<PAGE>
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
PRUCO LIFE INSURANCE COMPANY
as of March 11, 2005
Quaker Fabric Corporation of Fall River
941 Grinnell Street
Fall River, Massachusetts 02721
Attention: Mr. Paul J. Kelly
Re:
Forbearance to Note Agreements
------------------------------
Ladies and Gentlemen:
Reference is hereby made to the (i) that certain Note Purchase
Agreement, dated as of October 10, 1997 (as
amended, supplemented or otherwise
modified to date, the "1997 Note
Agreement") and (ii) that certain Note
Agreement and Private Shelf Facility, dated
as of February 14, 2002 (as amended,
supplemented or otherwise modified to date,
the "2002 Note Agreement", and
together with the 1997 Note Agreement, the
"Note Agreements"), each by and among
Quaker Fabric Corporation of Fall River, a
Massachusetts corporation (the
"Company"), Pruco Life Insurance Company
("Pruco") and The Prudential Insurance
Company of America ("Prudential"; and
together with Pruco collectively, the
"Noteholders").
The Company has informed the Noteholders that for the fiscal
quarter
ended on or about December 31, 2004, and
possibly for the fiscal quarters ending
on or about March 31, 2005 and June 30,
2005, the Fixed Charge Ratio for the
prior four (4) consecutive fiscal quarters
was (or will be) less than 1.75 to
1.00 in violation of paragraph 6D of each
Note Agreement. The Company has
further informed the Noteholders that, for
the fiscal quarters ending on or
about March 31, 2005 and June 30, 2005, the
Total Debt Ratio is likely to exceed
3.0 to 1.0 in violation of paragraph 6A(ii)
of each Note Agreement and the
Senior Debt Ratio is likely to exceed
2.75:1.0 in violation of Section 6A(i) of
each Note Agreement. The Company
acknowledges and agrees that such performance
results constitute Events of Default
(collectively, the "Specified Defaults")
under paragraph 7A(vi) of each Note
Agreement. The Company acknowledges and
agrees that as a result of the Specified
Defaults, absent this Agreement, the
Noteholders are entitled to proceed to
enforce any and all of their rights and
remedies under the terms of the Note
Agreements and any other document,
instrument or agreement executed in
connection therewith (collectively, with the
Note Agreements and the Security Documents,
as hereinafter defined, the "Note
Documents"). The Company further
acknowledges and agrees that as of the date
hereof the principal amount of the
obligations under the Note
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Agreements is $40,000,000 and interest has
accrued on such amount at the
applicable rate provided in each Note
Agreement and that, upon the exercise by
the Required Holders of their right to
accelerate pursuant to paragraph 7A of
each Note Agreement, such obligations,
together with a accrued and unpaid
interest and the applicable
Yield-Maintenance Amount will be due and payable in
full without offset, deduction or
counterclaim of any kind or character
whatsoever.
The Company has now requested that the Noteholders, subject to
the
terms and conditions provided herein,
forbear from making demand of payment on
any amounts due and owing under the Notes
and the Note Agreement (collectively,
the "Obligations"), forbear from exercising
and pursuing their rights and
remedies under the Note Agreements and the
other Note Documents until the
Forbearance Termination Date (as
hereinafter defined). In consideration of the
Noteholders' agreement to forbear from
making demand upon the Obligations and
any other obligation under any of the Note
Documents and from pursuing the
Noteholders' rights and remedies under the
Note Agreements and the other Note
Documents, all upon the terms and subject
to the conditions contained in this
Agreement, the Company by its signature
below hereby agrees with the Noteholders
as follows:
'SS'1. Definitions. All capitalized terms used herein without
definition that are defined in the Note
Agreements shall have the same meanings
herein as therein. All accounting terms
used herein and not otherwise defined
shall be used in accordance with generally
accepted accounting principles.
'SS'2. Forbearance. Subject to the conditions set forth in
'SS'4
hereof, the Noteholders agree to forbear
from enforcing any of their rights and
remedies under the Note Documents for the
purpose of seeking payment of the
Obligations (including, without limitation,
any act with respect to any
collateral now or hereafter securing
payment of any Obligations or any setoff
or any other application of funds of Quaker
Fabric Corporation ("Parent"), the
Company or its subsidiaries now or
hereafter on deposit with or otherwise
controlled by the Noteholders) until that
date (the "Forbearance Termination
Date") which is the earliest to occur of
(a) the Company's failure to comply
with any of the terms and conditions of
this Agreement, including any of the
undertakings set forth in 'SS''SS'3 and 4
hereof, (b) an Event of Default (other
than a Specified Default) under any of the
Note Documents, (c) any
representation or warranty made by the
Company herein or in any certificate,
financial statement or other document
delivered in connection with this
Agreement shall prove to have been untrue
or incorrect in any material respect
as of the date as of which made or deemed
to have been made or repeated, it
being acknowledged and agreed by the
Noteholders that any projections delivered
by the Company reflect good faith estimates
of future performance and do not
constitute representations or warranties as
to such future performance, (d) the
occurrence of any event or happening (other
than the Specified Defaults) which
has a material adverse effect upon (i) the
business, properties, prospects,
condition (financial or otherwise) or
operations of the Parent and its
Subsidiaries taken as a whole or (ii) the
ability of the Parent and its
Subsidiaries or the Company to pay or
perform any obligation or agreement
under the Note Agreements or any other Note
Document, (e) the Parent and
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its Subsidiaries, the Company, or any
person or entity claiming by or through
the Parent and its Subsidiaries or the
Company ever commences, joins in,
assists, cooperates or participates as an
adverse party or adverse witness in
any suit or other proceeding against any
Noteholder relating to the indebtedness
referred to as the Obligations or any
amounts owing hereunder or under any of
the Note Documents, (f) any of the claims
of the Noteholders under this
Agreement or under any Note Document or
with respect to the Obligations shall be
subordinated to the claims of any other
creditor of the Parent or the Company
except with the specific consent of the
Noteholders, (g) the termination by
Fleet National Bank ("Fleet") of its
forbearance under that certain letter
agreement dated as of March 11, 2005 by and
among Fleet and the Grantors (as
hereinafter defined) (the "Fleet
Forbearance Agreement"), (h) March 14,
2005, unless by 2 p.m. on such date, the
Company shall have paid to the
Noteholders a forbearance and amendment fee
in an amount equal to $150,000,
and (i) July 15, 2005. The period from the
effective date of this Agreement
through the Forbearance Termination Date is
referred to herein as the
"Forbearance Period".
'SS'3. Amendments, Covenants and Agreements. Without any prejudice
or
impairment whatsoever to any of the rights
and remedies of the Noteholders
contained in any of the Note Documents or
in any agreement, document or
instrument executed in connection
therewith, by execution of this Agreement, in
addition to its obligations under the Note
Documents, the Company covenants and
agrees with the Noteholders as follows:
(a) Amendment to Paragraph 6B. Paragraph 6B of each Note
Agreement is hereby amended and restated in its entirety as
follows:
6B. Priority Debt. The Company will not permit
Priority Debt to be outstanding at any time, other than Priority
Debt
permitted under clauses (i), (vii) and (viii) of paragraph 6G.
(b) Amendments to Paragraph 6G. Clauses (vii), (viii) and (xi)
of Paragraph 6G of each Note Agreement are hereby amended and
restated
in their entirety as follows:
(vii) any Lien created to secure all of any part of
the purchase price, or to secure Indebtedness incurred or assumed
to
pay all of the purchase price, of property acquired by the
Company
after the date of this Agreement, provided, that (a) any such
Lien
shall be confined solely to the item or items of property so
acquired
and, if required by the terms of the instrument originally
creating
such Lien, other property which is an improvement to or is acquired
for
specific use in connection with such acquired property or which is
real
property being improved by such acquired property, (b) the
principal
amount of the Indebtedness secured by any such Lien shall at no
time
exceed an amount equal to 100% of the lesser of (x) the cost to
the
Company of the property so acquired and (y) the fair market value
of
such property (as determined in good faith by the Board or
chief
executive officer of the Company) at the time of such acquisition,
and
(c) any such Lien shall be created, in the case of property, at
the
time of its acquisition or within 180 days after its acquisition,
or,
in the case of
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improvements, at the time of their completion or within 180 days
after
their completion; provided, however, that the aggregate
principal
amount of the Indebtedness secured by Liens permitted pursuant to
this
clause (vii) shall not exceed at any time $5,000,000 minus
Indebtedness
secured by Liens permitted under clause (viii) below;
(viii) any Lien existing on property of a Person
immediately prior to its being consolidated with or merged into
the
Company or its becoming a Subsidiary, or any Lien existing on
any
property acquired by the Company or any Subsidiary at the time
such
property is so acquired (whether or not the Indebtedness
secured
thereby shall have been assumed), provided that (a) no such Lien
shall
have been created or assumed in contemplation of such consolidation
or
merger or such Person's becoming a Subsidiary or such acquisition
of
property, (b) each such Lien shall at all times be confined solely
to
the item or items of property so acquired and, if required by the
terms
of the instrument originally creating such Lien, other property
which
is an improvement to or is acquired for specific use in connection
with
such acquired property and (c) the principal amount of the
Indebtedness
secured by all such Liens shall at no time exceed $5,000,000 less
all
amounts of Indebtedness secured by Liens described in clause
(vii)
above;
(xi) Reserved.
(c) Minimum Consolidated EBITDA. The Parent and the Company
shall not permit Consolidated EBITDA, calculated as of the last day
of
each fiscal month during the Forbearance Period, to be less than
the
amount set forth opposite such period in the table below:
<TABLE>
<CAPTION>
-----------------------------------
-----------------------------------------------------
Month Ended
Minimum Consolidated EBITDA
-----------------------------------
-----------------------------------------------------
<S>
<C>
January 2005
($1,000,000)
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-----------------------------------------------------
February 2005
($250,000)
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-----------------------------------------------------
March 2005
$500,000
-----------------------------------
-----------------------------------------------------
April 2005
$1,000,000
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-----------------------------------------------------
May 2005
$1,000,000
-----------------------------------
-----------------------------------------------------
June 2005
$1,000,000
-----------------------------------
-----------------------------------------------------
</TABLE>
(d) Reporting Requirements. Notwithstanding anything to the
contrary set forth in the Note Documents, in addition to all
financial
statements and reports required to be delivered pursuant to the
Note
Documents, during the Forbearance Period, the Company agrees to
furnish
to the Noteholders, within thirty (30) days after the end of
each
fiscal month of the Company, consolidated balance sheets,
statements of
income and retained earnings and cash flow statements of the
Company
and its Subsidiaries as of the end of each such fiscal month,
certified
by the chief financial officer of the Company, together with (i)
a
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calculation of Consolidated EBITDA as of the end of each such
fiscal
month certified by an officer of the Company, and (ii) a status
report
regarding booking reports received during such fiscal month
with
respect to distribution facilities, broken down on a weekly
basis,
together with a comparison of such report to booking reports
received
during the corresponding period of the immediately preceding
fiscal
year.
(e) Collateral Security. As soon as practical but in any event
not later than March 31, 2005, the Company, Quaker Textile
Corporation,
a Massachusetts corporation ("Quaker Textile"), Quaker Fabric
Mexico,
S.A. de C.V., a Mexican corporation ("Quaker Mexico"), and
