such excess) at the time that the amount of such excess is finally determined. (d) The Gross-up Payment or portion thereof provided for in subsection (c) above shall be paid not later than the thirtieth (30th) day following an event occurring which subjects Employee to the Excise Tax; provided, however, that if the amount of such Gross-up Payment or portion thereof cannot be finally determined on or before such day, the Company shall pay to Employee on such day an estimate, as determined in good faith by the Accountants, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Code Section 1274(b)(2)(B) of the Code), subject to further payments pursuant to subsection (c) hereof, as soon as the amount thereof can reasonably be determined, but in no event later than the ninetieth (90th) day after the occurrence of the event subjecting Employee to the Excise Tax. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to Employee, payable on the fifth (5th) day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (e) In the event of any controversy with the Internal Revenue Service (or other taxing authority) under this Section 9, Employee shall permit the Company to control issues related to this Section 9 (at its expense), provided that such issues do not potentially materially adversely affect Employee, but Employee shall control any other issues. In the event the issues are interrelated, Employee and the Company shall in good faith cooperate so as not to jeopardize resolution of either issue, but if the parties cannot agree, Employee shall make the final determination with regard to the issues. In the event of any conference with any taxing authority as to the Excise Tax or associated income taxes, Employee shall 5

permit the representative of the Company to accompany him, and Employee and his representative shall cooperate with the Company and its representative. (f) The Company shall be responsible for all charges of the Accountants." 7. A new Section 10 is hereby added to the Employment Agreement to read as follows: "10. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred in connection with any dispute concerning payments, benefits and other entitlements to which Employee may have under this Agreement; provided, however, the Company shall be reimbursed by Employee for the fees and expenses advanced in the event Employee's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. The Company shall pay to Employee interest at the prime lending rate as announced from time to time by Fleet National Bank (or any successor) on all or any part of any amount to be paid to Employee hereunder that is not paid when due. The prime rate for each calendar quarter shall be the prime rate in effect on the first day of the calendar quarter." 8. A new Section 11 is hereby added to the Employment Agreement to read as follows:

permit the representative of the Company to accompany him, and Employee and his representative shall cooperate with the Company and its representative. (f) The Company shall be responsible for all charges of the Accountants." 7. A new Section 10 is hereby added to the Employment Agreement to read as follows: "10. To the fullest extent permitted by law, the Company shall promptly pay upon submission of statements all legal and other professional fees, costs of litigation, prejudgment interest, and other expenses incurred in connection with any dispute concerning payments, benefits and other entitlements to which Employee may have under this Agreement; provided, however, the Company shall be reimbursed by Employee for the fees and expenses advanced in the event Employee's claim is, in a material manner, in bad faith or frivolous and the arbitrator or court, as applicable, determines that the reimbursement of such fees and expenses is appropriate. The Company shall pay to Employee interest at the prime lending rate as announced from time to time by Fleet National Bank (or any successor) on all or any part of any amount to be paid to Employee hereunder that is not paid when due. The prime rate for each calendar quarter shall be the prime rate in effect on the first day of the calendar quarter." 8. A new Section 11 is hereby added to the Employment Agreement to read as follows: "11. The Company agrees that if Employee's employment with the Company is terminated pursuant to this Agreement during the term of this Agreement, Employee shall not be required to seek other employment or to attempt in any way to reduce any amounts payable to Employee by the Company pursuant to this Agreement. Further, the amount of any payment or benefit provided for in this Agreement shall not be reduced by any compensation earned by Employee or benefit provided to Employee as the result of employment by another employer or otherwise. The Company's obligations to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against Employee." 9. A new Section 12 is hereby added to the Employment Agreement to read as follows: "12. The Company shall continue to cover Employee under any director and officer insurance maintained for directors and officers of the Company or any affiliate at the highest level so maintained for other officers or directors or, if 6

greater, at the level maintained by the Company immediately prior to a Change in Control, with regard to action or inaction while an officer or director." 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: _______________________________ Employee: ____________________________ Address: _____________________________

greater, at the level maintained by the Company immediately prior to a Change in Control, with regard to action or inaction while an officer or director." 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: _______________________________ Employee: ____________________________ Address: _____________________________ 7

EXHIBIT A (a) Termination for Good Reason. For purposes of this Employment Agreement, termination for Good Reason shall mean a termination by Employee effected by a written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence of any of the following events without Employee's express written consent: (A) any diminution in Employee's duties and responsibilities, authority, or title, except in each case in connection with the termination of Employee's employment for Cause or as a result of Employee's death, or temporarily as a result of Employee's illness or other absence, or, if it occurs after a Change of Control, the assignment to Employee of duties and responsibilities inconsistent with the position held by Employee immediately prior to the Change of Control; (B) a reduction in Employee's annual Base Salary; (C) a relocation of: (x) Employee's principal business location to an area outside a fifty (50) mile radius of Employee's current principal business location, (y) Employee's principal business location to a location which is more than seventy (70) miles from Employee's principal residence, or (z) the Company's headquarters to a location that is not substantially the same as Employee's current principal business location; (D) failure of the Company to continue in effect any health and welfare plan, employee benefit plan, pension plan, fringe benefit plan or compensation plan in which Employee (and eligible dependents) are participating immediately prior to such Change in Control, unless Employee (and eligible dependents) are permitted to participate in other plans providing Employee with substantially comparable benefits at no greater after-tax cost to Employee, or the taking of any action by the Company which would adversely affect Employee's participation in or reduce Executive's benefits under any such plan; (E) breach by the Company of any other agreement with Employee without proper justification that remains uncured for ten (10) days after written notice of such breach is given to the Company; or (F) failure of any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume in writing the obligations hereunder. (b) A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Section 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities;

EXHIBIT A (a) Termination for Good Reason. For purposes of this Employment Agreement, termination for Good Reason shall mean a termination by Employee effected by a written notice given within sixty (60) days after the occurrence of the Good Reason event. For purposes of this Agreement, "Good Reason" shall mean the occurrence or failure to cause the occurrence of any of the following events without Employee's express written consent: (A) any diminution in Employee's duties and responsibilities, authority, or title, except in each case in connection with the termination of Employee's employment for Cause or as a result of Employee's death, or temporarily as a result of Employee's illness or other absence, or, if it occurs after a Change of Control, the assignment to Employee of duties and responsibilities inconsistent with the position held by Employee immediately prior to the Change of Control; (B) a reduction in Employee's annual Base Salary; (C) a relocation of: (x) Employee's principal business location to an area outside a fifty (50) mile radius of Employee's current principal business location, (y) Employee's principal business location to a location which is more than seventy (70) miles from Employee's principal residence, or (z) the Company's headquarters to a location that is not substantially the same as Employee's current principal business location; (D) failure of the Company to continue in effect any health and welfare plan, employee benefit plan, pension plan, fringe benefit plan or compensation plan in which Employee (and eligible dependents) are participating immediately prior to such Change in Control, unless Employee (and eligible dependents) are permitted to participate in other plans providing Employee with substantially comparable benefits at no greater after-tax cost to Employee, or the taking of any action by the Company which would adversely affect Employee's participation in or reduce Executive's benefits under any such plan; (E) breach by the Company of any other agreement with Employee without proper justification that remains uncured for ten (10) days after written notice of such breach is given to the Company; or (F) failure of any successor to the Company (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume in writing the obligations hereunder. (b) A "Change in Control" shall mean the occurrence of any of the following: (i) any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Section 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company, any employee benefit plan sponsored or maintained by the Company or its subsidiaries (including any trustee of any such plan acting in his capacity as trustee), and Nortex Holdings, Inc, Larry A. Liebenow (or his estate, beneficiaries or heirs) and any Affiliate (as such term is defined in Rule 12b-2 of the Exchange Act) of Larry A. Liebenow, becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing twenty-five percent (25%) of the total combined voting power of the Company's then outstanding securities; 8

(ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holding, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or

(ii) the merger, consolidation or other business combination of the Company (a "Transaction"), other than a Transaction involving only the Company and one or more of its subsidiaries, or a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person other than Nortex Holding, Inc., Larry A. Liebenow (or his estate, beneficiaries or heirs) or any Affiliate of Larry A. Liebenow is the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity; (iii) during any period of two (2) consecutive years beginning on or after the date hereof, the persons who were members of the Board immediately before the beginning of such period (the "Incumbent Directors") ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the date hereof shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of, at least a majority of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or (iv) the approval by the stockholders of the Company of an agreement for the sale of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to Nortex Holdings, Inc., or Larry Liebenow (or his estate, beneficiaries or heirs) or to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company or Nortex Holding, Inc. at the time of such sale. 9

QUAKER FABRIC CORPORATION 1999 STOCK PURCHASE LOAN PROGRAM 1. Purpose. The Quaker Fabric Corporation (the "Company") 1999 Stock Purchase Loan Program (the "Program") is designed to provide certain employees of the Company and its affiliates a source of financing to facilitate the purchase of common stock, par value $.01 per share of the Company (the "Common Stock") on the open market. 2. Participation. The Compensation Committee (the "Committee") of the Board of Directors of the Company shall determine in its sole and absolute discretion whether an employee of the Company or its affiliates is eligible to participate in the Program ("Participant"). The Committee shall not reduce a Participant's rights under any outstanding loan except as otherwise provided in this Program and the loan documentation. Notwithstanding the foregoing, the Committee may, in its sole and absolute discretion: (i) terminate a Participant's Program eligibility at any time and for any reason (or for no reason); (ii) refuse to offer future loans to any Participant; or (iii) withdraw the offer of any loan. A Participant's participation in the Program shall immediately cease upon the individual's (i) death; (ii) disability (as determined under the Company's long-term disability program) ; (iii) leave of absence; or (iv) termination of employment with the Company and any affiliate. 3. Administration. The Program shall be administered and interpreted by the Committee. The Committee shall have the exclusive authority and responsibility to make all determinations necessary in connection with the administration of the Program, to adopt forms of loan documents and agreements, to select the individuals eligible to participate in the Program, and to take all other actions which the Committee deems are appropriate or necessary to the proper administration of the Program. All decisions of the Committee with respect to the Program shall be final, conclusive, and binding upon all parties.

QUAKER FABRIC CORPORATION 1999 STOCK PURCHASE LOAN PROGRAM 1. Purpose. The Quaker Fabric Corporation (the "Company") 1999 Stock Purchase Loan Program (the "Program") is designed to provide certain employees of the Company and its affiliates a source of financing to facilitate the purchase of common stock, par value $.01 per share of the Company (the "Common Stock") on the open market. 2. Participation. The Compensation Committee (the "Committee") of the Board of Directors of the Company shall determine in its sole and absolute discretion whether an employee of the Company or its affiliates is eligible to participate in the Program ("Participant"). The Committee shall not reduce a Participant's rights under any outstanding loan except as otherwise provided in this Program and the loan documentation. Notwithstanding the foregoing, the Committee may, in its sole and absolute discretion: (i) terminate a Participant's Program eligibility at any time and for any reason (or for no reason); (ii) refuse to offer future loans to any Participant; or (iii) withdraw the offer of any loan. A Participant's participation in the Program shall immediately cease upon the individual's (i) death; (ii) disability (as determined under the Company's long-term disability program) ; (iii) leave of absence; or (iv) termination of employment with the Company and any affiliate. 3. Administration. The Program shall be administered and interpreted by the Committee. The Committee shall have the exclusive authority and responsibility to make all determinations necessary in connection with the administration of the Program, to adopt forms of loan documents and agreements, to select the individuals eligible to participate in the Program, and to take all other actions which the Committee deems are appropriate or necessary to the proper administration of the Program. All decisions of the Committee with respect to the Program shall be final, conclusive, and binding upon all parties. 4. Loan Conditions. (a) Purpose. Loans shall be used solely for the purpose of purchasing shares of Common Stock on the open market. No other uses are permitted. 1

(b) Loan Amount. The Committee shall determine, in its sole and absolute discretion, the maximum aggregate amount of any loan or loans which may be outstanding with respect to a Participant at any time under the Program provided, however, that such amount or amounts shall at all times be less than $50,000. In no event will a Participant be allowed to have more than two (2) loans outstanding at any time under the Program (unless otherwise determined by the Committee in its sole and absolute discretion). Notwithstanding anything in this Program document to the contrary, in the event the Company becomes subject to the reporting requirements of Regulation U, no loan shall exceed the "maximum loan value" (within the meaning of Regulation U) of any Common Stock held by the Company as collateral with respect to the loan until the Company terminates its registration under Regulation U. (c) Loan Terms. The Committee shall determine, in its sole and absolute discretion, all applicable terms of the loan, which shall be set forth in one or more of the loan documents. (d) Interest Rate.

(b) Loan Amount. The Committee shall determine, in its sole and absolute discretion, the maximum aggregate amount of any loan or loans which may be outstanding with respect to a Participant at any time under the Program provided, however, that such amount or amounts shall at all times be less than $50,000. In no event will a Participant be allowed to have more than two (2) loans outstanding at any time under the Program (unless otherwise determined by the Committee in its sole and absolute discretion). Notwithstanding anything in this Program document to the contrary, in the event the Company becomes subject to the reporting requirements of Regulation U, no loan shall exceed the "maximum loan value" (within the meaning of Regulation U) of any Common Stock held by the Company as collateral with respect to the loan until the Company terminates its registration under Regulation U. (c) Loan Terms. The Committee shall determine, in its sole and absolute discretion, all applicable terms of the loan, which shall be set forth in one or more of the loan documents. (d) Interest Rate. The interest rate on each loan shall be determined by the Committee and set forth in the applicable promissory note provided, however, that such interest rate shall be at least equal to the minimum applicable federal rate, published by the Internal Revenue Service for the month during which the promissory note is executed, which is necessary to avoid imputed interest income under the Internal Revenue Code of 1986, as amended (the "Code"). (e) Form of Repayment. Repayment of Program loans shall be made in accordance with the schedule provided in the promissory note by means of offset against a Participant's annual bonus otherwise payable to the Participant, or by such other means as are authorized by the Committee at the time of the granting of the loan, or at any time thereafter, provided that no rights of a Participant are reduced. The unpaid principal balance of a loan, together with accrued interest thereon, may be prepaid in full or in part at any time without premium or penalty. (f) Security. In order to obtain a loan under the Program, a Participant shall execute all of the loan documents required by the Company and pledge collateral adequate to secure the loan. The adequacy of the collateral pledged by a Participant as security for a loan will be determined by the Committee in its sole discretion, but in all events, a pledge of the shares of Common Stock owned by the Participant or the shares of Common Stock to be acquired by the Participant with the loan proceeds will constitute adequate security. No additional collateral shall be required. 2

5. Miscellaneous Provisions. (a) Amendment/Termination. The Company or the Committee may, at any time, amend, modify, terminate or freeze the Program, discontinue the making of new loans or cancel any outstanding loan by forgiveness of the outstanding debt or otherwise, provided, however, that neither the Company nor the Committee may change the terms of any outstanding loan nor take any action which would affect the rights of a Participant with respect to Common Stock previously purchased by such Participant with a loan or loans under the Program. Without limiting the generality of the foregoing, neither the Company nor the Committee may unilaterally terminate any outstanding loan or force the sale of any shares of Common Stock, except as expressly stated herein or in a Participant's promissory note evidencing the loan. (b) No Right to Continue as a Employee.

5. Miscellaneous Provisions. (a) Amendment/Termination. The Company or the Committee may, at any time, amend, modify, terminate or freeze the Program, discontinue the making of new loans or cancel any outstanding loan by forgiveness of the outstanding debt or otherwise, provided, however, that neither the Company nor the Committee may change the terms of any outstanding loan nor take any action which would affect the rights of a Participant with respect to Common Stock previously purchased by such Participant with a loan or loans under the Program. Without limiting the generality of the foregoing, neither the Company nor the Committee may unilaterally terminate any outstanding loan or force the sale of any shares of Common Stock, except as expressly stated herein or in a Participant's promissory note evidencing the loan. (b) No Right to Continue as a Employee. The Program is a voluntary undertaking on the part of the Company and shall not constitute a contract between the Company (or any affiliate thereof) and any Participant, or consideration for, or any inducement or condition of, the employment of a Participant. Nothing contained in the Program shall give any individual the right to continue in the service of the Company as an employee or restrict the right of the Company to terminate the service of a Participant at any time. (c) No Third Party Beneficiaries. Nothing in this Program shall create rights by any third party to rely upon the terms hereof without the Committee's express written consent, including rights of a spouse. (d) Coordination with 401(k) Hardship Rules. In the event a Participant makes a hardship withdrawal of employee deferral (401(k)) contributions under a 401(k) profit sharing plan of the Company or an affiliate or any other plan qualified under Section 401(a) of the Code that contains a Code Section 401(k) feature, such Participant shall be prohibited from obtaining new loans under the Program for the twelve (12) month period following such hardship withdrawal. 6. Effective Date. This Program is effective as of December ___, 1999. 3

SECURED PROMISSORY NOTE UNDER THE QUAKER FABRIC CORPORATION 1999 STOCK PURCHASE LOAN PROGRAM ("PROGRAM") $________________ __________________ (Amount) (Date) FOR VALUE RECEIVED, the undersigned _______________ (the "Borrower"), promises to pay to the order of Quaker Fabric Corporation ("the Company"), the principal amount of ___________________________ ($____________) (the "Principal Amount") and all accrued interest thereon in accordance with the terms hereof (the "Note Indebtedness"). Interest. Interest shall accrue on the unpaid Principal Amount commencing on the date hereof at a rate equal to 6.37%, compounded semiannually.

SECURED PROMISSORY NOTE UNDER THE QUAKER FABRIC CORPORATION 1999 STOCK PURCHASE LOAN PROGRAM ("PROGRAM") $________________ __________________ (Amount) (Date) FOR VALUE RECEIVED, the undersigned _______________ (the "Borrower"), promises to pay to the order of Quaker Fabric Corporation ("the Company"), the principal amount of ___________________________ ($____________) (the "Principal Amount") and all accrued interest thereon in accordance with the terms hereof (the "Note Indebtedness"). Interest. Interest shall accrue on the unpaid Principal Amount commencing on the date hereof at a rate equal to 6.37%, compounded semiannually. Term. The term of this Promissory Note shall be for ten (10) years. The Borrower shall repay the Note Indebtedness in substantially level amortized payments over the term of this Promissory Note by means of offset against the bonus otherwise payable to the Borrower under the Company annual bonus plan and if no such bonus is payable (or if the annual bonus is insufficient to cover the Note Indebtedness payment then due), by means of a check payable to the order of the Company no later than 10 days after the bonus is paid, or if no bonus is payable, would have been paid. Unless otherwise provided by the Committee (as defined under the Program), the Note Indebtedness shall become due and payable no later than thirty (30) days following the Borrower's termination of employment with the Company and any affiliate (as defined under the Program) for any reason. The Borrower shall have the right to prepay this Promissory Note, in full or in part, at any time without premium or penalty. Security. This Promissory Note shall be secured by such shares of common stock, par value $.01 per share of the Company (the "Pledged Shares") as evidenced by a Stock Pledge Agreement between the Borrower and the Company of even date herewith (the "Pledge Agreement") and the Company and the Borrower agree that the Company's recourse under this Promissory Note shall be for the full amount of the Note Indebtedness and shall not be limited to the value of the Pledged Shares. In no event shall any of the Pledged Shares be sold unless the Committee consents to such sale and the amount of the Pledged Shares to be sold. In the event that all or a portion of the Pledged Shares are sold by the Borrower prior to the repayment of the Note Indebtedness, the proceeds from such sale shall be used to repay the Note Indebtedness, provided, that in the event the Company should become subject to registration under Regulation U, the amount of the Note Indebtedness shall not exceed more than fifty percent (50%) of the fair market value (as determined by the Committee, in its sole discretion) of the remaining Pledged Shares. This Promissory Note is subject to the terms of the Pledge Agreement. All the 1

representations, warranties, agreements, terms and conditions contained in the Pledge Agreement are incorporated herein. Default. During the continuance of an Event of Default (as defined in the Pledge Agreement), the Company shall have the right to offset any amounts owing by the Company to the Borrower for any reason, including but not limited to, salary or bonus, against any outstanding Note Indebtedness. If any action is brought to collect this Promissory Note, the Company shall be entitled to recover from the Borrower all the costs and expenses of that action, including, but not limited to, reasonable attorney's fees, and the holder shall be entitled to judgment for those additional amounts (in addition to the unpaid Note Indebtedness). Waiver of Rights. No failure or delay on the part of the Company to exercise any right or remedy granted to the Company in this Promissory Note or otherwise provided by law shall operate as a waiver of any such right or remedy. The Borrower hereby waives presentment, demand, notice of dishonor, notice of protest and all other notices and demands in connection with any delivery, acceptance, performance or default of this Promissory Note and agrees that this Promissory Note may be modified only by an agreement in writing signed by the

representations, warranties, agreements, terms and conditions contained in the Pledge Agreement are incorporated herein. Default. During the continuance of an Event of Default (as defined in the Pledge Agreement), the Company shall have the right to offset any amounts owing by the Company to the Borrower for any reason, including but not limited to, salary or bonus, against any outstanding Note Indebtedness. If any action is brought to collect this Promissory Note, the Company shall be entitled to recover from the Borrower all the costs and expenses of that action, including, but not limited to, reasonable attorney's fees, and the holder shall be entitled to judgment for those additional amounts (in addition to the unpaid Note Indebtedness). Waiver of Rights. No failure or delay on the part of the Company to exercise any right or remedy granted to the Company in this Promissory Note or otherwise provided by law shall operate as a waiver of any such right or remedy. The Borrower hereby waives presentment, demand, notice of dishonor, notice of protest and all other notices and demands in connection with any delivery, acceptance, performance or default of this Promissory Note and agrees that this Promissory Note may be modified only by an agreement in writing signed by the Borrower and the Company. Governing Law. This Promissory Note shall be governed and interpreted in accordance with the laws of the state of Delaware.
Accepted and Acknowledged by: QUAKER FABRIC CORPORATION By: _____________________________ Name: ___________________________ Accepted and Acknowledged by: BORROWER Name: __________________________

Title: __________________________ 2

STOCK PLEDGE AGREEMENT UNDER THE QUAKER FABRIC CORPORATION 1999 STOCK PURCHASE LOAN PROGRAM ("PROGRAM") This is a Stock Pledge Agreement ("Agreement"), dated as of ____________, 1999, between ______________ ("Borrower") and Quaker Fabric Corporation (the "Company"). WHEREAS, the Company has loaned Borrower the principal sum of $__________ pursuant to a Secured Promissory Note, dated as of the date hereof (the "Promissory Note"). NOW, THEREFORE, in order to induce the Company to make the loan, and to secure Borrower's obligations under the Promissory Note, the parties named herein agree as follows: 1. Pledge. The Borrower hereby grants a first security interest to the Company in the following collateral (the "Collateral"): (a) All shares of common stock, par value $.01 per share of the Company (the "Common Stock") identified on Exhibit A (the "Pledged Shares"), represented by certificate nos. ___ as stated on the Common Stock ownership certificates (the "Share Certificates," whether one or more). (b) Any securities hereafter delivered to the Borrower in addition to or in substitution for any of the Pledged Shares and all certificates and instruments representing or evidencing such securities.

STOCK PLEDGE AGREEMENT UNDER THE QUAKER FABRIC CORPORATION 1999 STOCK PURCHASE LOAN PROGRAM ("PROGRAM") This is a Stock Pledge Agreement ("Agreement"), dated as of ____________, 1999, between ______________ ("Borrower") and Quaker Fabric Corporation (the "Company"). WHEREAS, the Company has loaned Borrower the principal sum of $__________ pursuant to a Secured Promissory Note, dated as of the date hereof (the "Promissory Note"). NOW, THEREFORE, in order to induce the Company to make the loan, and to secure Borrower's obligations under the Promissory Note, the parties named herein agree as follows: 1. Pledge. The Borrower hereby grants a first security interest to the Company in the following collateral (the "Collateral"): (a) All shares of common stock, par value $.01 per share of the Company (the "Common Stock") identified on Exhibit A (the "Pledged Shares"), represented by certificate nos. ___ as stated on the Common Stock ownership certificates (the "Share Certificates," whether one or more). (b) Any securities hereafter delivered to the Borrower in addition to or in substitution for any of the Pledged Shares and all certificates and instruments representing or evidencing such securities. (c) All of Borrower's rights to, title and interest in the Pledged Shares, all dividends or distributions arising therefrom, payable therein or distributed in respect thereto, whether in cash, property, stock or otherwise and whether now or hereafter declared, paid or made, together with the right to receive and receipt therefor. 2. Perfection of Security Interest. In order to perfect the Company's security interest in the Pledged Shares, the Borrower has delivered to the Company the Share Certificates duly endorsed for transfer in blank (or accompanied by one or more signed stock powers in blank), to be held by the Company pursuant to the terms of this Agreement. 3. Representations, Warranties and Covenants. The Borrower hereby represents, warrants and agrees with the Company as follows: (a) The Borrower has the legal capacity to execute this Agreement and to carry out all of the terms, conditions, covenants and provisions contained herein. 1

(b) The Borrower is the only and absolute owner of the Pledged Shares and has full power to make the pledge contemplated hereby; the Pledged Shares are free from all security interests, liens and encumbrances (other than the security interest granted by this Agreement); immediately before granting the security interest created by this Agreement, the Borrower was the record and beneficial owner and holder of the Pledged Shares on the stock books and records of the Company; and the Pledged Shares are freely transferable without restriction or limitation. (c) During the term of this Agreement, and so long as there is no default in the observance and performance of any of the terms of this Agreement or the Promissory Note by the Borrower, the Borrower shall have the right to vote the Pledged Shares on all corporate questions. (d) If at any time during the term of this Agreement, any stock dividend, reclassification, readjustment or other change is declared or made in the capital structure of any of the applicable corporations, all new, substituted and additional shares or other securities issued in respect to the Pledged Shares shall be held by the Company under the terms of this Agreement in the same manner as the Pledged Shares.

(b) The Borrower is the only and absolute owner of the Pledged Shares and has full power to make the pledge contemplated hereby; the Pledged Shares are free from all security interests, liens and encumbrances (other than the security interest granted by this Agreement); immediately before granting the security interest created by this Agreement, the Borrower was the record and beneficial owner and holder of the Pledged Shares on the stock books and records of the Company; and the Pledged Shares are freely transferable without restriction or limitation. (c) During the term of this Agreement, and so long as there is no default in the observance and performance of any of the terms of this Agreement or the Promissory Note by the Borrower, the Borrower shall have the right to vote the Pledged Shares on all corporate questions. (d) If at any time during the term of this Agreement, any stock dividend, reclassification, readjustment or other change is declared or made in the capital structure of any of the applicable corporations, all new, substituted and additional shares or other securities issued in respect to the Pledged Shares shall be held by the Company under the terms of this Agreement in the same manner as the Pledged Shares. (e) If at any time during the term of this Agreement, subscription warrants or any other rights or options shall be issued in connection with the Pledged Shares or any other securities at the time held by the Company hereunder, such warrants, rights and options shall be held by the Company as part of the Collateral hereunder and treated in the same manner as the Pledged Shares, and if exercised by the Borrower, all new stock or other securities so acquired by the Borrower shall be held by the Company under the terms of this Agreement in the same manner as the Pledged Shares. (f) The Borrower has good right and lawful authority to pledge, hypothecate, mortgage, assign, transfer, deliver, set over and confirm unto the Company the Collateral as provided in this Agreement, and the Borrower shall warrant and defend the title thereto and the Company's security interest therein against persons making claims through the Borrower. (g) So long as this Agreement shall be in effect, the Borrower shall not sell, assign or transfer, and shall not pledge, hypothecate, mortgage or otherwise encumber any right or rights with respect to the Collateral or any rights or interest therein. (h) Borrower agrees to execute any form required to be executed pursuant to Regulation U and any other rules and regulations of the Federal Reserve System. 4. Default. Each of the following events or conditions constitutes an "Event of Default": (a) Failure by the Borrower to make any payment of principal or interest under the Promissory Note on or before thirty (30) days after the date such payment is due. 2

(b) Failure by the Borrower to comply with any other provision of the Promissory Note or this Agreement and the continuance of such failure for thirty (30) days or more after written notice from the Company. (c) Any representation, warranty or other statement by or on behalf of the Borrower contained in the Promissory Note or this Agreement is false or misleading in any material respect when made. (d) The Borrower becomes insolvent or bankrupt or makes an assignment for the benefit of creditors, or consents to the appointment of a trustee, receiver or liquidator. (e) Bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings are instituted by or against the Borrower, which proceedings are not dismissed or stayed within sixty (60) days after they are instituted. If at any time during the term of this Agreement, there shall have occurred an Event of Default, the Company shall have at any time thereafter the rights and remedies provided by law, including those contained in the Uniform Commercial Code as interpreted by the courts in Delaware, and without limiting the generality of the foregoing, (i)

(b) Failure by the Borrower to comply with any other provision of the Promissory Note or this Agreement and the continuance of such failure for thirty (30) days or more after written notice from the Company. (c) Any representation, warranty or other statement by or on behalf of the Borrower contained in the Promissory Note or this Agreement is false or misleading in any material respect when made. (d) The Borrower becomes insolvent or bankrupt or makes an assignment for the benefit of creditors, or consents to the appointment of a trustee, receiver or liquidator. (e) Bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings are instituted by or against the Borrower, which proceedings are not dismissed or stayed within sixty (60) days after they are instituted. If at any time during the term of this Agreement, there shall have occurred an Event of Default, the Company shall have at any time thereafter the rights and remedies provided by law, including those contained in the Uniform Commercial Code as interpreted by the courts in Delaware, and without limiting the generality of the foregoing, (i) the right to declare all amounts then remaining unpaid under the Promissory Note to be immediately due and payable, and (ii) the right to take any available action or proceeding, at law or in equity, which it deems necessary or advisable for its protection and security. 5. Governing Law. This transaction shall be governed by the laws of Delaware, and the Company shall have all of the rights and remedies granted to a secured party under the Uniform Commercial Code as interpreted by the courts of Delaware. 6. Authority of the Company. The Borrower hereby irrevocably authorizes and empowers the Company, in its absolute discretion, at any time after any Event of Default as defined herein, to complete the stock powers and to transfer or cause to be transferred on its books all of the Pledged Shares and the Share Certificates relating thereto. 7. Termination. When and if the Borrower's obligations under the Promissory Note have been paid in full, all rights and interests of the Company in and to the Pledged Shares and the other Collateral shall thereupon revest in the Borrower, and the Company thereupon shall release the security interest granted in this Agreement, reassign the Pledged Shares and the other Collateral to the Borrower and deliver the Share Certificates (together with any related stock powers) to the Borrower. 8. Taxes. The Company shall pay for any and all documentary stamps or other taxes on behalf of the Borrower on a grossed up basis (at the applicable rates) which may be imposed on the transfer and delivery to the Company, or the retransfer and redelivery to the Borrower, of the Pledged Shares, the other Collateral to the Borrower and the Share Certificates. 3

9. Waiver by Borrower. The Borrower hereby waives presentment, demand, protest or notice of protest with respect to the Promissory Note. 10. The Company's Rights; Exculpation. The Collateral shall be held in the possession of the Company, and in connection therewith, the Company shall have the authority and power to take such actions and to exercise such powers hereunder as are specifically delegated to the Company by the terms hereof, together with such other powers as are reasonably incidental thereto. The Company shall not be liable hereunder in its capacity as agent or bailee for any action taken or omitted by it hereunder except for its gross negligence or willful breach. The Company shall have no compensation hereunder and shall be under no duty with respect to the Collateral except to account therefor in due course, pursuant to the terms and conditions hereof. 11. Entire Agreement. This Agreement and the Promissory Note collectively constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder.

9. Waiver by Borrower. The Borrower hereby waives presentment, demand, protest or notice of protest with respect to the Promissory Note. 10. The Company's Rights; Exculpation. The Collateral shall be held in the possession of the Company, and in connection therewith, the Company shall have the authority and power to take such actions and to exercise such powers hereunder as are specifically delegated to the Company by the terms hereof, together with such other powers as are reasonably incidental thereto. The Company shall not be liable hereunder in its capacity as agent or bailee for any action taken or omitted by it hereunder except for its gross negligence or willful breach. The Company shall have no compensation hereunder and shall be under no duty with respect to the Collateral except to account therefor in due course, pursuant to the terms and conditions hereof. 11. Entire Agreement. This Agreement and the Promissory Note collectively constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and are not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 12. Modification of Agreement. This Agreement may not be modified except in writing and executed with the same formality as this Agreement. 13. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 14. Notices. All notices required or permitted to be given hereunder shall be in writing and addressed: If to Quaker Fabric Corporation as follows: Quaker Fabric Corporation 941 Grinnell Street Fall River, Massachusetts 02721 Attention: General Counsel If to the Borrower, at the address set forth below. 60 Westfield Road East Greenwich, RI 02818 4

15. Further Assurance. Each party shall execute and deliver to the other such further documents and instruments, and shall perform such other acts, as reasonably may be necessary or proper to carry out more effectually the purposes of this Agreement. BORROWER By: __________________________________ Address: _____________________________

QUAKER FABRIC CORPORATION By: __________________________________ Name: ________________________________ Title: _______________________________ 5

15. Further Assurance. Each party shall execute and deliver to the other such further documents and instruments, and shall perform such other acts, as reasonably may be necessary or proper to carry out more effectually the purposes of this Agreement. BORROWER By: __________________________________ Address: _____________________________

QUAKER FABRIC CORPORATION By: __________________________________ Name: ________________________________ Title: _______________________________ 5

AMENDMENT NO. 2, effective as of December 28, 1999, to the Note Agreement dated as of October 10, 1997, as amended, (the "Agreement") between Quaker Fabric Corporation of Fall River (the "Company"), Pruco Life Insurance Company ("Pruco") and The Prudential Insurance Company of America ("Prudential"; and collectively with Pruco, the "Noteholders"). Capitalized terms used herein have the meanings ascribed to such terms in the Agreement unless otherwise defined herein. WITNESSETH WHEREAS, the Noteholders and the Company have executed and delivered the Agreement; and WHEREAS, the parties hereto wish to amend certain terms of the Agreement and agree to such other matters, all as set forth below. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment to the Agreement. Subparagraph 6D of the Agreement is hereby amended to read in its entirety as follows: "6D. Maintenance of Fixed Charge Coverage. The Company will not permit the Fixed Charge Ratio at any time to be less than the ratio set forth opposite the applicable period below:
======================================================= Period Ratio ======================================================= January 3, 1999 through October 1, 1999 1.00 : 1.00 ------------------------------------------------------October 2, 1999 through June 30, 2000 1.25 : 1.00 ------------------------------------------------------July 1, 2000 and thereafter 1.50 : 1.00 =======================================================

2. Conditions to Effectiveness. This Amendment No. 2 shall be effective as of the date first above written and the Agreement shall be deemed amended hereby upon delivery of a fully executed copy hereof to Prudential. 3. Company Representations. The Company hereby represents and warrants that no Default or Event of Default

AMENDMENT NO. 2, effective as of December 28, 1999, to the Note Agreement dated as of October 10, 1997, as amended, (the "Agreement") between Quaker Fabric Corporation of Fall River (the "Company"), Pruco Life Insurance Company ("Pruco") and The Prudential Insurance Company of America ("Prudential"; and collectively with Pruco, the "Noteholders"). Capitalized terms used herein have the meanings ascribed to such terms in the Agreement unless otherwise defined herein. WITNESSETH WHEREAS, the Noteholders and the Company have executed and delivered the Agreement; and WHEREAS, the parties hereto wish to amend certain terms of the Agreement and agree to such other matters, all as set forth below. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment to the Agreement. Subparagraph 6D of the Agreement is hereby amended to read in its entirety as follows: "6D. Maintenance of Fixed Charge Coverage. The Company will not permit the Fixed Charge Ratio at any time to be less than the ratio set forth opposite the applicable period below:
======================================================= Period Ratio ======================================================= January 3, 1999 through October 1, 1999 1.00 : 1.00 ------------------------------------------------------October 2, 1999 through June 30, 2000 1.25 : 1.00 ------------------------------------------------------July 1, 2000 and thereafter 1.50 : 1.00 =======================================================

2. Conditions to Effectiveness. This Amendment No. 2 shall be effective as of the date first above written and the Agreement shall be deemed amended hereby upon delivery of a fully executed copy hereof to Prudential. 3. Company Representations. The Company hereby represents and warrants that no Default or Event of Default has occurred or is continuing. 4. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK. 5. Effect on Agreement. Except as expressly provided herein, the Agreement shall remain in full force and effect and this Amendment No. 2 shall not operate as a waiver of any

right, power or remedy of any holder of a Note, nor constitute a waiver of any provision of the Agreement. 6. Counterparts. This Amendment No. 2 may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers as of the date and year first above written. QUAKER FABRIC CORPORATION OF FALL RIVER

right, power or remedy of any holder of a Note, nor constitute a waiver of any provision of the Agreement. 6. Counterparts. This Amendment No. 2 may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective officers as of the date and year first above written. QUAKER FABRIC CORPORATION OF FALL RIVER By: __________________________________ Name: Title: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: __________________________________ Name: Kevin J. Kraska Title: Vice President PRUCO LIFE INSURANCE COMPANY By: __________________________________ Name: Kevin J. Kraska Title: Vice President 7

PARAGON[LOGO] SOFTWARE LICENSE AGREEMENT rev. 05/05/98 This SOFTWARE LICENSE AGREEMENT (the "Agreement") is entered into this day of December, 1999 by and between PARAGON MANAGEMENT SYSTEMS, INC., a California corporation located at 5933 Century Boulevard, Suite 1220, Los Angeles, California 90045 ("Paragon"), and QUAKER FABRIC CORPORATION OF FALL RIVER, a Massachusetts corporation located at 941 Grinnell Street, Fall River, Massachusetts 02721 ("Licensee"). 1. Definitions 1.1. "includes"; "including". Except where followed directly by the word "only", the terms "includes" or "including" shall mean "includes, but is not limited to" and "including, but not limited to" respectively, it being the intention of the parties that any listing following thereafter is illustrative and not exclusive or exhaustive. 1.2. "Software". The term "Software" shall mean the computer software programs of Paragon identified in Exhibit "A" attached hereto and incorporated herein in object code form only, and any versions of such programs which are provided to Licensee subsequent to the Effective Date (as defined below). 1.3. "Documentation". The term "Documentation" shall mean the operator and user manuals, training manuals, guides specifications and other documentation customarily supplied by Paragon with the Software to licensees. 1.4. "Products". The term "Products" shall mean the Software, the Documentation and any other materials provided to Licensee by Paragon hereunder. The plural term "Products" is used even though there may be only

PARAGON[LOGO] SOFTWARE LICENSE AGREEMENT rev. 05/05/98 This SOFTWARE LICENSE AGREEMENT (the "Agreement") is entered into this day of December, 1999 by and between PARAGON MANAGEMENT SYSTEMS, INC., a California corporation located at 5933 Century Boulevard, Suite 1220, Los Angeles, California 90045 ("Paragon"), and QUAKER FABRIC CORPORATION OF FALL RIVER, a Massachusetts corporation located at 941 Grinnell Street, Fall River, Massachusetts 02721 ("Licensee"). 1. Definitions 1.1. "includes"; "including". Except where followed directly by the word "only", the terms "includes" or "including" shall mean "includes, but is not limited to" and "including, but not limited to" respectively, it being the intention of the parties that any listing following thereafter is illustrative and not exclusive or exhaustive. 1.2. "Software". The term "Software" shall mean the computer software programs of Paragon identified in Exhibit "A" attached hereto and incorporated herein in object code form only, and any versions of such programs which are provided to Licensee subsequent to the Effective Date (as defined below). 1.3. "Documentation". The term "Documentation" shall mean the operator and user manuals, training manuals, guides specifications and other documentation customarily supplied by Paragon with the Software to licensees. 1.4. "Products". The term "Products" shall mean the Software, the Documentation and any other materials provided to Licensee by Paragon hereunder. The plural term "Products" is used even though there may be only one Product licensed hereunder. 1.5. "Facility". The term "Facility" shall mean a single unit or business activity of a business entity, which unit or business activity may be a manufacturing unit, production unit, assembly unit, storage unit or distribution unit. There may be more than one Facility within a single business entity, and there may be more than one Facility within a single site of a business entity. 1.6. "Licensed Facility". The term "Licensed Facility" shall mean a Facility as to which Licensee has licensed a Product hereunder. 1.7. "Designated Computer". The term "Designated Computer" shall mean the computer system owned by, or leased exclusively to, Licensee and operated by Licensee at Licensee's premises, designated on Exhibit "A" attached hereto and incorporated herein by this reference. 1.8. "Effective Date". The term "Effective Date" shall mean the date first set forth above which, upon execution of this Agreement by both parties, shall be the effective date of this Agreement. Computer Software License Agreeement Paragon Management Systems, Inc. 1

1.9. "New Release". The term "New Release" shall mean a new version of a Product prepared to incorporate one or more of the following: (i) improvement of speed, performance, capacity, ease of use or other aspects of a Product; (ii) correction of Nonconformities in the Software; (iii) the addition of features and/or functionality; or (iv) revision of a Product as necessary or desirable for the Product to operate with any upgraded versions of, or replacements for, any operating system. 1.10. "Corrected Version". The term "Corrected Version" shall mean a version of the Software prepared primarily for the purpose of correcting Nonconformities where it is undesirable or impractical to delay the correction of such Nonconformities until the next New Release.

1.9. "New Release". The term "New Release" shall mean a new version of a Product prepared to incorporate one or more of the following: (i) improvement of speed, performance, capacity, ease of use or other aspects of a Product; (ii) correction of Nonconformities in the Software; (iii) the addition of features and/or functionality; or (iv) revision of a Product as necessary or desirable for the Product to operate with any upgraded versions of, or replacements for, any operating system. 1.10. "Corrected Version". The term "Corrected Version" shall mean a version of the Software prepared primarily for the purpose of correcting Nonconformities where it is undesirable or impractical to delay the correction of such Nonconformities until the next New Release. 1.11. Other Terms. The following other terms are defined in the Sections cited: "Cessation" - Section 15.2. "Confidential Information" - Section 10. "Nonconformity" - Section 15.1.1 "Warranty Period" - Section 15.1.1 2. Third Party Software Licensee shall be solely responsible for obtaining, installing and maintaining any third party software necessary for, or useful in, the operation of the Products licensed by Licensee hereunder, at Licensee's sole expense. Paragon has identified all necessary and recommended third party software in Exhibit "A". 3. License and Term of Agreement 3.1. License. Subject to the terms and conditions set forth herein, Paragon hereby grants to Licensee a nonexclusive, nontransferable, nonsublicensable license to use the Products during the term of this Agreement, on the Designated Computers located at the Licensed Facility or Licensed Facilities identified in Exhibit "A" and only for the number of concurrent users identified in Exhibit "A", and only for Licensee's internal data processing purposes. Licensee may use the Products on a different computer or at a different Facility during a temporary emergency, provided that; (i) such use is under the control of Licensee; and (ii) such use continues only so long as is reasonably necessary to accommodate the emergency conditions (and in no event longer than _26_ weeks). Licensee assumes full responsibility for the management, supervision and control of the Products, and shall take all measures necessary to reasonably assure that all personnel using the Products are, in the opinion of both parties, suitably qualified and trained for such use. 3.2. Addition of Licensed Facilities. Licensee, at its sole discretion, shall have the absolute right to add an additional Licensed Facility under this Agreement, provided that Licensee notify Paragon of its decision to add an additional Licensed Facility and pays to Paragon the current list price for the license fee for the number of authorized concurrent users at such new Licensed Facility. 3.3. Addition of Concurrent Users At Existing Licensed Facility. License, at it is sole discretion, shall have the absolute right to add additional concurrent users at a then-existing Licensed Facility, Licensee notify Paragon and pay to Paragon the difference between the current list price for the increased number of users and the original price paid for the lower number of users at such existing Licensed Facility. Computer Software License Agreeement Paragon Management Systems, Inc. 2

3.4. Back-Up and Archival Copies. Licensee shall have the right to make a reasonable number of copies for back-up purposes, provided that no such backup copies are used for any other purpose, and further provided that the use of back-up copies does not have the effect of increasing the number of permitted concurrent users. In addition, Licensee shall be permitted to make archival copies as part of a regular program of computer system

3.4. Back-Up and Archival Copies. Licensee shall have the right to make a reasonable number of copies for back-up purposes, provided that no such backup copies are used for any other purpose, and further provided that the use of back-up copies does not have the effect of increasing the number of permitted concurrent users. In addition, Licensee shall be permitted to make archival copies as part of a regular program of computer system data archiving, provided that such archival copies are used only for archival purposes or emergency purposes, and further provided that the use of archival copies does not increase the number of permitted concurrent users. 3.5. Documentation. Licensee may make such copies of the Documentation as are reasonably necessary for its internal use of the Products by the permitted number of simultaneous users, but may not make copies of the Documentation for any other purpose. 3.6. No Service Bureau Use. Licensee shall not, under any circumstances, use or permit the use of the Software in or on any service bureau, time-sharing or in any situation where the computer system on which the Software is installed may be accessed by any party other than Licensee. 4. License Fees 4.1. License Fees. Licensee shall pay Paragon the license fees set forth in Exhibit "A" for the Products licensed, at the Licensed Facilities,, payable upon execution of this agreement. 4.2. Maintenance Fees. In consideration of the Software and services provided hereunder, Licensee shall pay Paragon the annual maintenance fees set forth in Exhibit "A" as adjusted for the number of Licensed Facilities and Concurrent Users set forth therein. Such payments shall be made in full in advance. Paragon may increase the annual maintenance fees in connection with any renewal of the term of this Agreement. Paragon shall give Licensee written notice of any increase in maintenance fees at least thirty (30) days' prior to the renewal date on which such increase is to take effect. Any price increases shall not exceed the increase in the Consumer Price Index from the prior annual period. 4.3. Fees For Unnecessary Use of Technical Support. Paragon shall have the right to charge additional maintenance fees at Paragon's then-current rates for unreasonable time spent providing technical support to Licensee's personnel with respect to basic questions or problems that could have been readily resolved by consultation of the Documentation, or with respect to matters which are not directly related to the operation of a Product. Paragon shall provide Licensee with written notice immediately upon Paragon's determination that Licensee's usage of Technical Support is becoming unreasonable. 4.4 Not Used 4.5. Taxes. Licensee shall be solely responsible for all sales, use, withholding property or other taxes applicable to the license granted pursuant to this Agreement, other than taxes based on Paragon's U.S. net income or employee and payroll taxes. 4.6. Late Payments. All payments to Vendor will be made in United States dollars. Amounts outstanding over thirty (30) days may be assessed interest at a rate equal to the lesser of one and one-half percent (1 1/2%) per month or the maximum rate allowed by law, and such accrual of interest will be in addition, and not in limitation of, any other rights or remedies which Paragon may have under this Agreement or at law or in equity. In the event that any interest has accrued, all amounts paid by Licensee will be credited first against such unpaid interest. Computer Software License Agreeement Paragon Management Systems, Inc. 3

5. Delivery and Installation 5.1. Delivery. As soon as may be practicable after receipt of payment of the initial license fee set forth in Exhibit "A" from Licensee, Paragon shall deliver the Products to Licensee's Licensed Facility.

5. Delivery and Installation 5.1. Delivery. As soon as may be practicable after receipt of payment of the initial license fee set forth in Exhibit "A" from Licensee, Paragon shall deliver the Products to Licensee's Licensed Facility. 5.2. Installation. Licensee shall be solely responsible for installation of the Software on each Designated Computer at each Licensed Facility. 6. Not Used 7. Maintenance 7.1. Support Period. The "Support Period" commences upon the Effective Date and shall continue until the first anniversary of the Effective Date. Licensee may renew the Support Period for one or more additional one-year terms by giving notice of renewal not later than thirty (30) days before the expiration of the then-current term and paying the annual renewal fee as set forth in Section 4.2 and Exhibit A hereto. 7.2. Maintenance. During the Support Period, Paragon shall (i) provide to Licensee reasonable telephone, facsimile, electronic mail or written consultation concerning the use and operation of the Software during business hours in the Eastern time zone and (ii) use reasonable diligence to correct verifiable and reproducible Nonconformities on a timely basis. Should any material Nonconformity be detected by either Licensee or Paragon, Paragon shall immediately endeavor to either correct such Nonconformity, or provide a reasonable workaround, within fourteen (14) days. Paragon shall endeavor to provide Corrected Versions on a timely basis in light of the severity of the Nonconformities existing at any particular time and the anticipated release of the next New Release. Licensee understands and acknowledges that Nonconformity corrections may be cumulative, and if Licensee fails to implement any Nonconformity correction, Corrected Version or New Release delivered by Paragon, subsequent Nonconformity corrections, Corrected Versions or New Releases may not be effective. In addition, Paragon's response will be in accordance with Exhibit B, which is attached hereto and incorporated herein. 7.3. New Releases. Each New Release which Paragon releases to its customers during the Support Period shall be provided to Licensee at no charge (other than the maintenance fee payable pursuant to this Agreement as set forth in Exhibit A hereto). Licensee understands and acknowledges that New Releases may be cumulative, and if Licensee fails to implement any New Release delivered by Paragon, subsequent New Releases may not be effective. Paragon shall deliver such New Release or Corrected Version to Licensee at each Licensed Facility authorized to use the Product underlying the New Release. Each New Release delivered to Licensee shall be subject to all of the rights, obligations, terms and conditions of the License Agreement upon delivery. 7.4. No Paragon Obligation As To Hardware or Other Software. Paragon shall not have any obligation to Licensee to provide maintenance or technical support for any hardware or to any software other than the Software provided by Paragon hereunder. Without limiting the generality of the foregoing, Paragon shall have no maintenance or technical support obligation to Licensee for operating systems, third party databases and related software, client/server tools, networks, printers, personal computers, terminal emulation software, communications packages or any hardware, whether or not purchased from Paragon. The foregoing shall not be construed to relieve Paragon of responsibility for any incompatibility or operational problem between the Software and any hardware or other software where the specifications of or documentation for the Computer Software License Agreeement Paragon Management Systems, Inc. 4

Software state that the Software is compatible or will operate with such hardware or other software. 7.5. Exclusions From Maintenance and Technical Support. The following are excluded from Paragon's obligations under this Agreement, and Paragon shall have no obligations to Licensee with respect to:

Software state that the Software is compatible or will operate with such hardware or other software. 7.5. Exclusions From Maintenance and Technical Support. The following are excluded from Paragon's obligations under this Agreement, and Paragon shall have no obligations to Licensee with respect to: (a) Any problem with a Product resulting from the misuse, improper use or alteration of the Product or any portion thereof by Licensee, or from the failure by Licensee to use the Product in accordance with the Documentation and any instructions given by Paragon technical personnel; (b) Any problem caused by modifications not provided by Paragon; (c) Any problem resulting from the combination of a Product with other software programs or programming not provided by Paragon and not expressly identified by Paragon as being compatible with the Product; (d) Any problem arising with respect to the use of a version of a Product other than the most current New Release, where such problem was corrected in a version subsequent to the version Licensee is then using and the subsequent version was made available to Licensee; and (e) Any problem relating to the sufficiency, installation or maintenance (or lack thereof) of any equipment, telecommunications lines, communications interfaces or other hardware necessary to operate a Product or used by Licensee in the operation of a Product. 7.6 Termination By Paragon For Failure To Implement New Releases. Paragon shall have the right to terminate the Support Period in the event that Licensee does not implement any New Release within one (1) year after such New Release is delivered to Licensee, except in the case where Licensee does not accept such New Release in accordance with Section 7.3 above. Such termination of the Support Period shall be effected by giving Licensee sixty (60) days' advance written notice of termination, and if Licensee does not implement the New Release within such sixty-day period, this Agreement shall terminate. 8. Expenses Except as expressly set forth herein, each party shall bear all expenses incurred by such party in connection with its performance hereunder. In no event shall either party incur any expense whatsoever on behalf of the other party without first having received express written authorization from such other party. 9. Escrow of Source Code Paragon will promptly deliver a complete copy of the source code for the Software to an escrow agent selected by mutual agreement of the parties, upon execution of this Agreement. Paragon will provide the escrow agent with reasonable written instructions specifying the conditions under which Licensee shall be entitled to receive a copy of the source code. These conditions are limited to cessation of operations by Paragon or its successors or if Paragon ceases to support and maintain the Software. Paragon will provide Licensee with copy of the final escrow agreement. 10. Term; Termination Computer Software License Agreeement Paragon Management Systems, Inc. 5

10.1. Term of Agreement. This Agreement shall become effective on the Effective Date and shall remain in full force and effect until terminated by either party pursuant to the terms and conditions set forth in this Section 10. 10.2. Termination For Cause. Either party may terminate this Agreement at any time in the event that the other party materially fails to perform any of its material obligations hereunder. Such termination shall be effected by giving thirty (30) days' written notice of termination to the other party stating in reasonable detail the asserted

10.1. Term of Agreement. This Agreement shall become effective on the Effective Date and shall remain in full force and effect until terminated by either party pursuant to the terms and conditions set forth in this Section 10. 10.2. Termination For Cause. Either party may terminate this Agreement at any time in the event that the other party materially fails to perform any of its material obligations hereunder. Such termination shall be effected by giving thirty (30) days' written notice of termination to the other party stating in reasonable detail the asserted failure. If before the end of the thirty (30) day notice period the party against whom such failure was asserted cures the asserted failure, to the reasonable satisfaction of the notifying party, then the notice of termination shall be void and this Agreement shall continue in force. (Termination shall be immediate if it is due to a breach of Section 11). 10.3. Termination Without Cause By Licensee. Licensee may terminate this Agreement without cause at any time by giving thirty (30) days' written notice of termination to Paragon, but such termination shall not entitle Licensee to a refund of any fees paid under this Agreement, nor shall it relieve Licensee of the obligation to pay any fees which were due and payable as of the date on which notice of termination was given. 10.4. Effect of Termination. On or before the effective date of any termination of this Agreement, whether for or without cause , Licensee shall: (i) cease all use of the Products; (ii) remove all copies of the Software from its computers; (iii) return to Paragon all Documentation and any other materials provided by Paragon, and all copies thereof; and (iv) deliver a certificate to Paragon certifying Licensee's compliance with the foregoing. Except as expressly set forth, no termination of this Agreement shall relieve Licensee of any obligation for amounts due to Paragon as of the effective date of termination. 10.5. Survival. The rights and obligations set forth in Sections 4.5, 4.6, 10.4 and Sections 11 through 18 shall survive any termination of this Agreement for any reason whatsoever. 11. Confidentiality 11.1. Confidential Information. For purposes of this Agreement, "Confidential Information" shall mean any information, whether or not owned or developed by the disclosing party, which the receiving party may obtain knowledge of through or as a result of the relationship established hereunder with the disclosing party, access to the disclosing party's premises, or communications with the disclosing party's employees or independent contractors. "Confidential Information" includes, but is not limited to, information about the disclosing party's finances, operations and maintenance, algorithms, trade secrets, computer programs, design, technology, ideas, know-how, processes, formulas, compositions, data, techniques, improvements, inventions (whether patentable or not), works of authorship, business and product development plans, call tracking tables, problem resolution data, customer history tables, maintenance contract tables, other customer information and other information concerning the disclosing party's actual or anticipated business, research or development, or which is received in confidence by or for the Company from any other person. Confidential Information also includes any information which the disclosing party obtains from any third party which the disclosing party treats as proprietary or designates as Confidential Information. Confidential Information shall not include information that (i) is known by the receiving party at the time of receipt from the disclosing party and which is not subject to any other nondisclosure agreement between the parties; (ii) is now, or hereafter becomes, generally known to the industry through no fault of the receiving party, or which is later intentionally published or generally disclosed to the public by the disclosing party; or (iii) is Computer Software License Agreeement Paragon Management Systems, Inc. 6

otherwise lawfully and independently developed by the receiving party, or is lawfully acquired from a third party without any obligation of confidentiality. The receiving party shall bear the burden of showing that any of the foregoing exclusions applies to any information or materials. The parties acknowledge that any disclosure or unauthorized use of Confidential Information will constitute a material breach of this Agreement and cause substantial harm to the disclosing party for which damages would not be a fully adequate remedy, and, therefore,

otherwise lawfully and independently developed by the receiving party, or is lawfully acquired from a third party without any obligation of confidentiality. The receiving party shall bear the burden of showing that any of the foregoing exclusions applies to any information or materials. The parties acknowledge that any disclosure or unauthorized use of Confidential Information will constitute a material breach of this Agreement and cause substantial harm to the disclosing party for which damages would not be a fully adequate remedy, and, therefore, in the event of any such breach, in addition to other available remedies, the disclosing party shall have the right to obtain injunctive relief. 11.2. No Use or Disclosure. Each party agrees to hold in confidence, not to use and not to disclose or reveal to any person or entity the Confidential Information received hereunder without the clear and express prior written consent of a duly authorized representative of the disclosing party. Each party agrees that it shall only be permitted to use the other party's Confidential Information to the limited extent necessary to fulfill its obligations under this Agreement. 11.3. Legally Required Disclosure. In the event a receiving party hereto is directed to disclose any portion of a disclosing party's Confidential Information or any other materials proprietary to the disclosing party in conjunction with a judicial proceeding or arbitration or pursuant to any other legal order or requirement, such receiving party shall immediately notify the disclosing party both orally and in writing, and shall provide reasonable cooperation to the disclosing party should the disclosing party seek a protective order or other relief with respect to the directed disclosure. 12. Nonsolicitation Each party agrees that it will not, during the term of this Agreement and for a period of twelve (12) months thereafter, directly or indirectly solicit, interfere with, or entice away from the other party any employee or independent contractor of such other party, or attempt to do so. 13. Ownership; Proprietary Rights 13.1. Paragon. As between the parties title to the Products and any and all other products, trade secrets and other proprietary information of Paragon and all copies of all or any portion thereof, all proprietary rights therein and thereto, and all related intellectual property rights, shall remain with Paragon. Licensee shall reproduce and include in all permitted copies of the Products all proprietary rights notices or legends of Paragon as they appear in the original from which the copies were made. Licensee shall not remove, cover, alter, or obfuscate any copyright notices or other proprietary rights notices placed or embedded by Paragon on or in the Products. Licensee shall not have a right to, and shall not, modify, translate, adapt or create derivative works based on any Product, or merge any Product into any other program or materials. Licensee agrees not to, directly or indirectly, decompile, disassemble, reverse engineer or otherwise attempt to discover the source code or underlying ideas or algorithms of any Product. License shall not copy (except as otherwise permitted hereunder), rent, lease, distribute, assign, or otherwise transfer rights to any Product or use any Product for the benefit of a third party. 13.2. Licensee. Nothing in this Agreement shall be construed as giving Paragon any ownership interest of any kind whatsoever in, or any right to use, any data or property of Licensee. 14. Technical Disabling Measures Computer Software License Agreeement Paragon Management Systems, Inc. 7

Licensee understands and acknowledges that Paragon may have included instructions within the Software that will make the Software inaccessible without an authorized password or will render the Software inoperative in unauthorized use (including unauthorized copies), and that the Software may become inoperative in the event any attempt is made to disable these instructions. Licensee agrees that it will not make, nor will it permit any other person to make, any attempts, either direct or indirect, to disable, circumvent or otherwise render ineffective these instructions. In the event that the Software becomes inoperative as a result of a violation of this Section 14,

Licensee understands and acknowledges that Paragon may have included instructions within the Software that will make the Software inaccessible without an authorized password or will render the Software inoperative in unauthorized use (including unauthorized copies), and that the Software may become inoperative in the event any attempt is made to disable these instructions. Licensee agrees that it will not make, nor will it permit any other person to make, any attempts, either direct or indirect, to disable, circumvent or otherwise render ineffective these instructions. In the event that the Software becomes inoperative as a result of a violation of this Section 14, Paragon's warranties set forth in this Agreement will be void with respect to the Software and product affected, and Paragon shall be under no obligation to restore the operability of the Software or to provide Licensee with an operable copy of the Software. 15. Paragon Representations and Warranties; Disclaimers; Limitations of Liability 15.1. Product Operation. 15.1.1. Warranty. As used herein, the term "Nonconformity" shall mean a material design error, design defect, functional defect, programming error or anomaly, virus, data error or deviation from the Documentation. For a period of ninety (90) days commencing upon the Effective Date (the "Warranty Period"), Paragon represents and warrants to Licensee only that the Products as delivered to Licensee are or will be free from any Nonconformities, and will operate substantially in conformance with the Documentation when used in full compliance with the instructions in the Documentation. 15.1.2. Correction and Remedies. Should any reproducible Nonconformity be detected at any time during the Warranty Period, Paragon shall, at its sole expense, either (i) correct such Nonconformity within a reasonable time after Licensee gives detailed written notice of such Nonconformity to Paragon, or (ii) provide a reasonable workaround. In the event that Licensee discovers any apparent Nonconformity, Licensee shall notify Paragon in writing, specifying the nature of the claimed Nonconformity and the conditions in which it arises in sufficient detail for Paragon to reproduce the Nonconformity in as much detail as Licensee is reasonably able to provide. Licensee agrees to give Paragon reasonable cooperation, and reasonable access to Licensee's data and/or computer system, in connection with Paragon's reproduction of the Nonconformity and correction thereof. If Paragon is unable to, or otherwise does not, correct the Nonconformity or provide a workaround within a reasonable time, then Licensee may, as its sole remedy and Paragon's sole liability, terminate this Agreement in accordance with Sections 10.2 and 10.4 above and receive a refund of the license fees paid by Licensee to Paragon hereunder, provided that such refund shall not become due until Licensee has completed compliance with Section 10.4 above. 15.2. Warranty Void. The representations and warranties set forth in Section 15.1.1 above shall be void if Licensee makes any attempt to, or does: (i) modify any Product; (ii) access the Software from unauthorized workstations or computers; (iii) defeat any technical protection measures embedded in the Software; or (iv) use any Product in any other unauthorized manner. 15.3 Year 2000 Warranty. Paragon applications are year 2000 compliant and warranted on all supported platforms including without limitation the designated computer shown in Exhibit A. Paragon Applications store dates internally in integer format as seconds elapsed since January 1st 1970. For external display purposes Paragon Applications offer a long (YYYY/MM/DD) and a short date format (YY/MM/DD). The short format is default and interprets years less than 1970 as 21st century dates. The display of the long date format is dependent on a display parameter that can be set statically at startup or dynamically during run-time. Computer Software License Agreeement Paragon Management Systems, Inc. 8

15.4. DISCLAIMERS. EXCEPT FOR THE WARRANTIES SET FORTH IN SECTION 15.1.1 ABOVE, PARAGON MAKES NO WARRANTIES, EXPRESS, IMPLIED OR OTHERWISE, WITH RESPECT TO THE PRODUCTS OR ANY SERVICES, AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY,

15.4. DISCLAIMERS. EXCEPT FOR THE WARRANTIES SET FORTH IN SECTION 15.1.1 ABOVE, PARAGON MAKES NO WARRANTIES, EXPRESS, IMPLIED OR OTHERWISE, WITH RESPECT TO THE PRODUCTS OR ANY SERVICES, AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. PARAGON ALSO MAKES NO WARRANTIES REGARDING NON-INTERRUPTION OF USE OR FREEDOM FROM BUGS. LICENSEE WILL NOT MAKE ANY WARRANTIES, EXPRESS OR IMPLIED ON BEHALF OF PARAGON TO ANY THIRD PARTY RELATING TO THE PRODUCTS OR ANY SERVICES. FURHTERMORE LICENSEE SHALL NOT HAVE THE RIGHT TO PASS THROUGH ANY WARRANTIES MADE HEREUNDER. 15.5. No Combination Claims. Notwithstanding anything to the contrary contained in this Agreement, Paragon shall not be liable to Licensee for any claim of any kind arising from or based upon the combination, operation or use of any Product with any other equipment, data or programming not supplied or specified by Paragon, as set forth in Exhibit A or arising from problems peculiar to Licensee's computer system configuration, or arising from any alteration or modification of any Product not performed by Paragon. 15.6. LIMITATION OF PARAGON LIABILITY; EXCLUSION OF CERTAIN DAMAGES. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, PARAGON WILL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (I) FOR ANY AMOUNTS IN EXCESS, IN THE AGGREGATE, OF THE LICENSE FEES PAID TO PARAGON HEREUNDER, OR (II) FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES. 15.7 LIMITATION OF LICENSEE LIABILITY, EXCLUSION OR CERTAIN DAMAGES. IN NO EVENT SHALL LICENSEE BE LIABLE TO PARAGON FOR ANY SPECIAL, LIQUIDATED, PUNITIVE, CONSEQUENTIAL OR REPLACEMENT DAMAGES. 16. Indemnification 16.1. Indemnification By Paragon. If any alleged infringement of a U.S. patent, copyright, trademark or misappropriation of a trade secret is asserted by a third party against Licensee based upon its use of the Products, Licensee will not be liable for and Paragon will indemnify, and hold Licensee harmless against any loss, damage or amounts finally awarded by a court or in a settlement to such party (and reasonable attorneys' fees and costs in connection therewith), provided that Paragon shall have received from Licensee notice of said claim within ten (10) days of Licensee's receipt of such claim; further provided that Paragon shall have the right, if it so chooses, to control and direct the investigation, defense, or settlement of such claims; and further provided that Paragon shall receive the reasonable cooperation and assistance of Licensee. In the event an infringement is determined or, if required by settlement, Paragon may substitute for a Product a substantially similar product, or, alternatively, Paragon may procure for Licensee the right to continue using the Product, so as eliminate the infringement. 16.2. Correction and Remedies. In the event that any Product is, or in the reasonable judgment of Paragon is likely to become, the subject of any legal action based upon a claim of infringement, Paragon may demand that Licensee cease to use such Product until and unless there is a final judgment or other final resolution establishing Paragon's right to continue using the Product. In the event that Licensee ceases to use the Product as a result of any legal action or threatened legal action upon Paragon's demand (a "Cessation"), Paragon shall (i) modify the Product so as to Computer Software License Agreeement Paragon Management Systems, Inc. 9

eliminate the infringement, (ii) procure the right for Licensee to use the Product, or (iii) provide Licensee with functionally equivalent software to use in place of the Product, so as to eliminate the infringement. In the event that

eliminate the infringement, (ii) procure the right for Licensee to use the Product, or (iii) provide Licensee with functionally equivalent software to use in place of the Product, so as to eliminate the infringement. In the event that Paragon is not able to achieve any of the foregoing in a commercially reasonable manner or at a commercially reasonable cost, in Paragon's reasonable discretion, then except for Paragon's indemnification obligation provided in Section 16.1 above, Licensee's sole remedy, and Paragon's sole liability, with respect to a Cessation and/or with respect to any infringement by a Product, shall be to terminate this Agreement in accordance with Sections 10.2 and 10.4 above and receive a refund of the unamortized portion of the license fees paid by Licensee to Paragon hereunder, based upon three-year straight-line depreciation commencing upon the Effective Date, provided that such refund shall not become due until Licensee has completed compliance with Section 10.4 above. 16.3. Indemnification By Licensee. Paragon shall not be liable for, and Licensee, at its sole expense, will defend, indemnify and hold Paragon harmless from and with respect to, any loss or damage (including reasonable attorneys' fees and costs) incurred in connection with, any suit or proceeding brought by a third party against Paragon insofar as such suit or proceeding shall be based upon: (i) any claim incident to an infringement not resulting primarily from the Products (including any claim under any theory of product liability with respect to any product of Licensee or any component thereof); (ii) any claim with respect to the use of the Products not strictly in accordance with this Agreement; (iii) any claim arising out of or relating to any act or omission of Licensee; (iv) any claim with respect to the Products or portions or components thereof modified after shipment by Paragon to the extent the alleged infringement results from such modification, or combined with other products, processes or materials; or (v) Any claim where the allegedly infringing activity continues after Licensee is notified thereof and informed of modifications that would have avoided the alleged infringement, provided Paragon gives Licensee prompt written notice within ten (10) days of any such claim and provides Licensee such reasonable cooperation and assistance as Licensee may request from time to time in the defense thereof. Licensee shall pay any damages and costs assessed against Paragon (or paid or payable by Paragon pursuant to a settlement agreement) in connection with such a suit or proceeding, provided Paragon has given Licensee prompt written notice within ten (10) days of such claim. Licensee shall have the right, if it chooses, to control and direct the investigation, defense, or settlement of such claims. 17. Notices Except as specifically provided herein, all notices required hereunder shall be in writing and shall be given by: (i) personal delivery, in which case notice shall be deemed effective upon personal delivery; or (ii) national overnight courier service, in which case notice shall be deemed effective one (1) business day following deposit with the national overnight courier service; or (iii) U.S. mail, certified or registered, postage prepaid, return receipt requested, in which case notice shall be deemed effective three (3) days following deposit in the U.S. mail. The addresses for Computer Software License Agreeement Paragon Management Systems, Inc. 10

giving notice shall be the parties' respective addresses first set forth above, or any other address as shall be specified by a party in a written notice to the other party. 18. Miscellaneous

giving notice shall be the parties' respective addresses first set forth above, or any other address as shall be specified by a party in a written notice to the other party. 18. Miscellaneous 18.1. Entire Agreement. This Agreement (including all the exhibits hereto) constitutes the entire understanding and agreement between the parties hereto and supersedes any and all prior or contemporaneous representations, understandings and agreements between Licensee and Paragon with respect to the subject matter hereof. This Agreement shall not be modified, amended or in any way altered except by an instrument in writing signed by an officer of Paragon and by Licensee. 18.2. Amendments. All amendments or modifications of this Agreement shall be binding upon the parties so long as the same shall be in writing and executed by the parties hereto in accordance with the other terms of this Agreement regarding modifications. 18.3. Waiver. No waiver of any provision of this Agreement or any rights or obligations of either party hereunder shall be effective, except pursuant to a written instrument signed by the party or parties waiving compliance, and any such waiver shall be effective only in the specific instance and for the specific purpose stated in such writing. 18.4. Paragon Right To Publicly Identify Licensee As User. Paragon shall have the right to make reasonable reference to Licensee as a user of the Products in communications between Paragon and individual customers or potential customers and in public communications such as advertising, promotional materials and press releases. 18.5 Cooperation and Assistance. Licensee agrees to give Paragon reasonable cooperation, and reasonable access to Licensee's data and/or computer system, in connection with Paragon's performance of its obligations under this Agreement. Without limiting the generality of the foregoing, Licensee will furnish to Paragon upon Paragon's reasonable request: (i) listings of output and any other data that Paragon may require or request in order to reproduce any problem and the operating conditions under which such problem occurred; and (ii) information concerning Licensee's use of a Product and concerning Licensee's operating, manufacturing and user environment. 18.5A Exclusivity. Paragon agrees not to license the Software to Culp Inc., Mastercraft, Main Street Textiles L.P., Joan Fabrics Corp. or any of their subsidiaries for a period of six (6) months from the Effective Date of this Agreement. 18.6. No Assignment by Licensee. Licensee may not assign or transfer this Agreement or any of its rights, duties or obligations hereunder and this Agreement may not be involuntarily assigned or assigned by operation of law, without the prior written consent of Paragon, which consent may be granted or withheld by Paragon in its sole discretion, but with such consent of Paragon not to be unreasonably withheld. The sale or transfer of any portion of Licensee's business (including to any corporation owning, owned by or affiliated with Licensee), or the combination of any of Licensee's business with any other business (including with any corporation owning, owned by or affiliated with Licensee), shall be considered an assignment for purposes of this Agreement and subject to the prohibition set forth in this Section 18.6. Any attempted assignment without such consent shall be null and void. Paragon shall have the unrestricted right to assign or transfer this Agreement or any interest herein (including rights and duties of performance). This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective legal successors and permitted assigns. Computer Software License Agreeement Paragon Management Systems, Inc. 11

18.7. Independent Parties. Nothing contained herein shall be deemed to create or construed as creating a joint venture or partnership between Licensee and Paragon. Neither party is, by virtue of this Agreement or otherwise, authorized as an agent or legal representative of the other party. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party or to bind such other party in any manner. Further, it is not the intention of this Agreement or of the parties

18.7. Independent Parties. Nothing contained herein shall be deemed to create or construed as creating a joint venture or partnership between Licensee and Paragon. Neither party is, by virtue of this Agreement or otherwise, authorized as an agent or legal representative of the other party. Neither party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other party or to bind such other party in any manner. Further, it is not the intention of this Agreement or of the parties hereto to confer a third party beneficiary right of action upon any third party or entity whatsoever, and nothing set forth in this Agreement shall be construed so as to confer upon any third party or entity other than the parties hereto a right of action under this Agreement or in any manner whatsoever. 18.8. Severability of Provisions. In the event that any provision hereof is found invalid or unenforceable pursuant to judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable, and shall be enforced, according to its terms. 18.9. Force Majeure. No party hereto shall be deemed in default if its performance or obligations hereunder are delayed or become impossible or impractical by reason of any act of God, war, fire, earthquake, labor dispute, accident, civil commotion, epidemic, act of government or government agency or officers, or any other cause beyond such party's control. 18.10. Governing Law. This Agreement shall be governed by the laws and judicial decisions of the Commonwealth of Massachusetts, and the choice-of-law provisions of Massachusetts law shall not be applied to substitute the law of any other State or nation, to which jurisdiction the parties submit. 18.11. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.
Paragon Management Systems, Inc. Quaker Fabric Corporation of Fall River

Signature: _______________________ Name: ____________________________ (Please Print) Title:____________________________ Date:_____________________________ Computer Software License Agreeement Paragon Management Systems, Inc.

Signature:____________________________ Name:_________________________________ (Please Print) Title:________________________________ Date:_________________________________

12

EXHIBIT A 1. SOFTWARE Licensee is granted a Global Site License for the following Paragon Products : o Supply Chain Planner SCP o Global Strategic Planner GSP o Global Real-time ATP GRA o Material and Capacity Planner MCP o Reactive and Dynamic SchedulerRDS

EXHIBIT A 1. SOFTWARE Licensee is granted a Global Site License for the following Paragon Products : o Supply Chain Planner SCP o Global Strategic Planner GSP o Global Real-time ATP GRA o Material and Capacity Planner MCP o Reactive and Dynamic SchedulerRDS o Demand Planner PDP o Real-time Event Monitor REM o I-Collaboration Tools Java Clients and Communication Third Party Software No purchase of third party software is needed for the standard use of above Paragon Applications. 2. LICENSED FACILITIES & NUMBER OF CONCURRENT USERS Licensee has the right, subject to this License Agreement, to install any of the above Software (on single or multiple servers) as needed at any Licensee's locations for which Licensee holds a minimum interest of fifty-one percent (51%) of the voting shares, without limitation on the numbers of users or required memory size, for a three (3) year period commencing upon the execution of this Agreement. This includes sites that may be acquired by Licensee within the next three (3) year period but excludes any sites of any company that may acquire Licensee Facilities.Thereafter, additional server licenses may be purchased as outlined below in section 3. 3. LICENSE FEES & MAINTENANCE FEES License Fees: $700,000.00; $231,000.00 due upon signing of this License Agreement, $231,000.00 due March 31, 2000, $238,000.00 due May 15, 2000. Additional Software: All additional Licenses of the Software listed above in item 1of this Exhibit A may be purchased at a thirty-five percent (35%) discount from the then current list price, for a period of three (3) years from the date this contract is executed. Thereafter, Licensee shall pay for any additional servers or in facilities at the then current list prices less a thirty-five percent (35%) discount. Maintenance Fees and Support Period: Maintenance Fees are $105,000.00for the first year beginning one (1) year from the effective date. Maintenance Fees are subject to annual increases not to exceed the increase in the Consumer Price Index for the prior annual period and shall be due at twelve (12) month intervals thereafter. Maintenance fees on additional Licenses will be fifteen percent (15%) of the Licensee purchase cost. Computer Software License Agreeement Paragon Management Systems, Inc. 13

EXHIBIT B

EXHIBIT B MAINTENANCE PROCEDURES Software Support Policy The Software Support Policy covers the process and procedures surrounding the correction of defects and management of enhancements to the existing release of the software. The policy is structured so that the customer is given the highest level of responsiveness possible, while still maintaining a quality release, and efficiency in bringing new features to the market place. The policy is divided into software defect support and software enhancement support. Software Defect Support Software Defects are reported and categorized into one of five categories by the user. As progress is made on the problem or as an implementation proceeds, the category will be changed. The problems are classified as follows: Category 1 - Production system crashes or no work around is available to out of production system problem. Category 2 - Implementation system crashes or no work around is available to key implementation feature or function. Production system problem has temporary work around available, but is affecting the performance of the system. Category 3 - Implementation system has functionality not working, but temporary work around exists. Production system has satisfactory work around. Category 4 - Functionality not working, but satisfactory work around exists for key features. Category 5 - Functionality not working, but satisfactory work around exists for features that has alternative features available, or is not key to business process. Category 1 Defects are called into the support center and immediately reported to the Director of development responsible for the particular area of the product. The support center will instruct and help the client prepare the problem report and test model that shows the defect. The problem is worked on during the current workday. The support staff with the help of R&D staff works to determine a software work around. Once a work around is determined the problem is reclassified. If no workaround is possible with the installed software, then the problem remains a level 1 bug and a software fix is released in the current version of the software as soon as it can be determined and corrected. Releases can be sent to the customer by FTP. Category 2 Defects are given to the R&D support staff for corrective action as soon as the supporting documentation and sample defect model are received. If the defect is not corrected in three (3) days the problem is elevated to the attention of the R&D Development Director. Once a correction has been determined and made in the software, it is released in the current release as soon as possible to the customer. Releases can be sent to the customer by FTP. Computer Software License Agreeement Paragon Management Systems, Inc. 14

Category 3

Category 3 Defects are addressed by the support desk in three (3) working days to see if an alternate work around or feature is available. After receipt of the defect report and sample model, the defect is scheduled with the R&D department to be corrected at a time that will not impact the production environment or implementation. If the correction schedule for the defect is not met the R&D Director is notified. The release is sent to the customer in the current version, when a bug fix release is scheduled. The release date is driven based on all defects Category 3 or higher. Category 4 and Category 5 The support desk logs in the defect report along with the sample model. The R&D staff corrects the defects in a future release. The defect is scheduled based on the workload of the R&D department and the impact of the defect. The defect correction is made available in the next production release after it is corrected. Computer Software License Agreeement Paragon Management Systems, Inc. 15

FINANCIAL HIGHLIGHTS QUAKER FABRIC CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS Financial Highlights ................................ Letter to our Shareholders .......................... The Company ......................................... Selected Financial Data ............................. Financial Statements ................................ Notes to Financial Statements........................ Report of Independent Accountants ......................................... Management's Discussion and Analysis ........................................ Summary Quarterly Financial Data .................... General Information ................................. 1 2 4 12 13 17 25 26 31 32

Quaker Fabric Corporation is a leading manufacturer of woven upholstery fabrics for residential furniture markets in the United States and abroad. The company's broad product line includes over 3,000 individual patterns, and Quaker's manufacturing operations are vertically integrated, beginning with the production of yarns for use in the manufacture of its fabrics and continuing through fabric weaving and finishing. The company also sells a portion of the yarn it produces to manufacturers of home furnishings products and apparel throughout the United States.
(Dollars in thousands, except per share data) ------------------------------------------FISCAL Fiscal Percent 1999 1998 Change ------------------------------------------$250,824 $252,558 (0.7)% 8,270 13,989 (40.9)% 2,073 5,770 (64.1)% $ 0.13 63,034 62,734 127,278 $ 0.40 72,694 71,572 124,993 (67.5)% (13.3)% (12.3)% 1.8%

Net sales ............................ Operating income...................... Net income............................ Earnings per common share-diluted........................ Working capital....................... Funded debt........................... Shareholders' equity..................

FINANCIAL HIGHLIGHTS QUAKER FABRIC CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS Financial Highlights ................................ Letter to our Shareholders .......................... The Company ......................................... Selected Financial Data ............................. Financial Statements ................................ Notes to Financial Statements........................ Report of Independent Accountants ......................................... Management's Discussion and Analysis ........................................ Summary Quarterly Financial Data .................... General Information ................................. 1 2 4 12 13 17 25 26 31 32

Quaker Fabric Corporation is a leading manufacturer of woven upholstery fabrics for residential furniture markets in the United States and abroad. The company's broad product line includes over 3,000 individual patterns, and Quaker's manufacturing operations are vertically integrated, beginning with the production of yarns for use in the manufacture of its fabrics and continuing through fabric weaving and finishing. The company also sells a portion of the yarn it produces to manufacturers of home furnishings products and apparel throughout the United States.
(Dollars in thousands, except per share data) ------------------------------------------FISCAL Fiscal Percent 1999 1998 Change ------------------------------------------$250,824 $252,558 (0.7)% 8,270 13,989 (40.9)% 2,073 5,770 (64.1)% $ 0.13 63,034 62,734 127,278 $ 0.40 72,694 71,572 124,993 (67.5)% (13.3)% (12.3)% 1.8%

Net sales ............................ Operating income...................... Net income............................ Earnings per common share-diluted........................ Working capital....................... Funded debt........................... Shareholders' equity..................

1

TO OUR SHAREHOLDERS Last year was an important transition year for Quaker, as we finished laying the foundation for additional market share gains in the U.S. and continued growth of our export business by further consolidating our product leadership position and making significant headway in our efforts to build an equally strong service advantage. With a great product line and customer confidence in our service capabilities very high, all of us at Quaker share a common belief that we have built the platform needed to hit the ground running in 2000 and to position the company as the supplier of choice to the worldwide furniture industry. We were successful in generating significant top-line momentum as we moved through last year -- with fourth quarter net sales of almost $69.0 million setting a new record for us, and domestic fabric sales and yarn sales for the quarter both up almost 9% versus the comparable period of 1998. But, our fourth quarter top-line gains came

TO OUR SHAREHOLDERS Last year was an important transition year for Quaker, as we finished laying the foundation for additional market share gains in the U.S. and continued growth of our export business by further consolidating our product leadership position and making significant headway in our efforts to build an equally strong service advantage. With a great product line and customer confidence in our service capabilities very high, all of us at Quaker share a common belief that we have built the platform needed to hit the ground running in 2000 and to position the company as the supplier of choice to the worldwide furniture industry. We were successful in generating significant top-line momentum as we moved through last year -- with fourth quarter net sales of almost $69.0 million setting a new record for us, and domestic fabric sales and yarn sales for the quarter both up almost 9% versus the comparable period of 1998. But, our fourth quarter top-line gains came too late to fully make up for last year's slow start, and our 1999 financial performance as a whole was a disappointment - with net sales, at $250.8 million, essentially flat in relationship to 1998, net income at $2.1 million versus $5.8 million in 1998, and diluted EPS of $0.13 compared to $0.40 in 1998. At year-end, our book value per share was at $8.12 and our balance sheet was further strengthened -- reflecting the effort we have made to maintain tight controls over inventory levels, capital spending, operating costs, debt levels and working capital. In addition, the strong operating cash flows we generated last year allowed us to reduce our long-term debt by about $9.0 million, resulting in funded debt of approximately $63.0 million and a debt to total capitalization ratio of about 33% at year-end. We have new initiatives underway in virtually every area of the company to further improve our financial performance. Additional technology-based analytical tools are being introduced in a number of key areas to improve the quality and timeliness of our decision-making processes. We continue to have the best yarn and fabric design and styling teams in the industry - and to help us achieve our revenue objectives in every market, we have new product development efforts underway to support each of our core business segments - including the development of new softening and finishing techniques to continue responding to strong demand for fabrics with a soft "hand." We have new marketing programs in place to build our yarn sales into the home furnishings segment. We are continuing to strengthen our sales and marketing team, both in the domestic market and around the world, including new, dedicated marketing representatives in China, the U.K. and Poland -- a new sales office and showroom in the Middle East -- and a new wholly-owned subsidiary in Brazil, with both a sales and marketing as well as a warehousing and distribution component to it. And we're introducing new methods and procedures in our production areas to improve our manufacturing efficiencies, increase throughput and reduce our overall operating costs. We're confident we are well positioned to take full advantage of the continuing strength of the domestic economy and favorable U.S. demographic trends -- and this year is off to a strong start. Incoming orders during the fourth quarter of last year were up approximately 44% versus the fourth quarter of 1998. Our production backlog at year-end was up about 2

18% versus year-end 1998, despite a simultaneous reduction in our delivery lead times. And we remain committed to reaching the goals we've set for ourselves with respect to our yarn and fabric export businesses -and have clear game plans in place to do that. We have a lot of work to do this year, but an enormous amount has already been accomplished. Quaker has had many years of very solid financial performance -- and significant investments have been made throughout the company to create the opportunities we have today -- investments in hard assets and, even more importantly, investments in Quaker's intellectual capital, including the development of the company's supply chain management expertise, strong new product development capabilities and equally strong technological competencies. It is with those investments in mind and an understanding of what they mean to our potential that we remain confident we have the product, the manufacturing capacity, the service, the technical know-how and the people to get the job done. And it is our objective during 2000 to use the investments we have made in our product and service capabilities to achieve a strong financial performance for our company. As we pursue that objective, we remain deeply appreciative of your continued support -- as well as the support

18% versus year-end 1998, despite a simultaneous reduction in our delivery lead times. And we remain committed to reaching the goals we've set for ourselves with respect to our yarn and fabric export businesses -and have clear game plans in place to do that. We have a lot of work to do this year, but an enormous amount has already been accomplished. Quaker has had many years of very solid financial performance -- and significant investments have been made throughout the company to create the opportunities we have today -- investments in hard assets and, even more importantly, investments in Quaker's intellectual capital, including the development of the company's supply chain management expertise, strong new product development capabilities and equally strong technological competencies. It is with those investments in mind and an understanding of what they mean to our potential that we remain confident we have the product, the manufacturing capacity, the service, the technical know-how and the people to get the job done. And it is our objective during 2000 to use the investments we have made in our product and service capabilities to achieve a strong financial performance for our company. As we pursue that objective, we remain deeply appreciative of your continued support -- as well as the support of our associates and their continuing commitment to our shared vision.
Sincerely, Larry A. Liebenow Larry A. Liebenow President and Chief Executive Officer Sangwoo Ahn Sangwoo Ahn Chairman of the Board

3

THE COMPANY Quaker makes upholstery fabric -- great upholstery fabric. In fact, the company is one of the largest residential upholstery fabric manufacturers in the United States -- and with about 17% of our gross fabric sales made outside the U.S. -- we have a strong international presence as well. We are also the world's largest producer of chenille yarn -- and our operations are vertically integrated -- from specialty yarn manufacturing through fabric weaving and finishing. As an upholstery fabric manufacturer, our fortunes are tied to the furniture business, rather than the broader textile industry -- with overall demand levels in our business a function of general economic conditions, consumer confidence levels and population demographics. GREAT PRODUCTS We offer a broad product line that serves the entire residential furniture industry -- with our Whitaker'r' Collection fabrics offering our higher-end customers a differentiated product -- and our Quaker'TM' line designed to meet the product and pricing needs of our higher volume, mid-price and promotional-end customers. Our customer base includes more than 3,000 manufacturers of fine furniture around the world, including virtually every major domestic furniture manufacturer and over 600 fabric distributors and furniture manufacturers in more than 40 other countries. In a product-driven industry like ours, styling and design expertise is a critical success factor -- and we have one of the best design departments in the industry. In fact, our new product development expertise was acknowledged, in a very public way, by our entire industry last April when -- in a survey sponsored by one of the furniture industry's most widely-read trade publications our customers voted overwhelmingly to award us "Design Giant" status in two categories -- "Overall Design Innovation" and "Creative Use of Technology." In addition to our fabrics, we also design and manufacture specialty yarns -- and last year, we sold about $22.0 million of spun and chenille yarns to manufacturers of home furnishings and apparel products in the U.S. 4

THE COMPANY Quaker makes upholstery fabric -- great upholstery fabric. In fact, the company is one of the largest residential upholstery fabric manufacturers in the United States -- and with about 17% of our gross fabric sales made outside the U.S. -- we have a strong international presence as well. We are also the world's largest producer of chenille yarn -- and our operations are vertically integrated -- from specialty yarn manufacturing through fabric weaving and finishing. As an upholstery fabric manufacturer, our fortunes are tied to the furniture business, rather than the broader textile industry -- with overall demand levels in our business a function of general economic conditions, consumer confidence levels and population demographics. GREAT PRODUCTS We offer a broad product line that serves the entire residential furniture industry -- with our Whitaker'r' Collection fabrics offering our higher-end customers a differentiated product -- and our Quaker'TM' line designed to meet the product and pricing needs of our higher volume, mid-price and promotional-end customers. Our customer base includes more than 3,000 manufacturers of fine furniture around the world, including virtually every major domestic furniture manufacturer and over 600 fabric distributors and furniture manufacturers in more than 40 other countries. In a product-driven industry like ours, styling and design expertise is a critical success factor -- and we have one of the best design departments in the industry. In fact, our new product development expertise was acknowledged, in a very public way, by our entire industry last April when -- in a survey sponsored by one of the furniture industry's most widely-read trade publications our customers voted overwhelmingly to award us "Design Giant" status in two categories -- "Overall Design Innovation" and "Creative Use of Technology." In addition to our fabrics, we also design and manufacture specialty yarns -- and last year, we sold about $22.0 million of spun and chenille yarns to manufacturers of home furnishings and apparel products in the U.S. 4

[PHOTO] 5

[PHOTO] 6

THE COMPANY (CONTINUED) QUALITY MANUFACTURING The new equipment we have added over the past few years has given us one of the most modern production operations in the industry and the capacity we need to provide great service to our customers. All of our looms are equipped with Jacquard heads -- the most versatile fabric formation equipment on the market today -- and our newest looms are equipped with microprocessors to accelerate product changeovers. It is our Jacquard weaving equipment, combined with our chenille yarns, that allows our Jacquard products to compete effectively with almost every other type of upholstery fabric. In addition to making most of the specialty yarns we use in our fabrics, the company is also vertically integrated in terms of its fabric finishing operations -- where we have developed product advantages. Our Quaker Plush'TM' products are a good example of this. They are rich in appearance - durable -- distinctive -- and extraordinarily soft. We introduced our very first Plush products in late 1997 -- and they have been a big hit with our customers.

[PHOTO] 5

[PHOTO] 6

THE COMPANY (CONTINUED) QUALITY MANUFACTURING The new equipment we have added over the past few years has given us one of the most modern production operations in the industry and the capacity we need to provide great service to our customers. All of our looms are equipped with Jacquard heads -- the most versatile fabric formation equipment on the market today -- and our newest looms are equipped with microprocessors to accelerate product changeovers. It is our Jacquard weaving equipment, combined with our chenille yarns, that allows our Jacquard products to compete effectively with almost every other type of upholstery fabric. In addition to making most of the specialty yarns we use in our fabrics, the company is also vertically integrated in terms of its fabric finishing operations -- where we have developed product advantages. Our Quaker Plush'TM' products are a good example of this. They are rich in appearance - durable -- distinctive -- and extraordinarily soft. We introduced our very first Plush products in late 1997 -- and they have been a big hit with our customers. Since then, we have also developed a collection of washed fabrics to provide additional product choices to our upper-end customers -- and introduced additional post-finishing equipment and processes into our manufacturing operations to increase the softness of our promotional-end fabrics. To ensure that all of the yarns and fabrics we produce meet our exacting quality standards, Quaker is ISO 9001 certified on a company-wide basis - from new product design to final product shipment. GREAT SERVICE Our customers want our products fast -- and delivered on time. We offer immediate delivery on the products we have in inventory at our distribution centers in North Carolina, Mississippi, California and Mexico -- but most of our products are made to customer order. Our current lead-time is four to six weeks -- which ranks us among the best in the business. One of our most important strategic initiatives is to lock in a service advantage for ourselves. To further that objective, in 1998, we added an experienced supply chain management professional to our senior management team, and each of the functional areas at Quaker critical to "getting the right product to the right customer at the right time" reports to him. With the additional capacity we have added over the past few 7

THE COMPANY (CONTINUED) years -- and our increased emphasis on supply chain management opportunities -- we are proud to say that we have given our customers good reason to have a high degree of confidence in our delivery performance. BUSINESS STRATEGY Our objective is to produce sustained, superior growth and profitability for the company over the long-term by dominating our market. We believe that the competitive advantages we have already developed -- strengthened by the addition of a service advantage to our arsenal -- will allow us to do that. The key components of our

[PHOTO] 6

THE COMPANY (CONTINUED) QUALITY MANUFACTURING The new equipment we have added over the past few years has given us one of the most modern production operations in the industry and the capacity we need to provide great service to our customers. All of our looms are equipped with Jacquard heads -- the most versatile fabric formation equipment on the market today -- and our newest looms are equipped with microprocessors to accelerate product changeovers. It is our Jacquard weaving equipment, combined with our chenille yarns, that allows our Jacquard products to compete effectively with almost every other type of upholstery fabric. In addition to making most of the specialty yarns we use in our fabrics, the company is also vertically integrated in terms of its fabric finishing operations -- where we have developed product advantages. Our Quaker Plush'TM' products are a good example of this. They are rich in appearance - durable -- distinctive -- and extraordinarily soft. We introduced our very first Plush products in late 1997 -- and they have been a big hit with our customers. Since then, we have also developed a collection of washed fabrics to provide additional product choices to our upper-end customers -- and introduced additional post-finishing equipment and processes into our manufacturing operations to increase the softness of our promotional-end fabrics. To ensure that all of the yarns and fabrics we produce meet our exacting quality standards, Quaker is ISO 9001 certified on a company-wide basis - from new product design to final product shipment. GREAT SERVICE Our customers want our products fast -- and delivered on time. We offer immediate delivery on the products we have in inventory at our distribution centers in North Carolina, Mississippi, California and Mexico -- but most of our products are made to customer order. Our current lead-time is four to six weeks -- which ranks us among the best in the business. One of our most important strategic initiatives is to lock in a service advantage for ourselves. To further that objective, in 1998, we added an experienced supply chain management professional to our senior management team, and each of the functional areas at Quaker critical to "getting the right product to the right customer at the right time" reports to him. With the additional capacity we have added over the past few 7

THE COMPANY (CONTINUED) years -- and our increased emphasis on supply chain management opportunities -- we are proud to say that we have given our customers good reason to have a high degree of confidence in our delivery performance. BUSINESS STRATEGY Our objective is to produce sustained, superior growth and profitability for the company over the long-term by dominating our market. We believe that the competitive advantages we have already developed -- strengthened by the addition of a service advantage to our arsenal -- will allow us to do that. The key components of our strategy include: Increasing our share of the domestic fabric market Expanding our international fabric sales

THE COMPANY (CONTINUED) QUALITY MANUFACTURING The new equipment we have added over the past few years has given us one of the most modern production operations in the industry and the capacity we need to provide great service to our customers. All of our looms are equipped with Jacquard heads -- the most versatile fabric formation equipment on the market today -- and our newest looms are equipped with microprocessors to accelerate product changeovers. It is our Jacquard weaving equipment, combined with our chenille yarns, that allows our Jacquard products to compete effectively with almost every other type of upholstery fabric. In addition to making most of the specialty yarns we use in our fabrics, the company is also vertically integrated in terms of its fabric finishing operations -- where we have developed product advantages. Our Quaker Plush'TM' products are a good example of this. They are rich in appearance - durable -- distinctive -- and extraordinarily soft. We introduced our very first Plush products in late 1997 -- and they have been a big hit with our customers. Since then, we have also developed a collection of washed fabrics to provide additional product choices to our upper-end customers -- and introduced additional post-finishing equipment and processes into our manufacturing operations to increase the softness of our promotional-end fabrics. To ensure that all of the yarns and fabrics we produce meet our exacting quality standards, Quaker is ISO 9001 certified on a company-wide basis - from new product design to final product shipment. GREAT SERVICE Our customers want our products fast -- and delivered on time. We offer immediate delivery on the products we have in inventory at our distribution centers in North Carolina, Mississippi, California and Mexico -- but most of our products are made to customer order. Our current lead-time is four to six weeks -- which ranks us among the best in the business. One of our most important strategic initiatives is to lock in a service advantage for ourselves. To further that objective, in 1998, we added an experienced supply chain management professional to our senior management team, and each of the functional areas at Quaker critical to "getting the right product to the right customer at the right time" reports to him. With the additional capacity we have added over the past few 7

THE COMPANY (CONTINUED) years -- and our increased emphasis on supply chain management opportunities -- we are proud to say that we have given our customers good reason to have a high degree of confidence in our delivery performance. BUSINESS STRATEGY Our objective is to produce sustained, superior growth and profitability for the company over the long-term by dominating our market. We believe that the competitive advantages we have already developed -- strengthened by the addition of a service advantage to our arsenal -- will allow us to do that. The key components of our strategy include: Increasing our share of the domestic fabric market Expanding our international fabric sales Capitalizing on the growing demand for softer upholstery fabric Penetrating related fabric markets -- including the office furniture market, and

THE COMPANY (CONTINUED) years -- and our increased emphasis on supply chain management opportunities -- we are proud to say that we have given our customers good reason to have a high degree of confidence in our delivery performance. BUSINESS STRATEGY Our objective is to produce sustained, superior growth and profitability for the company over the long-term by dominating our market. We believe that the competitive advantages we have already developed -- strengthened by the addition of a service advantage to our arsenal -- will allow us to do that. The key components of our strategy include: Increasing our share of the domestic fabric market Expanding our international fabric sales Capitalizing on the growing demand for softer upholstery fabric Penetrating related fabric markets -- including the office furniture market, and Growing our specialty yarn sales. In every case, our approach is to emphasize the superior styling and performance of our fabrics and yarns -- and our continuing commitment to product quality and customer service. MANUFACTURING CAPACITY The new fabrics we introduced in 1996 and 1997 -- particularly our new Whitaker and Quaker Plush products - created enormous demand, and in early 1997, we began implementing a two-year, $67.0 million capacity expansion project. That expansion program was completed in 1998, and it has given us the ability to produce more than $300.0 million of yarn and fabric annually. All of the new equipment included in our 1997-98 capacity expansion program was installed at our six manufacturing facilities in the Fall River, Massachusetts area. To plan for our long-term growth, we have purchased about sixty acres of undeveloped land in Fall River -- so that, in the future, we can add discrete production "modules" at a separate facility -- as customer demand warrants -- without disruption to our existing operations. 8

[PHOTO] 9

THE COMPANY (CONTINUED) During 1999, we made important gains in several critical areas - product leadership, product innovation, supply chain management and overall service levels -- and focused significant resources on building the platform needed -- when it comes to both product and service -- to achieve our operating and financial objectives in 2000. We're confident that we have the product, the manufacturing capacity, the service, the technical expertise and the people to get the job done. And our entire staff is committed to doing just that -- because everyone at Quaker knows that what we do -- every day -- matters to our customers -- and to our shareholders. 10

[PHOTO] 9

THE COMPANY (CONTINUED) During 1999, we made important gains in several critical areas - product leadership, product innovation, supply chain management and overall service levels -- and focused significant resources on building the platform needed -- when it comes to both product and service -- to achieve our operating and financial objectives in 2000. We're confident that we have the product, the manufacturing capacity, the service, the technical expertise and the people to get the job done. And our entire staff is committed to doing just that -- because everyone at Quaker knows that what we do -- every day -- matters to our customers -- and to our shareholders. 10

[PHOTO] 11

QUAKER FABRIC CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (In thousands, except per share and per yard data) The following table sets forth certain consolidated financial and operating data of the Company for the periods indicated, which data has been derived from the Consolidated Financial Statements of the Company and the Notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants. 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 1, January 2, January 3, January 4, December 30, 2000 1999 1998 1997(1) 1995 ------------------------------------------------------------INCOME STATEMENT DATA: Net sales ................... Cost of products sold ....... Gross margin ................ Selling, general and administrative expenses .... Operating income ............ Other expenses: Interest expense, net ..... Other, net ................ Income before provision for income taxes ........... Provision for income taxes .. Net income .................. Earnings per common share(2)--basic ........... Earnings per common share(2)--diluted .......... $250,824 $252,558 $219,174 $198,856 $173,487 201,236 199,886 167,401 152,787 137,083 --------------------------------------------------------49,588 52,672 51,773 46,069 36,404 41,318 38,683 32,311 29,121 26,176 --------------------------------------------------------8,270 13,989 19,462 16,948 10,228 5,127 5,405 3,700 4,092 3,898 (46) (28) 65 77 98 --------------------------------------------------------3,189 8,612 15,697 12,779 6,232 1,116 2,842 4,584 4,217 712 --------------------------------------------------------$ 2,073 $ 5,770 $ 11,113 $ 8,562 $ 5,520 ========================================================= $ 0.13 $ 0.42 $ 0.90 $ 0.71 $ 0.46 ========================================================= $ 0.13 $ 0.40 $ 0.85 $ 0.69 $ 0.44 =========================================================

THE COMPANY (CONTINUED) During 1999, we made important gains in several critical areas - product leadership, product innovation, supply chain management and overall service levels -- and focused significant resources on building the platform needed -- when it comes to both product and service -- to achieve our operating and financial objectives in 2000. We're confident that we have the product, the manufacturing capacity, the service, the technical expertise and the people to get the job done. And our entire staff is committed to doing just that -- because everyone at Quaker knows that what we do -- every day -- matters to our customers -- and to our shareholders. 10

[PHOTO] 11

QUAKER FABRIC CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (In thousands, except per share and per yard data) The following table sets forth certain consolidated financial and operating data of the Company for the periods indicated, which data has been derived from the Consolidated Financial Statements of the Company and the Notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants. 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 1, January 2, January 3, January 4, December 30, 2000 1999 1998 1997(1) 1995 ------------------------------------------------------------INCOME STATEMENT DATA: Net sales ................... Cost of products sold ....... Gross margin ................ Selling, general and administrative expenses .... Operating income ............ Other expenses: Interest expense, net ..... Other, net ................ Income before provision for income taxes ........... Provision for income taxes .. Net income .................. Earnings per common share(2)--basic ........... Earnings per common share(2)--diluted .......... Weighted average shares outstanding(2)--basic....... Weighted average shares outstanding(2)--diluted .... $250,824 $252,558 $219,174 $198,856 $173,487 201,236 199,886 167,401 152,787 137,083 --------------------------------------------------------49,588 52,672 51,773 46,069 36,404 41,318 38,683 32,311 29,121 26,176 --------------------------------------------------------8,270 13,989 19,462 16,948 10,228 5,127 5,405 3,700 4,092 3,898 (46) (28) 65 77 98 --------------------------------------------------------3,189 8,612 15,697 12,779 6,232 1,116 2,842 4,584 4,217 712 --------------------------------------------------------$ 2,073 $ 5,770 $ 11,113 $ 8,562 $ 5,520 ========================================================= $ 0.13 $ 0.42 $ 0.90 $ 0.71 $ 0.46 ========================================================= $ 0.13 $ 0.40 $ 0.85 $ 0.69 $ 0.44 ========================================================= 15,664 13,861 12,412 12,032 12,032 ========================================================= 16,081 14,477 13,022 12,498 12,440 =========================================================

[PHOTO] 11

QUAKER FABRIC CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (In thousands, except per share and per yard data) The following table sets forth certain consolidated financial and operating data of the Company for the periods indicated, which data has been derived from the Consolidated Financial Statements of the Company and the Notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants. 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 1, January 2, January 3, January 4, December 30, 2000 1999 1998 1997(1) 1995 ------------------------------------------------------------INCOME STATEMENT DATA: Net sales ................... Cost of products sold ....... Gross margin ................ Selling, general and administrative expenses .... Operating income ............ Other expenses: Interest expense, net ..... Other, net ................ Income before provision for income taxes ........... Provision for income taxes .. Net income .................. Earnings per common share(2)--basic ........... Earnings per common share(2)--diluted .......... Weighted average shares outstanding(2)--basic....... Weighted average shares outstanding(2)--diluted .... $250,824 $252,558 $219,174 $198,856 $173,487 201,236 199,886 167,401 152,787 137,083 --------------------------------------------------------49,588 52,672 51,773 46,069 36,404 41,318 38,683 32,311 29,121 26,176 --------------------------------------------------------8,270 13,989 19,462 16,948 10,228 5,127 5,405 3,700 4,092 3,898 (46) (28) 65 77 98 --------------------------------------------------------3,189 8,612 15,697 12,779 6,232 1,116 2,842 4,584 4,217 712 --------------------------------------------------------$ 2,073 $ 5,770 $ 11,113 $ 8,562 $ 5,520 ========================================================= $ 0.13 $ 0.42 $ 0.90 $ 0.71 $ 0.46 ========================================================= $ 0.13 $ 0.40 $ 0.85 $ 0.69 $ 0.44 ========================================================= 15,664 13,861 12,412 12,032 12,032 ========================================================= 16,081 14,477 13,022 12,498 12,440 =========================================================

SELECTED OPERATING DATA: EBITDA(3).................... Depreciation and amortization Net capital expenditures(4).. Unit volume (in yards) ...... Average gross sales price per yard .................. BALANCE SHEET DATA: Working capital ............. Total assets ................ Long-term debt, net of current portion, and capital leases ........ Stockholders' equity ........

$ 21,518 13,202 19,030 48,036 $ 4.84

$ 24,633 10,616 41,487 50,397 $ 4.54

$ 28,479 8,511 25,484 44,976 $ 4.23

$ 24,569 7,437 11,979 43,552 $ 4.05

$ 16,821 6,462 13,165 40,761 $ 3.88

$ 63,034 237,482

$ 72,694 234,766

$ 42,630 178,088

$ 32,620 148,832

$ 30,780 138,117

61,672 127,278

69,011 124,993

52,772 82,313

42,235 66,572

45,118 57,850

QUAKER FABRIC CORPORATION AND SUBSIDIARIES SELECTED FINANCIAL DATA (In thousands, except per share and per yard data) The following table sets forth certain consolidated financial and operating data of the Company for the periods indicated, which data has been derived from the Consolidated Financial Statements of the Company and the Notes thereto, which have been audited by Arthur Andersen LLP, independent public accountants. 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 1, January 2, January 3, January 4, December 30, 2000 1999 1998 1997(1) 1995 ------------------------------------------------------------INCOME STATEMENT DATA: Net sales ................... Cost of products sold ....... Gross margin ................ Selling, general and administrative expenses .... Operating income ............ Other expenses: Interest expense, net ..... Other, net ................ Income before provision for income taxes ........... Provision for income taxes .. Net income .................. Earnings per common share(2)--basic ........... Earnings per common share(2)--diluted .......... Weighted average shares outstanding(2)--basic....... Weighted average shares outstanding(2)--diluted .... $250,824 $252,558 $219,174 $198,856 $173,487 201,236 199,886 167,401 152,787 137,083 --------------------------------------------------------49,588 52,672 51,773 46,069 36,404 41,318 38,683 32,311 29,121 26,176 --------------------------------------------------------8,270 13,989 19,462 16,948 10,228 5,127 5,405 3,700 4,092 3,898 (46) (28) 65 77 98 --------------------------------------------------------3,189 8,612 15,697 12,779 6,232 1,116 2,842 4,584 4,217 712 --------------------------------------------------------$ 2,073 $ 5,770 $ 11,113 $ 8,562 $ 5,520 ========================================================= $ 0.13 $ 0.42 $ 0.90 $ 0.71 $ 0.46 ========================================================= $ 0.13 $ 0.40 $ 0.85 $ 0.69 $ 0.44 ========================================================= 15,664 13,861 12,412 12,032 12,032 ========================================================= 16,081 14,477 13,022 12,498 12,440 =========================================================

SELECTED OPERATING DATA: EBITDA(3).................... Depreciation and amortization Net capital expenditures(4).. Unit volume (in yards) ...... Average gross sales price per yard .................. BALANCE SHEET DATA: Working capital ............. Total assets ................ Long-term debt, net of current portion, and capital leases ........ Stockholders' equity ........

$ 21,518 13,202 19,030 48,036 $ 4.84

$ 24,633 10,616 41,487 50,397 $ 4.54

$ 28,479 8,511 25,484 44,976 $ 4.23

$ 24,569 7,437 11,979 43,552 $ 4.05

$ 16,821 6,462 13,165 40,761 $ 3.88

$ 63,034 237,482

$ 72,694 234,766

$ 42,630 178,088

$ 32,620 148,832

$ 30,780 138,117

61,672 127,278

69,011 124,993

52,772 82,313

42,235 66,572

45,118 57,850

(1) The fiscal year ended January 4, 1997 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. Earnings per share and weighted average shares outstanding reflect a three-for-two stock split paid on June 19, 1998. (3) Represents income from continuing operations plus interest, taxes, depreciation, amortization and other noncash expenses. Although the Company has measured EBITDA consistently among the periods presented, EBITDA as a measure of liquidity is not governed by GAAP and, as such, may not be comparable to other similarly titled measures of other companies. The Company believes that EBITDA, while providing useful information, should not be considered in isolation or as an alternative to either (i) operating income determined in accordance with GAAP as an indicator of operating performance or (ii) cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. (4) Net capital expenditures reflects assets acquired by purchase and capital lease. 12

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
JANUARY 1, January 2, 2000 1999 -----------------------ASSETS Current assets: Cash ................................................................. Accounts receivable, less reserves of $1,755 and $1,939 at January 1, 2000 and January 2, 1999, respectively, for doubtful accounts and sales returns and allowances .......... Inventories .......................................................... Prepaid and refundable income taxes .................................. Prepaid expenses and other current assets ............................ Total current assets .................................... Property, plant and equipment, net of accumulated depreciation and amortization of $60,442 and $47,514 at January 1, 2000 and January 2, 1999, respectively ........................................ Other assets: Goodwill, net of amortization ........................................ Deferred financing costs, net ........................................ Other assets ......................................................... Total assets ............................................ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt .................................... Current portion of capital lease obligations ......................... Accounts payable ..................................................... Accrued expenses ..................................................... Total current liabilities ............................... Long-term debt, less current portion ...................................... Capital lease obligations, net of current portion ......................... Deferred income taxes ..................................................... Other long-term liabilities ............................................... Commitments and contingencies (Note 7) Redeemable preferred stock: Series A convertible, $.01 par value per share, liquidation preference $1,000 per share, 50,000 shares authorized, none issued .............. Stockholders' equity: Common stock, $.01 par value per share, 20,000,000 shares authorized; 15,681,649 and 15,646,551 shares issued and outstanding at January 1, 2000 and January 2, 1999, respectively................ Additional paid-in capital ....................................... Retained earnings ................................................ Other accumulated comprehensive loss .............................

$

332

$

432

41,191 40,661 40,890 46,594 1,563 1,311 7,440 6,791 -----------------------91,416 95,789

138,509

132,420

5,818 6,011 293 252 1,446 294 -----------------------$237,482 $234,766 ========================

36 $ 700 1,026 1,861 19,983 13,754 7,337 6,780 -----------------------28,382 23,095 59,000 65,536 2,672 3,475 17,504 15,874 2,646 1,793

$

--

--

157 156 83,554 83,410 44,915 42,842 (1,348) (1,415) ------------------------

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
JANUARY 1, January 2, 2000 1999 -----------------------ASSETS Current assets: Cash ................................................................. Accounts receivable, less reserves of $1,755 and $1,939 at January 1, 2000 and January 2, 1999, respectively, for doubtful accounts and sales returns and allowances .......... Inventories .......................................................... Prepaid and refundable income taxes .................................. Prepaid expenses and other current assets ............................ Total current assets .................................... Property, plant and equipment, net of accumulated depreciation and amortization of $60,442 and $47,514 at January 1, 2000 and January 2, 1999, respectively ........................................ Other assets: Goodwill, net of amortization ........................................ Deferred financing costs, net ........................................ Other assets ......................................................... Total assets ............................................ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt .................................... Current portion of capital lease obligations ......................... Accounts payable ..................................................... Accrued expenses ..................................................... Total current liabilities ............................... Long-term debt, less current portion ...................................... Capital lease obligations, net of current portion ......................... Deferred income taxes ..................................................... Other long-term liabilities ............................................... Commitments and contingencies (Note 7) Redeemable preferred stock: Series A convertible, $.01 par value per share, liquidation preference $1,000 per share, 50,000 shares authorized, none issued .............. Stockholders' equity: Common stock, $.01 par value per share, 20,000,000 shares authorized; 15,681,649 and 15,646,551 shares issued and outstanding at January 1, 2000 and January 2, 1999, respectively................ Additional paid-in capital ....................................... Retained earnings ................................................ Other accumulated comprehensive loss ............................. Total stockholders' equity .............................. Total liabilities and stockholders' equity ..............

$

332

$

432

41,191 40,661 40,890 46,594 1,563 1,311 7,440 6,791 -----------------------91,416 95,789

138,509

132,420

5,818 6,011 293 252 1,446 294 -----------------------$237,482 $234,766 ========================

36 $ 700 1,026 1,861 19,983 13,754 7,337 6,780 -----------------------28,382 23,095 59,000 65,536 2,672 3,475 17,504 15,874 2,646 1,793

$

--

--

157 156 83,554 83,410 44,915 42,842 (1,348) (1,415) -----------------------127,278 124,993 -----------------------$237,482 $234,766 ========================

The accompanying notes are an integral part of these consolidated financial statements. 13

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands,

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts)
Fiscal Year Ended -------------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 -------------------------------------$250,824 $252,558 $219,174 201,236 199,886 167,401 -------------------------------------49,588 52,672 51,773 41,318 38,683 32,311 -------------------------------------8,270 13,989 19,462 5,127 5,405 3,700 (46) (28) 65 -------------------------------------3,189 8,612 15,697 1,116 2,842 4,584 -------------------------------------$ 2,073 $ 5,770 $ 11,113 -------------------------------------$ 0.13 $ 0.42 $ 0.90 ====================================== $ 0.13 $ 0.40 $ 0.85 ====================================== 15,664 13,861 12,412 ====================================== 16,081 14,477 13,022 ======================================

Net sales ................................ Cost of products sold .................... Gross margin ............................. Selling, general and administrative expenses ................ Operating income ......................... Other expenses: Interest expense, net .................. Other, net ............................. Income before provision for income taxes ........................ Provision for income taxes ............... Net income ............................... Earnings per common share -- basic ....... Earnings per common share -- diluted ..... Weighted average shares outstanding -- basic ................... Weighted average shares outstanding -- diluted .................

The accompanying notes are an integral part of these consolidated financial statements. 14

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except share amounts)
Other Additional Accumulated Tota Common Paid-in Retained Comprehensive Stockho Stock Capital Earnings Loss Equi ----------------------------------------------------------$120 $41,908 $25,959 $(1,415) $ 66,57 -571 --57 --11,113 -11,11 5 3,262 --3,26

Balance, January 4, 1997 ............... Stock option compensation expense .... Net income ........................... Proceeds from sale of 450,000 shares of common stock, net of expenses . Proceeds from stock options exercised, including tax benefits ...........

1 789 --79 ------------------------------------------------------------

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except share amounts)
Other Additional Accumulated Tota Common Paid-in Retained Comprehensive Stockho Stock Capital Earnings Loss Equi ----------------------------------------------------------$120 $41,908 $25,959 $(1,415) $ 66,57 -571 --57 --11,113 -11,11 5 3,262 --3,26

Balance, January 4, 1997 ............... Stock option compensation expense .... Net income ........................... Proceeds from sale of 450,000 shares of common stock, net of expenses . Proceeds from stock options exercised, including tax benefits ........... Balance, January 3, 1998 ................ Net income ........................... Proceeds from sale of 3,000,000 shares of common stock, net of expenses . Proceeds from stock options exercised, including tax benefits ........... Balance, January 2, 1999 ................ Net income ........................... Proceeds from stock options exercised, including tax benefits ........... Foreign translation adjustment ....... BALANCE, JANUARY 1, 2000 ................

1 789 --79 -----------------------------------------------------------$126 $46,530 $37,072 $(1,415) $ 82,31 --5,770 -5,77 30 36,454 --36,48

-426 --42 -----------------------------------------------------------$156 $83,410 $42,842 $(1,415) $124,99 --2,073 -2,07 1 144 --145 ---67 6 -----------------------------------------------------------$157 $83,554 $44,915 $(1,348) $127,27 ============================================================

The accompanying notes are an integral part of these consolidated financial statements. 15

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Fiscal Year Ended -------------------------------------JANUARY 1, January 2, J 2000 1999 -------------------------------------Cash flows from operating activities: Net income .................................................. Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization ............................. Stock option compensation expense ......................... Deferred income taxes ..................................... Changes in operating assets and liabilitiesAccounts receivable ....................................... Inventories ................................................ Prepaid expenses and other assets ......................... Accounts payable and accrued expenses ..................... Other long-term liabilities ............................... Net cash provided by (used in) operating activities...... Cash flows from investing activities: Net purchases of property, plant and equipment .............. $ 2,073 $ 5,770

13,210 -1,630

10,616 -2,103

(530) (7,665) 5,704 (14,418) (2,053) (3,476) 6,786 (4,789) 853 46 ----------------------------------27,673 (11,813) ----------------------------------(18,630) (41,487)

QUAKER FABRIC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Fiscal Year Ended -------------------------------------JANUARY 1, January 2, J 2000 1999 -------------------------------------Cash flows from operating activities: Net income .................................................. Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization ............................. Stock option compensation expense ......................... Deferred income taxes ..................................... Changes in operating assets and liabilitiesAccounts receivable ....................................... Inventories ................................................ Prepaid expenses and other assets ......................... Accounts payable and accrued expenses ..................... Other long-term liabilities ............................... Net cash provided by (used in) operating activities...... Cash flows from investing activities: Net purchases of property, plant and equipment .............. Net cash used for investing activities .................. Cash flows from financing activities: Proceeds from issuance of long-term debt .................... Net borrowings (repayments) of debt ......................... Repayments of capital lease obligations ..................... Capitalization of financing costs ........................... Proceeds from issuance of common stock, net of offering expenses ......................................... Proceeds from exercise of common stock options .............. Net cash provided by (used in) financing activities ..... Effect of exchange rates on cash ................................. Net increase (decrease) in cash .................................. Cash, beginning of period ........................................ Cash, end of period .............................................. Supplemental disclosure of cash flow information: Cash paid forInterest .......................................... Income taxes ...................................... Supplemental disclosure of non-cash investing and financing activities: Capital lease obligations incurred for new equipment ........ $ 2,073 $ 5,770

13,210 -1,630

10,616 -2,103

(530) (7,665) 5,704 (14,418) (2,053) (3,476) 6,786 (4,789) 853 46 ----------------------------------27,673 (11,813) ----------------------------------(18,630) (41,487) ----------------------------------(18,630) (41,487) -----------------------------------(7,200) (2,038) (109) -17,805 (1,167) (50)

-36,484 145 426 ----------------------------------(9,202) 53,498 59 -----------------------------------(100) 198 432 234 ----------------------------------$ 332 $ 432 ===================================

$ 5,093 $ 291

$ 5,290 $ 2,055

$

400

--

The accompanying notes are an integral part of these consolidated financial statements. 16

QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars 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

QUAKER FABRIC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars 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 significant intercompany balances and transactions have been eliminated. (b) FISCAL YEAR The Company's fiscal year ends on the Saturday nearest to January 1 of each year. The fiscal years ended January 1, 2000, January 2, 1999, and January 3, 1998 contain 52 weeks. (c) INVENTORIES Inventories are stated at the lower of cost or market and include materials, labor and overhead. Cost is determined by the last-in, first-out (LIFO) method. Inventories consist of the following at January 1, 2000 and January 2, 1999:
JANUARY 1 January 2, 2000 1999 --------------------$19,380 $20,137 9,761 12,439 11,809 14,297 -----------------40,950 46,873 (60) (279) -----------------$40,890 $46,594 ==================

Raw materials ............................... Work-in-process.............................. Finished goods............................... Inventory at FIFO.......................... LIFO reserve................................. Inventory at LIFO..........................

(d) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. The Company provides for depreciation on property and equipment on a straight-line basis over their estimated useful lives as follows:
Buildings and improvements ......................... Machinery and equipment ............................ Furniture and fixtures ............................. Motor vehicles ..................................... Leasehold Improvements ............................. 32-39 2-20 5-10 4-5 1-15 years years years years years

Maintenance and repairs are charged to operations as incurred. When equipment and improvements are sold or otherwise disposed of, the assets 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. (e) GOODWILL Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is amortized on a straight-line basis over 40 years. Accumulated amortization is $1,893 and $1,700 at January 1, 2000 and January 2, 1999, respectively. Amortization expense was approximately $193 for both years. The Company's policy is to evaluate annually whether the useful life of goodwill should be revised or whether the remaining balance has been impaired. When evaluating impairment, the Company uses an estimate of future operating income over the remaining goodwill life to measure whether the goodwill is recoverable.

(f) INCOME TAXES Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. (g) DEFERRED FINANCING COSTS Financing costs related to certain loans and capital leases have been capitalized and are being amortized over the life of the related loan or capital lease. Accumulated amortization was $526 and $458 as of January 1, 2000 and January 2, 1999, respectively. (h) EARNINGS PER COMMON SHARE Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. For diluted income 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 1, January 2, January 3, 2000 1999 1998 ----------------------------------Weighted average common shares outstanding ......... 15,664 13,861 12,412 Dilutive potential common shares ................... 417 616 610 -----------------------------Weighted average common shares outstanding and dilutive potential common shares ............. 16,081 14,477 13,022 -----------------------------Antidilutive options ............................... 1,052 239 -==============================

17

(i) FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's Mexican operations are translated at period-end exchange rates, and statement of income accounts are translated at weighted average exchange rates. In Fiscal 1999, the resulting translation adjustments are included in the consolidated balance sheet as a separate component of equity, "Other Accumulated Comprehensive Loss," and foreign currency transactions gains and losses are included in the consolidated statements of income. In 1997 and 1998, Mexico was designated a "highly inflationary country" and accordingly, the Company recorded translation gains and losses in the income statement rather than as a separate component of stockholders' equity. (j) IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically assesses its long-lived assets for impairment whenever events or changes in business circumstances indicate the carrying value may not be recoverable. Based on its review, the Company does not believe that any material impairment of its long-lived assets has occurred. (k) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The presentation 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 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 deferred taxes, inventory reserves, accounts receivable reserves, and accruals. (l) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, current maturities of long term debt, accounts payable, and long term debt. The carrying amount of these financial instruments as of January 1, 2000 approximates fair value due to the short term nature and terms of these instruments and also the rates available to the Company for debt with similar terms and remaining maturities. (m) COMPREHENSIVE INCOME In accordance with Statement of Financial Accounting Standards (SFAS) No. 130, the Company's "Other Comprehensive Items" consist of foreign currency translation gains or losses.

(i) FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's Mexican operations are translated at period-end exchange rates, and statement of income accounts are translated at weighted average exchange rates. In Fiscal 1999, the resulting translation adjustments are included in the consolidated balance sheet as a separate component of equity, "Other Accumulated Comprehensive Loss," and foreign currency transactions gains and losses are included in the consolidated statements of income. In 1997 and 1998, Mexico was designated a "highly inflationary country" and accordingly, the Company recorded translation gains and losses in the income statement rather than as a separate component of stockholders' equity. (j) IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically assesses its long-lived assets for impairment whenever events or changes in business circumstances indicate the carrying value may not be recoverable. Based on its review, the Company does not believe that any material impairment of its long-lived assets has occurred. (k) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The presentation 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 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 deferred taxes, inventory reserves, accounts receivable reserves, and accruals. (l) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist mainly of cash and cash equivalents, accounts receivable, current maturities of long term debt, accounts payable, and long term debt. The carrying amount of these financial instruments as of January 1, 2000 approximates fair value due to the short term nature and terms of these instruments and also the rates available to the Company for debt with similar terms and remaining maturities. (m) COMPREHENSIVE INCOME In accordance with Statement of Financial Accounting Standards (SFAS) No. 130, the Company's "Other Comprehensive Items" consist of foreign currency translation gains or losses. Foreign currency translation gains during 1999 were $67. No foreign currency translation gains or losses were reported in Fiscal 1998 or 1997. The Company's comprehensive income for Fiscal 1999, 1998 and 1997 was $2,140, $5,770, and $11,113, respectively. (n) RECLASSIFICATIONS Certain reclassifications have been made to the prior years' financial statements to conform to the presentation of the Fiscal 1999 Financial Statements. (o) STOCK SPLIT On May 28, 1998, the Board of Directors declared a three-for-two stock split effected by means of a stock dividend paid on June 19, 1998 to stockholders of record on June 8, 1998. All share and per share amounts give effect to such stock split. (p) REVENUE RECOGNITION Revenue is recognized upon the shipment of product. (q) SELF INSURANCE The Company is primarily self insured for worker's compensation and health benefits. Self insurance liabilities are based upon claims filed and estimates of claims incurred but not reported. 3 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
JANUARY 1, January 2, 2000 1999 ------------------------------$ 3,320 $ 236 21,231 19,983 3,775 2,165 167,698 151,966 1,782 1,736 356 333 789 3,515

Land ............................................. Buildings and improvements ....................... Leasehold improvements ........................... Machinery and equipment .......................... Furniture and fixtures ........................... Motor vehicles ................................... Construction in progress .........................

Less -- Accumulated depreciation and amortization.

-----------------------198,951 179,934 60,442 47,514 -----------------------$138,509 $132,420 ========================

18

Included in machinery and equipment is equipment under capital lease of $8,183 as of January 1, 2000 and $10,919 as of January 2, 1999. The Company is depreciating the equipment over economic useful lives of 15 to 20 years, which is greater than the lease terms, because the Company intends to exercise its option to purchase the equipment at the end of the initial lease terms at fair market value. 4 ACCRUED EXPENSES AND TAXES Accrued expenses and taxes consisted of the following:
JANUARY 1, JANUARY 2, 2000 1999 -----------------------------$1,280 $1,100 740 1,193 5,317 4,487 ---------------------$7,337 $6,780 ======================

Accrued workers' compensation Accrued medical insurance Other accrued expenses, including taxes

5 DEBT Debt consisted of the following:
JANUARY 1, January 2, 2000 1999 --------------------------$30,000 $30,000 15,000 15,000 14,000 20,500

7.18% Senior Notes due October 10, 2007 7.09% Senior Notes due October 10, 2005 Unsecured credit facility payable to several banks 9.73% Note payable in monthly principal and interest installments of $81 through August 1999, secured by certain equipment Note payable in monthly principal installments of $6 plus interest from August 1998 to July 2000, interest at prime plus 1% (9.50% at January 1, 2000 and 8.75% at January 2, 1999), secured by certain equipment Less -- Current portion

--

628

36 108 59,036 66,236 36 700 ----------------------$59,000 $65,536 =======================

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 maturity, at the Company's option, subject to a yield maintenance premium, as defined. Required principal payments of the Senior Notes are as follows:
7.18% NOTE $ ---15,000 7.09% NOTE $ 5,000 5,000 5,000 --

October October October October

10, 10, 10, 10,

2003 2004 2005 2006

................. ................. ................. .................

Included in machinery and equipment is equipment under capital lease of $8,183 as of January 1, 2000 and $10,919 as of January 2, 1999. The Company is depreciating the equipment over economic useful lives of 15 to 20 years, which is greater than the lease terms, because the Company intends to exercise its option to purchase the equipment at the end of the initial lease terms at fair market value. 4 ACCRUED EXPENSES AND TAXES Accrued expenses and taxes consisted of the following:
JANUARY 1, JANUARY 2, 2000 1999 -----------------------------$1,280 $1,100 740 1,193 5,317 4,487 ---------------------$7,337 $6,780 ======================

Accrued workers' compensation Accrued medical insurance Other accrued expenses, including taxes

5 DEBT Debt consisted of the following:
JANUARY 1, January 2, 2000 1999 --------------------------$30,000 $30,000 15,000 15,000 14,000 20,500

7.18% Senior Notes due October 10, 2007 7.09% Senior Notes due October 10, 2005 Unsecured credit facility payable to several banks 9.73% Note payable in monthly principal and interest installments of $81 through August 1999, secured by certain equipment Note payable in monthly principal installments of $6 plus interest from August 1998 to July 2000, interest at prime plus 1% (9.50% at January 1, 2000 and 8.75% at January 2, 1999), secured by certain equipment Less -- Current portion

--

628

36 108 59,036 66,236 36 700 ----------------------$59,000 $65,536 =======================

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 maturity, at the Company's option, subject to a yield maintenance premium, as defined. Required principal payments of the Senior Notes are as follows:
7.18% NOTE 7.09% NOTE $ -$ 5,000 -5,000 -5,000 15,000 -15,000 --------------------------$30,000 $15,000 ==========================

October October October October October

10, 10, 10, 10, 10,

2003 2004 2005 2006 2007

................. ................. ................. ................. .................

Under the terms of the unsecured credit facility (the "Credit Agreement"), the Company may borrow up to $70,000 through December 31, 2002. Advances made under the Credit Agreement bear interest at either the prime rate or the Eurodollar

(Libor) rate plus an "Applicable Margin." 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 (Libor) advances may range from 0.75% to 1.625%. 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 1, 2000, the commitment fee is 0.375% of the unused portion of the Credit Agreement which was $56,000. As of January 1, 2000, the Company had $14,000 outstanding under the Credit Agreement at an effective interest rate of 8.08%. As of January 2, 1999, the Company had $20,500 outstanding under the Credit Agreement at an effective interest rate of 6.45%. 19

The Company is required to comply with a number of affirmative and negative covenants under the Credit Agreement and the Senior Notes. Among other things, the Credit Agreement and the Senior Notes require the Company to satisfy certain financial tests and ratios (including interest coverage ratios, leverage ratios, and net worth requirements). The Credit Agreement and the Senior 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. As of January 1, 2000, the Company is in compliance with all debt covenants. As of January 1, 2000, total debt principal payments for each of the next five fiscal years and thereafter are as follows:
2000 .............................................. 2001 .............................................. 2002 .............................................. 2003 .............................................. 2004 .............................................. Thereafter ........................................ $ 36 -14,000 5,000 5,000 35,000 ------$59,036 =======

6 INCOME TAXES Income before provision for income taxes consists of:
Fiscal Year Ended ----------------------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 ----------------------------------------------$3,039 $8,818 $14,471 150 (206) 1,226 ----------------------------------------------$3,189 $8,612 $15,697 ===============================================

Domestic ....................................... Foreign ........................................

The following is a summary of the provision (benefit) for income taxes:
Fiscal Year Ended ----------------------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 ----------------------------------------------Federal Current ............................. Deferred ............................ $ (955) $ 597 $2,544 1,690 1,814 1,341 ---------------------------------------------$ 735 $2,411 $3,885 ---------------------------------------------$ 220 52 $ 360 71 $ 410 (195)

State Current ............................. Deferred ............................

The Company is required to comply with a number of affirmative and negative covenants under the Credit Agreement and the Senior Notes. Among other things, the Credit Agreement and the Senior Notes require the Company to satisfy certain financial tests and ratios (including interest coverage ratios, leverage ratios, and net worth requirements). The Credit Agreement and the Senior 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. As of January 1, 2000, the Company is in compliance with all debt covenants. As of January 1, 2000, total debt principal payments for each of the next five fiscal years and thereafter are as follows:
2000 .............................................. 2001 .............................................. 2002 .............................................. 2003 .............................................. 2004 .............................................. Thereafter ........................................ $ 36 -14,000 5,000 5,000 35,000 ------$59,036 =======

6 INCOME TAXES Income before provision for income taxes consists of:
Fiscal Year Ended ----------------------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 ----------------------------------------------$3,039 $8,818 $14,471 150 (206) 1,226 ----------------------------------------------$3,189 $8,612 $15,697 ===============================================

Domestic ....................................... Foreign ........................................

The following is a summary of the provision (benefit) for income taxes:
Fiscal Year Ended ----------------------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 ----------------------------------------------Federal Current ............................. Deferred ............................ $ (955) $ 597 $2,544 1,690 1,814 1,341 ---------------------------------------------$ 735 $2,411 $3,885 ---------------------------------------------220 $ 360 $ 410 52 71 (195) ---------------------------------------------$ 272 $ 431 $ 215 ---------------------------------------------97 $ 72 $ 60 12 (72) 424 ---------------------------------------------$ 109 $ -$ 484 ---------------------------------------------$1,116 $2,842 $4,584 ============================================== $ $

State Current ............................. Deferred ............................

Foreign Current ............................. Deferred ............................

20

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 1, January 2, January 3, 2000 1999 1998 --------------------------------Computed expected tax provision ............................... $ 1,084 $ 2,928 $ 5,494 Increase in taxes resulting from: Amortization of goodwill ............................... 67 67 67 State and foreign income taxes, net of federal benefit.. 390 456 893 Decrease in taxes resulting from: State investment tax credits, net of federal provision.. (612) (1,124) (813) Reversal of tax reserves no longer required ............ --(1,081) Foreign sales corporation benefit ...................... (275) (476) (485) Valuation allowance .................................... 473 959 488 Other .................................................. (11) 32 21 ------------------------------$ 1,116 $ 2,842 $ 4,584 ===============================

At January 1, 2000, the Company had net operating loss carryforwards of approximately $9,425 for federal income tax purposes available to offset future taxable income which have been benefitted for financial reporting purposes. These carryforwards expire from 2003 to 2020. Additionally, the Company has available for use $1,271 of federal tax credit carryforwards, of which approximately $494 expire from 2000 to 2017. The remaining tax credit carryforwards have no expiration dates. The timing and use of the net operating loss carryforwards and the tax credit carryforwards are limited under applicable federal income tax legislation. In addition, the Company has approximately $4,300 of state investment tax credit carryforwards. These tax credits have no expiration date, however, the timing and use of these credits is limited under applicable state income tax legislation. The significant items comprising the domestic deferred tax asset/liability are as follows:
JANUARY 1, 2000 January 2, 1999 --------------------------------------------CURRENT LONG-TERM Current Long-term --------------------------------------------Assets: Net operating loss carryforwards ......... Tax credit carryforwards ................. Receivable reserves ...................... Other .................................... Total assets ........................ Valuation allowance ................. Total assets, net of valuation allowance.. Liabilities: Property basis differences ............... Inventory basis differences .............. Total liabilities ................... Net assets (liabilities) .......... $ 270 $ 3,170 $ 270 $ 355 324 3,819 322 3,792 255 -137 -222 2,243 880 2,233 --------------------------------------------$ 1,071 $ 9,232 $ 1,609 $ 6,380 -(1,880) -(1,447) --------------------------------------------$ 1,071 $ 7,352 $ 1,609 $ 4,933 --------------------------------------------$ -$(24,856) $ -$(20,807) (694) -(1,002) ---------------------------------------------$ (694) $(24,856) $ (1,002) $(20,807) --------------------------------------------$ 377 $(17,504) $ 607 $(15,874) =============================================

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 foreign deferred tax asset/liability are as follows:

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 1, January 2, January 3, 2000 1999 1998 --------------------------------Computed expected tax provision ............................... $ 1,084 $ 2,928 $ 5,494 Increase in taxes resulting from: Amortization of goodwill ............................... 67 67 67 State and foreign income taxes, net of federal benefit.. 390 456 893 Decrease in taxes resulting from: State investment tax credits, net of federal provision.. (612) (1,124) (813) Reversal of tax reserves no longer required ............ --(1,081) Foreign sales corporation benefit ...................... (275) (476) (485) Valuation allowance .................................... 473 959 488 Other .................................................. (11) 32 21 ------------------------------$ 1,116 $ 2,842 $ 4,584 ===============================

At January 1, 2000, the Company had net operating loss carryforwards of approximately $9,425 for federal income tax purposes available to offset future taxable income which have been benefitted for financial reporting purposes. These carryforwards expire from 2003 to 2020. Additionally, the Company has available for use $1,271 of federal tax credit carryforwards, of which approximately $494 expire from 2000 to 2017. The remaining tax credit carryforwards have no expiration dates. The timing and use of the net operating loss carryforwards and the tax credit carryforwards are limited under applicable federal income tax legislation. In addition, the Company has approximately $4,300 of state investment tax credit carryforwards. These tax credits have no expiration date, however, the timing and use of these credits is limited under applicable state income tax legislation. The significant items comprising the domestic deferred tax asset/liability are as follows:
JANUARY 1, 2000 January 2, 1999 --------------------------------------------CURRENT LONG-TERM Current Long-term --------------------------------------------Assets: Net operating loss carryforwards ......... Tax credit carryforwards ................. Receivable reserves ...................... Other .................................... Total assets ........................ Valuation allowance ................. Total assets, net of valuation allowance.. Liabilities: Property basis differences ............... Inventory basis differences .............. Total liabilities ................... Net assets (liabilities) .......... 270 $ 3,170 $ 270 $ 355 324 3,819 322 3,792 255 -137 -222 2,243 880 2,233 --------------------------------------------$ 1,071 $ 9,232 $ 1,609 $ 6,380 -(1,880) -(1,447) --------------------------------------------$ 1,071 $ 7,352 $ 1,609 $ 4,933 --------------------------------------------$ -$(24,856) $ -$(20,807) (694) -(1,002) ---------------------------------------------$ (694) $(24,856) $ (1,002) $(20,807) --------------------------------------------$ 377 $(17,504) $ 607 $(15,874) ============================================= $

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 foreign deferred tax asset/liability are as follows:
JANUARY 1, 2000 January 2, 1999

--------------------------------------CURRENT LONG-TERM Current Long-term --------------------------------------Assets: Net operating loss carryforwards ........ Liabilities: Inventory ............................... $ $ 216 (580) $ $ --$ $ 144 (569) $ $ ---

Net assets (liabilities) ............

--------------------------------------$ (364) $ -$ (425) $ -========================================

21

7 COMMITMENTS AND CONTINGENCIES (a) LITIGATION AND ENVIRONMENTAL CLEANUP MATTERS The Company, its directors, and certain of its officers were named as defendants in several putative class action lawsuits filed during September and October 1998 relating to the Company's public offering of 3.2 million shares of common stock that was completed on August 4, 1998 (the "Offering"). These cases were consolidated and an amended class action complaint (the "Complaint") was subsequently filed on September 13, 1999. The Company and the individual defendants have moved to dismiss the Complaint, and the court has reserved decision following the oral argument heard on the matter in January 2000. While the plaintiffs seek unspecified damages and rescission for alleged material misrepresentations and omissions in the registration statement and prospectus for the Offering, the Company does not believe that this matter will have a material adverse effect on its operations or financial condition. The Company is engaged in certain routine environmental cleanup matters. In the opinion of management, the costs associated with these cleanup matters are not expected to materially affect the Company's financial condition, results of operations or liquidity. (b) LEASES The Company leases certain facilities and equipment under operating lease agreements and capital lease agreements that expire at various dates from the current year to the year 2005. As of January 1, 2000, the aggregate minimum future commitments under leases are as follows:
CAPITAL OPERATING Total LEASES LEASES Leases -----------------------------$1,293 $1,990 $3,283 2,114 1,647 3,761 725 1,372 2,097 -1,211 1,211 -159 159 -6 6 ----------------------------$4,132 $6,385 $10,517 ================== 434 -----$3,698 1,026 -----$2,672 ======

2000 2001 2002 2003 2004 2005

....................................... ....................................... ....................................... ....................................... ....................................... .......................................

Less -- Amount representing interest .......

Less -- Current portion ....................

Rent expense for operating leases for the years ended January 1, 2000, January 2, 1999 and January 3, 1998 was $3,050, $1,982, and $953, respectively. (c) 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 1, 2000 and January 2, 1999, the Company has issued or agreed to issue letters of credit totaling $0 and $86, respectively.

7 COMMITMENTS AND CONTINGENCIES (a) LITIGATION AND ENVIRONMENTAL CLEANUP MATTERS The Company, its directors, and certain of its officers were named as defendants in several putative class action lawsuits filed during September and October 1998 relating to the Company's public offering of 3.2 million shares of common stock that was completed on August 4, 1998 (the "Offering"). These cases were consolidated and an amended class action complaint (the "Complaint") was subsequently filed on September 13, 1999. The Company and the individual defendants have moved to dismiss the Complaint, and the court has reserved decision following the oral argument heard on the matter in January 2000. While the plaintiffs seek unspecified damages and rescission for alleged material misrepresentations and omissions in the registration statement and prospectus for the Offering, the Company does not believe that this matter will have a material adverse effect on its operations or financial condition. The Company is engaged in certain routine environmental cleanup matters. In the opinion of management, the costs associated with these cleanup matters are not expected to materially affect the Company's financial condition, results of operations or liquidity. (b) LEASES The Company leases certain facilities and equipment under operating lease agreements and capital lease agreements that expire at various dates from the current year to the year 2005. As of January 1, 2000, the aggregate minimum future commitments under leases are as follows:
CAPITAL OPERATING Total LEASES LEASES Leases -----------------------------$1,293 $1,990 $3,283 2,114 1,647 3,761 725 1,372 2,097 -1,211 1,211 -159 159 -6 6 ----------------------------$4,132 $6,385 $10,517 ================== 434 -----$3,698 1,026 -----$2,672 ======

2000 2001 2002 2003 2004 2005

....................................... ....................................... ....................................... ....................................... ....................................... .......................................

Less -- Amount representing interest .......

Less -- Current portion ....................

Rent expense for operating leases for the years ended January 1, 2000, January 2, 1999 and January 3, 1998 was $3,050, $1,982, and $953, respectively. (c) 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 1, 2000 and January 2, 1999, the Company has issued or agreed to issue letters of credit totaling $0 and $86, respectively. (d) EMPLOYMENT CONTRACT 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, 2002, subject to an automatic three-year extension, unless terminated by the Company upon one year's prior notice. 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 1, 2000, Mr. Liebenow would have been entitled to receive $1,800 (in the event of a voluntary termination, termination for cause or for any other reason). During 1999, the Company entered into change-incontrol agreements with the Company's corporate officers. These agreements provide certain benefits to the Company's officers in the event their employment with the Company is terminated as a result of a change-incontrol as defined. The maximum contingent liability related to the change-in-control agreements is approximately

$2.5 million. 8 STOCK OPTIONS In 1993, the Company adopted the 1993 Stock Option Plan for Company officers, and options to purchase a total of 953,692 shares of common stock were granted to certain officers that year. The difference of $1,186 between the fair market value at the grant date and the exercise price of these options was charged to compensation expense over five years. During 1996, additional options to purchase 141,000 shares of common stock were granted to certain officers 22

under the 1993 Stock Option Plan. The difference of $348 between the fair market value at the grant date and the exercise price of these options was charged to compensation expense over five years. The 1993 Stock Option Plan provided that all options granted under the plan would vest over five years and be exercisable for ten years except in the event of a change in control, in which case all outstanding options granted pursuant to the plan would vest immediately. Upon the consummation of the Company's public offering of common stock in 1997, all previously unvested options granted under the 1993 Stock Option Plan became immediately exercisable in full, and the amount of unamortized compensation expense of $480 was recorded as a charge to the statement of income at that time. During 1996, the Company adopted the 1996 Stock Option Plan for key middle managment employees. Options are granted at not less than fair market value, vest over a five year period, and are exercisable for ten years. A total of 600,000 shares are reserved under this plan, and options to purchase 319,500 shares have been granted. During 1997, the Company adopted the 1997 Stock Option Plan. Options to purchase 700,000 shares of common stock have been granted to certain officers under the 1997 Stock Option Plan. These options vest over five years, and are exercisable for ten years. A total of 750,000 shares are reserved under this plan. During 1995, options to purchase 7,500 shares of common stock were granted to a director of the Company. During 1997, options to purchase an aggregate of 15,000 shares of common stock were granted to two directors of the Company. During 1998, options to purchase an aggregate of 30,000 shares of common stock were granted to three directors of the Company. All options granted to directors in 1995, 1997 and 1998 vest over three years and are exercisable for ten years. During 1999, options to purchase an aggregate of 30,000 shares of common stock were granted to three directors of the Company. These options vested immediately and are exercisable for ten years. During 1997, the Company recorded $571 as stock option compensation expense. PRO FORMA STOCK-BASED COMPENSATION EXPENSE SFAS No. 123, "Accounting for StockBased Compensation," sets forth a fair-value-based method of recognizing stock-based compensation expense. As permitted under SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards granted in Fiscal 1999, Fiscal 1998 and Fiscal 1997 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:
1999 1998 1997 -------------------------Net income As reported ........................... Pro forma ............................. Earnings per common share -- basic As reported ........................... Pro forma ............................. Earnings per common share -- diluted As reported ........................... Pro forma ............................. $ 2,073 $ 1,139 $ $ $ $ 0.13 0.07 0.13 0.07 $ 5,770 $ 5,082 $ $ $ $ 0.42 0.37 0.40 0.35 $11,113 $10,788 $ $ $ $ 0.90 0.87 0.85 0.83

under the 1993 Stock Option Plan. The difference of $348 between the fair market value at the grant date and the exercise price of these options was charged to compensation expense over five years. The 1993 Stock Option Plan provided that all options granted under the plan would vest over five years and be exercisable for ten years except in the event of a change in control, in which case all outstanding options granted pursuant to the plan would vest immediately. Upon the consummation of the Company's public offering of common stock in 1997, all previously unvested options granted under the 1993 Stock Option Plan became immediately exercisable in full, and the amount of unamortized compensation expense of $480 was recorded as a charge to the statement of income at that time. During 1996, the Company adopted the 1996 Stock Option Plan for key middle managment employees. Options are granted at not less than fair market value, vest over a five year period, and are exercisable for ten years. A total of 600,000 shares are reserved under this plan, and options to purchase 319,500 shares have been granted. During 1997, the Company adopted the 1997 Stock Option Plan. Options to purchase 700,000 shares of common stock have been granted to certain officers under the 1997 Stock Option Plan. These options vest over five years, and are exercisable for ten years. A total of 750,000 shares are reserved under this plan. During 1995, options to purchase 7,500 shares of common stock were granted to a director of the Company. During 1997, options to purchase an aggregate of 15,000 shares of common stock were granted to two directors of the Company. During 1998, options to purchase an aggregate of 30,000 shares of common stock were granted to three directors of the Company. All options granted to directors in 1995, 1997 and 1998 vest over three years and are exercisable for ten years. During 1999, options to purchase an aggregate of 30,000 shares of common stock were granted to three directors of the Company. These options vested immediately and are exercisable for ten years. During 1997, the Company recorded $571 as stock option compensation expense. PRO FORMA STOCK-BASED COMPENSATION EXPENSE SFAS No. 123, "Accounting for StockBased Compensation," sets forth a fair-value-based method of recognizing stock-based compensation expense. As permitted under SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards granted in Fiscal 1999, Fiscal 1998 and Fiscal 1997 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:
1999 1998 1997 -------------------------Net income As reported ........................... Pro forma ............................. Earnings per common share -- basic As reported ........................... Pro forma ............................. Earnings per common share -- diluted As reported ........................... Pro forma ............................. $ 2,073 $ 1,139 $ $ $ $ 0.13 0.07 0.13 0.07 $ 5,770 $ 5,082 $ $ $ $ 0.42 0.37 0.40 0.35 $11,113 $10,788 $ $ $ $ 0.90 0.87 0.85 0.83

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 fair value on the grant date of each option granted was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
1999 1998 1997 -----------------------------------61.00% 60.13% 44.83% 5.38% 4.99% 6.69% 7.00 YEARS 5.98 years 6.48 years

Volatility ............................... Risk-free interest rate .................. Expected life of options .................

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. 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. 23

STOCK OPTION ACTIVITY A summary of the Company's stock option activity is as follows:
1999 1998 1997 ----------------------------------------------------------------WEIGHTED Weighted Weig NUMBER AVG. EXERCISE Number Avg. Exercise Number Avg. E OF SHARES PRICE of Shares Price of Shares Pr ----------------------------------------------------------------Options outstanding, beginning of year ................. Granted ............................. Exercised ........................... Forfeited ........................... Expired ............................. Options outstanding, end of year .... Options exercisable ................. Options available for grant ......... Weighted average fair value per share of options granted 1,836,430 145,500 -(6,000) -1,975,930 1,250,430 314,900 -$ 5.71 $ 5.08 -$12.93 -$ 5.64 $ 3.69 -$ 3.33 1,549,080 379,000 (37,350) (54,300) -1,836,430 1,004,080 124,400 -$ 4.74 $10.03 $ 4.09 $ 10.2 -$ 5.71 $ 2.33 -$ 5.56 1,092,311 586,500 (119,381) (10,350) -1,549,080 912,705 270,300 -$ $ $ $ $ $

$

The following table summarizes information for options outstanding and exercisable at January 1, 2000:
----------------------------------------------------------------------------------Weighted Weighted Weighted Average. Average Average Range of Options Exercise Remaining Options Exercise Prices Outstanding Price Life Exercisable Price ----------------------------------------------------------------------------------$ 0.80 555,539 $0.80 3.28 555,539 $ 0.80 $ 1.37 151,956 1.37 4.35 151,956 1.37 $ 12.75 166,435 2.75 4.30 166,435 2.75 $ 4.25-5.50 242,300 4.99 8.62 64,600 5.25 $ 7.25-10.25 736,700 9.22 7.75 283,300 9.56 $13.00-17.67 123,000 16.53 8.44 28,600 16.04 ----------------------------------------------------------1,975,930 $5.64 6.09 1,975,930 $ 3.69 ===========================================================

9 SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which the Company has adopted. Segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company operates as a single business segment consisting of sales of two products, upholstery fabric and yarn. Management evaluates the Company's financial performance in the aggregate and allocates the Company's resources without distinguishing between yarn and fabric products. Export sales from the United States to unaffiliated customers by major geographical area were as follows:
FISCAL YEAR ENDED ---------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 ----------------------------------

STOCK OPTION ACTIVITY A summary of the Company's stock option activity is as follows:
1999 1998 1997 ----------------------------------------------------------------WEIGHTED Weighted Weig NUMBER AVG. EXERCISE Number Avg. Exercise Number Avg. E OF SHARES PRICE of Shares Price of Shares Pr ----------------------------------------------------------------Options outstanding, beginning of year ................. Granted ............................. Exercised ........................... Forfeited ........................... Expired ............................. Options outstanding, end of year .... Options exercisable ................. Options available for grant ......... Weighted average fair value per share of options granted 1,836,430 145,500 -(6,000) -1,975,930 1,250,430 314,900 -$ 5.71 $ 5.08 -$12.93 -$ 5.64 $ 3.69 -$ 3.33 1,549,080 379,000 (37,350) (54,300) -1,836,430 1,004,080 124,400 -$ 4.74 $10.03 $ 4.09 $ 10.2 -$ 5.71 $ 2.33 -$ 5.56 1,092,311 586,500 (119,381) (10,350) -1,549,080 912,705 270,300 -$ $ $ $ $ $

$

The following table summarizes information for options outstanding and exercisable at January 1, 2000:
----------------------------------------------------------------------------------Weighted Weighted Weighted Average. Average Average Range of Options Exercise Remaining Options Exercise Prices Outstanding Price Life Exercisable Price ----------------------------------------------------------------------------------$ 0.80 555,539 $0.80 3.28 555,539 $ 0.80 $ 1.37 151,956 1.37 4.35 151,956 1.37 $ 12.75 166,435 2.75 4.30 166,435 2.75 $ 4.25-5.50 242,300 4.99 8.62 64,600 5.25 $ 7.25-10.25 736,700 9.22 7.75 283,300 9.56 $13.00-17.67 123,000 16.53 8.44 28,600 16.04 ----------------------------------------------------------1,975,930 $5.64 6.09 1,975,930 $ 3.69 ===========================================================

9 SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which the Company has adopted. Segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company operates as a single business segment consisting of sales of two products, upholstery fabric and yarn. Management evaluates the Company's financial performance in the aggregate and allocates the Company's resources without distinguishing between yarn and fabric products. Export sales from the United States to unaffiliated customers by major geographical area were as follows:
FISCAL YEAR ENDED ---------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 ---------------------------------$14,600 $ 15,500 $ 11,900 5,500 9,000 11,300 1,200 2,300 1,800 6,600 4,500 2,900 5,400 4,100 4,600 ---------------------------------$33,300 $ 35,400 $ 32,500 ==================================

North America (excluding USA) ........... Middle East ............................. South America ........................... Europe .................................. All other areas .........................

Gross sales by product category are as follows:
FISCAL YEAR ENDED ---------------------------------JANUARY 1, January 2, January 3, 2000 1999 1998 ---------------------------------$232,553 $228,704 $190,183 22,430 30,116 32,979 ---------------------------------$254,983 $258,820 $223,162 ==================================

Fabric ................................ Yarn ..................................

24

10 401(k) PLAN 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 $10,000) 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. 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. 11 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative's fair value be recognized currently in income unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of income and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133," shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 cannot be applied retroactively. SFAS No. 133, as amended, must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the effect of adopting SFAS No. 133 on its consolidated financial statements and has not determined the timing or method of its adoption of the statement. However, the Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO QUAKER FABRIC CORPORATION: We have audited the accompanying consolidated balance sheets of Quaker Fabric Corporation (a Delaware corporation) and subsidiaries as of January 1, 2000 and January 2, 1999, and the related statements of income, changes in stockholders' equity and cash flows the years then ended. 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.

10 401(k) PLAN 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 $10,000) 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. 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. 11 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. This statement requires that changes in the derivative's fair value be recognized currently in income unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement of income and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133," shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 cannot be applied retroactively. SFAS No. 133, as amended, must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the effect of adopting SFAS No. 133 on its consolidated financial statements and has not determined the timing or method of its adoption of the statement. However, the Company does not expect the adoption of this statement to have a material impact on its financial position or results of operations. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO QUAKER FABRIC CORPORATION: We have audited the accompanying consolidated balance sheets of Quaker Fabric Corporation (a Delaware corporation) and subsidiaries as of January 1, 2000 and January 2, 1999, and the related statements of income, changes in stockholders' equity and cash flows the years then ended. 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 audits 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 January 1, 2000 and January 2, 1999, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP

Boston, Massachusetts February 10, 2000 25

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 throughout the United States. During the second half of 1997, record order rates for the Company's fabric and yarn products caused the Company's production backlog and delivery lead times to increase significantly. To respond to this growing demand for the Company's products and to support its new market development efforts, Quaker began implementing an aggressive capacity expansion plan involving the expenditure of approximately $67.0 million during 1997 and 1998. Period costs associated with the implementation of this plan, including the cost of identifying and preparing the space needed to house the new equipment included in the plan, costs related to the hiring and training of the more than 350 new employees needed to run this new equipment, and some deterioration in the Company's productivity and internal quality performance resulting from the addition of these new employees adversely affected the Company's margin performance during the third and fourth quarters of 1997. In addition, heavy overtime expenses incurred to meet customer demand despite existing capacity constraints, also put pressure on the Company's margins during the second half of 1997. These cost factors continued to exert downward pressure on the Company's margins during 1998, but their effect had begun to diminish by the end of the second quarter. The Company's margins were beginning to improve and Quaker's financial performance during the first half was reasonably strong. However, production delays encountered during the Company's implementation of a new management information system during the third quarter of 1998, coupled with a significant decline in the Company's new order rate during the latter part of the year, resulted in a disappointing second half. Management believes the decline in the Company's order rate at that time was attributable to a number of facturs, including order rate adjustments made by Quaker's customers later in the year to account for improvements in the Company's delivery lead times. International economic conditions, which continued to weaken throughout the year, hurt Quaker's fabric exports, as well as its yarn sales business, which faced heavy competition from imported apparel products from the Far East during 1998. The Company's new order rate continued to demonstrate weakness during the early part of 1999, but strengthened significantly throughout the year, leading to record revenues during the fourth quarter of 1999 and a fourth quarter order rate which was up 44% in comparison to the same period of 1998. In addition, the Company continued to make substantial improvements in its overall service levels in 1999, and management believes its delivery lead times are now among the best in the industry. Quaker also further strengthened its balance sheet in 1999, reducing its long-term debt by nearly $9 million and thereby achieving a debt to total capitalization ratio of about 33% at year-end.

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 throughout the United States. During the second half of 1997, record order rates for the Company's fabric and yarn products caused the Company's production backlog and delivery lead times to increase significantly. To respond to this growing demand for the Company's products and to support its new market development efforts, Quaker began implementing an aggressive capacity expansion plan involving the expenditure of approximately $67.0 million during 1997 and 1998. Period costs associated with the implementation of this plan, including the cost of identifying and preparing the space needed to house the new equipment included in the plan, costs related to the hiring and training of the more than 350 new employees needed to run this new equipment, and some deterioration in the Company's productivity and internal quality performance resulting from the addition of these new employees adversely affected the Company's margin performance during the third and fourth quarters of 1997. In addition, heavy overtime expenses incurred to meet customer demand despite existing capacity constraints, also put pressure on the Company's margins during the second half of 1997. These cost factors continued to exert downward pressure on the Company's margins during 1998, but their effect had begun to diminish by the end of the second quarter. The Company's margins were beginning to improve and Quaker's financial performance during the first half was reasonably strong. However, production delays encountered during the Company's implementation of a new management information system during the third quarter of 1998, coupled with a significant decline in the Company's new order rate during the latter part of the year, resulted in a disappointing second half. Management believes the decline in the Company's order rate at that time was attributable to a number of facturs, including order rate adjustments made by Quaker's customers later in the year to account for improvements in the Company's delivery lead times. International economic conditions, which continued to weaken throughout the year, hurt Quaker's fabric exports, as well as its yarn sales business, which faced heavy competition from imported apparel products from the Far East during 1998. The Company's new order rate continued to demonstrate weakness during the early part of 1999, but strengthened significantly throughout the year, leading to record revenues during the fourth quarter of 1999 and a fourth quarter order rate which was up 44% in comparison to the same period of 1998. In addition, the Company continued to make substantial improvements in its overall service levels in 1999, and management believes its delivery lead times are now among the best in the industry. Quaker also further strengthened its balance sheet in 1999, reducing its long-term debt by nearly $9 million and thereby achieving a debt to total capitalization ratio of about 33% at year-end. Management believes that a relatively strong U.S. economy will continue to provide the Company with a business environment which is generally favorable to the achievement of Quaker's growth and marketing objectives. Uncertainty surrounding the global economic environment, however, is expected to continue to depress the Company's revenues from its yarn and export businesses over the near term.

QUARTERLY OPERATING RESULTS The following table sets forth certain condensed unaudited consolidated statements of income data for the eight fiscal quarters ended January 1, 2000, as well as certain data expressed as a percentage of the Company's total net sales for the periods indicated:
Fiscal 1999 Fiscal 1998 -----------------------------------------------------------------------FIRST SECOND THIRD FOURTH First Second Thi QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quar -----------------------------------------------------------------------(in thousands, except per share data) Net sales ......................... $56,140 $64,463 $61,305 $68,916 $62,730 $64,075 Gross margin....................... 10,337 13,127 12,332 13,792 13,591 14,594 Gross margin percentage............ 18.4% 20.4% 20.1% 20.0% 21.7% 22.8% Operating income................... 684 2,463 2,500 2,623 4,193 5,376 Operating income percentage........ 1.2% 3.8% 4.1% 3.8% 6.7% 8.4% Income before provision for income taxes..................... $ (587) $ 1,243 $ 1,243 $ 1,290 $ 2,978 $ 3,911 --------------------------------------------------------------------Net income......................... $ (382) $ 809 $ 808 $ 838 $ 1,936 $ 2,542 ===================================================================== Earnings per common share-basic.... $ (0.02) $ 0.05 $ 0.05 $ 0.05 $ 0.15 $ 0.20 ===================================================================== Earnings per common share-diluted.. $ (0.02) $ 0.05 $ 0.05 $ 0.05 $ 0.15 $ 0.19 =====================================================================

(1) 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. 26

The Company follows industry practice by closing its operating facilities for a one-to-two week period during July of each year. In 1999, this shutdown period, and the resulting effect on sales, occurred in the third fiscal quarter. In 1997 and 1998, the first week of the annual shutdown period occurred in the second fiscal quarter. PRODUCT MIX By increasing the number of higher margin, middle to better-end fabrics in its line and by expanding the number of fabrics it offers at each price point and in each styling category, the Company has added new manufacturers of higher-end furniture to its customer base and positioned itself as a full service supplier of Jacquard and plain woven fabrics to all of its customers. The following table sets forth certain information relating to the changes that have occurred in the Company's product mix and the average gross sales price of its fabrics since 1997:
FISCAL YEAR -----------------------------------------------------------------1999 1998 1997 -----------------------------------------------------------------PERCENT Percent Percent OF of of AMOUNT SALES Amount Sales Amount Sales -----------------------------------------------------------------(in thousands, except per yard data) Gross fabric sales (dollars): Promotional-end fabrics ......... Middle to better-end fabrics .... Gross fabric sales ............ Gross fabric sales (yards): Promotional-end fabrics ......... Middle to better-end fabrics .... Gross fabric sales ............ Average gross sales price per yard: Promotional-end fabrics ......... Middle to better-end fabrics .... Average per yard--all fabrics.. $ 44,542 19.2% $ 54,913 24.00% $ 57,395 30.2% 188,011 80.8 173,791 76.0 132,788 69.8 ------------------------------------------------------------------$232,553 100% $228,704 100.0% $190,183 100.0% ------------------------------------------------------------------12,877 26.8% 15,951 31.7% 16,822 37.4% 35,159 73.2 34,446 68.3 28,154 62.6 ------------------------------------------------------------------48,036 100.0% 50,397 100.0% 44,976 100.0% ------------------------------------------------------------------$ 3.46 5.35 4.84 $ 3.44 5.05 4.54 $ 3.41 4.72 4.23

The Company follows industry practice by closing its operating facilities for a one-to-two week period during July of each year. In 1999, this shutdown period, and the resulting effect on sales, occurred in the third fiscal quarter. In 1997 and 1998, the first week of the annual shutdown period occurred in the second fiscal quarter. PRODUCT MIX By increasing the number of higher margin, middle to better-end fabrics in its line and by expanding the number of fabrics it offers at each price point and in each styling category, the Company has added new manufacturers of higher-end furniture to its customer base and positioned itself as a full service supplier of Jacquard and plain woven fabrics to all of its customers. The following table sets forth certain information relating to the changes that have occurred in the Company's product mix and the average gross sales price of its fabrics since 1997:
FISCAL YEAR -----------------------------------------------------------------1999 1998 1997 -----------------------------------------------------------------PERCENT Percent Percent OF of of AMOUNT SALES Amount Sales Amount Sales -----------------------------------------------------------------(in thousands, except per yard data) Gross fabric sales (dollars): Promotional-end fabrics ......... Middle to better-end fabrics .... Gross fabric sales ............ Gross fabric sales (yards): Promotional-end fabrics ......... Middle to better-end fabrics .... Gross fabric sales ............ Average gross sales price per yard: Promotional-end fabrics ......... Middle to better-end fabrics .... Average per yard--all fabrics.. $ 44,542 19.2% $ 54,913 24.00% $ 57,395 30.2% 188,011 80.8 173,791 76.0 132,788 69.8 ------------------------------------------------------------------$232,553 100% $228,704 100.0% $190,183 100.0% ------------------------------------------------------------------12,877 26.8% 15,951 31.7% 16,822 37.4% 35,159 73.2 34,446 68.3 28,154 62.6 ------------------------------------------------------------------48,036 100.0% 50,397 100.0% 44,976 100.0% ------------------------------------------------------------------$ 3.46 5.35 4.84 $ 3.44 5.05 4.54 $ 3.41 4.72 4.23

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 Mexico City, Mexico distribution center. 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 1997:
FISCAL YEAR --------------------------------------------------------------1999 1998 1997 --------------------------------------------------------------PERCENT Percent Percent OF of of AMOUNT SALES Amount Sales Amount Sales --------------------------------------------------------------(in thousands) Gross fabric sales: Domestic sales .................. $193,376 83.2% $187,231 81.9% $150,525 79.1% Foreign sales(1) ................ 39,177 16.8 41,473 18.1 39,658 20.9 --------------------------------------------------------------Gross fabric sales ........ $232,553 100.0% $228,704 100.0% $190,183 100.0% ===============================================================

(1) Foreign sales consists of both direct exports from the United States as well as sales from the Company's Mexico City distribution center. RESULTS OF OPERATIONS FISCAL 1999 COMPARED TO FISCAL 1998 Net Sales. Net sales for 1999 decreased $1.8 million, or

0.7%, to $250.8 million from $252.6 million in 1998. Gross fabric sales and gross yarn sales were lower during the period. Gross fabric sales decreased due to a decline in foreign fabric sales. Gross fabric sales within the United States increased 3.3%, to $193.4 million in 1999 from $187.2 million in 1998. Foreign sales decreased 5.5%, to $39.2 million in 1999 from $41.5 million in 1998. This decrease was due to lower sales in Mexico and other international markets important to the Company. Gross yarn sales decreased 25.5%, to $22.4 million in 1999 from $30.1 million in 1998, due primarily to weakness in the domestic apparel market caused by an increase in imported yarn and apparel products. The gross volume of fabric sold decreased 4.7%, to 48.0 million yards in 1999 from 50.4 million yards in 1998. The average gross sales price per yard increased 6.6%, to $4.84 in 1999 from $4.54 in 1998. The increase was principally due to a product shift to more middle to 27

better-end fabrics. The Company sold 2.1% more yards of middle to better-end fabrics and 19.3% fewer yards of promotional-end fabrics in 1999 than in 1998. The average gross sales price per yard of middle to better-end fabrics increased by 5.9%, to $5.35 in 1999 from $5.05 in 1998. The average gross sales price per yard of promotional-end fabrics increased by 0.6%, to $3.46 in 1999 from $3.44 in 1998. Gross Margin. The gross margin percentage for Fiscal 1999 decreased to 19.8% as compared to 20.9% for Fiscal 1998. The decrease in the gross margin percentage was primarily due to an increase in the Company's fixed overhead expenses and a decrease in the Company's unit sales volume. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $41.3 million in 1999 from $38.7 million in 1998 due to increases in labor and fringes and sampling expenses associated with the Company's efforts to increase sales. Selling, general and administrative expenses as a percentage of net sales were 16.5% in 1999 and 15.4% in 1998. Interest Expense, Net. Interest expense decreased to $5.1 million in 1999 from $5.4 million in 1998 primarily due to lower senior debt levels. Effective Tax Rate. The effective tax rate increased to 35.0% in 1999 from 33.0% in 1998. See Note 6 of Notes to Consolidated Financial Statements included elsewhere in this report. FISCAL 1998 COMPARED TO FISCAL 1997 Net Sales. Net sales for 1998 increased $33.4 million, or 15.2%, to $252.6 million from $219.2 million in 1997. Gross fabric sales were higher while gross yarn sales were lower during the period. Gross fabric sales increased due to increases in both domestic and foreign fabric sales. Gross fabric sales within the United States increased 24.4%, to $187.2 million in 1998 from $150.5 million in 1997. Foreign sales increased 4.6%, to $41.5 million in 1998 from $39.7 million in 1997. This increase was due to improved sales in Canada as well as increased penetration of other international markets. Gross yarn sales decreased 8.7%, to $30.1 million in 1998 from $33.0 million in 1997. The gross volume of fabric sold increased 12.1%, to 50.4 million yards in 1998 from 45.0 million yards in 1997. The average gross sales price per yard increased 7.3%, to $4.54 in 1998 from $4.23 in 1997. The increase was principally due to a product shift to more middle to better-end fabrics. The Company sold 22.3% more yards of middle to better-end fabrics and 5.2% fewer yards of promotional-end fabrics in 1998 than in 1997. The average gross sales price per yard of middle to better-end fabrics increased by 7.0%, to $5.05 in 1998 from $4.72 in 1997. The average gross sales price per yard of promotional-end fabrics increased by 0.9%, to $3.44 in 1998 from $3.41 in 1997. Gross Margin. The gross margin percentage for the first half of Fiscal 1998 decreased to 22.2% as compared to 24.7% for the first half of 1997. The decrease in the gross margin percentage was due to 1.) lower operating efficiencies and other period costs associated with a two-year capacity expansion plan, which the Company began implementing in 1997, and 2.) heavy overtime expenses associated with operating almost all of the Company's manufacturing areas on a six and one-half day per week schedule to meet customer demand. For the second half of Fiscal 1998, the gross margin percentage was 19.5% as compared to 22.6% during the second half of 1997. This decrease was due to 1.) systems-related issues which depressed the Company's production rates during the third quarter of 1998,

better-end fabrics. The Company sold 2.1% more yards of middle to better-end fabrics and 19.3% fewer yards of promotional-end fabrics in 1999 than in 1998. The average gross sales price per yard of middle to better-end fabrics increased by 5.9%, to $5.35 in 1999 from $5.05 in 1998. The average gross sales price per yard of promotional-end fabrics increased by 0.6%, to $3.46 in 1999 from $3.44 in 1998. Gross Margin. The gross margin percentage for Fiscal 1999 decreased to 19.8% as compared to 20.9% for Fiscal 1998. The decrease in the gross margin percentage was primarily due to an increase in the Company's fixed overhead expenses and a decrease in the Company's unit sales volume. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $41.3 million in 1999 from $38.7 million in 1998 due to increases in labor and fringes and sampling expenses associated with the Company's efforts to increase sales. Selling, general and administrative expenses as a percentage of net sales were 16.5% in 1999 and 15.4% in 1998. Interest Expense, Net. Interest expense decreased to $5.1 million in 1999 from $5.4 million in 1998 primarily due to lower senior debt levels. Effective Tax Rate. The effective tax rate increased to 35.0% in 1999 from 33.0% in 1998. See Note 6 of Notes to Consolidated Financial Statements included elsewhere in this report. FISCAL 1998 COMPARED TO FISCAL 1997 Net Sales. Net sales for 1998 increased $33.4 million, or 15.2%, to $252.6 million from $219.2 million in 1997. Gross fabric sales were higher while gross yarn sales were lower during the period. Gross fabric sales increased due to increases in both domestic and foreign fabric sales. Gross fabric sales within the United States increased 24.4%, to $187.2 million in 1998 from $150.5 million in 1997. Foreign sales increased 4.6%, to $41.5 million in 1998 from $39.7 million in 1997. This increase was due to improved sales in Canada as well as increased penetration of other international markets. Gross yarn sales decreased 8.7%, to $30.1 million in 1998 from $33.0 million in 1997. The gross volume of fabric sold increased 12.1%, to 50.4 million yards in 1998 from 45.0 million yards in 1997. The average gross sales price per yard increased 7.3%, to $4.54 in 1998 from $4.23 in 1997. The increase was principally due to a product shift to more middle to better-end fabrics. The Company sold 22.3% more yards of middle to better-end fabrics and 5.2% fewer yards of promotional-end fabrics in 1998 than in 1997. The average gross sales price per yard of middle to better-end fabrics increased by 7.0%, to $5.05 in 1998 from $4.72 in 1997. The average gross sales price per yard of promotional-end fabrics increased by 0.9%, to $3.44 in 1998 from $3.41 in 1997. Gross Margin. The gross margin percentage for the first half of Fiscal 1998 decreased to 22.2% as compared to 24.7% for the first half of 1997. The decrease in the gross margin percentage was due to 1.) lower operating efficiencies and other period costs associated with a two-year capacity expansion plan, which the Company began implementing in 1997, and 2.) heavy overtime expenses associated with operating almost all of the Company's manufacturing areas on a six and one-half day per week schedule to meet customer demand. For the second half of Fiscal 1998, the gross margin percentage was 19.5% as compared to 22.6% during the second half of 1997. This decrease was due to 1.) systems-related issues which depressed the Company's production rates during the third quarter of 1998, 2.) a significant shortfall in expected sales during the fourth quarter of 1998 due to an order rate approximately 40% below the comparable period of 1997, and 3.) a significant increase in the sale of seconds in the second half of the year as compared to both the first half of Fiscal 1998 and the second half of Fiscal 1997. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $38.7 million in 1998 from $32.3 million in 1997 due to increases in sales commissions, labor and fringes, freight expenses and sampling expenses associated with the Company's higher net sales for the period. Selling, general and administrative expenses as a percentage of net sales were 15.4% in 1998 and 14.7% in 1997. Interest Expense, Net. Interest expense increased to $5.4 million in 1998 from $3.7 million in 1997. Higher levels of senior debt financing at higher rates of interest was the primary reason. Effective Tax Rate. The effective tax rate increased to 33.0% in 1998 from 29.2% in 1997. The unusually low

effective tax rate in Fiscal 1997 was due to the reversal of tax reserves no longer required and an increase in the foreign sales corporation benefit partially offset by an increase in state and foreign income taxes. See Note 6 of Notes to Consolidated Financial Statements included elsewhere in this report. 28

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, 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, enhance the softness of the Company's fabrics, and improve the Company's quality and productivity performance and (ii) an increase in the Company's working capital needs related to its sales growth. The primary source of the Company's liquidity and capital resources has been operating cash flow. The Company's net cash provided by (used in) operating activities was $11.1 million, ($11.8) million and $27.7 million in 1997, 1998 and 1999, respectively. The Company has supplemented its operating cash flow with borrowings. Net borrowings (repayments) were ($10.2) million in 1997, $16.6 million in 1998 and ($9.2) million in 1999. The Company also raised $3.3 million from the offering of 450,000 new common shares in 1997, and $36.5 million from the offering of 3,000,000 new common shares in 1998. Capital expenditures in 1998 and 1999 were $41.5 million and $19.0 million, respectively. Capital expenditures during 1999 were funded by operating cash flow and borrowings. Management anticipates that capital expenditures will total approximately $14.5 million in 2000, consisting of approximately $8.0 million primarily for new production equipment to expand finishing capacity and support the Company's marketing, productivity, quality, service and financial performance objectives. Management believes that operating income and borrowings under the Credit Agreement will provide sufficient funding for the Company's capital expenditures and working capital needs for the foreseeable future. As discussed in Note 5 of Notes to Consolidated Financial Statements, the Company issued $45.0 million of Senior Notes due October 2005 and 2007 (the "Senior Notes") during 1997. Proceeds from the Senior Notes were used to replace the 6.81% Series A Notes and reduce borrowings under the Credit Agreement. 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. The Company also has a $70.0 million Credit Agreement with two banks which expires December 31, 2002. In 1998, the Company amended its Credit Agreement to increase the amount of the facility from $50.0 million to $70.0 million and to eliminate covenant limitations with respect to capital expenditures. As of January 1, 2000, the Company had $14.0 million outstanding under the Credit Agreement and unused availability of $56.0 million. See Note 5 of Notes to Consolidated Financial Statements included elsewhere in this report. In 1998, the Company completed a public offering of 3.2 million shares of its common stock of which 3.0 million shares were sold by the Company and 0.2 millions shares were sold by a selling stockholder (the "1998 Offering"). The Company applied its share of the net proceeds from the 1998 Offering, or approximately $36.5 million, to repay amounts borrowed under the Credit Agreement. The Company is required to comply with a number of affirmative and negative covenants under the Credit Agreement and the Senior 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 Senior Notes and management believes the Company's continued compliance will not prevent the Company from operating in the normal course of business. INFLATION

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, 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, enhance the softness of the Company's fabrics, and improve the Company's quality and productivity performance and (ii) an increase in the Company's working capital needs related to its sales growth. The primary source of the Company's liquidity and capital resources has been operating cash flow. The Company's net cash provided by (used in) operating activities was $11.1 million, ($11.8) million and $27.7 million in 1997, 1998 and 1999, respectively. The Company has supplemented its operating cash flow with borrowings. Net borrowings (repayments) were ($10.2) million in 1997, $16.6 million in 1998 and ($9.2) million in 1999. The Company also raised $3.3 million from the offering of 450,000 new common shares in 1997, and $36.5 million from the offering of 3,000,000 new common shares in 1998. Capital expenditures in 1998 and 1999 were $41.5 million and $19.0 million, respectively. Capital expenditures during 1999 were funded by operating cash flow and borrowings. Management anticipates that capital expenditures will total approximately $14.5 million in 2000, consisting of approximately $8.0 million primarily for new production equipment to expand finishing capacity and support the Company's marketing, productivity, quality, service and financial performance objectives. Management believes that operating income and borrowings under the Credit Agreement will provide sufficient funding for the Company's capital expenditures and working capital needs for the foreseeable future. As discussed in Note 5 of Notes to Consolidated Financial Statements, the Company issued $45.0 million of Senior Notes due October 2005 and 2007 (the "Senior Notes") during 1997. Proceeds from the Senior Notes were used to replace the 6.81% Series A Notes and reduce borrowings under the Credit Agreement. 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. The Company also has a $70.0 million Credit Agreement with two banks which expires December 31, 2002. In 1998, the Company amended its Credit Agreement to increase the amount of the facility from $50.0 million to $70.0 million and to eliminate covenant limitations with respect to capital expenditures. As of January 1, 2000, the Company had $14.0 million outstanding under the Credit Agreement and unused availability of $56.0 million. See Note 5 of Notes to Consolidated Financial Statements included elsewhere in this report. In 1998, the Company completed a public offering of 3.2 million shares of its common stock of which 3.0 million shares were sold by the Company and 0.2 millions shares were sold by a selling stockholder (the "1998 Offering"). The Company applied its share of the net proceeds from the 1998 Offering, or approximately $36.5 million, to repay amounts borrowed under the Credit Agreement. The Company is required to comply with a number of affirmative and negative covenants under the Credit Agreement and the Senior 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 Senior Notes and management believes the Company's continued compliance will not prevent the Company from operating in the normal course of business. INFLATION The Company does not believe that inflation has had a significant impact on the Company's results of operations for the periods presented. Historically, the Company believes it has been able to minimize the effects of inflation by improving its manufacturing and purchasing efficiency, by increasing employee productivity, by reflecting the effects of inflation in the selling prices of the new products it introduces each year and, to a lesser degree, by increasing the selling prices of those products which have been included in the Company's product line for more than one year.

29

FOREIGN CURRENCY TRANSLATION All of the Company's sales are denominated in U.S. dollars except sales through the Company's Mexico City distribution center. These sales are denominated in pesos and are, therefore, subject to currency fluctuations. Accounts receivable in pesos at January 1, 2000 were $2.3 million. In 1997 and 1998, Mexico was designated as a "highly inflationary country" for purposes of applying Statement of Financial Standards No. 52, Foreign Currency Translation. Accordingly, the Company has recorded translation gains and losses in the income statement rather than as a separate component of equity in Fiscal 1997 and Fiscal 1998. In Fiscal 1999 and prior to Fiscal 1997, the translation adjustments were included in the balance sheet as a separate component of equity. See Note 2(i) of Notes to Consolidated Financial Statements included elsewhere in this report. YEAR 2000 Because many existing computer programs use only the last two, rather than all four, digits to specify a year, there was widespread concern prior to January 1, 2000 that date sensitive programs would only recognize "00" as signifying the year 1900 and, therefore, not recognize the year 2000. This concern was commonly referred to as the "Year 2000" or "Y2K" issue. The Company believes that it has been successful in its efforts to address the Year 2000 issue and will, therefore, not suffer any material adverse effect on its operations or financial condition due to the Y2K problem. In addition, the Company has developed a contingency plan designed to minimize risks associated with failure of critical systems after December 31, 1999. 30

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 1, 2000 and January 2, 1999. In thousands, except per share data
FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER -------------------------------------------------------------------------------NET SALES.................................. $56,140 $64,463 $61,305 $68,916 GROSS MARGIN............................... 10,337 13,127 12,332 13,792 OPERATING INCOME........................... 684 2,463 2,500 2,623 NET INCOME (LOSS).......................... $ (382) $ 809 $ 808 $ 838 EARNINGS PER COMMON SHARE-BASIC............ $ (0.02) $ 0.05 $ 0.05 $ 0.05 EARNINGS PER COMMON SHARE-DILUTED.......... $ (0.02) $ 0.05 $ 0.05 $ 0.05 First Second Third Fourth 1998 Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------Net sales.................................. 62,730 $64,075 $60,331 $65,422 Gross margin............................... 13,591 14,594 12,137 12,350 Operating income........................... 4,193 5,376 2,456 1,964 Net income................................. $ 1,936 $ 2,542 $ 692 $ 600 Earnings per common share-basic............ $ 0.15 $ 0.20 $ 0.04 $ 0.04

FOREIGN CURRENCY TRANSLATION All of the Company's sales are denominated in U.S. dollars except sales through the Company's Mexico City distribution center. These sales are denominated in pesos and are, therefore, subject to currency fluctuations. Accounts receivable in pesos at January 1, 2000 were $2.3 million. In 1997 and 1998, Mexico was designated as a "highly inflationary country" for purposes of applying Statement of Financial Standards No. 52, Foreign Currency Translation. Accordingly, the Company has recorded translation gains and losses in the income statement rather than as a separate component of equity in Fiscal 1997 and Fiscal 1998. In Fiscal 1999 and prior to Fiscal 1997, the translation adjustments were included in the balance sheet as a separate component of equity. See Note 2(i) of Notes to Consolidated Financial Statements included elsewhere in this report. YEAR 2000 Because many existing computer programs use only the last two, rather than all four, digits to specify a year, there was widespread concern prior to January 1, 2000 that date sensitive programs would only recognize "00" as signifying the year 1900 and, therefore, not recognize the year 2000. This concern was commonly referred to as the "Year 2000" or "Y2K" issue. The Company believes that it has been successful in its efforts to address the Year 2000 issue and will, therefore, not suffer any material adverse effect on its operations or financial condition due to the Y2K problem. In addition, the Company has developed a contingency plan designed to minimize risks associated with failure of critical systems after December 31, 1999. 30

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 1, 2000 and January 2, 1999. In thousands, except per share data
FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER -------------------------------------------------------------------------------NET SALES.................................. $56,140 $64,463 $61,305 $68,916 GROSS MARGIN............................... 10,337 13,127 12,332 13,792 OPERATING INCOME........................... 684 2,463 2,500 2,623 NET INCOME (LOSS).......................... $ (382) $ 809 $ 808 $ 838 EARNINGS PER COMMON SHARE-BASIC............ $ (0.02) $ 0.05 $ 0.05 $ 0.05 EARNINGS PER COMMON SHARE-DILUTED.......... $ (0.02) $ 0.05 $ 0.05 $ 0.05 First Second Third Fourth 1998 Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------Net sales.................................. 62,730 $64,075 $60,331 $65,422 Gross margin............................... 13,591 14,594 12,137 12,350 Operating income........................... 4,193 5,376 2,456 1,964 Net income................................. $ 1,936 $ 2,542 $ 692 $ 600 Earnings per common share-basic............ $ 0.15 $ 0.20 $ 0.04 $ 0.04 Earnings per common share-diluted.......... $ 0.15 $ 0.19 $ 0.04 $ 0.04

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 1, 2000 and January 2, 1999. In thousands, except per share data
FIRST SECOND THIRD FOURTH 1999 QUARTER QUARTER QUARTER QUARTER -------------------------------------------------------------------------------NET SALES.................................. $56,140 $64,463 $61,305 $68,916 GROSS MARGIN............................... 10,337 13,127 12,332 13,792 OPERATING INCOME........................... 684 2,463 2,500 2,623 NET INCOME (LOSS).......................... $ (382) $ 809 $ 808 $ 838 EARNINGS PER COMMON SHARE-BASIC............ $ (0.02) $ 0.05 $ 0.05 $ 0.05 EARNINGS PER COMMON SHARE-DILUTED.......... $ (0.02) $ 0.05 $ 0.05 $ 0.05 First Second Third Fourth 1998 Quarter Quarter Quarter Quarter -------------------------------------------------------------------------------Net sales.................................. 62,730 $64,075 $60,331 $65,422 Gross margin............................... 13,591 14,594 12,137 12,350 Operating income........................... 4,193 5,376 2,456 1,964 Net income................................. $ 1,936 $ 2,542 $ 692 $ 600 Earnings per common share-basic............ $ 0.15 $ 0.20 $ 0.04 $ 0.04 Earnings per common share-diluted.......... $ 0.15 $ 0.19 $ 0.04 $ 0.04

The following summarizes common stock prices for the years ended January 1, 2000 and January 2, 1999.
PRICE PER SHARE 1999 HIGH LOW -------------------------------------------------------------------------------FIRST QUARTER................................................. $ 6.69 $ 3.50 SECOND QUARTER................................................ $ 6.00 $ 4.00 THIRD QUARTER................................................. $ 6.25 $ 4.13 FOURTH QUARTER................................................ $ 5.00 $ 3.00

Price per 1998 High First Quarter................................................. $17.67 Second Quarter................................................ $20.17 Third Quarter................................................. $17.00 Fourth Quarter...................................................$ 7.63

Share Low $11.42 $13.00 $ 4.38 $ 3.91

(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 paid on the Company's common stock. (3) As of March 21, 2000, there were approximately 105 record holders of common stock. (4) The Company's Credit Agreement and Senior Notes contain restrictive covenants which limit the Company's ability to declare and pay dividends. Under the most restrictive of these covenants, $22.0 million was available for the payment of dividends as of January 1, 2000.

(5) On May 28, 1998, the Board of Directors declared a three-for-two stock split effected by means of a stock dividend paid on June 19, 1998 to stockholders of record on June 8, 1998. All share amounts give effect to such stock split. 31

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 Stanford University Graduate School of Business ERIBERTO R. SCOCIMARA President and Chief Executive Officer Hungarian-American Enterprise Fund

COMMITTEES -------------------------------------------------------------------------------AUDIT COMMITTEE COMPENSATION COMMITTEE Sangwoo Ahn Sangwoo Ahn Eriberto R. Scocimara Larry A. Liebenow Jerry I. Porras STOCK OPTION COMMITTEE Sangwoo Ahn Jerry I. Porras

OFFICERS -------------------------------------------------------------------------------LARRY A. LIEBENOW MARK R. HELLWIG President and Chief Vice President Executive Officer Supply Chain Management MICHAEL E. COSTA Controller ANTHONY DEGOMES Vice President New Business Development JAMES A. DULUDE Vice President Manufacturing CYNTHIA L. GORDAN Vice President, Secretary and General Counsel PAUL J. KELLY Vice President -- Finance, Treasurer and Chief Financial Officer THOMAS H. MUZEKARI Vice President Sales and Marketing BEATRICE SPIRES Vice President Styling and Design J. DUNCAN WHITEHEAD Vice President Research and Development

CORPORATE DATA CORPORATE OFFICE NASDAQ: QFAB [LOGO]
Quaker Fabric Corporation 941 Grinnell Street Fall River, Massachusetts 02721 (508) 678-1951 http://www.quakerfabric.com INDEPENDENT AUDITORS Arthur Andersen LLP 225 Franklin Street Boston, Massachusetts 02110

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 Stanford University Graduate School of Business ERIBERTO R. SCOCIMARA President and Chief Executive Officer Hungarian-American Enterprise Fund

COMMITTEES -------------------------------------------------------------------------------AUDIT COMMITTEE COMPENSATION COMMITTEE Sangwoo Ahn Sangwoo Ahn Eriberto R. Scocimara Larry A. Liebenow Jerry I. Porras STOCK OPTION COMMITTEE Sangwoo Ahn Jerry I. Porras

OFFICERS -------------------------------------------------------------------------------LARRY A. LIEBENOW MARK R. HELLWIG President and Chief Vice President Executive Officer Supply Chain Management MICHAEL E. COSTA Controller ANTHONY DEGOMES Vice President New Business Development JAMES A. DULUDE Vice President Manufacturing CYNTHIA L. GORDAN Vice President, Secretary and General Counsel PAUL J. KELLY Vice President -- Finance, Treasurer and Chief Financial Officer THOMAS H. MUZEKARI Vice President Sales and Marketing BEATRICE SPIRES Vice President Styling and Design J. DUNCAN WHITEHEAD Vice President Research and Development

CORPORATE DATA CORPORATE OFFICE NASDAQ: QFAB [LOGO]
Quaker Fabric Corporation 941 Grinnell Street Fall River, Massachusetts 02721 (508) 678-1951 http://www.quakerfabric.com ANNUAL MEETING 11:00 a.m., May 18, 2000 BankBoston N.A. 100 Federal Street Boston, Massachusetts 02105 TRANSFER AGENT AND REGISTRAR BankBoston, N.A. c/o EquiServe Limited Partnership INDEPENDENT AUDITORS Arthur Andersen LLP 225 Franklin Street Boston, Massachusetts 02110 LEGAL COUNSEL Proskauer Rose LLP 1585 Broadway New York, New York 10036 FORM 10-K The Company's Form 10-K Report, as filed with the Securities and Exchange Commission, is available

c/o EquiServe Limited Partnership P.O. Box 8040 Boston, MA 02266-8040 (781) 575-3170 http://www.equiserve.com

Exchange Commission, is available to stockholders without charge upon request to the Corporate Office, Attn: Corporate Secretary

32

Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 10, 2000 incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File No. 33-88264) and Form S-3 (File No. 33-88236). ARTHUR ANDERSEN LLP Boston, Massachusetts March 24, 2000

ARTICLE 5 MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS BASIC EPS DILUTED

12 MOS JAN 02 1999 JAN 04 1998 JAN 02 1999 432 0 40,661 1,939 46,594 95,789 179,934 47,514 234,766 23,095 69,011 0 0 156 124,837 234,766 252,558 252,558 199,886 199,886 (28) 0 5,405 8,612 2,842 5,770 0 0 0 5,770 0.42 0.40

Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 10, 2000 incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File No. 33-88264) and Form S-3 (File No. 33-88236). ARTHUR ANDERSEN LLP Boston, Massachusetts March 24, 2000

ARTICLE 5 MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS BASIC EPS DILUTED

12 MOS JAN 02 1999 JAN 04 1998 JAN 02 1999 432 0 40,661 1,939 46,594 95,789 179,934 47,514 234,766 23,095 69,011 0 0 156 124,837 234,766 252,558 252,558 199,886 199,886 (28) 0 5,405 8,612 2,842 5,770 0 0 0 5,770 0.42 0.40

ARTICLE 5 MULTIPLIER: 1,000

PERIOD TYPE FISCAL YEAR END PERIOD START PERIOD END CASH SECURITIES RECEIVABLES ALLOWANCES INVENTORY CURRENT ASSETS PP&E DEPRECIATION TOTAL ASSETS CURRENT LIABILITIES BONDS PREFERRED MANDATORY PREFERRED COMMON OTHER SE TOTAL LIABILITY AND EQUITY SALES TOTAL REVENUES CGS TOTAL COSTS OTHER EXPENSES LOSS PROVISION INTEREST EXPENSE INCOME PRETAX INCOME TAX INCOME CONTINUING DISCONTINUED EXTRAORDINARY CHANGES NET INCOME EPS BASIC EPS DILUTED

12 MOS JAN 02 1999 JAN 04 1998 JAN 02 1999 432 0 40,661 1,939 46,594 95,789 179,934 47,514 234,766 23,095 69,011 0 0 156 124,837 234,766 252,558 252,558 199,886 199,886 (28) 0 5,405 8,612 2,842 5,770 0 0 0 5,770 0.42 0.40