<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1997
REGISTRATION NO. 333--21957
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
QUAKER FABRIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2221 04-1933106
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
941 Grinnell Street, Fall River, Massachusetts 02721
(508) 678-1951
------------------------
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
------------------------
LARRY A. LIEBENOW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
QUAKER FABRIC CORPORATION
941 GRINNELL STREET
FALL RIVER, MASSACHUSETTS 02721
(508) 678-1951
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies of Communications to:
<TABLE>
<S> <C>
ARNOLD S. JACOBS, ESQ. NEIL GOLD, ESQ.
PROSKAUER ROSE GOETZ & MENDELSOHN LLP FULBRIGHT & JAWORSKI L.L.P.
1585 BROADWAY 666 FIFTH AVENUE
NEW YORK, NEW YORK 10036-8299 NEW YORK, NEW YORK 10103
(212) 969-3000 (212) 318-3000
FAX (212) 969-2900 FAX (212) 752-5958
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
------------------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED FEBRUARY 25, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
3,400,000 Shares
[QUAKER LOGO]
QUAKER FABRIC CORPORATION
Common Stock
- --------------------------------------------------------------------------------
Of the 3,400,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby, 300,000 are being sold by Quaker Fabric Corporation
("Quaker" or the "Company") and 3,100,000 are being sold by certain selling
stockholders of the Company (the "Selling Stockholders"). The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
See "Principal and Selling Stockholders."
The Common Stock is included in The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") under the symbol "QFAB." On February 24, 1997, the
last reported sales price for the Common Stock on the Nasdaq National Market was
$16.25 per share. See "Price Range of Common Stock."
SEE "RISK FACTORS" ON PAGES 8 THROUGH 11 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON
STOCK OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
- ------------------------------------------------------------------------------------------------
Total (3).................. $ $ $ $
================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting estimated offering expenses of $400,000 payable by the
Company.
(3) One of the Selling Stockholders has granted the several Underwriters a
30-day over-allotment option to purchase up to 510,000 additional shares of
Common Stock on the same terms and conditions as set forth above. If all
such additional shares are purchased by the Underwriters, the total Price to
Public will be $ , the total Underwriting Discounts and Commissions
will be $ , the total Proceeds to Company will be $ and
the total Proceeds to Selling Stockholders will be $ . See
"Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Stockholders and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the offices of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about March , 1997.
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY COMPANY, INC.
WHEAT FIRST BUTCHER SINGER
March , 1997
<PAGE> 3
[PHOTOGRAPHS OF FABRIC SAMPLES AND THE COMPANY'S DESIGN STAFF IN THE COMPANY'S
DESIGN STUDIO AND THE PHRASE "MARKET LEADERSHIP -- COMMITMENT TO EXCELLENCE IN
DESIGN"]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise indicated, the information in
this Prospectus assumes that all outstanding options and the Underwriters'
over-allotment option will not be exercised. References to financial or
statistical data for a particular year refer to the Company's corresponding
fiscal year, which is currently a 52 or 53-week period ending on the Saturday
closest to January 1. (For example, "1995" means the fiscal year ended December
30, 1995 and "1996" means the fiscal year ended January 4, 1997.)
THE COMPANY
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 have grown from
$123.4 million in 1992 to $198.9 million in 1996, a compound annual growth rate
("CAGR") of 12.7%.
Quaker has been producing upholstery fabric for over fifty 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 3,000
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 700 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. In addition, 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.
The Company sells its upholstery fabrics to over 600 domestic furniture
manufacturers, including virtually every significant domestic manufacturer of
upholstered furniture, such as Furniture Brands International (Action by Lane,
Broyhill and Thomasville), Klaussner, La-Z-Boy, Lifestyle Furnishings
International (Berkline, Benchcraft and others), Rowe and Simmons. Quaker also
distributes its fabrics internationally. In 1996, fabric sales outside the
United States of $35.7 million represented approximately 20.2% of gross fabric
sales. Quaker's October 1996 introduction of its Whitaker 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,
including Baker, Bernhardt, Henredon and Sherrill. Management estimates that
approximately 85% of the Company's fabric sales in recent years have been
manufactured to customer order.
THE INDUSTRY
Total domestic upholstery fabric sales, exclusive of automotive
applications, are estimated to be approximately $2.0 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 15 upholstery
fabric manufacturers, including Quaker, accounting for over 80% of the total
market. Most of the largest U.S. fabric producers have expanded their export
sales, capitalizing on their size, distribution capabilities, technology
advantages and broad product lines. Management believes that over the last
several years furniture manufacturers have moved toward more highly styled
Jacquard fabrics, at the expense of less distinctive fabrics, such as flocks,
plaids, plains, prints, stripes, tufts and velvets. 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.
3
<PAGE> 5
GROWTH STRATEGY
Quaker's strategy to further its growth and financial performance
objectives includes:
Increasing Sales to the Middle to Better-End Segment. 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 by increasing the breadth and depth of its
product line. Sales of the Company's middle to better-end fabrics,
which the Company first began emphasizing in the early 1990s, have
increased from $66.3 million, or 56.3% of total fabric sales in 1992,
to $121.7 million, or 69.0% of total fabric sales in 1996, a CAGR of
16.4%.
Expanding International Sales. The Company has made worldwide
distribution of its upholstery fabrics a key component of its growth
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. As a result, the Company's
international sales have increased from $18.3 million in 1992 to $35.7
million in 1996, a CAGR of 18.2%.
Capitalizing on the Growth of the Casual Furniture
Segment. Based upon its leading position in the Jacquard market and
its own internally produced chenille yarns, management believes Quaker
is well positioned to benefit from the growth of the casual furniture
segment, where soft, durable, distinctive fabrics, such as Quaker's
Jacquard and other chenilles, are in increasing demand.
Penetrating Related Fabric Markets. Management believes the
superior styling and performance characteristics of the Company's
fabrics provide opportunities to penetrate markets related to Quaker's
core residential fabric business. The Company has specifically
targeted the contract (office and institutional) and recreational
vehicle markets, where management believes Quaker's Jacquard chenille
fabrics will provide the Company with a clear product advantage. The
Company has also targeted additional sales to the decorative jobber
(distributors to the interior design trade) market, where management
believes the Company's recently introduced Whitaker Collection will
have broad appeal.
Growing Specialty Yarn Sales. Quaker is a leading producer of
specialty yarns and management believes it is the world's largest
producer of chenille yarns. Sales of the Company's specialty yarns
have increased from $7.8 million in 1992 to $26.8 million in 1996, a
CAGR of 36.2%. In addition to the popularity of the Company's current
line of specialty yarns, including its proprietary, abrasion-resistant
Ankyra chenille yarns, Quaker regularly creates innovative new
specialty yarns for use in the Company's fabrics and sale to the
Company's growing list of yarn customers. Quaker intends to increase
sales by targeting new markets and applications for its specialty
yarns.
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 growth strategy:
Product Design and Development Capabilities. Management believes
that Quaker's reputation for design excellence and product leadership
is, and will continue to be, the Company's most important competitive
strength.
Focus on Jacquard Fabrics. Management believes the detailed,
copyrighted designs of the Company's Jacquard fabrics have enabled it
to compete primarily based on superior styling and design,
contributing to Quaker's strong gross margin performance.
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.
4
<PAGE> 6
Vertical Integration. Using Quaker's own specialty yarns in the
production of its fabrics provides the Company with significant
design, cost and delivery advantages.
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.
During the past five years, Quaker has invested more than $51 million in
new manufacturing equipment to expand its yarn and fabric production capacity,
increase productivity, improve product quality and produce the more complex
fabrics associated with the Company's successful penetration of the middle to
better-end segment of the upholstery fabric market. During 1997, Quaker plans to
spend approximately $14.4 million, plus the estimated $4.2 million net proceeds
to the Company from this offering, on additional manufacturing equipment to
accelerate the growth of its specialty yarn business, respond to anticipated
increases in demand for its fabric products, and achieve its marketing,
productivity, quality, service and financial objectives.
The Company produces all of its yarn and fabric products in its four
manufacturing plants in Fall River, Massachusetts, where Quaker has over one
million square feet of manufacturing space. In addition to distribution from the
Company's facilities in Fall River, Quaker maintains domestic distribution
centers in High Point, North Carolina, Tupelo, Mississippi, and Los Angeles,
California. To provide better service to its international customers, the
Company also has a distribution center in Mexico and maintains inventory in
Holland.
Quaker's executive offices are located at 941 Grinnell Street, Fall River,
Massachusetts 02721 and the Company's telephone number is (508) 678-1951.
SELLING STOCKHOLDERS
In September 1989, the Company was acquired (the "1989 Acquisition") by a
European company and Nortex Holdings, Inc. ("Nortex Holdings"), a corporation
owned by three officers of the Company, including Larry A. Liebenow, the
President and Chief Executive Officer of the Company. In early 1993, the Company
reacquired all of the European company's interest in Quaker in a management-led
recapitalization (the "1993 Recapitalization"). To finance the 1993
Recapitalization, the Company issued Common Stock and other securities to MLGA
Fund II, L.P. ("MLGA Fund") and other affiliates of Morgan Lewis Githens & Ahn,
Inc., an investment banking firm. MLGA Fund and Nortex Holdings are the Selling
Stockholders and are selling 3,000,000 and 100,000 shares of Common Stock,
respectively. Upon completion of this offering, MLGA Fund and Nortex Holdings
will beneficially own 8.1% (2.0% if the Underwriters' over-allotment option is
exercised in full) and 23.3% of the outstanding Common Stock, respectively. See
"Management" and "Principal and Selling Stockholders."
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company........................... 300,000 shares
Common Stock Offered by the Selling Stockholders.............. 3,100,000 shares
Common Stock to be Outstanding after the Offering(1).......... 8,321,097 shares
Use of Proceeds by the Company................................ To acquire production equipment
to expand chenille yarn
manufacturing capacity.
See "Use of Proceeds."
Nasdaq National Market Symbol................................. QFAB
</TABLE>
- ------------------------
(1) Does not include (i) 918,354 shares of Common Stock which may be issued
pursuant to the Company's stock option plans, of which options to purchase
682,848 shares of Common Stock were outstanding on February 24, 1997
(including 330,000 shares which have been granted subject to stockholder
approval), (ii) 5,000 shares of Common Stock which may be issued upon
exercise of an option granted to a director and (iii) 370,359 shares of
Common Stock which may be issued upon exercise of an option issued to Nortex
Holdings (the "Nortex Option"). See "Management -- Benefit Plans."
Ankyra(TM), Quaker(TM) and Whitaker(TM) are trademarks of the Company.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 4,
1993(1) 1994 1994 1995 1997(1)
----------- ----------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales....................................... $ 123,414 $ 147,867 $180,842 $173,487 $ 198,856
Cost of products sold........................... 92,855 110,753 133,168 137,083 152,787
-------- -------- -------- -------- --------
Gross margin.................................... 30,559 37,114 47,674 36,404 46,069
Selling, general and administrative expenses.... 18,862 22,292 27,560 26,176 29,121
-------- -------- -------- -------- --------
Operating income................................ 11,697 14,822 20,114 10,228 16,948
Interest expense, net........................... 4,148 4,936 3,863 3,898 4,092
Other expenses, net............................. 479 299 34 98 77
-------- -------- -------- -------- --------
Income before provision for income taxes........ 7,070 9,587 16,217 6,232 12,779
Provision for income taxes...................... 2,925 4,218 6,691 712 4,217
-------- -------- -------- -------- --------
Income before extraordinary item................ 4,145 5,369 9,526 5,520 8,562
Extraordinary item: loss on extinguishment of
debt.......................................... -- (2,550) -- -- --
Net income...................................... 4,145 2,819 9,526 5,520 8,562
Preferred stock dividends....................... 420 70 -- -- --
-------- -------- -------- -------- --------
Net income applicable to common stock........... $ 3,725 $ 2,749 $ 9,526 $ 5,520 $ 8,562
======== ======== ======== ======== ========
Earnings per common share before extraordinary
item(2)....................................... $ 0.55 $ 0.75 $ 1.15 $ 0.67 $ 1.03
======== ======== ======== ======== ========
Weighted average shares outstanding(2).......... 8,536 8,536 8,301 8,293 8,332
======== ======== ======== ======== ========
SELECTED OPERATING DATA:
EBITDA(3)....................................... $ 15,597 $ 19,710 $ 25,920 $ 16,821 $ 24,569
Depreciation and amortization................... 4,379 5,019 5,603 6,462 7,437
Net capital expenditures(4)..................... 5,186 10,558 18,727 13,165 11,979
Unit volume (in yards).......................... 32,228 36,289 41,641 40,761 43,552
Average gross sales price per yard.............. $ 3.66 $ 3.87 $ 4.06 $ 3.88 $ 4.05
</TABLE>
<TABLE>
<CAPTION>
JANUARY 4, 1997
-------------------------
ACTUAL AS ADJUSTED(5)
--------- --------------
BALANCE SHEET DATA: (IN THOUSANDS)
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<S> <C> <C>
Working capital...................................................................... $ 32,620 $ 32,620
Total assets......................................................................... 148,832 153,039
Long-term debt and capital leases.................................................... 42,235 42,235
Stockholders' equity................................................................. 66,572 70,779
</TABLE>
- ------------------
(1) The fiscal years ended January 2, 1993 and January 4, 1997 were 53-week
periods.
(2) Earnings per share for 1994, 1995 and 1996 is computed using the weighted
average number of common shares and common share equivalents outstanding
during the year. Earnings per share for 1992 and 1993 gives effect to the
1993 Recapitalization and the use of proceeds from the Company's initial
public offering of Common Stock in 1993 (the "1993 Offering") as if both
events had occurred at the beginning of 1992.
(3) Represents income from continuing operations before extraordinary items plus
interest, taxes, depreciation, amortization and other non-cash expenses.
Although the Company has measured EBITDA consistently between the periods
presented, EBITDA as a measure of liquidity is not governed by generally
accepted accounting principles ("GAAP"), and, as such, may not be comparable
to other similarly titled measures of other companies. The Company believes
that EBITDA, while providing useful information, should not be considered in
isolation or as an alternative to either (i) operating income determined in
accordance with GAAP as an indicator of operating performance or (ii) cash
flows from operating activities determined in accordance with GAAP as a
measure of liquidity.
(4) Net capital expenditures reflect assets acquired by purchase and capital
lease.
(5) Adjusted to give effect to the sale of 300,000 shares of Common Stock
offered hereby by the Company at an assumed offering price of $16.25 per
share (the last reported sales price for the Common Stock on the Nasdaq
National Market on February 24, 1997) after deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company and
the application of the net proceeds to the Company therefrom to purchase
production equipment. See "Use of Proceeds" and "Capitalization."
7
<PAGE> 9
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus, in
connection with an investment in the Common Stock offered hereby.
This Prospectus contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the 1934 Act. Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operations; (ii) the Company's financing plans; (iii) the Company's
business and growth strategies; (iv) the use of the proceeds to the Company of
this offering; and (v) the declaration and payment of dividends. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. The accompanying information
contained in this Prospectus, including without limitation the information set
forth under the headings "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," identifies
important factors that could cause such differences.
GENERAL ECONOMIC CONDITIONS. Domestic demand for the Company's upholstery
fabrics is principally a function of consumer demand for, and production levels
of, upholstered furniture which, in turn, fluctuate with U.S. economic
conditions and consumer sentiment. For most individuals, a decision to buy
upholstered furniture represents both a discretionary purchase and a relatively
large expenditure. Accordingly, demand is, in general, higher during periods of
economic strength and lower during periods of economic weakness or uncertainty.
Key economic conditions influencing demand for Quaker's products are housing
starts, sales of existing homes, consumer confidence and spending levels,
population demographics, trends in disposable income, prevailing interest rates
for home mortgages and the availability of consumer credit. Adverse economic
conditions could have a material adverse effect on the Company.
FOREIGN SALES. The Company anticipates that an increasing portion of its
revenues will be derived from foreign and export sales (together "foreign
sales"). In 1996, foreign sales totalled $35.7 million, or 20.2% of the
Company's gross fabric sales. A reduction in the volume of international trade,
fluctuations in currency exchange rates, political instability in any of the
export markets important to the Company, any material restrictions on
international trade, or a downturn in the international economy or the domestic
economy of any of the export markets important to the Company, could have a
material adverse effect on the Company. In addition, the Company's 1996 gross
fabric sales to customers in four foreign countries, including Mexico, were
$27.2 million in the aggregate, representing 76.2% of the Company's total
foreign sales and 15.4% of the Company's gross fabric sales. Beginning in
December 1994, Mexico experienced an economic crisis characterized by exchange
rate instability and currency devaluation, high domestic interest and inflation
rates, negative economic growth, reduced consumer purchasing and high
unemployment. As a result, the Company's sales in Mexico (including sales from
its distribution center in Mexico) were adversely affected in 1995. There can be
no assurance that economic, political or other events in Mexico or any other
foreign market will not have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Growth Strategy."
PRICING AND AVAILABILITY OF RAW MATERIALS. The Company is dependent upon
outside suppliers for all of its raw material needs, including dyeing services,
and is subject to price increases and delays in receiving these materials and
services. The raw materials are predominantly petrochemical products and their
prices fluctuate with changes in the underlying petrochemical market in general.
Historically, the Company has been able to pass through a substantial portion of
any increases in its raw material costs; however, the Company experienced
significant increases in certain raw material prices in 1995 which it was not
able to pass through fully to its customers during 1995 and which contributed to
a reduction in the Company's 1995 gross margin. Similar conditions in the future
could have a material adverse effect on the Company. Although other sources of
supply are available, the Company currently procures approximately one-half of
its raw materials from two major industry suppliers, one of which is the sole
supplier of a filament yarn used in the Company's chenille manufacturing
operations. A shortage or interruption in the supply of any critical component
could have a
8
<PAGE> 10
material adverse effect on the Company. See "Business -- Sources and
Availability of Raw Materials" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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. The Company's
products are predominantly Jacquard and plain woven fabrics. The Company's
products compete with other upholstery fabrics and furniture coverings,
including prints, flocks, tufts, velvets and leather. Several of the companies
with which the Company competes have greater financial resources than the
Company. Although the Company has experienced no significant competition in the
United States from imports to date, changes in foreign exchange rates or other
factors could make imported fabrics more competitive with the Company's products
in the future. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the efforts and abilities of Larry A. Liebenow, its
President and Chief Executive Officer, and other members of senior management.
The loss of the services of one or more of these key employees could have a
material adverse effect on the Company. The Company does not have "key man" life
insurance on the life of any member of its senior management. See "Management."
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 historical operations at the Company's sites. 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. Further, certain
of the Company's manufacturing areas are subject to OSHA's "Comprehensive Cotton
Dust Standard." 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. 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. The Company has notified the Commonwealth of Massachusetts
regarding these releases. The Company's ultimate clean-up costs relating to
these underground storage tanks cannot be predicted with certainty at this time.
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 maintain appropriately the asbestos that
remains present at its facilities. At the Company's former facility in
Claremont, New Hampshire, it has been determined that there is oil-contaminated
soil, as well as groundwater contamination, resulting from a leak during the
mid-1970s from an underground fuel storage tank. The Company has agreed to
indemnify the purchaser for clean-up costs subject to certain limitations. The
Company also has agreed to indemnify the purchaser of the Company's former
facility in Leominster, Massachusetts for certain environmental contingencies.
The Company has accrued reserves for environmental matters based on
information presently available. 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. See "Business -- Environmental
Matters."
SIGNIFICANT STOCKHOLDER. Upon the completion of this offering, Nortex
Holdings, a corporation owned by three officers of the Company, including Larry
A. Liebenow, its President and Chief Executive Officer, will beneficially own
23.3% of the outstanding Common Stock. Accordingly, Nortex Holdings will be in a
position to not only influence the election of the Company's directors but also
influence or determine the
9
<PAGE> 11
outcome of corporate actions requiring stockholder approval. This concentration
of ownership may have the effect of delaying or preventing a change of control
of the Company.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's certificate
of incorporation and bylaws may make it more difficult for a third party to
acquire, or may discourage acquisition bids for, the Company and could limit the
price that certain investors might be willing to pay in the future for shares of
Common Stock. These provisions, among other things, (a) require the affirmative
vote of the holders of at least 66 2/3% of the votes which all the stockholders
would be entitled to cast at any annual election of directors or class of
directors to approve any merger or consolidation of the Company with any other
corporation or a sale, lease, transfer or exchange of all or substantially all
the assets of the Company or the adoption of any plan for the liquidation or
dissolution of the Company; (b) require the affirmative vote of 80% of the
voting power of all the shares of the Company entitled to vote in the election
of directors to remove a director; and (c) require the affirmative vote of 80%
of the voting power of all the shares of the Company to amend or repeal certain
provisions of the certificate of incorporation and the bylaws. Moreover, the
Board of Directors (the "Board") has the authority to issue, at any time,
without further stockholder approval, up to 50,000 shares of preferred stock,
and to determine the price, rights, privileges and preferences of those shares,
which may be senior to the rights of holders of the Common Stock. Such issuance
could adversely affect the holders of Common Stock, and could have the effect of
dissuading a potential acquiror from acquiring outstanding shares of the Common
Stock at a price that represents a premium to the then current trading price.
See "Description of Securities -- Preferred Stock." Under certain conditions,
Section 203 of the General Corporation Law of the State of Delaware (the "DGCL")
would prohibit an "interested stockholder" (in general, a stockholder owning 15%
or more of the Company's outstanding voting stock) from engaging in a "business
combination" with the Company for a period of three years. The Board has adopted
a stockholder rights plan (the "Rights Plan"), the purpose of which is to
protect stockholders against unsolicited attempts to acquire control of the
Company that do not offer a fair price to all stockholders. The Rights Plan may
have the effect of dissuading a potential acquiror from acquiring outstanding
shares of Common Stock at a price that represents a premium to the then current
trading price. The Rights Plan will not apply to certain acquisitions by MLGA
Fund, Nortex Holdings and certain of their transferees. See "Description of
Securities -- Stockholder Rights Plan."
VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be
subject to significant fluctuations in response to the Company's operating
results and other factors, and there can be no assurance that the market price
of the Common Stock will not decline below the public offering price herein.
Developments in the upholstery and home furnishings industries or changes in
general economic conditions could adversely affect the market price of the
Common Stock. In addition, the stock market has from time to time experienced
extreme price and volume volatility. These fluctuations may be unrelated to the
operating performance of particular companies whose shares are traded and may
adversely affect the market price of the Common Stock. See "Price Range of
Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, the
Company will have 8,321,097 shares of Common Stock outstanding. Of these shares,
a total of 5,776,498 shares (6,286,498 shares if the Underwriters'
over-allotment option is exercised in full), including the shares offered
hereby, will be freely tradable without restrictions or further registration
under the Securities Act. The remaining 2,544,599 shares of Common Stock are
"restricted securities" as that term is defined in Rule 144 promulgated under
the Securities Act. In general, under Rule 144 as currently in effect, an
affiliate of the Company or any person (or persons whose shares are aggregated
in accordance with Rule 144) who has beneficially owned such restricted
securities for at least two years (reduced to one year effective late April
1997) would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the outstanding shares of Common Stock
(approximately 83,211 shares based upon the number of shares outstanding after
this offering) or the reported average weekly trading volume in the
over-the-counter market for the four weeks preceding the sale. Sales under Rule
144 are also subjected to certain manner of sale restrictions and notice
requirements and to the availability of current public information concerning
the Company. Persons who have not been affiliates of the Company for at least
three months and who have held these shares for more than three years (reduced
to two years effective late April 1997) are entitled to sell such restricted
securities without regard to the volume, manner of sale, notice and public
information requirements of Rule 144. All of
10
<PAGE> 12
these restricted securities are currently eligible for sale in the public market
pursuant to Rule 144. Additional shares of Common Stock, including shares
issuable upon exercise of options, will also become eligible for sale in the
public market pursuant to Rule 144 from time to time. The Company has registered
306,348 shares of Common Stock issuable upon the exercise of stock options which
will be available for sale in the open market upon exercise. As of February 24,
1997, an aggregate of 381,247 shares were subject to presently exercisable stock
options and, upon consummation of this offering, options to purchase an
additional 327,083 shares will become exercisable. The Company, its directors
and executive officers and each of the Selling Stockholders, who upon completion
of this offering will beneficially own in the aggregate 3,152,553 shares
(2,642,553 shares if the Underwriters' over-allotment option is exercised in
full), each have agreed (except as to an aggregate of 100,000 shares previously
pledged) that they will not, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or other capital stock or any security convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company, for a period of 180 days, in the case of the Company, the
Selling Stockholders and certain of their affiliates, and 90 days, in the case
of other directors and executive officers, after the date of this Prospectus,
without the prior written consent of Prudential Securities Incorporated on
behalf of the Underwriters except for bona fide gifts or transfers effected by
such stockholder other than on any securities exchange or in the
over-the-counter market to donees or transferees that agree to be bound by
similar agreements and except for issuances by the Company and sales by Nortex
Holdings pursuant to the exercise of certain stock options outstanding upon
completion of this offering. Prudential Securities Incorporated may, in its sole
discretion, at any time and without prior notice, release all or any portion of
the shares of Common Stock subject to such agreements. The Company is unable to
predict the effect, if any, that future sales of shares, or the availability of
shares for future sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the perception that such sales could occur, could adversely affect the market
price for the Common Stock and could impair the Company's future ability to
obtain capital through offerings of equity securities. See "Principal and
Selling Stockholders," "Shares Eligible for Future Sale" and "Underwriting."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 300,000 shares of Common
Stock offered hereby by the Company are estimated to be approximately $4.2
million, based on an assumed offering price of $16.25 per share of Common Stock
(the last reported sales price on the Nasdaq National Market for the Common
Stock on February 24, 1997) and after deducting underwriting discounts and
commissions and estimated expenses payable by the Company. The Company intends
to apply its net proceeds to acquire production equipment to expand the
Company's chenille yarn manufacturing capacity. Pending such application, the
Company intends to temporarily repay a portion of the amount outstanding under
the Company's revolving credit facility with a commercial bank (the "Credit
Agreement") or to invest in short-term, investment grade securities,
certificates of deposit or direct or guaranteed obligations of the U.S.
government, or a combination thereof. Indebtedness under the Credit Agreement
has been used for working capital and capital expenditure purposes, is due
December 31, 2000 and bears interest at an effective annual rate of 7.0%. The
Company will not receive any of the proceeds from the sale of shares of Common
Stock being offered by the Selling Stockholders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Principal and Selling Stockholders."
11
<PAGE> 13
PRICE RANGE OF COMMON STOCK
The Common Stock is included in the Nasdaq National Market under the symbol
"QFAB." The following table sets forth the range of the high and low sales
prices of the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 30, 1995
First Quarter.......................................... $12 3/4 $10 1/4
Second Quarter......................................... 11 7 1/2
Third Quarter.......................................... 11 7 3/4
Fourth Quarter......................................... 9 3/4 8 1/4
FISCAL YEAR ENDED JANUARY 4, 1997
First Quarter.......................................... 9 1/2 5 11/16
Second Quarter......................................... 9 3/4 7 1/4
Third Quarter.......................................... 10 5/8 7
Fourth Quarter......................................... 14 1/2 9 1/4
FISCAL YEAR ENDING JANUARY 3, 1998
First Quarter (through February 24, 1997).............. $19 1/4 $13 1/2
</TABLE>
On February 24, 1997, the last reported sales price of the Common Stock on
the Nasdaq National Market was $16.25 per share. As of February 14, 1997, there
were 49 record owners of the Common Stock.
DIVIDEND POLICY
The Company has not declared or paid dividends on the Common Stock since
prior to the 1993 Offering, does not intend to declare or pay any cash dividends
for the foreseeable future and intends to retain earnings, if any, for the
future operation and expansion of the Company's business. Future cash dividends,
if any, will be at the discretion of the Board and will depend upon, among other
things, the Company's future earnings, operations, capital requirements and
surplus, availability of cash, general financial condition, contractual
restrictions, and such other factors as the Board may deem relevant. Currently,
the Company is restricted in its ability to pay dividends under the terms of the
Credit Agreement and the Series A Notes (as hereinafter defined). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 5 of Notes to
Consolidated Financial Statements.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company as of January 4, 1997, and as adjusted to give effect to the sale of
the 300,000 shares of Common Stock offered by the Company (at an assumed
offering price of $16.25 per share, the last reported sales price for the Common
Stock on the Nasdaq National Market on February 24, 1997) and the application of
the estimated net proceeds therefrom to purchase production equipment as
described under "Use of Proceeds." This table should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JANUARY 4, 1997
--------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt................................ $ 951 $ 951
Current portion of capitalized leases(1)......................... 1,532 1,532
-------- --------
Total current portion of long-term debt and capitalized
leases................................................. $ 2,483 $ 2,483
======== ========
Long-term debt:
Credit Agreement................................................. $ 4,000 $ 4,000
Capitalized leases(1)............................................ 6,504 6,504
6.81% Series A Notes............................................. 30,000 30,000
Other............................................................ 1,731 1,731
-------- --------
Total long-term debt..................................... 42,235 42,235
Stockholders' equity:
Common Stock, par value $.01 per share, 20,000,000 shares
authorized; 8,021,097 shares issued and outstanding; and
8,321,097 shares as adjusted.................................. 80 83
Additional paid-in capital....................................... 41,948 46,152
Retained earnings................................................ 25,959 25,959
Cumulative translation adjustment(2)............................. (1,415) (1,415)
-------- --------
Total stockholders' equity............................... 66,572 70,779
-------- --------
Total capitalization..................................... $108,807 $ 113,014
======== ========
</TABLE>
- ---------------
(1) For information concerning capital lease commitments, see Note 7(b) of Notes
to Consolidated Financial Statements.
(2) For information concerning this item, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 2(i) of
Notes to Consolidated Financial Statements.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth certain consolidated financial and operating
data of the Company for the periods indicated, which data has been derived from
the Consolidated Financial Statements of the Company and the Notes thereto,
which have been audited by Arthur Andersen LLP, independent public accountants.
This selected financial and operating data should be read in conjunction with
the Consolidated Financial Statements, the Notes thereto and the other financial
information included herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 31, DECEMBER 30, JANUARY 4,
1993(1) 1994 1994 1995 1997(1)
-------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales................................. $123,414 $147,867 $180,842 $173,487 $198,856
Cost of products sold..................... 92,855 110,753 133,168 137,083 152,787
-------- -------- -------- -------- --------
Gross margin.............................. 30,559 37,114 47,674 36,404 46,069
Selling, general and administrative
expenses................................ 18,862 22,292 27,560 26,176 29,121
-------- -------- -------- -------- --------
Operating income.......................... 11,697 14,822 20,114 10,228 16,948
Interest expense, net..................... 4,148 4,936 3,863 3,898 4,092
Other expenses, net....................... 479 299 34 98 77
-------- -------- -------- -------- --------
Income before provision for income taxes
and extraordinary item.................. 7,070 9,587 16,217 6,232 12,779
Provision for income taxes................ 2,925 4,218 6,691 712 4,217
-------- -------- -------- -------- --------
Income before extraordinary item.......... 4,145 5,369 9,526 5,520 8,562
Extraordinary item: loss on extinguishment
of debt................................. -- (2,550) -- -- --
Net income................................ 4,145 2,819 9,526 5,520 8,562
Preferred stock dividends................. 420 70 -- -- --
-------- -------- -------- -------- --------
Net income applicable to common stock..... $ 3,725 $ 2,749 $ 9,526 $ 5,520 $ 8,562
======== ======== ======== ======== ========
Earnings per common share before
extraordinary item(2)................... $ 0.55 $ 0.75 $ 1.15 $ 0.67 $ 1.03
Extraordinary item........................ -- (0.30) -- -- --
-------- -------- -------- -------- --------
Earnings per common share(2).............. $ 0.55 $ 0.45 $ 1.15 $ 0.67 $ 1.03
======== ======== ======== ======== ========
Weighted average shares outstanding(2).... 8,536 8,536 8,301 8,293 8,332
======== ======== ======== ======== ========
SELECTED OPERATING DATA:
EBITDA(3)................................. $ 15,597 $ 19,710 $ 25,920 $ 16,821 $ 24,569
Depreciation and amortization............. 4,379 5,019 5,603 6,462 7,437
Net capital expenditures(4)............... 5,186 10,558 18,727 13,165 11,979
Unit volume (in yards).................... 32,228 36,289 41,641 40,761 43,552
Average gross sales price per yard........ $ 3.66 $ 3.87 $ 4.06 $ 3.88 $ 4.05
BALANCE SHEET DATA:
Working capital........................... $ 14,477 $ 25,915 $ 30,994 $ 30,780 $ 32,620
Total assets.............................. 94,556 109,908 130,476 138,117 148,832
Long-term debt and capital leases......... 46,747 35,172 43,845 45,118 42,235
Stockholders' equity...................... 18,431 43,574 52,589 57,850 66,572
</TABLE>
- ---------------
(1) The fiscal years ended January 2, 1993 and January 4, 1997 were 53-week
periods.
(2) Earnings per share for 1994, 1995 and 1996 is computed using the weighted
average number of common shares and common share equivalents outstanding
during the year. Earnings per share for 1992 and 1993 gives effect to the
1993 Recapitalization and the use of proceeds from the 1993 Offering as if
both events had occurred at the beginning of 1992.
(3) Represents income from continuing operations before extraordinary items plus
interest, taxes, depreciation, amortization and other non-cash expenses.
Although the Company has measured EBITDA consistently between the periods
presented, EBITDA as a measure of liquidity is not governed by GAAP, and, as
such, may not be comparable to other similarly titled measures of other
companies. The Company believes that EBITDA, while providing useful
information, should not be considered in isolation or as an alternative to
either (i) operating income determined in accordance with GAAP as an
indicator of operating performance or (ii) cash flows from operating
activities determined in accordance with GAAP as a measure of liquidity.
(4) Net capital expenditures reflect assets acquired by purchase and capital
lease.
14
<PAGE> 16
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, including the Notes thereto, contained elsewhere in this
Prospectus.
GENERAL
OVERVIEW
Quaker has been producing upholstery fabrics for the home furnishings
market for more than 50 years. Today, Quaker is a leading designer, manufacturer
and worldwide marketer of woven upholstery fabrics for residential furniture
markets and one of the largest producers of Jacquard upholstery fabrics in the
world. Over the last five years, Quaker has achieved sales and net income
(excluding extraordinary items) growth in every year except 1995. Net sales and
net income have grown from $123.4 million and $3.7 million, respectively, in
1992 to $198.9 million and $8.6 million, respectively, in 1996.
During 1995, the Company reported a decrease in net sales and lower gross,
operating and net margins as a result of a convergence of economic, industry and
Company-specific factors. These factors caused the Company's net sales to
decline $7.3 million, to $173.5 million from $180.8 million in 1994. The Company
encountered poor market conditions in Mexico, Canada and the Middle East, each
of which is an important export market for the Company. As a result, 1995
foreign sales decreased by $10.7 million, or 31.6% below 1994 foreign sales
levels. This decline was partially offset by a $2.9 million increase in net yarn
sales, with domestic fabric sales essentially flat.
Significant price increases were also announced by several of the Company's
most important raw material suppliers in early 1995. Such price increases
adversely affected the Company's gross margin, particularly during the latter
part of the year, as the Company was unable to fully pass along these cost
increases to customers during 1995.
The Company generally produces goods to customer order and seeks to operate
its production areas on a five to five and one-half day week, three shift
schedule. During 1995, however, the Company experienced a number of sharp
changes in its order rates which required several significant adjustments in the
Company's production rates. These adjustments adversely affected equipment
utilization rates, quality performance and overtime costs, particularly during
the fourth quarter, contributing to the deterioration in the Company's 1995
gross margin.
In response to the challenges encountered during 1995, management developed
a comprehensive performance improvement plan designed to increase margins and
earnings by growing sales, reducing raw material costs and realizing
manufacturing efficiencies.
(i) To increase sales, the Company strengthened its marketing,
merchandising, design, distribution and new business development functions,
expanded its network of international sales agents, introduced a branded line of
better-end fabrics under its Whitaker label, developed products to meet the
specific styling and design needs of its international and jobber customers,
continued to broaden its product line, focused on opportunities to reduce
delivery lead times and improve customer service, identified new markets and
applications for its specialty yarn products and prepared to enter the contract
(office and institutional) market.
(ii) To reduce raw material costs, the Company identified alternate
suppliers for several of its key raw materials, employed more cost effective raw
materials in certain of its products and implemented a Company-wide program to
reduce waste.
(iii) To improve manufacturing efficiencies, the Company continued to
pursue ISO 9001 certification, invested more than $10.8 million in new
manufacturing equipment in 1996 to eliminate bottlenecks and meet its quality
objectives, changed its new product development process to enhance coordination
between the Company's design and manufacturing areas, reduced set-up times,
provided additional training to the
15
<PAGE> 17
Company's managers and production area employees and implemented a number of
process improvements throughout the Company's manufacturing areas.
Following management's implementation of the Company's 1996 performance
improvement plan, the Company's sales and profitability improved in comparison
to prior periods in each of the last three quarters of 1996.
QUARTERLY OPERATING RESULTS
The following table sets forth certain condensed unaudited consolidated
statements of income data for the eight fiscal quarters ended January 4, 1997,
as well as certain data expressed as a percentage of the Company's total net
sales for the periods indicated:
<TABLE>
<CAPTION>
FISCAL 1995(1) FISCAL 1996(1)
----------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................. $ 46,250 $ 41,068 $ 37,984 $ 48,185 $ 43,254 $ 51,025 $ 46,436 $ 58,141
Gross margin.............................. 12,104 8,720 7,344 8,236 9,297 11,312 10,751 14,709
Gross margin percentage................... 26.2% 21.2% 19.3% 17.1% 21.5% 22.2% 23.2% 25.3%
Operating income.......................... 4,969 2,708 1,630 921 2,673 4,014 4,053 6,208
Operating income percentage............... 10.7% 6.6% 4.3% 1.9% 6.2% 7.9% 8.7% 10.7%
Income before provision for income
taxes................................... $ 4,002 $ 1,715 $ 749 $ (234) $ 1,696 $ 2,972 $ 2,984 $ 5,127
-------- -------- -------- -------- -------- -------- -------- --------
Net income................................ $ 2,495 $ 1,307 $ 498 $ 1,220 $ 1,136 $ 1,992 $ 1,999 $ 3,435
======= ======= ======= ======= ======= ======= ======= =======
Earnings per common share................. $ 0.30 $ 0.16 $ 0.06 $ 0.15 $ 0.14 $ 0.24 $ 0.24 $ 0.41
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) The data reflected in this table has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere
in this Prospectus.
While the Company's sales have historically not been subject to significant
seasonality, Quaker's net sales and gross margins are typically slightly
stronger in the second and fourth quarters. In 1995, however, management
believes that relatively poor conditions in both the domestic market and several
of the export markets important to the Company, as well as the Company-specific
factors discussed above, had a more pronounced effect on sales and profitability
than any seasonal variations.
As a result of the sale of shares by MLGA Fund in this offering, vesting of
certain outstanding stock options will be accelerated. This acceleration will
result in the recognition by the Company of additional general and
administrative expenses equal to the unamortized portion of deferred
compensation expense associated with such options, resulting in a non-cash
compensation charge of approximately $500,000 in the fiscal quarter in which
this offering is consummated. This charge would otherwise be recognized as
compensation expense through March 2001. See "Management -- Benefit Plans."
The Company follows industry practice by closing its operating facilities
for a one-to-two week period during July of each year. In 1995 and 1996, this
shut down period, and the resulting effect on sales, occurred in the third
fiscal quarter. In 1997, the first week of the annual shut down period will
occur in the second fiscal quarter.
16
<PAGE> 18
PRODUCT MIX
Over the past several years, Quaker has taken steps to expand both the
breadth and depth of the Company's product line by increasing the number of
higher margin, middle to better-end fabrics in its line and by expanding the
number of fabrics it offers at each price point and in each styling category. As
a result, the Company has added new manufacturers of higher-end furniture to its
customer base and positioned itself as a full service supplier of Jacquard and
plain woven fabrics to all of its customers. The following table sets forth
certain information relating to the changes that have occurred in the Company's
product mix and the average gross sales price of its fabrics since 1994:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER YARD DATA)
<S> <C> <C> <C> <C> <C> <C>
Gross fabric sales (dollars):
Promotional-end fabrics................. $ 59,763 35.3% $ 57,023 36.0% $ 54,716 31.0%
Middle to better-end fabrics............ 109,427 64.7 101,201 64.0 121,702 69.0
-------- -------- -------- -------- -------- --------
Gross fabric sales.................... $169,190 100.0% $158,224 100.0% $176,418 100.0%
======== ======== ======== ======== ======== ========
Gross fabric sales (yards):
Promotional-end fabrics................. 17,597 42.3% 17,042 41.8% 16,074 36.9%
Middle to better-end fabrics............ 24,044 57.7 23,719 58.2 27,478 63.1
-------- -------- -------- -------- -------- --------
Gross fabric sales.................... 41,641 100.0% 40,761 100.0% 43,552 100.0%
======== ======== ======== ======== ======== ========
Average gross sales price per yard:
Promotional-end fabrics................. $ 3.40 $ 3.35 $ 3.40
Middle to better-end fabrics............ 4.55 4.27 4.43
Average per yard -- all fabrics......... 4.06 3.88 4.05
</TABLE>
GEOGRAPHIC DISTRIBUTION OF SALES
To develop markets for upholstery fabric outside the United States, the
Company has placed substantial emphasis on building both direct exports from the
United States as well as sales from its Mexico City, Mexico distribution center
and from the inventory it maintains in Roosendaal, Holland. The Company's 1996
foreign sales were up by $12.5 million, or 54.0% above 1995. 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 1994:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT SALES AMOUNT SALES AMOUNT SALES
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross fabric sales:
Domestic sales.......................... $135,295 80.0% $135,037 85.3% $140,717 79.8%
Foreign sales(1)........................ 33,895 20.0 23,187 14.7 35,701 20.2
-------- -------- -------- -------- -------- --------
Gross fabric sales................ $169,190 100.0% $158,224 100.0% $176,418 100.0%
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Foreign sales consists of both direct exports from the United States as well
as sales from the Company's Mexico City distribution center and from the
inventory it maintains in Holland.
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<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of the Company's net sales represented by certain income and expense items in
the Company's consolidated statements of income:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0%
Cost of products sold......................................... 73.6 79.0 76.8
------- ------- -------
Gross margin.................................................. 26.4 21.0 23.2
Selling, general and administrative expenses.................. 15.3 15.1 14.7
------- ------- -------
Operating income.............................................. 11.1 5.9 8.5
Interest expense, net......................................... 2.1 2.2 2.1
Other expenses, net........................................... -- 0.1 --
------- ------- -------
Income before provisions for income taxes..................... 9.0 3.6 6.4
Provisions for income taxes................................... 3.7 0.4 2.1
------- ------- -------
Net income.................................................... 5.3% 3.2% 4.3%
====== ====== ======
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales for 1996 increased $25.4 million, or 14.6%, to $198.9
million from $173.5 million in 1995. Both gross fabric sales and gross yarn
sales were higher during the period. Gross fabric sales increased due to
increases in both domestic and foreign fabric sales. Gross fabric sales within
the United States increased 4.2%, to $140.7 million in 1996 from $135.0 million
in 1995. Foreign sales increased 54.0%, to $35.7 million in 1996 from $23.2
million in 1995. This increase was due to improved sales in Mexico, Canada and
the Middle East as well as increased penetration of other international markets.
Gross yarn sales increased 42.0%, to $26.8 million in 1996 from $18.8 million in
1995.
The gross volume of fabric sold increased 6.8%, to 43.6 million yards in
1996 from 40.8 million yards in 1995. The average gross sales price per yard
increased 4.4%, to $4.05 in 1996 from $3.88 in 1995. The increase was
principally due to a product shift to more middle to better-end fabrics. The
Company sold 15.8% more yards of middle to better-end fabrics and 5.7% fewer
yards of promotional-end fabrics in 1996 than in 1995. The average gross sales
price per yard of middle to better-end fabrics increased by 3.7%, to $4.43 in
1996 from $4.27 in 1995. The average gross sales price per yard of
promotional-end fabrics increased by 1.5%, to $3.40 in 1996 from $3.35 in 1995.
Gross Margin. The gross margin percentage for 1996 increased to 23.2% from
21.0% for 1995. This percentage growth was primarily attributable to the
Company's performance improvement plan which resulted in increased domestic and
international sales of higher-margin, middle to better-end fabrics, improved
manufacturing efficiencies related to the acquisition of newer, more efficient
manufacturing equipment and more efficient use of the Company's existing
equipment, improved quality performance, decreased raw material costs, and the
effect of spreading overhead over a higher sales base.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $29.1 million in 1996 from $26.2 million in
1995 due to increases in sales commissions, labor and fringes, and sampling
expenses associated with the Company's higher net sales for the period. Selling,
general and administrative expenses as a percentage of net sales decreased to
14.7% in 1996 from 15.1% in 1995 due to a significant increase in net sales
without a corresponding increase in overhead.
Interest Expense, Net. Interest expense increased to $4.1 million in 1996
from $3.9 million in 1995. Lower debt levels were offset by higher commitment
fees associated with increased borrowing availability and other financing
charges.
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<PAGE> 20
Effective Tax Rate. The effective tax rate increased to 33.0% in 1996 from
11.4% in 1995. The reduced tax rate for 1995 reflects an adjustment recorded
during the fourth quarter as a result of tax law changes in Massachusetts
enacted in November 1995 which reduced the Company's future deferred tax
liability. See Note 6 of Notes to Consolidated Financial Statements included
elsewhere in this Prospectus.
Net Income. Net income for 1996 increased to $8.6 million, or $1.03 per
share, from $5.5 million, or $0.67 per share, for 1995. For a discussion of
Earnings Per Share, see Note 2(h) of Notes to Consolidated Financial Statements
included elsewhere in this Prospectus.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales for 1995 decreased $7.3 million or 4.1%, to $173.5
million from $180.8 million in 1994. Gross fabric sales declined during the
period, while gross yarn sales increased. The decline in gross fabric sales was
due primarily to a decrease in foreign sales and essentially flat domestic
fabric sales. Foreign sales decreased 31.6%, to $23.2 million in 1995 from $33.9
million in 1994. This decrease was due to (i) a decline in sales into the
Mexican market resulting from the devaluation of the Mexican peso in December
1994 and the ensuing recession in Mexico and (ii) a reduction in the amount of
business the Company was able to do in Canada and the Middle East due to general
economic conditions in those markets. Gross fabric sales within the United
States remained approximately the same at $135.0 million. Gross yarn sales
increased 15.0%, to $18.8 million in 1995 from $16.4 million in 1994.
The gross volume of fabric sold decreased 2.1%, to 40.8 million yards for
1995 from 41.6 million yards for 1994. The average gross sales price per yard
declined 4.4%, to $3.88 for 1995 from $4.06 for 1994. This decrease was
principally due to a decrease in foreign sales, which have higher than average
selling prices and an increase in the volume of seconds sold in the off-quality
market. The Company sold 1.4% fewer yards of middle to better-end fabrics and
3.1% fewer yards of promotional-end fabrics in 1995 as in 1994. The average
gross sales price per yard of middle to better-end fabrics decreased by 6.2%, to
$4.27 in 1995 from $4.55 in 1994. The average gross sales price per yard of
promotional-end fabric decreased by 1.5%, to $3.35 in 1995 from $3.40 in 1994.
Gross Margin. The gross margin percentage for 1995 decreased to 21.0% from
26.4% for 1994. The decrease in gross profit margin was primarily due to (i)
lower absorption of fixed overhead costs because of lower sales and production
volume, (ii) a reduction in the Company's manufacturing efficiencies and quality
performance, (iii) increased raw material prices which were not fully passed on
to customers during 1995, and (iv) a reduction in volume of foreign sales which
carry higher than average gross margins. During 1995, the Company experienced
sharp changes in order demand. Since finished goods generally are manufactured
to a specific customer order, these changes required significant decreases and
increases in the Company's production rates. These changes in production rates
adversely affected the Company's gross margin as manufacturing efficiencies and
quality performance suffered. Additionally, the Company incurred significant
costs (principally overtime) associated with increasing production rates during
the fourth quarter of 1995 to meet increased order demand.
Selling, General and Administrative Expense. Selling, general and
administrative expenses decreased to $26.2 million for 1995 from $27.6 million
for 1994. Selling, general and administrative expenses as a percentage of net
sales decreased to 15.1% in 1995 from 15.3% in 1994. The decrease in selling,
general and administrative expenses was primarily due to reductions in sales
commissions, freight and other variable costs related to the Company's lower
sales volume. The decrease as a percentage of net sales was due to a reduction
in fixed costs, such as expenses associated with the Company's Mexico City
distribution center.
Interest Expense, Net. Interest expense remained approximately the same,
at $3.8 million each year, as interest rates in 1995 were slightly lower but
borrowing levels were slightly higher.
Effective Tax Rate. The effective tax rate decreased to 11.4% for 1995
from 41.3% for 1994. This decrease was partially attributable to tax benefits
related to the foreign sales corporation established by the Company during the
second quarter of 1994 and to lower state income taxes due to investment tax
credits associated with the Company's capital expenditure program. Additionally,
the reduced tax rate for 1995
19
<PAGE> 21
reflects an adjustment recorded during the fourth quarter as a result of tax law
changes in Massachusetts enacted in November 1995 which reduced the Company's
future deferred tax liability. See Note 6 of Notes to Consolidated Financial
Statements included elsewhere in this Prospectus.
Net Income. Net income for 1995 decreased to $5.5 million, or $0.67 per
share, from $9.5 million, or $1.15 per share, for 1994. For a discussion of
"Earnings Per Share," see Note 2(h) of Notes to Consolidated Financial
Statements included elsewhere in this Prospectus.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings,
and equipment leasing. The Company's capital requirements have arisen
principally in connection with the purchase of equipment to expand production
capacity and improve the Company's quality and productivity performance and with
an increase in the Company's working capital needs related to its sales growth.
The primary source of the Company's liquidity and capital resources has
been operating cash flow. The Company's net cash provided by operating
activities was $11.1 million, $12.0 million and $14.8 million in 1994, 1995 and
1996, respectively. The Company has supplemented its operating cash flow with
borrowings and equipment leases. Net borrowings (repayments) and equipment
leases were $5.5 million in 1994, $1.3 million in 1995 and $(2.5) million in
1996.
Over the last five years, the Company has placed in service new
manufacturing equipment with an aggregate cost of $51.0 million. Capital
expenditures in 1995 and 1996 were $13.2 million and $12.0 million,
respectively. Capital expenditures during 1996 were funded by operating cash
flow. Management anticipates that capital expenditures will total approximately
$22.1 million in 1997, consisting of $14.4 million, plus the estimated $4.2
million net proceeds to the Company from this offering, primarily for new
production equipment to expand chenille yarn capacity, increase weaving
capacity, and support the Company's marketing, productivity, quality, service
and financial performance objectives and $3.5 million to upgrade the Company's
management information systems. Management believes that the net proceeds to the
Company from this offering, together with operating income and borrowings under
the Company's Credit Agreement, will provide sufficient funding for the
Company's capital expenditures and working capital needs for the foreseeable
future.
As discussed in Note 5 of Notes to Consolidated Financial Statements, the
Company issued $30.0 million of 6.81% Series A Senior Notes due December 15,
2002 (the "Series A Notes") during 1995. Proceeds from the Series A Notes were
used to reduce borrowings under the Credit Agreement. The Series A Notes bear
interest at a fixed rate of 6.81% during the entire term, with no principal
payments due until December 15, 1998.
Additionally, the Company amended the Credit Agreement during 1995 to (i)
increase the revolving credit facility to $50.0 million, (ii) extend the
maturity date to December 31, 2000, and (iii) reduce the interest rate. As of
January 4, 1997, the Company had $4.0 million outstanding under the Credit
Agreement and unused availability of $45.5 million, net of outstanding letters
of credit.
The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement 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, make capital
expenditures in excess of certain specified amounts, 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 Notes and management believes the Company's continued
compliance will not prevent the Company from operating in the normal course of
business.
20
<PAGE> 22
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's results of operations for the periods presented. Historically, the
Company believes it has been able to minimize the effects of inflation by
improving its manufacturing and purchasing efficiency, by increasing employee
productivity, by reflecting the effects of inflation in the selling prices of
the new products it introduces each year and, to a lesser degree, by increasing
the selling prices of those products which have been included in the Company's
product line for more than one year.
FOREIGN CURRENCY TRANSLATION
All of the Company's sales are denominated in U.S. dollars except sales
through the Company's Mexico City distribution center. These sales are
denominated in pesos and are, therefore, subject to currency fluctuations.
Accounts receivable in pesos at January 4, 1997 were $1.7 million.
Mexico has been designated as a "highly inflationary country" for purposes
of applying Statement of Financial Standards No. 52, Foreign Currency
Translation. Accordingly, in 1997 the Company will record translation gains and
losses in the income statement rather than as a separate component of equity.
See Note 2(i) of Notes to Consolidated Financial Statements included elsewhere
in this Prospectus.
21
<PAGE> 23
BUSINESS
GENERAL
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 have grown from
$123.4 million in 1992 to $198.9 million in 1996, a compound annual growth rate
("CAGR") of 12.7%.
Quaker has been producing upholstery fabric for over fifty 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 3,000
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 700 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. In addition, 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.
The Company sells its upholstery fabrics to over 600 domestic furniture
manufacturers, including virtually every significant domestic manufacturer of
upholstered furniture, such as Furniture Brands International (Action by Lane,
Broyhill and Thomasville), Klaussner, La-Z-Boy, Lifestyle Furnishings
International (Berkline, Benchcraft and others), Rowe and Simmons. Quaker also
distributes its fabrics internationally. In 1996, fabric sales outside the
United States of $35.7 million represented approximately 20.2% of gross fabric
sales. Quaker's October 1996 introduction of its Whitaker 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,
including Baker, Bernhardt, Henredon and Sherrill. Management estimates that
approximately 85% of the Company's fabric sales in recent years have been
manufactured to customer order.
THE INDUSTRY
Total domestic upholstery fabric sales, exclusive of automotive
applications, are approximately $2.0 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 15 upholstery fabric manufacturers,
including Quaker, accounting for over 80% of the total market. Most of the
largest U.S. fabric producers have expanded their export sales, leveraging their
size, distribution capabilities, technology advantages and broad product lines.
Demand for upholstery fabric is a function of demand for upholstered
furniture. The upholstered furniture market has grown from $5.4 billion in 1991
to $7.4 billion in 1995. Total upholstered furniture demand is affected by
population growth and demographics, consumer confidence, disposable income,
geographic mobility, housing starts, and home sales. Although the domestic
residential furniture industry is cyclical, periods of decline have been
relatively brief, with industry shipments decreasing in only two years since
1975.
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.
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<PAGE> 24
Management believes the long-term outlook for its upholstery fabric sales
will be influenced by certain trends:
(i) As "baby boomers" mature to the 35-64 year age group over the next decade,
they will be reaching their highest earnings power. This age group
includes the largest consumers of residential furniture.
(ii) Over the last several years, furniture manufacturers have moved toward
more highly styled Jacquards, at the expense of less distinctive fabrics,
such as flocks, plaids, plains, prints, stripes, tufts and velvets.
(iii) Consolidation in the furniture industry is resulting in fewer, but larger,
customers for upholstery fabric manufacturers. These larger customers
typically prefer to purchase their fabric requirements from a small number
of vendors able to provide a broad range of product choices, handle their
volume requirements and offer focused, customized service.
(iv) Homes are decorated more casually today than they were a decade ago,
resulting in a trend toward more comfortable furniture, as well as "motion
furniture." Historically, motion furniture was typically covered with less
expensive flock, plain, tufted or velvet fabrics. The development of
softer, more durable and highly styled Jacquards has allowed motion
furniture manufacturers to improve their profit margins by differentiating
their products.
(v) 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.
(vi) 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.
(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.
GROWTH STRATEGY
The Company's strategy to further its growth and financial performance
objectives includes:
Increasing Sales to the Middle to Better-End Segment. 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. The Company has
expanded its fabric line by increasing both the number of products it offers at
each price point and in each styling category, as well as the number of middle
to better-end fabrics in its line. This has enabled the Company to sell more
product to its existing customers, add new higher-end furniture manufacturers to
its customer base, and provide all of its customers with a greater selection. In
1996, to generate additional business from manufacturers of higher-end
upholstered furniture, Quaker began offering a select group of its middle to
better-end products exclusively to those customers under its Whitaker label.
Sales of the Company's middle to better-end fabrics, which Quaker first began
emphasizing in the early 1990s, have increased from $66.3 million, or 56.3% of
total fabric sales in 1992, to $121.7 million, or 69.0% of total fabric sales in
1996, a CAGR of 16.4%.
Expanding International Sales. The Company has made worldwide distribution
of its upholstery fabrics a key component of its growth 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. As a result, the Company's
international sales have increased from $18.3 million in 1992 to $35.7 million
in 1996, a CAGR of 18.2%.
Capitalizing on the Growth of the Casual Furniture Segment. Based upon its
leading position in the Jacquard market and its own internally produced chenille
yarns, management believes Quaker is well
23
<PAGE> 25
positioned to benefit from the growth of the casual furniture segment, where
soft, durable, distinctive fabrics, such as Quaker's Jacquard and other
chenilles, are in increasing demand. The Company believes its soft, highly
styled Jacquard chenille fabrics, including its Ankyra-based fabrics, are
particularly well suited to meet the needs of this market segment. The styling
advantages of the Company's more durable Jacquard chenille fabrics allow the
Company to compete effectively with flocks, velvets and tufted fabrics which
have traditionally enjoyed strong positions in this market segment.
Penetrating Related Fabric Markets. Management believes the superior
styling and performance characteristics of the Company's fabrics provide
opportunities to penetrate markets related to Quaker's core residential fabric
business. The Company has specifically targeted the contract (office and
institutional) and recreational vehicle markets, where management believes
Quaker's Jacquard chenille fabrics will provide the Company with a clear product
advantage. The Company has also targeted additional sales to the decorative
jobber (distributors to the interior design trade) market where management
believes the Company's recently introduced Whitaker Collection will have broad
appeal.
Growing Specialty Yarn Sales. Quaker is a leading producer of specialty
yarns and management believes it is the world's largest producer of chenille
yarns. Sales of the Company's specialty yarns have increased from $7.8 million
in 1992 to $26.8 million in 1996, a CAGR of 36.2%. In addition to the popularity
of the Company's current line of specialty yarns, including its proprietary,
abrasion-resistant Ankyra chenille yarns, Quaker regularly creates innovative
new specialty yarns for use in the Company's fabrics and sale to the Company's
growing list of yarn customers. Quaker intends to increase sales by targeting
new markets and applications for its specialty yarns.
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 growth strategy:
Product Design and Development Capabilities. Management believes that
Quaker's reputation for design excellence and product leadership is, and will
continue to be, the Company's most important competitive strength. Each year the
Company adds approximately 700 new products to its line to meet the styling and
design, color, texture, quality and pricing requirements of furniture
manufacturers selling into both the promotional and middle to better-end
segments of the retail furniture market. Substantially all of the Company's
products are developed by the Company's in-house design staff using CAD
equipment to shorten the new product development cycle.
Focus on Jacquard Fabrics. Quaker is one of the largest producers of
Jacquard fabrics in the world. Management believes the detailed, copyrighted
designs of its Jacquard fabrics have enabled it to compete primarily based on
superior styling and design, contributing to Quaker's strong gross margin
performance.
Broad Product Offering. Over the past several years, the Company has taken
steps to expand both the breadth and depth of the Company's product line to
enable the Company to be a full service provider of Jacquard and plain woven
fabrics to its customers. The Company currently offers a product line consisting
of over 3,000 fabric patterns. As a result, the Company's customer base includes
virtually every significant domestic manufacturer of upholstered furniture.
Vertical Integration. Quaker is vertically integrated, beginning with the
production of specialty yarns. Quaker's ability to both design and manufacture
approximately 70% of its filling yarn requirements provides the Company with
significant design, cost and delivery advantages. The Company intends to
continue to increase these advantages through additional investments in
specialty yarn manufacturing equipment.
State-of-the-Art Manufacturing Equipment. Over the past five years, Quaker
has invested in excess of $51 million in new manufacturing equipment. Management
believes the Company now has one of the most modern, efficient and
technologically advanced manufacturing bases in the industry. Quaker intends to
spend approximately $14.4 million, plus the estimated $4.2 million net proceeds
to the Company of this offering, on additional manufacturing equipment during
1997, primarily to expand chenille manufacturing capacity,
24
<PAGE> 26
increase capacity in its weaving and fabric finishing areas and support its
marketing, productivity, quality, service and financial objectives.
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 $2.50 to $18.00 per yard.
While most of the Company's fabrics are sold under the Quaker label, the Company
began marketing a select group of its middle to better-end fabrics under its
Whitaker label in October 1996. In 1996 the Company's promotional-end fabric
line and its middle to better-end fabric line had average gross sales prices of
$3.40 per yard and $4.43 per yard, respectively, compared to $3.35 and $4.27,
respectively, in 1995. The average gross sales price per yard of the Company's
fabrics was $4.05 in 1996, compared to $3.88 in 1995.
Quaker's product line consists of low to medium pick (from 6 through 14
picks per inch) woven fabrics, purchased primarily by manufacturers of
promotional-end furniture; and medium to high pick (from 15 through 60 picks per
inch) woven fabrics, purchased primarily by manufacturers of middle to
higher-end furniture. In the textile industry, "picks per inch" refers to the
number of times the filling, or weft, yarn in a fabric crosses the warp yarn in
that fabric. Lower pick fabrics generally require the use of bulkier filling
yarns in order to effectively "fill" each inch of space to be "covered" and,
therefore, most lower pick fabrics have less well-defined designs and a
considerable amount of "texture" to them. Conversely, the higher pick content of
the Company's middle to better-end fabrics makes it possible for these fabrics
to have more well-defined design features and to present a smoother, finer, more
sophisticated appearance than its promotional-end fabrics.
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. All 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. Fabrics
manufactured on looms without Jacquard heads have a much more limited range of
possible designs.
Quaker's product offerings are noted for their wide use of chenille yarns,
which have a soft, velvet-like feel. To take advantage of casual furniture
trends, and to capitalize on the rapid growth of the motion furniture market,
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
label. Through a licensing agreement with Monsanto Company, a number of the
Company's Ankyra-based chenille fabrics, as well as certain other fabrics in its
line, have been "Wear-Dated" by Monsanto.
The Company has taken steps to expand both the breadth and depth of the
Company's product portfolio by increasing the number of fabrics designed to meet
the needs of manufacturers of middle to higher-end upholstered furniture
products, and expanding the number of fabrics and styles offered at each price
point and in each styling category to provide all of the Company's customers
with more product choices. 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. In 1996, to generate additional business from
manufacturers of higher-end upholstered furniture, the Company began offering a
select group of its middle to better-end products exclusively to those customers
under its Whitaker label. Sales of the Company's middle to better-end fabrics
have increased from $66.3 million, or 56.3% of total fabric sales in 1992, to
$121.7 million, or 69.0% of total fabric sales in 1996.
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
25
<PAGE> 27
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 CAD
equipment to reduce the new product development cycle.
The development of each new fabric line requires four to five 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.
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 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 some plain, striped and
plaid fabrics remain in the Company's product line for 10 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."
SALES AND MARKETING
UPHOLSTERY FABRICS
Net fabric sales during 1996 were $171.9 million, or approximately 86.4% of
the Company's net sales. The Company sells its upholstery fabrics to over 600
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 40.8% of 1996 net sales. None of
the Company's customers accounted for more than 5% of net sales during 1996.
The Company uses a direct marketing force of 19 sales representatives, two
of whom are based in Quaker's Mexico City distribution center, to market its
fabrics in the United States 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 27 independent commissioned
agents appointed to represent the Company in Europe, the Far East, Australia,
New Zealand, the Middle East, and Central and South America. All agents located
outside the United States are supervised by the Company's staff of four
full-time export sales managers with offices at the Company's headquarters.
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
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upholstered furniture products that they will exhibit at the April and October
High Point Furniture Markets. The Company also introduces two less extensive
lines in April and October of each year to respond to competitive opportunities
identified at the January and July Showtime trade shows.
Quaker also markets its fabrics at a number of trade shows regularly
attended by its export customers, including shows in Belgium, Dubai, Germany,
Italy, and Mexico, as well as certain trade shows in the United States aimed at
the international market. Foreign sales of fabric accounted for approximately
20.2% of Quaker's gross fabric sales during 1996.
In addition to distribution from the Company's facilities in Fall River,
Massachusetts, Quaker maintains four distribution centers from which its
customers may purchase the Company's products directly. These facilities are
located in Los Angeles, California; Mexico City, Mexico; High Point, North
Carolina; and Verona, Mississippi. The Company also maintains inventory in
Roosendaal, Holland.
SPECIALTY YARNS
Net yarn sales during 1996 were $25.7 million, or approximately 12.9% of
the Company's net sales. The Company designs, manufactures and markets several
types of specialty yarns, including fancy spun, fancy twisted, taslan, 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, have become increasingly popular over the past several
years, in part, as a result of the recent trend toward 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, as well as
manufacturers of sweaters and other apparel. The Company has approximately 55
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. For example, the creation of Quaker's line of
Ankyra chenille yarns was an important product breakthrough for both Quaker and
its yarn customers. Historically, chenille yarns have had difficulty meeting the
durability standards required for use in fabrics which are likely to be
subjected to heavy wear, such as car seats and certain home furnishings
products. Quaker's yarn development staff created a finished chenille yarn with
superior abrasion resistance and the Company was recently notified that the
United States Patent and Trademark Office had approved its application for
patent protection of the Company's Ankyra process.
Quaker's Ankyra technology has enabled the Company to expand the sale of
its chenille yarns to makers of end products for which both softness and
durability are important. Management believes that this will prove to be a
source of further growth in the Company's yarn sales. In addition, the Company
believes that a number of the other specialty yarns developed by Quaker's yarn
development technicians have significant revenue potential and that important
market opportunities exist for all of its specialty yarns outside the United
States.
MANUFACTURING
All of Quaker's fabrics and yarns are manufactured at the Company's four
Fall River, Massachusetts manufacturing facilities and management estimates that
approximately 85% of the Company's fabric sales in recent years have been
manufactured to customer order. The Company's objective is to operate its
production facilities on a five to five and one half-day week, three-shift
schedule. However, during periods of heaviest demand, Quaker operates some or
all of its production areas on seven-day, three-shift schedules.
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 in the United States. 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 the
application of a latex backing, to enhance the durability and
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performance characteristics of the end product, as well as a stain-resistant
finish upon customer request, and a final product quality inspection prior to
shipment to the Company's customers.
Quaker has added approximately 200 new looms to its manufacturing base
since the 1989 Acquisition and the addition of these newer looms has increased
both production capacity and efficiency, without a proportionate increase in
labor costs. All of the Company's looms are equipped with Jacquard heads,
maximizing the Company's ability to design its products to meet customer needs,
without being limited by equipment-related design constraints.
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.
From the 1989 Acquisition through 1996, the Company placed in service
manufacturing equipment with an aggregate cost of approximately $62 million to
increase capacity, improve manufacturing efficiencies, and support the Company's
marketing, quality and delivery objectives. The Company plans to purchase during
1997 an additional $14.4 million, plus the estimated $4.2 million net proceeds
to the Company from this offering, of manufacturing equipment. Management
believes that during each of the next several years additional capital equipment
will be needed to meet anticipated demand for the Company's products.
QUALITY ASSURANCE
Management believes that product quality is a significant competitive
factor in both the domestic and international fabric markets and has established
aggressive performance objectives for the Company in this area. Quaker's quality
initiatives include:
- The introduction of a revised group incentive program in certain of its
production departments to factor quality into the overall compensation
programs in these areas.
- Inspection of all 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.
- The assignment of additional quality control staff to each of the
Company's weaving areas and to various other quality-critical production
departments to identify defects early in the manufacturing process.
- A final quality inspection of the Company's yarn and fabric products
before they are released for shipment.
- The use of statistical process control reports to provide continuous
monitoring of the Company's performance against industry standards and
its own internal quality standards.
- Progress toward ISO 9001 certification.
In addition to these measures, the built-in quality control features and
more precise settings on the new production equipment the Company has placed in
service since 1990 have also played an important role in the Company's efforts
to provide defect-free products to its customers.
Primarily as a result of the Company-wide quality improvement program
implemented in early 1996, the Company's quality-related return rate, as a
percentage of total yards shipped, improved from 0.8% in 1995 to 0.6% in 1996,
and the Company's sales of second-quality fabric decreased by 45.3%, from $3.9
million in 1995 to $2.2 million in 1996.
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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 MRP II 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; and (iv) the
use of electronic Jacquard heads and other production equipment equipped with
microprocessors to improve manufacturing efficiencies and reduce unit costs.
During 1996, the Company completed a comprehensive re-evaluation of its
data processing systems and developed a long-range information systems plan
intended to meet the Company's future management information needs and to
provide new and innovative technology solutions to the Company's customers. As a
result of this study, Quaker is in the process of upgrading its MRP II system to
an Enterprise Resource Planning ("ERP") system, with a full conversion to ERP
expected during 1998. Management believes that the installation of the Company's
new ERP system will enhance Quaker's ability to meet its quality and service
objectives by: (i) providing Quaker's customers with direct access to the system
to check the status of their orders; (ii) reducing delivery lead times by
improving the Company's ability to accurately forecast its raw material
requirements, provide better and more timely information to its vendors and
schedule its production operations more efficiently; and (iii) providing
computerized support to the Company's quality control system and ISO 9001
certification efforts.
The Company's CAD equipment is used not only to develop new fabric designs
but also 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; however, the use of computer disks substantially reduces the amount of
equipment downtime required for style changes, resulting in improved
manufacturing efficiencies. See "Business -- New Product Development and
Design."
The Company first introduced bar-coding technology in certain of its
operations in 1993. In 1997, Quaker plans to introduce bar-coding technology in
the balance of its manufacturing areas so that material movement can be traced
electronically from receiving to shipping.
Much of the new equipment Quaker has added to its manufacturing base since
the 1989 Acquisition is equipped with microprocessors and other electronic
controls. In particular, all the Jacquard heads purchased by the Company since
1993 are electronic, substantially reducing the amount of time it takes to
change from the production of one fabric pattern to the next, and contributing
to improved productivity in Quaker's manufacturing areas.
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 and 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. 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. Historically, the Company has been able to pass through a substantial
portion of any increases in its raw material costs; however, the Company
experienced significant increases in certain raw material prices in 1995 which
it was not able to pass through fully to its customers during 1995 and which
contributed to a reduction in the Company's 1995 gross margin.
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Future price levels of raw materials will depend upon supply and demand
conditions, the general inflation rate, and overall economic conditions.
Although other sources are available, the Company currently procures
approximately one-half 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 seeks to identify alternate sources for all critical raw
material components.
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 market, where competition is weighted more heavy toward fabric
styling and design considerations. Although the Company has experienced no
significant competition in the United States from imports to date, changes in
foreign exchange rates or other factors could make imported fabrics more
competitive with the Company's products in the future.
The Company's principal competitors include: Burlington House Upholstery
Division of Burlington Industries Inc., Culp, Inc., Joan Fabrics Corporation,
the Mastercraft Division of Collins & Aikman Corporation and Valdese Weavers,
Inc. Several of the companies with which the Company competes 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, 1997, the Company had orders pending for approximately
$29.1 million of fabric and yarn compared to $24.5 million as of December 30,
1995. 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
chenille yarns. The Company has recently been notified that the United States
Patent and Trademark Office has approved its application for patent protection
of the proprietary manufacturing process developed by Quaker to produce these
yarns. Quaker has also filed an application with the United States Patent and
Trademark Office for registration of its Whitaker mark.
INSURANCE
The Company maintains general liability and property insurance. The costs
of insurance coverage vary generally and the availability of certain coverages
has fluctuated in recent years. 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 second largest private
sector employer, in Fall River, Massachusetts. As of January 5, 1997, Quaker
employed 1,647 persons, including 1,339 production employees, 111 technical and
clerical employees, and 197 exempt employees and commissioned sales
representatives. The Company's employees are not represented by a labor union.
In October 1994, the Teamsters Local 251, headquartered in East Providence,
Rhode Island, filed an election petition. In
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November 1994, the union withdrew its election petition. Management believes
that employee relations are good.
PROPERTIES
Quaker is headquartered in Fall River, Massachusetts where it currently has
four facilities, three used primarily for manufacturing purposes, including
warehouse space. The fourth facility houses the Company's executive,
administrative and design areas as well as certain manufacturing operations. 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:
<TABLE>
<CAPTION>
APPROXIMATE
ENCLOSED AREA
LOCATION PRIMARY USE (SQUARE FEET) OWNERSHIP
- --------------------------------------------------- ----------------------------------- --------
<S> <C> <C> <C>
Grinnell Street, Fall River........................ Manufacturing 728,000 Owned
Quequechan Street, Fall River...................... Manufacturing 244,000 Owned
Davol Street, Fall River........................... Offices/Manufacturing 245,000 Owned
Ferry Street, Fall River........................... Manufacturing 193,000 Owned
Verona, Mississippi................................ Distribution Center 20,000 Owned
City of Industry, California....................... Distribution Center 17,286 Leased(1)
Mexico City, Mexico................................ Distribution Center 9,000 Leased(2)
High Point, North Carolina......................... Distribution Center 8,500 Leased(3)
</TABLE>
- ---------------
(1) Lease expires October 1, 2001.
(2) Lease expired February 5, 1997. The Company is in the process of negotiating
a renewal.
(3) Lease expires July 31, 2001.
The Company also maintains inventory at a public warehouse in Roosendaal,
Holland. Quaker has sales offices in Fall River, Massachusetts; Mexico City,
Mexico; Hickory and High Point, North Carolina; Chicago, Illinois; Tupelo,
Mississippi; and Los Angeles, California. All of the Company's sales offices,
except the one in Fall River, Massachusetts, are leased.
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. 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. Further, certain of the
Company's manufacturing areas are subject to OSHA's "Comprehensive Cotton Dust
Standard." 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. The Company has notified the Commonwealth of Massachusetts
regarding these releases. The Company's ultimate clean-up costs relating to
these underground storage tanks cannot be predicted with certainty at this time.
In addition, during the fourth quarter of 1993 the
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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. At Quaker's former
facility in Claremont, New Hampshire, it has been determined that there is oil-
contaminated soil, as well as groundwater contamination, resulting from a leak
during the mid-1970s from an underground fuel storage tank. The Company has
agreed to indemnify the purchaser for clean-up costs subject to certain
limitations. The Company has also agreed to indemnify the purchaser of the
Company's former facility in Leominster, Massachusetts, for certain
environmental contingencies.
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 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.
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.
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MANAGEMENT
The following table sets forth certain information regarding the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ---- -------------------------------------------------
<S> <C> <C>
Larry A. Liebenow(1)(2)................... 53 President, Chief Executive Officer, and Director
Anthony Degomes(2)........................ 56 Vice President--New Business Development
James A. Dulude........................... 41 Vice President--Manufacturing
Thomas J. Finneran........................ 56 Vice President--Sales
Cynthia L. Gordan......................... 49 Vice President, Secretary, and General Counsel
Paul J. Kelly............................. 52 Vice President--Finance and Treasurer
Thomas H. Muzekari........................ 56 Vice President--Marketing
M. Beatrice Spires........................ 35 Vice President--Styling and Design
J. Duncan Whitehead(2).................... 54 Vice President--Technology and Development, and
Yarn Sales
Sangwoo Ahn(1)(3)......................... 58 Chairman of the Board
Perry J. Lewis(1)(3)...................... 59 Director
Eriberto R. Scocimara(4).................. 61 Director
Ira Starr(3)(4)........................... 37 Director
</TABLE>
- -------------------
(1) Member of Compensation Committee.
(2) Affiliated with Nortex Holdings.
(3) Affiliated with Morgan Lewis Githens & Ahn, Inc.
(4) Member of Audit Committee.
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company. There are no family relationships among any
of the Company's directors or executive officers.
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., a manufacturer and distributor of specialty yarns
which was merged into the Company in the 1989 Acquisition ("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. Mr. Liebenow is also a trustee of Eastern
Utilities Associates; a Director of the U.S. Chamber of Commerce, Chairman of
its Western Hemisphere Task Force and a member of its International Policy
Committee; and a Director of the American Textile Manufacturers Institute.
Anthony Degomes. Mr. Degomes has been employed by the Company since
September 1989 and has served as Vice President -- New Business Development
since March 1996. Mr. Degomes served as Vice President -- Styling and Design of
the Company from September 1991 to March 1996. From December 1990 to September
1991, Mr. Degomes served as the Company's Director of Styling and Design. From
September 1989 to November 1990, Mr. Degomes served as the Vice
President -- Styling, Design and Development of the Company's Nortex Division.
From March 1984 to September 1989, Mr. Degomes served as the Vice President in
charge of Styling and Development for Nortex International.
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.
Thomas J. Finneran. Mr. Finneran has been employed by the Company since
January 1982, and has served as Vice President -- Sales since March 1996. Mr.
Finneran served as Vice President -- Marketing
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from July 1988 to March 1996 and Vice President -- Sales from January 1982 to
July 1988. From 1973 to January 1982, Mr. Finneran was responsible for sales and
marketing of velvets, Jacquard and dobbie product lines at Joan Fabrics
Corporation.
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.
Paul J. Kelly. Mr. Kelly has served as Vice President -- Finance,
Treasurer and Chief Financial Officer of the Company since December 1989, and
since November 1993 has also had responsibility for working with industry and
institutional equity research 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 Muzekari. Mr. Muzekari has served as Vice President -- Marketing
since March 1996. From September 1989 until February 1996, Mr. Muzekari was the
Vice President -- Marketing for the Velvet Division of Collins & Aikman Group,
Inc. ("C&A").
M. Beatrice Spires. Ms. Spires has been employed by the Company since
September 1995 and has served as Vice President -- Styling and Design since
March 1996. 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 the Velvet Division of C&A.
J. Duncan Whitehead. Mr. Whitehead has served as Vice
President -- Technology and Development, and Yarn Sales since December 1996. Mr.
Whitehead served as Vice President -- Research and Technology, and Yarn Sales
from August 1995 to December 1996. 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.
Sangwoo Ahn. Mr. Ahn has served as a director of the Company since March
12, 1993 and Chairman of the Board since May 19, 1993. Mr. Ahn has served as a
general partner of MLGAL Partners, L.P. ("MLGAL"), the general partner of MLGA
Fund since 1987 and as a managing director of its affiliate, Morgan Lewis
Githens & Ahn, Inc., an investment banking firm, since 1982. Mr. Ahn also serves
as a director of Gradall Industries, Inc., Kaneb Services, Inc., Kaneb Pipe Line
Partners, L.P., ITI Technologies Inc., PAR Technology Corp., and Stuart
Entertainment, Inc.
Perry J. Lewis. Mr. Lewis has served as a director of the Company since
March 12, 1993. Since 1987, Mr. Lewis has served as a general partner of MLGAL
and as a managing director of its affiliate, Morgan Lewis Githens & Ahn, Inc.,
since 1982. Mr. Lewis also serves as a director of Aon Corporation, Evergreen
Media Corporation, Stuart Entertainment, Inc., ITI Technologies, Inc., and
Gradall Industries, Inc.
Eriberto R. Scocimara. Mr. Scocimara has served as a director of the
Company since December 14, 1993. Since April 1, 1994, Mr. Scocimara has been the
President and Chief Executive Officer of the Hungarian-American Enterprise Fund,
a private tax-exempt Delaware corporation established pursuant to Federal law
for the purpose of promoting private enterprise in Hungary. Mr. Scocimara has
been the President and Chief Executive Officer of Scocimara & Company, Inc., a
financial consulting firm, and a general partner of Rockwood Holdings
International, a partnership organized for the purpose of acquiring and
operating small companies, since 1984. Since 1990, he has also been a partner of
The Contrarian Group, an investment and
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<PAGE> 36
management company. Mr. Scocimara also serves as a director of Carlisle
Corporation, Harrow Corporation, Roper Industries, Inc., and several privately
owned companies.
Ira Starr. Mr. Starr has served as a director of the Company since March
12, 1993. Mr. Starr served as a Vice President of Morgan Lewis Githens & Ahn,
Inc. from May 1988 to December 1993 and has been a managing director since
January 1994. Mr. Starr also serves as a director of Haynes International, Inc.
and Stuart Entertainment, Inc.
In connection with the 1993 Recapitalization, the stockholders of the
Company entered into a stockholders agreement (the "Stockholders Agreement")
pursuant to which Nortex Holdings granted MLGA Fund, for so long as MLGA Fund
beneficially owns at least 20% of the outstanding Common Stock, a proxy with
respect to such number of shares of Common Stock owned by Nortex Holdings as
would enable MLGA Fund to vote a majority of the outstanding shares of Common
Stock. The Stockholders Agreement also provides that, for so long as the proxy
is outstanding, MLGA Fund will vote its shares of Common Stock, and the shares
of Common Stock subject to the proxy, to cause Mr. Liebenow to continue to serve
as a director of the Company. The Stockholders Agreement will terminate upon
consummation of this offering. There are no other arrangements or understandings
between any director and any other person as to his election as Director.
All directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors are elected and qualified.
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.
Pursuant to Section 145 of the DGCL, Article NINTH of the Company's
certificate of incorporation provides that the Company shall indemnify its
directors and officers against liability for certain of their acts. Article
EIGHTH of the Company's certificate of incorporation provides that, except to
the extent prohibited by the DGCL, no director of the Company shall be liable to
the Company for monetary damages for breach of his fiduciary duty as a director.
In addition, the Company has entered into indemnification agreements with
certain of its directors indemnifying such persons against judgments and other
expenses incurred in connection with pending or threatened litigation resulting
from that director's position with the Company. The Company also provides its
directors and officers with coverage under a director's and officer's liability
insurance policy.
COMMITTEES
The Board has established an Audit Committee consisting of two directors
and a Compensation Committee consisting of three directors. The Audit Committee,
currently composed of Messrs. Scocimara and Starr, meets periodically with
management and the Company's independent accountants to determine the adequacy
of internal controls and other financial reporting matters. The Compensation
Committee, currently composed of Messrs. Ahn, Lewis and Liebenow, reviews
general policy matters relating to compensation and benefits of employees
generally and has responsibility for reviewing and approving compensation and
benefits for all officers of the Company. The Compensation Committee also
administers the Company's stock option plans.
DIRECTORS' REMUNERATION
With the exception of Mr. Scocimara, directors of the Company do not
receive a fee for serving as directors. For his services as a director of the
Company, Mr. Scocimara is paid a $15,000 annual retainer and is entitled to
receive a $1,000 fee for each Board and Committee meeting attended. It is
anticipated that following the consummation of this offering, Messrs. Ahn, Lewis
and Starr will be paid for their services as directors. All directors are
reimbursed for all out-of-pocket expenses incurred by them in connection with
their attendance at Board meetings.
Effective July 28, 1995, the Company granted to Mr. Scocimara an option
(the "Director's Option"), exercisable at any time prior to April 18, 2005, to
purchase 5,000 shares of Common Stock at an exercise price of $11.00 per share.
The Director's Option provides that it will vest in equal annual installments
over a three-
35
<PAGE> 37
year period. For a period of three months following the termination of
directorship for any reason except for cause (as defined in the Director's
Option), the optionholder may exercise that portion of the option which was
otherwise exercisable on the date of termination. Upon termination of the
directorship for cause, all unexercised options would be forfeited.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Liebenow, Ahn and Lewis. Mr.
Liebenow, who is President, Chief Executive Officer and a director of the
Company, participates in all discussions and decisions regarding salaries,
benefits and incentive compensation for all employees of the Company, except
discussions and decisions relating to his own salary, benefits and incentive
compensation.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company for services rendered during 1994, 1995 and 1996 to the Chief
Executive Officer of the Company and to each of the four other most highly
compensated executive officers of the Company whose total cash compensation for
1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-------------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($)
- ------------------------------------------------------------------- ----- --------- -------- ----------------
<S> <C> <C> <C> <C>
Larry A. Liebenow.................................................. 1996 575,000 60,000(2) 44,982(3)
President and Chief 1995 574,519 -- 43,857(4)
Executive Officer 1994 550,000 75,000(5) 41,501(6)
Thomas J. Finneran................................................. 1996 272,885 25,000(7) 16,150(3)
Vice President -- Sales 1995 260,000 -- 15,550(4)
1994 252,885 38,500(8) 15,000(6)
Anthony Degomes.................................................... 1996 205,000 25,000(7) 24,594(3)
Vice President -- New Business Development 1995 202,500 -- 23,572(4)
1994 187,500 38,500(8) 21,662(6)
Cynthia L. Gordan.................................................. 1996 170,000 25,000(7) 10,600(3)
Vice President, Secretary and 1995 163,654 -- 10,150(4)
General Counsel 1994 147,308 38,500(8) 9,000(6)
J. Duncan Whitehead ............................................... 1996 170,000 25,000(7) 23,867(3)
Vice President -- Technology and 1995 155,961 -- 22,370(4)
Development, and Yarn Sales 1994 140,000 38,500(8) 21,389(6)
</TABLE>
- ---------------
(1) The aggregate amount of other annual compensation paid to each of the named
executive officers during 1994, 1995 and 1996 was less than $50,000 and also
less than 10% of the total annual salary and bonus paid to each.
(2) Consists of a bonus paid in 1997 attributable to 1996 operations pursuant to
the terms of the Employment Agreement (as hereinafter defined).
(3) Includes the Company's payment of $34,500, $15,750, $12,300, $10,200 and
$9,300 to cover insurance premiums on the split dollar insurance policies
being used to informally fund the Company's obligations to Messrs. Liebenow,
Finneran and Degomes, Ms. Gordan and Mr. Whitehead, respectively, under the
Company's Retirement Plan (as hereinafter defined); the Company's
contribution of $400 to each of Messrs. Liebenow's and Finneran's, Ms.
Gordan's and Mr. Whitehead's accounts under the Company's 401(k) plan; and
the Company's payment of $10,082, $12,294 and $14,167 in insurance premiums
due with respect to certain personal life and disability insurance policies
owned by Messrs. Liebenow, Degomes and Whitehead, respectively.
(4) Includes the Company's payment of $33,375, $15,150, $11,850, $9,750 and
$8,550 to cover insurance premiums on the split dollar insurance policies
used to informally fund the Company's obligations to Messrs. Liebenow,
Finneran and Degomes, Ms. Gordan and Mr. Whitehead, respectively, under the
Company's Retirement Plan; the Company's contribution of $400 to each of
Messrs. Liebenow's,
36
<PAGE> 38
Finneran's and Whitehead's and Ms. Gordan's accounts under the Company's
401(k) plan; and the Company's payment of $10,082, $11,722 and $13,420 in
insurance premiums due with respect to certain personal life and disability
insurance policies owned by Messrs. Liebenow, Degomes and Whitehead,
respectively.
(5) Consists of a bonus paid in 1995 attributable to 1994 operations pursuant to
the terms of the Employment Agreement.
(6) Includes the Company's payment of $31,500, $15,000, $10,350, $8,700 and
$8,130 to cover insurance premiums on the split dollar insurance policies
being used to informally fund the Company's obligations to Messrs. Liebenow,
Finneran and Degomes, Ms. Gordan and Mr. Whitehead, respectively, under the
Company's Retirement Plan; the Company's contribution of $300 to each of
Messrs. Liebenow's and Whitehead's and Ms. Gordan's accounts under the
Company's 401(k) plan; and the Company's payment of $9,701, $11,312 and
$12,959 in insurance premiums due with respect to certain personal life and
disability insurance policies owned by Messrs. Liebenow, Degomes and
Whitehead, respectively.
(7) Consists of a bonus paid in 1997 attributable to 1996 operations.
(8) Consists of payments made in 1995 to such officer pursuant to the Company's
1994 EIC Plan (as hereinafter defined).
OPTION/SAR EXERCISES AND HOLDINGS
The following table sets forth certain information concerning the fiscal
year-end value of unexercised options held by the executives named in the
Summary Compensation Table. No options were exercised by these executives in
1996.
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF VALUE OF THE VALUE OF THE
SECURITIES SECURITIES UNEXERCISED IN- UNEXERCISED IN-
UNDERLYING UNDERLYING THE-MONEY THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END(#) FY-END($)(1) FY-END($)(1)
----------------- ----------------- ----------------- -----------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Larry A. Liebenow......................... 148,751(2) 99,167(2) $ 1,885,419 $ 1,256,946
Thomas J. Finneran........................ 31,852(3) 21,235(3) $ 310,716 $ 250,892
7,489(4) -- 46,469 --
------- ------ --------- ---------
39,341 21,235 $ 357,185 $ 250,892
======= ====== ========= =========
Anthony Degomes........................... 30,466(2) 20,310(2) $ 386,157 $ 257,429
Cynthia L. Gordan......................... 31,852(3) 21,235(3) $ 310,716 $ 250,892
7,489(4) -- 46,469 --
------- ------ --------- ---------
39,341 21,235 $ 357,185 $ 250,892
======= ====== ========= =========
J. Duncan Whitehead....................... 42,999(2) 28,666(2) $ 545,008 $ 363,329
------- ------ --------- ---------
</TABLE>
- ---------------
(1) Based on a closing sales price of $13.875 per share as quoted on the Nasdaq
National Market on January 3, 1997, the last trading date in fiscal 1996.
(2) Represents the indicated person's proportionate interest (based upon
ownership of Nortex Holdings shares) in the Nortex Option. The exercise
price of the shares covered by each option is $1.20 per share and the Nortex
Option covers a total of 370,359 shares of Common Stock. The unvested
portion of the Nortex Option will vest upon the consummation of this
offering.
(3) Represents options granted by the Company to certain executive officers of
the Company (the "1993 Stock Option Plan"). The exercise price of the shares
covered by each option is $4.12 per share as to 60% of the shares
purchasable upon exercise of the option and $2.06 per share as to 40% of the
shares purchasable upon exercise of the option. Pursuant to the 1993 Stock
Option Plan, all unvested options granted thereunder will vest upon the
consummation of this offering.
(4) Represents options with an exercise price of $7.67 per share granted by
Nortex Holdings to certain executive officers of the Company (the "Holdings
Options").
37
<PAGE> 39
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AGREEMENTS
The Company is a party to an Employment Agreement, amended as of February
24, 1997 (the "Employment Agreement"), with Larry A. Liebenow pursuant to which
Mr. Liebenow serves as President and Chief Executive Officer of the Company on a
full-time basis for the period ending March 12, 2002, subject to an automatic
three-year extension unless terminated by the Company upon one year's prior
notice. Mr. Liebenow may terminate the Employment Agreement at any time upon
three months' prior notice. The Employment Agreement provides for a base salary
of $600,000 (effective January 1, 1997), subject to annual increases as may be
determined by the Board, as well as certain benefits and reimbursement of
expenses. The Employment Agreement provides for annual bonuses in such amounts
as the Board shall determine. Pursuant to the Employment Agreement, the Company
has the right to terminate Mr. Liebenow's employment only for cause (as defined
in the Employment Agreement). Upon voluntary termination of employment by Mr.
Liebenow, termination of his employment for cause (other than conviction of a
crime involving moral turpitude) or termination of his employment for any other
reason (other than conviction of a crime involving moral turpitude), Mr.
Liebenow will receive a lump sum payment equal to three times his prior year's
base salary plus any bonus paid or payable with respect to the prior year. If
the Employment Agreement had terminated as of February 24, 1997, Mr. Liebenow
would have been entitled to receive $1,905,000. The Employment Agreement also
provides for the continuation of his salary through March 12, 2002 in the event
Mr. Liebenow dies or becomes disabled or incapacitated. In addition, the
Employment Agreement prohibits Mr. Liebenow from disclosing or using any
confidential information of the Company or competing with the Company during the
period of his employment and for one year thereafter.
The Company has entered into severance agreements with three of its
executive officers, including Mr. Finneran and Ms. Gordan. Pursuant to these
agreements, in the event Mr. Finneran's employment is terminated without cause,
Mr. Finneran will be entitled to receive an amount equal to one year's base
salary (based on his highest annual base salary) payable monthly in arrears and,
for the one year period following his termination date, will be further entitled
to continue to participate in each of the fringe benefit programs offered by the
Company to its employees generally. In the event Ms. Gordan or the other Company
officer with a similar agreement, is terminated without cause, Ms. Gordan and
such other officer will be entitled to receive an amount equal to six months'
base salary (based on their respective highest annual base salaries) payable
monthly in arrears and, for the six month period following his or her
termination date, will be further entitled to continue to participate in each of
the fringe benefit programs offered by the Company to its employees generally.
If the employment relationship of each executive officer with a severance
agreement had terminated on January 4, 1997, Mr. Finneran and Ms. Gordan would
have been entitled to receive $270,000, and $85,000 respectively, and the three
executive officers as a group would have been entitled to receive $440,000.
BENEFIT PLANS
1993 STOCK OPTION PLAN
Effective April 13, 1993, the Company established the 1993 Stock Option
Plan in which officers and other key employees of the Company may participate.
Options granted under the 1993 Stock Option Plan are nonqualified options. The
1993 Stock Option Plan provides for the issuance of options to purchase up to
318,354 shares of Common Stock, subject to adjustment under certain
circumstances. The 1993 Stock Option Plan is intended to provide participating
employees with a more direct stake in the success of the Company and to support
the Company's efforts to attract and retain qualified employees.
The 1993 Stock Option Plan is administered by the Compensation Committee of
the Board of the Company. A subcommittee of the Compensation Committee,
consisting solely of non-employee directors, determines, subject to the
provisions of the Plan and such limitations as the Board may from time to time
38
<PAGE> 40
impose, the persons to whom, and the time or times at which, grants shall be
made, the number of shares of Common Stock subject to an option, and other terms
and provisions of the options.
The exercise price of the shares of Common Stock covered by each option is
$4.12 per share as to 60% of the shares purchasable upon exercise of the option
and $2.06 per share as to 40% of the shares purchasable upon exercise of the
option. The 1993 Stock Option Plan provides that each option will vest in equal
annual installments over a five-year period, with that portion of the option
with the higher exercise price vesting first. For a period of the lesser of
three months or the remaining term of the option following the termination of
employment for any reason other than voluntary termination or termination for
cause (as defined in the 1993 Stock Option Plan), an optionholder may exercise
any unexercised options to the extent such options are then exercisable. Upon
termination of employment for cause, all unexercised options are forfeited.
Options may not be exercised after the tenth anniversary of the date of grant.
Upon the occurrence of a change in control of the Company (as defined in the
1993 Stock Option Plan) all options granted will become immediately exercisable
in full.
As of January 4, 1997, there were outstanding options under the 1993 Stock
Option Plan to purchase an aggregate of 306,348 shares of Common Stock at a
weighted average exercise price of $3.29 per share, including options to
purchase 53,087 shares held by each of Mr. Finneran and Ms. Gordan each at a
weighted average exercise price of $3.29.
Pursuant to the change in control provisions of the 1993 Stock Option Plan,
all unvested options granted thereunder will vest upon the consummation of this
offering.
1996 STOCK OPTION PLAN
Effective April 26, 1996, the Company established the 1996 Stock Option
Plan in which key middle management employees of the Company may participate.
Options granted under the 1996 Stock Option Plan are nonqualified options. The
1996 Stock Option Plan provides for the issuance of options to purchase up to
100,000 shares of Common Stock, subject to adjustment under certain
circumstances. The 1996 Stock Option Plan is intended to provide participating
employees with a more direct stake in the success of the Company and to support
the Company's efforts to attract and retain qualified employees.
The 1996 Stock Option Plan is administered by the Compensation Committee of
the Board of the Company. The Compensation Committee determines, subject to the
provisions of the Plan and such limitations as the Board may from time to time
impose, the persons to whom, and the time or times at which, grants shall be
made, the number of shares of Common Stock subject to an option, and other terms
and provisions of the options.
The exercise price of the shares of Common Stock covered by each option is
not less than the fair market value of the Common Stock at the date of grant.
The 1996 Stock Option Plan provides that each option will vest in equal annual
installments over a five-year period. For a period of the lesser of three months
or the remaining term of an option following the termination of employment
because of an optionholder's death, disability (as defined in the 1996 Stock
Option Plan) or retirement (as defied in the 1996 Stock Option Plan), an
optionholder may exercise any unexercised options to the extent such options are
then exercisable. Upon termination of employment for reasons other than death,
disability or retirement, all unexercised options are forfeited. Options may not
be exercised after the tenth anniversary of the date of grant. Upon the
occurrence of certain business combinations all options granted will become
immediately exercisable in full.
As of January 4, 1997 under the 1996 Stock Option Plan, there were
outstanding options to purchase an aggregate of 46,500 shares of Common Stock at
a weighted average exercise price of $8.25 per share.
No portion of the options granted under the 1996 Stock Option Plan will
vest as a result of this offering.
1997 STOCK OPTION PLAN
Effective February 24, 1997, the Company established the 1997 Stock Option
Plan (subject to stockholder approval) in which officers and other key employees
of the Company may participate. Options
39
<PAGE> 41
granted under the 1997 Stock Option Plan are nonqualified options. The 1997
Stock Option Plan provides for the issuance of options to purchase up to 500,000
shares of Common Stock, subject to adjustment under certain circumstances. The
1997 Stock Option Plan is intended to provide participating employees with a
more direct stake in the success of the Company and to support the Company's
efforts to attract and retain qualified employees.
The 1997 Stock Option Plan is administered by the Compensation Committee of
the Board of the Company. A sub-committee of the Compensation Committee,
consisting solely of non-employee directors, determines, subject to the
provisions of the Plan and such limitations as the Board may from time to time
impose, the persons to whom, and the time or times at which, grants shall be
made, the number of shares of Common Stock subject to an option, and other terms
and provisions of the options.
The exercise price of the shares of Common Stock covered by each option
will be not less than the fair market value of the Common Stock at the date of
grant, except as described below. The 1997 Stock Option Plan provides that each
option will vest in equal annual installments over a five-year period. For a
period of the lesser of three months (one year in the case of death) or the
remaining term of an option, following the termination of employment for any
reason other than voluntary termination or termination for cause (as defined in
the 1997 Stock Option Plan), an optionholder may exercise any unexercised
options to the extent such option is then exercisable. Upon termination of
employment for cause, all unexercised options are forfeited. Options may not be
exercised after the tenth anniversary of the date of grant. Upon the occurrence
of a change in control of the Company (as defined in the 1997 Stock Option Plan)
all options granted will become immediately exercisable in full, except as
otherwise provided in an option agreement.
As of February 24, 1997, there were outstanding, subject to stockholder
approval, options under the 1997 Stock Option Plan to purchase an aggregate of
330,000 shares of Common Stock. Of these options, 90,000 have been granted to
Mr. Liebenow, 30,000 to Mr. Finneran, 30,000 to Mr. Degomes, 30,000 to Ms.
Gordon, and 30,000 to Mr. Whitehead. The exercise price of all of these options
will be the fair market value of the Common Stock on the date of stockholder
approval. The Company intends to seek stockholder approval for the 1997 Stock
Option Plan at its annual meeting to be held in May 1997.
No portion of the options granted under the 1997 Stock Option Plan will
vest as a result of this offering.
NORTEX OPTION
Effective as of April 13, 1993, the Company granted to Nortex Holdings the
Nortex Option, exercisable at any time prior to April 13, 2003, to purchase
370,359 shares of Common Stock, subject to adjustment under certain
circumstances. The Nortex Option provides that it will vest over a five-year
period. Upon the occurrence of a change in control of the Company (as defined in
the Nortex Option), the Nortex Option will become immediately exercisable in
full. The exercise price of the shares of Common Stock covered by the Nortex
Option is $1.20 per share and may be paid in cash or by delivery of a seven-year
promissory note (non-recourse to the stockholders of Nortex Holdings) which will
bear interest at the federal Mid-Term Rate (as promulgated by the United States
Secretary of the Treasury) for the month of issuance of the note and be secured
by a pledge of the Common Stock purchased pursuant thereby. Messrs. Liebenow,
Whitehead and Degomes own 66.94%, 19.35% and 13.71%, respectively, of the
outstanding Nortex Holdings common stock.
The unvested portion of the Nortex Option will vest upon the consummation
of this offering.
HOLDINGS OPTIONS
Effective as of April 13, 1993, Nortex Holdings granted the Holdings
Options to certain executive officers of the Company, exercisable at any time
prior to April 13, 2003, to purchase 29,956 shares of Common Stock held by
Nortex Holdings, subject to adjustment under certain circumstances. The Holdings
Options are fully vested. The exercise price of the shares of Common Stock
covered by the Holdings Options is $7.67 per share.
40
<PAGE> 42
For a period of three months following the termination of employment for
any reason other than voluntary termination or termination for cause (as defined
in the Holdings Options), an optionholder may exercise any unexercised options
to the extent such options are then exercisable. Upon termination of employment
for cause, all unexercised options will be forfeited. Pursuant to the Holdings
Options, Mr. Finneran and Ms. Gordan each received options to purchase 7,489
shares of Common Stock.
MEDICAL EXPENSE REIMBURSEMENT PLAN
Since April 1, 1990, the Company has maintained a Medical Expense
Reimbursement Plan (the "Medical Plan") for the benefit of its executive
officers. Pursuant to the Medical Plan, executive officers of the Company
receive reimbursement for all medical expenses up to the plan limit, incurred by
them or their dependents, to the extent such expenses are not covered under the
group medical plan available generally to all Company employees. The
reimbursement limitation under the Medical Plan for each plan participant is
$10,000 per year.
INCENTIVE COMPENSATION PLAN
The Company's annual executive incentive compensation plans (the "EIC
Plans"), in which all the Company's Vice Presidents participate, are designed to
encourage the executives to work effectively together as a team and to establish
a clear relationship between the Company's financial performance and overall
executive compensation levels. The Compensation Committee bases the formula for
the EIC Plan bonus pools on a percentage (which, in the last three years has
ranged from 3 to 7%) of the amount by which the Company's Adjusted Pre-tax
Income during the applicable EIC Plan year exceeds the preceding year's Adjusted
Pre-tax Income, subject to a maximum bonus paid equal to 25% of the aggregate
base salaries paid to all EIC Plan participants during the applicable EIC Plan
year. Each EIC Plan participant's actual allocable share of the bonus pool is
determined by Quaker's President and reviewed by the Compensation Committee. The
formulas resulted in no bonus pools for EIC Plan years 1995 and 1996, and a
bonus pool of approximately $260,000 for 1994. No payments are permitted under
the EIC Plan to participants who resigned or were terminated for cause during
the applicable EIC Plan year. Pro rata distributions would have been made with
respect to any participant who died, became disabled, retired, or whose
employment was terminated without cause during the applicable EIC Plan year.
It is anticipated that the Company will continue, annually, to establish
executive incentive compensation plans similar to those described above.
DEFERRED COMPENSATION PLAN
On July 16, 1992, the Company established a Deferred Compensation Plan (the
"Retirement Plan"), for the benefit of all of the Company's executive officers.
Pursuant to the provisions of the Retirement Plan, the Company has agreed to
provide certain benefits to each plan participant based on the value of
accumulated contributions made under the Retirement Plan on their behalf and
split-dollar variable life insurance contracts insuring the lives of each plan
participant have been purchased to informally fund its obligations under the
Retirement Plan. Among the benefits provided to each plan participant are a
pre-retirement death benefit, a monthly retirement benefit payable over a
15-year period beginning at age 65 for a participant who terminates employment
after attaining age 55 and completing at least five years of plan participation,
and certain other amounts payable pursuant to the provisions of the Retirement
Plan in the event a plan participant's employment with the Company is terminated
prior to attaining age 55 and completing five years of plan participation. The
Company has established an irrevocable "grantor" trust for the purpose of
accumulating the amounts needed to pay benefits under the Retirement Plan and to
hold the variable life insurance contracts. The Company has agreed to make
annual contributions to the trust in an amount equal to 6% of the base salaries
of all plan participants (or such higher amount as the Board of Directors may
determine). The assets of the trust will be considered to be assets of the
Company for purposes of satisfying the claims of the Company's general
creditors.
41
<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
In September 1989, the Company was acquired by a European company and
Nortex Holdings, a corporation owned by three officers of the Company, including
Larry A. Liebenow, the President and Chief Executive Officer of the Company. In
early 1993, the Company reacquired all of the European company's interest in
Quaker in the 1993 Recapitalization. To finance the 1993 Recapitalization, the
Company issued Common Stock and other securities to MLGA Fund and other
affiliates of Morgan Lewis Githens & Ahn, an investment banking firm. See
"Management."
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of February 1, 1997 and as adjusted to reflect the
completion of this offering, by (i) each of the Company's directors and
executive officers, (ii) all directors and executive officers of the Company as
a group, (iii) each person who is known by the Company to own beneficially more
than five percent of the outstanding shares of the Common Stock and (iv) each of
the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
--------------------- SHARES ---------------------
NAME NUMBER PERCENT OFFERED(1) NUMBER PERCENT
- ------------------------------------ --------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
MLGA Fund II, L.P.(2) .............. 3,674,798 45.8% 3,000,000 674,798 8.1%
Nortex Holdings, Inc.(3)............ 2,123,552 25.3 100,000 2,023,552 23.3
Larry A. Liebenow(4)(5)............. 2,123,552 25.3 100,000 2,023,552 23.3
Anthony Degomes(5)(6)............... 2,123,552 25.3 100,000 2,023,552 23.3
J. Duncan Whitehead(5)(7)........... 2,123,952 25.3 100,000 2,023,952 23.3
Sangwoo Ahn(8)(9)................... 3,735,652 46.6 3,000,000 735,652 8.8
Perry J. Lewis(8)(10)............... 3,705,652 46.2 3,000,000 705,652 8.5
Eriberto R. Scocimara(11)........... 5,000 * 0 5,000 *
Ira Starr(12)....................... 13,235 * 0 13,235 *
James A. Dulude(5)(13).............. 60,776 * 0 60,776 *
Thomas J. Finneran(5)(14)........... 60,576 * 0 60,576 *
Cynthia L. Gordan(5)(14)............ 60,576 * 0 60,576 *
Paul J. Kelly(5)(15)................ 67,932 * 0 67,932 *
Thomas H. Muzekari(5)(16)........... 47,000 * 0 47,000 *
M. Beatrice Spires(5)(16)........... 47,000 * 0 47,000 *
All executive officers and directors
as a group (13 persons)........... 6,252,553 71.6 3,100,000 3,152,553 34.9
</TABLE>
- ---------------
* Less than 1%
(1) Assuming the several Underwriters exercise the over-allotment option in
full, MLGA Fund will sell an additional 510,000 shares of Common Stock,
reducing its beneficial ownership to 164,798 shares of Common Stock or 2.0%
of the outstanding shares.
(2) Consists of shares of Common Stock owned directly by MLGA Fund. Does not
include shares owned by Nortex Holdings as to which MLGA Fund has been
granted a proxy. See "Management." The address of MLGA Fund is Two
Greenwich Plaza, Greenwich, Connecticut 06830. The general partners of
MLGAL, including Sangwoo Ahn and Perry J. Lewis, who are directors of the
Company, may be deemed to beneficially own the shares of Common Stock owned
directly by MLGA Fund. Messrs. Ahn and Lewis disclaim beneficial ownership
of such shares.
(3) Consists of (i) 1,753,193 shares of Common Stock owned directly by Nortex
Holdings and (ii) 370,359 shares which Nortex Holdings has the right to
acquire upon exercise of the Nortex Option (see "Management--Benefit
Plans--Nortex Option"). Nortex Holdings has granted a proxy to MLGA Fund
which will entitle MLGA Fund to vote certain of its shares, which proxy
will terminate upon consummation of this offering, and has granted options
to purchase 29,956 shares of Common Stock to
42
<PAGE> 44
(footnotes from previous page)
certain executive officers of the Company. See "Management--Benefit
Plans--Holdings Option." The address of Nortex Holdings is 941 Grinnell
Street, Fall River, Massachusetts 02721.
(4) Consists of shares of Common Stock beneficially owned by Nortex Holdings.
See footnote (3). Mr. Liebenow is the President, a director and the
majority stockholder of Nortex Holdings and, as such, may be deemed to
beneficially own the shares owned by Nortex Holdings. Mr. Liebenow has a
non-binding understanding with the Underwriters pursuant to which he is to
reinvest in Common Stock the after-tax net proceeds of this offering
attributable to his proportionate interest in Nortex Holdings (either
directly or indirectly through repurchase of Nortex Holdings securities
held by other Nortex Holdings stockholders).
(5) The address for the named individual is c/o Quaker Fabric Corporation, 941
Grinnell Street, Fall River, Massachusetts 02721.
(6) Consists of shares of Common Stock beneficially owned by Nortex Holdings.
See footnote (3). Mr. Degomes is an officer, director and stockholder of
Nortex Holdings and, as such, may be deemed to beneficially own the shares
owned by Nortex Holdings.
(7) Consists of (i) the shares of Common Stock beneficially owned by Nortex
Holdings and (ii) 400 shares of Common Stock held by Mr. Whitehead's
children. See footnote (3). Mr. Whitehead is an officer, director and
stockholder of Nortex Holdings and, as such, may be deemed to beneficially
own the shares owned by Nortex Holdings.
(8) Includes 3,674,798 shares owned directly by MLGA Fund. The general partner
of MLGA Fund is MLGAL. Messrs. Lewis and Ahn are general partners of MLGAL
and may be deemed to beneficially own these shares. Messrs. Lewis and Ahn
disclaim any beneficial interest in all shares beneficially owned by MLGA
Fund. The address for Messrs. Ahn and Lewis is c/o Morgan Lewis Githens &
Ahn, Inc., Two Greenwich Plaza, Greenwich, Connecticut 06830.
(9) Includes 50,854 shares of Common Stock owned directly by Mr. Ahn and 10,000
shares of Common Stock held by his children.
(10) Includes 30,854 shares of Common Stock owned directly by Mr. Lewis.
(11) Consists of shares of Common Stock which Mr. Scocimara has the right to
acquire upon the exercise of the Director's Option. See
"Management -- Directors' Remuneration." Mr. Scocimara's address is c/o
Hungarian-American Enterprise Fund, 666 Steamboat Road, Greenwich,
Connecticut 06830.
(12) Consists of 13,235 shares of Common Stock owned directly by Mr. Starr. The
address for Mr. Starr is c/o Morgan Lewis Githens Ahn, Inc., Two Greenwich
Plaza, Greenwich, Connecticut 06830.
(13) Consists of 60,576 shares of Common Stock which Mr. Dulude has the right to
acquire upon the exercise of options granted under the 1993 Stock Option
Plan and the Holdings Options and 200 shares of Common Stock held by his
children.
(14) Consists solely of shares of Common Stock which the individual has the
right to acquire upon the exercise of options granted under the 1993 Stock
Option Plan and the Holdings Options.
(15) Consists of 7,356 shares of Common Stock held by Mr. Kelly and 60,576
shares of Common Stock which Mr. Kelly has the right to acquire upon the
exercise of options granted under the 1993 Stock Option Plan and the
Holdings Options.
(16) Consists solely of shares of Common Stock which the individual has the
right to acquire upon the exercise of options granted under the 1993 Stock
Option Plan.
Except as noted in the footnotes, the Company believes the beneficial
holders listed in the table above have sole voting and investment power
regarding the shares shown as being beneficially owned by them. Except as noted
in the footnotes, none of such shares is known by the Company to be shares with
respect to which the beneficial owner has the right to acquire such shares.
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<PAGE> 45
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $.01 per share, of which 8,021,097 were outstanding
on January 4, 1997, and 50,000 shares of preferred stock, par value $.01 per
share, none of which is outstanding. As of February 14, 1997, there were 49
holders of record of the Common Stock.
COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote for each
outstanding share of Common Stock owned by him on each matter property submitted
to the stockholders for their vote. Nortex Holdings has granted a proxy with
respect to certain of its shares, which proxy will terminate upon consummation
of this offering. See "Management."
Except as may be limited by the terms and provisions of any class of
preferred stock which may be authorized by the Board in the future and the terms
of the Credit Agreement and the Series A Notes, holders of Common Stock are
entitled to any dividend declared by the Board out of funds legally available
for such purpose. See "Dividend Policy." Subject to the liquidation preference
of any class of preferred stock which may be authorized by the Board in the
future, holders of Common Stock are entitled to receive on a pro rata basis all
remaining assets of the Company available for distribution to the holders of
Common Stock in the event of the liquidation, dissolution, or winding up of the
Company.
Holders of Common Stock have no preemptive or other subscription rights,
and there are no conversion rights or redemption or sinking fund provisions with
respect to such shares. All of the outstanding shares of Common Stock are, and
the shares of Common Stock to be sold in this offering will be, upon issuance
and payment therefor, fully paid and nonassessable.
PREFERRED STOCK
The certificate of incorporation of the Company authorizes the issuance of
50,000 shares of preferred stock. The Board, within the limitations and
restrictions contained in the certificate of incorporation and without further
action by the Company's stockholders, has the authority to issue shares of
preferred stock from time to time in one or more series and to fix the number of
shares and the relative rights, conversion rights, voting rights, rights and
terms of redemption, liquidation preferences and any other preferences, special
rights, and qualifications of any such series. If shares of preferred stock with
voting rights are issued, such issuance could affect the voting rights of the
holders of the Common Stock by increasing the number of outstanding shares
entitled to vote and by the creation of class or series voting rights. In
addition, any further issuance of preferred stock, could, under certain
circumstances, have the effect of delaying or preventing a change of control of
the Company and may adversely affect the rights of holders of Common Stock.
There are no shares of preferred stock currently issued and outstanding and the
Company has no present plans to issue any shares of preferred stock or to
establish or designate any series of preferred stock.
STOCKHOLDER RIGHTS PLAN
The Board has adopted the Rights Plan to give it increased power to
negotiate in the best interests of the Company with certain potential acquirors
and to discourage appropriation of control of the Company at a price that is
unfair to its stockholders. It is not intended to prevent fair offers for
acquisition of control determined by the Board to be in the best interests of
the Company and its stockholders, nor is it intended to prevent a person or
group from obtaining representation on or control of the Board through a proxy
contest, or to relieve the Board of its fiduciary duty to consider any proposal
for acquisition of the Company in good faith.
The Rights Plan provides for the distribution of one "Right" as a dividend
on each outstanding share of the Common Stock. The distribution will be made to
all holders of record on a date prior to consummation of this offering. Rights
will generally be issued with respect to each share of Common Stock issued after
such record date, including the shares to be issued in this offering. Each Right
shall entitle the holder to purchase one-tenth of a share of Common Stock. The
Rights generally become exercisable upon certain triggering events involving the
acquisition of 15% or more of the outstanding Common Stock or ten days after the
44
<PAGE> 46
initiation of a tender or exchange offer, and the exercise price is based on the
estimated long-term value of the Common Stock. The exercise of these rights
becomes economically attractive upon the triggering of certain "Flip-In" or
"Flip-Over" provisions. The Flip-In provisions will permit their holders to
purchase shares of Common Stock at a discounted rate, resulting in substantial
dilution of an acquiror's voting and economic interests in the Company. The
Flip-Over element of the Rights Plan involves certain mergers or significant
asset purchases, which trigger certain rights to purchase shares of the
acquiring or surviving company at a discount. The Rights Plan contains a
"Permitted Offer" exception to allow offers determined by the Board to be in the
best interests of the Company and its stockholders to take place free of the
dilutive effects of the Rights Plan's mechanisms.
The Board retains the right (at all times prior to acquisition of 15% of
the Common Stock by an acquiror) to discontinue the Rights Plan through
redemption of all Rights or to amend the Rights Plan in any respect.
The Rights Plan will not apply to certain acquisitions by MLGA Fund, Nortex
Holdings and certain of their transferees.
CERTAIN PROVISIONS
Provisions of the Company's certificate of incorporation and bylaws and of
Delaware law may make it more difficult for a third party to acquire, or may
discourage acquisition bids for, the Company and could limit the price that
certain investors may be willing to pay in the future for shares of Common
Stock.
Restrictions on Certain Business Combinations. The Company's certificate
of incorporation requires the affirmative vote of the holders of at least
66 2/3% of the votes which all the stockholders would be entitled to cast at any
annual election of directors or class of directors to approve any merger or
consolidation of the Company with any other corporation or a sale, lease,
transfer or exchange of all or substantially all the assets of the Company or
the adoption of any plan for the liquidation or dissolution of the Company.
Removal of Directors. The Company's bylaws require the affirmative vote of
80% of the voting power of all the shares of the Company entitled to vote in the
election of directors to remove a director. Following the offering, Nortex
Holdings, which is owned by three officers of the Company including Mr.
Liebenow, will hold 23.3% of the outstanding Common Stock.
Vote Required to Amend or Repeal Certain Provisions of the Company's
Certificate of Incorporation and Bylaws. The Company's certificate of
incorporation requires the affirmative vote of 80% of the voting power of all
the shares of the Company, to amend or repeal certain provisions of the
certificate of incorporation and bylaws. Following the offering, Nortex
Holdings, which is owned by three officers of the Company including Mr.
Liebenow, will hold 23.3% of the outstanding Common Stock.
Requirements for Advance Notification of Stockholder Nomination and
Proposals. The Company's bylaws establish advance notice procedures with regard
to stockholder proposals and the nomination, other than by or at the direction
of the Board or a committee thereof, of candidates for election as directors.
Director's Liability. The Company's certificate of incorporation provides
that to the fullest extent permitted by the DGCL, a director of the Company
shall not be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director. Under current Delaware law, liability of
a director may not be limited: (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) in respect of certain unlawful dividend payments or stock redemptions or
repurchases, and (iv) for any transaction from which the director derives an
improper personal benefit. The effect of this provision of the Company's
certificate of incorporation is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against a director for breach of the fiduciary duty
of care as a director (including breaches resulting from negligent or grossly
negligent behavior) except in the situations described in clauses (i) through
(iv) above. This provision does not limit or eliminate the rights of the Company
or any stockholder to seek non-monetary relief such as an injunction or recision
in the event of a breach of a director's duty of care. In addition, the
Company's certificate of incorporation provides that the Company shall indemnify
its directors and executive officers to the fullest extent permitted by Delaware
law.
45
<PAGE> 47
Section 203 of the DGCL. The Company as a Delaware corporation, is subject
to Section 203 of the DGCL. In general, Section 203 prevents an "interested
stockholder" (defined as a person who is the owner of 15% or more of a
corporation's voting stock, or who, as an affiliate or associate of a
corporation, was the owner of 15% or more of that corporation's voting stock
within the prior three years) from engaging in a "business combination" (as
defined under the DGCL) with a Delaware corporation for three years following
the date such person became an interested stockholder unless: (i) before such
person became an interested stockholder the board of directors of the
corporation approved the transaction or the business combination in which the
interested stockholder became an interested stockholder, (ii) upon consummation
of the transaction that resulted in the interested stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding shares owned by persons who are both officers and directors
of the corporation and shares held by certain employee stock ownership plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer), or (iii) following the transaction in which such person became an
interested stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
stock of the corporation not owned by the "interested stockholder." A "business
combination" generally includes mergers, stock or asset sales and other
transactions resulting in a financial benefit to the "interested stockholders."
TRANSFER AGENT
The transfer agent for the Common Stock is The First National Bank of
Boston.
46
<PAGE> 48
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 8,321,097 shares of
Common Stock outstanding. Of these shares, a total of 5,776,498 shares
(6,286,498 shares if the Underwriters' over-allotment option is exercised in
full), including all of the shares of Common Stock sold in this offering, will
be freely tradable without restriction or limitation under the Securities Act.
The remaining 2,544,599 shares are "restricted securities" within the meaning of
Rule 144 adopted under the Securities Act (the "Restricted Securities"). The
Restricted Securities were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act and may not be sold except in compliance with the registration requirements
of the Securities Act or pursuant to an exemption from registration, such as the
exemption provided by Rule 144 under the Securities Act.
All of the Restricted Securities are currently eligible for sale in the
public market pursuant to Rule 144. In general, under Rule 144 as currently in
effect, any affiliate of the Company or any person (or persons whose shares are
aggregated in accordance with Rule 144) who has beneficially owned such
Restricted Securities for at least two years (reduced to one year effective late
April 1997) would be entitled to sell a number of shares that does not exceed
the greater of 1.0% of the outstanding shares of Common Stock (approximately
83,211 shares based upon the number of shares outstanding after this offering)
or the reported average weekly trading volume in the over-the-counter market for
the four weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale restrictions and notice requirements and to the
availability of current public information concerning the Company. Persons who
have not been affiliates of the Company and who have held their shares for more
than three years (reduced to two years effective late April 1997) are entitled
to sell Restricted Securities without regard to the volume, manner of sale,
notice and public information requirements of Rule 144.
As of February 24, 1997, outstanding options to purchase 1,028,951 shares
of Common Stock were held by certain officers, directors and employees of the
Company and Nortex Holdings pursuant to the Nortex Option, the Director's Option
and the Company's stock option plans and an aggregate of 235,506 shares were
available for the grant of future options under the Company's stock option
plans. The Company has registered 306,348 shares of Common Stock issuable upon
the exercise of stock options which will be available for sale in the open
market on exercise. As of February 24, 1997, an aggregate of 381,247 shares were
subject to presently exercisable stock options and, upon consummation of this
offering, options to purchase an additional 327,083 shares will become
exercisable.
The Company, its executive officers and directors and each of the Selling
Stockholders (who, upon completion of this offering, will beneficially own in
the aggregate 3,152,553 shares of Common Stock, or 2,642,553 shares if the
Underwriters' over-allotment option is exercised in full) each have agreed
(except as to an aggregate of 100,000 shares previously pledged) that they will
not, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant or any option to
purchase or other sale or disposition) of any shares of Common Stock or other
capital stock of the Company or any securities convertible into, or exercisable
or exchangeable for, any shares of Common Stock or other capital stock of the
Company, or any right to purchase or acquire Common Stock or other capital stock
of the Company, for a period of 180 days, in the case of the Company, the
Selling Stockholders and certain of their affiliates, and 90 days, in the case
of other directors and officers, after the date of this Prospectus, without the
prior consent of Prudential Securities Incorporated, on behalf of the
Underwriters, except for bona fide gifts or transfers effected by such
stockholders other than on any securities exchange or in the over-the-counter
market to donees or transferees that agree to be bound by similar agreements and
except for issuances by the Company and sales by Nortex Holdings pursuant to the
exercise of certain stock options outstanding upon completion of this offering.
Prudential Securities Incorporated may, in its sole discretion, at any time and
without prior notice, release all or any portion of the shares of Common Stock
subject to such agreements.
The Company is unable to predict the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price for the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect the market price for the Common Stock and could impair the
Company's future ability to obtain capital through offerings of equity
securities.
47
<PAGE> 49
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, The Robinson-Humphrey Company, Inc. and Wheat, First
Securities, Inc. are acting as representatives of the Underwriters (the
"Representatives"), severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company and the
Selling Stockholders the number of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------------------------------------------------------------------- ---------
<S> <C>
Prudential Securities Incorporated....................................
The Robinson-Humphrey Company, Inc. ..................................
Wheat, First Securities, Inc. ........................................
---------
Total....................................................... 3,400,000
=========
</TABLE>
The Company and the Selling Stockholders are obligated to sell, and the
Underwriters are obligated to purchase, all of the shares of Common Stock
offered hereby if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock
initially at the public offering price set forth on the cover page of this
Prospectus; that the Underwriters may allow to selected dealers a concession of
$ per share; and that such dealers may reallow a concession of
$ per share to certain other dealers. After the public offering, the
offering price and the concession may be changed by the Representatives.
MLGA Fund, as a Selling Stockholder, has granted the Underwriters an
over-allotment option, exercisable for 30 days from the date of this Prospectus,
to purchase up to 510,000 additional shares of Common Stock at the public
offering price, less underwriting discounts, as set forth on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the shares of Common
Stock offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriter's name in the preceding table bears to 3,400,000.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act.
The Company, its directors and executive officers and each of the Selling
Stockholders who, upon completion of this offering, will beneficially own in the
aggregate 3,152,553 shares (2,642,553 shares if the Underwriters' over-allotment
option is exercised in full), have agreed (except as to 100,000 shares
previously pledged) not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or other capital stock or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock or other capital
stock of the Company, or any right to purchase or acquire Common Stock or other
capital stock of the Company for a period of 180 days, in the case of the
Company, the Selling Stockholders and certain of their affiliates, and 90 days
in the case of other directors and executives officers, after the date of this
Prospectus without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except for bona fide gifts or
transfers effected by such stockholders other than on any securities exchange or
in the over-the-counter market to donees or transferees that agree to be bound
by similar agreements and except for issuances by the Company and sales by
Nortex Holdings pursuant to the exercise of certain stock options
48
<PAGE> 50
outstanding upon completion of this offering. Prudential Securities Incorporated
may, in its sole discretion, at any time and without prior notice, release all
or any portion of the shares of Common Stock subject to such agreements.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers of sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the offering then
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following
completion of the offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
510,000 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the offering) for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Prudential Life Insurance Company of America ("The Prudential"), an
affiliate of Prudential Securities Incorporated, is a limited partner of the
MLGA Fund and holds an approximately 16.9% interest in MLGA Fund's holdings of
Common Stock. MLGA Fund is selling 3,000,000 shares of Common Stock in this
offering (3,510,000 shares if the Underwriters' over-allotment option is
exercised in full). As a result, an affiliate of Prudential Securities
Incorporated will receive more than 10% of the proceeds of this offering. In
addition, The Prudential and one or more of its affiliates hold the entire $30.0
million in principal amount of the Company's Series A Notes.
Under the Conduct Rules of the National Association of Securities Dealers,
Inc. ("NASD"), due to the ownership interest in the Company of The Prudential,
the Company may be deemed to be an affiliate of Prudential Securities
Incorporated. Accordingly, the public offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
In accordance with the requirement, Wheat, First Securities, Inc. is serving in
such role and will recommend a price in compliance with the requirements of the
Conduct Rules. Wheat, First Securities, Inc., in its role as qualified
independent underwriter, has performed a due diligence investigation and has
reviewed and participated in the preparation of this Prospectus and the
registration statement of which this Prospectus forms a part. In accordance with
the NASD Conduct Rules, no NASD member participating in the distribution is
permitted to confirm sales to accounts over which it exercises discretionary
authority without prior specific written consent.
Wheat, First Securities, Inc., one of the several Underwriters of this
offering, acted as placement agent for the Company's sale of the Series A Notes
and received a customary commission in connection therewith.
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<PAGE> 51
LEGAL MATTERS
Certain matters with respect to the legality of the shares of Common Stock
offered hereby will be passed upon for the Company by Proskauer Rose Goetz &
Mendelsohn LLP, New York, New York. Certain legal matters relating to this
offering will be passed upon for the Underwriters by Fulbright & Jaworski
L.L.P., New York, New York. Certain members of Proskauer Rose Goetz & Mendelsohn
LLP have acted as counsel to Nortex Holdings and its affiliates in certain
matters, including acting as counsel to Nortex Holdings and Mr. Liebenow in the
1993 Recapitalization.
EXPERTS
The consolidated financial statements and financial statement schedules
appearing elsewhere in this Prospectus and Registration Statement, to the extent
and for the periods indicated in their reports, have been audited by Arthur
Andersen LLP as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company is subject to certain informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained at prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a World Wide Web site, containing such
reports, proxy statements and other information regarding the Company, at
"http://www.sec.gov." In addition, such reports, proxy statements and other
information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006-1506.
50
<PAGE> 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets -- December 30, 1995 and January 4, 1997.................. F-3
Consolidated Statements of Income -- For the years ended December 31, 1994, December
30, 1995 and January 4, 1997........................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity -- For the years ended
December 31, 1994, December 30, 1995 and January 4, 1997............................ F-5
Consolidated Statements of Cash Flows -- For the years ended December 31, 1994,
December 30, 1995 and January 4, 1997............................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO QUAKER FABRIC CORPORATION:
We have audited the accompanying consolidated balance sheets of Quaker
Fabric Corporation (a Delaware corporation) and subsidiaries as of January 4,
1997 and December 30, 1995, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years ended
January 4, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Quaker
Fabric Corporation and subsidiaries as of January 4, 1997 and December 30, 1995,
and the results of their operations and their cash flows for each of the three
years ended January 4, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 11, 1997
F-2
<PAGE> 54
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 4,
1995 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 200 $ 385
Accounts receivable, less allowances of $1,985 and $2,052 at
December 30, 1995 and January 4, 1997, respectively, for
doubtful accounts and sales returns and allowances........... 24,211 26,261
Inventories................................................... 23,156 27,737
Prepaid and refundable income taxes........................... 1,702 694
Prepaid expenses and other current assets..................... 2,371 2,837
-------- ---------
Total current assets..................................... 51,640 57,914
Property, plant and equipment, net of depreciation and
amortization..................................................... 79,156 84,045
Other assets:
Goodwill, net of amortization................................. 6,589 6,397
Deferred financing costs...................................... 461 322
Other assets.................................................. 271 154
-------- ---------
Total assets............................................. $138,117 $ 148,832
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt....................................... $ 878 $ 951
Current portion of capital lease obligations.................. 1,249 1,532
Accounts payable.............................................. 14,127 14,384
Accrued expenses and taxes.................................... 4,606 8,427
-------- ---------
Total current liabilities................................ 20,860 25,294
Long-term debt, less current portion............................... 37,082 35,731
Capital lease obligations, less current portion.................... 8,036 6,504
Deferred income taxes.............................................. 10,523 11,649
Other long-term liabilities........................................ 3,766 3,082
Commitments and contingencies
Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation
preference $1,000 per share, 50,000 shares authorized, none
issued....................................................... -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares
authorized; 8,021,097 shares issued and outstanding at
January 4, 1997 and December 30, 1995........................ 80 80
Additional paid-in capital.................................... 41,687 41,948
Retained earnings............................................. 17,397 25,959
Cumulative translation adjustment............................. (1,314) (1,415)
-------- ---------
Total stockholders' equity............................... 57,850 66,572
-------- ---------
Total liabilities and stockholders' equity............... $138,117 $ 148,832
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 55
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------
DECEMBER 31, DECEMBER 30, JANUARY 4,
1994 1995 1997
------------ ------------ -----------
<S> <C> <C> <C>
Net sales............................................ $180,842 $173,487 $ 198,856
Cost of products sold................................ 133,168 137,083 152,787
-------- -------- --------
Gross margin......................................... 47,674 36,404 46,069
Selling, general and administrative expenses......... 27,560 26,176 29,121
-------- -------- --------
Operating income..................................... 20,114 10,228 16,948
Other expenses:
Interest expense, net.............................. 3,863 3,898 4,092
Other, net......................................... 34 98 77
-------- -------- --------
Income before provision for income taxes............. 16,217 6,232 12,779
Provision for income taxes........................... 6,691 712 4,217
-------- -------- --------
Net income........................................... $ 9,526 $ 5,520 $ 8,562
======== ======== ========
Earnings per common share............................ $ 1.15 $ 0.67 $ 1.03
======== ======== ========
Weighted average shares outstanding.................. 8,301 8,293 8,332
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 56
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE TOTAL
COMMON PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENT EQUITY
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994............ $80 $41,143 $ 2,351 $ -- $43,574
Stock option compensation
expense........................ -- 237 -- -- 237
Net income........................ -- -- 9,526 -- 9,526
Foreign currency translation
adjustment..................... -- -- -- (748) (748)
--- ------- ------- ------- -------
Balance, December 31, 1994.......... $80 $41,380 $11,877 $ (748) $52,589
Stock option compensation
expense........................ -- 229 -- -- 229
Net income........................ -- -- 5,520 -- 5,520
Issuance of 10,618 shares of
common stock under stock option
plan........................... -- 78 -- -- 78
Foreign currency translation
adjustment..................... -- -- -- (566) (566)
--- ------- ------- ------- -------
Balance, December 30, 1995.......... $80 $41,687 $17,397 $(1,314) $57,850
Stock option compensation
expense........................ -- 261 -- -- 261
Net income........................ -- -- 8,562 -- 8,562
Foreign currency translation
adjustment..................... -- -- -- (101) (101)
--- ------- ------- ------- -------
Balance, January 4, 1997............ $80 $41,948 $25,959 $(1,415) $66,572
=== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 57
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------
DECEMBER 31, DECEMBER 30, JANUARY 4,
1994 1995 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 9,526 $ 5,520 $ 8,562
Adjustments to reconcile net income to net cash provided
by operating activities -- Depreciation and
amortization......................................... 5,603 6,462 7,437
Stock option compensation expense.................... 237 229 261
Deferred income taxes................................ 1,546 (253) 1,126
Changes in operating assets and liabilities --
Accounts receivable.................................. (3,394) 1,398 (2,050)
Inventories.......................................... (4,970) (871) (4,581)
Prepaid expenses and other current assets............ 231 (1,374) 657
Accounts payable and accrued expenses................ 1,321 1,158 4,078
Other long-term liabilities.......................... 999 (245) (684)
-------- -------- --------
Net cash provided by operating activities............ 11,099 12,024 14,806
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment.............. (18,727) (13,165) (11,979)
Sale of equipment....................................... 2,795 212 --
-------- -------- --------
Net cash used for investing activities............... (15,932) (12,953) (11,979)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of short-term and long-term
debt................................................. 33,900 34,500 --
Repayments of debt...................................... (27,128) (31,912) (1,278)
Repayments of capital leases............................ (962) (1,171) (1,249)
Capitalization of financing costs....................... (345) (135) (14)
Issuance of common stock under stock option plan........ -- 78 --
-------- -------- --------
Net cash provided (used) by financing activities..... 5,465 1,360 (2,541)
-------- -------- --------
Effect of exchange rates on cash.......................... (748) (566) (101)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents...... (116) (135) 185
Cash and cash equivalents, beginning of period............ 451 335 200
-------- -------- --------
Cash and cash equivalents, end of period.................. $ 335 $ 200 $ 385
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for --
Interest............................................. $ 3,787 $ 4,043 $ 3,916
Income taxes......................................... $ 3,367 $ 1,881 $ 829
Supplemental schedule of non-cash investing and financing
activities:
Capital lease obligations incurred for new
equipment.......................................... $ 2,795 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 58
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. OPERATIONS
Quaker Fabric Corporation and subsidiaries (the "Company" or "Quaker")
designs, manufactures and markets woven upholstery fabrics for residential
furniture markets and specialty yarns for use in the production of its own
fabrics and for sale to manufacturers of home furnishings and other products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Quaker Fabric Corporation and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
(b) Fiscal Year
The Company's fiscal year ends on the Saturday nearest to January 1 of each
year. The fiscal years ended December 31, 1994 and December 30, 1995 contained
52 weeks while the fiscal year ended January 4, 1997 contained 53 weeks.
(c) Inventories
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the last-in, first-out
(LIFO) method. Inventories consist of the following at December 30, 1995 and
January 4, 1997:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 4,
1995 1997
------------ ----------
<S> <C> <C>
Raw materials.......................................... $ 10,028 $ 11,127
Work-in-process........................................ 8,087 8,421
Finished goods......................................... 5,591 8,280
------- -------
Inventory at FIFO.................................... 23,706 27,828
LIFO reserve........................................... 550 91
------- -------
Inventory at LIFO.................................... $ 23,156 $ 27,737
======= =======
</TABLE>
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost. The Company provides for
depreciation on property and equipment on a straight-line basis over their
estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings and improvements............................. 32-39 years
Machinery and equipment................................ 5-20 years
Furniture and fixtures................................. 10 years
Motor vehicles......................................... 4-5 years
</TABLE>
Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated life of the assets or the remaining lease term.
F-7
<PAGE> 59
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(e) Goodwill
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired. Goodwill is amortized on a straight-line basis
over 40 years. Accumulated amortization is $1,121 and $1,314 at December 30,
1995 and January 4, 1997, respectively. Amortization expense was approximately
$193 for both years. The Company's policy is to evaluate annually whether the
useful life of goodwill should be revised or whether the remaining balance has
been impaired. When evaluating impairment, the Company uses an estimate of
future operating income over the remaining goodwill life to measure whether the
goodwill is recoverable.
(f) Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
(g) Deferred Financing Costs
Financing costs related to certain loans and capital leases have been
capitalized and are being amortized over the life of the related loan or capital
lease. Accumulated amortization was $159 and $313 as of December 30, 1995 and
January 4, 1997, respectively.
(h) Earnings Per Common Share
Earnings per common share for the years ended December 31, 1994, December
30 1995 and January 4, 1997 are computed using the weighted average number of
common shares and common share equivalents outstanding during the year.
(i) Foreign Currency Translation
The assets and liabilities of the Company's Mexican operations are
translated at period-end exchange rates, and statement of income accounts are
translated at weighted average exchange rates. In 1994, 1995 and 1996, the
resulting translation adjustments are included in the consolidated balance sheet
as a separate component of equity, "Cumulative Translation Adjustment," and
foreign currency transaction gains and losses are included in the consolidated
statements of income. In 1997 Mexico has been designated a "highly inflationary
country" and accordingly, in the future the Company will record translation
gains and losses in the income statement rather than as a separate component of
equity.
(j) Impairment of Long-Lived Assets
The Company periodically assesses the realizability of its long-lived
assets in accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." Based on its review, the Company does not believe that any
material impairment of its long-lived assets has occurred.
(k) Use of Estimates in the Preparation of Financial Statements
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the
F-8
<PAGE> 60
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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.
(l) Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, current maturities of long-term debt, accounts
payable and long-term debt. The carrying amount of these financial instruments
as of January 4, 1997, approximate fair value due to the short term nature of
these instruments and the recent nature of the amendments made to the Credit
Agreement.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 4,
1995 1997
------------ -----------
<S> <C> <C>
Land................................................ $ 236 $ 236
Buildings and improvements.......................... 17,046 17,559
Leasehold improvements.............................. 283 309
Machinery and equipment............................. 85,191 94,541
Furniture and fixtures.............................. 1,193 1,292
Motor vehicles...................................... 289 330
Construction in progress............................ 470 1,899
-------- ---------
104,708 116,166
Less -- Accumulated depreciation and amortization... 25,552 32,121
-------- ---------
$ 79,156 $ 84,045
======== =========
</TABLE>
Included in machinery and equipment is equipment under capital lease of
$12,644 as of December 30, 1995 and January 4, 1997. The Company is depreciating
this equipment over its economic useful lives of 15 to 20 years, which is
greater than the lease terms, because the Company intends to exercise its option
to purchase the equipment at the end of the initial lease terms at fair market
value.
4. ACCRUED EXPENSES AND TAXES
Accrued expenses and taxes consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 4,
1995 1997
------------ ------------
<S> <C> <C>
Accrued workers' compensation.................... $ 1,230 $ 1,500
Accrued medical insurance........................ 450 1,766
Accrued other, including taxes................... 2,926 5,161
-------- --------
$ 4,606 $ 8,427
======== ========
</TABLE>
F-9
<PAGE> 61
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
5. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 4,
1995 1997
------------ ------------
<S> <C> <C>
6.81% Series A Notes due December 15, 2002....... $ 30,000 $ 30,000
Unsecured credit facility payable to several
banks.......................................... 4,400 4,000
9.73% Note payable in monthly principal and
interest installments of $81 through August
1999, secured by certain equipment............. 3,003 2,287
Notes payable in monthly principal installments
of $13 plus interest until July 1998 and $6
plus interest from August 1998 to July 2000,
interest at prime plus 1% (9.75% at December
30, 1995 and 9.25% at January 4, 1997), secured
by certain equipment........................... 557 395
---------- ----------
37,960 36,682
Less -- Current portion.......................... 878 951
---------- ----------
$ 37,082 $ 35,731
========== ==========
</TABLE>
The Series A Notes are unsecured and bear interest at a fixed rate of 6.81%
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. Required principal payments of the Series A Notes are as
follows:
<TABLE>
<S> <C>
December 15, 1998.......................................... $ 2,500
December 15, 1999.......................................... 8,500
December 15, 2000.......................................... 8,500
December 15, 2001.......................................... 8,000
December 15, 2002.......................................... 2,500
-------
$30,000
=======
</TABLE>
Under the terms of the Credit Agreement, the Company may borrow up to
$50,000 through December 31, 2000. Advances made under the Credit Agreement bear
interest at either the prime rate or the Eurodollar (Libor) rate plus an
"Applicable Margin." The Applicable Margin on advances is adjusted quarterly
based on the Company's Leverage Ratio as defined in the Credit Agreement. The
Applicable Margin for Eurodollar (Libor) advances may range from 0.625% to 1.5%.
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, 1997,
the commitment fee is 0.375% of the unused portion of the Credit Agreement which
was $45,528, net of outstanding letters of credit. As of January 4, 1997, the
Company had $4,000 outstanding under the Credit Agreement at an effective
interest rate of 7.0%. As of December 30, 1995, the Company had $4,400
outstanding under the Credit Agreement at an effective interest rate of 6.9%.
The Company is required to comply with a number of affirmative and negative
covenants under the Credit Agreement and the Series A Notes. Among other things,
the Credit Agreement 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 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, make capital expenditures, and
purchase,
F-10
<PAGE> 62
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
merge or consolidate with or into any other corporation. As of January 4, 1997,
the Company is in full compliance with all debt covenants.
As of January 4, 1997, total debt principal payments for each of the next
five fiscal years and thereafter are as follows:
<TABLE>
<S> <C>
1997....................................................... $ 951
1998....................................................... 3,495
1999....................................................... 9,200
2000....................................................... 12,536
2001....................................................... 8,000
Thereafter................................................. 2,500
-------
$36,682
=======
</TABLE>
6. INCOME TAXES
Income before provision for income taxes consists of:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 30, JANUARY 4,
1994 1995 1997
------------ ------------ ----------
<S> <C> <C> <C>
Domestic...................................... $ 15,788 $ 6,184 $ 12,200
Foreign....................................... 429 48 579
------ ------- -------
$ 16,217 $ 6,232 $ 12,779
====== ======= =======
</TABLE>
The following is a summary of the provision (benefit) for income taxes:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 30, JANUARY 4,
1994 1995 1997
------------ ------------ ----------
<S> <C> <C> <C>
Federal
Current..................................... $ 4,470 $ 725 $ 2,510
Deferred.................................... 678 1,703 1,300
------ ------- -------
$ 5,148 $ 2,428 $ 3,810
------ ------- -------
State
Current..................................... $ 675 $ 187 $ 573
Deferred.................................... 840 (1,903) (166)
------ ------- -------
$ 1,515 $ (1,716) $ 407
------ ------- -------
Foreign
Current..................................... $ -- $ -- $ --
Deferred.................................... 28 -- --
------ ------- -------
$ 28 $ -- $ --
------ ------- -------
$ 6,691 $ 712 $ 4,217
====== ======= =======
</TABLE>
F-11
<PAGE> 63
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
A reconciliation between the provision for income taxes before
extraordinary item computed at U.S. federal statutory rates and the amount
reflected in the accompanying consolidated statements of income is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 31, DECEMBER 30, JANUARY 4,
1994 1995 1997
------------ ------------ ----------
<S> <C> <C> <C>
Computed expected tax provision............... $ 5,676 $ 2,119 $ 4,345
Increase in taxes resulting from:
Amortization of goodwill................. 67 67 67
State income taxes, net of federal
benefit................................ 1,354 385 583
Decrease in taxes resulting from:
State investment tax credits, net of
federal provision...................... (369) (452) (319)
Reversal of state deferred taxes due to
change in tax law, net of federal
provision.............................. -- (1,050) --
Foreign sales corporation benefit........ (150) (270) (245)
Other.................................... 113 (87) (214)
------ ------- -------
$ 6,691 $ 712 $ 4,217
====== ======= =======
</TABLE>
At January 4, 1997, the Company had net operating loss carryforwards of
approximately $2,451 for federal income tax purposes available to offset future
taxable income. These carryforwards expire from 2001 to 2005. Additionally, the
Company has available for use $1,142 of tax credit carryforwards, of which
approximately $696 expire from 1999 to 2005. The remaining tax credit
carryforwards have no expiration dates. The timing and use of the net operating
loss carryforwards and the tax credit carryforwards are limited under federal
income tax legislation.
In November 1995, the Massachusetts legislature amended the apportionment
formula for corporate income tax purposes and adopted a single sales factor
formula. The effect of this new apportionment formula will be phased in over a
five year period beginning in 1996. In accordance with SFAS 109, the Company has
recorded the effect of this tax law change on deferred taxes as a reduction of
state deferred tax liability of $1,050, net of federal taxes, as of December 30,
1995.
F-12
<PAGE> 64
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The significant items comprising the domestic deferred tax asset/liability
are as follows:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 JANUARY 4, 1997
-------------------- --------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- -------- ------- --------
<S> <C> <C> <C> <C>
Assets:
Net operating loss carryforwards.............. $ 259 $ 889 $ 259 $ 599
Tax credit carryforwards...................... 773 1,660 191 951
Receivable reserves........................... 714 -- 718 --
Other......................................... 379 1,065 1,311 1,123
------- -------- ------- --------
Total assets............................... $ 2,125 $ 3,614 $ 2,479 $ 2,673
------- -------- ------- --------
Liabilities:
Property basis differences.................... $ -- $(14,332) $ -- $(14,832)
Inventory basis differences................... (1,427) -- (1,292) --
------- -------- ------- --------
Total liabilities.......................... $(1,427) $(14,332) $(1,292) $(14,832)
------- -------- ------- --------
Net assets (liabilities)................... $ 698 $(10,718) $ 1,187 $(12,159)
======= ======== ======= ========
</TABLE>
The significant items comprising the foreign deferred tax asset/liability
are as follows:
<TABLE>
<CAPTION>
DECEMBER 30, 1995 JANUARY 4, 1997
--------------------- ---------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Assets:
Net operating loss carryforwards................. $ -- $ 195 $ -- $ 510
Liabilities:
Inventory........................................ $(195) $ -- $(506) $ --
----- ---- ----- ----
Net assets (liabilities)...................... $(195) $ 195 $(506) $ 510
===== ==== ===== ====
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
(a) Litigation and Environmental Cleanup Matters
The Company is engaged in various claims and legal proceedings including
certain routine environmental cleanup matters. In the opinion of management, the
final resolution of these claims and proceedings is not expected to materially
affect the accompanying consolidated financial statements.
F-13
<PAGE> 65
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(b) Leases
The Company leases certain facilities and equipment under operating lease
agreements and capital lease agreements that expire at various dates from the
current year to the year 2002. As of January 4, 1997, the aggregate minimum
future commitments under leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING TOTAL
LEASES LEASES LEASES
--------- --------- ---------
<S> <C> <C> <C>
1997................................................. $ 2,145 $ 656 $ 2,801
1998................................................. 1,651 426 2,077
1999................................................. 2,240 330 2,570
2000................................................. 1,094 209 1,303
2001................................................. 2,080 104 2,184
Thereafter........................................... 725 -- 725
------ ------ -------
$ 9,935 $ 1,725 $11,660
====== =======
Less -- Amount representing interest................. 1,899
------
$ 8,036
Less -- Current portion.............................. 1,532
------
$ 6,504
======
</TABLE>
Rent expense for the years ended December 31, 1994, December 30, 1995, and
January 4, 1997, was $1,503, $1,561, and $1,276, respectively.
(c) Letters of Credit
In the normal course of its business activities, the Company is required
under certain contracts to provide letters of credit which may be drawn down in
the event the Company fails to perform under the contracts. As of December 30,
1995 and January 4, 1997, the Company has issued or agreed to issue letters of
credit totaling $639, and $472 respectively.
(d) Employment Contract
The Company has an employment agreement, dated as of March 12, 1993 (the
Employment Agreement), with Larry A. Liebenow pursuant to which Mr. Liebenow
will continue to serve as President and Chief Executive Officer of the Company
on a full-time basis for the five-year period ending March 12, 1998, subject to
an automatic three-year extension, unless terminated by the Company upon one
year's prior notice. The Employment Agreement provides for an initial base
salary of $550, 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, 1997, Mr. Liebenow
would have been entitled to receive $572 (in the event of a voluntary
termination or termination for cause) or $1,725 (in the event of a termination
for any other reason, and assuming the Company elected to make a lump-sum
payment).
(e) Trade Acceptance
The Company is contingently liable to a bank for a trade acceptance of
$1,440 as of January 4, 1997.
F-14
<PAGE> 66
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
8. STOCK OPTIONS
In 1993, options to purchase a total of 635,795 shares of common stock were
granted to certain officers. The options vest over five years and are
exercisable for ten years. The difference of $1,186 between fair market value at
the grant date and the exercise price for these options is being charged to
compensation expense over five years. During 1995, options to purchase 5,000
shares of common stock were granted to a director of the Company. These options
vest over three years and are exercisable for ten years.
During 1996 options to purchase 94,000 shares of common stock were granted
to certain officers. These options vest over five years and are exercisable for
ten years. Options for 56,400 shares were granted at $4.12 per share and 37,600
were granted at $2.06 per share. The fair market value of the common stock on
the grant date was $7.00 per share. The difference of $348 between the fair
market value at grant date and exercise price is being charged to compensation
expense over five years. However, these options and those in the preceding
paragraph vest immediately upon a change in control, as defined, of the Company.
The offering contemplated by this Prospectus meets the change in control
definition. Accordingly, the unamortized portion of the deferred compensation
will be accelerated and recorded immediately upon the closing of this offering.
Also during 1996, the Company adopted the 1996 stock option plan for key
middle management employees. Options are granted at not less than fair market
value, vest over a five year period, and are exercisable for ten years. 100,000
shares are reserved under this plan. During 1996, options for 48,000 shares were
granted at $8.25 per share and options for 1,500 shares were canceled.
During 1996, the Company recorded $261 as stock option compensation
expense. The following table summarizes all option activity as of January 4,
1997:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE
--------- ---------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1994................................. 635,795 $1.20 - 4.12
Cancelled.................................................. (42,470) $2.06 - 4.12
------- ---------------
Outstanding, December 31, 1994............................... 593,325 $1.20 - 4.12
Granted.................................................... 5,000 $ 11.00
Exercised.................................................. (10,618) $ 4.12
------- ---------------
Outstanding, December 30, 1995............................... 587,707 $1.20 - 11.00
Granted.................................................... 142,000 $2.06 - 8.25
Cancelled.................................................. (1,500) $8.25
------- ---------------
Outstanding, January 4, 1997................................. 728,207 $1.20 - 11.00
======= ===============
Exercisable, January 4, 1997................................. 351,289
========
Weighted Average Option Price of Options Exercisable......... $2.01
======
Weighted Average Option Price of All Options................. $2.60
======
</TABLE>
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation costs for those plans using
the method of accounting prescribed by APB Opinion 25. Entities electing to
remain with the accounting in APB Opinion 25 must make pro forma disclosures of
net income and, if presented, earnings per share as if the fair value based
method of accounting defined in SFAS 123 has been applied.
F-15
<PAGE> 67
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
The Company has elected to account for its stock-based compensation plans
under APB Opinion 25. Had compensation cost for these plans been determined
consistent with FASB Statement No. 123, the Company's net income and earnings
per share would not have been materially different from the amounts reported.
Because the Statement No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
costs may not be representative of that to be expected in future years.
Set forth below is a summary of options granted in 1995 and 1996:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OPTIONS PER SHARE
---------------- ----------- FAIR VALUE
EXERCISE PRICES OPTIONS EXERCISE PRICE REMAINING LIFE EXERCISABLE OF OPTIONS
- --------------- ------- ---------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$2.06-$4.12 94,000 $ 3.30 10 Years 0 $ 5.95
$8.25 46,500 $ 8.25 10 Years 0 $ 6.31
$11.00 5,000 $11.00 9 Years 1,665 $ 6.24
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for the 1995 and 1996 grants: Risk free interest rate of 6.44%,
expected dividend yield at zero, expected lives of 10 years and expected
volatility of 60.1%.
9. EXPORT SALES
Export sales from the United States to unaffiliated customers were $24,300
in 1994, $19,500 in 1995, and $30,100 in 1996.
10. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITOR'S REPORT
On February 24, 1997 the Company's Board of Directors approved a new
Stockholder Rights Plan. See page 44 of this Prospectus for a description of the
plan.
Also on February 24, 1997 the Company's Board of Directors approved an
amendment to the President and Chief Executive Officer's employment agreement.
See page 38 of this Prospectus for a description of the amendment.
F-16
<PAGE> 68
============================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 8
Use of Proceeds........................... 11
Price Range of Common Stock............... 12
Dividend Policy........................... 12
Capitalization............................ 13
Selected Consolidated Financial and
Operating Data.......................... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 15
Business.................................. 22
Management................................ 33
Principal and Selling Stockholders........ 42
Description of Securities................. 44
Shares Eligible for Future Sale........... 47
Underwriting.............................. 48
Legal Matters............................. 50
Experts................................... 50
Additional Information.................... 50
Index to Consolidated Financial
Statements.............................. F-1
</TABLE>
============================================================
============================================================
3,400,000 Shares
[QUAKER LOGO]
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
THE ROBINSON-HUMPHREY
COMPANY, INC.
WHEAT FIRST BUTCHER SINGER
March , 1997
============================================================
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
An estimate of the fees and expenses of issuance and distribution (other
than underwriting discounts and commissions) of the Common Stock offered hereby
(all of which will be paid by the Company) is as follows:
<TABLE>
<S> <C>
SEC registration fee................................................... $ 19,402
NASD filing fee........................................................ 7,147
Nasdaq listing fee..................................................... 6,000
Printing and engraving expenses........................................ 100,000
Legal fees and expenses................................................ 150,000
Blue sky fees and expenses (including fees of counsel)................. 5,000
Accounting fees and expenses........................................... 100,000
Transfer agent fees.................................................... 1,000
Miscellaneous expenses................................................. 11,451
---------
Total............................................................. $ 400,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("DGCL") grants each corporation organized thereunder the power to indemnify its
officers and directors against liability for certain of their acts. Article
NINTH of the Company's certificate of incorporation provides that the Company
shall indemnify any person who was or is a party to any action by reason of the
fact that he is or was or has agreed to become a director or officer of the
Company, or is or was serving at the request of the Company as a director or
officer of another corporation, partnership, joint venture, trust or other
enterprise against any liability incurred by him in connection with such action,
if he acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Company, and, with respect to any
criminal action or proceeding, has no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in, or not
opposed to, the best interests of the Company and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
unlawful. Article EIGHTH of the Company's certificate of incorporation provides,
except to the extent prohibited by the DGCL, that no director of the Company
shall be liable to the Company for monetary damages for breach of fiduciary duty
as a director. In addition, the Company has entered into indemnification
agreements with certain of its directors indemnifying such persons against
judgments and other expenses incurred in connection with pending or threatened
litigation resulting from that director's position with the Company. The Company
also provides its directors and officers with coverage under a directors' and
officers' liability insurance policy.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and its controlling persons on the one hand and the Underwriters and
their controlling persons on the other hand against certain liabilities in
connection with this offering, including liabilities under the Securities Act of
1933.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On December 29, 1995, the Company issued and sold $30.0 million principal
amount of 6.81% Series A Senior Notes due December 15, 2002 (the "Series A
Notes") to The Prudential Insurance Company of America and Pruco Life Insurance
Company. The aggregate offering price for the Series A Notes was $30.0 million,
all of which was paid in cash. Based in part on representations made by the
purchasers, the Company believes the sale of the Series A Notes was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof.
II-1
<PAGE> 70
(b) Financial Statement Schedules
The following financial statement schedule of the Company included herein
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Registration Statement.
Report of Independent Public Accountants on Supplemental Schedule to the
Consolidated Financial Statements
Schedule II -- Valuation and Qualifying Accounts
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.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act of 1933 shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fall River, State of Massachusetts on February 24,
1997.
QUAKER FABRIC CORPORATION
By: /s/ LARRY A. LIEBENOW
------------------------------------
Larry A. Liebenow
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act, Amendment No. 1 to the
Registration Statement has been signed by the persons whose signatures appear
below in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ------------------
<C> <S> <C>
/s/ LARRY A. LIEBENOW President, Chief Executive February 24, 1997
- ------------------------------------------ Officer, and Director
(LARRY A. LIEBENOW) (principal executive officer)
/s/ PAUL J. KELLY Vice President -- Finance and February 24, 1997
- ------------------------------------------ Treasurer (principal financial
(PAUL J. KELLY) and accounting officer)
* Director February 24, 1997
- ------------------------------------------
(SANGWOO AHN)
* Director February 24, 1997
- ------------------------------------------
(PERRY J. LEWIS)
* Director February 24, 1997
- ------------------------------------------
(ERIBERTO R. SCOCIMARA)
* Director February 24, 1997
- ------------------------------------------
(IRA STARR)
* /s/ LARRY A. LIEBENOW
- ------------------------------------------
LARRY A. LIEBENOW, ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE> 72
SCHEDULE II
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND JANUARY 4, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NET
BALANCE AT PROVISIONS DEDUCTIONS BALANCE
BEGINNING CHARGED TO FROM AT END
DESCRIPTIONS OF PERIOD OPERATIONS ALLOWANCES OF PERIOD
- ------------------------------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Bad Debt Reserve............................... $1,650 $1,417 $ (1,883) $ 1,184
Sales Returns & Allowances Reserve............. 400 4,938 (4,608) 730
Year Ended December 30, 1995
Bad Debt Reserve............................... $1,184 $1,878 $ (1,706) $ 1,356
Sales Returns & Allowances Reserve............. 730 4,218 (4,319) 629
Year Ended January 4, 1997
Bad Debt Reserve............................... $1,356 $ 921 $ (1,002) $ 1,275
Sales Returns & Allowances Reserve............. 629 4,923 (4,775) 777
</TABLE>
<PAGE> 73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SUPPLEMENTAL SCHEDULE TO THE CONSOLIDATED FINANCIAL STATEMENTS
To Quaker Fabric Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Quaker Fabric Corporation and
subsidiaries' included in this Registration Statement and have issued our report
thereon dated February 11, 1997. Our audit was made for the purpose of forming
an opinion on those financial statements taken as a whole. The schedule listed
in the index in Item 16(b) 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.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 11, 1997
<PAGE> 74
[PHOTOGRAPHS OF THE COMPANY'S PRODUCTION EQUIPMENT AND OF ONE OF THE COMPANY'S
FABRIC PRODUCTS BEING PRODUCED AND THE PHRASE "VERTICAL INTEGRATION--THE
CORNERSTONE TO INNOVATION IN YARN AND FABRIC"]
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C> <C> <C>
1 -- Form of Underwriting Agreement.+.......................................
3.1 -- Certificate of Incorporation of the Company, as amended.(1)............
3.2 -- By-laws of the Company.(1).............................................
5 -- Opinion of Proskauer Rose Goetz & Mendelsohn LLP.+.....................
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).................................................
10.4 -- Shareholders Agreement, dated March 12, 1993, by and among the Company,
Larry A. 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
Quaker Fabric Corporation of Fall River ("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)............................
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C> <C> <C>
10.23 -- Chicago, Illinois Showroom Lease, dated July 1, 1994, between the
Company and LaSalle National Bank, Trustee.+...........................
10.24 -- Hickory, North Carolina Showroom Lease, dated July 5, 1995, between the
Company and Hickory Furniture Mart, Inc. ..............................
10.25 -- High Point, North Carolina Showroom Lease, dated May 15, 1995, between
the Company and Market Square Limited Partnership. ....................
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 August 19, 1996, between the
Company and Tupelo Furniture Market. ..................................
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)......................
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,
Continental Bank N.A. and The First National Bank of Boston.(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)..........................................
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<S> <C> <C> <C>
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, The 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. ...........................
10.57 -- Standard Industrial Lease Agreement, dated May 10, 1996, between CIIF
Associates II Limited Partnership and QFR. ............................
10.58 -- Rights Agreement dated March ,1997 between the Company and The First
National Bank of Boston relating to the Company's Stockholder Rights
Plan.+.................................................................
10.59 -- 1997 Stock Option Plan.+...............................................
10.60 -- Amendment, dated as of February 24, 1997, to Employment Agreement
between the Company and Larry A. Liebenow.+............................
21 -- Subsidiaries.(5).......................................................
23.1 -- Consent of Arthur Andersen LLP. .......................................
23.2 -- Consent of Proskauer Rose Goetz & Mendelsohn LLP (contained in opinion
to be filed as Exhibit 5).+............................................
24 -- Power of Attorney.(6)..................................................
27 -- Financial Data Schedule.(6)............................................
</TABLE>
- ---------------
+ To be filed by amendment.
(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.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q,
for the quarterly period 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) Previously filed.
<PAGE> 1
Hickory, NC Exhibit 10.24
NORTH CAROLINA
LEASE AGREEMENT
CATAWBA COUNTY
This agreement made this 5th day of July, 1995, between Hickory
Furniture Mart, Inc., a North Carolina corporation with its place of business
located at 2220 Highway 70 SE (Box 2644), Hickory, NC 28603 hereinafter referred
to as Lessor, and Quaker Fabric Corporation of Fall River, a Corporation duly
organized and existing under the laws of the State of Massachusetts with its
principal offices located at 941 Grinnell St. (P.O. Box 2139) (mailing address),
State of Fall River, MA 02721, hereinafter referred to as Tenant:
WITNESSETH:
For the consideration herein, and subject to the terms and conditions
of this agreement, the Lessor hereby leases to the Tenant and the Tenant hereby
accepts as Tenant the following space of real property located and situated in
Catawba County, NC, and being more particularly described as: That certain stall
or section known as Number 254 of the second level floor of the Hickory
Furniture Mart Exhibition Building situated on the west side of Mull's
Restaurant and on the south side of Highway 70 east of Hickory, N.C., and
containing 1,140 square feet of floor space, including the hallway entrance
portion and a portion of certain other common areas, all subject to the terms
and conditions hereof.
1. The term of this lease shall be thirty Six (36) months commencing on
the 1st day of August, 1995, and ending on the 1st day of August, 1998, both
dates inclusive, unless sooner terminated as herein provided.
2. Tenant shall pay to the Lessor yearly rent which shall be a sum
equal to $9.24/$9.45/$9.66 per square foot of floor space covered by this lease
per year, or a total of $10,533.60 per year, to be paid as follows:
$10,773.00
$11,012.40
$877.80 per mo. for 12 mos.; $897.75 per mo. for 12 mos.; $917.70 per mo. for 12
mos.
3. The Tenant may sublet the leased property with the written approval
of the Lessor, which approval the Lessor shall not unreasonably withhold,
provided that the business of the subtenant is compatible with the business of
the Lessor and provided further that the Tenant shall remain primarily liable
for the payment of the rent herein reserved and for the performance of all of
other terms of this lease required to be performed by the Tenant; in no event
shall any rental charged for any sublease exceed the sum payable by the Tenant
herein. Should the Tenant elect to sublet the leased premise, then the Tenant
must notify the Lessor of such fact and obtain the written approval of the
Lessor, and Tenant must appoint the Lessor as its agent to effectuate such
sublease.
4. Tenant shall vacate the leased property in the good order and repair
in which the property now is, ordinary wear and tear excepted, and shall remove
all its property therefrom so that the Lessor can repossess the leased property
not later than noon on the day this lease ends. The tenant may at any time prior
to the termination of this lease remove from the leased property all materials
and equipment and other property of the Tenant in and
<PAGE> 2
upon the leased property; any property not removed by such time shall become the
property of the Lessor and Lessor shall have no duty to preserve or account for
same, but may appropriate same as the Lessor's or causes the same to be
destroyed or disposed of as property of the Lessor and Tenant shall have no
claim against the Lessor or any other person for same.
5. Tenant shall be responsible for all licenses, franchise taxes or
other taxes or charges in the nature thereof due as a result of its use of, or
the location of property upon, the leased property. Lessor shall be responsible
for all taxes in the nature of ad valorem taxes upon the building and land.
6. Tenant shall be responsible for maintaining fire and other insurance
coverage on any of its contents or other property which may be upon, kept,
stored, or displayed on the leased property or the property known as Hickory
Furniture Mart Exhibition Building if it desires that the same be so protected.
The Lessor will be responsible to carry only such fire and other insurance
coverage on the leased property and the property known as Hickory Furniture
Mart, Inc. as it in its sole discretion shall determine, and neither party to
this lease shall be under any liability or obligation to the other for failure
to carry any such fire or other insurance coverage.
7. It is agreed that in the event either the space herewith leased or
the property known as the Hickory Furniture Mart Exhibition Building (the
"Building") should be damaged by fire or other casualty, then this lease shall
terminate, except that if either the space herewith leased or the Building be
damaged by fire or other casualty to only a small degree so that the use of said
space and Building by the Tenant is not interfered with or if the said space and
the Building could be repaired sufficiently within two weeks to allow use by the
Tenant, then the lease shall remain in full force and effect, should the Lessor
so elect, and in such event, the Lessor agrees to repair the said space and
Building as quickly as is reasonably possible.
8. Each of the parties hereto waives all rights of action for
negligence against the other party which may hereafter arise from damages to the
premises, or to the property therein, resulting from fire or other casualties
covered by standard fire insurance policy with extended coverage, regardless of
whether or not, or in what amount, such insurance is now or hereafter carried by
the party hereto,all to the extent of such coverage and amount.
9. The Tenant shall have the right make changes to the interior of the
space herein leased in the nature of remodeling. Such changes must be made by or
at the expense of the Tenant, after approval in advance from the Lessor. No such
change shall at any time be made which would impair the structural soundness or
diminish the value of the leased property and all work done in connection with
any change or alteration shall be done in a good and workmanlike manner.
10. If the leased property shall be deserted or vacated, or if
proceedings are commenced against the Tenant in any court under a bankruptcy act
or for the appointment of a trustee or received of the Tenant's property either
before or after the commencement of the lease term, or if there shall be a
default in the payment of rent or any part thereof for more than ten days after
written notice of such default by the Lessor, or if there shall be a default in
the performance of any other covenant, agreement, condition, rule or regulation
herein contained or hereafter established on the part of the Tenant for more
than ten days after written notice of such default by the Lessor, this lease (if
the Lessor so elects) shall thereupon terminate, and the Lessor shall have the
right to reenter or repossess the leased property, either by force, summary
proceedings, surrender, or otherwise, and dispossess and remove therefrom the
Tenant, or other occupants thereof, and their effects, without being liable to
any prosecution therefor. In such case the Lessor shall use its best efforts to
relet the leased property or any part thereof at its fair market rental value,
as the agent of the Tenant, and the Tenant shall pay the Lessor the difference
between the rent hereby reserved and
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<PAGE> 3
agreed to be paid by the Tenant for the portion of the term remaining at the
time of reentry or repossession and the amount, if any, received or to be
received under such reletting fro such portion of the term, plus any deficiency
and expenses.
11. The Tenant shall not paint or install any signs on the exterior
doors, plate glass and exterior walls of the demised premises without the prior
consent of the Lessor. No showcases or other fixtures or objects shall be placed
by the Tenant in front of the building, or elsewhere in or around the building
other than within the demised premises. No eternal antennas or other objects can
be placed on the building without expressed written permission of the Lessor.
12. Lessor agrees to be responsible for maintaining the physical
structure and improvements that are in place as of the effective date of this
lease. Service from misuse of physical structure including but not limited to
heating, air-conditioning, water equipment and facilities will be at Tenant's
expense. Tenant shall be responsible for trash disposal. Additional service will
be at Tenant's expense.
13. The Tenant shall be responsible for all utilities used in
connection with leased space. The amount will be apportioned by the square
footage of the Tenant in relation to the total square footage of the building.
14. Tenant shall not use any form of advertisement utilizing the
Lessor's name or its tenants thereof without the expressed permission of the
Lessor.
15. The Lessor and its representatives may enter the leased property at
any reasonable time for the purpose of inspecting the leased property,
performing any work, and during the final 210 day period of the lease,
exhibiting the leased property for sale, lease, or for other reasonable purpose.
16. Tenant must abide by the rules and regulations set forth by the
building.
17. Any notice under this lease must be in writing and may be sent by
ordinary mail addressed to the Tenant at the address appearing on this lease, or
such other address as the Tenant shall designate in writing, and in the case of
the Lessor to the address appearing on this lease or otherwise designated in
writing by the Lessor.
18. The Tenant and/or subtenant hereunder shall make no unlawful or
offensive use of the space herewith leased.
19. This agreement shall enure to the benefit and be binding upon the
parties hereto, their successors and assigns.
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<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by its duly authorized officers and its corporate seal to be hereto
affixed, all in duplicate originals, the day and year first above written.
HICKORY FURNITURE MART, INC.
By /s/
--------------------------------------
By /s/
--------------------------------------
CORPORATE SEAL
ATTEST:
/s/
- --------------------------------------------
SECRETARY
QUAKER FABRIC CORPORATION OF FALL RIVER
TENANT
/s/
-----------------------------------------
TITLE
CORPORATE SEAL
ATTEST:
/s/
- --------------------------------------------
SECRETARY
Page 4
<PAGE> 1
Exhibit 10.25
NORTH CAROLINA
GUILFORD COUNTY
LEASE AGREEMENT
THIS LEASE made and entered into this 15th day of May, 1995, by and
between MARKET SQUARE LIMITED PARTNERSHIP hereinafter referred to as "Landlord",
and QUAKER FABRIC CORPORATION OF FALL RIVER, hereinafter referred to as
"Tenant";
WITNESSETH:
That in consideration of the mutual covenants, promises and conditions
hereinafter set forth, and the rentals agreed by Tenant to be paid to Landlord,
Landlord does hereby rent, demise and lease to Tenant and Tenant hereby takes
and leases from Landlord certain office premises in Market Square Tower, located
on the southeast corner of Lindsay and High Streets, High Point, North Carolina;
and in consideration whereof the Landlord and Tenant mutually agree as follows:
1. Premises, Rent and Term: The premises leased to Tenant, the monthly
rent payable by Tenant and the term of this Lease are all specified in Schedule
"A", which schedule is attached hereto and incorporated herein by reference. As
to any conflict between the terms or conditions set forth herein and those set
forth in Schedule "A" (or in any written agreement which is expressly referred
to therein or attached hereto) the terms set forth in Schedule "A" shall apply
and control.
2. Occupancy:
A. The commencement date of this Lease shall be the date as set
forth and shown in Schedule A attached hereto.
B. No delays by Landlord in rendering the premises ready for
occupancy shall be deemed cause for Tenant's revocation of this Lease or grounds
for any suit for damages or other legal or equitable relief unless such delays
are attributable to Landlord's negligence or other misfeasance under which
circumstances Tenant, after first giving Landlord thirty (30) days written
notice of its intention so to do and the opportunity during such interval to
complete the premises, may terminate Tenant's obligations hereunder if the
premises are not rendered ready for occupancy within the thirty day period.
Tenant may not hold Landlord accountable in any event for any damages or other
monetary relief or restitution by reason of any delay in rendering the premises
ready for occupancy.
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3. Interior Improvements: Landlord shall provide Tenant with the
number of square feet of space specified in Schedule A as a shell structure. The
shell structure shall include finished and painted exterior and interior walls,
a finished ceiling, any necessary interior doors, floor covering, HVAC ducts and
returns, and lighting. In the absence of written agreement to the contrary, any
additional upfitting or interior improvements shall be the sole responsibility
of the Tenant, at the Tenant's expense. Tenant shall submit to Landlord plans
and specifications for any upfitting or improvements (including any
modifications or changes to existing improvements), and Tenant must receive from
Landlord written approval of the plans and specifications prior to beginning any
construction on the premises.
4. Landlord's Services: So long as Tenant is not in default under the
terms and provisions of this Lease, and subject to the regulations of the
building wherein the demised premises are situate, Landlord shall provide
certain services to Tenant. As additional monthly rent, Tenant agrees to pay
Tenant's proportionate share of the expense of the services provided by
Landlord, which are as follows:
A. Utilities. Landlord shall provide electric current, lighting,
heating and air conditioning and water and sewer during proper seasons and as
reasonably required, but in the event Tenant shall install any unusual or
extraordinary electrical equipment or fixtures resulting in extra operational
cost to Landlord, then Landlord may require Tenant to pay for the additional
electric current required to operate such equipment, and such charges shall be
considered additional rent payable on regular rental installment due dates.
B. Cleaning. Landlord shall cause the demised premises to be
cleaned, including the removal of refuse and rubbish, once daily in the evening,
Monday through Friday, except on legal holidays.
C. Repairs. Landlord shall keep and maintain the building in which
the leased premises are located and its common or public fixtures,
appurtenances, systems and facilities in good working order and repair; make all
interior and exterior structural repairs as and when needed; and repair or
replace all building materials, fixtures and equipment required for the normal
use of the leased premises by Tenant; provided, however, that the cost of any
such repairs required as a result of the negligence or willful act of Tenant,
its customers, licensees, agents, servants, and employees shall be borne by
Tenant and shall be payable with the next rental payment after notification by
Landlord, and provided further that nothing herein contained shall be construed
to impose upon Landlord the obligation to renovate or redecorate the demised
premises. For purposes of this Paragraph 4.C., repairs shall not include
expenditures which are in the nature of additions or
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<PAGE> 3
substantial alterations to the building in which the demised premises are
located.
The Landlord shall not be liable for delay or failure to supply any
such services due to unusual circumstances or from causes beyond the control of
Landlord, and Tenant shall not be entitled to any abatement of rent for
Landlord's failure to supply such services.
5. Landlord's Liability: It is agreed that Landlord shall not be liable
and is hereby expressly relieved from liability for injury, loss or damage to
the person or property of Tenant in or about the leased premises, or of Tenant's
agents, employees, visitors or any person claiming by or through Tenant whether
caused by leaks, breaks, or overflows of roof, pipes, drains, or plumbing
fixtures, defects in sewer or air conditioning equipment, imperfect wiring or
construction, by snow, ice or other elements, or by any other tenant of the
building in which the leased premises is located, or by theft or pilferage, or
by any other thing whatsoever, unless caused by willful default of Landlord or
Landlord's gross negligence, nor shall Landlord be liable for any damages caused
by interruption or failure of any of the services referred to in Paragraph 4,
nor shall any deduction or rebate be claimed or allowed in the rent hereby
reserved by reason of such interruption or failure of said services, unless
caused by willful default of Landlord or Landlord's gross negligence. Tenant
shall give to Landlord prompt written notice of any accident to, or defect in
the premises, including the water pipes, wiring, stairwells, air conditioning
and heating equipment, and, upon receipt of such notice, Landlord shall remedy
same with reasonable diligence.
6. Care of Premises: The Tenant agrees to take good care of the leased
premises, fixtures, and appurtenances; to suffer no waste or injury thereto; and
to pay for all repairs to the premises, fixtures and appurtenances necessitated
by the fault of Tenant, its employees, agents, customers or guests. At the end
of the term Tenant will surrender the leased premises in as good condition as
Tenant obtained the same at the commencement of the term, reasonable wear and
tear excepted.
7. Alterations: The Tenant will not, without Landlord's prior written
consent, make any alterations, additions to, or improvements in the leased
premises, and all additions or improvements made by Tenant, except only movable
office furniture and equipment, shall become the property of Landlord at the
termination of this Lease or upon Landlord's earlier lawful occupancy of the
premises. Tenant will not deface or permit the defacing of any part of the
leased premises nor of the building in which the same are located, and will not
do or suffer anything to be done on the leased premises which will increase the
rate of fire or other insurance hazards on the building.
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8. Assignment: The Tenant will not assign or sublet the leased premises
nor any part thereof without Landlord's prior written consent, which consent
shall not unreasonably be withheld or delayed. Should Landlord consent to the
assignment of this Lease or the subletting of the demised premises, in whole or
in part, Tenant shall remain bound hereunder and does hereby absolutely
guarantee the payment of, and covenants to pay, the rent reserved hereunder
until the expiration of the term hereof and no failure of Landlord to promptly
collect from any such assignees or subtenants any rentals and other sums to
become due to Landlord hereunder, and no extension of time for the payment of
such rentals or other sums shall release Tenant from its obligation to pay same
to Landlord. Any lawful levy, sale or execution or other legal possession, or
any assignment for the benefit of creditors, or any Tenant bankruptcy or
insolvency shall be deemed an assignment within the meaning of this Lease.
9. Destruction or Damage: In the event the Market Square Tower is
damaged or destroyed by fire or other casualty, Landlord shall have the option
of determining whether the same shall be repaired or rebuilt and shall notify
Tenant in writing of its election within thirty days after the date on which the
damage or destruction shall occur. If Landlord shall fail to notify Tenant of
its decision within the specified time Landlord shall be conclusively deemed to
have elected not to repair or reconstruct.
If Landlord shall elect not to repair or reconstruct, this Lease shall
be terminated and of no further force or effect from and after the date of the
damage or destruction, or from the date on which Tenant is dispossessed, or
surrenders possession, whichever is later, but all monetary obligations of the
parties to each other existing at the date of termination shall survive said
termination and be promptly paid to the others.
If Landlord shall elect to repair or reconstruct, this Lease shall
continue in full force and effect unless the extent of the damage to the leased
premises is sufficient to deprive Tenant of its use and enjoyment of said
premises for ninety days or more, in which event Tenant shall have the right to
terminate this Lease by so notifying Landlord of such fact within fourteen days
after receiving Landlord's statement of its election to repair. If Tenant shall
elect to so terminate, the cancellation shall be effective as of the date and
under the terms specified in the preceding paragraph.
If Tenant's possession and/or use of the demised premises shall be
interrupted or substantially impaired due to damage caused by fire or other
casualty, there shall be an abatement of rentals for the period in which, and to
the extent which, Tenant is unable to occupy said premises.
10. Eminent Domain: Landlord may at its option terminate the estate
hereby granted from the time the title to, or right to possession of, a
significant portion of Landlord's property shall vest in or be taken by public
authority; and Landlord shall be entitled to any and all awards whatsoever which
may be paid or made
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in connection with such public taking. Tenant may so terminate only if the
taking results in a violation of the terms of this Lease which default or
violation cannot or will not be cured by Landlord, but Tenant shall be entitled
to an abatement of rentals for any period during which Tenant is temporarily
dispossessed on account of the condemnation.
11. Renewal and/or Holding Over:
A. Renewal of this Lease may be made only by mutual consent of
Landlord and Tenant, under such terms and conditions as may be negotiated at the
time of renewal. Tenant shall give Landlord in writing no less than 210 days
advance notice of Tenant's desire to renew this Lease.
B. Any holding over after expiration of the term hereof without the
consent of Landlord shall be construed to create a tenancy from month to month.
In such event, the rental rate shall be fifty percent (50%) above the then
current offering rate for space of comparable size, and such tenancy shall
otherwise be subject to the terms and conditions of this Lease.
12. Rules and Regulations: In consideration of the several covenants
contained in this Lease, it is mutually covenanted and agreed that the rules and
regulations relating to the use of the building in which the leased premises are
located and which are annexed hereto as part hereof, marked Schedule "B" are
agreed to by Tenant, and Tenant agrees to be bound by the same, and also
covenants to be bound by such further rules and regulations, or amendments and
modifications thereof, as may from time to time be made by Landlord, and deemed
by it to be necessary for the safety, care, cleanliness and economical
management of the premises, and for the preservation of good order therein. Any
failure on the part of Tenant, its servants, employees, agents, and invitees to
comply with each and every term of this Lease, or with any of said rules and
regulations, at Landlord's option, shall work a forfeiture of this Lease and of
all rights of Tenant hereunder; and thereupon Landlord, its agents or attorneys
shall have the right to re-enter said premises and remove Tenant therefrom, and
to take all necessary steps to collect any rent due hereunder up to the time of
said forfeiture or cancellations. Landlord agrees to consistently enforce all
such rules and regulations against all Tenants of the building.
13. Right of Entry: Landlord, or any of its authorized agents or
representatives, shall be entitled to enter the demised premises at any
reasonable time to inspect the premises; to perform any repairs, alterations or
changes required or permitted to be performed under this Lease; and during the
final 210 day period of this Lease to exhibit the premises to any prospective
tenant, mortgagee, or investor. Landlord agrees that, to the extent possible,
Landlord will not unreasonably interfere with, the
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<PAGE> 6
operation of Tenant's business in the exercise of Landlord's rights under this
Section .
14. Default: Tenant covenants that if the rent reserved by this Lease
or any part thereof shall be unpaid when due, or if the premises shall become
vacant or actually unoccupied during the term, or if Tenant shall fail to
perform any of the conditions, covenants, provisions and agreements contained
herein, or if a petition in bankruptcy shall be filed by Tenant, or if Tenant
shall be adjudged bankrupt or insolvent by any court, or if a receiver or
trustee in bankruptcy or a receiver of the property of Tenant shall be appointed
in any suit, action or proceeding, or if Tenant shall make an assignment for the
benefit of creditors, or if an execution shall be issued against Tenant, or if
Tenant's leasehold interest herein shall be levied upon, or if Tenant's
leasehold interest herein shall by operation of law pass to any person other
than Tenant, then, in such events, Landlord may, subject to the applicable
provisions of the laws of the State of North Carolina, at its option, without
notice to Tenant or to any assignee, transferee, trustee, receiver or other
person or persons, with force or otherwise retake and recover possession of said
premises and terminate this Lease and the term herein and hereby granted and
demised; or, in each and every such case, Landlord at its option without notice
to Tenant, or to any assignee, transferee, trustee, receiver or other person or
persons, with force or otherwise, may enter said premises and relet the same as
it may see fit, without avoiding or terminating this Lease and for the purpose
of such reletting Landlord may make such repairs in or to said premises as
Landlord may deem necessary for the purpose of such reletting, and if a
sufficient sum shall not be realized from such reletting after paying the costs,
expenses and charges of such reletting and of the repairs in and to said
premises to equal the rent hereinbefore covenanted to be paid by Tenant, then
Tenant shall pay any deficiency thereby upon demand therefor and such deficiency
shall be considered, construed and taken to be a debt provable in bankruptcy or
receivership. On default, as herein defined, Landlord shall have the further
right to take possession of any furniture or other property on said premises,
and to sell the same at public or private sale without notice, and to apply the
same to the payment of the rent due by these presents, holding the Tenant liable
for the deficiency, if any.
15. Taxes and Insurance:
A. In the event that the amount of real estate taxes, special
assessments, or any governmental charges which may be levied or assessed against
the land upon which the building stands and upon the building containing the
leased premises attributable to any tax year following the base year during the
term of this Lease or any renewals, shall exceed the amount of taxes on the real
property attributable to the base year, then Tenant shall pay to Landlord
Tenant's pro rate share of the increase in taxes. In addition, Tenant shall pay
Landlord its proportionate share of any
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increase in the insurance expenses required for the operation of the Market
Square Complex that accrue during the term of this lease. The Tenant's pro rata
share in any calendar year shall be determined by multiplying the amount by
which the taxes and insurance for said calendar year exceed the taxes and
insurance charged in the base year by a percentage determined by dividing
Tenant's net leasable space by the total net leasable space in the building. For
purposes of this Section the base year shall mean and refer to the year 1985. It
is hereby understood and agreed that should Tenant not have been in possession
of the leased premises for the entire year in which taxes and insurance exceed
those in the base year, Tenant's liability for such extra taxes and insurance
shall be pro rata. The Tenant's obligation to Landlord as set forth herein is to
survive the expiration date of this Lease and the expiration date of any renewal
term hereof. Any payments required by such increase in taxes and insurance shall
be paid within 30 days of receipt of a statement therefor from Landlord.
B. Landlord shall pay all real estate and ad valorem taxes and any
special assessments upon the premises imposed by lawful authority provided,
however, Landlord shall be reimbursed by Tenant as additional rent for such
amount as may be required by the preceding paragraph for Tenant's proportionate
share thereof; and the Tenant shall pay all ad valorem taxes upon its property,
merchandise, inventory, and equipment and any other taxes or levies assessed or
charged against the Tenant as a result of its use and occupancy of the premises
or improvements thereto made by Tenant, provided, however, Tenant shall pay as
additional rent such amounts as may be required by the preceding paragraph.
16. Strict Observance: The failure of either party to insist in any
instance on strict performance of any covenant hereof, or the Building Rules and
Regulations, or to exercise any option herein contained, shall not be construed
as a waiver of such covenant or option in any instance. The receipt of any sum
paid by Tenant to Landlord after breach of any conditions, covenant, term or
provision herein contained shall not be deemed a waiver of such breach but shall
be taken, considered and construed as payment for use and occupation and not as
rent, unless such breach shall be expressly waived in writing by Landlord. No
modifications of any provision hereof and no cancellation or surrender hereof
shall be valid unless in writing, and signed by both parties.
17. Subordination: This Lease is subject and subordinate to all
security liens, mortgages and deeds of trust which may now or hereafter affect
the demised premises, the building or the real property upon which said building
is located, and subordinate to all renewals, modifications, consolidations,
replacements and extensions thereof. The Tenant shall execute promptly any
certificate or other form of instrument confirming said subordination that
Landlord may request; provided, however, Landlord hereby represents and warrants
that there are no
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provisions of such instruments which would impair Tenant's rights under
Paragraph 22 hereof.
18. Notice: Any notice required hereunder shall be in writing. Any
notice required hereunder to be given by Landlord to Tenant shall be deemed to
have been given at the time such notice is mailed, by certified or registered
mail, postage prepaid, and addressed to Tenant at 941 Grinnell Street, Fall
River, Massachusetts 02721, Attention: President; and if to be given by Tenant
to Landlord, it shall be deemed to have been given at the time such notice is
mailed, by certified or registered mail, postage prepaid, addressed to Landlord
at Post Office Box 926, High Point, North Carolina, 27261, or at the last known
post office address thereof, or mailed to such agent at such other address as
Landlord may from time to time designate in writing.
19. Rights: The rights of Landlord under this Lease shall be
cumulative, and failure on the part of Landlord to exercise promptly any rights
given hereunder shall not operate to forfeit any of said rights or be deemed a
waiver thereof.
20. Relocation: Landlord reserves the right to move Tenant to other
space in the building on ninety (90) days notice, provided the space to which
Landlord is proposing to move Tenant is within a portion of the building
containing a fabric showroom environment. Tenant shall have the option within
fifteen (15) days from the date said notice is given to agree with Landlord upon
new space, but if Landlord and Tenant do not so agree within said fifteen (15)
days, then this Lease shall become null and void and of no further effect at the
expiration of ninety (90) days from the date said notice is given. Landlord
agrees to pay the expenses of moving Tenant to the new space in said building to
the extent the same are fair and reasonable.
21. Binding Effect: All rights and liabilities herein given to or
imposed on either of the parties hereto shall extend to the heirs, executors,
administrators, successors and assigns of such parties, except that an assignee
of Landlord's interest in the Lease for security purposes shall not be liable
for the performance of Landlord's obligations unless and until such assignee
becomes the owner of the building and then only for so long as such assignee is
such owner; and except that in the event Landlord shall sell, or assign all of
its interest in the Market Square Tower to any person, firm or corporation and
such transferee or assignee assumes the Landlord's obligations under this Lease,
then in that event Market Square Limited Partnership shall not thereafter be
liable for the performance of Landlord's obligations under this Lease.
22. Quiet Enjoyment: Subject to the terms, conditions and covenants of
this Lease, Landlord agrees that Tenant shall and may peaceably have, hold and
enjoy the premises above described, without hindrance or molestation by
Landlord.
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23. Liability Insurance: Tenant shall during the entire term hereof
keep in full force and effect a policy of public liability and property damage
insurance with respect to the premises, in which the limits of public liability
shall be no less than $300,000 per person and $500,000 per accident, and in
which the property damage liability shall be not less than $50,000. The policy
shall name Landlord, any person, firm or corporations designated by Landlord as
its Agent, and Tenant as the insured, and shall contain a clause that the
insurer will not cancel or change the insurance without first giving Landlord
ten (10) days prior written notice. The insurance shall be in an insurance
company approved by the State of North Carolina, and Tenant will furnish to
Landlord or its agent a copy of said policy or endorsement.
24. Denial of Subrogation Rights: Neither the Landlord nor the Tenant
shall be liable to the other for any business interruption or any loss or damage
to property or injury to or death of persons occurring on the leased property or
the adjoining property, or in any manner growing out of or connected with the
Tenant's use and occupation of the leased property, or the condition thereof, or
of the adjoining property, whether or not caused by the negligence or other
fault of the Landlord or the Tenant or of their respective agents, employees,
subtenants, licensees, or assignees. This release shall apply only to the extent
that such business interruption, loss or damage to property, or injury to or
death of persons is covered by insurance. Nothing in this paragraph shall be
construed to impose any other or greater liability upon either the Landlord or
the Tenant than would have existed in the absence of this paragraph. This
release shall be in effect only so long as the applicable insurance policies
contain a clause to the effect that this release shall not affect the right of
the insured to recover under such policies. Such clauses shall be obtained by
the parties whenever possible.
25. Estoppel Certificate: The Tenant shall from time to time, upon not
less than ten (10) days' prior written request by Landlord, deliver to Landlord
a statement in writing certifying; (a) that this Lease is unmodified and in full
force and effect, or if there have been any modifications, that the Lease as
modified is in full force and effect; (b) the dates to which rent and other
charges have been made; and (c) that Landlord is not in default of any provision
of this Lease, or, if in default, a detailed description thereof. Failure to
deliver the certificate within ten (10) days shall be conclusive upon Tenant for
the benefit of Lessor and its successors that this Lease is in full force and
effect and has not been modified, except as may be represented by Landlord.
26. Special Provisions. Tenant hereby agrees not to look to the
mortgagee, as mortgagee, mortgagee in possession, or successor in title to the
property, for accountability for any security deposit required by the Landlord
hereinunder, unless said sums have actually been received by said mortgagee as
security for the Tenant's performance of this lease.
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<PAGE> 10
Tenant hereby agrees not to handle, store or dispose of any hazardous
or toxic waste or substance upon the premises which is prohibited by any
federal, state or local statutes, ordinances or regulations. Tenant hereby
covenants to indemnify and hold Landlord, its successors and assigns, harmless
from any loss, damage, claims, costs, liabilities or cleanup costs arising out
of Tenant's use, handling, storage or disposal of any such hazardous or toxic
wastes or substances on the premises.
27. Entire Agreement: This Lease is the entire agreement of the
parties, and there are no terms, conditions, representations, warranties, or
agreements relative to Tenant's use and occupancy of the demised premises except
those specifically contained herein or attached hereto and specifically made a
part hereof.
TENANT
QUAKER FABRIC CORPORATION OF FALL RIVER
By: /s/
-------------------------------------
Title: (Vice) President
ATTEST:
/s/
- -----------------------------------
Secretary
LANDLORD
MARKET SQUARE LIMITED PARTNERSHIP
By: /s/
-------------------------------------
General Partner
10
<PAGE> 11
SCHEDULE "A"
MARKET SQUARE LIMITED PARTNERSHIP
PARTIES:
Landlord - Market Square Limited Partnership
305 West High Street
High Point, NC 27261
Tenant - QUAKER FABRIC CORP OF FALL RIVER
941 Grinnell Street
Fall River, MA 02721
DESCRIPTION OF LEASED PREMISES:
Building - Market Square Tower
corner of Lindsay and High Streets
High Point, NC
Area/Floor - 10th Floor
Space for Rental
Computation - 3838 square feet x 20% common area for a
total of 4606 square feet.
LEASE AND TERM AND RENTAL:
Initial Term - 5 years and 0 months beginning on April
1, 1995 and ending at the close of
business on March 31, 2000
Rental - Initial term basic rental 3838 sq. ft. at
$11.50 per sq. ft. per year. Tenant
share of common area 768 sq. ft. at
$11.50 per sq. ft. per year.
The Annual Rental is $ 52,969.00 payable
in monthly installments of $4,414.08
beginning April 1, 1995. All rental
payments to be made to Market Square
Limited Partnership, 305 West High
Street, High Point, North Carolina,
27261, or to any party which the Landlord
may subsequently direct, on or before the
first day of each month.
OTHER INFORMATION:
Leased premises shall be used solely for or as office space and/or
fabric showroom unless written approval for other or additional use is
granted by Landlord.
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EXECUTION OF LEASE:
THIS LEASE IS SUBJECT TO BOTH THE PROVISIONS STATED ABOVE AND THOSE SET
FORTH IN THE BODY OF THE LEASE, and is duly executed by Landlord and Tenant the
day and year first therein mentioned.
TENANT
QUAKER FABRIC CORPORATION OF FALL RIVER
By: /s/
-------------------------------------
Title: (Vice) President
(Corporate Seal)
ATTEST:
By: /s/
----------------------------------------
Secretary
LANDLORD
MARKET SQUARE LIMITED PARTNERSHIP
By: /s/
-------------------------------------
General Partner
12
<PAGE> 13
SCHEDULE "B"
MARKET SQUARE TOWER
High Point, North Carolina
RULES AND REGULATIONS
The following rules and regulations have been adopted by the Landlord
for the care, protection and benefit of the building and for the general comfort
and welfare of the Tenants.
1. The sidewalks, parking facilities, entrances, halls, passages and
stairways shall not be obstructed by the Tenant or used by him for any purpose
other than entrance and exit to and from the building and Tenant's premises,
2. Restroom facilities, water fountains and janitor sinks shall not be
used for any purposes other than those for which they were designed.
3. No sign, advertisement or notice shall be inscribed, painted or
attached on or to any part of the outside or entrance to Tenant's space except
those specifically provided or approved by the Landlord. Landlord may require
Tenant to remove or may remove at Tenant's expense any advertisement or notice
Landlord deems, in its sole discretion, to be undesirable.
4. The Tenant shall not do anything in the premises, or bring or keep
anything therein, which shall in any way conflict with any law, ordinance, rule
or regulation affecting the occupancy and use of the premises, which is or may
hereafter be enacted or promulgated by any public authority or by the Board of
Fire Underwriters.
5. In order to insure proper use and care of the premises, neither the
Tenant nor any employee of the Tenant shall:
(a) Keep animals or birds on the premises.
(b) Use the premises as sleeping apartments.
(c) Maintain or utilize bicycles or other vehicles on the premises.
(d) Make improper noises or disturbances of any kind without first
securing consent of Landlord.
(e) Engage in or permit games of chance or any form of gambling or
immoral conduct in or about the leased premises.
(f) Mark or defile toilet rooms, walls, windows, doors or any part of
the building.
(g) Allow any furniture, packages or articles of any kind to remain in
corridors except for short periods incidental to moving same in or
out of the building or to cleaning or rearranging occupancy of
leased space.
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<PAGE> 14
(h) Deposit waste paper, dirt or other substances in corridors,
stairways, toilets, rest rooms, or any other part of the building
not leased to him.
(i) Fasten any article, drill holes, drive nails or screws into walls,
floors, doors or partitions, or otherwise mar or deface any of them
by paint, paper or otherwise, unless written consent is first
obtained from the Landlord.
(j) Operate any machinery within the building except customary motor
driven office equipment, such as dictaphones, calculators, electric
typewriters, and the like. Special electrical or other motor driven
equipment used in the trade or profession of the Tenant may be
operated only with the prior written consent of the Landlord.
(k) Tamper or interfere in any way with windows, doors, locks, air
conditioning controls, heating, lighting, electric or plumbing
fixtures.
(l) Leave premises unoccupied without locking all doors, extinguishing
lights and turning off all water outlets.
(m) Install or operate vending machines of any kind in the leased
premises without written consent of Landlord.
6. The Landlord shall have the right to prohibit any advertising by the
Tenant which, in its opinion, tends to damage the reputation of the building or
its desirability as a building for offices, and upon written notice from
Landlord, the Tenant shall discontinue any such advertising.
7. Tenant shall not use or keep in the office space any explosives,
petroleum products, or chemicals without Landlord's prior written consent other
than those in normal use to maintain Tenant's office equipment.
8. The Landlord reserves the right to designate the time when and
method whereby freight, furniture, safes, goods, merchandise and other articles
may be brought into, moved or taken from the building and the premises leased by
the Tenant; and workmen employed, designated or approved by the Landlord must be
employed by Tenants for repairs, painting, material moving and other similar
work that may be done on the premises.
9. The Landlord shall not be responsible for damage to furniture caused
by janitor or any other servant personnel, nor for any loss of property from the
premises, however occurring unless caused by the willful action or gross
negligence of such janitor or other servant personnel employed by and acting on
behalf of Landlord. The Tenant will reimburse the Landlord for the cost of
repairing any damage to the leased premises or other part of the building caused
by the Tenant or the agents or employees of the Tenant, including replacing any
glass broken.
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<PAGE> 15
10. The Landlord shall furnish a reasonable number of door keys for the
needs of the Tenant, which shall be surrendered on termination of the Lease, and
reserves the right to require a deposit to insure their return at termination of
lease. The Tenant shall obtain keys only from the Landlord, shall not obtain
duplicate keys from any outside source and shall not alter the locks or effect
any substitution.
11. The Tenant shall not install in the leased premises any metal safes
or permit any concentration of excessive weight in any portion thereof without
first having obtained the written permission of Landlord.
12. The Landlord reserves the right at all times to exclude bootblacks,
newsboys, loiterers, vendors, solicitors and peddlers, from the building, and to
require registration, satisfactory identification and credentials from all
persons seeking access to any part of the building outside of ordinary business
hours. The Landlord will exercise its best judgment in the execution of such
control but shall not be held liable for the granting or refusal of such access.
13. The attaching of wires to the outside of the building is absolutely
prohibited, and no wires shall be run or installed in any part of the building
without the Landlord's permission and direction.
14. Requests for services of janitors or other building employees must
be made at the office of the Building Manager.
15. The Landlord shall have the right to modify these rules and to make
such other and further reasonable rules and regulations as in the judgment of
the Landlord, may from time to time be necessary for the safety, care and
cleanliness of the premises and for the preservation of good order there in,
effective five (5) days after all Tenants have been given written notice
thereof.
15
<PAGE> 1
Exhibit 10.27
LEASE AGREEMENT
This Lease agreement, made and entered into by and between:
The Tupelo Furniture Market
hereinafter referred to as Landlord, and
Quaker Fabric Corp. of Fall River,
hereinafter referred to as Tenant,
Witnesseth:
I.
In consideration of the obligation of tenant to pay as herein provided,
and in consideration of the other terms, provisions, and covenants hereof,
Landlord hereby agrees to let to Tenant, and Tenant hereby agrees to lease from
Landlord, the following described space in the Tupelo Furniture Market,
Mississippi Complex, situated on a tract of land at 705 Coley Road. A showroom
containing approximately 3200 square feet of space and being known as space
number B 15, together with all rights, privileges, easements, appurtenances, and
immunities belonging to or in any way pertaining to the said premises.
II.
Landlord agrees to have and to hold same space in reserve for Tenant
during markets for a period of 3 year(s) commencing on June 30, 1996 and ending
on June 30, 1999.
III.
Space will be considered Permanent and rental of said space will be at
a rate of $7.00 square foot, with payments for said space being made in 36 equal
installments to be received by Landlord on or before the first day of each month
with the monies for each market paid in full no less than thirty days before the
date of the market.
IV.
Special Provisions and agreements are listed below:
* Monthly rental rate will be $1,866.67, plus a $416.00 monthly
utility charge. ($2,282.67) due and payable on the first of
each month.
* If any proposed new location and space is unacceptable to the
Tenant, then the Tenant shall, at its option, have the right
to terminate this Lease.
<PAGE> 2
* If any relocation is required by the Landlord, the Landlord shall
provide comparable replacements for all installations and
improvements made by the Tenant in the space demised herein, which
are not reasonably movable by the Tenant, in the new space.
V.
3200 sq. feet x $7.00 (per Square Foot) = $22,400.00 per year
Utility Charge $416.00 per month Total: $27,392.00 per year
The Tupelo Furniture Market and the undersigned Exhibitor hereby enter in this
lease agreement upon the terms and conditions and regulations of the Tupelo
Furniture Market.
Company Quaker Fabric Corp. of Fall River
Address 941 Grinnell Street
City Fall River State MA Zip 02721
Telephone (508) 678-1957
Printed Name of Company Official: Tom Finneran, VP. Sales
Date: X Date 8/19/96
Please remit at once to:
Tupelo Furniture Market
Mississippi Complex
705 Coley Road
Tupelo, MS 38801
V.M. Cleveland, President
Janie Foster, Managing Director
Mississippi Complex
(601) 844 - 1473
(601) 844-3692 - fax
2
<PAGE> 3
RULES AND REGULATIONS
WHICH ARE A PART OF THIS CONTRACT
* Management reserves the right to refuse any or all applications for
space and to prohibit or remove any exhibit, display or part thereof,
or proposed exhibit display or device, which in the opinion of show
management is not suitable to or in keeping with the policy of show
management.
* Booths are assigned for the purpose of displaying merchandise and must
be properly manned during the hours of the show.
* Exhibit fees - If the entire exhibit fee is not paid in full 30 days
prior to the opening of the show, management reserves the right to
cancel this display area and reassign it to another with no refund to
the original company to whom the display area was confirmed.
* All applicants for exhibit space must be authorized representatives of
the company for whom he is making application for space. He agrees to
display and offer for sale only those products and services of the
company he represents. This form, properly filled out, must be
submitted for approval when making application.
* Exhibit fee covers rental of exhibit space assigned for the period of
the show. Exhibitors accept full responsibility for any and all service
delivered to the exhibitor's space at any time during the show.
* All exhibitors must comply with the local fire protection code. This
code will be strictly enforced.
* Exhibitors will be held responsible for any and all property damage
incurred by their employees. Violators will be held responsible and
charged for repairs.
* Subletting of space is prohibited. Exhibitors are not permitted to
sublet any portion of their space, nor are they allowed to display or
offer for sale any merchandise or services other than their own
products as listed in this contract.
* In the event the exhibitor selects space already assigned to others,
management reserves the right to assign said exhibitor to space as
close as possible to the original choice made by the exhibitor.
* Management reserves the right to reassign space to exhibitors who might
accidentally be assigned to space whose proximity to competitors may
cause conflict.
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<PAGE> 4
* Noisy or undignified displays are prohibited and will not be permitted
nor will noisily operated displays be allowed. Sound devices,
megaphones, loud speakers, side show tactics, or undignified methods of
attracting attention will not be permitted.
* Installation of exhibits - Exhibitors will be permitted to commence
setting up their exhibits on day(s) indicated. After official opening,
no cases or packing materials are to be left in the aisles or booths.
All displays must be built within the overall booth size.
* Dismantling of exhibit - Exhibitors will not be permitted to dismantle
their exhibits, nor do any packing prior to the official closing hour
of the show and then only after all visitors have left the exhibit
floor. It is agreed that your display will remain intact and properly
attended by your representative until the official closing time as
stated in your exhibitor kit. Management has pledged to visitors that
all exhibits will remain intact and attended until the close of the
show. All merchandise and display material must be removed from the
booths and packed ready for shipment no later than the time specified
in the exhibitor kit.
* Cancellation - In the event of cancellation of show due to fire,
strikes, or other causes beyond control, and if exhibit fees have been
paid and spaces assigned, exhibitor will permit a proportionate share
of his exhibit fee to be used by show management for direct expenses
incurred by show management in connection with the production of the
exhibit. The applicant agrees that after contract for space is accepted
and signed, it shall be binding upon the applicant hereof and subject
to all the terms and conditions of this contract, and constitutes a
non-cancellable contract for space assigned.
* Selling activities and promotional efforts must be confined within the
space assigned to each exhibitor.
* Any space either applied for or contracted for, of which the exhibitor
does not complete his contractual obligation, shall be deemed as
forfeited by the exhibitor, as shall any deposits or other monies paid.
Show management is herein authorized to dispose of such space as is
best for the success of the exhibit and shall retain as damages, any
and all such monies that had been paid, as damages and expenses.
* The exhibit facility, as well as any officer or staff member of either
organization mentioned, will not be responsible for any damage that
might accrue from fire, theft, loss of merchandise, water damage,
personal injury or damage alleged to have been caused or attributed to,
by reason of any exhibitor's participation in the show. It is agreed
that the exhibit facility shall be blameless for all liability which
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<PAGE> 5
might ensue from any cause mentioned above, unless it is due to the
Landlord's negligence.
* Show management respectfully suggests that each exhibitor carry his own
insurance protection.
* Whenever the word "space" is used in this contract, it shall denote
booth, singular or plural.
* Landlord shall furnish working heat and air conditioning connections to
the Tenant's space. Landlord shall be responsible for all repairs to
the heat and air conditioning equipment.
5
<PAGE> 1
Exhibit 10.56
NORTH CAROLINA
GUILFORD COUNTY
THIS LEASE, made this 1ST day of APRIL, 1996, by and between C&M
INVESTMENTS OF HIGH POINT INC., a North Carolina Corporation hereinafter called
the Landlord, and QUAKER FABRIC CORPORATION OF FALL RIVER, a Massachusetts
Corporation, having its principal office at 941 Grinnell Street Fall River,
Massachusetts 02721, hereinafter called the Tenant.
WITNESSETH:
That in consideration of the mutual covenants hereinafter contained,
the parties hereto agree as follows:
The Landlord hereby leases to the Tenant, and the Tenant hereby leases
from the Landlord, a free standing building to be built of approximately 10,000
square feet (100' x 100') located on a lot in TURNPIKE INDUSTRIAL PARK,
Randolph County, Trinity, North Carolina. A copy of a site plan and survey,
upon their completion, shall be attached to and become a part of this lease by
reference and shall be known as EXHIBIT "A". The Landlord warrants that it owns
the Premises in fee simple (subject to existing deeds of trust, utility
easements and restrictive covenants of record) and had the right to enter into
this Lease; and that the Tenant, provided it performs all of its obligations
under this Lease, will peaceably and quietly enjoy the Premises during the
lease term without any disturbance from the Landlord or any other person,
except as otherwise specifically provide in this Lease.
TERM. Article 1. The term of this Lease shall be for FIVE (5) years,
beginning on the 1ST day of AUGUST, 1996 and expiring on the 31ST day of JULY,
2001, both dates inclusive.
RENTAL. Article 2. As rental for the said premises, the Tenant shall
pay to the Landlord's agent, DWAIN SKEEN COMMERCIAL * INDUSTRIAL REAL ESTATE,
without notice or demand therefor, a rental at the rate of THIRTY THOUSAND AND
00/100 DOLLARS ($30,000.00) per year, payable in equal monthly installments of
TWO THOUSAND FIVE HUNDRED AND 00/100 DOLLARS ($2,500.00), in advance, on the
first day of each month. Rental payments received after the 10TH day of the
month shall have a late fee of ONE HUNDRED TWENTY FIVE AND 00/100 DOLLARS
($125.00). Any check issued by the Tenant returned marked Non-Sufficient Funds
(NSF) will have a service fee charged of ONE HUNDRED AND 00/100 DOLLARS
($100.00).
RENEWAL. Article 3. The Landlord does hereby grant to the Tenant the
additional right, privilege and option to extend this Lease for an additional
period of FIVE (5) years after the termination of the initial FIVE (5) year
term, provided the Tenant is not then in default in the rent or any other of
the covenants herein contained. The additional term of FIVE (5) years shall
begin immediately upon the expiration of the initial FIVE (5) year term upon
notice in writing to the Landlord of the Tenant's intention to exercise said
option, said notice to be given at least ONE HUNDRED TWENTY (120) days prior to
the expiration of the initial FIVE (5) year term. All of the conditions of this
Lease shall be applicable on the renewal. The annual rental for the renewal
shall be THIRTY FOUR THOUSAND FIVE HUNDRED AND 00/100 DOLLARS ($34,500.00) per
annum, payable in equal monthly installments of TWO THOUSAND EIGHT HUNDRED
SEVENTY FIVE AND 00/100 DOLLARS ($2,875.00) or shall increase by a percentage
equal to the percent increase of the United States Department of Commerce
Consumer Price Index for All Urban Consumers - All Items (1982-84 = 100) for
the period APRIL 1, 1996 to APRIL 1, 2001 whichever is the lesser of the two.
TIME OF THE ESSENCE. Article 4. Whereas the Landlord, at its sole cost
and expense, will erect the above-described free standing building prior to the
effective date of this Lease, and whereas the Landlord recognizes that time is
of the essence for the completion of the building, the Landlord, therefore,
agrees to the following terms: If, as of August 1, 1996, the building is not
complete and/or if final inspections have not been completed by the Randolph
County officials and/or other similar authorities, the Tenant will be entitled,
as
<PAGE> 2
economic damages, to one day free rent for each day after August 1, 1996 that
the building is not complete and/or final inspections have not been completed
by the Randolph County officials and/or other similar authorities, such free
rent to be applied beginning on the day that the Tenant first occupies the
building. If, as of September 1, 1996, the building is not complete and/or if
final inspections have not been completed by the Randolph County officials
and/or other similar authorities, the Tenant may choose to avoid the lease in
its entirety.
USE. Article 5. The leased premises shall be used by the Tenant for
WAREHOUSE AND WHOLESALE DISTRIBUTION OF FABRICS, and any other operation
incidental to and connected with the business of the Tenant, and for no other
purpose except with the written consent of the Landlord, which consent shall
not be unreasonably withheld. The premises are leased to the Tenant subject to
all zoning restrictions and all ordinances, and to all building restrictions
and regulations, adopted by any governmental subdivisions having jurisdiction,
which may now or hereafter affect the leased premises; and the Tenant agrees
that it will make no unlawful or offensive use of the premises, and will use
and maintain any equipment, appliances, or apparatus therein or thereon, in
accordance with the laws, ordinances, regulations, and requirements of any such
governmental subdivision affecting the same. Landlord hereby represents and
warrants that no laws, ordinances, regulations, and requirements of any such
governmental subdivisions make the Tenant's intended use, as described above,
unlawful or offensive.
UTILITIES. Article 6. The Tenant shall pay promptly when due, all
charges for utilities services including water, electricity and fuel consumed
on the premises.
TAXES. Article 7. The Landlord shall pay all ad valorem taxes and
assessments (except those described in the next succeeding paragraph) which may
be levied, assessed or charged against the demised premises.
The Tenant shall pay all ad valorem taxes assessed against any
machinery, fixtures, goods, and other personal property which it may install or
store in the leased premises and all license required in the operation of its
business.
INCREASED TAXES AND/OR INSURANCE. Article 8. If, during any calendar
year of the original term of this Lease Agreement, or any extension thereof,
the ad valorem taxes ad/or causality insurance premium levied or assessed
against the property herein demised shall be increased over the amount of said
taxes and/or causality insurance due and payable for the calendar year 1997,
the Tenant shall, upon demand from the Landlord, promptly pay to the Landlord
as additional rental, 100% of such increase.
REPAIRS. Article 9. The Landlord shall keep the roof and exterior
walls, exclusive of the windows, window framing, doors and door framing, of
said building in good condition and agrees that if either the roof or any part
of the exterior walls, except as above limited, shall become defective at any
time during the said term that upon notification from the Tenant he will
immediately repair and restore the defective part to good condition. In the
event the Landlord fails or refuses to commence repair of the defective
condition after a period of five (5) days from receipt of notice of said
condition, the Tenant may cause the same to be remedied and restored to good
condition, charge the reasonable cost thereof to the Landlord and deduct the
cost from the next succeeding installment(s) of rent due by it to the said
Landlord, but it is expressly understood and agreed that the Landlord shall not
be liable to the Tenant for any damage it may sustain to its merchandise or
equipment in or on the demised premises.
The Tenant, at its own cost and expense, shall maintain (and replace
when necessary) all other parts of the premises, including windows, window
framing, doors and door framing, in as good condition as when the premises were
received by it, and it shall return the premises at the expiration or
termination of this Lease in good order and repair, less ordinary wear and
tear, damage or loss by fire, the elements, or casualty excepted.
(A) MECHANICALS. The Tenant shall be responsible for any and all
repairs to the heating and air conditioning equipment up to the first ONE
HUNDRED AND 00/100 DOLLARS ($100.00) on any occurrence. Landlord, if heating
and air conditioning equipment is properly maintained, shall be responsible
for replacement of fan motor, compressor, heat exchanger and the housing of
said equipment, if necessary. Landlord warrants that the plumbing, electrical,
and heating and air conditioning systems are in good operable condition on the
initial date of occupancy by Tenant. Tenant agrees to maintain and pay for a
service contract on the heating and air conditioning system serving the
premises, at an estimated cost of up to TWO HUNDRED AND 00/100 DOLLARS
($200.00) per year. Such contract must provide that upon cancellation, written
notice of the same shall
2
<PAGE> 3
to be given to Landlord by both parties and shall include at least quarterly
service for the filters, motor and belts. Tenant agrees to provide Landlord at
all times with a copy of the then currently effective service contract.
(B) LANDSCAPING AND DEBRIS. The Tenant shall keep the premises free
from all trash and debris, maintain the shrubbery and landscaping in a well
kept manner.
GLASS. Article 10. The Tenant shall be liable for any damage to or
breakage of glass on the demised premises occurring during the term of this
Lease or any extension thereof, and agrees that it shall promptly replace any
such damaged or broken glass at its own expense. The Tenant, at its option, may
procure glass insurance for the said premises.
ALTERATIONS. Article 11. The Tenant shall have the right and privilege
to make, at its own expense, ordinary repairs and alterations to the premises
hereby demised; provided, however, that no major alterations or changes of a
structural nature shall be made without prior written consent of the Landlord,
which consent the Landlord agrees shall not be unreasonably withheld. Upon
termination of the Lease, the Tenant shall, upon demand by the Landlord, remove
at its own cost and expense all alterations made by it and restore the
premises to its condition at the commencement of the term of this Lease,
ordinary wear and tear excepted.
SIGNS. Article 12. The Tenant will not exhibit, inscribe, paint, or
affix any sign, advertisement, notice or other lettering on any part of the
outside of the leased premises or of the building in which the leased premises
are located without first obtaining the written approval of the Landlord; and
the Tenant further agrees to maintain such sign, lettering, etc., as may be
approved by the Landlord in good condition and repair at all times.
FIXTURES. Article 13. The Tenant, at the expiration or termination of
this Lease, may remove from the premises all movable trade fixtures, machinery,
furniture, and equipment which it may have placed in the premises at its own
expense, or may have otherwise acquired; but the Tenant agrees that it will
repair, at its own expense, any and all damage or disfigurement to the premises
caused by such removal.
DAMAGE. Article 14. (A) The Landlord shall maintain insurance upon the
building in which the leased premises are located covering such casualty and
other risks in such amounts and with such insurance companies as shall be
satisfactory from time to time to the Landlord.
(B) If the leased premises shall be damaged during the term (or terms)
of this Lease by fire or any other casualty which is among the hazards included
in the insurance maintained under their terms of paragraph (A) above, the
damage shall be repaired and the premises shall be restored, as nearly as
possible, by and at the expense of the Landlord; and until such repairs and
restoration are effected, the rental shall be equitably apportioned according
to the proportion of the leased premises which may be usable by the Tenant;
provided, however, that if the building in which the leased premises are
located shall be so damaged to such an extent that the estimated cost of such
repairs and restoration shall be greater than fifty percent (50%) of the
building immediately before such damaged or if the loading docks shall be so
damaged such that fifty percent (50%) of the building immediately before such
damage or if the loading docks shall be so damaged such that fifty percent
(50%) or more of the loading docks or surrounding area are not usable for their
normal and intended purposes, then either party shall have the option of
terminating this Lease as of the date of the occurrence of such damage by
giving written notice to the other party within fifteen (15) days thereafter.
(C) The Tenant, at its own cost and expense, shall keep its contents,
furniture, furnishings, fixtures, and other property located in the leased
premises insured for its current value against the hazards of fire or any other
casualty which is among the hazards included in the standard extended coverage
insurance form.
(D) Each of the parties hereby releases, to the extent of its
insurance coverage, the other party from any liability for loss or damage
caused by fire or any other casualty which is among the hazards included in
the insurance maintained by such party even if such fire or other casualty
shall be caused by the fault or negligence of the other party, its agent, or
employees.
(E) The Tenant shall not do, or knowingly permit to be done, any act or
thing which will invalidate or be in conflict with the fire insurance policies
covering the building in which the premises are located, or permit anything
therein or thereon, which will increase the rate of fire insurance on the
building in which the premises are located. If by reason of the failure of the
Tenant to comply with this provision, the fire insurance rate on the said
building shall at any time be any higher than it is on the commencement date of
this Lease, then the Tenant shall reimburse the Landlord for his proportionate
share for that portion of all fire insurance premiums on the building
thereafter paid by the Landlord on the 15th day of the month following such
outlay by the Landlord, as additional rental under this Lease. The Tenant
further agrees that, at its own cost and expense, it will promptly comply with
<PAGE> 4
all rules, orders, regulations and requirements of the North Carolina Board of
Fire Underwriters, or any other body succeeding to its functions.
INDEMNIFICATION. Article 15. The Landlord shall not be liable for any
injury to person or damage to property caused by or resulting from the use or
resulting from carelessness in the operation of any equipment on the premises
and the Tenant expressly agrees to indemnify the Landlord against and hold it
harmless from all claims for damage to property or injury to person arising out
of the use or occupancy of the premises by Tenant, or its employees, agents,
customers, or licensees, or out of the performance of any work on or the making
of any repairs to the premises by the Tenant, or its employees or agents, or by
any independent contractor engaged by the Tenant.
The Tenant, at its own expense, shall also carry throughout the term (or
terms) of this Lease (and upon request by the Landlord, the Tenant shall provide
certificates of coverage for) general liability insurance protecting the Tenant
and the Landlord against any and all liability occasioned by accident or
disaster occurring in or on the premises, to an amount of at least TWO HUNDRED
FIFTY THOUSAND AND 00/100 DOLLARS ($250,000.00) with respect to any one person,
FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($500,000.00) with respect to any
accident or disaster, and ONE HUNDRED THOUSAND AND 00/100 DOLLARS ($100,000.00)
with respect to property damage, and the said liability insurance shall cover
both the premises and the parking lot adjoining the premises and shall contain
provisions that the policies are noncancelable except with thirty (30) days
notice in writing to the Landlord.
ASSIGNMENT. Article 16. The Tenant shall have no right to assign this
Lease or to sublet the whole or any part of the premises without the prior
written consent to the Landlord, which consent shall not be unreasonably
withheld, provided, however, that if the Tenant merges with another
organization, whether or not the Tenant is the surviving company, the lease, by
operation of law, will become that of the surviving corporation. In the event
that the Landlord shall consent an assignment or subleasing, the Tenant shall
still remain liable for all of its obligations hereunder, including, but not
limited to, the payment of rental.
INSPECTION. Article 17. The Tenant agrees that the agents of the
Landlord shall have the right to enter the premises with prior appointment made
with the Tenant, to examine the same and to make any repairs which the
Landlord is required to make under this Lease and to show the premises to
prospective purchasers or tenants; and the Tenant further agrees that during
the sixty (60) days prior to the expiration of the term of this Lease, the
Landlord shall have the right to place notices on the front of the said
premises, or on any part thereof, offering the premises for lease or for sale.
NOTICES. Article 18. All rental notices, demands, and statements sent
or required to be sent pursuant to the terms of this Lease shall be sent
certified mail, return receipt requested, and if intended for the Tenant, shall
be addressed to it at:
QUAKER FABRIC CORPORATION OF FALL RIVER
941 GRINNELL STREET
FALL RIVER, MA 02721
and if intended for the Landlord, shall be addressed to it:
C&M INVESTMENTS OF HIGH POINT INC.
c/o DWAIN SKEEN COMMERCIAL - INDUSTRIAL REAL ESTATE
PO BOX 84
HIGH POINT, NC 27261-0084
Either of the parties to this Lease, however, may designate a new address for
the purpose of this paragraph by giving notice in writing to the other.
EMINENT DOMAIN. Article 19. If the whole or any portion of the leased
premises substantial enough to affect the use of the premises by the Tenant
shall be taken or condemned by any competent authority for any public or
quasi-public use or purpose, then, and in such event, this lease shall be
terminated as of the date when possession of the portion so taken shall be
required for such use or purpose. The current rental, in any such
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<PAGE> 5
case, shall be prorated to the date of taking and Landlord shall be entitled to
receive the full award without apportionment to Tenant.
HOLDOVER. Article 20. If the Tenant shall hold over and remain in
possession of the leased premises after the expiration of the original term of
this Lease, or any extended term that may later be granted, such possession
shall be as a month-to-month tenant. During such month-to-month tenancy, rent
shall be payable at 150% of the rate that in effect during the last month of
the preceding term, and the provisions of this Lease shall be applicable.
RIGHTS. Article 21. All rights and liabilities herein given to or
imposed upon the parties to this Lease shall extend to and shall be binding
upon the heirs, executors, administrators, successors, and assigns of the
parties.
BANKRUPTCY. Article 22. The interest of the Tenant under this Lease
shall not be transferable by any execution sale, receiving proceeding,
bankruptcy proceeding, or by operation of law in any manner whatsoever, and in
any such event or contingency, or if the Tenant shall file a petition in
bankruptcy, or be adjudicated a bankrupt, or make an assignment of the benefit
of creditors, or take advantage of any insolvency act, this Lease shall
automatically be terminated, and upon such termination the Tenant shall have no
further interest in the leased premises nor any further rights under this
Lease.
ENVIRONMENTAL MATTERS: INDEMNITIES. Article 23. Tenant hereby
indemnifies Landlord and agrees to hold Landlord harmless from and against any
and all losses, liabilities, damages, injuries, costs, expenses and claims of
any and every kind, whatsoever paid, incurred or suffered by or asserted
against Landlord for, with respect to, or as a direct or indirect result of, the
presence on or under, or the escape, seepage, leakage, spillage, discharge,
omission, discharging or release from the Premises of any "Hazardous
Material" (and as defined herein), including, without limitation, any losses,
liabilities, damages, injuries, costs, expenses or claims asserted or arising
under the Comprehensive Environmental Response, Compensation and Liability Act,
or any so-called "Superfund" or "Superlien" law, or any other federal, state
or local statute, law, ordinance, code, rule, regulation, order or decree
regulating, or relating to or imposing liability or standards of conduct
concerning any Hazardous Material, but only to the extent caused by, or within
the control of the Tenant. It is understood and agreed that any and all
underground storage tanks ("UST") on the property, if any, are not within the
control of the Tenant, provided, however, that the Tenant does not install such
a UST during the course of this lease. Otherwise, Landlord agrees to indemnify
and hold Tenant harmless from all of the foregoing. The provisions of and
undertakings and indemnifications set out in this paragraph shall survive the
termination of this Lease.
For purposes of this Lease, "Hazardous Material" means and includes
any hazardous, toxic or dangerous waste, substance or material defined as such
in (or for purposes of) the Comprehensive Environmental Response, Compensation
and Liability Act, any so-called "Superfund" or "Superlien" law, or any other
federal, state or local statute, law, ordinance, code, rule, regulation, order
or decree regulating, or relating to or imposing liability or standards of
conduct concerning any hazardous, toxic or dangerous waste, substance or
material, as now or any time hereafter in effect.
DEFAULT. Article 24. The happening of any one or more of the following
listed events shall constitute a breach of this Lease Agreement.
(A) The failure of Tenant to pay when due any rent payable under this
Lease Agreement.
(B) The failure of Tenant to perform timely any acts required of it in
the performance of this Lease or otherwise to comply with any term or provision
hereof.
EFFECTS OF DEFAULT. Article 25.
(A) Upon the occurrence of any event of default and the failure of
Tenant to cure or remove same within fifteen (15) days after written notice of
such default, Landlord may, if it shall so elect, in addition to any other
remedies available to it, terminate the term hereof upon written notice of
termination to the Tenant, and upon exercise of such election, the same shall
be effective as of the date of the event of default; or
(B) Landlord may, if it shall so elect, terminate Tenant's right of
possession or occupancy only, without suspending or terminating the remaining
term of the Lease Agreement or Tenant's obligations hereunder.
(C) If the Landlord shall terminate the Tenant's right of possession
without terminating this Lease, Landlord shall be entitled to make such
alterations or repairs for the account of Tenant as may be reasonably necessary
and shall make a reasonable effort to relet the leased premises or any part
thereof for such term or terms
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<PAGE> 6
(which may exceed the balance of the term of this Lease) and at such rental and
upon such other terms and conditions as in Landlord's sole discretion may be
deemed advisable. Upon each such reletting, all rentals received by Landlord
from the reletting shall be applied, first, to the payment of any indebtedness
other than rental due hereunder from Tenant to Landlord; second, to the payment
of any costs and expenses of such reletting, including brokerage fees and
attorneys fees; third, to the payment of rent due and unpaid hereunder and the
residue, if any, shall be held by Landlord and applied to payment of rent as
the same shall become due and payable hereunder. If the rentals received from
such reletting during any month shall be less than that to be paid during that
month by the Tenant hereunder, Tenant shall pay any such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. No reentry or
taking of possession of the leased property by Landlord shall be construed as
an election on Landlord's part to terminate this Lease unless written notice of
such intention is given to Tenant by Landlord or unless the termination of this
Lease has been decreed by a court of competent jurisdiction. Notwithstanding
any reletting without termination, Landlord may elect at any time after
default to terminate this Lease, and in addition to any other remedies Landlord
may have, may recover from Tenant all damages incurred by reason of such
default, including the cost of recovering the leased premises, reasonable
attorneys fees, and including the worth at the time of such termination of the
excess, if any, of the amount of rent and charges equivalent to the rent
reserved in this Lease for the remainder of the term hereof over the then
reasonable rental value of the leased premises for the remainder of the term of
this Lease, all of which amounts shall be immediately due and payable from
Tenant to Landlord. In the event Landlord is successful in reletting the leased
premises for a rental in excess of that agreed to be paid by Tenant pursuant to
the terms of this Lease, Tenant and Landlord each mutually agree that Tenant
shall not be entitled, under any circumstances, to such excess rental, and
Tenant does hereby specifically waive any claim to such excess.
(D) The rights and remedies of Landlord above provided are not
exclusive and shall be in addition to and not in lieu of any other rights and
remedies available to Landlord hereunder, at law or in equity, on account of
default of Tenant.
MISCELLANEOUS. Article 26.
(A) This Lease contains the entire understanding of the parties and
there are no conditions precedent to its effectiveness or collateral
understandings with respect to its subject matter.
(B) This Lease may not be modified except by a writing signed by both
parties.
(C) This Lease shall not be construed strictly against either party,
but fairly in accordance with their intent as expressed herein.
(D) The Landlord's remedies are cumulative and not exclusive of other
remedies to which the Landlord may be legally entitled.
(E) No waiver of any breach of a provision of this Lease may be
construed to be a waiver of any succeeding breach of the same or any other
provision.
(F) Time is of the essence in every particular, especially where the
obligation to pay money is involved.
(G) Each provision of this Lease shall be deemed both a covenant and a
condition.
(H) This Lease binds the parties, their respective heirs, personal
representatives, successors and permitted assigns.
(I) If requested by either party, both parties shall execute a short
form lease or memorandum of lease for recording purposes.
IN WITNESS WHEREOF, the Landlord has caused this Lease to be executed
in its name and the Tenant has caused this Lease to be executed in its name,
all as of the day and year first written above.
LANDLORD:
C&M INVESTMENTS OF HIGH POINT INC.
ATTEST: __________________________ ________________________________
ASHLEY M. DAVIS, SECRETARY BY: C. WAYNE MCDONALD, PRESIDENT
6
<PAGE> 7
TENANT:
QUAKER FABRIC CORPORATION OF FALL RIVER
ATTEST: __________________________ ________________________________
SECRETARY VICE PRESIDENT - SALES
7
<PAGE> 1
Exhibit 10.57
STANDARD INDUSTRIAL LEASE AGREEMENT
between
CIIF ASSOCIATES II LIMITED PARTNERSHIP,
a Delaware limited partnership,
as Landlord
and
QUAKER FABRIC CORPORATION OF FALL RIVER, INC.,
a Massachusetts corporation,
as Tenant
Premises Location: 14331-14333 East Don Julian Avenue
City of Industry, California 91748
<PAGE> 2
STANDARD INDUSTRIAL LEASE AGREEMENT
THIS STANDARD INDUSTRIAL LEASE AGREEMENT (this "Lease"), dated
this 10th day of May, 1996, is made and entered into by and between CIIF
ASSOCIATES II LIMITED PARTNERSHIP, a Delaware limited partnership, hereinafter
referred to as "Landlord", and QUAKER FABRIC CORPORATION OF FALL RIVER, INC., a
Massachusetts corporation, hereinafter referred to as "Tenant".
BASIC LEASE PROVISIONS
1. Area of Premises: Approximately 17,286 rentable square
feet. (Paragraph 1.1)
2. Building Address: 14331-14333 Don Julian Avenue
City of Industry, California 91748
(Paragraph 1.1)
3. Commencement Date: Subject to the terms of Paragraph 1.3,
the Commencement Date shall be August 1, 1996.
4. Term: Sixty-Two (62) months. (Paragraph 1.2)
5. The amount of the First Month's Rent is as follows:
(Paragraph 2.1)
<TABLE>
<S> <C> <C> <C>
(a) Base Rent (See Exhibit "C"
for adjustments thereto) $6,247.51
(b) Taxes $1,007.33
(c) Insurance $ 432.00
(d) Operating Expenses $ 143.72
FIRST MONTH'S RENT TOTAL $7,830.56
</TABLE>
6. Security Deposit: $8,000.00. (Paragraph 2.3)
7. Tenant's Proportionate Share: The Premises comprise six and
32/100th percent (6.32%) of the Building (such percentage
shall be Tenant's Proportionate Share). (Paragraph 2.4)
8. Use of Premises: Warehousing and distribution of fabrics
and general office purposes (Paragraph
3.1)
9. Parking: 25 automobiles and 4 trucks. (Paragraph 3.3)
10. Liability insurance amount: $3,000,000.00.
(Paragraph 12.3.1)
11. Tenant's Address
For Notices: 14331-14333 Don Julian Avenue
City of Industry, California 91748
(Paragraph 22.21)
12. Landlord's Address For
Payments and Notices: 5801 S. Eastern Avenue, Suite 100
Los Angeles, California 90040
(Paragraph 22.21)
13. Tenant's broker: CB Commercial (Peter McWilliams)
(Paragraph 22.24)
14. Exhibits:
"A" Site Plan of Project
"B" Intentionally Omitted
"C" Rent Adjustment Rider
"D" Signage Program
<PAGE> 3
The paragraphs of the Lease identified above in parentheses are those
provisions where references to particular items from the Basic Lease Provisions
appear, and such items are incorporated into the Lease as part thereof. In the
event of any conflict between any Basic Lease Provision and the Lease, the
former shall control.
3
<PAGE> 4
1. PREMISES AND TERM.
1.1 LEASE OF PREMISES. Landlord leases to Tenant, and Tenant hires from
Landlord, certain premises (the "Premises") consisting of the rentable area
shown in Item 1 of the Basic Lease Provisions within a building (the "Building")
described in Item 2 of the Basic Lease Provisions. The location of the Building
and Premises are shown on the site plan attached hereto as "Exhibit A" and
incorporated herein. The "Project" shall refer to the land shown on the site
plan (the "Land") together with such additions and deletions to the Land as
Landlord may from time to time designate, plus all buildings and improvements
located thereon.
1.2 TERM. The term of this Lease shall commence on the "Commencement
Date" specified in or established pursuant to Item 3 of the Basic Lease
Provisions, and except as otherwise provided herein, shall continue in full
force and effect through the number of months provided in Item 4 of the Basic
Lease Provisions (the "Term"), provided, however, that if the Commencement Date
is a date other than the first day of a calendar month, the Term shall consist
of the remainder of the calendar month including and following the Commencement
Date, plus said number of full calendar months.
1.3 CONDITION OF PREMISES.
Tenant acknowledges that it has inspected and accepts the
Premises in their present condition as suitable for the purpose for which the
Premises are leased. Notwithstanding the preceding sentence, Landlord shall make
the following repairs, alterations or improvements prior to the Commencement
Date: (i) removal of the existing wood demising wall within the Premises; (ii)
re-seal the existing skylight; and (iii) repaint and carpet the existing office
area within that portion of the Premises commonly known as 14333 Don Julian
Avenue ("Landlord's Work"). The taking of possession by Tenant shall be
conclusive to establish that the Premises are in good and satisfactory condition
when possession is taken. Tenant further acknowledges that no representations or
promises were made by Landlord or any agent of Landlord to repair, alter,
remodel or improve the Premises, except as expressly set forth in this Lease.
The Commencement Date shall be the date provided in Item 3 of
the Basic Lease Provisions. If this Lease is executed before the Premises become
vacant or otherwise available or if any present tenant or occupant of the
Premises holds over, and Landlord cannot acquire possession of the Premises in
time to deliver them by the Commencement Date, or if any required repairs,
alterations or improvements are not substantially completed by Landlord prior to
the Commencement Date, this Lease shall not be void or voidable, and Landlord
shall not be deemed to be in default hereunder, nor shall Landlord be liable for
any loss or damage directly or indirectly arising out of or resulting from such
holdover. Tenant agrees to accept possession of the Premises at such time as
Landlord is able to tender the same, which date shall thenceforth be deemed the
Commencement Date. After the Commencement Date, Tenant shall, upon demand,
execute and deliver to Landlord a letter of acceptance of delivery of the
Premises specifying the Commencement Date.
1.4 EARLY ENTRY INTO PREMISES. Tenant may enter into the Premises upon
receipt of Landlord's consent, solely for the purpose of installing furniture,
special flooring or carpeting, trade fixtures, telephones, computers, photocopy
equipment, and other business equipment. Such early entry will not advance the
Commencement Date so long as Tenant does not commence business operations from
any part of the Premises. All of the provisions of this Lease shall apply to
Tenant during any early entry, including the indemnity in Paragraph 12.1, but
excluding the obligation to pay Rent unless and until Tenant has commenced
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<PAGE> 5
business operations in the Premises, whereupon Rent shall commence. Landlord may
revoke its permission for Tenant's early entry if Tenant's activities or workers
interfere with the completion of Landlord's Work. If Tenant is granted early
entry, Landlord shall not be responsible for any loss, including theft, damage
or destruction to any work or material installed or stored by Tenant at the
Premises or for any injury to Tenant or its agents, employees, contractors,
subcontractors, subtenants, assigns or invitees (collectively, "Tenant's
Parties"). Landlord shall have the right to post appropriate notices of non-
responsibility and to require Tenant to provide Landlord with evidence that
Tenant has fulfilled its obligation to provide insurance pursuant to paragraphs
7(d) and 12.3 of this Lease.
2. RENT AND SECURITY DEPOSIT.
2.1 RENT. Rent (as defined below) shall accrue hereunder from the
Commencement Date. The amounts per month provided in Item 5(a) of the Basic
Lease Provisions, as adjusted pursuant to Paragraph 2.2 ("Base Rent"), plus the
"Additional Rent" (as defined in Paragraph 2.5 below) shall collectively
constitute the "Rent". The first full calendar month's Rent shall be due and
payable upon execution of this Lease in the total amount shown in Item 5 of the
Basic Lease Provisions. A like monthly installment, subject to the adjustments
described herein, shall be due and payable without demand on or before the first
day of each calendar month succeeding the Commencement Date during the Term,
except that Rent for any fractional calendar month at the commencement or end of
the Term shall be prorated on a daily basis.
2.2 ADJUSTMENT OF BASE RENT. Base Rent shall be increased on the first
day of the thirty-second (32nd) month of the Term in accordance with the Rent
Adjustment Rider attached hereto as Exhibit "C" and incorporated herein.
2.3 SECURITY DEPOSIT. Tenant shall deposit with Landlord upon execution
of this Lease the sum provided in Item 6 of the Basic Lease Provisions
("Security Deposit"), which sum shall be held by Landlord in its general fund,
without obligation for interest, as security for the performance of Tenant's
covenants and obligations under this Lease, it being expressly understood and
agreed that the Security Deposit is not an advance rental deposit or a measure
of Landlord's damages in case of Tenant's default. Upon the occurrence of any
event of default by Tenant, Landlord may, without prejudice to any other remedy
provided herein or provided by law, use the Security Deposit to the extent
necessary to make good any arrears of Rent or other payments due Landlord
hereunder, all of which shall be deemed to be Rent, and any other damage,
injury, expense or liability caused by such event of default; and Tenant shall
pay to Landlord on demand the amount so applied in order to restore the Security
deposit to its original amount. Any remaining balance of the Security Deposit
shall be returned by Landlord to Tenant within fourteen (14) days after
termination of this Lease, provided all of Tenant's obligations under this Lease
have been fulfilled.
2.4 TENANT'S PROPORTIONATE SHARE. "Tenant's Proportionate Share", as
used in this Lease, shall mean (a) with respect to the cost of an item
attributable to the Building, that portion of the cost of the applicable item
that is obtained by multiplying such cost of the applicable item by a fraction,
the numerator of which is the rentable square footage of the Premises and the
denominator of which is the rentable square footage of the Building, which
fraction is set forth as a percentage figure in Item 7 of the Basic Lease
Provisions, and (b) with respect to the cost of an item attributable to the
common areas or Land in the Project (but not any buildings in the Project), that
portion of such cost of the applicable item that is obtained by multiplying the
fraction described in clause (a) above by the portion of the cost of the
applicable item that is allocated to the Building by
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<PAGE> 6
Landlord in a reasonably consistent manner which reflects the size of the
Building and other buildings, the types of uses to which the Building and other
buildings are primarily suited and the relative demands and burdens that such
uses place on the Project.
2.5 ADDITIONAL RENT.
2.5.1 DEFINITION. In addition to the Base Rent set forth in
Paragraph 2.1, Tenant agrees to pay Tenant's Proportionate Share of (a) "Taxes"
as defined in and payable by Landlord pursuant to Paragraph 4.1 below, (b)
Landlord's costs of providing insurance on the Project pursuant to Paragraph
12.2 below, and (c) "Operating Expenses" as defined in and incurred pursuant to
Paragraph 5.1 below (collectively, "Additional Rent").
2.5.2 MONTHLY PAYMENTS AND ANNUAL RECONCILIATION. On the first day
of each month of the Term, Tenant shall pay Landlord a sum equal to 1/12 of the
estimated amount of Additional Rent for that particular year based on Landlord's
reasonable estimate thereof, to be delivered to Tenant on or about April of each
year during the Term. The monthly payments are subject to increase or decrease
as determined by Landlord to reflect revised estimates of such costs. Tenant
shall pay within ten (10) days following demand therefor by Landlord any
increases in estimated Additional Rent upon receipt of any initial or revised
estimate retroactive to January of that calendar year. The payments made by
Tenant shall be reconciled annually. If Tenant's total payments of Additional
Rent are less than the actual Additional Rent due under Paragraph 2.5.1, Tenant
shall pay the difference within ten (10) days following demand therefor by
Landlord; if the total payments of Additional Rent made by Tenant are more than
the actual Additional Rent due under Paragraph 2.5.1, Landlord shall retain such
excess and credit it to Tenant's next accruing Additional Rent payments, except
at the end of the Term, when any excess will be refunded within thirty (30)
days. Any failure or delay by Landlord in delivering any estimate, demand or
reconciliation shall not affect the rights and obligations of the parties
hereunder.
2.5.3 TENANT'S AUDIT RIGHTS. Provided that Tenant is not then in
default under this leas, then tenant shall have the right, once each calendar
year (but no later than ninty (90) days following the delivery of Tenant's Audit
Notice [defined below]), to cause an independent certified public accountant
reasonably approved by Landlord to review supporting data for any portion of an
actual statement of annual Operating Expenses delivered by Landlord (the "Actual
Statement") (provided, however, Tenant may not have an audit right to all
documentation relating to Building oeprations as this would far-exceed the
relevant information necessary to properly document a pass-through billing
statement, but real estate tax statements, and information on utilities,
repairs, maintenance and insurance will be available), in accordance with the
following procedure.
(i) Tenant shall, within thirty (30) days after any
Actual Statement is delivered, deliver a written notice ("Tenant's Audit
Notice") to Landlord specifying the portions of the Actual Statement that are
claimed to be incorrect, and Tenant shall simultaneously pay to Landlord all
amounts due from Tenant to Landlord as specified in the Actual Statement. In no
event shall Tenant be entitled to withhold, deduct, or offset any monetary
obligation of Tenant to Landlord under the Lease (including without limitation,
Tenant's obligation to make all payments of Rent and all payments of Tenant's
Operating Expenses) pending the completion of and regardless of the results of
any review of records under this Paragraph. The right of Tenant under this
Paragraph may only be exercised once for any Actual Statement, and if Tenant
fails to meet any of the above conditions or time constraints as a prerequisite
to the exercise
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<PAGE> 7
of such right, the right of Tenant under this Paragraph for a particular Actual
Statement shall be deemed waived.
(ii) Tenant acknowledges that Landlord maintains its
records for the Project at Landlord's main office, and Tenant agrees that any
review of records under this Paragraph shall be at the sole expense of Tenant
and shall be conducted by an independent firm of certified public accountants
mutually agreed upon by Tenant and Landlord. Tenant acknowledges and agrees that
any records reviewed under this Paragraph constitute confidential information of
Landlord, which shall not be disclosed to anyone other than the accountants
performing the review, the principals of Tenant who receive the results of the
review, and Tenant's accounting employees. The disclosure of such information to
any other person, whether or not caused by the conduct of Tenant, shall
constitute a material breach of this Lease.
(iii) Any errors disclosed by the review shall be
promptly corrected by Landlord, provided, however, that if Landlord disagrees
with any such claimed errors, Landlord shall have the right to cause another
review to be made. In the event of a disagreement regarding the audits, the
review that discloses the least amount of deviation from the Actual Statement
shall be deemed to be correct. In the event that the results of the review of
records (taking into account, if applicable, the results of any additional
review caused by Landlord) reveal that Tenant has overpaid obligations for a
preceding period, the amount of such overpayment shall be credited against
Tenant's subsequent installment obligations to pay the estimated Operating
Expense (and if such overpayment is in excess of five percent (5%) as a result
of an excessive charge by Landlord, Landlord shall reimburse Tenant for the
reasonable out-of-pocket costs of such audit provided that such costs were paid
on a hourly non-contingent basis). In the event that such results show that
Tenant has underpaid its obligations for a preceding period, the amount of such
underpayment shall be paid by Tenant to Landlord with the next succeeding
installment obligation of estimated Operating Expense.
2.6 PAYMENT. Tenant shall pay Landlord all amounts due from Tenant to
Landlord hereunder, whether for Rent or otherwise, in lawful money of the United
States, at the place designated for the delivery of notices to Landlord pursuant
to Paragraph 22.21, without any deduction or offset whatsoever.
2.7 LATE CHARGES. Tenant acknowledges that late payment by Tenant of
any sum owed to Landlord under this Lease will cause Landlord to incur costs not
contemplated by this Lease, the exact amounts of which are extremely difficult
and impracticable to fix. Such costs include, without limitation, processing and
accounting charges, time spent addressing the issue with Tenant, and late
charges that may be imposed on Landlord by the terms of any obligation or note
secured by any encumbrance covering the Premises. Therefore, if any installment
of rent or other payment due from Tenant is not received by Landlord when due,
Tenant shall pay to Landlord an additional sum equal to ten percent (10%) of the
overdue rent or other payment as a late charge. Late charges shall be deemed
Additional Rent. The parties agree that this late charge represents a fair and
reasonable estimate of the administrative and other costs that Landlord will
incur by reason of a late payment by Tenant. Acceptance of any late payment
charge shall not constitute a waiver of Tenant's default with respect to the
overdue payment, nor prevent Landlord from exercising any of the other rights
and remedies available to Landlord under this Lease, at law or in equity,
including, but not limited to, the interest charge imposed pursuant to Paragraph
22.2.
2.8 BASE RENT CREDIT. Provided that Tenant is not in default under any
of the terms, covenants or conditions of this Lease, Tenant shall be credited
with the payment of Base Rent due
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and payable under this Lease for the second (2nd) and third (3rd) months of the
Term, as and when the same becomes due. No such Base Rent credit shall reduce or
limit any Additional Rent or other sum due and payable by Tenant under this
Lease. Tenant understands and agrees that the foregoing Base Rent credit is
conditioned upon Tenant's not having wrongfully terminated this Lease or
Landlord not having terminated this Lease by reason of Tenant's default
hereunder (each such termination, a "Trigger Event"). Accordingly, (a) upon the
occurrence of any Trigger Event during any portion of the Base Rent credit
period, the foregoing Base Rent credit shall be null and void, and all of the
Base Rent which, in the absence of such Base Rent credit, would have been
payable during such period up to the date of the Trigger Event shall become
immediately due and payable by Tenant, and Tenant shall pay Base Rent during the
remainder of such Base Rent credit period as such Base Rent would have become
due and payable in the absence of such Base Rent credit provision, and (b) upon
the occurrence of any Trigger Event after the Base Rent credit period, all Base
Rent which would have been payable during such Base Rent credit period in the
absence of such Base Rent credit shall become immediately due and payable by
Tenant.
3. USE.
3.1 USE OF PREMISES. Subject to any additional uses or limitations on
use contained in Item 8 of the Basic Lease Provisions, the Premises shall be
used only for the purpose of receiving, storing, shipping and selling (other
than retail) products, materials and merchandise made and/or distributed by
Tenant and for such other lawful purposes as may be directly incidental thereto,
and for no other use or purpose. Tenant acknowledges that Landlord has not made
any representations or warranties with respect to the suitability of the
Premises for Tenant's uses. Tenant and Tenant's Parties shall at all times
comply with all rules and regulations regarding the Premises of which Tenant is
notified, the Building and/or the Project as Landlord may establish from time to
time. Landlord shall not be responsible for nor liable to Tenant for any
violation and/or enforcement of such rules and regulations by any other tenant
of the Project.
Tenant shall be responsible for and shall at its own cost and
expense obtain any and all licenses and permits necessary for any such use.
Tenant shall comply with all governmental laws, ordinances and regulations
applicable to the use of the Premises, including, without limitation, the
Americans with Disabilities Act of 1990, as amended, triggered subsequent to the
Commencement Date as a result of Tenant's alterations or use of the Premises.
Without limiting the generality of the foregoing, and subject to Paragraph 7
below, Tenant shall at its own cost and expense install and construct all
physical improvements to or needed to serve the Premises (i) required by any
federal, state or local building code or other law or regulation enacted or
becoming effective after the Commencement Date, including, but not limited to,
special plumbing, railings, ramps and other improvements for use by the
handicapped, or (ii) made necessary by the nature of Tenant's use of the
Premises; provided, however, that Landlord shall have the option to install and
construct such improvements, in which case the cost thereof shall be equitably
allocated by Landlord in its reasonable discretion among the benefitted
premises, and Tenant, upon demand, shall pay to Landlord, as Additional Rent,
such portion of the cost thereof as may be allocated equitably, in Landlord's
reasonable discretion, to the Premises. Tenant shall not place a load upon the
floor of the Premises which exceeds the load per square foot which Tenant is
notified by Landlord that such floor was designed to carry and which is allowed
by law. Tenant shall promptly comply with all governmental orders and directives
for the correction, prevention and abatement of nuisances in or upon, or
connected with, the Premises, all at Tenant's sole expense. Tenant shall not
permit any objectionable or unpleasant odors,
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smoke, dust, gas, noise or vibrations to emanate from the Premises, nor take any
other action which would constitute a nuisance or would disturb or endanger any
other tenants of the Project or unreasonably interfere with their use of their
respective premises.
Tenant shall not permit the Premises to be used for any
purpose or in any manner (including without limitation any method of storage)
which would render the insurance thereon void or the insurance risk more
hazardous or cause the state insurance authority to disallow any sprinkler
credits. If any increase in the fire and extended coverage insurance premiums
paid by Landlord or other tenants for the Project is caused by Tenant's use and
occupancy of the Premises, or if Tenant vacates the Premises and causes any
increase in such premiums, then Tenant shall pay as additional Rent the amount
of such increase to Landlord, and, upon demand by Landlord, correct at Tenant's
expense the cause of such disallowance, increased cost, penalty or surcharge to
the satisfaction of the particular insurance provider or authority, as
applicable.
3.2 HAZARDOUS MATERIALS. Except for the incidental use of certain
products for routine cleaning and maintenance of floors, bathrooms, windows,
kitchens, and administrative offices on the Premises or Project, Tenant hereby
represents, warrants and covenants that Tenant will not produce, use, store or
generate any "Hazardous Materials" (as defined below) on, under or about the
Premises and/or Project. Tenant has fully and accurately completed Landlord's
Pre-Leasing Environmental Exposure Questionnaire ("Environmental
Questionnaire"), which is incorporated herein by reference. If Tenant's
Environmental Questionnaire indicates that Tenant will be utilizing Hazardous
Materials, in addition to all other rights and remedies Landlord may have under
this Lease, including, without limitation, declaring a default hereunder by
Tenant for breach of representation, Landlord may require Tenant to execute an
amendment to this Lease relating to such Hazardous Materials use and Tenant's
failure to execute any such amendment within ten (10) days of Landlord's
delivery thereof to Tenant shall constitute a default hereunder by Tenant.
Tenant shall not cause or permit any Hazardous Material to be brought upon,
placed, stored, manufactured, generated, blended, handled, recycled, disposed
of, used or released on, in, under or about the Premises and/or Project by
Tenant or Tenant's Parties. Tenant shall keep, operate and maintain the Premises
in full compliance with all federal, state and local environmental, health
and/or safety laws, ordinances, rules, regulations, codes, orders, directives,
guidelines, permits or permit conditions currently existing and as amended,
enacted, issued or adopted in the future which are applicable to the Premises
(collectively, "Environmental Laws").
Landlord shall have the right (but not the obligation) to
enter upon the Premises and cure any non-compliance by Tenant with the terms of
this Paragraph 3.2 or any Environmental Laws or any release, discharge, spill,
improper use, storage, handling or disposal of Hazardous Materials on, under,
from, or about the Premises or Project, regardless of the quantity of any such
release, discharge, spill, improper use, storage, handling or disposal of
Hazardous Materials on or about the Premises or Project, the full cost of which
shall be deemed to be Rent and shall be due and payable by Tenant to Landlord
immediately upon demand. If Landlord elects to enter upon the Premises and cure
any such non-compliance or release, discharge, spill, improper use, storage,
handling or disposal of Hazardous Materials on, under, from, or about the
Premises or Project, Tenant shall not be entitled to participate in Landlord's
activities on the Premises.
If any information provided to Landlord by Tenant in the
Environmental Questionnaire, or otherwise relating to information concerning
Hazardous Materials is false, incomplete,
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or misleading in any material respect, the same shall be deemed an event of
default by Tenant under this Lease.
Without limiting in any way Tenant's obligations under any
other provision of this Lease, Tenant and its successors and assigns shall
indemnify, protect, defend and hold Landlord, its partners, officers, directors,
shareholders, employees, agents, lenders, contractors and each of their
respective successors and assigns (collectively, the "Indemnified Parties")
harmless from any and all claims, judgments, damages, penalties, enforcement
actions, taxes, fines, remedial actions, liabilities, losses, costs and expenses
(including, without limitation, actual attorneys' fees, litigation, arbitration
and administrative proceeding costs, expert and consultant fees and laboratory
costs) including, without limitation, damages arising out the diminution in the
value of the Premises or Project or any portion thereof, damages for the loss of
the Premises or Project, damages arising from any adverse impact on the
marketing of space in the Premises or Project, and sums paid in settlement of
claims, which arise during or after the Term in whole or in part as a result of
the presence or suspected presence of any Hazardous Materials, in, on, under,
from or about the Premises or the Project and/or other adjacent properties due
to Tenant's or Tenant's Parties' activities, or failures to act (including,
without limitation, Tenant's failure to report any spill or release to the
appropriate regulatory agencies), on or about the Premises or Project.
For purposes of this Lease, the term "Hazardous Material"
means any chemical, substance, material, controlled substance, object, waste or
any combination thereof, which is or may be hazardous to human health, safety or
to the environment due to its radioactivity, ignitability, corrosiveness,
reactivity, explosiveness, toxicity, carcinogenicity, infectiousness or other
harmful or potentially harmful properties or effects, including, without
limitation, petroleum and petroleum products, benzene, toluene, ethyl benzene,
xylenes, waste oil, asbestos, radon, polychlorinated biphenyls (PCBs),
degreasers, solvents, and any and all of those chemicals, substances, materials,
controlled substances, objects, wastes or combinations thereof which are now or
may become in the future listed, defined or regulated in any manner as
"hazardous substances", "hazardous wastes", "toxic substances", "solid wastes,"
or bearing similar or analogous definitions pursuant to any and all
Environmental Laws.
3.3 USE OF COMMON AREAS. Tenant and Tenant's Parties shall have the
non-exclusive right, in common with the other parties occupying the Project, to
use the grounds, sidewalks, parking areas, driveways and alleys of the Project,
subject to such reasonable rules and regulations as Landlord may from time to
time prescribe. Tenant and Tenant's Parties may park only up to the maximum
number of automobiles and trucks shown in Item 9 of the Basic Lease Provisions
near the Premises during normal business hours on a non-exclusive basis. Outside
storage, including without limitation, trucks and other vehicles, is prohibited
without Landlord's prior written consent, which may be withheld in Landlord's
sole and absolute discretion. Tenant shall not succeed to any of Landlord's
easement rights over and relating to the Project, nor shall Tenant obtain any
rights to common areas, as designated by Landlord, other than those rights
specifically granted to Tenant in this Lease. Landlord shall have the sole right
of control over the use, maintenance, configuration, repair and improvement of
the common area. Landlord may make such changes to the use or configuration of,
or improvements comprising, the common area as Landlord may elect without
liability to Tenant (including the right to add or eliminate buildings from the
Project), subject only to Tenant's vehicular parking rights shown in Item 9 of
the Basic Lease Provisions.
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4. TAXES.
4.1 PAYMENT OF REAL PROPERTY TAXES. Landlord agrees to pay, before they
become delinquent, all real property taxes; current installments of any general
or special assessments; license fees, commercial rental taxes, in lieu taxes,
levies, charges, penalties or similar impositions imposed by any authority
having the direct power to tax, and are paid or incurred by Landlord, including
but not limited to, the following: (a) any tax on or measured by Rent received
by Landlord from the Project or as against Landlord's business of leasing any of
the Project; (b) any assessment, tax, fee, levy or charge imposed by
governmental agencies for such services as fire protection, street, sidewalk and
road maintenance, transportation, refuse removal and for other governmental
services formerly provided without charge to property owners or occupants; (c)
assessments due to deed restrictions and/or owner associations; and (d) costs of
determining, filing, contesting and appealing any such tax, assessment or
charge, including reasonable accountants', attorneys' and consultants' fees, but
excluding any income, inheritance, estate or corporate franchise taxes of
Landlord (collectively, "Taxes").
Taxes shall also include any assessment, tax, fee, levy or
charge in substitution, partially or totally, of any assessment, tax, fee, levy
or charge previously included within the definition of Taxes. It is hereby
acknowledged by Tenant and Landlord that Proposition 13 was adopted by the
voters of California in June 1978 and that assessments, taxes, fees, levies and
charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, transportation, refuse
removal and other governmental services formerly provided without charge to
property owners or occupants. It is the intention of Tenant and Landlord that
all such new and increased assessments, taxes, fees, levies and charges, and all
similar assessments, taxes, fees, levies and charges be included within the
definition of Taxes for purposes of this Lease.
4.2 LIABILITY FOR ALL PERSONAL PROPERTY TAXES. Tenant shall be liable
for all taxes levied or assessed against personal property, furniture, fixtures,
above-standard Tenant Improvements and alterations, additions or improvements
placed by or for Tenant in the Premises. If any such taxes for which Tenant is
liable are levied or assessed against Landlord or Landlord's property and if
Landlord elects to pay the same or if the assessed value of Landlord's property
is increased by inclusion of personal property, furniture, fixtures,
above-standard Tenant Improvements or alterations, additions or improvements
placed by or for Tenant in the Premises, and Landlord elects to pay the Taxes
based on such increase, Tenant shall pay to Landlord upon demand that portion of
the Taxes.
5. LANDLORD'S MAINTENANCE AND REPAIR.
5.1 LANDLORD'S MAINTENANCE. Landlord shall maintain and repair only the
exterior portions of the roof, and the foundation and the structural soundness
of the exterior walls of the Building and utility facilities stubbed to the
Premises in good condition, reasonable wear and tear excepted. The term "walls"
as used herein shall not include windows, glass or plate glass, doors, special
store fronts or office entries, unless otherwise specified by Landlord in
writing. Landlord shall maintain, repair and repaint the exterior walls,
overhead doors, canopies, entries, handrails, gutters and other exposed parts of
the Building as deemed necessary by Landlord to maintain safety and aesthetic
standards. Landlord shall maintain, repair, and operate the common areas of the
Project, including but not limited to, mowing grass and general landscaping,
maintenance of parking areas, driveways and alleys, parking lot sweeping, paving
and restriping, exterior lighting, painting, pest control and
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window washing. The cost of all of the foregoing, including the cost of all
supplies, uniforms, equipment, tools and materials, together with utility costs
not otherwise charged directly to Tenant or other tenants, all wages and
benefits of employees and independent contractors engaged in the operation,
maintenance and repair of the Project, all expenses for security and safety
services and equipment, any license, permit and inspection fees required in
connection with the operation, maintenance or repair of the Project (but not
related to improvements to tenant space), management, consulting, legal and
accounting fees of independent contractors engaged by Landlord (but not related
to the negotiation or enforcement of leases), other costs and expenses actually
incurred by Landlord in connection with the ownership, operation, leasing and
management of the Project, and other usual costs and expenses which are
typically paid by other landlords to provide on-site operation of industrial,
warehouse and service center projects, are collectively referred to herein as
"Operating Expenses". To the extent that an Operating Expense consists of a
maintenance or repair (including renovation and refurbishment) expense that is
not properly fully deductible as an expense in the year incurred in accordance
with generally accepted accounting principles, such expense shall be amortized
over its useful life. Any amounts which are amortized, together with Landlord's
actual cost of funds, shall result in equal payments being included in Operating
Expenses for the year of expenditure and succeeding years during the
amortization period.
5.2 PROCEDURE AND LIABILITY. Tenant shall immediately give Landlord
written notice of any defect or the need for repair of the items for which
Landlord is responsible, after which Landlord shall have reasonable opportunity
to repair the same or cure such defect. Landlord's liability with respect to any
defects, repairs or maintenance for which Landlord is responsible under any of
the provisions of this Lease shall be limited to the cost of such repairs or
maintenance or the curing of such defect. If Tenant or Tenant's Parties caused
any damage necessitating such repair, then Tenant shall pay the cost thereof,
upon demand. Tenant hereby waives the benefit of California Civil Code Sections
1941 and 1942, and any other statute providing a right to make repairs and
deduct the cost thereof from the Rent. Tenant waives any right to terminate this
Lease or offset or abate Rent by reason of any failure of Landlord to make
repairs to the Premises.
6. TENANT'S MAINTENANCE AND REPAIR.
6.1 TENANT'S MAINTENANCE. Tenant shall, at its own cost and expense,
keep and maintain all parts of the Premises (except those listed as Landlord's
responsibility in Paragraph 5.1 above) in good and sanitary condition, promptly
making all necessary repairs and replacements, including but not limited to,
windows, glass and plate glass, doors, any special store front or office entry,
interior walls and finish work, floors and floor covering, heating and air
conditioning systems, dock boards, truck doors, dock bumpers, plumbing work and
fixtures, termite and pest extermination, and regular removal of trash and
debris. If Tenant shall fail to make any repair for which Tenant is responsible
within ten (10) days following notice from Landlord requiring the same, Landlord
and its agents and contractors shall have the right, but not the obligation, to
enter upon the Premises and perform such repairs, the full cost of which shall
be deemed to be Rent and shall be due and payable by Tenant to Landlord
immediately upon demand. In the case of emergency, Landlord, its agents and
contractors may enter upon the Premises to perform such repairs without the
necessity of prior notice to Tenant. Tenant shall maintain its trash receptacles
within the Premises. Repairs shall be made in accordance with all applicable
laws, including without limitation, the Americans with Disabilities Act of 1990.
The cost of maintenance and repair of any common party wall (any wall, divider,
partition or any other structure separating the Premises from any adjacent
premises
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occupied by other tenants) shall be shared equally by Tenant and the tenant(s)
occupying such adjacent premises. Tenant shall not damage any party wall or
disturb the integrity and support provided by any party wall and shall, at its
sole cost and expense, promptly repair any damage or injury to any party wall
caused by Tenant or Tenant's Parties.
6.2 MAINTENANCE/SERVICE CONTRACTS. Tenant shall, at its own cost and
expense, enter into a regularly scheduled preventive maintenance/service
contract with a maintenance contractor for serving all hot water, heating and
air conditioning systems and equipment within the Premises. The maintenance
contractor and the contract must be approved in writing by Landlord in advance.
The service contract shall include all services recommended by the equipment
manufacturer within the operation/maintenance manual and shall become effective
(and a copy thereof delivered to Landlord) within thirty (30) days following the
date Tenant takes possession of the Premises.
7. ALTERATIONS
Tenant shall make no alterations, additions or improvements to the
Premises (including, without limitation, roof and wall penetrations) or any part
thereof without obtaining the prior written consent of Landlord in each
instance. Such consent may be granted or withheld in Landlord's sole and
absolute discretion. Landlord may impose as a condition to such consent such
requirements as Landlord may deem necessary, in its sole and absolute
discretion, including, without limitation that: (a) Landlord be furnished with
working drawings before work commences; (b) performance and labor and material
payment bonds in form and amount and issued by a company satisfactory to
Landlord be furnished; (c) Landlord approve the contractor by whom the work is
to be performed; (d) adequate course of construction and general liability
insurance be in place and Landlord be named as an additional insured under the
contractor's liability and property insurance policies; and (e) Landlord's
instructions relating to the manner in which the work is to be performed and the
times during which it is to be accomplished shall be complied with. All such
alterations, additions or improvements must be performed in a good and
workmanlike manner in compliance with all laws, rules and regulations,
including, without limitation, the Americans with Disabilities Act of 1990, and
diligently prosecuted to completion. Tenant shall deliver to Landlord upon
commencement of such work a copy of the building permit with respect thereto,
and a certificate of occupancy, if applicable, immediately upon completion of
the work. All such work shall be performed so as not to obstruct the access to
the premises of any other tenant in the Building or Project. Should Tenant make
any alterations without Landlord's prior written consent, or without
satisfaction of any of the conditions established by Landlord in conjunction
with granting such consent, Landlord shall have the right, in addition to and
without limitation of any right or remedy Landlord may have under this Lease, at
law or in equity, to require Tenant to remove all or some of the alterations,
additions or improvements at Tenant's sole cost and restore the Premises to the
same condition as existed prior to undertaking the alterations, or if Tenant
shall fail to do so, Landlord may cause such removal or restoration to be
performed at Tenant's expense and the cost thereof shall be Additional Rent to
be paid by Tenant immediately upon demand. Landlord shall have the right to
require Tenant, at Tenant's expense, to remove any and all alterations,
additions or improvements and to restore the Premises to its prior condition
upon the expiration or sooner termination of this Lease. Tenant shall notify
Landlord in writing at least ten (10) days prior to the commencement of any such
work in or about the Premises, and Landlord shall have the right at any time and
from time to time to post and maintain notices of nonresponsibility in or about
the Premises.
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8. LIENS.
Tenant shall have no authority, express or implied, to create or place
any lien or encumbrance of any kind or nature whatsoever upon, or in any manner
to bind, the interest of Landlord or Tenant in the Premises or to charge the
Rent payable hereunder for any claim in favor of any person dealing with Tenant,
including those who may furnish materials or perform labor for any construction
or repairs. Tenant shall pay or cause to be paid all sums legally due and
payable by it on account of any labor performed or materials furnished in
connection with any work performed by Tenant on the Premises. Tenant shall
discharge of record by payment, bonding or otherwise any lien filed against the
Premises on account of any labor performed or materials furnished in connection
with any work performed by Tenant on the Premises immediately upon the filing of
any claim of lien. Tenant shall indemnify, defend and hold Landlord harmless
from any and all liability, loss, cost or expense based on or arising out of
asserted claims or liens against the leasehold estate or against the right,
title and interest of Landlord in the Project or this Lease arising f;rom the
act or agreement of Tenant. Tenant agrees to give Landlord immediate written
notice of the placing of any lien or encumbrance against the Premises. Landlord
shall have the right, at Landlord's option, of paying and discharging the same
or any portion thereof without inquiry as to the validity thereof, and any
amounts so paid, including expenses and applicable late charge, shall be
Additional Rent immediately due and payable by Tenant upon rendition of a bill
therefor.
9. SIGNS.
9.1 LANDLORD'S SIGNAGE PROGRAM. Tenant shall abide by the terms of
Landlord's signage program attached hereto as Exhibit "D" and incorporated
herein as the same may be changed from time to time at Landlord's sole
discretion. Upon vacation of the Premises or the removal or alteration of its
sign for any reason, Tenant shall be responsible, at its sole cost, for the
repair, painting and/or replacement of the structure to which signs are attached
to its original condition. If Tenant fails to perform such work, Landlord may
cause the same to be performed, and the cost thereof shall be Additional Rent
immediately due and payable upon rendition of a bill therefor.
9.2 CRITERIA FOR CHANGES. Tenant shall not, without Landlord's prior
written consent, which may be withheld in Landlord's sole and absolute
discretion: (a) make any changes to or paint the exterior of the Building; (b)
install any exterior lights, decorations or paintings; or (c) erect or install
any signs, window or door lettering, placards, decorations or advertising media
of any type which can be viewed from the exterior of the Premises. All signs,
decorations, advertising media, blinds, draperies and other window treatment or
bars or other security installations visible from outside the Premises shall be
subject to the prior written approval of Landlord as to construction, method of
attachment, size, shape, height, design, lighting, color and general appearance.
All signs shall be in compliance with all applicable laws and regulations and
all covenants, conditions and restrictions relating to the Premises. All signs
shall be kept in good condition and in proper operating order at all times.
10. UTILITIES
Tenant shall pay for all separately metered water, gas, heat, light,
telephone, sewer and sprinkler charges and for other utilities and services used
on or from the Premises, together with any taxes, penalties, surcharges or the
like pertaining thereto and any maintenance charges for utilities, and shall
furnish all electric light bulbs and tubes. If any utilities serving the
Premises are not separately metered, Tenant shall pay
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to Landlord its proportionate share of the cost thereof as reasonably determined
by Landlord. Landlord shall in no event be liable for any damages directly or
indirectly resulting from or arising out of the interruption or failure of
utility services on the Premises. Tenant shall have no right to terminate this
Lease nor shall Tenant be entitled to any abatement in Rent as a result of any
such interruption or failure of utility services. No such interruptionor failure
of utility services shall be deemed to constitute a constructive eviction of
Tenant. Notwithstanding the foregoing, if the utilities servicing the Premises
are interrupted and not available ("Interruption") for more than five (5)
consecutive business days, then beginning on the sixth (6th) consecutive
business day of Interruption through the last day of such Interruption, Tenant
shall be entitled to an abatement of Base Rent, and the Term shall be extended
the same number of days, but only if (i) the Interruption is not caused by a
casualty covered by Paragraph 11 of this Lease or by an act or omission of
Tenant or Tenant's Parties, and (ii) Tenant is prevented by the Interruption
from using and does not use the Premises or any portion thereof, and (iii) the
Interruption is the direct result of Landlord's negligence or willful
misconduct.
11. FIRE AND CASUALTY DAMAGE.
11.1 NOTICE OF DESTRUCTION. If the Premises are damaged or destroyed by
fire, earthquake or other casualty, Tenant shall give immediate written notice
thereof to Landlord.
11.2 LOSS COVERED BY INSURANCE. If at any time prior to the expiration
or termination of this Lease, the Premises or the Project are wholly or
partially damaged or destroyed, the loss to Landlord from which is fully covered
by proceeds of insurance maintained by Landlord or for Landlord's benefit, which
damage renders the Premises totally or partially inaccessible or unusable by
Tenant in the ordinary conduct of Tenant's business, then:
(a) If all repairs to the Premises or Project can, in
Landlord's judgment, be completed within two hundred (200) days following the
date of notice to Landlord of such damage or destruction without the payment of
overtime or other premiums, and if such damage or destruction is not the result
of the negligence or willful misconduct or omission of Tenant or Tenant's
Parties (as contemplated in Paragraph 11.4), Landlord shall, at Landlord's
expense (provided Landlord can obtain all necessary governmental permits and
approvals therefor at reasonable cost and on reasonable conditions), repair the
same, and this Lease shall remain in full force and effect and a proportionate
reduction of Rent shall be allowed Tenant for such portion of the Premises as
shall be rendered inaccessible or unusable to Tenant during the period of time
that such portion is unusable or inaccessible. There shall be no proportionate
reduction of Rent by reason of any portion of the Premises being unusable or
inaccessible for a period equal to five (5) consecutive business days or less.
(b) If such damage or destruction is not the result of the
negligence or willful misconduct or omission of Tenant or Tenant's Parties, and
if all such repairs cannot, in Landlord's judgment, be completed within two
hundred (200) days following the date of notice to Landlord of such damage or
destruction without the payment of overtime or other premiums, either party may,
at its sole and absolute option, by written notice to the other given within
twenty (20) days following the date of Landlord's notice to Tenant stating that
all such repairs cannot in Landlord's judgment, be completed within said two
hundred (200) days, terminate this Lease as of the date of the occurrence of
such damage or destruction; provided however, if neither party elects to
terminate this Lease within said twenty (20) day period, then this Lease shall
remain in full force and effect,
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but the Rent shall be proportionately reduced as provided in
Paragraph 11.2(a).
Tenant shall pay to Landlord, within ten (10) days following
Landlord's demand therefor, the amount of the deductible under Landlord's
insurance policy. If the damage involves portions of the Project other than the
Premises, Tenant shall pay only a portion of the deductible based on the ratio
of the cost of repairing the damage in the Premises to the total cost of
repairing all of the damage in the Project.
11.3 LOSS NOT COVERED BY INSURANCE. If, at any time prior to the
expiration or termination of this Lease, the Premises or the Project are totally
or partially damaged or destroyed from a risk, the loss to Landlord from which
is not fully covered by insurance maintained by Landlord or for Landlord's
benefit, which damage renders the Premises inaccessible or unusable to Tenant in
the ordinary course of its business, and if such damage or destruction is not
the result of the negligence or willful misconduct or omission of Tenant or
Tenant's Parties, Landlord may, at its option, upon written notice to Tenant
within thirty (30) days after notice to Landlord of the occurrence of such
damage or destruction, elect to repair or restore such damage or destruction, or
Landlord may elect to terminate this Lease. If Landlord elects to repair or
restore such damage or destruction, this Lease shall continue in full force and
effect, but the Rent shall be proportionately reduced as provided in Paragraph
11.2(a). If Landlord elects to terminate this Lease, such termination shall be
effective as of the date of the occurrence of such damage or destruction.
Notwithstanding the foregoing, if all such repairs cannot, in Landlord's
judgment, be completed within two hundred (200) days following the date of
notice to Landlord of such damage or destruction without the payment of overtime
or other premiums, either party may, at its sole and absolute option, by written
notice to the other given within twenty (20) days following the date of
Landlord's notice to Tenant stating that all such repairs cannot, in Landlord's
judgment, be completed within said two hundred (200) days, terminate this Lease
as of the date of occurrence of such damage or destruction; provided, however,
if neither party elects to terminate this Lease within said twenty (20) day
period, then this Lease shall remain in full force and effect but the Rent shall
be proportionately reduced as provided in Paragraph 11.2(a).
11.4 LOSS CAUSED BY TENANT OR TENANT'S PARTIES. If the Premises or the
Project are wholly or partially damaged or destroyed as a result of the
negligence or willful misconduct or omission of Tenant or Tenant's Parties,
Tenant shall forthwith diligently undertake to repair or restore all such damage
or destruction at Tenant's sole cost and expense, or Landlord may at its option
undertake such repair or restoration at Tenant's sole cost and expense;
provided, however, that Tenant shall be relieved of its repair and payment
obligations pursuant to this Paragraph 11.4 to the extent that insurance
proceeds are collected by Landlord to repair such damage, although Tenant shall
in all such events pay to Landlord the full amount of the deductible under
Landlord's insurance policy and any amounts not insured. This Lease shall
continue in full force and effect without any abatement or reduction in Rent or
other payments owed by Tenant.
11.5 DESTRUCTION NEAR END OF TERM. Notwithstanding the foregoing, if
the Premises or the Project are wholly or partially damaged or destroyed within
the final six (6) months of the Term, and such damage cannot, in Landlord's
judgment, be repaired within sixty (60) days, either party may, at its option,
elect to terminate this Lease upon written notice given to the other within
thirty (30) days following such damage or destruction.
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11.6 DESTRUCTION OF IMPROVEMENTS AND PERSONAL PROPERTY. In the event of
any damage to or destruction of the Premises or the Project, under no
circumstances shall Landlord be required to repair, replace or compensate
Tenant, Tenant's Parties or any other person for the personal property, trade
fixtures, machinery, equipment or furniture of Tenant or any of Tenant's
Parties, or any alterations, additions or improvements installed in the Premises
by Tenant, and Tenant shall promptly repair and replace all such personal
property and improvements at Tenant's sole cost and expense.
11.7 EXCLUSIVE REMEDY. The provisions of this Paragraph 11 shall
constitute Tenant's sole and exclusive remedy in the event of damage or
destruction to the Premises or the Project, and Tenant waives and releases all
statutory rights and remedies in favor of Tenant in the event of damage or
destruction, including without limitation those available under California Civil
Code Sections 1932 and 1933(4). No damages, compensation or claim shall be
payable by Landlord for any inconvenience, any interruption or cessation of
Tenant's business, or any annoyance, arising from any damage or destruction of
all or any portion of the Premises or the Project.
11.8 LENDER DISCRETION. Notwithstanding anything herein to the
contrary, in the event the holder of any indebtedness secured by a mortgage or
deed of trust covering the Premises requires that the insurance proceeds from
insurance held by Landlord be applied to such indebtedness, then Landlord shall
have the right to deliver written notice to Tenant terminating this Lease.
12. INDEMNITY AND INSURANCE.
12.1 INDEMNITY. Tenant hereby releases all Indemnified Parties, and
shall indemnify, protect, defend and hold the Indemnified Parties harmless from
any and all claims, judgments, damages, liabilities, losses, sums paid in
settlement of claims, costs and expenses (including, but not limited to,
reasonable attorneys' fees and litigation costs), obligations, liens and causes
of action, whether threatened or actual, direct or indirect (collectively,
"Claims"), which arise in any way, directly or indirectly, resulting from or in
connection with, in whole or in part, Tenant's or Tenant's Parties' activities
in, on or about the Premises or Project, including, without limitation, Tenant's
breach or default of any obligation of Tenant to be performed under the terms of
this Lease, the conduct of Tenant's business, the nonobservance or
nonperformance of any law, ordinance or regulation or the negligence or
misconduct of Tenant or Tenant's Parties, the buildings and improvements located
on the Project becoming out of repair, the leakage of gas, oil, water, steam or
electricity emanating from their usual conduits, or due to any cause whatsoever;
except injury to persons or damage to property the sole cause of which is the
active, gross negligence or willful misconduct of Landlord, or the wrongful
failure of Landlord to repair any part of the Project which Landlord is
obligated to repair and maintain hereunder within a reasonable time after the
receipt of written notice from Tenant of needed repairs. Landlord shall not be
liable to Tenant for any damages arising from any act, omission or neglect of
any other tenant in the Project.
12.2 LANDLORD'S INSURANCE. Landlord shall maintain insurance covering
the Project and Landlord's ownership and operation thereof in such types and
amounts as it deems necessary or desirable in its sole discretion, which may
include, without limitation, liability, property damage and/or loss of rental
income coverage. Such insurance shall be for the sole benefit of Landlord and
under its sole control. The premiums for any such insurance shall be an
Operating Expense.
12.3 TENANT'S INSURANCE OBLIGATIONS. Tenant agrees that at all times
from and after the date Tenant is given access to the
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Premises for any reason, Tenant shall carry and maintain, at its sole cost and
expense, the following types, amounts and forms of insurance:
12.3.1 GENERAL LIABILITY INSURANCE. A broad form comprehensive
general liability or commercial general liability policy covering property
damage, personal injury, advertising injury and bodily injury, and including
blanket contractual liability coverage for obligations under this Lease,
covering the Project in an amount of not less than the amount per occurrence
specified in Item 10 of the Basic Lease Provisions. Such policy shall be in the
occurrence form with a per location general aggregate. Each policy shall name
Landlord and any management agent from time to time designated by Landlord and
any lender of Landlord as additional insureds, and shall provide that any
coverage to additional insureds shall be primary; when any policy issued to
Landlord provides duplicate coverage or is similar in coverage, Landlord's
policy will be excess over Tenant's policies. No deductibles in excess of Five
Thousand Dollars ($5,000) per occurrence shall be permitted. Tenant shall pay
any deductibles. The amounts of such insurance required hereunder shall be
subject to adjustment from time to time as required by Landlord based upon
Landlord's determination as to (a) the amounts of such insurance generally
required at such time for comparable tenants, premises and buildings in the
general geographical location of the Building; (b) as requested by any lender
with an interest in the Building or Project; (c) Tenant's activities; (d)
increases in recovered liability claims; (e) increased claims consciousness by
the public; or (f) any combination of the foregoing.
12.3.2 PROPERTY INSURANCE. A policy or policies, including the
Boiler and Machinery Perils and the Special Causes of Loss form of coverage
("All Risks"), including vandalism and malicious mischief, theft, sprinkler
leakage (including earthquake sprinkler leakage) and water damage coverage in an
amount equal to the full replacement value, new without deduction for
depreciation, on an agreed amount basis (no co-insurance requirement), of all
trade fixtures, furniture and equipment in the Premises, and all alterations,
additions and improvements to the Premises installed by or for Tenant or
provided to Tenant. Such insurance shall also include business interruption and
extra expense coverage for Tenant's operations and debris removal coverage for
removal of property of Tenant and Tenant's Parties which may be damaged within
the Premises. Such coverage shall name the Landlord as an additional insured
and/or loss payee as its interest may appear. No deductibles in excess of Fifty
Thousand Dollars ($50,000) shall be permitted. Tenant shall pay any deductibles.
12.3.3 WORKERS' COMPENSATION INSURANCE. Workers' compensation
insurance, including employers' liability coverage, shall comply with applicable
California law. Such insurance shall include a waiver of subrogation in favor of
Landlord, if available.
12.4 EVIDENCE OF COVERAGE. All of the policies required to be obtained
by Tenant pursuant to Paragraph 12.3 shall be with companies and in form
satisfactory to Landlord. Each insurance company providing coverage shall have a
current Best's Rating of "A-XII" or better. Upon notice from Landlord, Tenant
shall add any mortgagee of Landlord as an additional insured or loss payee, as
applicable. Tenant shall provide Landlord with certificates and copies of
endorsements (and upon request, policies) of insurance acceptable to Landlord
issued by each of the insurance companies issuing any of the policies required
pursuant to the provisions of Paragraph 12.3, and said certificates and
endorsements shall provide that the insurance issued thereunder shall not be
altered, cancelled or non-renewed until after thirty (30) days' written notice
to Landlord. "Claims made" policies shall not be permitted. Each policy shall
permit the waiver in
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Section 12.5 below. Evidence of insurance coverage shall be furnished to
Landlord prior to Tenant's possession of the Premises and thereafter not fewer
than fifteen (15) days prior to the expiration date of any required policy.
Tenant may satisfy its insurance obligations hereunder by carrying such
insurance under a so-called blanket policy or policies of insurance which are
acceptable to Landlord. If Tenant fails to obtain any insurance required hereby
or provide evidence thereof to Landlord, Landlord may, but shall not be
obligated to, and Tenant hereby appoints Landlord as its agent to, procure such
insurance and bill the cost of the insurance plus a twenty percent (20%)
handling charge to Tenant. Tenant shall pay such costs to Landlord as Additional
Rent with the next monthly payment of Rent.
12.5 WAIVERS OF SUBROGATION. Landlord waives any and all rights of
recovery against Tenant for or arising out of damage to, or destruction of the
Building or the Premises to the extent that Landlord's insurance policies then
in force insure against such damage or destruction and permit such waiver and
only to the extent of insurance proceeds actually received by Landlord for such
damage or destruction. Tenant waives any and all rights of recovery against
Landlord for or arising out of damage to or destruction of any property of
Tenant to the extent that Tenant's insurance policies then in force or the
policies required by this Lease, whichever is broader, insure against such
damage or destruction.
13. LANDLORD'S RIGHT OF ACCESS.
Tenant shall permit Landlord and its employees and agents, at all
reasonable times and at any time in case of emergency, in such manner as to
cause as little disturbance to Tenant as reasonably practicable (a) to enter
into and upon the Premises to inspect them, to protect the Landlord's interest
therein, or to post notices of non-responsibility, (b) to take all necessary
materials and equipment into the Premises, and perform necessary work therein,
and (c) to perform periodic environmental audits, inspections, investigations,
testing and sampling of the Premises and/or the Project, and to review and copy
any documents, materials, data, inventories, financial data, notices or
correspondence to or from private parties or governmental authorities in
connection therewith. No such work shall cause or permit any rebate of Rent to
Tenant for any loss of occupancy or quiet enjoyment of the Premises, or damage,
injury or inconvenience thereby occasioned, or constitute constructive eviction.
Landlord may at any time place on or about the Building any ordinary "for sale"
and "for lease" signs, except that Landlord shall not place a "for lease" sign
on the Building with respect to the availability of Tenant's Premises until the
earlier of (i) six (6) months prior to the expiration of this Lease, (ii) the
termination of this Lease, or (iii) any other time with the consent of Tenant.
Tenant shall also permit Landlord and its employees and agents, upon request, to
enter the Premises or any part thereof, at reasonable times during normal
business hours, to show the Premises to any fee owners, lessors of superior
leases, holders of encumbrances on the interest of Landlord under the Lease, or
prospective purchasers, mortgagees or lessees of the Project or Building as an
entirety. During the period of six (6) months prior to the expiration date of
this Lease, Landlord may exhibit the Premises to prospective tenants.
14. ASSIGNMENT AND SUBLETTING.
14.1 LANDLORD'S CONSENT. Tenant shall not assign all or any portion of
its interest in this Lease, whether voluntarily, by operation of law or
otherwise, and shall not sublet all or any portion of the Premises, including,
but not limited to, sharing them, permitting another party to occupy them or
granting concessions or licenses to another party, except with the prior written
consent of Landlord, which Landlord may withhold for any
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reasonable condition, including, but not limited to: (a) Tenant is in default of
this Lease; (b) the assignee or subtenant is unwilling to assume in writing all
of Tenant's obligations hereunder; (c) the assignee or subtenant has a financial
condition which is reasonably unsatisfactory to Landlord or Landlord's
mortgagee; (d) the Premises will be used for different purposes than those set
forth in Paragraph 3 or for a use requiring or generating increased or different
Hazardous Materials; (e) the proposed assignee or subtenant or its business is
subject to compliance with additional requirements of the law (including related
resolutions) commonly known as the Americans with Disabilities Act of 1990
beyond those requirements applicable to Tenant; (f) Tenant proposes to assign
less than all of its interest in this Lease or to sublet the Premises in units
that are unusually small for the Project; and (g) the assignee or subtenant
requires extensive alterations to the Premises.
14.2 FEES. Tenant shall pay Landlord's reasonable attorneys' fees
incurred in evaluating any proposed assignment or sublease and documenting
Landlord's consent.
14.3 PROCEDURE. Whenever Tenant has obtained an offer to assign any
interest in-this Lease or to sublease all or any portion of the Premises, Tenant
shall provide to Landlord the name and address of said proposed assignee or
sublessee, the base rent and all other compensation to be paid to Tenant, the
proposed use by the proposed assignee or sublessee, the proposed effective date
of the assignment or subletting, and any other business terms which are material
to the offer and/or which differ from the provisions of this Lease ("Notice of
Offer"). Tenant shall also provide to Landlord the nature of business, financial
statement and business experience resume for the immediately preceding five (5)
years of the proposed assignee or sublessee and such other information
concerning such proposed assignee or sublessee as Landlord may require. The
foregoing information shall be in writing and shall be received by Landlord no
less than sixty (60) days prior to the effective date of the proposed assignment
or sublease.
Within thirty (30) days following its receipt of a Notice of
Offer for the proposed assignment or subletting, Landlord shall be entitled to
terminate this Lease as to all of the Premises (unless Tenant proposes a
sublease of a portion of the Premises, in which event Landlord may terminate
this Lease as to such portion) by written notice to Tenant ("Termination
Notice"), and such termination shall be effective as of the proposed effective
date of the proposed assignment or sublease. If Landlord does not elect to
terminate this Lease, Landlord shall either notify Tenant that Landlord consents
to the proposed assignment or subletting or withholds its consent for reasons to
be specified in the notice. If Landlord does not provide a Termination Notice or
a notice withholding its consent to Tenant within thirty (30) days following its
receipt of a Notice of Offer, Landlord shall be deemed to have consented to the
proposed assignment or subletting.
14.4 BONUS RENT. If any interest in this Lease is assigned or all or
any portion of the Premises is subleased, Landlord shall receive all of the
"bonus rent" to be realized from such assignment or subletting. The bonus rent
shall mean any lump sum payment or other value received by Tenant, plus any base
rent, percentage rent or periodic compensation received by Tenant from or for
the benefit of an assignee or sublessee in excess of (a) all amounts owed for
Rent and other charges pursuant to this Lease, and (b) all reasonable
commissions and fees paid to any real estate broker or finder who is
unaffiliated with Tenant in connection with the assignment or subletting. If a
portion of the Premises is subleased, the amount in clause (a) shall be prorated
based on the portion of the Premises' rentable area to be subleased. The bonus
rent shall be paid on the first (1st) day of each calendar month next following
tenant's receipt of
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each payment from its assignee or sublessee, after reduction for all amounts
described in clauses (a) and (b) above, amortized over the full term of the
assignment or sublease.
14.5 CONTINUING TENANT OBLIGATIONS. No subleasing or assignment shall
relieve Tenant from liability for payment of all forms of Rent and other charges
herein provided or from Tenant's obligations to keep and be bound by the terms,
conditions and covenants of this Lease.
14.6 WAIVER, DEFAULT AND CONSENT. The acceptance of Rent from any other
person shall not be deemed to be a waiver of any of the provisions of this Lease
or a consent to the assignment or subletting of the Premises. Any assignment or
sublease without the Landlord's prior written consent shall be voidable, at
Landlord's election, and shall constitute a noncurable event of default under
this Lease. Consent to any assignment or subletting shall not be deemed a
consent to any future assignment or subletting.
14.7 RESTRUCTURING OF BUSINESS ORGANIZATIONS. Any transfer of corporate
shares or partnership interests of Tenant, so as to result in a change in the
present voting control of Tenant by the person or persons owning a majority of
said corporate shares or partnership interests on the date of this Lease (except
for trading on an exchange), shall constitute an assignment and shall be subject
to the provisions of this Paragraph 14. Notwithstanding the foregoing, an
assignment of this Lease by operation of law as a result of a merger or
consolidation of Tenant, and an assignment of this Lease in conjunction with (i)
the sale of all or substantially all of Tenant's assets, or (ii) a public
offering of the stock of Tenant, shall not constitute an assignment of this
Lease under this Paragraph 14, provided that, and only so long as, the surviving
tenant or assignee has a net worth greater than or equal to that of Tenant as of
the date hereof. Notwithstanding the foregoing, an assignment of this Lease to
an entity which owns, or is owned by, Tenant, shall not constitute an assignment
of this Lease under this paragraph 14, provided that (a) such entity owns more
than fifty percent (50%) of the oustanding shares of all classes of voting stock
of Tenant, or Tenant own more than fifty percent (50%) of all ownership and
controlling interests of such assignee, and (b) in either such case, the
assignee has a net worth at least equal to that of Tenant as of the date of this
Lease hereof.
14.8 ASSIGNMENT OF SUBLEASE RENT. Tenant immediately and irrevocably
assigns to Landlord, as security for Tenant's obligations under this Lease, all
rents from any subletting of all or any part of the Premises, and Landlord, as
assignee and as attorney-in-fact for Tenant for purposes hereof, or a receiver
for Tenant appointed on Landlord's application, may collect such rents and apply
same toward Tenant's obligations under this Lease, except that, until the
occurrence of an event of default by Tenant, Tenant shall have the right and
license to collect such rents.
14.9 ASSIGNMENT IN BANKRUPTCY. If this Lease is assigned to any person
or entity pursuant to the provisions of the United States Bankruptcy Code, 11
U.S.C. Section 101 et seq., or such similar laws or amendments thereto which may
be enacted from time to time (the "Bankruptcy Code"), any and all monies or
other considerations payable or otherwise to be delivered in connection with
such assignment shall be paid or delivered to Landlord, shall be and remain the
exclusive property of Landlord and shall not constitute property of Tenant or of
the estate of Tenant within the meaning of the Bankruptcy Code. Any and all
monies or other considerations constituting Landlord's property under the
preceding sentence not paid or delivered to Landlord shall be held in trust for
the benefit of Landlord and be promptly paid or delivered to Landlord.
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14.10 ASSUMPTION OF OBLIGATIONS. Any person or entity to which this
Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be
deemed, without further act or deed, to have assumed all of the obligations
arising under this Lease on and after the date of such assignment. Any such
assignee shall upon demand execute and deliver to Landlord an instrument
confirming such assumption.
15. CONDEMNATION.
15.1 TOTAL TAKING. If the whole or any substantial part of the Premises
or the Project shall be taken or damaged because of the exercise of the power of
eminent domain, whether by condemnation proceedings or otherwise, including acts
or omissions constituting inverse condemnation, or any transfer of the Premises
or Project or portion thereof in avoidance of the exercise of the power of
eminent domain (collectively, a "Taking"), and the Taking would prevent or
materially interfere with the use of the Premises for the purpose for which they
are being used, this Lease shall terminate effective when the physical Taking of
the Premises shall occur.
15.2 PARTIAL TAKING. If part of the Premises shall be subject to a
Taking and this Lease is not terminated as provided in the Paragraph 15.1 above,
this Lease shall not terminate but the Rent payable hereunder during the
unexpired portion of this Lease shall be reduced in proportion to the area of
the Premises rendered unusable by Tenant.
15.3 CONDEMNATION AWARD. The entire award or compensation for any
Taking of the Project and/or the Premises, or any part thereof, or for
diminution in value, shall be the property of Landlord, and Tenant hereby
assigns its interest in any such award to Landlord; provided, however, Landlord
shall have no interest in any separate award made to Tenant for loss of
business, for relocation purposes, or for the taking of Tenant's fixtures and
improvements.
15.4 EXCLUSIVE REMEDY. This Paragraph 15 shall be Tenant's sole and
exclusive remedy in the event of any Taking. Tenant hereby waives the benefits
of California Code of Civil Procedure Section 1265.130 or any other statute
granting Tenant specific rights in the event of a Taking which are contrary to
the provisions of this Paragraph 15.
16. SURRENDER AND HOLDING OVER.
16.1 SURRENDER. Upon the expiration or sooner termination of this
Lease, Tenant shall surrender the Premises in as good condition as when
received, reasonable wear and tear excepted, broom clean and free of trash and
rubbish, and free from all tenancies or occupancies by any person. Subject to
Landlord's rights under Paragraph 19.8, Tenant shall remove all trade fixtures,
furniture, equipment and other personal property installed in the Premises prior
to the expiration or earlier termination of this Lease. Unless otherwise
provided in Paragraph 7 or waived by Landlord in writing prior to the expiration
or earlier termination of this Lease, Tenant shall remove at its sole cost all
alterations, additions and improvements made by Tenant to the Premises.
Alterations, additions and improvements remaining on the Premises at the
expiration or earlier termination of this Lease shall become the property of
Landlord. Tenant shall, at its own cost, completely repair any and all damage to
the Premises and the Building resulting from or caused by such removal. The
provisions of Paragraph 7 shall apply to such removal and repair work.
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16.2 HOLDING OVER. If Landlord agrees in writing that Tenant may hold
over after the expiration or earlier termination of this Lease, unless the
parties hereto otherwise agree in writing as to the terms of such holding over,
the holdover tenancy shall be subject to termination by Landlord or Tenant at
any time upon not less than thirty (30) days' prior written notice. If Tenant
holds over without the consent of Landlord, the same shall be a tenancy at will
terminable at any time, and Tenant shall be liable to Landlord for, and Tenant
shall indemnify, protect, defend and hold Landlord harmless from and against,
any damages, liabilities, losses, costs, expenses or claims suffered or caused
by such holdover, including damages and costs related to any successor tenant of
the Premises to whom Landlord could not deliver possession of the Premises when
promised. All of the other terms and provisions of this Lease shall be
applicable during any holdover period, with or without consent, except that
Tenant shall pay to Landlord from time to time upon demand, as Rent for the
period of any holdover, an amount equal to two hundred percent (200%) of the
then applicable Base Rent plus all Additional Rent in effect on the termination
date, computed on a daily basis for each day of the holdover period. No holding
over by Tenant, whether with or without consent of Landlord, shall operate to
extend this Lease. The preceding provisions of this Paragraph 16.2 shall not be
construed as Landlord's consent to any holding over by Tenant.
16.3 ENTRY AT END OF TERM. If during the last month of the Term, Tenant
shall have removed substantially all of Tenant's property and personnel from the
Premises, Landlord may enter the Premises and, repair, alter and redecorate the
same, without abatement of Rent and without liability to Tenant, and such acts
shall have no effect on this Lease. Tenant shall give written notice to Landlord
at least thirty (30) days prior to vacating the Premises and shall arrange to
meet with Landlord for a joint inspection of the Premises prior to vacating. In
the event of Tenant's failure to give such notice or arrange such joint
inspection, Landlord's inspection at or after Tenant's vacation of the Premises
shall be conclusively deemed correct for purposes of determining Tenant's
responsibility for repairs and restoration.
17. QUIET ENJOYMENT.
Landlord represents and warrants that it has full rights and authority
to enter into this Lease and that Tenant, upon paying the Rent and performing
its other covenants and agreements herein set forth, shall peaceably and quietly
have, hold and enjoy the Premises for the Term without hindrance or molestation
from Landlord, subject to the terms and provisions of this Lease, any ground
lease, any mortgage or deed of trust now or hereafter encumbering the Premises
or the Project, and all matters of record.
18. EVENTS OF DEFAULT.
The following events shall be deemed to be events of default by Tenant
under this Lease:
18.1 FAILURE TO PAY RENT. Tenant shall fail to pay any installment of
the Rent herein reserved when due, or any other payment or reimbursement to
Landlord required herein when due.
18.2 INSOLVENCY. Tenant or any guarantor of Tenant's obligations
hereunder shall generally not pay its debts as they become due or shall admit in
writing the inability to pay its debts or shall make a general assignment for
the benefit of creditors.
18.3 APPOINTMENT OF RECEIVER. A receiver or trustee (or similar
official) shall be appointed for all or substantially all of the assets of
Tenant.
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18.4 BANKRUPTCY. Intentionally omitted.
18.5 ATTACHMENT. The attachment, execution or other judicial seizure or
non-judicial seizure of all or substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease or the Premises, if such
attachment or other seizure remains undismissed or undischarged for a period of
ten (10) business days after the levy thereof.
18.6 VACATION OF PREMISES. Tenant shall vacate all or a substantial
portion of the Premises, whether or not Tenant is in default of the Rent or
other charges due under this Lease.
18.7 CERTIFICATES. Tenant shall fail to deliver to Landlord any
subordination agreement within the time limit prescribed in Paragraph 21 below,
or a Certificate of Occupancy, all financial statements or an estoppel
certificate within the time limits prescribed in Paragraph 22.7 below.
18.8 FAILURE TO DISCHARGE LIENS. Tenant shall fail to discharge any
lien placed upon the Premises in violation of Paragraph 8 hereof.
18.9 FALSE FINANCIAL STATEMENT. Landlord discovers that any financial
statement given to Landlord by Tenant, any assignee, subtenant or successor in
interest of Tenant, or any guarantor of Tenant's obligations hereunder, or any
of them, was materially false when given to Landlord.
18.10 FAILURE TO COMPLY WITH LEASE TERMS. Tenant shall fail to comply
with any other term, provision or covenant of this Lease, and shall not cure
such failure within fifteen (15) days after written notice thereof to Tenant;
provided, however, if the nature of the obligation is such that it cannot be
cured within fifteen (15) days, Tenant shall not be in default so long as Tenant
commences performance of such cure as soon as possible (and in no event later
than fifteen days following Landlord's delivery of notice to Tenant) and
thereafter diligently prosecutes the same to completion (not to exceed ninety
(90) days).
18.11 GUARANTOR DEFAULT. Any guarantor of Tenant's obligations
hereunder shall be in default under the terms of its guaranty.
19. LANDLORD'S REMEDIES.
Upon the occurrence of any event of default, Landlord may, at its
option without further notice or demand and in addition to any other rights and
remedies hereunder or at law or in equity, do any or all of the following:
19.1 TERMINATION. Terminate Tenant's right to possession of the
Premises by any lawful means upon at least 3 days' written notice (which notice
may be satisfied by any notice which may be given by Landlord pursuant to
Paragraph 18, if applicable), in which case Tenant shall immediately surrender
possession of the Premises to Landlord and, in addition to any rights and
remedies Landlord may have at law or in equity, Landlord shall have the
following rights:
(a) To re-enter the Premises then or at any time thereafter
and remove all persons and property and possess the Premises,
without prejudice to any other remedies Landlord may have by
reason of Tenant's default or of such termination, and Tenant
shall have no further claim hereunder.
(b) To recover all damages incurred by Landlord by reason of
the default, including without limitation (i) the worth at the
time of the award of the payments owed
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by Tenant to Landlord under this Lease that were earned but
unpaid at the time of termination; (ii) the worth at the time
of the award of the amount by which the payments owed by
Tenant to Landlord under the Lease that would have been earned
after the date of termination until the time of the award
exceeds the amount of the loss of payments owed by Tenant to
Landlord under this Lease for the same period that Tenant
proves could have been reasonably avoided; (iii) the worth at
the time of the award of the amount by which the payments owed
by Tenant to Landlord for the balance of the Term after the
time of the award exceeds the amount of the loss of payments
owed by Tenant for the same period that Tenant proves could
have been reasonably avoided; (iv) all costs incurred by
Landlord in retaking possession of the Premises and restoring
them to good order and condition; (v) all costs, including
without limitation brokerage commissions, advertising costs
and restoration costs, incurred by Landlord in reletting the
Premises; plus (vi) any other amount, including without
limitation attorneys' fees and audit expenses, necessary to
compensate Landlord for all detriment proximately caused by
Tenant's failure to perform its obligations under this Lease
or which in the ordinary course of things would be likely to
result therefrom. "The worth at the time of the award," as
used in clauses (i) and (ii) of this paragraph, is to be
determined by computing interest as to each unpaid payment
owed by Tenant to Landlord under the Lease, at the highest
interest rate permitted by law. "The worth at the time of the
award," as referred to in clause (iii) of this paragraph, is
to be determined by discounting such amount, as of the time of
award, at the discount rate of the San Francisco Federal
Reserve Bank, plus one percent (1%).
(c) To remove, at Tenant's sole risk, any and all personal
property in the Premises and place such in a public or private
warehouse or elsewhere at the sole cost and expense and in the
name of Tenant. Any such warehouser shall have all of the
rights and remedies provided by law against Tenant as owner of
such property. If Tenant shall not pay the cost of such
storage within thirty (30) days following Landlord's demand,
Landlord may, subject to the provisions of applicable law,
sell any or all such property at a public or private sale in
such manner and at such times and places as Landlord deems
proper, without notice to or demand upon Tenant. Tenant waives
all claims for damages caused by Landlord's removal, storage
or sale of the property and shall indemnify and hold Landlord
free and harmless from and against any and all loss, cost and
damage, including without limitation court costs and
attorneys' fees. Tenant hereby irrevocably appoints Landlord
as Tenant's attorney-in-fact, coupled with an interest, with
all rights and powers necessary to effectuate the provisions
of this subparagraph.
19.2 CONTINUATION OF LEASE. Maintain Tenant's right to possession, in
which case this Lease shall continue in effect whether or not Tenant shall have
abandoned the Premises. In such event, Landlord may enforce all of Landlord's
rights and remedies under this Lease, including the right to recover rent as it
becomes due hereunder, and, at Landlord's election, to re-enter and relet the
Premises on such terms and conditions as Landlord deems appropriate. Without
limiting the generality of the foregoing, Landlord shall have the remedy
described in California Civil Code Section 1951.4 (lessor may continue lease in
effect after lessee's breach and abandonment and recover rent as it becomes due,
if lessee has right to sublet or assign, subject only to reasonable
limitations). If Landlord relets the Premises
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or any portion thereof, any rent collected shall be applied against amounts due
from Tenant. Landlord may execute any lease made pursuant hereto in its own
name, and Tenant shall have no right to collect any such rent or other proceeds.
Landlord's re-entry and/or reletting of the Premises, or any other acts, shall
not be deemed an acceptance of surrender of the Premises or Tenant's interest
therein, a termination of this Lease or a waiver or release of Tenant's
obligations hereunder. Landlord shall have the same rights with respect to
Tenant's improvements and personal property as under Paragraph 19.1 above, even
though such re-entry and/or reletting do not constitute acceptance of surrender
of the Premises or termination of this Lease.
19.3 APPOINTMENT OF RECEIVER. Cause a receiver to be appointed in any
action against Tenant and to cause such receiver to take possession of the
Premises and to collect the rents or bonus rent derived therefrom. The foregoing
shall not constitute an election by Landlord to terminate this Lease unless
specific notice of such intent is given.
19.4 LATE CHARGE. Charge late charges as provided in Paragraph 2.7.
19.5 INTEREST. Charge interest on any amount not paid when due as
provided in Paragraph 22.2. Interest shall accrue from the date funds are first
due or, if the payment is for funds expended by Landlord on Tenant's behalf,
from the date Landlord expends such funds.
19.6 ATTORNEYS' FEES. Collect, upon demand, all reasonable attorneys'
fees and expenses incurred by Landlord in enforcing its rights and remedies
hereunder.
19.7 INJUNCTION. To restrain by injunction or other equitable means any
breach or anticipated breach of this Lease.
20. TENANT'S REMEDIES.
20.1 LANDLORD'S DEFAULT. Landlord shall not be in default under this
Lease unless Landlord fails to perform obligations required of Landlord within
sixty (60) days after written notice is delivered by Tenant to Landlord and to
the holder of any mortgages or deeds of trust (collectively, "Lender") covering
the Premises whose name and address shall have theretofore been furnished to
Tenant in writing, specifying the obligation which Landlord has failed to
perform; provided, however, that if the nature of Landlord's obligation is such
that more than sixty (60) days are required for performance, then Landlord shall
not be in default if Landlord or Lender commences performance within such sixty
(60) day period and thereafter diligently prosecutes the same to completion. All
obligations of Landlord hereunder shall be construed as covenants, not
conditions.
20.2 TENANT'S REMEDIES. In the event of any default, breach or
violation of Tenant's rights under this Lease by Landlord, Tenant's exclusive
remedies shall be an action for specific performance or action for actual
damages. Tenant hereby waives the benefit of any laws granting it the right to
perform Landlord's obligation, a lien upon the property of Landlord and/or upon
Rent due Landlord, or the right to terminate this Lease or withhold Rent on
account of any Landlord default.
20.3 NON-RECOURSE. Notwithstanding anything to the contrary in this
Lease, any judgment obtained by Tenant or any of Tenant's Parties against
Landlord or any Indemnified Parties shall be satisfied only out of Landlord's
equity interest in the Building and the legal parcel of land on which it sits.
Neither Landlord nor any Indemnified Parties shall have any personal liability
for any matter in connection with this Lease or its obligations as Landlord of
the Premises, except as provided above. Tenant shall not institute, seek or
enforce any personal or deficiency
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judgment against Landlord or any Indemnified Parties, and none of their property
shall be available to satisfy any judgment hereunder, except as provided in this
Paragraph 20.3.
20.4 SALE OF PREMISES. In the event of any sale or transfer of the
Premises (and provided that any security deposit held by the seller, transferor
or assignor (collectively, "Seller") is delivered or credited to the purchaser,
transferee or assignee (collectively, "Purchaser"), the Seller shall be and
hereby is entirely freed and relieved of all agreements, covenants and
obligations of Landlord thereafter to be performed and it shall be deemed and
construed without further agreement between the parties or their successors in
interest or between the Seller and the Purchaser on any such sale, transfer or
assignment that such Purchaser has assumed and agreed to carry out any and all
agreements, covenants and obligations of Landlord hereunder.
21. MORTGAGES.
Tenant accepts this Lease subject and subordinate to any ground lease,
mortgage and/or deed of trust now or at any time hereafter constituting a lien
or encumbrance upon the Premises. Notwithstanding any such subordination,
Tenant's right to quiet possession of the Premises shall not be disturbed if
Tenant is not in default and so long as Tenant shall pay the Rent and observe
and perform all of its obligations hereunder, unless this Lease is otherwise
terminated pursuant to its terms. If any ground lessor, mortgagee or beneficiary
under a deed of trust elects to have Tenant's interest in this Lease superior to
any such instrument, then by notice to Tenant from such ground lessor, mortgagee
or beneficiary, this Lease shall be deemed superior to such ground lease or
lien, whether this Lease was executed before or after said ground lease,
mortgage or deed of trust. Tenant shall at any time hereafter on demand execute
any instruments, releases or other documents which may be required by any ground
lessor or mortgagee for the purpose of attornment or subjecting and
subordinating this Lease to any ground lease or the lien of any such mortgage.
Tenant's failure to execute each instrument, release or document within ten (10)
days after written demand shall constitute an event of default by Tenant
hereunder without further notice to Tenant, or at Landlord's option Landlord
shall execute such instrument, release or document on behalf of Tenant as
Tenant's attorney-in-fact. Tenant does hereby make, constitute and irrevocably
appoint Landlord as Tenant's attorney-in-fact, coupled with an interest, and in
Tenant's name, place and stead, to execute such documents in accordance with
this Paragraph 21.
22. GENERAL PROVISIONS.
22.1 SINGULAR AND PLURAL. Words of any gender used in this Lease shall
be held and construed to include any other gender, and words in the singular
number shall be held to include the plural, unless the context otherwise
requires.
22.2 INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein
provided to the contrary, any amount due to Landlord not paid when due shall
bear interest at the maximum rate then allowable by law from the date due.
Payment of such interest shall not excuse or cure any default by Tenant under
this Lease, provided, however, that interest shall not be payable on late
charges incurred by Tenant.
22.3 TIME OF ESSENCE. Time is of the essence.
22.4 BINDING EFFECT. The terms, provisions and covenants and conditions
contained in this Lease shall apply to, inure to the benefit of, and be binding
upon, the parties hereto and upon their respective heirs, legal representatives,
successors and permitted assigns, except as otherwise herein expressly provided.
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22.5 CHOICE OF LAW. This Lease shall be governed by the laws of the
State of California applicable to contracts made and to be performed in such
state.
22.6 CAPTIONS. The captions inserted in this Lease are for convenience
only and in no way define, limit or otherwise describe the scope or intent of
this Lease, or any provision hereof, or in any way affect the interpretation of
this Lease.
22.7 CERTIFICATES. Tenant agrees from time to time within ten (10) days
after request of Landlord, to deliver to Landlord, or Landlord's designee a
Certificate of Occupancy for work performed by Tenant or Tenant's Parties in the
Premises, annual financial statements for each of the previous three (3) fiscal
years of Tenant, and an estoppel certificate stating that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification and certifying that this Lease, as so modified, is in full
force and effect), the date to which Rent has been paid, the unexpired Term of
this Lease and such other matters pertaining to this Lease as may be requested
by Landlord or Landlord's designee. Any such certificate may be conclusively
relied upon by Landlord or Landlord's designee. At Landlord's option, Tenant's
failure to timely deliver such certificate shall be an event of default by
Tenant, without further notice to Tenant, or it shall be conclusive upon Tenant
that this Lease is in full force and effect, without modification except as may
be represented by Landlord, that there are no uncured defaults in Landlord's
performance, and that not more than one (1) month's rent has been paid in
advance.
22.8 AMENDMENTS. This Lease may not be altered, changed or amended
except by an instrument in writing signed and dated by both parties hereto.
Tenant agrees to make such reasonable modifications to this Lease as may be
required by any lender in connection with the obtaining of financing or
refinancing of the Project or any portion thereof.
22.9 ENTIRE AGREEMENT. This Lease constitutes the entire understanding
and agreement of Landlord and Tenant with respect to the subject matter of this
Lease, and contains all of the covenants and agreements of Landlord and Tenant
with respect thereto, and supersedes all prior agreements or understandings.
Landlord and Tenant each acknowledge that no representations, inducements,
promises or agreements, oral or written, have been made by Landlord or Tenant,
or anyone acting on behalf of Landlord or Tenant, which are not contained
herein, and any prior agreements, promises, negotiations, or representations not
expressly set forth in this Lease are of no force or effect.
22.10 WAIVERS. The waiver by Landlord of any term, covenant, agreement
or condition herein contained shall not be deemed to be a waiver of any
subsequent breach of the same or any other term, covenant, agreement or
condition herein contained, nor shall any custom or practice which may arise
between the parties in the administration of this Lease be construed to waive or
lessen the right of Landlord to insist upon the performance by Tenant in strict
accordance with all of the provisions of this Lease. The subsequent acceptance
of Rent hereunder by Landlord shall not be deemed to be a waiver of any
preceding breach by Tenant of any provisions, covenant, agreement or condition
of this Lease, other than the failure of Tenant to pay the particular Rent so
accepted, regardless of Landlord's knowledge of such preceding breach at the
time of acceptance of such Rent.
22.11 ATTORNEYS' FEES. If either Landlord or Tenant commences or
engages in, or threatens to commence or engage in, an action by or against the
other party arising out of or in connection with this Lease or the Premises,
including but not limited to any action for recovery of Rent due and unpaid, to
recover possession or for damages for breach of this Lease, the
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prevailing party shall be entitled to have and recover from the losing party
reasonable attorneys' fees and other costs incurred in connection with the
action, preparation for such action, any appeals relating thereto and enforcing
any judgments rendered in connection therewith. If Landlord becomes involved in
any action, threatened or actual, by or against anyone not a party to this
Lease, but arising by reason of or related to any act or omission of Tenant or
Tenant's Parties, Tenant agrees to pay Landlord's reasonable attorneys' fees and
other costs incurred in connection with the action, preparation for such action,
any appeals relating thereto and enforcing any judgments rendered in connection
therewith.
22.12 MERGER. The voluntary or other surrender of this Lease by Tenant
or a mutual cancellation hereof shall not constitute a merger. Such event shall,
at the option of Landlord, either terminate all or any existing subtenancies or
operate as an assignment to Landlord of any or all of such subtenancies.
22.13 SURVIVAL OF OBLIGATIONS. Paragraphs 2, 3.2, 4.2, 5.2, 8, 12.1,
12.5, 15.3, 16, 19, 20 and 22 and all obligations of Tenant hereunder not fully
performed as of the expiration or earlier termination of the Term shall survive
the expiration or earlier termination of the Term, including without limitation,
all payment obligations with respect to Rent and all obligations concerning the
condition of the Premises. Upon the expiration or earlier termination of the
Term, and prior to Tenant vacating the Premises, Tenant shall pay to Landlord
any amount reasonably estimated by Landlord (i) as necessary to perform Tenant's
duties under paragraphs 6.1 and 16.1 and put the Premises, including without
limitations all heating and air conditioning systems and equipment therein, in
good condition and repair, and (ii) as sufficient to meet Tenant's obligation
hereunder for prorated Additional Rent for the year in which the Lease expires
or terminates. All such amounts shall be used and held by Landlord for payment
of such obligations, with Tenant being liable for any additional costs therefor
upon demand by Landlord, or with any excess to be returned to Tenant after all
such obligations have been determined and satisfied as the case may be. Any
Security Deposit held by Landlord shall be credited against the amounts payable
by Tenant under this Paragraph 22.13.
22.14 SEVERABILITY. If any clause or provision of this Lease is
illegal, invalid or unenforceable under present or future laws effective during
the Term, the remainder of this Lease shall not be affected thereby, and in lieu
of each clause or provision of this Lease that is illegal, invalid or
unenforceable, there shall be added as a part of this Lease a clause or
provision as similar in terms to such illegal, invalid or unenforceable clause
or provision as may be possible and be legal, valid and enforceable.
22.15 SECURITY MEASURES. Tenant hereby acknowledges that the Rent
payable to Landlord hereunder does not include the cost of guard service or
other security measures, and that Landlord shall have no obligation whatsoever
to provide same. Tenant assumes all responsibility for the protection of Tenant,
Tenants' Parties and their property from acts of third parties.
22.16 EASEMENTS. Landlord reserves to itself the right, from time to
time, to grant such easements, rights and dedications that Landlord deems
necessary or desirable, and to cause the recordation of parcel maps, easement
agreements and covenants, conditions and restrictions, so long as such
easements, rights, dedications, maps and covenants, conditions and restrictions
do not unreasonably interfere with the permitted use of the Premises by Tenant.
Tenant shall sign any of the aforementioned documents upon request of Landlord
and failure to do so shall constitute a material breach of this Lease.
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22.17 MULTIPLE PARTIES. If more than one person or entity is named as
Tenant herein, the obligations of Tenant hereunder shall be the joint and
several responsibility of all persons or entities so named.
22.18 CONFLICT. Any conflict between the printed provisions of this
Lease and any typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
22.19 NO THIRD PARTY BENEFICIARIES. This Lease is not intended by
either party to confer any benefit on any third party, including without
limitations any broker, finder, or brokerage firm.
22.20 EFFECTIVE DATE/NONBINDING OFFER. Submission of this Lease for
examination or signature by Tenant does not constitute an offer or option for
lease, and it is not effective as a lease or otherwise until executed and
delivered by both Landlord and Tenant.
22.21 NOTICES. Each provision of this Lease or of any applicable
governmental laws, ordinances, regulations and other requirements with reference
to the sending, mailing or delivery of any notice or the making of any payment
by one party to the other shall be deemed to be complied with when and if the
following steps are taken:
(a) All Rent and other payments required to be made
hereunder shall be payable to the applicable party hereto as follows: to
Landlord at the address set forth in Item 12 of the Basic Lease Provisions, and
to Tenant at the Premises, or at such other addresses as the parties may have
hereafter specified by written notice. All obligations to pay Rent and/or any
other amounts under the terms of this Lease shall not be deemed satisfied until
such Rent and other amounts have been actually received by the respective party.
(b) Wherever any notice is required or permitted
hereunder, such notice shall be in writing. Any notice or document required or
permitted to be delivered hereunder shall be deemed to be delivered (i) upon
personal delivery; (ii) seventy- two (72) hours after deposit thereof in the
United States mail, postage prepaid, certified or registered mail, return
receipt requested; (iii) upon confirmation of delivery by Federal Express or
other reputable overnight delivery service; or (iv) upon written confirmation of
delivery by telegraph, telecopy or other electronic written transmission device;
correctly addressed to the parties hereto as follows: if to Tenant before the
Commencement Date, then at the address specified in Item 11 of the Basic Lease
Provisions; if to Tenant after the Commencement Date, then at the Premises; and
if to Landlord, then at the address specified in Item 12 of the Basic Lease
Provisions; or at such other address (but no more than one (1) address at a
time, except as provided in Paragraph 20.1) as the recipient may theretofore
have specified by written notice.
22.22 WATER OIL AND MINERAL RIGHTS. Landlord reserves all right, title
or interest in water, oil, gas or other hydrocarbons, other mineral rights and
air and development rights, together with the sole and exclusive right of
Landlord to sell, lease, assign or otherwise transfer the same, but without any
right of Landlord or any such transferee to enter upon the Premises during the
Term except as otherwise provided herein.
22.23 CONFIDENTIALITY. Tenant agrees to keep the Lease and its terms,
covenants, obligations and conditions strictly confidential and not to disclose
such matters to any other landlord, tenant, prospective tenant, or broker;
provided, however, Tenant may provide a copy of this Lease to its attorneys,
accountants and bankers, and to a non-party solely in
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conjunction with Tenant's reasonable and good faith effort to secure an assignee
or sublessee for the Premises.
22.24 BROKER'S FEES. Tenant represents and warrants that it has dealt
with no broker, agent or other person in connection with this transaction and
that no broker, agent or other person brought about this transaction, other than
the brokerage firm specified in Item 13 of the Basic Lease Provisions, if any,
and Tenant shall indemnify, defend, protect and hold Landlord harmless from and
against any claims, losses, liabilities, demands, costs, expenses or causes of
action by any other broker, agent or other person claiming a commission or other
form of compensation by virtue of having dealt with Tenant with regard to this
leasing transaction.
22.25 REMEDIES CUMULATIVE. All rights, privileges and remedies of the
parties are cumulative and not alternative or exclusive to the extent permitted
by law, except as otherwise provided herein.
22.26 RETURN OF CHECK. If Tenant's check, given to Landlord in payment
of any sum, is returned by the bank for non-payment, Tenant shall pay to
Landlord immediately on demand, as Additional Rent, all expenses incurred by
Landlord as a result thereof.
22.27 NO RECORDATION OF LEASE. Neither this Lease nor any memorandum
hereof may be recorded.
22.28 AUTHORITY. If Tenant is a corporation or partnership, each
individual executing this Lease on behalf of such entity represents and warrants
that he or she is duly authorized to execute and deliver this Lease. Tenant
shall, within thirty (30) days following execution of this Lease, deliver to
Landlord evidence of such authority satisfactory to Landlord.
22.29 INTERPRETATION. This Lease shall be construed fairly according to
its terms without regard to which party, or which party's attorneys, prepared
its form.
22.30 LANDLORD'S APPROVALS. Except where the provisions of this Lease
expressly provide that Landlord's consent or approval must be reasonably given,
all consents or approvals of Landlord sought or required pursuant to the terms
of this Lease may be given or withheld in Landlord's sole and absolute
discretion.
22.31 ADDITIONAL PROVISIONS. Those additional provisions set forth in
Exhibit "E", if any, are hereby incorporated by this reference as if fully set
forth herein.
22.32 WAIVER OF RIGHT TO TRIAL BY JURY. Tenant hereby waives the right
to trial by jury.
22.33 SUBSTITUTED PREMISES. At any time after the execution and
delivery of this Lease by Landlord and Tenant, Landlord shall have the right,
upon not less than thirty (30) days' prior written notice to Tenant, to
substitute for the Premises for all purposes under this Lease, other premises of
Landlord's selection within the Building containing the same or larger amount of
floor area as the Premises, provided that the Rental shall not increase as a
result of the relocation and provided further that Landlord shall (a) pay all
expenses reasonably incurred in moving Tenant's property to such new location;
and (b) furnish the substituted premises with Tenant Improvements comparable in
quality to those in the Premises.
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LANDLORD: TENANT:
CIIF ASSOCIATES II LIMITED QUAKER FABRIC CORPORATION
PARTNERSHIP, a Delaware OF FALL RIVER, INC., a
limited partnership Massachusetts corporation
By: Copley Advisors, Inc., a By: /s/
Massachusetts corporation ------------------------------
Its: V.P. - Sales
Its: Managing General By: /s/
Partner ------------------------------
Its: V.P.
By: /s/
-------------------------------
Its: CHRISTOPHER A. KAZANTIS
Vice President
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EXHIBIT "A"
[Technical diagram of Building 162]
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EXHIBIT "B"
INTENTIONALLY OMITTED
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EXHIBIT "C"
RENT ADJUSTMENT RIDER
For CPI Rent Increases:
The Base Rent is initially $6,247.51 per month.
The Base Rent shall be adjusted as provided below on the first day of
the thirty-second (32nd) month of the Term (the "Adjustment Date"):
The adjusted Base Rent as of each Adjustment Date shall be the Base
Rent effective on the day preceding that Adjustment Date, multiplied by a
fraction, the numerator of which is the CPI figure for the third calendar month
preceding the month during which the particular Adjustment Date occurs and the
denominator of which is the CPI figure for the month occurring three (3)
calendar months prior to the month in which the previous Adjustment Date, or if
none, the Commencement Date, occurred. As used in this paragraph, the "CPI"
means the Consumer Price Index for Urban Wage Earners and Clerical Workers, Los
Angeles/Anaheim/ Riverside CMSA, all items (1982-84 = 100), published by the
U.S. Department of Labor, Bureau of Labor Statistics, or if such index is no
longer published, the U.S. Department of Labor's most comprehensive official
index then in use that most nearly corresponds to the index named above. If it
is calculated from a base different from the base period 1982-84 = 100, figures
used for calculating the adjustment shall first be converted to the base period
used under a formula supplied by the Bureau. If the described index shall no
longer be published, another index generally recognized as authoritative shall
be substituted by Landlord.
Notwithstanding the foregoing, on each Adjustment Date, the Base Rent
shall be increased by no less than 3% per year and by no more than 6% per year,
which increase shall be cumulative and compounded annually.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quaker Fabric Corporation:
As independent public accountants, we hereby consent to the use of our
report dated February 11, 1997 (and to all references to our Firm) included in
or made part of this Registration Statement and related Prospectus of Quaker
Fabric Corporation.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 24, 1997
