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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
March 11, 2005
Date of Report (Date of earliest event reported)
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-7023 04-1933106
(State of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 678-1951
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
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Item 1.01 Entry into a Material Definitive Agreement
Quaker Fabric Corporation of Fall River ("Quaker"), a wholly-owned subsidiary of
Quaker Fabric Corporation (the "Company"), two other subsidiaries of the Company
(together with Quaker, the "Borrowers") and the Company, as guarantor, are
parties to a Second Amended and Restated Credit Agreement, dated as of February
14, 2002, with a bank (the "Bank") which expires January 31, 2007 (as amended,
the "Credit Agreement"). The Credit Agreement provides for a revolving credit
facility and a letter of credit facility. See Note 5 of Notes to Consolidated
Financial Statements included in the Company's 2003 Annual Report on Form 10-K.
Quaker issued $45.0 million of Senior Notes due October 2005 and 2007 (the
"Senior Notes") during 1997 under a Note Agreement (as amended, the "Senior Note
Agreement") with an insurance company (the "Insurance Company" and together with
the Bank, the "Lenders"). The Senior Notes are unsecured and bear interest at a
fixed rate of 7.09% on $15.0 million and 7.18% on $30.0 million. The Senior
Notes may be prepaid in whole or in part prior to maturity, at Quaker's option,
subject to a yield maintenance premium, as defined. Annual principal payments
began on October 10, 2003 with a final payment due October 10, 2007. Annual
principal payment amounts are three payments of $5.0 million beginning in
October 2003 (of which only the October 2005 payment is unpaid as of March 11,
2005), followed by two payments of $15.0 million beginning in 2006.
On February 14, 2002, Quaker issued $5.0 million of 7.56% Series A Notes due
February 2009 (the "Series A Notes" and together with the Senior Notes, the
"Term Notes") under a Note Purchase Agreement (as amended, the "Series A Note
Agreement" and together with the Senior Note Agreement, the "Note Agreements")
with the Insurance Company. The Series A Notes are unsecured and bear interest
at a fixed rate of 7.56%, payable semiannually. The Series A Notes may be
prepaid in whole or in part prior to maturity, at Quaker's option, subject to a
yield maintenance premium, as defined. In addition, the Series A Note Agreement
includes a $45.0 million non-committed shelf note provision pursuant to which,
if the conditions to borrowing, including the consent of the Insurance Company,
were met, Quaker could issue additional senior notes prior to February 14, 2005
with maturity dates of up to ten years. Quaker does not anticipate issuing any
additional senior notes under the Series A Note Agreement.
The Company and/or Quaker are required to comply with a number of affirmative
and negative convenants under the Credit Agreement and the Note Agreements,
including, but not limited to, maintenance of certain financial tests and ratios
(including interest coverage ratios, net worth related ratios, and net worth
requirements); limitations on certain business activities of the Company and
Quaker; restrictions on the Company's and/or Quaker's ability to declare and pay
dividends, incur additional indebtedness, create certain liens, incur capital
lease obligations, make certain investments, engage in certain transactions with
stockholders and affiliates, and purchase, merge, or consolidate with or into
any other corporation.
On March 11, 2005, the Borrowers and the Company, as guarantor, entered into a
Forbearance and Amendment to the Second Amended and Restated Credit Agreement
(the "Bank Forbearance Agreement"). Pursuant to the terms of the Bank
Forbearance Agreement, the Borrowers and the Company acknowledged that in the
absence of a waiver from the Bank, they would be in breach of
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both the debt service coverage ratio covenant and the profitable operations
covenant in the Credit Agreement for the last quarter of 2004 and posibly in
violation of those covenants and the leverage ratio and senior debt ratio
covenant for each of the first and second quarters of 2005 and that these
breaches would constitute Events of Default, as defined in the Credit Agreement
(the "Specified Bank Defaults"). In the Bank Forbearance Agreement, the Bank
agreed to waive the Specified Bank Defaults through the period ending July 15,
2005 (the "Limited Bank Waiver Period"), subject to certain conditions including
the Bank's receipt of fully executed copies of a similar waiver from the
Insurance Company with respect to the fixed charge coverage ratio, the total
debt ratio and senior debt ratio set forth in the Note Agreements. The Bank
Forbearance Agreement also provides for, among other things, (i) an increase
in the interest rate and fees payable under the Credit Agreement, (ii) a
reduction in the permitted aggregate amount of capitalized leases and purchase
money debt to $5,000,000, (iii) the inclusion of a minimum EBITDA covenant,
(iv) a change in the definition of EBIT, (v) monthly financial reporting to
the Bank, (vi) the grant, not later than March 31, 2005, of a perfected, first
priority security interest (subject to certain exceptions, including pari passu
liens to be granted to the holders of the Term Notes) in all personal property
assets of the Borrowers and the Company then owned or thereafter acquired and
the contemporaneous execution of an intercreditor agreement, in form and
substance satisfactory to the Bank, among the Bank, the holders of the Term
Notes, the Borrowers and the Company, which is a condition to any further
borrowing under the Credit Agreement, and (vii) the reduction of the maximum
amount of loans and letters of credit the Bank has agreed to make under the
Credit Agreement to $15,000,000. In the Bank Forbearance Agreement, the
Borrowers and the Company agreed that they will repay all amounts outstanding,
and cash collateralize all letters of credit issued, under the Credit Agreement
on July 16, 2005 and that at such time the Bank will have all of its rights
and remedies under and in respect of the Credit Agreement and applicable law,
including those arising by virtue of the occurrence of the Specfied Bank
Defaults. As of March 11, 2004, there were no loans outstanding under the
Credit Agreement, approximately $5.3 million of letters of credit and unused
availability (after a reduction of the Bank's Commitment, as defined in the
Credit Agreement) of $9.7 million.
On March 11, 2005, Quaker and the Company, as guarantor, entered into a
Forbearance to Note Agreements with respect to the Note Agreements with the
Insurance Company (the "Insurance Company Forbearance Agreement"). Pursuant to
the terms of the Insurance Company Forbearance Agreement, Quaker and the Company
acknowledged that in the absence of a waiver from the Insurance Company, Quaker
and the Company would be in breach of the fixed charge coverage ratio set forth
in the Note Agreements for the last quarter of 2004 and possibly in breach of
the total debt ratio and senior debt ratio set forth in the Note Agreements for
each of the first and second quarters of 2005 and that these breaches would
constitute an Event of Default, as defined in the Note Agreements (the
"Specificied Insurance Company Defaults"). In the Insurance Company Forbearance
Agreement, the Insurance Company agreed to waive the Specified Insurance Company
Defaults through the period ending July 15, 2005 (the "Limited Insurance Company
Waiver Period"), subject to certain conditions including, but not limited to,
the Insurance Company's receipt of fully executed copies of a similar waiver
from the Bank with respect to the debt service coverage ratio covenant, the
profitable operations covenant, the leverage ratio covenant and senior debt
ratio set forth in the Credit Agreement. The Insurance Company Forbearance
Agreement also provides, among other things, (i) that the Company will not
permit any Priority Debt (as defined in the Note Agreements) to be outstanding
at anytime other than as permitted under the Note Agreements, (ii) the Company
will not, and will not permit any subsidiary
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to, directly or indirectly create, incur, assume or permit to exist any Lien (as
defined in the Note Agreements) for securing Recourse Obligations (as defined in
the Note Agreements), (iii) for the inclusion of a consolidated minium EBITDA
covenant, (iv) for monthly financial reporting to the Insurance Company, (v) for
the grant, not later than March 31, 2005, of a perfected, first priority
security interest (subject to certain exceptions, including pari passu liens to
be granted to the Bank) in all personal property assets of the Borrowers and the
Company then owned or thereafter acquired and the contemporaneous execution of
an intercreditor agreement, in form and substance satisfactory to the Insurance
Company, among the Bank, the Insurance Company, Borrowers and the Company,
(vi) that on or prior to July 15, 2005, the Company shall enter into a
refinancing credit facility and using the proceeds thereof shall repay in full
all of the Obligations (as defined in the Insurance Company Forbearance
Agreement) and (vii) that the Company will not, nor permit any subsidiary to,
make any investments other than as permitted in the Note Agreements. Pursuant
to the Insurance Company Forbearance Agreement, on July 15, 2005, the Company
has agreed to immediately repay to the Insurance Company all of the outstanding
Obligations, and the Company has acknowledged that the Insurance Company shall
be free in its sole and absolute discretion to proceed to enforce any or all of
its rights and remedies under or in respect of the Note Agreements and
applicable law, including without limitation, those of termination,
acceleration, enforcement and other rights and remedies arising by virtue of the
maturity of the Obligations and of the occurrence of the Specified Insurance
Company Defaults. As of March 11, 2005, Quaker owed $40.0 million principal plus
accrued interest under the Note Agreements.
The Company is in discussions with a commercial bank (the "Prospective Lender")
regarding a proposed new credit facility to replace, and repay borrowings under,
the Note Agreements and the Credit Agreement. Any such facility is expected to
include terms which may be unfavorable to the Company including, but not limited
to, the grant of security interests to the Prospective Lender to secure the
payment and performance of Quaker's and the Company's obligations under the
proposed credit facility and restrictions on Quaker's and the Company's capital
expenditures going forward. There can be no assurance that the Company will
reach agreement with the Prospective Lender on terms acceptable to the Company,
or at all. The Company may be required to seek alternate financing sources, the
terms of which financing, if obtainable, may be disadvantageous to the Company.
Based upon the anticipated performance of the Company for the foreseeable
future, and absent appropriate additional waivers or agreements to forbear from
the Lenders, the failure to obtain new financing would likely result in an Event
of Default under the Note Agreements and the Credit Agreement and the inability
to borrow under the Credit Agreement no later than July 16, 2005.
No dividends were paid on the Company's common stock prior to fiscal 2003.
During the first quarter of fiscal 2003, the Board of Directors adopted a new
dividend policy. This policy provides for future dividends to be declared at the
discretion of the Board of Directors, based on the Board's quarterly evaluation
of the Company's results of operations, cash requirements, financial conditions
and other factors deemed relevant by the Board. In the first nine months of 2004
and in 2003, the Company paid cash dividends of $1.5 million or $0.09 per common
share and $1.3 million or $0.075 per common share, respectively. The Company
previously agreed with its Lenders not to declare or pay any dividends or
distributions before December 31, 2004 or at any time when a Default has
occurred and is continuing. It is anticipated that any further amendments to the
Note Agreements or the Credit Agreement, or any agreements for alternate
financing, may prohibit the declaration or payment of dividends.
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The foregoing descriptions of the Bank Forbearance Agreement and the Insurance
Company Forbearance Agreement are qualified in their entirety by reference to
the Bank Forbearance Agreement and the Insurance Company Forbearance Agreement,
which are filed as Exhibits 10.16 and 10.17, respectively, to this Form 8-K and
are incorporated by reference herein.
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Item 9.01 Financial Statements and Exhibits
(c) Exhibits
10.16 Forbearance and Amendment (dated as of March 11, 2005) to Second
Amended and Restated Credit Agreement dated as of February 14, 2002 by
and among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Borrowers,
Quaker Fabric Corporation, as Parent, and Fleet National Bank, as the
Lender.
10.17 Forbearance Agreement (dated as of March 11, 2005) to the Note
Agreement dated as of October 10, 1997 and the Note Purchase and
Private Shelf Agreement, dated as of February 14, 2002 by and among
Quaker Fabric Corporation of Fall River, Pruco Life Insurance Company
and The Prudential Insurance Company of America.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
(Registrant)
Date: March 11, 2005 /s/ Paul J. Kelly
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Paul J. Kelly
Vice President -
Finance and Treasurer
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EXHIBIT INDEX
10.16 Forbearance and Amendment (dated as of March 11, 2005) to Second
Amended and Restated Credit Agreement dated as of February 14, 2002 by
and among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Borrowers,
Quaker Fabric Corporation, as Parent, and Fleet National Bank, as the
Lender.
10.17 Forbearance Agreement (dated as of March 11, 2005) to the Note
Agreement dated as of October 10, 1997 and the Note Purchase and
Private Shelf Agreement, dated as of February 14, 2002 by and among
Quaker Fabric Corporation of Fall River, Pruco Life Insurance Company
and The Prudential Insurance Company of America.
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STATEMENT OF DIFFERENCES
The section symbol shall be expressed as....................................'SS'