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

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED JANUARY 4, 2003

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

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

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

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

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

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

None

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE:

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

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TO OUR SHAREHOLDERS

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

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

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

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

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

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

Sincerely,

Larry A. Liebenow Sangwoo Ahn

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

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PART I

ITEM 1. BUSINESS

OVERVIEW

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

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

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

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

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

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

THE INDUSTRY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

STRATEGY

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

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

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

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

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

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

COMPETITIVE STRENGTHS

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

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

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

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

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

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

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

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

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

PRODUCTS

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

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

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

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

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

NEW PRODUCT DEVELOPMENT AND DESIGN

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

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

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

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

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

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SALES AND MARKETING

UPHOLSTERY FABRICS

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

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

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

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

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

SPECIALTY YARNS

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

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

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MANUFACTURING

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

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

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

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

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

QUALITY ASSURANCE

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

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

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

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

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

7

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

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

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

TECHNOLOGY

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

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

SOURCES AND AVAILABILITY OF RAW MATERIALS

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

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

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

8

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

COMPETITION

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

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

BACKLOG

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

TRADEMARKS, PATENTS, COPYRIGHTS

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

INSURANCE

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

9

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

EMPLOYEES

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

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

The executive officers of the Company are as follows:

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

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

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

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

10

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

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

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

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

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

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

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

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

11

ITEM 2. PROPERTIES

PROPERTIES

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

- ---------

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

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

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

ENVIRONMENTAL MATTERS

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

12

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

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

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

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

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

13

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

ITEM 3. LEGAL PROCEEDINGS

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

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

None.

14

PART II

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

MARKET INFORMATION

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

- ---------

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

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

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

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

15

EQUITY COMPENSATION PLAN INFORMATION
(IN THOUSANDS)

EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS

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

16

ITEM 6. SELECTED FINANCIAL DATA

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

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

- ---------

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

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

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

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

17

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

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

18

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS)

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

19

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

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

20

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

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

21

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

1. OPERATIONS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

22

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

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

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

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

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

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

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

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

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

23

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

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

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

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

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

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

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

24

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

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

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

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

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

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

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

25

QUAKER FABRIC CORPORATION AND SUBSIDIARIES

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

(n) Self-Insurance Reserves. The Company is sel