EXECUTION VERSION

 

SECURITY AGREEMENT

SECURITY AGREEMENT, dated as of May 18, 2005, between (a) QUAKER FABRIC
CORPORATION OF FALL RIVER, a Massachusetts corporation (the “Borrower”), (b)
QUAKER TEXTILE CORPORATION, a Massachusetts corporation (“Quaker Textile”),
QUAKER FABRIC MEXICO, S.A. de C.V., a Mexican corporation (“Quaker Mexico”), and
QUAKER FABRIC CORPORATION, a Delaware corporation (the “Parent”, and together
with Quaker Textile and Quaker Mexico, the “Guarantors”) (the Borrower and each
of the Guarantors being sometimes referred to herein as a “Company” and
collectively, as the “Companies”), and (c) BANK OF AMERICA, N.A., as
administrative agent (hereinafter, the “Administrative Agent”) for itself and
the other lending institutions (hereinafter, collectively the “Lenders”) which
are or may become parties to a Revolving Credit and Term Loan Agreement of even
date herewith (the “Credit Agreement”), among the Borrower, the Parent, the
Lenders, the Administrative Agent, and Bank of America, N.A., as Issuing Bank,
and Fleet National Bank, as Cash Management Bank.

WHEREAS, it is a condition precedent to the Lenders’ making any loans or
otherwise extending credit to the Borrower under the Credit Agreement that each
Company execute and deliver to the Administrative Agent, for the benefit of the
Lenders and the Administrative Agent, a security agreement in substantially the
form hereof; and

WHEREAS, each Company wishes to grant a security interest in favor of the
Administrative Agent, for the benefit of the Lenders and the Administrative
Agent, as herein provided;

NOW, THEREFORE, in consideration of the promises contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

1.  Definitions.  All capitalized terms used herein without definitions shall
have the respective meanings provided therefor in the Credit Agreement. The term
“State”, as used herein, means the Commonwealth of Massachusetts. All terms
defined in the Uniform Commercial Code of the State and used herein shall have
the same definitions herein as specified therein. However, if a term is defined
in Article 9 of the Uniform Commercial Code of the State differently than in
another Article of the Uniform Commercial Code of the State, the term has the
meaning specified in Article 9. The term “electronic document” applies in the
event that the 2003 revisions to Article 7, with amendments to Article 9, of the
Uniform Commercial Code, in substantially the form approved by the American Law
Institute and the National Conference of Commissioners on Uniform State Laws,
are now or hereafter adopted and become effective in the State or in any other
relevant jurisdiction.

2.  Grant of Security Interest.  Each Company hereby grants to the
Administrative Agent, for the benefit of the Lenders and the Administrative
Agent, to secure the payment and performance in full of all of the Obligations,
a continuing

 

 

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security interest in and so pledges and assigns to the Administrative Agent, for
the benefit of the Lenders and the Administrative Agent, the following
properties, assets and rights of such Company, wherever located, whether now
owned or hereafter acquired or arising, and all proceeds and products thereof
(all of the same being hereinafter called the “Collateral”): all personal and
fixture property of every kind and nature including without limitation all goods
(including inventory, equipment (including rolling stock) and any accessions
thereto), instruments (including promissory notes), documents including, if
applicable, electronic documents, accounts (including health care insurance
receivables), chattel paper (whether tangible or electronic), deposit accounts,
letter-of-credit rights (whether or not the letter of credit is evidenced by a
writing), software, intellectual property rights, commercial tort claims,
securities and all other investment property, cash and cash equivalents,
supporting obligations, any other contract rights or rights to the payment of
money, insurance claims and proceeds, all general intangibles (including all
payment intangibles), and all books and records relating to the foregoing. The
Administrative Agent acknowledges that the attachment of its security interest
in any commercial tort claim as original collateral is subject to each Company’s
compliance with §4.7.

3.  Authorization to File Financing Statements.  Each Company hereby irrevocably
authorizes the Administrative Agent, its counsel or representative at any time
and from time to time to file in any filing office in any Uniform Commercial
Code jurisdiction any initial financing statements and amendments thereto that
(a) indicate the Collateral (i) as all assets of the Company or words of similar
effect, regardless of whether any particular asset comprised in the Collateral
falls within the scope of Article 9 of the Uniform Commercial Code of the State
or such other jurisdiction, or (ii) as being of an equal or lesser scope or with
greater detail, and (b) contain any other information required by part 5 of
Article 9 of the Uniform Commercial Code of the State or such other jurisdiction
for the sufficiency or filing office acceptance of any financing statement or
amendment, including (i) whether such Company is an organization, the type of
organization and any organizational identification number issued to such Company
and, (ii) in the case of a financing statement filed as a fixture filing or
indicating Collateral as extracted collateral, a sufficient description of real
property to which the Collateral relates. Each Company agrees to furnish any
such information to the Administrative Agent promptly upon request. Each Company
also ratifies its authorization for the Administrative Agent to have filed in
any Uniform Commercial Code jurisdiction any like initial financing statements
or amendments thereto if filed prior to the date hereof, with all costs and
expenses associated with any such filings to be at the Companies’ expense.

4.  Other Actions.  Further to insure the attachment, perfection and first
priority of, and the ability of the Administrative Agent to enforce, the
Administrative Agent’s security interest in the Collateral, each Company agrees,
in each case at such Company’s own expense, to take the following actions with
respect to the following Collateral and without limitation on such Company’s
other obligations contained in this Agreement:

 

 

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4.1.  Promissory Notes and Tangible Chattel Paper.  If any Company shall, now or
at any time hereafter, hold or acquire any promissory notes or tangible chattel
paper (excluding promissory notes in favor of employees of any Company not
exceeding $300,000 individually or $500,000 in the aggregate), such Company
shall forthwith endorse, assign and deliver the same to the Administrative
Agent, accompanied by such instruments of transfer or assignment duly executed
in blank as the Administrative Agent may from time to time specify.

4.2.  Deposit Accounts.  For each deposit account that each Company, now or at
any time hereafter, opens or maintains with any depositary bank, each such
Company shall deliver to the Administrative Agent an Agency Account Agreement in
favor of the Administrative Agent, in form and substance satisfactory to the
Administrative Agent, executed by such depositary bank; provided, that any
Company may maintain such accounts that are not subject to an Agency Account
Agreement in favor of the Administrative Agent so long as the aggregate balance
maintained in all such accounts does not exceed $750,000. The provisions of this
paragraph shall not apply to (i) a deposit account for which the Administrative
Agent is the depositary bank and is in automatic control and (ii) any deposit
accounts specially and exclusively used for payroll, payroll taxes and other
employee wage and benefit payments to or for the benefit of a Company’s salaried
employees.

4.3.  Investment Property.  If any Company shall, now or at any time hereafter,
hold or acquire any certificated securities, such Company shall forthwith
endorse, assign and deliver the same to the Administrative Agent, accompanied by
such instruments of transfer or assignment duly executed in blank as the
Administrative Agent may from time to time specify. If any securities now or
hereafter acquired by any Company are uncertificated and are issued to such
Company or its nominee directly by the issuer thereof, such Company shall
immediately notify the Administrative Agent thereof and, at the Administrative
Agent’s request and option, pursuant to an agreement in form and substance
satisfactory to the Administrative Agent, either (a) cause the issuer to agree
to comply without further consent of such Company or such nominee, at any time
with instructions from the Administrative Agent as to such securities, or (b)
arrange for the Administrative Agent to become the registered owner of the
securities; provided, however, that if any securities, whether certificated or
uncertificated, or other investment property now or hereafter acquired by any
Company are held by such Company or its nominee through a securities
intermediary or commodity intermediary, such Company shall immediately notify
the Administrative Agent thereof and, at the Administrative Agent’s request and
option, pursuant to an agreement in form and substance satisfactory to the
Administrative Agent, either (i) cause such securities intermediary or (as the
case may be) commodity intermediary to agree to comply, in each case without
further consent of such Company or such nominee, at any time with entitlement
orders or other instructions from the Administrative Agent to such securities
intermediary

 

 

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as to such securities or other investment property, or (as the case may be) to
apply any value distributed on account of any commodity contract as directed by
the Administrative Agent to such commodity intermediary, or (ii) in the case of
financial assets or other investment property held through a securities
intermediary, arrange for the Administrative Agent to become the entitlement
holder with respect to such investment property, with such Company being
permitted, only with the consent of the Administrative Agent, to exercise rights
to withdraw or otherwise deal with such investment property. The provisions of
this paragraph shall not apply to any financial assets credited to a securities
account for which the Administrative Agent is the securities intermediary.

4.4.  Collateral in the Possession of a Bailee.  If any Collateral is, now or at
any time hereafter, in the possession of a bailee (excluding Collateral in the
possession of dyers and contract manufacturers in the ordinary course of the
Companies’ business consistent with past practices that is designated as
ineligible inventory on the most recent Borrowing Base Certificate and/or
Collateral Update Certificate), the applicable Company or Companies shall
promptly notify the Administrative Agent thereof and, at the Administrative
Agent’s request and option, such Company or Companies shall promptly obtain an
acknowledgement from the bailee, in form and substance satisfactory to the
Administrative Agent, that the bailee holds such Collateral for the benefit of
the Administrative Agent and such bailee’s agreement to comply, without further
consent of such Company or Companies, at any time with instructions of the
Administrative Agent as to such Collateral.

4.5.  Electronic Chattel Paper and Transferable Records.  If any Company, now or
at any time hereafter, holds or acquires an interest in any electronic chattel
paper, any electronic document or any “transferable record,” as that term is
defined in Section 201 of the federal Electronic Signatures in Global and
National Commerce Act, or in §16 of the Uniform Electronic Transactions Act as
in effect in any relevant jurisdiction, such Company shall promptly notify the
Administrative Agent thereof and, at the request and option of the
Administrative Agent, shall take such action as the Administrative Agent may
reasonably request to vest in the Administrative Agent control, under §9-105 of
the Uniform Commercial Code of the State or any other relevant jurisdiction, of
such electronic chattel paper, control, under §7-106 of the Uniform Commercial
Code of the State or any other relevant jurisdiction, of such electronic
document or control, under Section 201 of the federal Electronic Signatures in
Global and National Commerce Act or, as the case may be, §16 of the Uniform
Electronic Transactions Act, as so in effect in such jurisdiction, of such
transferable record. The provisions of this §4.5 relating to electronic
documents and “control” under UCC §7-106 apply in the event that the 2003
revisions to Article 7, with amendments to Article 9, of the Uniform Commercial
Code, in substantially the form approved by the American Law Institute and the
National Conference of Commissioners on Uniform State Laws, are now or hereafter
adopted and become effective in the State or in any other relevant jurisdiction.

 

 

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4.6.  Letter-of-Credit Rights.  If any Company is, now or at any time hereafter,
a beneficiary under a letter of credit (excluding trade letters of credit) with
a face amount equal to or greater than $500,000 individually, or $1,500,000 in
the aggregate with all other letters of credit under which such Company is
beneficiary, now or hereafter, such Company shall promptly notify the
Administrative Agent thereof and, at the request and option of the
Administrative Agent, such Company shall, pursuant to an agreement in form and
substance satisfactory to the Administrative Agent, either (a) arrange for the
issuer and any confirmer or other nominated person of such letter of credit to
consent to an assignment to the Administrative Agent of the proceeds of the
letter of credit or (b) arrange for the Administrative Agent to become the
transferee beneficiary of the letter of credit, with the Administrative Agent
agreeing, in each case, that the proceeds of the letter of credit are to be
applied as provided in the Credit Agreement.

4.7.  Commercial Tort Claims.  If any Company shall, now or at any time
hereafter, hold or acquire a commercial tort claim, such Company shall
immediately notify the Administrative Agent in a writing signed by such Company
of the particulars thereof and grant to the Administrative Agent, for the
benefit of the Lenders and the Administrative Agent, in such writing a security
interest therein and in the proceeds thereof, all upon the terms of this
Agreement, with such writing to be in form and substance satisfactory to the
Administrative Agent.

4.8.  Other Actions as to any and all Collateral.  Each Company further agrees,
upon the request of the Administrative Agent and at the Administrative Agent’s
option, to take any and all other actions as the Administrative Agent may
determine to be necessary or useful for the attachment, perfection and first
priority of, and the ability of the Administrative Agent to enforce, the
Administrative Agent’s security interest in any and all of the Collateral,
including, without limitation, (a) executing, delivering and, where appropriate,
filing financing statements and amendments relating thereto under the Uniform
Commercial Code of any relevant jurisdiction, to the extent, if any, that such
Company’s signature thereon is required therefor, (b) causing the Administrative
Agent’s name to be noted as secured party on any certificate of title for a
titled good if such notation is a condition to attachment, perfection or
priority of, or ability of the Administrative Agent to enforce, the
Administrative Agent’s security interest in such Collateral, (c) complying with
any provision of any statute, regulation or treaty of the United States as to
any Collateral if compliance with such provision is a condition to attachment,
perfection or priority of, or ability of the Administrative Agent to enforce,
the Administrative Agent’s security interest in such Collateral, (d) obtaining
governmental and other third party waivers, consents and approvals, in form and
substance satisfactory to the Administrative Agent, including, without
limitation, any consent of any licensor, lessor or other person obligated on
Collateral, (e) obtaining waivers from mortgagees and landlords in form and
substance satisfactory to the Administrative

 

 

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Agent and (f) taking all actions under any earlier versions of the Uniform
Commercial Code or under any other law, as reasonably determined by the
Administrative Agent to be applicable in any relevant Uniform Commercial Code or
other jurisdiction, including any foreign jurisdiction, in each such case, at
the Companies’ expense.

5.  Relation to Other Collateral Documents.  The provisions of this Agreement
supplement the provisions of any real estate mortgage or deed of trust granted
by the Companies to the Administrative Agent, for the benefit of the Lenders and
the Administrative Agent, and which secures the payment or performance of any of
the Obligations. Nothing contained in any such real estate mortgage or deed of
trust shall derogate from any of the rights or remedies of the Administrative
Agent or any of the Lenders hereunder. In addition, to the provisions of this
Agreement being so read and construed with any such mortgage or deed of trust,
the provisions of this Agreement shall be read and construed with the other
Security Documents referred to below in the manner so indicated.

5.1.  Stock Pledge Agreement.  Concurrently herewith certain of the Companies
are executing and delivering to the Administrative Agent, for the benefit of the
Lenders and the Administrative Agent, a stock pledge agreement pursuant to which
each Company party thereto is pledging to the Administrative Agent, for the
benefit of the Lenders and the Administrative Agent, all of its shares of
capital stock in certain of its Subsidiaries. Such pledges shall be governed by
the terms of such pledge agreement and not by the terms of this Agreement.

5.2.  Patent and Trademark Assignments.  Concurrently herewith certain of the
Companies are executing and delivering to the Administrative Agent, for the
benefit of the Lenders and the Administrative Agent, a Patent Collateral
Assignment and Security Agreement (the “Patent Assignment”) and a Trademark
Collateral Assignment and Pledge Agreement (the “Trademark Assignment”) pursuant
to which such Companies are assigning to the Administrative Agent, for the
benefit of the Lenders and the Administrative Agent, certain Collateral
consisting of patents and patent rights and trademarks, service marks and
trademark and service mark rights, together with the goodwill appurtenant
thereto. The provisions of the Patent Assignment and the Trademark Assignment
are supplemental to the provisions of this Agreement, and nothing contained in
the Patent Assignment or the Trademark Assignment shall derogate from any of the
rights or remedies of the Administrative Agent or any of the Lenders hereunder.
Neither the delivery of, nor anything contained in, the Patent Assignment or the
Trademark Assignment shall be deemed to prevent or postpone the time of
attachment or perfection of any security interest in such Collateral created
hereby.

5.3.  Copyright Memorandum.  Concurrently herewith certain of the Companies are
executing and delivering to the Administrative Agent, for the benefit of the
Lenders and the Administrative Agent, for recording in the United States
Copyright Office (the “Copyright Office”), a Memorandum of Grant of

 

 

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Security Interest in Copyrights. Each Company represents and warrants to the
Lenders and the Administrative Agent that such Memorandum identifies all now
existing material copyrights and other rights in and to all material
copyrightable works of the Companies, identified, where applicable, by title,
author and/or Copyright Office registration number and date.

6.  Representations and Warranties Concerning each Company’s Legal Status.  Each
of the Companies has previously delivered to the Administrative Agent a
certificate signed by the Company and entitled “Perfection Certificate” (the
“Perfection Certificate”). Each Company represents and warrants to the Lenders
and the Administrative Agent as follows: (a) each Company’s exact legal name is
that indicated on its Perfection Certificate and on the signature page hereof,
(b) the Company is an organization of the type, and is organized in the
jurisdiction, set forth in its Perfection Certificate, (c) its Perfection
Certificate accurately sets forth the Company’s organizational identification
number or accurately states that such Company has none, (d) its Perfection
Certificate accurately sets forth such Company’s place of business or, if more
than one, its chief executive office, as well as such Company’s mailing address,
if different, (e) all other information set forth on its Perfection Certificate
pertaining to such Company is accurate and complete and (f) there has been no
change in any of such information since the date on which its Perfection
Certificate was signed by such Company.

7.  Covenants Concerning each Company’s Legal Status.  Each Company covenants
with the Lenders and the Administrative Agent as follows: (a) without providing
at least thirty (30) days prior written notice to the Administrative Agent, such
Company will not change its name, its place of business or, if more than one,
chief executive office, or its mailing address or organizational identification
number if it has one, (b) if such Company does not have an organizational
identification number and later obtains one, such Company will forthwith notify
the Administrative Agent of such organizational identification number, and (c)
such Company will not change its type of organization, jurisdiction of
organization or other legal structure.

8.  Representations and Warranties Concerning Collateral, Etc.  Each Company
further represents and warrants to the Lenders and the Administrative Agent as
follows: (a) such Company is the owner of the Collateral, free from any right or
claim of any person or any adverse lien, except for the security interest
created by this Agreement and other Liens permitted by the Credit Agreement, (b)
none of the Collateral constitutes, or is the proceeds of, “farm products” as
defined in §9-102(a)(34) of the Uniform Commercial Code of the State, (c) except
as disclosed to the Administrative Agent in writing, none of the account debtors
or other persons obligated on any of the Collateral is a governmental authority
covered by the Federal Assignment of Claims Act or like federal, state or local
statute or rule in respect of such Collateral, (d) such Company holds no
commercial tort claim except as indicated on its Perfection Certificate or
claims arising after the date on which notice is given, (e) such Company has at
all times operated its business in compliance with all applicable provisions of
the federal Fair Labor Standards Act, as amended, and with all applicable
provisions of federal, state and local

 

 

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statutes and ordinances dealing with the control, shipment, storage or disposal
of hazardous materials or substances, (f) all other information set forth on its
Perfection Certificate pertaining to the Collateral is accurate and complete,
and (g) there has been no change in any of such information since the date on
which its Perfection Certificate was signed by such Company.

9.  Covenants Concerning Collateral, Etc.  Each Company further covenants with
the Lenders and the Administrative Agent as follows: (a) the Collateral, to the
extent not delivered to the Administrative Agent pursuant to §4, will be kept at
those locations listed on its Perfection Certificate and such Company will not
remove the Collateral from such locations without providing at least 30 days
prior written notice to the Administrative Agent, (b) except for the security
interest herein granted and Liens permitted by §8.3 of the Credit Agreement, the
Companies shall be the owners of the Collateral free from any right or claim of
any other person or any lien, security interest or other encumbrance, and such
Company shall defend the same against all claims and demands of all Persons at
any time claiming the same or any interests therein adverse to the
Administrative Agent or any of the Lenders, (c) such Company shall not pledge,
mortgage or create, or suffer to exist any right of any person in or claim by
any person to the Collateral, or any lien, security interest or other
encumbrance in the Collateral in favor of any person, or become bound (as
provided in Section 9 203(d) of the Uniform Commercial Code of the State or any
other relevant jurisdiction or otherwise) by a security agreement in favor of
any person as secured party, other than the Administrative Agent except for
Liens permitted by the Credit Agreement, (d) such Company will keep the
Collateral in good order and repair (ordinary wear and tear excepted) and will
not use the same in violation of law or any policy of insurance thereon, (e) as
provided in the Credit Agreement, such Company will permit the Administrative
Agent, or its designee, to inspect the Collateral at any reasonable time,
wherever located, (f) such Company will pay promptly when due all taxes,
assessments, governmental charges and levies upon the Collateral or incurred in
connection with the use or operation of the Collateral or incurred in connection
with this Agreement, (g) such Company will continue to operate, its business in
compliance with all applicable provisions of the federal Fair Labor Standards
Act, as amended, and with all applicable provisions of federal, state and local
statutes and ordinances dealing with the control, shipment, storage or disposal
of hazardous materials or substances, (h) such Company will not sell or
otherwise dispose, or offer to sell or otherwise dispose, of the Collateral or
any interest therein except for sales or other dispositions expressly permitted
under the Credit Agreement, and (i) such Company will not file any amendment to
or termination of any Uniform Commercial Code financing statement naming such
Company as debtor and the Administrative Agent as secured party.

10.  Insurance.  

10.1.  Maintenance of Insurance.  Each Company will maintain with financially
sound and reputable insurers insurance with respect to its properties and
business against such casualties and contingencies as shall be in accordance
with general practices of businesses engaged in similar activities in similar

 

 

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geographic areas. Such insurance shall be in such minimum amounts that such
Company will not be deemed a co-insurer under applicable insurance laws,
regulations and policies and otherwise shall be in such amounts, contain such
terms, be in such forms and be for such periods as may be reasonably
satisfactory to the Administrative Agent. In addition, all such insurance shall
be payable to the Administrative Agent as loss payee under a “standard” or “New
York” loss payee clause for the benefit of the Lenders and the Administrative
Agent. Without limiting the foregoing, the Company will (a) keep all of its
physical property insured with casualty or physical hazard insurance on an “all
risks” basis, with broad form flood and earthquake coverages and electronic data
processing coverage, with a full replacement cost endorsement and an “agreed
amount” clause in an amount equal to 100% of the full replacement cost of such
property, (b) maintain all such workers’ compensation or similar insurance as
may be required by law and (c) maintain, in amounts and with deductibles
consistent with those generally maintained by businesses engaged in similar
activities in similar geographic areas and otherwise in a manner consistent with
its past practices, general public liability insurance against claims of bodily
injury, death or property damage occurring, on, in or about the properties of
the Company; business interruption insurance; and product liability insurance.

10.2.  Insurance Proceeds.  The proceeds of any casualty insurance in respect of
any casualty loss of any of the Collateral shall, subject to the rights, if any,
of other parties with an interest having priority in the property covered
thereby, be applied pursuant to the terms of the Credit Agreement.

10.3.  Continuation of Insurance.  All policies of insurance shall provide for
at least thirty (30) days prior written cancellation notice to the
Administrative Agent. In the event of failure by any Company to provide and
maintain insurance as herein provided, the Administrative Agent may, at its
option, provide such insurance and charge the amount thereof to the Companies.
Each Company shall furnish the Administrative Agent with certificates of
insurance and policies evidencing compliance with the foregoing insurance
provision.

11.  Collateral Protection Expenses; Preservation of Collateral.  

11.1.  Expenses Incurred by Administrative Agent.  In the Administrative Agent’s
discretion, the Administrative Agent may discharge taxes and other encumbrances
(other than Permitted Liens) at any time levied or placed on any of the
Collateral, maintain any of the Collateral, make necessary repairs thereto and
pay any necessary filing fees or insurance premiums, in each case if the
Companies fail to do so. Each Company agrees to reimburse the Administrative
Agent on demand for all expenditures so made. The Administrative Agent shall
have no obligation to any Company to make any such expenditures, nor shall the
making thereof be construed as a waiver or cure of any Default or Event of
Default.

 

 

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11.2.  Administrative Agent’s Obligations and Duties.  Anything herein to the
contrary notwithstanding, each Company shall remain obligated and liable under
each contract or agreement comprised in the Collateral to be observed or
performed by such Company thereunder. Neither the Administrative Agent nor any
Lender shall have any obligation or liability under any such contract or
agreement by reason of or arising out of this Agreement or the receipt by the
Administrative Agent or any Lender of any payment relating to any of the
Collateral, nor shall the Administrative Agent or any Lender be obligated in any
manner to perform any of the obligations of any Company under or pursuant to any
such contract or agreement, to make inquiry as to the nature or sufficiency of
any payment received by the Administrative Agent or any Lender in respect of the
Collateral or as to the sufficiency of any performance by any party under any
such contract or agreement, to present or file any claim, to take any action to
enforce any performance or to collect the payment of any amounts which may have
been assigned to the Administrative Agent or to which the Administrative Agent
or any Lender may be entitled at any time or times. The Administrative Agent’s
sole duty with respect to the custody, safe keeping and physical preservation of
the Collateral in its possession, under §9-207 of the Uniform Commercial Code of
the State or otherwise, shall be to deal with such Collateral in the same manner
as the Administrative Agent deals with similar property for its own account.

12.  Securities and Deposits.  The Administrative Agent may at any time
following and during the continuance of an Event of Default, at its option,
transfer to itself or any nominee any securities constituting Collateral,
receive any income thereon and hold such income as additional Collateral or
apply it to the Obligations. Whether or not any Obligations are due, the
Administrative Agent may, following and during the continuance of an Event of
Default, demand, sue for, collect, or make any settlement or compromise which it
deems desirable with respect to the Collateral. Regardless of the adequacy of
Collateral or any other security for the Obligations, any deposits or other sums
at any time credited by or due from the Administrative Agent or any Lender to
any Company may at any time be applied to or set off against any of the
Obligations.

13.  Notification to Account Debtors and Other Persons Obligated on
Collateral.  Each Company shall, following and during the continuance of an
Event of Default, at the request and option of the Administrative Agent, notify
account debtors and other persons obligated on any of the Collateral of the
security interest of the Administrative Agent in any account, chattel paper,
general intangible, instrument or other Collateral and that payment thereof is
to be made directly to the Administrative Agent or to any financial institution
designated by the Administrative Agent as the Administrative Agent’s agent
therefor, and following and during the continuance of an Event of Default, the
Administrative Agent may itself, without notice to or demand upon such Company,
so notify account debtors and other persons obligated on Collateral. After the
making of such a request or the giving of any such notification, such Company
shall hold any proceeds of collection of accounts, chattel paper, general
intangibles, instruments and other Collateral received by such Company as
trustee for the Administrative Agent, for the benefit of the Lenders and the
Administrative Agent,

 

 

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without commingling the same with other funds of such Company and shall turn the
same over to the Administrative Agent in the identical form received, together
with any necessary endorsements or assignments. The Administrative Agent shall
apply the proceeds of collection of accounts, chattel paper, general
intangibles, instruments and other Collateral received by the Administrative
Agent to the Obligations in accordance with the Credit Agreement, such proceeds
to be immediately credited after final payment in cash or other immediately
available funds of the items giving rise to them.

14.  Power of Attorney.  

14.1.  Appointment and Powers of Administrative Agent.  Each Company hereby
irrevocably constitutes and appoints the Administrative Agent and any officer or
agent thereof, with, subject to the provisions of applicable law, full power of
substitution, as its true and lawful attorneys-in-fact with full irrevocable
power and authority in the place and stead of such Company or in the
Administrative Agent’s own name, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents and instruments that may be necessary or useful to accomplish the
purposes of this Agreement and, without limiting the generality of the
foregoing, hereby gives said attorneys the power and right, on behalf of such
Company, without notice to or assent by such Company, to do the following:

(a)               upon the occurrence and during the continuance of an Event of
Default, generally to sell, transfer, pledge, make any agreement with respect to
or otherwise dispose of or deal with any of the Collateral in such manner as is
consistent with the Uniform Commercial Code of the State or any other relevant
jurisdiction and as fully and completely as though the Administrative Agent were
the absolute owner thereof for all purposes, and to do, at such Company’s
expense, at any time, or from time to time, all acts and things which the
Administrative Agent deems necessary or useful to protect, preserve or realize
upon the Collateral and the Administrative Agent’s security interest therein, in
order to effect the intent of this Agreement, all no less fully and effectively
as such Company might do, including, without limitation, (i) the filing and
prosecuting of registration and transfer applications with the appropriate
federal, state or local agencies or authorities with respect to trademarks,
copyrights and patentable inventions and processes, (ii) upon written notice to
such Company, the exercise of voting rights with respect to voting securities,
which rights may be exercised, if the Administrative Agent so elects, with a
view to causing the liquidation of assets of the issuer of any such securities
and (iii) the execution, delivery and recording, in connection with any sale or
other disposition of any Collateral, of the endorsements, assignments or other
instruments of conveyance or transfer with respect to such Collateral; and

 

 

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(b)               whether or not an Event of Default shall have occurred and be
continuing, to the extent that such Company’s authorization given in §3 is not
sufficient, to file such financing statements with respect hereto, with or
without such Company’s signature, or a photocopy of this Agreement in
substitution for a financing statement, as the Administrative Agent may deem
appropriate and to execute in such Company’s name such financing statements and
amendments thereto and continuation statements which may require such Company’s
signature.

14.2.  Ratification by the Companies.  To the extent permitted by law, each
Company hereby ratifies all that said attorneys shall lawfully do or cause to be
done by virtue hereof. This power of attorney is a power coupled with an
interest and is irrevocable.

14.3.  No Duty on Administrative Agent.  The powers conferred on the
Administrative Agent hereunder are solely to protect the interests of the
Administrative Agent and the Lenders in the Collateral and shall not impose any
duty upon the Administrative Agent to exercise any such powers. The
Administrative Agent shall be accountable only for the amounts that it actually
receives as a result of the exercise of such powers, and neither it nor any of
its officers, directors, employees or agents shall be responsible to any Company
for any act or failure to act, except for the Administrative Agent’s own gross
negligence or willful misconduct.

15.  Rights and Remedies.  If an Event of Default shall have occurred and be
continuing, the Administrative Agent, without any other notice to or demand upon
the Companies, shall have in any jurisdiction in which enforcement hereof is
sought, in addition to all other rights and remedies, the rights and remedies of
a secured party under the Uniform Commercial Code of the State or any other
relevant jurisdiction and any additional rights and remedies as may be provided
to a secured party at law or in equity in any jurisdiction in which Collateral
is located, including, without limitation, the right to take possession of the
Collateral, and for that purpose the Administrative Agent may, so far as any
Company can give authority therefor, enter upon any premises on which the
Collateral may be situated and remove the same therefrom. The Administrative
Agent may in its discretion require each Company to assemble all or any part of
the Collateral at such location or locations within the jurisdiction(s) of such
Company’s principal office(s) or at such other locations as the Administrative
Agent may reasonably designate. Unless the Collateral is perishable or threatens
to decline speedily in value or is of a type customarily sold on a recognized
market, the Administrative Agent shall give to the Companies at least twenty
(20) days prior written notice of the time and place of any public sale of
Collateral or of the time after which any private sale or any other intended
disposition is to be made. Each Company hereby acknowledges that twenty (20)
days prior written notice of such sale or sales shall be reasonable notice. In
addition, each Company waives any and all rights that it may have to a judicial
hearing in advance of the enforcement of any of the Administrative Agent’s
rights and remedies hereunder,

 

 

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including, without limitation, its right following an Event of Default to take
immediate possession of the Collateral and to exercise its rights and remedies
with respect thereto.

16.  Standards for Exercising Rights and Remedies.  To the extent that
applicable law imposes duties on the Administrative Agent to exercise remedies
in a commercially reasonable manner, each Company acknowledges and agrees that
it is not commercially unreasonable for the Administrative Agent (a) to fail to
incur expenses reasonably deemed significant by the Administrative Agent to
prepare Collateral for disposition or otherwise to fail to complete raw material
or work in process into finished goods or other finished products for
disposition, (b) to fail to obtain third party consents for access to Collateral
to be disposed of, or to obtain or, if not required by other law, to fail to
obtain governmental or third party consents for the collection or disposition of
Collateral to be collected or disposed of, (c) to fail to exercise collection
remedies against account debtors or other persons obligated on Collateral or to
fail to remove Liens on or any adverse claims against Collateral, (d) to
exercise collection remedies against account debtors and other persons obligated
on Collateral directly or through the use of collection agencies and other
collection specialists, (e) to advertise dispositions of Collateral through
publications or media of general circulation, whether or not the Collateral is
of a specialized nature, (f) to contact other persons, whether or not in the
same business as such Company, for expressions of interest in acquiring all or
any portion of the Collateral, (g) to hire one or more professional auctioneers
to assist in the disposition of Collateral, whether or not the Collateral is of
a specialized nature, (h) to dispose of Collateral by utilizing Internet sites
that provide for the auction of assets of the types included in the Collateral
or that have the reasonable capability of doing so, or that match buyers and
sellers of assets, (i) to dispose of assets in wholesale rather than retail
markets, (j) to disclaim disposition warranties, (k) to purchase insurance or
credit enhancements to insure the Administrative Agent against risks of loss,
collection or disposition of Collateral or to provide to the Administrative
Agent a guaranteed return from the collection or disposition of Collateral, or
(l) to the extent deemed appropriate by the Administrative Agent, to obtain the
services of brokers, investment bankers, consultants and other professionals to
assist the Administrative Agent in the collection or disposition of any of the
Collateral. Each Company acknowledges that the purpose of this §16 is to provide
non-exhaustive indications of what actions or omissions by the Administrative
Agent would fulfill the Administrative Agent’s duties under the Uniform
Commercial Code of the State or any other relevant jurisdiction in the
Administrative Agent’s exercise of remedies against the Collateral and that
other actions or omissions by the Administrative Agent shall not be deemed to
fail to fulfill such duties solely on account of not being indicated in this
§16. Without limitation upon the foregoing, nothing contained in this §16 shall
be construed to grant any rights to any Company or to impose any duties on the
Administrative Agent that would not have been granted or imposed by this
Agreement or by applicable law in the absence of this §16.

17.  No Waiver by Administrative Agent, Etc.  The Administrative Agent shall not
be deemed to have waived any of its rights and remedies in respect of the
Obligations or the Collateral unless such waiver shall be in writing and signed
by the Administrative Agent with the consent of the Required Lenders. No delay
or omission on the part of the

 

 

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Administrative Agent in exercising any right or remedy shall operate as a waiver
of such right or remedy or any other right or remedy. A waiver on any one
occasion shall not be construed as a bar to or waiver of any right or remedy on
any future occasion. All rights and remedies of the Administrative Agent with
respect to the Obligations or the Collateral, whether evidenced hereby or by any
other instrument or papers, shall be cumulative and may be exercised singularly,
alternatively, successively or concurrently at such time or at such times as the
Administrative Agent deems expedient.

18.  Suretyship Waivers by the Companies.  Each Company waives demand, notice
(other than notices expressly provided for herein or in any other Loan
Document), protest, notice of acceptance of this Agreement, notice of loans
made, credit extended, Collateral received or delivered or other action taken in
reliance hereon and all other demands and notices of any description. With
respect to both the Obligations and the Collateral, each Company assents to any
extension or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of or failure to perfect any security interest
in any Collateral, to the addition or release of any party or person primarily
or secondarily liable, to the acceptance of partial payment thereon and the
settlement, compromising or adjusting of any thereof, all in such manner and at
such time or times as the Administrative Agent may deem advisable. The
Administrative Agent shall have no duty as to the collection or protection of
the Collateral or any income therefrom, the preservation of rights against prior
parties, or the preservation of any rights pertaining thereto beyond the safe
custody thereof as set forth in §11.2. Each Company further waives any and all
other suretyship defenses.

19.  Marshalling.  Neither the Administrative Agent nor any Lender shall be
required to marshal any present or future collateral security (including but not
limited to the Collateral) for, or other assurances of payment of, the
Obligations or any of them or to resort to such collateral security or other
assurances of payment in any particular order, and all of the rights and
remedies of the Administrative Agent or any Lender hereunder and of the
Administrative Agent or any Lender in respect of such collateral security and
other assurances of payment shall be cumulative and in addition to all other
rights and remedies, however existing or arising. To the extent that it lawfully
may, each Company hereby agrees that it will not invoke any law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Administrative Agent’s rights and remedies under this Agreement or under
any other instrument creating or evidencing any of the Obligations or under
which any of the Obligations is outstanding or by which any of the Obligations
is secured or payment thereof is otherwise assured, and, to the extent that it
lawfully may, each Company hereby irrevocably waives the benefits of all such
laws.

20.  Proceeds of Dispositions; Expenses.  Each Company shall pay to the
Administrative Agent on demand any and all expenses, including reasonable
attorneys’ fees and disbursements, incurred or paid by the Administrative Agent
in protecting, preserving or, after and during the continuance of an Event of
Default, enforcing the Administrative Agent’s rights and remedies under or in
respect of any of the Obligations or any of the Collateral. After deducting all
of said expenses, the residue of any proceeds

 

 

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-15-

 

of collection or sale or other disposition of Collateral shall, to the extent
actually received in cash, be applied to the payment of the Obligations in
accordance with the provisions of the Credit Agreement, proper allowance and
provision being made for any Obligations not then due. Upon the final payment
and satisfaction in full of all of the Obligations and after making any payments
required by Sections 9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial
Code of the State, any excess shall be returned to the Companies. In the absence
of final payment and satisfaction in full of all of the Obligations, each
Company shall remain liable for any deficiency.

21.  Overdue Amounts.  Until paid, all amounts due and payable by the Companies
hereunder shall be a debt secured by the Collateral and shall bear, whether
before or after judgment, interest at the Default Rate.

22.  Governing Law; Consent to Jurisdiction.  THIS AGREEMENT IS INTENDED TO TAKE
EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE. Each Company agrees that any action or
claim arising out of any dispute in connection with this Agreement, any rights
or obligations hereunder or the performance or enforcement of such rights or
obligations may be brought in the courts of the State or any federal court
sitting therein and consents to the non-exclusive jurisdiction of such court and
to service of process in any such suit being made upon such Company by mail at
the address specified in §19 of the Credit Agreement. Each Company hereby waives
any objection that it may now or hereafter have to the venue of any such suit or
any such court or that such suit is brought in an inconvenient court.

23.  Submission to Jurisdiction; Waiver of Jury Trial.  EACH OF THE PARTIES
HERETO IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED
STATES FEDERAL OR MASSACHUSETTS STATE COURT SITTING IN MASSACHUSETTS IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT AND EACH OF
THE PARTIES HERETO HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH
ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. NONE OF THE
PARTIES HERETO SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM
OR OTHER LITIGATION PROCEDURE BASED UPON OR ARISING OUT OF OR OTHERWISE RELATED
TO THIS AGREEMENT AND EACH OF THE PARTIES HERETO HEREBY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO ANY SUCH JURY TRIAL AND ANY RIGHT
EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO
VENUE TO THE EXTENT ANY SUCH PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS §23.
Except as prohibited by law, each Company waives any right which it may have to
claim or recover in any litigation referred to in the preceding sentence any
special, exemplary, punitive or consequential damages or any damages other than,
or in addition to, actual damages. Each Company (a) certifies that none of the
Administrative Agent, any Lender or any representative, agent or attorney of the
Administrative Agent or any Lender has

 

 

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represented, expressly or otherwise, that the Administrative Agent or any Lender
would not, in the event of litigation, seek to enforce the foregoing waivers or
other waivers contained in this Agreement and (b) acknowledges that, in entering
into the Credit Agreement and the other Loan Documents to which the
Administrative Agent or any Lender is a party, the Administrative Agent and the
Lenders are relying upon, among other things, the waivers and certifications
contained in this §23.

24.  Amendments to Agreement and Documentation. This Agreement and the
provisions hereof may be amended, modified or waived only by a writing signed by
the Administrative Agent and each of the Companies.

25.  Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed an original but all of which shall constitute one
agreement, and shall constitute a binding agreement when executed by each of the
parties hereto.

26.  Notices. All written communications provided for hereunder shall be sent in
accordance with the provisions of §19 of the Credit Agreement.

27.  Miscellaneous.  The headings of each section of this Agreement are for
convenience only and shall not define or limit the provisions thereof. This
Agreement and all rights and obligations hereunder shall be binding upon each
Company and its successors and assigns, and shall inure to the benefit of the
Administrative Agent, the Lenders and their respective successors and assigns.
If any term of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of all other terms hereof shall in no way be
affected thereby, and this Agreement shall be construed and be enforceable as if
such invalid, illegal or unenforceable term had not been included herein. Each
Company acknowledges receipt of a copy of this Agreement.

[Remainder of page intentionally left blank]

 

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IN WITNESS WHEREOF, intending to be legally bound, each Company has caused this
Agreement to be duly executed as of the date first above written.

QUAKER FABRIC CORPORATION OF FALL

RIVER

QUAKER FABRIC CORPORATION

QUAKER TEXTILE CORPORATION

QUAKER FABRIC MEXICO, S.A. de C.V.

 

By:                                                                                                                               

Name:

Paul J. Kelly

 

Title:

Vice President Finance

 

 

(Signature Page to Security Agreement)

 

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Accepted:

 

BANK OF AMERICA, N.A.,

as Administrative Agent

By:                                                                                                                               

Name:

Matthew T. O’Keefe

 

Title:

Senior Vice Presiden

 

 

 

 

(Signature Page to Security Agreement)

 

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CERTIFICATE OF ACKNOWLEDGMENT

COMMONWEALTH OR STATE OF                                                    

)

 

 

) ss.

COUNTY OF
                                                                                             

)

 

On this ___ day of May, 2005, before me, the undersigned notary public,
personally appeared Paul J. Kelly, proved to me through satisfactory evidence of
identification, which were _____________________________, to be the person whose
name is signed on the preceding document, and acknowledged to me that he signed
it voluntarily for its stated purpose as Vice President Finance of Quaker Fabric
Corporation, Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation, and Quaker Fabric Mexico, S.A. de C.V.

 

 

______________________________

(official signature and seal of notary)

 

My commission expires:

 

 

(Acknowledgment Page to Security Agreement)

 

 

 

 

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