QUAKER FABRIC CORP /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 4, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

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QUAKER FABRIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 04-1933106
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

941 GRINNELL STREET
FALL RIVER, MASSACHUSETTS 02721
(ADDRESS PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (508) 678-1951

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.01
(TITLE OF CLASS)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant, computed by reference to the closing sales
price as quoted on NASDAQ on March 24, 2003 was approximately $77.7 million.

As of March 24, 2003, 16,680,398 shares of Registrant's common stock, par
value $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)

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TO OUR SHAREHOLDERS

With new company records set at both the top and bottom lines, Quaker's
overall performance last year was impressive. Net sales for the year of $365.4
million and net income of $11.6 million were up 10.4% and 21.0%, respectively,
confirming that Quaker has what it takes to continue to outperform the industry.
And, when viewed in the context of last year's difficult macroeconomic
environment -- including significant weakness in the home furnishings sector,
Quaker's 2002 results reflect the soundness of our core strategy -- a proven
approach that is focused on the fundamentals -- consistently delivering great
products and great service to our customers.

Although our 2002 results were very solid overall, macroeconomic conditions
deteriorated as the year progressed and the fourth quarter was definitely the
weakest for us, with domestic fabric sales down 8.9% for the quarter and yarn
sales off significantly. Demand for our products has picked up since the first
of the year, however, with our average weekly incoming order rate so far this
year running approximately 20% ahead of the fourteen-week fourth quarter. The
company generated approximately $13.0 million of free cash flow during the
fourth quarter, allowing us to reduce funded debt by approximately $13.3 million
during the quarter -- and our balance sheet at year-end was very strong.

Looking ahead, we are confident in Quaker's ability to compete vigorously,
and we remain committed to increasing our sales, broadening our markets,
improving our margin and financial performance and generating strong cash
flows -- with installed capacity sufficient to allow for an increase in our
production rates this year in comparison to 2002 and planned spending on capital
projects currently expected to be in the $9.0 million range this
year -- compared to about $32.0 million last year. Additionally, the Company is
analyzing various financing alternatives in connection with the possible
development of additional manufacturing and warehousing facilities in the Fall
River area.

During the balance of 2003, we will continue to emphasize our strong product
line, and as the response we received earlier this year to our newest fabric
line at important shows in Germany, San Francisco and High Point indicates -- we
still set the standard in our industry when it comes to design and styling
excellence -- and our delivery lead times remain among the best in the business.
In addition, Quaker's commitment to the export market continues to be
strategically important -- with our overall export sales during 2002 up about
16% from 2001 -- and we intend to keep aggressively pursuing our international
program, including the development of new initiatives intended to allow us to
enjoy the benefits of the various free trade agreements important to us,
including the ones the US has almost completed with Singapore and Chile -- and
the one currently being negotiated with Australia. Our efforts in both the
contract and decorative home fashions markets are beginning to show some real
results, and those initiatives will also play an important role in our strategy
going forward. And our demonstrated leadership in product and technical
innovation will allow us to consistently develop new products to meet the needs
of a wide range of customers at price points throughout the market. With each of
these components of our time-tested strategy in place, we believe we are solidly
positioned to deliver value to our shareholders as economic conditions improve.

Despite the challenging economic environment affecting every American
business at the moment, we are quite optimistic about Quaker's prospects for
sustained growth over the long-term. We remain the market leader and have the
best product-service combination available on the market today. We are committed
to keeping Quaker in a strong competitive position and agile enough to respond
to new opportunities. Continuing to reinforce our solid balance sheet and low
debt to total capitalization ratio is part of that effort. Our investments in
plant, equipment and our most important resource -- our people -- are all in
place, and we look forward to building on the strong foundation we have laid.
Through the hard work of the entire Quaker team, we had a very solid 2002 and,
as we begin 2003, we believe the company is strategically well-positioned to
continue to be successful over the near term, and

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to really benefit when economic conditions begin to improve. Everyone at Quaker
remains dedicated to increasing shareholder value over time, and we thank you
for your continued support.

Sincerely,

Larry A. Liebenow Sangwoo Ahn

Larry A. Liebenow Sangwoo Ahn
President and Chief Executive Officer Chairman of the Board

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PART I

ITEM 1. BUSINESS

OVERVIEW

Quaker is a leading designer, manufacturer and worldwide marketer of woven
upholstery fabrics for residential furniture and one of the largest producers of
Jacquard upholstery fabrics in the world. The Company is also a leading
developer and manufacturer of specialty yarns, and management believes it is the
world's largest producer of chenille yarns, which Quaker both sells and uses in
the production of its fabrics. The Company's vertically integrated operations
provide Quaker with important design, cost and delivery advantages. The
Company's product line is one of the most comprehensive in the industry and
Quaker is well known for its broad range of Jacquard fabrics, including its
soft, velvet-like Jacquard chenilles. The Company's revenues in 2002 were $365.4
million.

Quaker has been producing upholstery fabric for over fifty-five years and is
a full-service supplier of Jacquard and plain woven upholstery fabric to the
furniture market. Quaker's current product line consists of over 5,000
traditional, contemporary, transitional and country fabric patterns intended to
meet the styling and design, color, texture, quality and pricing requirements of
promotional through middle to higher-end furniture manufacturers, and the
Company introduces approximately 1,000 new products to the market annually.
Management believes that Jacquard fabrics, with their detailed designs, provide
furniture manufacturers with more product differentiation opportunities than any
other fabric construction on the market.

The Company sells its upholstery fabrics to over 3,000 furniture
manufacturers worldwide, including virtually every significant domestic
manufacturer of upholstered furniture. Quaker also distributes its fabrics
internationally. In 2002, fabric sales outside the United States of $48.8
million represented approximately 13.7% of gross fabric sales. Quaker's
Whitaker'r' Collection, a branded line of a select group of the Company's
better-end products, has resulted in incremental sales to a number of well-known
higher-end furniture manufacturers. In 2001, the Company began marketing certain
fabrics intended to meet the design, construction and pricing needs of its
promotional-end customers under the Company's Davol'TM' brand name. Management
estimates that approximately 65% of the Company's fabric sales are manufactured
to customer order.

During the past five years, Quaker has invested $120.3 million in new
manufacturing equipment to expand its yarn and fabric production capacity,
increase productivity, and improve product quality. During 2003, Quaker plans to
spend approximately $9.0 million for new projects consisting principally of new
manufacturing equipment to further its marketing, productivity, quality, service
and financial objectives, and for IT programs.

The Company produces its yarn and fabric products in its ten manufacturing
plants in Fall River and Somerset, Massachusetts, where Quaker has nearly 2.0
million square feet of manufacturing and warehousing space. Quaker also has
warehouse space in Brockton, Massachusetts. In addition to distribution from the
Company's facilities in Fall River, Quaker maintains domestic distribution
centers in High Point, North Carolina, Verona, Mississippi, and Los Angeles,
California. To provide better service to its international customers, the
Company also has a distribution center in Mexico and uses a third-party
distribution company to provide warehousing services in Brazil.

The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
and all amendments to those reports will be made available free of charge
through the Investor Relations section of the Company's Internet website
(http://www.quakerfabric.com) as soon as practicable after such material is
electronically filed with, or furnished to, the Securities and Exchange
Commission.

THE INDUSTRY

Total domestic upholstery fabric sales, exclusive of automotive
applications, are estimated to be in excess of $2.5 billion annually. Management
estimates the size of the international fabric market to be at least twice that
of the domestic market. Due to the capital intensive nature of the fabric
manufacturing process and the importance of economies of scale in the industry,
the domestic industry is concentrated, with the top 14 upholstery fabric
manufacturers, including Quaker, accounting for over 80% of the total

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market. Management believes that Quaker is currently the sole large U.S. fabric
producer that is continuing to demonstrate its long-term commitment to the
international market by focusing on expanding its export sales.

Within the Jacquard segment, price is a more important competitive factor in
the promotional-end of the market than it is in the middle to better-end of the
market, where fabric styling and design considerations typically play a more
important role.

Demand for upholstery fabric is a function of demand for upholstered
furniture. The upholstered furniture market grew from $5.4 billion in 1991 to an
estimated $10.7 billion in 2001. Total upholstered furniture demand is cyclical
and is affected by population growth and demographics, consumer confidence,
disposable income, geographic mobility, housing starts, and home sales.

The upholstery fabric covering a sofa, chair, or other piece of furniture is
one of the most significant factors influencing a furniture buyer's selection.
Purchase decisions are based primarily on the consumer's evaluation of
aesthetics, comfort, durability, quality and price. As a result, the fabric
decisions a furniture manufacturer makes play a critical role in its ability to
gain a product differentiation advantage at the retail level.

Management believes the long-term outlook for the Company's upholstery
fabric sales will be influenced by the following factors:

(i) The furniture industry has been consolidating at both the retail and
manufacturing levels for several years. As a result, fabric suppliers
are required to deal with larger customers that require shorter
delivery lead times, customer-specific inventory management programs,
and additional information technology-based support services. Large
integrated fabric suppliers have an advantage over smaller competitors
because of their ability to offer a broader range of product choices
and meet the volume, delivery and support service requirements of the
large furniture manufacturers and retailers.

(ii) The United States has shifted toward a more casual lifestyle, as
evidenced by product shifts in the apparel and home furnishings
industries. Management believes this has resulted in growing demand
for less formal furniture upholstered with softer, more comfortable
fabric.

(iii) Pushed by consumers demanding immediate product delivery, the
furniture industry has increased its focus on just-in-time
manufacturing methods and shorter delivery lead times.

(iv) Advances in the use and application of information technology
throughout the industry supply chain can be anticipated to allow
furniture industry manufacturers, suppliers and customers to share
information more quickly and more effectively, resulting in reduced
cycle times and greater transparency for end consumers who will be
able to determine the status of their orders at each stage of the
manufacturing process. Significant advances in the use of information
technology in the sales and marketing function are also anticipated.

(v) Both consumers and furniture manufacturers have placed increased
emphasis on product quality, enabling fabric manufacturers with
effective quality control systems to gain a competitive advantage.

(vi) While demand levels over the near term may be adversely affected by
weakness in both the domestic and global economies, a move by the baby
boom generation toward more upscale furniture as they approach
retirement age and additional demand generated by that same group's
purchases of vacation and retirement homes can be expected to provide
favorable longer term demand trends.

(vii) Technological advances in the speed and flexibility of the Jacquard
loom have reduced the cost of producing Jacquard fabrics, enabling
them to compete more effectively with prints, velvets, flocks, tufts
and other plain woven products.

(viii) While at one time most of the largest U.S. fabric producers had
leveraged their size and broad product lines to expand their export
sales, management believes that Quaker alone continues to focus on
international sales as a major strategic initiative.

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(ix) Fabrics entering the United States from China and other low labor cost
countries are resulting in increased price competition at the middle
range of the upholstery fabric and upholstered furniture markets. In
addition, competition in the middle to better-end segment of the
market is being affected by upper-end fabric imports from Europe.

(x) A 'cocooning' or 'nestbuilding' trend among Americans is resulting in
an increased focus on home furnishings.

STRATEGY

Quaker's strategy to further its growth and financial performance objectives
includes:

Taking Domestic Market Share. To capitalize on the consolidation trend
in the furniture industry, the Company has positioned itself as a
full-service supplier of Jacquard and plain woven fabrics to the promotional
and middle to better end of the market by offering a wide variety of fabric
patterns at prices ranging from $2.40 to $39.00 per yard and by emphasizing
superior customer service.

Expanding International Sales. The Company has made worldwide
distribution of its upholstery fabrics a key component of its strategy.
Quaker has built an international sales and distribution network, dedicated
significant corporate resources to the development of fabrics to meet the
specific styling and design needs of its international customers, and put
programs in place to simplify the purchase of product from Quaker, including
the operation of a distribution facility in Mexico, and the utilization of
the services of a third party distribution company in Brazil. The Company's
international gross sales were $48.8 million in 2002.

Penetrating Related Fabric Markets. Management believes the Company's
styling and design expertise, as well as its ISO 9001-certified operations,
provide opportunities to penetrate the contract and decorative
top-of-the-bed markets, as well as increase Quaker's share of the interior
decorator and recreational vehicle markets. Management believes Quaker's
Ankyra'TM' chenille yarns and fabric finishing abilities will provide the
Company with a product advantage in these markets. During 2001, the Company
commenced its efforts to penetrate the home fashions industry by adding a
design director and three additional designers to focus on pillows and
decorative top-of-the-bed products. As part of these efforts, during 2002
the Company purchased 24 'double-wide' looms to support its entry into this
market.

Maintaining Specialty Yarn Sales. Quaker is a leading producer of
specialty yarns, and management believes it is the world's largest producer
of chenille yarns. Approximately 90% of the chenille yarn manufactured by
the Company is used in the production of the Company's fabric. The balance
is sold to home fashions accessories firms and upholstery weavers through
Quaker's yarn sales division, Nortex Yarns. Gross sales of the Company's
specialty yarns were $15.9 million in 2002. The Company's current line of
specialty yarns includes over 55 different varieties of spun and chenille
yarns, and Quaker's yarn design and development staff regularly creates
innovative new specialty yarns for use in the Company's fabrics and sale to
the Company's yarn customers.

Pursuing Strategic Acquisition Opportunities. Although all of Quaker's
growth to date has been the result of internal initiatives, the Company has
evaluated a number of acquisition candidates in the past and plans to pursue
appropriate acquisition opportunities in the future. An ideal acquisition
candidate would either support the Company's new market development
objectives, enhance its international position, or offer a unique and
complementary product, manufacturing or technical capability.

COMPETITIVE STRENGTHS

Management believes that the following competitive strengths distinguish
Quaker from its competitors and that these strengths serve as a solid foundation
for the Company's long-term growth strategy:

Product Design, Development and Technological Innovation Capabilities.
Management believes that Quaker's reputation for design excellence, product
leadership and technological development is, and will continue to be, the
Company's most important competitive strength.

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Financial Strength. With a strong financial position, including a low
debt to total capital ratio, the Company has the ability to support research
and development and targeted capital investment initiatives.

Commitment to Customer Service. The Company is committed to offering its
customers the best overall service levels in the industry. Management
believes Quaker's current delivery lead times continue to be among the best
in the industry.

Broad Product Offering. The breadth and depth of Quaker's product line
enables the Company to be a full-service supplier of Jacquard and plain
woven fabrics to virtually every significant domestic manufacturer of
upholstered furniture.

Technological Expertise. Quaker is driven by innovation and is committed
to exploring the development and use of new technology to meet its product
development, customer service, operating and financial objectives.

State-of-the-Art Manufacturing Equipment. Management believes the
Company has one of the most modern, efficient and technologically advanced
manufacturing bases in the industry.

Focus on Jacquard Fabrics. Management believes the detailed, copyrighted
designs of the Company's Jacquard fabrics have enabled it to compete
primarily on the basis of superior styling and design, rather than price.

Vertical Integration. Using Quaker's own specialty yarns in the
production of its fabrics provides the Company with significant design, cost
and delivery advantages.

PRODUCTS

The Company offers a broad assortment of contemporary, traditional,
transitional and country fabrics to manufacturers of both promotional-end and
middle to better-end furniture at prices ranging from $2.40 to $39.00 per yard.
While most of the Company's fabrics have historically been sold under the Quaker
label, the Company began marketing a select group of its middle to better-end
fabrics under its Whitaker'r' label in October 1996. During 2001, the Company
began marketing certain of its fabrics to its promotional-end customers under
its Davol'TM' brand name. In 2002, the Company's promotional-end fabric line and
its middle to better-end fabric line had average gross sales prices of $4.00 per
yard and $6.43 per yard, respectively, compared to $3.95 and $6.15,
respectively, in 2001. The weighted average gross sales price per yard of the
Company's fabrics was $5.57 in 2002, compared to $5.51 in 2001.

Quaker's product line is focused on fabrics with complex designs referred to
in the industry as 'Jacquards,' because of the special Jacquard equipment, or
heads, required to produce them, and also includes a broad assortment of
striped, plaid, and plain fabrics. The vast majority of Quaker's looms are
equipped with Jacquard heads. The use of these heads makes it possible to vary
the pattern, color, and texture of both the filling and warp yarns in a fabric.
While fabrics manufactured on looms without Jacquard heads have a much more
limited range of possible designs, Quaker added thirty-six Dobby looms to its
manufacturing base during 2001 to reduce the cost of manufacturing certain
fabrics that do not require the use of Jacquard heads. During 2002, Quaker added
24 'double-wide' Jacquard looms to support the Company's entry into the
decorative home fashions segment.

Quaker's product offerings are noted for their use of chenille and other
specialty yarns, which give the fabric a soft, velvet-like appearance and feel.
To take advantage of the trend toward casually styled furniture, and to
capitalize on the growth of the motion furniture segment, Quaker developed a
soft chenille yarn with superior abrasion resistance to compete effectively with
flocks, velvets and tufted fabrics. The Company markets the line of chenille
fabrics it produces using these yarns under its Ankyra'TM' label. Through a
licensing agreement with Solutia (f/k/a Monsanto), a number of the Company's
Ankyra'TM'-based chenille fabrics, as well as certain other fabrics in its line,
have been 'Wear-Dated' by Solutia. Management anticipates that chenille will
remain a very important element in the Company's fabric designs and that it will
continue to influence -- and be enhanced by -- Quaker's on-going development and
use of additional new specialty yarns and manufacturing techniques and
processes. In addition, the Company has recently developed a collection of spun
yarn products,

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including several distinctive boucles that Quaker's design staff is using to
further the Company's styling and design objectives.

Quaker's broad product line is very important from a competitive standpoint.
It enhances the ability of the Company's customers to meet most of their fabric
needs through one full-service supplier while, at the same time, allowing them
to purchase fabrics in a wide enough range of designs to enable them to
differentiate their own new lines of upholstered furniture from those of their
competitors. To generate additional business from manufacturers of higher-end
upholstered furniture, the Company offers a select group of its middle to
better-end products under its Whitaker'r' label, and in 2001 the Company began
marketing certain of its promotional-end products under its Davol'TM' brand
name. Gross sales of the Company's middle to better-end fabrics were $264.2
million, or 74.4% of total gross fabric sales in 2002, with approximately 42.3%
of those sales made under the Whitaker'r' label. During 2001, the Company added
a new director to its design department, as well as three additional design
professionals, to focus on pillows and decorative top-of-the-bed products, as
part of the Company's efforts to enter the home fashions market and further
diversify its product offerings.

NEW PRODUCT DEVELOPMENT AND DESIGN

Although management believes fashion trends in the upholstery industry do
not change significantly from year to year, consumer tastes in upholstery fabric
do change over time. Therefore, it is important to identify emerging fashion
needs and to develop new products responsive to those needs. Management believes
Quaker's design staff has an established reputation for design excellence and
product leadership.

The Company's design department has overall responsibility for the
development of new upholstery fabric patterns for sale by the Company. Although
the Company purchases artwork from independent artists, the Company's staff of
professional designers and designer technicians creates the majority of the
designs on which the Company's fabric patterns are based and also determines the
construction of those patterns. The design department uses state-of-the-art
Computer Aided Design ('CAD') equipment to reduce the length of the Company's
new product development cycle.

The development of each new fabric line requires six months. The first step
in the new product development process is the preparation of a merchandising
plan for the line. The Company's merchandising plans are based on extensive
input from Quaker's sales representatives, senior managers, and major customers
and provide both a broad outline of the number of new products to be included
within each major styling category (e.g., contemporary, traditional,
transitional, and country), as well as the number of new products to be created
for sale at each of the major price points within those styling categories.
During 2002, the Company enhanced its merchandising practices by developing a
number of fabric collections reflecting a common theme, such as Sanctuary,
Timeless Traditions, Romance, Home Sweet Home, Island Home, World Beat,
Thoroughbred, Technicolor and Easy Living.

In addition, because of the design, cost, and delivery advantages of
Quaker's vertically integrated manufacturing operations, substantial emphasis is
placed on making maximum use of the Company's internally produced yarns during
the fabric development process. After each new fabric merchandising plan is
developed, members of the Company's fabric design and yarn development staffs
meet to identify the design staff's yarn requirements for the Company's next
fabric line and many of Quaker's proprietary yarns trace their origins to this
design-driven process. Quaker's product development, engineering and
manufacturing staffs also play a key role in the new product development process
by reviewing each proposed new product to evaluate its impact on the Company's
raw material costs, equipment utilization rates and quality performance.
Although a few plain, striped and plaid fabrics remain in the Company's product
line for ten years or more, a successful product typically has a life of two to
three years.

Quaker's design staff also regularly creates custom patterns for customers
seeking to differentiate their products for distribution purposes, hit a certain
price point at the retail level, or meet a particular styling need in the market
they serve. These patterns, which are not part of Quaker's 'open line,' are
known in the industry as 'Specials.'

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SALES AND MARKETING

UPHOLSTERY FABRICS

Net fabric sales during 2002 were $349.8 million, or approximately 95.7% of
the Company's net sales. The Company sells its upholstery fabrics to over 3,000
furniture manufacturers worldwide, including substantially all of the largest
domestic manufacturers of upholstered furniture. Fabric sales to the Company's
top 25 customers accounted for approximately 44% of 2002 net sales. None of the
Company's customers accounted for more than 7.3% of net sales during 2002.

The Company uses a direct marketing force of 25 sales representatives, five
of whom are based in Mexico, to market its fabrics in the United States, Canada
and Mexico. All such sales representatives are paid on a commission basis and
represent the Company exclusively. Quaker's fabrics are distributed
internationally through a network of eleven exclusive sales representatives,
including sales offices and showrooms in the United Kingdom, the United Arab
Emirates, India, Singapore, and four exclusive sales agents in Brazil, where
Quaker maintains a showroom and sales office in Sao Paulo. In addition, Quaker
has appointed 10 independent commissioned sales agents to represent the Company
in Europe, the Far East, Australia, New Zealand, the Middle East, Central and
South America, Africa and Asia. All agents located outside the United States are
supervised by Quaker's Vice President -- Sales.

Quaker's United States customers market their products through two annual
national furniture industry trade shows held in April and October in High Point,
North Carolina, as well as through various regional shows. These shows provide
most of Quaker's customers with the opportunity to introduce their new furniture
lines to their major retail customers in a single setting. Quaker's design and
marketing process is closely linked to these trade shows. The Company develops
two major lines for introduction to the Company's customers at the Showtime
Fabric Fairs held in High Point in January and July of each year. Almost all
major U.S. furniture manufacturers attend Showtime to begin selecting fabric for
the new lines of sofas and other upholstered furniture products that they will
exhibit at the April and October High Point Furniture Markets.

Quaker also markets its fabrics at a number of trade shows regularly
attended by its export customers, including shows in Belgium, China, Dubai,
Germany, Italy, Brazil and Mexico, as well as certain trade shows in the United
States aimed at the international market. Foreign sales of fabric accounted for
approximately 13.7% of Quaker's gross fabric sales during 2002.

In addition to distribution from the Company's facilities in Fall River,
Massachusetts, Quaker maintains five distribution centers from which its
customers may purchase selected products from the Company's products directly.
These facilities are located in Los Angeles, California; Mexico City, Mexico;
High Point, North Carolina; Sao Paulo, Brazil; and Verona, Mississippi.

SPECIALTY YARNS

Net yarn sales during 2002 were $15.6 million, or approximately 4.3% of the
Company's net sales. The Company designs, manufactures and markets several types
of specialty yarns, including fancy spun, fancy twisted and chenille. Quaker is
a leading developer and manufacturer of specialty yarns and management believes
it is the world's largest producer of chenille yarn, a soft pile yarn which
produces a velvet-like fabric. Chenille yarns, and fabrics made out of chenille
yarns, are responsive to consumer demand for softer, more casual home
furnishings and apparel. The Company's specialty yarns are sold under the name
of Nortex Yarns to manufacturers of home furnishings products, principally
weavers of upholstery fabric, throws, afghans and other products. The Company
has approximately 45 yarn customers.

Management believes the technical expertise of Quaker's yarn development
staff provides the Company with an important competitive advantage by enabling
Quaker to create and market innovative specialty yarns to meet its customers'
styling and performance criteria. Historically, chenille yarns have had
difficulty meeting the durability standards required for use in fabrics which
are likely to be subjected to heavy wear. To address this problem, Quaker's yarn
development staff created a finished chenille yarn with superior abrasion
resistance, and in 1997 the United States Patent and Trademark Office issued a
patent to protect the Company's Ankyra'TM' process.

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MANUFACTURING

The Company operates ten manufacturing facilities in Fall River and
Somerset, Massachusetts, and management estimates that approximately 65% of the
Company's fabric sales are manufactured to customer order. Management, in
partnership with key customers, is utilizing forecasting techniques to
significantly reduce delivery lead times. The Company's objective is to operate
its production facilities on a three-shift, five to five and one half-day week
schedule. However, during periods of heaviest demand, Quaker operates some or
all of its production areas on seven-day, three-shift schedules and/or
outsources a portion of its production requirements. During periods of weaker
demand, the Company will decrease its production rates accordingly.

The Company's vertically integrated manufacturing process begins with the
production of specialty yarns, primarily for use in the production of the
Company's fabrics, but also for sale to manufacturers of home furnishings
products and apparel. Although the Company purchases all of its commodity yarns,
most of the Company's weft, or filling, yarn needs are met through internal
production. The next stage of the fabric manufacturing process involves the
preparation of beams of warp yarn. The beams are then sent to the Company's
weave rooms, where looms are used to weave the warp and filling yarns together.
The final steps in the fabric production process include routing the fabric
through various fabric finishing processes followed by the application of a
latex backing, to enhance the durability and performance characteristics of the
end product, as well as a stain-resistant finish upon customer request. Some of
the Company's fabrics, including its Quaker Plush'r', Quaker Suede'TM', Quaker
Silk'TM' and Quaker Ultra'TM' products, benefit from additional chemical and
mechanical finishing processes designed to enhance their appearance, softness
and/or performance characteristics. A final product quality inspection is
conducted prior to shipment to the Company's customers.

Quaker has added approximately 400 new looms to its manufacturing base since
1989. The vast majority of the Company's looms are equipped with Jacquard heads,
maximizing the Company's ability to design its products to meet customer needs,
without equipment-related design constraints. During 2000, the mechanical
Jacquard heads on approximately 80 of the Company's older looms were replaced
with electronic Jacquard heads to improve productivity, and another 26
mechanical heads were replaced with electronic heads during 2002. During 2001,
the Company added 36 Dobby looms to reduce the cost of manufacturing certain
fabrics not requiring the use of Jacquard heads, and during 2002 added 24
'double-wide' Jacquard looms to support the Company's entry into the decorative
home fashions segment.

The Company's fabrics are generally shipped directly to its customers on an
FOB Fall River or FOB warehouse basis. The Company also supplies its
distribution centers with an appropriate selection of fabrics for customers
needing immediate delivery.

During the past five years, the Company placed in service more than $120.3
million of new manufacturing equipment to increase capacity, improve
manufacturing efficiencies, and support the Company's marketing, quality and
delivery objectives.

QUALITY ASSURANCE

Management believes that product quality is a significant competitive factor
in both the domestic and international fabric markets. Quaker's quality
initiatives include:

The use of incentive programs in certain of its production
departments to factor quality into the overall compensation
programs in these areas.

Inspection of incoming raw materials to ensure they meet the
Company's product specifications and to provide prompt
feedback to vendors when defects are discovered so that
corrective actions may be undertaken immediately.

A final quality inspection of the Company's yarn and fabric
products before they are released for shipment.

Continuous monitoring of the Company's performance against
industry standards and its own internal quality standards.

7

ISO 9001 certification of all of the Company's operations.
During 2001, the Company received certification to the new
ISO 9000: 2000 Quality Standard for ISO 9001.

In addition to these measures, the built-in quality control features and
more precise settings on the Company's newer production equipment also support
the Company's efforts to provide defect-free products to its customers.

The Company's quality-related return rate, as a percentage of total yards
shipped was 0.5% in 2002 and 0.4% in 2001, and the Company's sales of
second-quality fabric were $1.9 million in 2002 and $1.2 million in 2001.

TECHNOLOGY

As part of Quaker's overall strategy to improve productivity and achieve a
service advantage over its competitors, the Company strives to introduce new
technologies into its operations whenever possible. Quaker's efforts in this
area include: (i) the use of its management information system to provide
computer support to the Company's manufacturing operations; (ii) the use of CAD
equipment to reduce the time required to bring its new products to market,
including the design of 'Specials'; (iii) the use of bar-coding systems to
improve both the efficiency of its own manufacturing operations and service to
its customers; (iv) the use of electronic Jacquard heads and other production
equipment equipped with microprocessors to improve manufacturing efficiencies
and reduce unit costs; (v) the use of a heuristic advanced planning system to
both support Quaker's delivery lead time objectives and improve productivity
levels in Quaker's manufacturing areas; and (vi) the use of real-time process
monitoring control systems to identify opportunities to improve manufacturing
efficiencies.

The Company's CAD equipment is used to develop new fabric designs and to
prepare plastic Jacquard cards for use with the Company's mechanical Jacquard
heads, and computer disks for use with Quaker's newer electronic Jacquard heads.
These plastic cards and computer disks contain precise instructions about the
construction of the particular fabric pattern to be woven. During 2001, the
Company installed new CAD software, providing all of Quaker's design
professionals with enhanced automated design support directly on their
individual desktop computers.

SOURCES AND AVAILABILITY OF RAW MATERIALS

Quaker's raw materials consist principally of polypropylene, polyester,
acrylic, cotton and rayon fibers and yarns for use in its yarn manufacturing and
fabric weaving operations, and latex to backcoat its finished fabrics. In
addition, Quaker purchases commission dyeing services from various dyehouses
which dye, to the Company's specifications, certain of the yarns the Company
produces internally or purchases from other manufacturers. Substantially all of
the raw materials used by the Company are purchased from primary producers with
manufacturing operations in the United States, however, certain of the Company's
raw material requirements are purchased from non-U.S. based suppliers. The
Company is dependent upon outside suppliers for its raw material needs,
including dyeing services, and is subject to price increases and delays in
receiving these materials and services. The Company's raw materials are
predominantly petrochemical products and their prices fluctuate with changes in
the underlying market for petrochemicals in general. In addition, the financial
performance and/or condition of some textile industry suppliers has been hurt by
the recent recession, increasing the risk of business failures and/or further
consolidations among the Company's supplier population and the related risk of
disruption to Quaker's operations.

Although other sources are available, the Company currently procures
approximately 30% of its raw material components from two major industry
suppliers, one of which is the sole supplier of a filament yarn used in the
Company's chenille manufacturing operations. Generally, Quaker has not
experienced any significant difficulty in meeting its raw material needs,
expects that it will be able to obtain adequate amounts to meet future
requirements, and has identified alternate sources for all critical raw material
components. A shortage or interruption in the supply of any critical component
could have a material adverse effect on the Company.

The Company's production operations are heavily reliant upon a consistent
supply of energy, including electricity to power the Company's manufacturing
equipment, natural gas to generate the heat

8

used in Quaker's finishing operations and oil to heat the Company's office
areas. A significant shortage or interruption in the availability of these
energy sources would likely have a material adverse effect on the Company's
operations and financial performance. Beginning in the latter part of 2000, the
Company began to experience rising energy costs. To help provide the Company
with greater stability and to reduce the impact of rising energy costs, during
2001, Quaker entered into a contract to purchase its electrical power
requirements at a fixed price over a three year period.

COMPETITION

The markets for the Company's products are highly competitive. Competitive
factors in the upholstery fabric business include product design, styling,
price, customer service and quality. Price is a more important competitive
factor in the promotional-end of the market than it is in the middle to
better-end of the market, where competition is weighted more heavily toward
fabric styling and design considerations. Although the Company has experienced
no significant competition in the United States from imported fabric to date,
changes in foreign exchange rates or other factors could make imported fabrics
more competitive with the Company's products in the future. Historically, fabric
imported from China, India and other low labor cost countries suffered from
relatively poor service levels and generally unsophisticated product designs,
however, recent improvements in these areas have enhanced the competitive
position of products imported from China. During 2002, the Company's yarn sales
business continued to be adversely affected by diminished demand for products
manufactured by the Company's domestic yarn customers. Management anticipates
this condition will continue for the foreseeable future.

The Company's principal competitors include: Berkshire Hathaway, Inc., Culp,
Inc., Craftex Mills, Inc., Joan Fabrics Corporation and its Mastercraft
Division, Sunbury Textile Mills, Inc., and Valdese Weavers, Inc. Several of the
companies with which the Company competes may have greater financial resources
than the Company. The Company's products compete with other upholstery fabrics
and furniture coverings, including prints, flocks, tufts, velvets and leather.

BACKLOG

As of January 4, 2003, the Company had orders pending for approximately
$26.1 million of fabric and yarn compared to $43.0 million as of December 29,
2001. The Company's backlog position at year-end 2002 was down considerably due
to both significant reductions Quaker achieved in its delivery lead times and
weakness in the Company's fourth quarter order rate. The Company's backlog
position at any given time may not be indicative of the Company's long-term
performance.

TRADEMARKS, PATENTS, COPYRIGHTS

The Company seeks copyright protection for all new fabric designs it
creates, and management believes that the copyrights owned by the Company serve
as a deterrent to those industry participants which might otherwise seek to
replicate the Company's unique fabric designs. In June 1995, the Company
introduced a new collection of fabrics featuring Quaker's proprietary Ankyra'TM'
chenille yarns. In 1997, the United States Patent and Trademark Office issued a
patent to the Company protecting the proprietary manufacturing process developed
by Quaker to produce these yarns. The Company's Whitaker mark, as well as a logo
form of the 'W' mark, is registered with the U.S. Patent and Trademark Office.
During 2000, the Company's Quaker Plush mark also became registered with the
U.S. Patent and Trademark Office. The Company has applications pending, with the
U.S. Patent and Trademark Office to register its Davol mark and its Quaker Ultra
mark.

INSURANCE

The Company maintains general liability and property insurance. The costs of
insurance coverage vary generally and the availability of certain coverages can
change. As a result of recent trends in the insurance market, including the
effects of the events of September 11, 2001, the Company has experienced
significant increases in the premium rates on its various insurance coverages
and certain changes have been made in the insurance carriers used by the Company
and in the terms and conditions

9

of some of the Company's insurance policies. While the Company believes that its
present insurance coverage is adequate for its current operations, there can be
no assurance that the coverage is sufficient for all future claims or will
continue to be available in adequate amounts or at reasonable rates.

EMPLOYEES

The Company is the largest manufacturer, and the largest private sector
employer, in Fall River, Massachusetts. As of January 4, 2003, Quaker employed
2,816 persons, including 2,282 production employees, 184 technical and clerical
employees, and 350 exempt employees and commissioned sales representatives. The
Company's employees are not represented by a labor union, and management
believes that employee relations are good. The Company's operations are heavily
dependent on the availability of labor in the Fall River, Massachusetts area.

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT (See Item 10 herein)

The executive officers of the Company are as follows:

Larry A. Liebenow. Mr. Liebenow has served as President, Chief Executive
Officer, and a Director of the Company since September 1989. From July 1983
until September 1989, Mr. Liebenow was Chairman of the Board and President of
Nortex International, Inc. ('Nortex International'). From September 1971 to July
1983, Mr. Liebenow served as the Chief Operating Officer of Grupo Pliana, S.A.,
a Mexican yarn and upholstery fabric manufacturing concern.

James A. Dulude. Mr. Dulude has been employed by the Company since May 1986
and has served as Vice President -- Manufacturing since August 1995. Mr. Dulude
served as Vice President -- Purchasing, Planning and MIS from November 1990 to
August 1995. Mr. Dulude served as the Company's Director of Purchasing and
Planning from May 1989 to November 1990, Director of Planning and Scheduling
from July 1988 to May 1989, and Director of Information Systems from May 1986 to
July 1988.

Cynthia L. Gordan. Ms. Gordan has been employed by the Company since March
1988 and has served as Vice President, Secretary, and General Counsel of the
Company since March 1989. Ms. Gordan is also responsible for the Company's Risk
Management, Investor Relations and Human Resources functions. From April 1986 to
November 1987, Ms. Gordan served as a Senior Associate in the Corporate
Department of the Chicago law firm of Katten Muchin & Zavis. From November 1981
to April 1986, Ms. Gordan was employed by The General Electric Company where she
served first as the Vice President and General Counsel of General Electric's
life, property, and casualty insurance affiliates in Providence, Rhode Island,
and later as the strategic planner and acquisition specialist for a division of
General Electric Capital Corporation.

Mark R. Hellwig. Mr. Hellwig has served as Vice President -- Supply Chain
Management since October 1998. From January 1996 until October 1998, Mr. Hellwig
was Director -- Supply Chain

10

Management for Solo Cup Company. From August 1993 to January 1996, Mr. Hellwig
was Director -- Logistics at Solo Cup Company. From 1989 to 1993, Mr. Hellwig
was with Deloitte and Touche LLP.

Carole E. Johnson. Ms. Johnson has served as Vice President -- Marketing
since March 2003. From June 1981 through December 2002, Ms. Johnson held
positions of increasing responsibility with the Gillette Company, most recently
as Vice President Business Services, Commercial Operations North America.
Earlier positions at Gillette included Vice President Marketing Services,
Commercial Operations North America (1991-2001), Vice President Global Business
Management, Personal Care Products (1992-1998), Vice President Sales and
Marketing, Personal Care Division USA (1991-1992), and Vice President Sales,
Personal Care Division USA (1988-1991).

Paul J. Kelly. Mr. Kelly has served as Vice President -- Finance, Chief
Financial Officer and Treasurer of the Company since December 1989, and since
November 1993 has also had responsibility for working with industry and
institutional analysts. From January 1988 to December 1989, Mr. Kelly was the
co-founder and President of International Business Brokers and Consultants Ltd.,
a business broker and consulting firm. From December 1977 to December 1987, Mr.
Kelly served as Chief Financial Officer of Ferranti Ocean Research Equipment,
Inc., an international manufacturing concern. From February 1973 to December
1977, he was a certified public accountant with Arthur Andersen & Co.

Thomas H. Muzekari. Mr. Muzekari has served as Vice President -- Sales since
March 2003, and was Vice President -- Sales and Marketing from October 1998
until March 2003, and Vice President -- Marketing from March 1996 until October
1998. From September 1989 until February 1996, Mr. Muzekari was the Vice
President -- Marketing for Collins & Aikman's Velvet Division. From 1970 to
September 1989, Mr. Muzekari held various management positions in both sales and
marketing with Milliken and Company.

M. Beatrice Spires. Ms. Spires has been employed by the Company since
September 1995 and has served as Vice President -- Design and Merchandising
since March 2003, and was Vice President -- Styling and Design from March 1996
until March 2003. From September 1995 to March 1996, Ms. Spires served as
Quaker's Director of Design. From July 1992 to September 1995, Ms. Spires was
Vice President -- Merchandising for Collins & Aikman's Velvet Division. From
September 1991 to July 1992, Ms. Spires was Merchandising Manager at Collins &
Aikman.

Norman J. Sturdevant. Mr. Sturdevant has served as Vice President -- Chief
Information Officer since August 2001. From August 1999 to April 2001, Mr.
Sturdevant served as Vice President of Information Technology for Bausch &
Lomb's Europe, Middle East and Africa Region. Prior to that, Mr. Sturdevant
served in various director and manager-level information technology positions
with Bausch & Lomb, Entex Information Services and Electronic Data Systems. Mr.
Sturdevant served as an officer in the U.S. Navy from 1976 to 1984.

Duncan Whitehead. Mr. Whitehead has served as Vice President -- Technology
and Development, and Yarn Sales since August 1995. Mr. Whitehead served as Vice
President -- Yarn Sales and Development from May 1990 to August 1995. From
September 1989 to May 1990, Mr. Whitehead was the Vice President -- Sales and
Marketing for the Company's Nortex Division. From July 1983 to September 1989,
Mr. Whitehead served as Vice President of Sales and Marketing for Nortex
International.

The Company's President, Secretary, and Treasurer are elected annually by
the Board at its first meeting following the annual meeting of stockholders. All
other executive officers hold office until their successors are chosen and
qualified.

11

ITEM 2. PROPERTIES

PROPERTIES

Quaker is headquartered in Fall River, Massachusetts where it currently has
ten facilities, nine of which are used primarily for manufacturing and
warehousing purposes. The tenth facility houses the Company's executive,
administrative and design areas as well as certain manufacturing operations. In
addition, the Company maintains a manufacturing facility in Somerset,
Massachusetts and warehouse space in Brockton, Massachusetts. The Company has
three distribution centers in the United States and one in Mexico. The table
below sets forth certain information relating to the Company's current
facilities:

- ---------

(1) Lease expires December 31, 2003, with two two-year renewal options
(2) Lease expires July 31, 2007
(3) Lease expires March 29, 2004
(4) Lease expires May 20, 2003, with an option to purchase for $1,250,000
(5) Lease expires June 30, 2005
(6) Lease expires May 31, 2004
(7) Lease expires September 30, 2006
(8) Lease expires February 28, 2006
(9) Lease expires July 31, 2004

During 2000, the Company also started to maintain inventory at a third party
warehouse provider in Sao Paulo, Brazil. Quaker has sales offices in Fall River,
Massachusetts; Guadalajara and Mexico City, Mexico; Sharjah, United Arab
Emirates; Cambridgeshire, England; Hickory and High Point, North Carolina;
Chicago, Illinois; Tupelo, Mississippi; Los Angeles, California; and Sao Paulo,
Brazil. All of the Company's sales offices, except the one in Fall River,
Massachusetts, are leased.

In late 1998 and early 1999, the Company purchased approximately 60 acres of
undeveloped land in Fall River to allow for expansion of its operations.

ENVIRONMENTAL MATTERS

The Company's operations are subject to numerous federal, state, and local
laws and regulations pertaining to the discharge of materials into the
environment or otherwise relating to the protection of the environment. The
Company's facilities are located in industrial areas and, therefore, there is
the possibility of incurring environmental liabilities as a result of historic
operations at the Company's sites.

12

Environmental liability can extend to previously owned or leased properties,
properties owned by third parties, and properties currently owned or leased by
the Company. Environmental liabilities can also be asserted by adjacent
landowners or other third parties in toxic tort litigation. In addition, under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended ('CERCLA'), and analogous state statutes, liability can be
imposed for the disposal of waste at sites targeted for cleanup by federal and
state regulatory authorities. Liability under CERCLA is strict as well as joint
and several. Environmental laws and regulations are subject to change in the
future, and any failure by the Company to comply with present or future laws or
regulations could subject it to future liabilities or interruption of production
which could have a material adverse effect on the Company. In addition, changes
in environmental regulations could restrict the Company's ability to expand its
facilities or require the Company to incur substantial unexpected other expenses
to comply with such regulations.

In particular, the Company is aware of soil and groundwater contamination
relating to the use of certain underground fuel oil storage tanks at its Fall
River facilities. During 2001, the Company filed Response Action Outcome
Statements (RAOs) and Activities and Use Limitations (AULs) with the
Commonwealth of Massachusetts with respect to soil and groundwater contamination
at two of its facilities. The AULs are intended to limit human access to the
tainted soil and groundwater, close out the sites and end future regulatory
reporting. In addition, during the fourth quarter of 1993 the Company removed
and encapsulated asbestos at two of its facilities and the Company has an
on-going asbestos management program in place to appropriately maintain the
asbestos that remains present at its facilities. During the fourth quarter of
1998 and the first quarter of 1999 oil-contaminated soil resulting from a leak
during the mid-1970s from an underground fuel storage tank at the Company's
former facility in Claremont, New Hampshire, was removed and disposed of at an
asphalt batching plant. In January 2003, the New Hampshire Department of
Environmental Services issued a 'no further action required' letter with respect
to this site, and a related escrow account originally established to cover
Quaker's clean up cost indemnification obligations was closed out. The Company
has also agreed to indemnify the purchaser of the Company's former facility in
Leominster, Massachusetts, for certain environmental contingencies.

Quaker has also determined that several localized areas of a sixty-acre
parcel of land in Fall River owned by the Company contain surficial soil
contamination from polyaromatic hydrocarbons ('PAHs') and lead, and are thus
subject to the Massachusetts Superfund law. Over eighty percent of the
contaminated soil exists under high-tension power lines. The site is currently
undeveloped and was purchased by the Company during 1998-1999 to provide a
location for the possible future development of a manufacturing and warehouse
facility. The Company engaged the services of a Licensed Site Professional
('LSP') and filed the appropriate notices and reports with the Massachusetts
Department of Environmental Protection. Following the determination of the
vertical and lateral extent of the contamination and the nature of the soil
contamination by the LSP, it was established that the site could be properly
remediated by covering the contaminated soil with a one-foot depth of clean
soil. This was completed during the second half of 2000. Subsequent soil
sampling and laboratory analyses have confirmed that the areas of contamination
have been properly remediated. Additional environmental assessment and
remediation work at the site is anticipated, the final cost of which is
currently uncertain.

The Company acquired two additional manufacturing facilities during the
second half of 2001. Prior to the Company's purchase, comprehensive
environmental site assessments, including soil and groundwater analyses, were
completed at both sites by an LSP. As a result of these assessments, an AUL has
been filed with the Commonwealth of Massachusetts with respect to one of the
sites. Further, although urban fill containing waste material, including coal
and ash, was discovered at the other site, the Company has determined that the
'urban fill' exemption from the assessment and remediation requirements of the
Massachusetts environmental regulations requires no further action by the
Company with respect to this property.

The Company has accrued reserves for environmental matters based on
information presently available. Based on this information and the Company's
established reserves, the Company does not believe that these environmental
matters will have a material adverse effect on either the Company's

13

financial condition or results of operations. However, there can be no assurance
that these reserves will be adequate or that the costs associated with
environmental matters will not increase in the future.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings other than routine legal
proceedings incidental to its business, which, in the opinion of management, are
immaterial in amount or are expected to be covered by the Company's insurance
carriers.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

14

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

The following summarizes common stock prices for the years ended January 4,
2003 and December 29, 2001.

- ---------

(1) The Company's common stock is traded over the counter and is
quoted on the Nasdaq National Market under the symbol
'QFAB.'

(2) No dividends have been previously paid on the Company's
common stock. However, on March 3, 2003 the Board of
Directors approved the payment of a cash dividend of $0.025
per common share payable on March 27, 2003 to shareholders
of record on March 17, 2003. See Note 12 of Notes to
Financial Statements.

(3) As of March 24, 2003, there were approximately 81 record
holders of common stock.

(4) The Company's Credit Agreement, Senior Notes, and Series A
Notes contain restrictive covenants which limit the
Company's ability to declare and pay dividends. Under the
most restrictive of these covenants, $28.9 million was
available for the payment of dividends as of January 4,
2003. See Note 5 of Notes to Financial Statements.

15

EQUITY COMPENSATION PLAN INFORMATION
(IN THOUSANDS)

EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS

The Company granted options to acquire 555,538 shares of common stock
(adjusted for stock splits), exercisable at a price of $0.80 per share, to
Nortex Holdings, Inc. in April 1993 ('Nortex Option'). Options to acquire 66,665
shares are outstanding under the Nortex Option, which expires in April 2003. All
options granted under the 1993 Stock Option Plan for certain Company officers
are fully vested and currently cover 92,630 shares of common stock. When
granted, the exercise price of the shares covered by the 1993 Stock Option Plan
was $2.75 per share as to 60% of the shares granted and $1.37 per share as to
40% of the shares granted. The Company's 1996 Stock Option Plan for certain key
employees currently covers 770,450 shares of common stock. Options granted under
the 1996 Stock Option Plan vest over a five-year period beginning on the date of
each grant. Options are issued at their fair market value at the date of grant,
and the average exercise price for all options granted is $7.53 per share. Prior
to their participation in the Company's 1997 Stock Option Plan in 2000, the
Company's outside directors were awarded options pursuant to individual
contracts. These options were issued at their fair market value at the date of
grant, and the average exercise price for all such options granted is $9.20 per
share. All options granted under these contracts are fully vested and currently
cover a total of 82,500 shares of common stock.

16

ITEM 6. SELECTED FINANCIAL DATA

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)

The following table sets forth certain consolidated financial and operating
data of the Company for the periods indicated. This selected financial and
operating data should be read in conjunction with the Consolidated Financial
Statements, the Notes thereto and the other financial information included
herein.

- ---------

(1) The fiscal year ended January 4, 2003 was a 53-week period.

(2) Earnings per share is computed using the weighted average
number of common shares and common share equivalents
outstanding during the year.

(3) Net capital expenditures reflects assets acquired by
purchase and capital lease.

(4) Costs incurred related to a potential acquisition which was
not completed.

17

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

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

18

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

-------------------

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)

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

19

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

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

20

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

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

21

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

1. OPERATIONS

Quaker Fabric Corporation and subsidiaries (the 'Company' or 'Quaker')
designs, manufactures and markets woven upholstery fabrics primarily for
residential furniture markets and specialty yarns for use in the production of
its own fabrics and for sale to manufacturers of home furnishings and other
products.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of Quaker Fabric Corporation and its wholly
owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.

(b) Fiscal Year. The Company's fiscal year ends on the Saturday nearest to
January 1 of each year. The fiscal years ended December 29, 2001 and
December 30, 2000 each contained 52 weeks, while the fiscal year ended
January 4, 2003 contained 53 weeks.

(c) Revenue Recognition. Revenue is recognized from product sales when
earned as required by generally accepted accounting principles and in accordance
with SAB 101, 'Revenue Recognition in Financial Statements.' Revenues are
recognized when product shipment has occurred. At that time, the price is fixed
and determinable and collectability is reasonably assured, title and risk of
loss have transferred and all provisions agreed to in the arrangement necessary
for customer acceptance have been fulfilled.

(d) Cash and cash equivalents. Cash and cash equivalents includes cash on
hand, demand deposits and short-term cash investments which are highly liquid in
nature and have original maturities of three months or less.

(e) Allowance for Doubtful Accounts and Sales Returns and Allowances. The
Company performs ongoing credit evaluations of its customers and adjusts credit
limits based upon payment history and the customer's current creditworthiness,
as determined by management's review of their current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon historical
experience and any specific customer collection issues identified. While such
credit losses have historically been within expectations and the provisions
established, the Company cannot guarantee that credit loss rates in the future
will be consistent with those experienced in the past. The Company's accounts
receivable are spread among approximately 1,000 customers and no single customer
represents more than 6.0% of the accounts receivable balance at January 4, 2003.

Management analyzes historical sales and quality returns, current economic
trends, and the Company's quality performance when evaluating the adequacy of
the reserve for sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the reserve
for sales returns and allowances in any accounting period. The provision for
sales returns and allowances is recorded as a reduction of sales. Material
differences may result in the amount and timing of net sales for any period if
management makes different judgments or uses different estimates.

(f) Inventories. Inventories are stated at the lower of cost or market and
include materials, labor and overhead. A standard cost system is used and
approximates cost on a FIFO basis. Cost for financial

22

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

reporting purposes is determined by the last-in, first-out (LIFO) method.
Inventories consist of the following at January 4, 2003 and December 29, 2001:

LIFO inventory values are higher than FIFO costs because current
manufacturing costs are lower than the older historical costs used to value
inventory on a LIFO basis.

Approximately 65% of finished goods are produced upon receipt of a firm
order. Management, in partnership with key customers, is utilizing forecasting
techniques to significantly reduce delivery lead times. Management regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on historical information and estimated
forecasts of product demand and raw material requirements for the next twelve
months.

(g) Property, Plant and Equipment. Property, plant and equipment are stated
at cost. The Company provides for depreciation and amortization on property and
equipment on a straight-line basis over their estimated useful lives as follows:

Buildings and improvements.................................. 32-39 years
Machinery and equipment..................................... 2-20 years
Furniture and fixtures...................................... 5-10 years
Motor vehicles.............................................. 4-5 years
Leasehold improvements...................................... 1-15 years

Maintenance and repairs are charged to operations as incurred. When
equipment and improvements are sold or otherwise disposed of, the asset's cost
and accumulated depreciation are removed from the accounts, and the resulting
gain or loss, if any, is included in the results of operations. Fully
depreciated assets are removed from the accounts when they are no longer in use.

(h) Impairment of Long-Lived Assets. The Company periodically considers
whether there has been a permanent impairment in the value of its long-lived
assets, primarily property and equipment in accordance with Financial Accounting
Standards Board ('FASB') Statement No. 144 ('SFAS No. 144'), 'Accounting for the
Impairment or Disposal of Long-Lived Assets.' The Company evaluates various
factors, including current and projected future operating results and the
undiscounted cash flows for any underperforming long-lived assets. To the extent
that the estimated future undiscounted cash flows are less than the carrying
amount of the asset, the asset is written down to its estimated fair market
value and an impairment loss is recognized. The value of impaired long-lived
assets is adjusted periodically based on changes in these factors. Based on its
review, the Company does not believe that any material impairment of its
long-lived assets has occurred.

(i) Goodwill. Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired. Goodwill was historically
amortized on a straight-line basis over 40 years. In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 142, 'Goodwill and Other Intangible Assets.' The Company has adopted
the requirements of SFAS No. 142 effective December 30, 2001. SFAS No. 142
requires companies to test all goodwill for impairment at least annually and to
cease amortization of this asset. Amortization expense was approximately $193
for each of the two fiscal years in the period ended December 29, 2001. At

23

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

January 4, 2003, the Company was not required to recognize any impairment. There
can be no assurance goodwill will not be impaired in the future.

(j) Income Taxes. The Company accounts for income taxes under SFAS No. 109,
'Accounting for Income Taxes.' This statement requires that the Company
recognize a current tax liability or asset for current taxes payable or
refundable and a deferred tax liability or asset for the estimated future tax
effects of temporary differences and carryforwards to the extent they are
realizable. A valuation allowance is recorded to reduce the Company's deferred
tax assets to the amount that is more likely than not to be realized. While
management has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event management were to determine that the Company would be able to realize
deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should management determine that the Company
would not be able to realize all or part of its net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made. The Company does not provide for United
States income taxes on earnings of subsidiaries outside of the United States.
The Company's intention is to reinvest these earnings permanently or to
repatriate the earnings only when tax-effective to do so. Management believes
that United States foreign tax credits would largely eliminate any United States
taxes or offset any foreign withholding taxes.

(k) Earnings Per Common Share. Basic earnings per common share is computed
by dividing net income by the weighted average number of common shares
outstanding during the period. For diluted earnings per share, the denominator
also includes dilutive outstanding stock options determined using the treasury
stock method. The following table reconciles weighted average common shares
outstanding to weighted average common shares outstanding and dilutive potential
common shares.

(l) Foreign Currency. The assets and liabilities of the Company's Mexican
and Brazilian operations are translated at period-end exchange rates, and
statement of income accounts are translated at weighted average exchange rates.
The resulting translation adjustments are included in the consolidated balance
sheet as a separate component of equity, 'Accumulated Other Comprehensive Loss,'
and foreign currency transaction gains and losses are included with selling,
general and administrative expenses in the consolidated statements of income.

In accordance with SFAS No. 137, 'Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133,'
the Company adopted SFAS No. 133, 'Accounting for Derivative Instruments and
Hedging Activities' and SFAS No. 138 'Accounting for Certain Derivative
Instruments and Hedging Activities, an Amendment of FASB Statement No. 133,'
(collectively, SFAS No. 133, as amended) effective in fiscal 2001.

SFAS No. 133, as amended, establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as
either an asset or liability measured at its fair value. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, to the extent
effective, and requires that the Company formally document,

24

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

designate and assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133, as amended, in part, allows special hedge accounting
for fair value and cash flow hedges. The statement provides that the gain or
loss on a derivative instrument designated and qualifying as a fair value
hedging instrument, as well as the offsetting changes in the fair value of the
hedged item attributable to the hedged risk, be recognized currently in earnings
in the same accounting period. SFAS No. 133, as amended, provides that the
effective portion of the gain or loss on a derivative instrument designated and
qualifying as a cash flow hedging instrument be reported as a component of other
comprehensive income and be reclassified into earnings in the same period or
periods during which the hedged forecasted transaction affects earnings. The
ineffective portion of a derivative's change in fair value is recognized
currently through earnings regardless of whether the instrument is designated as
a hedge.

The Company enters into forward exchange contracts to hedge the fair value
of foreign currency denominated intercompany accounts payable. The purpose of
the Company's foreign currency hedging activities is to minimize, for a period
of time, the unforeseen impact on the Company's results of operations of
fluctuations in foreign exchange rates. At January 4, 2003, the Company had 6
forward contracts totaling $900, all maturing in less than six months, to
exchange Brazilian reals and Mexican pesos for U.S. dollars. The Company has
designated these contracts as fair value hedges intended to lock in the expected
cash flows from the repayment of foreign currency denominated intercompany
payables at the available forward rate at the inception of the contract. Changes
in the fair value of the hedge instruments are recognized in earnings. At
January 4, 2003, the fair value of these contracts resulted in an unrealized
gain of $6.

The Company also enters into forward exchange contracts to hedge the
purchase of fixed assets denominated in foreign currencies. At January 4, 2003,
the Company had one forward contract for $398 to hedge the purchase of equipment
denominated in a foreign currency. The Company has designated this hedge as a
cash flow hedge intended to reduce the risk of currency fluctuations from the
time of order through delivery of the equipment. The fair value of this contract
as of January 4, 2003 resulted in an unrealized gain of $16 which was recorded
in other comprehensive income.

In December 2001, the Company entered into a foreign currency swap in order
to further provide an economic hedge against an additional portion of its
currency risk in Mexico. The terms of the agreement call for the Company to swap
2.0 million Mexican pesos per month from April 2002 through March 2003 at a
fixed rate of 9.13 pesos to the U.S. Dollar. The original notional amount of the
contract was approximately $2,600, and the remaining notional amount as of
January 4, 2003, is approximately $650. The Company must pay a floating interest
rate on the outstanding notional amount of the contract. The interest rate is
the Mexican Interbank Equilibrium Rate less 1.0%. The rate is reset every 28
days. The interest rate at January 4, 2003 is 7.75%. Unrealized gains and losses
resulting from the impact of currency fluctuations on the value of this contract
are recognized in earnings in the period when the exchange rates change. At
January 4, 2003, an unrealized gain of $81 has been recorded on this currency
swap.

These derivative financial instruments are for risk management purposes only
and are not used for trading or speculative purposes.

(m) Use of Estimates in the Preparation of Financial Statements. The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions. Material estimates that are
particularly susceptible to significant changes in the near term relate to the
determination of income taxes, inventory reserves, accounts receivable reserves,
and self insurance reserves.

25

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(n) Self-Insurance Reserves. The Company is self-insured for workers'
compensation and medical insurance. Quaker has also purchased stop loss coverage
for both types of risks in order to minimize the effect of a catastrophic level
of claims. At the end of each accounting period, the reserves for incurred but
not reported claims must be evaluated. Management evaluates claims experience on
a regular basis in consultation with the Company's insurance advisors and makes
adjustments to these reserves. Significant management judgments and estimates
must be made and used in connection with evaluating the adequacy of
self-insurance reserves. Material differences may result in the amount and
timing of these costs for any period if management makes different judgments or
uses different estimates.

(o) Fair Value of Financial Instruments. The Company's financial instruments
mainly consist of cash, accounts receivable, accounts payable, foreign currency
financial instruments and long term debt. The carrying amounts of these
financial instruments as of January 4, 2003 approximate their fair values due to
the short term nature and terms of these instruments, and also the rates
available to the Company for debt and foreign currency financial instruments
with similar terms and remaining maturities.

(p) Shipping and Handling Costs. In Fiscal 2000, the Company adopted
Emerging Issues Task Force (EITF) Issue 00-10, 'Accounting for Shipping and
Handling Fees and Costs' (EITF 00-10). At adoption, EITF 00-10 required the
Company to classify amounts billed to a customer in a sales transaction related
to shipping and handling as revenues and classify similar costs in a sales
transaction as cost of goods sold. The net effect of the adoption of EITF 00-10
resulted in the Company reclassifying net shipping costs from 'selling, general
and administrative' expenses to 'net sales' and 'cost of products sold' within
the consolidated statements of income. Shipping and handling costs are not
significant and therefore not separately disclosed.

(q) Recently Issued Accounting Standards. In January 2003, the FASB issued
Interpretation No. 46 ('FIN 46'), 'Consolidation of Variable Interest Entities,
an interpretation of Accounting Research Bulletin ('ARB') No. 51 ('ARB 51').'
The primary objectives of FIN 46 are to provide guidance on the identification
of, and financial reporting for, entities for which control is achieved through
means other than through voting rights; such entities are known as
variable-interest entities (VIEs). FIN 46 provides guidance that determines
(1) whether consolidation is required under (a) the 'controlling financial
interest' model of ARB 51, 'Consolidated Financial Statements,' or (b) other
existing authoritative guidance or, alternatively, (2) whether the
variable-interest model under FIN 46 should be used to account for existing and
new entities. In addition, FIN 46 requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a VIE make
additional disclosures. FIN 46 is effective for VIEs which are created after
January 31, 2003 and for all VIEs for the first fiscal year or interim period
beginning after June 15, 2003. The Company has evaluated the provisions of FIN
46 and determined that this interpretation will have no effect on its
consolidated financial statements.

In December 2002, the FASB issued Statement No. 148 ('SFAS 148'),
'Accounting for Stock-Based Compensation.' SFAS 148 amends FASB issued Statement
No. 123 ('SFAS 123'), 'Accounting for Stock-Based Compensation,' to provide
alternative methods of transition for an entity that voluntarily adopts the
accounting provisions of SFAS 123. SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The Company
has elected to continue to account for our stock option plans under Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees,' as
well as to provide disclosure of stock based compensation as outlined in SFAS
123 and as amended in SFAS 148.

In November 2002, the FASB issued Interpretation No. 45 ('FIN 45'),
'Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others,

26

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

and interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 44.' FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. FIN 45
is effective on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements in FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company has
adopted the disclosure provisions of FIN 45 and determined that this
interpretation had no material effect on its consolidated financial statements.

In June 2002, the FASB issued Statement No. 146 ('SFAS 146'), 'Accounting
for Costs Associated with Exit or Disposal Activities.' This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3 ('EITF
94-3'), 'Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring).' The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002.

(r) Stock option plans. As more fully described in Note 8, the Company has
stock option plans in effect that provide for the grant of non-qualified stock
options to directors, officers and employees of the Company. The Company applies
APB Opinion 25, 'Accounting for Stock Issued to Employees,' and related
interpretations in accounting for its stock option plans. The exercise price of
stock options, set at the time of grant, is not less than the fair market value
per share at the date of grant. Options have a term of 10 years and generally
vest after 5 years.

The following table illustrates the effect on net income and earnings per
share as if the Black-Scholes fair value method described in SFAS No. 123,
'Accounting for Stock-Based Compensation,' had been applied to the Company's
stock option plans.

27

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Depreciation and amortization expense related to property, plant and
equipment for the years ending January 4, 2003, December 29, 2001, and
December 30, 2000 was $17,723, $15,154, and $13,723, respectively.

4. ACCRUED EXPENSES

Accrued expenses consists of the following:

5. DEBT

Debt consists of the following:

On October 10, 1997, the Company issued $30,000 of 7.18% Senior Notes and
$15,000 of 7.09% Senior Notes (the 'Senior Notes'). The Senior Notes are
unsecured and bear interest at fixed rates of 7.18% and 7.09%, payable
semiannually. The Senior Notes may be prepaid in whole or in part prior to

28

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

maturity, at the Company's option, subject to a yield maintenance premium, as
defined. On February 14, 2002, the Company issued $5,000 of 7.56% Series A Notes
(the 'Series A Notes'). The Series A Notes are unsecured and bear interest at a
fixed interest rate of 7.56%, payable semiannually. The Series A Notes may
be prepaid in whole or in part prior to maturity, at the Company's option,
subject to a yield maintenance premium, as defined. In addition and also on
February 14, 2002, the Company entered into a $45,000 non-committed Shelf Note
agreement with an insurance company pursuant to which the Company may issue
additional senior notes prior to February 14, 2005 with maturity dates of up to
ten years. Required principal payments of the Senior Notes are as follows:

Under the terms of the unsecured credit facility (the 'Credit Agreement'),
which was amended and restated on February 14, 2002, the Company may borrow up
to $60,000 through January 31, 2007. Advances made under the Credit Agreement
bear interest at either the prime rate plus 0.25% or the Eurodollar rate plus an
'Applicable Margin,' as determined by the Company. The Applicable Margin on
advances is adjusted quarterly based on the Company's Leverage Ratio as defined
in the Credit Agreement. The Applicable Margin for Eurodollar advances may range
from 1.0% to 1.875%. The Company is also required to pay certain fees including
a commitment fee which will vary based on the Company's Leverage Ratio. As of
January 4, 2003, the commitment fee is 0.375% of the unused portion of the
Credit Agreement which was $43,683, net of outstanding letters of credit of
$117. As of January 4, 2003, the Company had $16,200 outstanding under the
Credit Agreement at an effective interest rate of 3.77%. As of December 29,
2001, the Company had $18,500 outstanding under the Credit Agreement at an
effective interest rate of 3.16%.

The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement, the Senior Notes, and the Series A Notes.
Among other things, the Credit Agreement, the Senior Notes and the Series A
Notes require the Company to satisfy certain financial tests and ratios
(including interest coverage ratios, leverage ratios, and net worth
requirements). The Credit Agreement, the Senior Notes and the Series A Notes
also impose limitations on the Company's ability to incur additional
indebtedness, create certain liens, incur capital lease obligations, declare and
pay dividends, make certain investments, and purchase, merge or consolidate with
or into any other corporation. Under the most restrictive of these covenants
$28.9 million was available for the payment of dividends as of January 4, 2003.
As of January 4, 2003, the Company is in compliance with all debt covenants.

As of January 4, 2003, total debt principal payments for each of the next
five fiscal years and thereafter are as follows:

2003....................................................... $ 5,000
2004....................................................... 5,000
2005....................................................... 5,000
2006....................................................... 15,000
2007....................................................... 31,200
Thereafter................................................. 5,000
-------
$66,200
-------
-------

29

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

6. INCOME TAXES

Income (loss) before provision for income taxes consists of:

The following is a summary of the provision (benefit) for income taxes:

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:

30

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The Company has available for use $503 of federal tax credit carryforwards,
which have no expiration dates. The timing and use of the tax credit
carryforwards are limited under applicable federal income tax legislation. In
addition, the Company has approximately $7,317 of state investment tax credit
carryforwards. These state tax credits have no expiration date, however, the
timing and use of these credits is limited under applicable state income tax
legislation. The Company has provided a valuation allowance for a portion of
certain state tax credits that may not be realized.

The significant items comprising the deferred tax asset/liability are as
follows:

7. COMMITMENTS AND CONTINGENCIES

(a) Litigation. In the ordinary course of business, the Company is party to
various types of litigation. The Company believes it has meritorious defenses to
all claims and in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position, results of
operations or liquidity.

(b) Environmental Cleanup Matters. The Company accrues for estimated costs
associated with known environmental matters when such costs are probable and can
be reasonably estimated. The actual costs to be incurred for environmental
remediation may vary from estimates, given the inherent uncertainties in
evaluating and estimating environmental liabilities, including the possible
effects of changing laws and regulations, the stage of the remediation process
and the magnitude of contamination found as the remediation progresses.
Management believes the ultimate disposition of known environmental matters will
not have a material adverse effect on the liquidity, capital resources, business
or consolidated financial position of the Company.

31

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(c) Leases. The Company leases certain facilities and equipment under
operating lease agreements expiring at various dates from the current year to
the year 2010. As of January 4, 2003, the aggregate minimum future commitments
under leases are as follows:

Rent expense for operating leases for the years ended January 4, 2003,
December 29, 2001 and December 30, 2000 was $3,903, $3,331, and $3,094,
respectively.

(d) Letters of Credit. In the normal course of its business activities, the
Company is required under certain contracts to provide letters of credit which
may be drawn down in the event the Company fails to perform under the contracts.
As of January 4, 2003, the Company had issued or agreed to issue letters of
credit totaling $117.

(e) Employment Contract and Change-in-Control Agreements. In 1999, the
Company's Board of Directors approved a second amendment to the President and
Chief Executive Officer's Employment Agreement (the Employment Agreement). The
Employment Agreement provides for Mr. Liebenow to continue to serve as President
and Chief Executive Officer of the Company on a full-time basis through March
12, 2005, subject to an automatic three-year extension, unless terminated by the
Company upon one year's prior notice and provides for certain payments to be
made to Mr. Liebenow in the event of a change in control.

The Employment Agreement provides for a base salary of $600, subject to such
annual increases as may be determined by the Board of Directors, as well as
certain benefits and reimbursement of expenses. If the Employment Agreement had
terminated as of January 4, 2003, Mr. Liebenow would have been entitled to
receive $1,980 (in the event of a voluntary termination, termination for cause
or for any other reason).

During 1999, the Company also entered into change-in-control agreements with
the Company's other corporate officers. These agreements provide certain
benefits to the Company's other officers in the event their employment with the
Company is terminated as a result of a change-in-control as defined. The maximum
contingent liability related to the change-in-control agreements is
approximately $3.0 million.

8. STOCK OPTIONS

The Company has several stock option plans (the Plans) in effect that
provide for the granting of non-qualified stock options to directors, officers,
and employees of the Company. Options under the Plans are generally granted at
fair market value and vesting is determined by the Board of Directors.

32

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Stock Option Activity. A summary of the Company's stock option activity is
as follows:

The following table summarizes information for options outstanding and
exercisable at January 4, 2003:

At its regular meeting in December 2001, the Company's Board of Directors
granted options to purchase 160 shares of common stock at an exercise price of
$8.30 per share to certain individuals subject to shareholder approval of an
increase of 750 shares in the number of shares available for grant under the
Plans. At the May 16, 2002 Annual Meeting, shareholder approval was received.
Accordingly, the Company recorded an unearned compensation charge equal to the
difference between the exercise price and the fair value on the date of
shareholder approval of $1,032. During 2002, the Company recognized $131 of
amortization of unearned compensation.

Accounting for Stock Based Compensation. The Company discloses stock-based
compensation information in accordance with SFAS 148 and SFAS 123. SFAS 148
provides additional transition guidance for companies that elect to voluntarily
adopt the provisions of SFAS 123. SFAS 148 does not change the provisions of
SFAS 123 that permit entities to continue to apply the intrinsic value method of
APB 25. The Company has elected to continue to account for its stock option
plans under APB 25 as well as to provide disclosure of stock based compensation
as outlined in SFAS 123 as amended by SFAS 148. SFAS 123 requires disclosure of
pro forma net income, EPS and other information as if the fair value method of
accounting for stock options and other equity instruments described in SFAS 123
had been adopted. SFAS 123 does not apply to awards made prior to June 24, 1995,
and so all pro forma disclosures include the effects of all options granted
after June 24, 1995. Additional awards in future

33

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

years are anticipated. The effects of applying SFAS 123 in this pro forma
disclosure are not indicative of future expectations.

Had compensation cost for awards granted in Fiscal 2002, Fiscal 2001 and
Fiscal 2000 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
in SFAS No. 123, the effect on the Company's net income and earnings per common
share would have been as follows:

Pro forma compensation expense for options is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.

The Black-Scholes option-pricing model is used to estimate the fair value on
the date of grant of each option grated after December 15, 1994. The following
assumptions used for stock option grants and employee purchase right grants were
as follows:

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options with no vesting or transferability
restrictions. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions used
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options. Management has determined that the impact of the
cash dividend declared on March 3, 2003, which is discussed in Note 12, did not
have a material effect on pro forma compensation expense for 2002.

9. SEGMENT REPORTING

The Company operates as a single business segment consisting of sales of two
products; upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.

34

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Gross foreign and export sales from the United States to unaffiliated
customers by major geographical area were as follows:

Gross sales by product category are as follows:

10. EMPLOYEE BENEFIT PLANS
(reflects actual dollar and share amounts)

The Company has established a 401(k) plan (the 401(k) Plan) for eligible
employees of the Company who may contribute up to 15% of their annual salaries
(up to $11,000 for 2002) to the 401(k) Plan. All contributions made by an
employee are fully vested and are not subject to forfeiture. Each year the
Company contributes on behalf of each participating employee an amount equal to
100% of the first $200 contributed by each employee and 25% of the next $800
contributed by such employee, for a maximum annual Company contribution of $400
per employee. The Company's matching contribution was $586,000, $483,000, and
$397,000, in 2002, 2001, and 2000, respectively. An employee is fully vested in
the contributions made by the Company upon his or her completion of five years
of participation in the 401(k) Plan.

Effective October 1, 1997, the Company established an Employee Stock
Purchase Plan (the ESPP) under which a maximum of 100,000 shares of common stock
may be purchased by eligible employees. All full-time employees of the Company,
other than officers of the Company, are eligible to participate in the ESPP.

The ESPP provides for quarterly 'purchase periods' within each of the
Company's fiscal years. Shares are purchased through payroll deductions (of not
less than 1% nor more than 10% of compensation as defined, or up to a maximum of
$10,000 in a designated dollar amount per year.) The purchase price for shares
is 85% of the fair market value of the common stock at the date of purchase. For
Fiscal Years 2002, 2001, and 2000 the Company issued 19,899 shares, 22,984
shares, and 34,281 shares respectively, under the Plan.

11. NON-RECURRING CHARGE

In July 2001, the Company's negotiations with a potential acquisition target
were terminated. Costs incurred related to this potential acquisition were $800.
As a result, a non-recurring, pre-tax charge of $800 ($500 after-tax or $0.03
per diluted share) was recorded in the third quarter of Fiscal 2001.

35

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

12. SUBSEQUENT EVENTS

On March 3, 2003, the Board of Directors approved a new dividend policy
reflecting the Company's intention to pay dividends going forward, with the
level of each dividend payment, if any, to be determined by the Board based on a
number of factors, including the Company's financial performance, cash flows and
cash requirements. Also on March 3, 2003, the Board approved and announced the
payment of a cash dividend in an amount equal to $0.025 per common share payable
March 27, 2003 to shareholders of record on March 17, 2003.

On February 24, 2003, Nortex Holdings, Inc., a Delaware holding company
owned by Larry Liebenow, Quaker Fabric's Chief Executive Officer, and Duncan
Whitehead, Vice President-Research and Development, exercised options for
488,873 shares of Quaker common stock. These options were originally granted to
Nortex Holdings in April 1993 in connection with the buy-out of a financial
holding company's interest in Quaker and were nearing the end of their ten-year
term.

13. SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the results of operations for each of the
quarters within the years ended January 4, 2003 and December 29, 2001.

- ---------

(1) All quarters in 2002 and 2001 were 13 weeks except for the
fourth quarter of 2002 which contained 14 weeks.

(2) Earnings per common share for the quarters presented have
each been calculated separately. Accordingly, quarterly
amounts may not sum to the fiscal year amount presented.

36

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF QUAKER FABRIC CORPORATION:

In our opinion, the accompanying consolidated balance sheet as of January 4,
2003 and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Quaker Fabric Corporation (the
Company) and its subsidiaries at January 4, 2003 and the results of their
operations and their cash flows for the fiscal year ended January 4, 2003 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

The financial statements of the Company as of December 29, 2001, and for each of
the two years in the period ended December 29, 2001 were audited by other
independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report dated February 4, 2002, except with respect to the matters
discussed in Note 5 of those financial statements, as to which the date was
February 14, 2002.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 17, 2003 (except with respect
to the matters discussed in Note 12,
as to which the date is March 3, 2003)

37

REPORT OF INDEPENDENT ACCOUNTANTS

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP

TO QUAKER FABRIC CORPORATION:

We have audited the accompanying consolidated balance sheets of Quaker
Fabric Corporation (a Delaware corporation) and subsidiaries as of December 29,
2001 and December 30, 2000, and the related consolidated statements of income,
comprehensive income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 29, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Quaker
Fabric Corporation and subsidiaries as of December 29, 2001 and December 30,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 29, 2001, in conformity with accounting
principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 4, 2002 (except with respect
to the matters discussed in Note 5,
as to which the date is February 14, 2002)

38

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.

GENERAL

Overview. Quaker is a leading designer, manufacturer and worldwide marketer
of woven upholstery fabrics and one of the largest producers of Jacquard
upholstery fabrics in the world. The Company also manufactures specialty yarns,
most of which are used in the production of the Company's fabric products. The
balance is sold to manufacturers of home furnishings and other products.

Overall demand levels in the upholstery fabric sector are a function of
overall demand for household furniture, which is, in turn, affected by general
economic conditions, population demographics, consumer confidence and disposable
income levels, sales of new and existing homes and interest rates.

Although both industry and macroeconomic conditions began to weaken in May
of 2000 and continued to deteriorate throughout the balance of the year, the
positive momentum in the Company's order rate that started during 1999 continued
throughout 2000, culminating in record revenues for 2000 of $303.0 million and a
dramatic increase in Quaker's bottom line profitability, with net income of
$10.9 million. The Company also generated strong cash flows in 2000, allowing it
to reduce debt by an additional $7.2 million and resulting in a net debt to
capital ratio of approximately 28.4% at year-end.

During 2001, Quaker once again demonstrated outstanding top line results,
particularly when compared to the performance of the furniture sector as a
whole, achieving record revenues of $331.1 million for the year, up 9.3%, with
net income of $9.5 million, new orders up 18.5% during the fourth quarter versus
the comparable period of 2000, and a production backlog at the end of 2001 of
$43.0 million.

The Company's order rate remained strong going into 2002, and Quaker's 2002
revenues of $365.4 million and net income of $11.6 million both set new company
records. During the first half of 2002, Quaker's revenues were running at an
annualized rate of approximately $400.0 million, however, global economic
conditions deteriorated as the year progressed, ultimately resulting in a weak
fourth quarter, with domestic fabric sales down 8.9% for the quarter and yarn
sales off significantly. The Company's backlog position at year-end was also
down considerably from $43.0 million in 2001 to $26.1 million at the end of
2002, due to both significant reductions Quaker achieved in its delivery lead
times and weakness in the Company's fourth quarter order rate. During 2002,
Quaker also further strengthened its balance sheet, with the Company generating
approximately $13.0 million of free cash flow during the fourth quarter, thereby
allowing Quaker to reduce funded debt by approximately $13.3 million during the
quarter.

Demand levels for the Company's products have increased since the start of
2003 compared to the fourth quarter of 2002. At this time, management believes
that global economic conditions will remain relatively weak during 2003,
resulting in a challenging business environment for Quaker, its suppliers and
its customers. Uncertainty surrounding the global economic and geopolitical
environment will likely continue to put pressure on the Company's fabric sales,
including a significant reduction in overall demand in certain of its export
markets over the near term. Additionally, continued softening in domestic demand
for yarn products is expected to depress the Company's yarn revenues. Management
nevertheless believes that the significant investments the Company has made in
new product development, manufacturing equipment, new technology and market
initiatives have positioned the Company to compete successfully and deliver a
strong overall financial performance as business conditions improve. With a
focus this year on generating free cash flow, management anticipates new
spending on capital projects of approximately $9.0 million during 2003, compared
to approximately $32.0 million during 2002. Additionally, the Company is
analyzing various financing alternatives in connection with the possible
development of additional manufacturing and warehousing facilities in the Fall
River area.

39

Quarterly Operating Results. The following table sets forth certain
condensed unaudited consolidated statements of income data for the eight fiscal
quarters ended January 4, 2003, as well as certain data expressed as a
percentage of the Company's total net sales for the periods indicated:

- ---------

The data reflected in this table has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this report. Fiscal year 2001 contained 52 weeks while fiscal year 2002 was 53
weeks. The fourth quarter of fiscal year 2002 contained 14 weeks.

-------------------

The Company follows industry practice by closing its operating facilities
for a one-to-two week period during July of each year. In 2002 and 2001, this
shutdown period, and the resulting effect on sales, occurred in the third fiscal
quarter. During 2003, the shutdown period, and the resulting effect on sales,
will be split between the second and third fiscal quarters.

Product Mix. By offering a broad assortment of fabrics at each price point
and in each styling category, the Company has positioned itself as a full
service supplier of Jacquard and plain woven fabrics to the upholstered
furniture segment. While Quaker offers a full range of fabrics to its
promotional-end customers, the Company's primary focus is on the development of
products for the middle to upper-end of the market, where Quaker's design,
technology and manufacturing expertise provide the Company with the greatest
competitive advantage. Quaker's product line is divided into three distinct
branded collections, with its Davol'TM', Quaker'TM', and Whitaker'r' Collections
intended to meet the styling, design, quality and pricing needs of the
promotional, middle to better, and better to upper ends of the market,
respectively.

40

Geographic Distribution of Fabric Sales. To develop markets for upholstery
fabric outside the United States, the Company has placed substantial emphasis on
building both direct exports from the United States as well as sales from its
distribution centers in Mexico and Brazil. The following table sets forth
certain information about the changes which have occurred in the geographic
distribution of the Company's gross fabric sales since 2000:

- ---------

(1) Foreign sales consists of both direct exports from the
United States as well as sales from the Company's
distribution centers in Mexico and Brazil.

CRITICAL ACCOUNTING ESTIMATES

The following is a brief discussion of the more significant accounting
estimates used by the Company.

GENERAL

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to
accounts receivable reserves, inventory valuation and inventory reserves, and
self-insurance reserves. Actual amounts could differ significantly from these
estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS AND ALLOWANCES

The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current
creditworthiness, as determined by management's review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues identified.
While such credit losses have historically been within expectations and the
provisions established, the Company cannot guarantee that credit loss rates in
the future will be consistent with those experienced in the past. The Company's
accounts receivable are spread among more than 1,000 customers and no single
customer represents more than 6.0% of the accounts receivable balance at January
4, 2003.

Management analyzes historical sales and quality returns, current economic
trends, and the Company's quality performance when evaluating the adequacy of
the reserve for sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the reserve
for sales returns and allowances in any accounting period. Material differences
may result in the amount and timing of the Company's net sales for any period if
management makes different judgments or uses different estimates.

INVENTORIES

Inventory is valued using the last-in, first-out (LIFO) method.
Approximately 65% of finished goods are produced upon receipt of a firm order.
Management, in partnership with key customers, is utilizing forecasting
techniques to significantly reduce delivery lead times. Management regularly

41

reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on historical information and estimated
forecasts of product demand and raw material requirements for the next twelve
months. A significant increase in demand for the Company's products could result
in a short-term increase in manufacturing costs, including but not limited to
overtime and other costs related to capacity constraints in certain areas of the
Company. A significant decrease in demand could result in an increase in the
amount of excess inventory quantities on hand. Additionally, assumptions used in
determining management's estimates of future product demand may prove to be
incorrect, in which case the provision required for excess and obsolete
inventory would have to be adjusted in the future. If inventory is determined to
be overvalued, the Company would be required to recognize such costs as cost of
goods sold at the time of such determination. Therefore, although every effort
is made to ensure the accuracy of management's forecasts of future product
demand, any significant unanticipated changes in demand could have a significant
impact on the value of the Company's inventory and the Company's reported
operating results.

SELF-INSURANCE RESERVES

The Company is self-insured for workers' compensation and medical insurance.
Quaker has also purchased stop loss coverage for both types of risks in order to
minimize the effect of a catastrophic level of claims. At the end of each
accounting period, the reserves for incurred but not reported claims must be
evaluated. Management evaluates claims experience on a regular basis in
consultation with the Company's insurance advisors and makes adjustments to
these reserves. Significant management judgments and estimates must be made and
used in connection with evaluating the adequacy of self-insurance reserves.
Material differences may result in the amount and timing of these costs for any
period if management makes different judgments or uses different estimates.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is depreciated over the estimated useful
lives. Useful lives are based on management's estimates of the period that the
assets will generate revenue. These assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Reductions in the useful lives of the Company's fixed
assets would have an adverse impact on the Company's financial results.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, 'Accounting for
Income Taxes.' This statement requires that the Company recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
and carryforwards to the extent they are realizable. A valuation allowance is
recorded to reduce the Company's deferred tax assets to the amount that is more
likely than not to be realized. While management has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event management were to determine that
the Company would be able to realize deferred tax assets in the future in excess
of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should
management determine that the Company would not be able to realize all or part
of its net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made. The
Company does not provide for United States income taxes on earnings of
subsidiaries outside of the United States. The Company's intention is to
reinvest these earnings permanently or to repatriate the earnings only when
tax-effective to do so. Management believes that United States foreign tax
credits would largely eliminate any United States taxes or offset any foreign
withholding taxes.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46 ('FIN 46'),
'Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51 ('ARB 51').' The primary

42

objectives of FIN 46 are to provide guidance on the identification of, and
financial reporting for, entities for which control is achieved through means
other than through voting rights; such entities are known as variable-interest
entities (VIEs). FIN 46 provides guidance that determines (1) whether
consolidation is required under (a) the 'controlling financial interest' model
of ARB 51, 'Consolidated Financial Statements,' or (b) other existing
authoritative guidance, or alternatively, (2) whether the variable-interest
model under FIN 46 should be used to account for existing and new entities. In
addition, FIN 46 requires that both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE make additional
disclosures. FIN 46 is effective for VIEs which are created after January 31,
2003 and for all VIEs for the first fiscal year or interim period beginning
after June 15, 2003. The Company has evaluated the provisions of FIN 46 and
determined that this interpretation will have no effect on its consolidated
financial statements.

In December 2002, the FASB issued Statement No. 148 ('SFAS 148'),
'Accounting for Stock-Based Compensation.' SFAS 148 amends FASB Statement No.
123 ('SFAS 123'), 'Accounting for Stock-Based Compensation,' to provide
alternative methods of transition for an entity that voluntarily adopts the
accounting provisions of SFAS 123. SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002. The Company
has elected to continue to account for our stock option plans under Accounting
Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees,' as
well as to provide disclosure of stock based compensation as outlined in SFAS
123, as amended by SFAS 148.

In November 2002, the FASB issued Interpretation No. 45 ('FIN 45'),
'Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others, and interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 44.'
FIN 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair value, or market value, of the obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. FIN 45 is effective on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure provisions of FIN 45 and determined
that this interpretation had no material effect on its consolidated financial
statements.

In June 2002, the FASB issued Statement No. 146 ('SFAS 146'), 'Accounting
for Costs Associated with Exit or Disposal Activities.' This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3 ('EITF
94-3'), 'Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs incurred in a
Restructuring).' The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002.

RESULTS OF OPERATIONS

FISCAL 2002 COMPARED TO FISCAL 2001

Net Sales. Net sales for 2002 increased $34.3 million, or 10.4%, to $365.4
million from $331.1 million in 2001. Gross fabric sales increased due to
increases in both domestic and foreign fabric sales. Gross fabric sales within
the United States increased 13.5%, to $306.5 million in 2002 from $270.0 million
in 2001. Foreign sales increased 15.6%, to $48.8 million in 2002 from $42.3
million in 2001. This increase in foreign sales was due to improved sales in
Mexico and Canada as well as increased penetration of other international
markets. Gross yarn sales decreased 31.5%, to $15.9 million in 2002 from $23.2
million in 2001.

The gross volume of fabric sold increased 12.6%, to 63.8 million yards in
2002 from 56.7 million yards in 2001. The weighted average gross sales price per
yard increased 1.1%, to $5.57 in 2002 from

43

$5.51 in 2001. The Company sold 2.6% more yards of middle to better-end fabrics
and 36.6% more yards of promotional-end fabrics in 2002 than in 2001. The
average gross sales price per yard of middle to better-end fabrics increased by
4.6%, to $6.43 in 2002 from $6.15 in 2001. The average gross sales price per
yard of promotional-end fabrics increased by 1.3%, to $4.00 in 2002 from $3.95
in 2001.

Gross Margin. The gross margin percentage for 2002 increased to 21.9% as
compared to 21.2% for 2001. Improvements in raw material yields on a per unit
basis accounted for approximately $8.4 million in cost reductions compared to
the prior year. Increased manufacturing capacity resulted in a drop in the
Company's overtime requirements, reducing overtime costs by approximately $1.1
million. Distribution of revenues among the fiscal quarters also affects the
incurrence of overtime. In 2002 record sales during the first half of the year
resulted in significant overtime costs, while less overtime was incurred during
the second half of the year because of lower demand for the Company's products.
The production of second quality fabric increased during 2002, offsetting these
margin improvements by approximately $2.4 million and fixed overhead costs
increased by approximately $8.5 million as compared to 2001. All other variable
costs increased by approximately $1.0 million.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $56.9 million in 2002 from $50.5 million in
2001. Selling, general and administrative expenses as a percentage of net sales
were 15.6% and 15.3% in 2002 and 2001, respectively. The increase in selling,
general and administrative expenses was due to higher variable costs, such as
sales commissions, resulting from higher sales. Additionally, labor and related
costs and sampling expenses were each up $2.2 million as compared to 2001.

Interest Expense, Net. Interest expense increased to $4.6 million in 2002
from $4.1 million in 2001. Higher average levels of senior debt, partially
offset by lower rates of interest were the primary reasons for the increase.

Effective Tax Rate. The Company's effective tax rate was 37.0% for 2002 and
36.0% for 2001. The effective income tax rate is lower than the combined federal
and state statutory rates due primarily to certain tax benefits related to
extraterritorial income at the federal level and investment tax credits at the
state level. The effective tax rate increased in 2002 principally due to lower
federal tax credits. See Note 6 of the Notes to Consolidated Financial
Statements included elsewhere in this report. Based upon existing tax laws and
our operating plans for 2003, we anticipate the effective tax rate will be
similar to 2002.

FISCAL 2001 COMPARED TO FISCAL 2000

Net Sales. Net sales for 2001 increased $28.1 million, or 9.3%, to $331.1
million from $303.0 million in 2000. Gross fabric sales increased due to
increases in both domestic and foreign fabric sales. Gross fabric sales within
the United States increased 11.8%, to $270.0 million in 2001 from $241.6 million
in 2000. Foreign sales increased 2.3%, to $42.3 million in 2001 from $43.1
million in 2000. This increase was due to improved sales in Mexico and Canada as
well as increased penetration of other international markets. Gross yarn sales
decreased 2.9%, to $23.2 million in 2001 from $23.9 million in 2000.

The gross volume of fabric sold increased 6.3%, to 56.7 million yards in
2001 from 53.4 million yards in 2000. The weighted average gross sales price per
yard increased 4.0%, to $5.51 in 2001 from $5.30 in 2000. The Company sold 1.6%
more yards of middle to better-end fabrics and 31.3% more yards of
promotional-end fabrics in 2001 than in 2000. The average gross sales price per
yard of middle to better-end fabrics increased by 6.2%, to $6.15 in 2001 from
$5.79 in 2000. The average gross sales price per yard of promotional-end fabrics
increased by 5.9%, to $3.95 in 2001 from $3.73 in 2000.

Gross Margin. The gross margin percentage for 2001 decreased to 21.2% as
compared to 22.5% for 2000. The decrease was due to increased energy costs and
raw material price increases. Also, as a consequence of uncertain market
conditions in the furniture industry during the first half of the year, our
customers changed their purchasing habits in terms of both the size and
frequency of their orders. As a result, the Company's operating efficiencies
were negatively affected by the need to produce a higher number of smaller
customer orders. As order volume increased, particularly during the fourth
quarter, the Company's overtime costs increased, adversely impacting the gross
margin. Overtime costs

44

for 2001 were 21% higher than 2000 and overtime costs for the second half of
2001 were 48% higher than the second half of 2000.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $50.5 million in 2001 from $46.5 million in
2000. Selling, general and administrative expenses as a percentage of net sales
were 15.3% in both 2001 and 2000. The increase in selling, general and
administrative expenses was due to higher variable costs, such as sales
commissions, resulting from higher sales and increased costs associated with
foreign sales operations, offset by lower sampling costs.

Non-recurring Charge. In July 2001, the Company's negotiations with a
potential acquisition target were terminated. Costs incurred related to this
potential acquisition were $0.8 million. As a result, a non-recurring, pre-tax,
charge of $0.8 million ($0.5 million after-tax or $0.03 per diluted share) was
recorded in the third quarter of 2001.

Interest Expense, Net. Interest expense decreased to $4.1 million in 2001
from $4.9 million in 2000. Lower average levels of senior debt and lower rates
of interest were the primary reasons for the decrease.

Effective Tax Rate. The Company's effective tax rate was 36.0% for 2001 and
35.0% for 2000. The effective income tax rate is lower than the combined federal
and state statutory rates due primarily to certain tax benefits related to
extraterritorial income at the federal level and investment tax credits at the
state level. The effective tax rate increased in 2001 principally due to a lower
tax benefit related to extraterritorial income. See Note 6 of the Notes to
Consolidated Financial Statements included elsewhere in this report.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
under the Credit Agreement (as hereinafter defined), and debt and equity
offerings. The Company's capital requirements have arisen principally in
connection with (i) the purchase of equipment to expand production capacity,
introduce new technologies to broaden and differentiate the Company's products,
and improve the Company's quality and productivity performance (ii) increases in
the Company's working capital needs related to its sales growth, and (iii)
investments in the Company's IT systems.

The primary source of the Company's liquidity and capital resources has been
operating cash flow. The Company's net cash provided by operating activities was
$29.1 million, $23.6 million and $24.5 million in 2002, 2001 and 2000
respectively. As necessary, the Company supplements its operating cash flow with
borrowings. Net borrowings (repayments) were $2.0 million in 2002, $8.8 million
in 2001 and ($7.4) million in 2000.

Capital expenditures in 2002, 2001, and 2000 were $32.1 million, $32.6
million, and $17.1 million respectively. Capital expenditures during 2002 were
funded by operating cash flow and borrowings. Management anticipates that
capital expenditures for new projects will total approximately $9.0 million in
2003, consisting principally of $5.0 million for various manufacturing
equipment, $2.0 million for IT projects and $2.0 million for various other
capital projects. Additionally, the Company is analyzing several financing
alternatives in connection with the possible development of additional
manufacturing and warehousing facilities in the Fall River area. Management
believes that operating income and borrowings under the Credit Agreement (as
hereinafter defined) will provide sufficient funding for the Company's capital
expenditures and working capital needs for the foreseeable future.

As discussed in Note 5 of the Notes to Consolidated Financial Statements,
the Company issued $45.0 million of Senior Notes due October 2005 and 2007 (the
Senior Notes) during 1997. The Senior Notes bear interest at a fixed rate of
7.09% on $15.0 million and 7.18% on $30.0 million. Annual principal payments
begin on October 10, 2003 with a final payment due October 10, 2007.

Also on February 14, 2002, the Company issued $5.0 million of 7.56% Series A
Notes due February 2009 (the 'Series A Notes'). The Series A Notes are unsecured
and bear interest at a fixed interest rate of 7.56%, payable semiannually. The
Series A Notes may be prepaid in whole or in part prior to maturity, at the
Company's option, subject to a yield maintenance premium, as defined. In
addition and

45

also on February 14, 2002, the Company entered into a $45.0 million
non-committed Shelf Note agreement with an insurance company pursuant to which
the Company may issue additional senior notes prior to February 14, 2005 with
maturity dates of up to ten years.

The Company also has a $60.0 million unsecured Credit Agreement with a bank
which expires January 31, 2007 (the Credit Agreement). As of January 4, 2003,
the Company had $16.2 million outstanding under the Credit Agreement and unused
availability of $43.7 million. See Note 5 of Notes to Consolidated Financial
Statements included elsewhere in this report.

The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement, the Senior Notes, and the Series A Notes,
including, but not limited to, maintenance of certain financial tests and ratios
(including interest coverage ratios, net worth related ratios, and net worth
requirements); limitations on certain business activities of the Company;
restrictions on the Company's ability to declare and pay dividends, incur
additional indebtedness, create certain liens, incur capital lease obligations,
make certain investments, engage in certain transactions with stockholders and
affiliates, and purchase, merge, or consolidate with or into any other
corporation. The Company is currently in compliance with all of the affirmative
and negative covenants in the Credit Agreement and the Series A and Senior Notes
and management believes the Company's continued compliance will not prevent the
Company from operating in the normal course of business.

The following table sets forth contractual obligations and commitments due
as of January 4, 2003:

The Company has historically not paid dividends, instead using earnings to
fuel growth and capital equipment requirements. However, on March 3, 2003, the
Company's Board of Directors adopted a new dividend policy reflecting Quaker's
intention to pay quarterly dividends going forward, with the level of each
dividend payment, if any, to be determined by Quaker's board of directors based
on a number of factors, including the Company's financial performance, cash
flows and cash requirements. Also on March 3, 2003, the Company announced the
payment of a cash dividend in an amount equal to $0.025 per common share payable
on March 27, 2003 to shareholders of record on March 17, 2003. The Company
anticipates that free cash flow from operations will be sufficient to allow for
the payment of regular quarterly dividends.

INFLATION

The Company does not believe that inflation has had a significant impact on
the Company's results of operations for the periods presented. Historically, the
Company believes it has been able to minimize the effects of inflation by
improving its manufacturing and purchasing efficiency, by increasing employee
productivity, and by reflecting the effects of inflation in the selling prices
of the new products it introduces each year.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Statements contained in this report, as well as oral statements made by the
Company that are prefaced with the words 'may,' 'will,' 'expect,' 'anticipate,'
'continue,' 'estimate,' 'project,' 'intend,' 'designed' and similar expressions,
are intended to identify forward looking statements regarding events, conditions
and financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial position. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances about which the Company can give no firm
assurance. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any

46

forward-looking statement to reflect events or circumstances after the date on
which such statement is made. As it is not possible to predict every new factor
that may emerge, forward-looking statements should not be relied upon as a
prediction of the Company's actual future financial condition or results. These
forward-looking statements like any forward-looking statements, involve risks
and uncertainties that could cause actual results to differ materially from
those projected or unanticipated. Such risks and uncertainties include product
demand and market acceptance of the Company's products, regulatory
uncertainties, the effect of economic conditions, the impact of competitive
products and pricing, foreign currency exchange rates, changes in customers'
ordering patterns, and the effect of uncertainties in markets outside the U.S.
(including Mexico and South America) in which the Company operates.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposures relative to market risk are due to foreign exchange
risk and interest rate risk.

FOREIGN CURRENCY RISK

Approximately 3.2% of the Company's revenues are generated outside the U.S.
from sales which are not denominated in U.S. dollars. Foreign currency risk
arises because the Company engages in business in Mexico and Brazil in local
currency. Accordingly, in the absence of hedging activities whenever the U.S.
dollar strengthens relative to the other major currencies, there is an adverse
affect on the Company's results of operations, and alternatively, whenever the
U.S. dollar weakens relative to the other major currencies, there is a positive
affect on the Company's results of operations.

It is the Company's policy to minimize, for a period of time, the unforeseen
impact on its results of operations of fluctuations in foreign exchange rates by
using derivative financial instruments to hedge the fair value of foreign
currency denominated intercompany payables. The Company's primary foreign
currency exposures in relation to the U.S. dollar are the Mexican peso and
Brazilian real.

At January 4, 2003, the Company had the following significant derivative
financial instruments to hedge the anticipated cash flows from the repayment of
foreign currency denominated intercompany payables outstanding:

The Company estimated the change in the fair value of all derivative
financial instruments assuming both a 10% strengthening and weakening of the
U.S. dollar relative to all other major currencies. In the event of a 10%
strengthening of the U.S. dollar, the change in fair value of all derivative
financial instruments would result in approximately a $0.3 million unrealized
gain; whereas a 10% weakening of the U.S. dollar would result in approximately a
$0.3 million unrealized loss.

INTEREST RATE RISK

Approximately 75.5% of the Company's long-term debt is at fixed rates.
Accordingly, a change in interest rates has an insignificant effect on the
Company's interest expense. The fair value of the Company's long-term debt,
however, would change in response to interest rate movements due to its fixed
rate nature.

47

Using a scenario analysis, the Company has evaluated the impact on all
long-term maturities of changing the interest rate 10% from the rate levels that
existed at January 4, 2003 and has determined that such a rate change would not
have a material impact on the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required under Item 8 is included in Item 6.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information with respect to the directors of the Company required by
this item will be included in the Company's definitive proxy statement for its
2003 Annual Meeting of Stockholders (the 'Proxy Statement') to be filed pursuant
to Regulation 14A, and such information is incorporated herein by reference. The
information with respect to the executive officers of the Company required by
this item is set forth in Item 1A of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

48

PART IV

ITEM 14. CONTROLS AND PROCEDURES

During the 90-day period prior to the filing date of this report,
management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon, and as of the date of
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.

There have been no significant changes in the Company's internal controls or
in other factors which could significantly affect internal controls subsequent
to the date the Company carried out its evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and, therefore,
no corrective actions were taken.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of this Form 10-K

(i) Financial Statements

Consolidated Balance Sheets -- January 4, 2003 and December 29, 2001

Consolidated Statements of Income -- For the years ended January 4, 2003,
December 29, 2001, and December 30, 2000

Consolidated Statements of Comprehensive Income -- For the years ended
January 4, 2003, December 29, 2001, and December 30, 2000

Consolidated Statements of Changes in Stockholders' Equity -- For the years
ended January 4, 2003, December 29, 2001, and December 30, 2000

Consolidated Statements of Cash Flows -- For the years ended January 4,
2003, December 29, 2001, and December 30, 2000

Notes to Consolidated Financial Statements

Report of Independent Public Accountants

(ii) Financial Statement Schedules

The following financial statement schedule of the Company included herein
should be read in conjunction with the audited financial statements incorporated
by reference in this Form 10-K.

Schedule II -- Valuation and Qualifying Accounts

Report of Independent Accountants on Financial Statement Schedule.

All other schedules for the Company are omitted because either they are not
applicable or the required information is shown in the financial statements or
notes thereto.

(b) Reports on Form 8-K

None.

(c) Exhibits

3(i) -- Certificate of Incorporation of the Company, as
amended.(1)
3(ii) -- By-laws of the Company.(1)
10.1 -- Loan and Security Agreement, dated as of October 31,
1990, between the Company and Continental Bank N.A., as
amended by Amendments Nos. 1 through 9 thereto.(1)
10.2 -- Securities Purchase Agreement, dated April 13, 1993,
among the Company, MLGA Fund II, L.P. and MLGAL Partners,
as amended by Amendment No. 1 thereto.(1)
10.3 -- Subscription Agreement, dated March 12, 1993, among the
Company and MLGA Fund II, L.P., Nortex Holdings, Inc., QFC
Holdings Corporation, and Larry Liebenow.(1)

49

10.4 -- Shareholders Agreement, dated March 12, 1993, by and
among the Company, Larry Liebenow, Ira Starr, and Sangwoo
Ahn.(1)
10.5 -- Employment Agreement, dated as of March 12, 1993, between
the Company and Larry A. Liebenow.(1)
10.6 -- Director Indemnification Contract, dated October 18,
1989, between the Company and Larry A. Liebenow.(1)
10.7 -- Director Indemnification Contract, dated October 18,
1989, between the Company and Roberto Pesaro.(1)
10.8 -- Director Indemnification Contract, dated April 15, 1992,
between the Company and Samuel A. Plum.(1)
10.9 -- Director Indemnification Contract, dated May 2, 1991,
between the Company and Andrea Gotti-Lega.(1)
10.10 -- Severance Contract, dated August 15, 1988, between the
Company and Thomas J. Finneran.(1)
10.11 -- Severance Contract, dated May 26, 1989, between the
Company and James Dulude.(1)
10.12 -- Severance Contract, dated December 1, 1988, between the
Company and Cynthia Gordan.(1)
10.13 -- Equipment Financing Lease Agreement, dated September 18,
1992, between QFR and United States Leasing
Corporation.(1)
10.14 -- Equipment Financing Lease Agreement, dated September 29,
1992, between QFR and KeyCorp Leasing pursuant to a Notice
of Assignment from U.S. Leasing.(1)
10.15 -- Equipment Financing Lease Agreement, dated February 16,
1989, between QFR and Key Financial Services, Inc.(1)
10.16 -- Equipment Financing Lease Agreement, dated September 22,
1992, between QFR and Dana Commercial Credit Corporation
(Fleet National Bank).(1)
10.17 -- Equipment Financing Lease Agreement, dated October 8,
1992, between QFR and Capital Associates International,
Inc.(1)
10.18 -- Equipment Financing Loan Agreement, dated August 31,
1992, between QFR and HCFS Business Equipment
Corporation.(1)
10.19 -- Equipment Financing Lease Agreement, dated September 13,
1991, between QFR and Sovran Leasing and Finance
Corp/NationsBanc Leasing Corp.(1)
10.20 -- Equipment Financing Lease Agreement, dated December 18,
1990, between QFR and IBM Credit Corporation.(1)
10.21 -- Equipment Financing Lease Agreement, dated May 5, 1993,
between QFR and The CIT Group.(1)
10.22 -- Equipment Financing Lease Agreement, dated June 30, 1993,
between QFR and AT&T Commercial Finance Corporation.(1)
10.23 -- Chicago, Illinois Showroom Lease, dated July 1, 1989,
between the Company and LaSalle National Bank, Trustee.(1)
10.24 -- Hickory, North Carolina Showroom Lease, dated June 15,
1993, between the Company and Hickory Furniture Mart,
Inc.(6)
10.25 -- High Point, North Carolina Showroom Lease, dated November
6, 1991, between the Company and Market Square Limited
Partnership.(1)
10.26 -- Los Angeles, California Showroom Lease, dated September
23, 1992, between the Company and The L.A. Mart.(1)
10.27 -- Tupelo, Mississippi Showroom Lease, dated December 14,
1992, between the Company and Mississippi Furniture
Market, Inc.(6)
10.28 -- Mexico City, Mexico Warehouse Lease, dated June 6, 1993,
between Quaker Fabric Mexico, S.A. de C.V. and Irene Font
Byrom.(1)
10.29 -- Licensing Agreement, dated May 17, 1990, between the
Company as Licensee and General Electric Company.(1)
10.30 -- Licensing Agreement, dated September 24, 1990, between
the Company as Licensee and Amoco Fabrics and Fibers
Company.(1)

50

10.31 -- Software Licensing Agreement, dated October 29, 1987,
between the Company as Licensee and System Software
Associates.(1)
10.32 -- Licensing Agreement, dated June 5, 1974, between the
Company and E.I. DuPont de Nemours & Company, Inc.(1)
10.33 -- Licensing Agreement, dated October 17, 1988, between the
Company as Licensee and Monsanto Company.(1)
10.34 -- Licensing Agreement, dated July 28, 1987, between the
Company as Licensee and Phillips Fibers Corporation.(1)
10.35 -- Software Licensing Agreement, dated July 7, 1988, between
the Company as Licensee and Software 2000, Inc.(1)
10.36 -- Licensing Agreement, dated February 1, 1977, between the
Company as Licensee and 3M.(1)
10.37 -- Software Licensing Agreement, dated April 8, 1992,
between the Company as Licensee and Premenos
Corporation.(1)
10.38 -- Software Licensing Agreement, dated March 19, 1993,
between the Company as Licensee and Sophis U.S.A., Inc.(1)
10.39 -- Quaker Fabric Corporation 1993 Stock Option Plan and Form
of Option Agreement thereunder.(1)
10.40 -- Option to Purchase Common Stock issued to Nortex
Holdings, Inc., effective April 13, 1993.(1)
10.41 -- Amendment No. 1, dated as of October 25, 1993, to
Shareholders Agreement, dated March 12, 1993, by and among
the Company, Nortex Holdings, Inc., MLGA Fund II, L.P.,
MLGAL Partners, W. Wallace McDowell, Jr., William Ughetta,
and Ira Starr.(1)
10.42 -- Quaker Fabric Corporation Deferred Compensation Plan and
related Trust Agreement.(2)
10.43 -- Form of Split Dollar Agreement with Senior Officers.(2)
10.44 -- Credit Agreement, dated as of June 29, 1994, by and among
the Company, The First National Bank of Boston, and
Continental Bank, N.A.(3)
10.45 -- Equipment Schedule No. 5, dated as of September 14, 1994,
to Master Lease Agreement, dated as of May 5, 1993,
between QFR and the CIT Group/Equipment Financing, Inc.(4)
10.46 -- Commission and Sales Agreement, dated as of April 25,
1994, between QFR and Quaker Fabric Foreign Sales
Corporation.(4)
10.47 -- Stock Option Agreement, dated as of July 28, 1995,
between the Company and Eriberto R. Scocimara.(5)
10.48 -- Amended and Restated Credit Agreement, dated December 18,
1995, among the Company, QFR, Quaker Textile Corporation,
Quaker Fabric Mexico, S.A. de C.V., The First National
Bank of Boston, and Fleet National Bank.(5)
10.49 -- Note Purchase and Private Shelf Agreement, dated December
18, 1995, among the Company, Prudential Insurance Company
of America, and Pruco Life Insurance Company.(5)
10.50 -- Guarantee Agreement, dated as of December 18, 1995, among
the Company, The Prudential Insurance Company of America,
and Pruco Life Insurance Company.(5)
10.51 -- Amendment Agreement No. 1, dated as of March 21, 1996, to
that certain Amended and Restated Credit Agreement, dated
as of December 18, 1995, among the Company, QFR, Quaker
Textile Corporation, Quaker Fabric Mexico, S.A. de C.V.,
The First National Bank of Boston, and Fleet National
Bank.(5)
10.52 -- 1996 Stock Option Plan for Key Employees of QFR, dated
April 26, 1996.(6)
10.53 -- Amendment Agreement No. 2, dated as of October 21, 1996,
to that certain Amended and Restated Credit Agreement,
dated as of December 18, 1995, among the Company, QFR,
Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de
C.V., The First National Bank of Boston, and Fleet
National Bank.(6)
10.54 -- Software License Agreement dated October 31, 1996 between
the Company and System Software Associates Inc.(6)
10.55 -- Medical Expense Reimbursement Plan.(6)
10.56 -- High Point, North Carolina Warehouse Lease, dated April 1,
1996 between QFR and C&M Investments of High Point, Inc.(6)

51

10.57 -- Standard Industrial Lease Agreement, dated May 10, 1996,
between CIIF Associates II Limited Partnership and QFR.(6)
10.58 -- Rights Agreement dated March 4, 1997 between the Company
and The First National Bank of Boston relating to the
Company's Stockholder Rights Plan.(6)
10.59 -- 1997 Stock Option Plan.(6)
10.60 -- Amendment, dated as of February 24, 1997, to Employment
Agreement between the Company and Larry A. Liebenow.(6)
10.61 -- Amendment No. 4, dated as of December 19, 1997 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(7)
10.62 -- Employee Stock Purchase Plan, dated as of October 1,
1997.(7)
10.63 -- Note Purchase Agreement dated October 10, 1997 among QFR,
The Prudential Insurance Company of America, and Pruco
Life Insurance Company.(7)
10.64 -- Guaranty Agreement, dated as of October 10, 1997, by the
Company in favor of the Prudential Insurance Company of
America and PrucoLife Insurance Company.(7)
10.65 -- Commercial Lease between QFR and Clocktower Enterprises,
Inc., dated as of August 1, 1997.(7)
10.66 -- Lease between Robbins Manufacturing Co., Inc. and QFR,
dated as of October 22, 1997.(7)
10.67 -- Lease between Tilly Realty Associates and QFR, dated as
of December 9, 1997.(7)
10.68 -- Lease between 1 Lewiston Street, LLC and QFR, dated as of
March 16, 1998.(7)
10.69 -- Purchase and Sale Agreement, dated August 7, 1998,
between QFR and Rodney Realty Trust.(8)
10.70 -- Stock Option Agreement, dated as of October 19, 1998,
between the Company and Mark R. Hellwig.(8)
10.71 -- Lease between ADAP, Inc. and QFR, dated as of December 11,
1998.(8)
10.72 -- Purchase and Sale Agreement, dated January 6, 1999,
between QFR and Montaup Electric Company.(8)
10.73 -- Purchase and Sale Agreement, dated January 22, 1999,
between QFR and Jefferson Realty Partnership.(8)
10.74 -- Amendment No. 6, dated as of March 26, 1999 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(8)
10.75 -- Amendment No. 1, dated as of March 26, 1999 to the Note
Purchase Agreement dated as of October 10, 1997 among QFR,
The Prudential Insurance Company of America, and Pruco
Life Insurance Company.(8)
10.76 -- Purchase and Sale Agreement, dated May, 1999, between QFR
and The Center for Child Care and Development, Inc.(9)
10.77 -- Tax Increment Financing Agreement, dated May 27, 1999,
between the City of Fall River and QFR.(9)
10.78 -- Memorandum of Understanding, dated July 1, 1999, between
the City of Fall River and QFR.(9)
10.79 -- Lease between Frank B. Peters, Jr. and QFR, dated as of
June 15, 1999.(9)
10.80 -- Amendment No. 7, dated as of September 30, 1999 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(9)
10.81 -- Lease between Hamriyah Free Zone Authority and QFR, dated
as of November 28, 1999.(9)
10.82 -- Form of change in control agreement, dated December 17,
1999, between the Company and each of its vice
presidents.(9)
10.83 -- Agreement concerning change in control, dated December
17, 1999, between the Company and its controller.(9)
10.84 -- Amendment No. 1 to the Company's Deferred Compensation
Plan, dated December 17, 1999.(9)

52

10.85 -- Amendment No. 1 to the Split Dollar Insurance Agreements
between QFR and each of its officers.(9)
10.86 -- Amendment, dated as of December 17, 1999, to Employment
Agreement between the Company and Larry A. Liebenow.(9)
10.87 -- 1999 Stock Purchase Loan Program and form of related
Secured Promissory Note and Stock Pledge Agreement.(9)
10.88 -- Amendment No. 2, dated as of December 28, 1999 to the
Note Purchase Agreement dated as of October 10, 1997 among
QFR, The Prudential Insurance Company of America, and
Pruco Life Insurance Company.(9)
10.89 -- Software License Agreement, dated December 29, 1999,
between QFR as Licensee and Paragon Management Systems,
Inc.(9)
10.90 -- Mexico City, Mexico Warehouse Lease, dated February 6,
2000, between Quaker Fabric Mexico, S.A. de C.V. and Irene
Font Byrom.(10)
10.91 -- Amendment to the 1997 Stock Option Plan.(10)
10.92 -- Lease between Sayre A. Litchman and QFR, dated June 30,
2000.(10)
10.93 -- Software License Agreement dated April 30, 2001 between
QFR and SSA Global Technologies, Inc.(11)
10.94 -- Purchase and Sale Agreement, dated June 29, 2001, between
QFR and Whaling Mfg. Co., Inc.(11)
10.95 -- High Point, North Carolina Warehouse Lease Extension
Agreement, dated July 29, 2001, between QFR and Bresmiro
Associates, LLC.(11)
10.96 -- Purchase and Sale Agreement, dated September 4, 2001,
between QFR and Charles McAnsin Associates, LP.(11)
10.97 -- Los Angeles Warehouse First Amendment to Standard
Industrial Lease Agreement, dated September 24, 2001,
between QFR and CIIF Associates II, LP.(11)
10.98 -- Energy Supply Agreement, dated December 4, 2001, between
QFR and Select Energy, Inc.(11)
10.99 -- Second Amended and Restated Credit Agreement, dated
February 14, 2002, among QFR, Quaker Textile Corp., Quaker
Fabric Mexico, S.A. de C.V., the Company, and Fleet
National Bank.(11)
10.100 -- Note Purchase and Private Shelf Agreement, dated February
14, 2002, between QFR and The Prudential Insurance Company
of America.(11)
10.101 -- Form of stock option agreement between the Company and
outside directors, prior to participation in the 1997
Stock Option Plan.
10.102 -- Natural Gas Service Terms Agreement, dated May 20, 2002,
between QFR and AllEnergy Gas and Electric Marketing
Company, L.L.C.
10.103 -- Form of extension of change in control agreement, dated
December 13, 2002, between the Company, each of its vice
presidents, and its controller.
10.104 -- Form of indemnification agreement, dated December 13,
2002, between the Company and each of its directors and
officers.
10.105 -- Software License Agreement dated December 31, 2002
between QFR and SPSS, Inc.
10.106 -- Mexico City, Mexico Warehouse Lease, dated February 6,
2003, between Quaker Fabric Mexico, S.A. de C.V. and Irene
Font Byrom.
10.107 -- Amendment No. 1 to Software License Agreement, dated
February 24, 2003, between QFR and Adexa, Inc.
21 -- Subsidiaries.(5)
23 -- Consent of PricewaterhouseCoopers LLP.

- ---------

(1) Incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 33-69002, initially
filed with the Securities and Exchange Commission on
September 17, 1993, as amended.

(2) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 1, 1994.

(footnotes continued on next page)

53

(footnotes continued from previous page)

(3) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended July 2, 1994.

(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.

(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995.

(6) Incorporated by reference to the Company's Registration
Statement on Form S-1, Registration No. 333-21957, initially
filed with the Securities and Exchange Commission on
February 25, 1997, as amended.

(7) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1998.

(8) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 2, 1999.

(9) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended January 1, 2000.

(10) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 30, 2000.

(11) Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 29, 2001.

54

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 31, 2003.

QUAKER FABRIC CORPORATION

By: /s/ LARRY A. LIEBENOW
..................................
LARRY A. LIEBENOW
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

55

CERTIFICATIONS

I, Larry A. Liebenow, certify that:

1. I have reviewed this annual report on Form 10-K of Quaker Fabric
Corporation.

2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state any material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the 'Evaluation Date'); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):

a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

By: /s/ LARRY A. LIEBENOW
..................................
LARRY A. LIEBENOW
CHIEF EXECUTIVE OFFICER

Date: April 2, 2003

56

I, Paul J. Kelly, certify that:

1. I have reviewed this annual report on Form 10-K of Quaker Fabric
Corporation.

2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state any material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the 'Evaluation Date'); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):

a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.

By: /s/ PAUL J. KELLY
..................................
PAUL J. KELLY
CHIEF FINANCIAL OFFICER

Date: April 2, 2003

57

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

In connection with this annual report on Form 10-K of Quaker Fabric
Corporation for the annual period ended January 4, 2003 (the 'Periodic Report'),
I, Larry A. Liebenow, Chief Executive Officer of the Company, hereby certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Periodic Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.

Date: April 2, 2003 /s/ LARRY A. LIEBENOW
......................................
LARRY A. LIEBENOW
CHIEF EXECUTIVE OFFICER

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

In connection with this annual report on Form 10-K of Quaker Fabric
Corporation for the annual period ended January 4, 2003 (the 'Periodic Report'),
I, Paul J. Kelly, Chief Financial Officer of the Company, hereby certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Periodic Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in the Periodic Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.

Date: April 2, 2003 /s/ PAUL J. KELLY
.................................
PAUL J. KELLY
CHIEF EXECUTIVE OFFICER

58

SCHEDULE II

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 30, 2000, DECEMBER 29, 2001, AND JANUARY 4, 2003
(DOLLARS IN THOUSANDS)

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of Quaker Fabric Corporation:

Our audit of the consolidated financial statements referred to in our report
dated February 17, 2003 (except with respect to the matters discussed in
Note 12, as to which the date is March 3, 2003) appearing in the 2002 Annual
Report on Form 10-K of Quaker Fabric Corporation also included an audit of the
financial statement schedule listed in Item 15(a)(ii) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

The financial statement schedule of the Company as of and for the years ended
December 29, 2001 and December 30, 2000 was audited by other independent
accountants who have ceased operations. Those independent Accountants stated
in a report dated February 4, 2002, that the schedule presented fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 17, 2003

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL
SCHEDULE TO THE CONSOLIDATED FINANCIAL STATEMENTS

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in this
Form 10-K, and have issued our report thereon dated February 4, 2002 (except
with respect to the matters discussed in Note 5, as to which the date is
February 14, 2002). Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed in the index in
item 14(a) is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 4, 2002

GENERAL INFORMATION

DIRECTORS

SANGWOO AHN, Chairman
Partner
Morgan Lewis Githens & Ahn

LARRY A. LIEBENOW
President and CEO
Quaker Fabric Corporation

DR. JERRY I. PORRAS,
Lane Professor of Organizational
Behavior and Change, Emeritus
Stanford University Graduate
School of Business

ERIBERTO R. SCOCIMARA
President and Chief Executive Officer
Hungarian-American Enterprise Fund

COMMITTEES

AUDIT COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

STOCK OPTION COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

COMPENSATION COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

NOMINATING COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

OFFICERS

LARRY A. LIEBENOW
President and Chief
Executive Officer

MICHAEL E. COSTA
Controller

JAMES A. DULUDE
Vice President
Manufacturing

CYNTHIA L. GORDAN
Vice President, Secretary
and General Counsel

MARK R. HELLWIG
Vice President
Supply Chain Management

CAROLE E. JOHNSON
Vice President
Marketing

PAUL J. KELLY
Vice President -- Finance,
Treasurer and Chief Financial Officer

THOMAS H. MUZEKARI
Vice President
Sales

BEATRICE SPIRES
Vice President
Design and Merchandising

NORMAN J. STURDEVANT
Vice President and Chief
Information Officer

DUNCAN WHITEHEAD
Vice President
Research and Development

CORPORATE DATA

CORPORATE OFFICE
Quaker Fabric Corporation
941 Grinnell Street
Fall River, Massachusetts 02721
(508) 678-1951

ANNUAL MEETING
10:00 a.m., May 23, 2003
Quaker Fabric Corporation
1082 Davol Street
Fall River, Massachusetts 02720

TRANSFER AGENT AND REGISTRAR
Equiserve Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
(781) 575-3120
http://www.equiserve.com

NASDAQ: QFAB
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
One International Place
Boston, Massachusetts 02110

LEGAL COUNSEL
Proskauer Rose LLP
1585 Broadway
New York, New York 10036

STATEMENT OF DIFFERENCES
------------------------

The trademark symbol shall be expressed as ............................. 'TM'
The registered trademark symbol shall be expressed as .................. 'r'