FORM 10-Q QUARTERLY REPORT
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended FEBRUARY 26, 2005
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5901
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FAB INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2581181
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 MADISON AVENUE, NEW YORK, N.Y. 10016
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(Address of principal executive office) (Zip Code)
(212) 592-2700
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year;
if changed since last report)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [_] No [X]
Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of May 11, 2005, 5,215,031 shares of the registrant's common stock, $0.20 par
value, were outstanding.
FAB INDUSTRIES INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Statement of Net Assets in Liquidation at
February 26, 2005 (unaudited) and November 27, 2004 2
Statement of changes in Net Assets in Liquidation
for the 13 Weeks ended February 26, 2005 (unaudited) 3
Condensed Consolidated Statements of Operations
13 Weeks ended February 28, 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
13 Weeks ended February 28, 2004 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6
Item 2. Management Discussion and Analysis of
Financial Condition And Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 21
Item 4. Controls and Procedures 21
Item 6. Exhibits 22
SIGNATURES
23
(1)
FAB INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
FEBRUARY 26, 2005 NOVEMBER 27, 2004
----------------- -----------------
ASSETS
Cash and cash equivalents $ 530,000 $ 639,000
Investment securities available-for-sale 19,400,000 19,255,000
Accounts receivable 6,324,000 7,057,000
Inventories 1,717,000 1,517,000
Other assets 3,111,000 3,034,000
Property, plant and equipment 6,082,000 6,082,000
---------------------------------------------------------------------------------------------------------
TOTAL ASSETS 37,164,000 37,584,000
---------------------------------------------------------------------------------------------------------
LIABILITIES:
Accounts payable 3,487,000 3,570,000
Corporate income and other taxes 566,000 819,000
Accrued payroll and related expenses 639,000 983,000
Other liabilities 3,719,000 3,636,000
Estimated cost of liquidation 11,648,000 11,589,000
---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 20,059,000 20,597,000
---------------------------------------------------------------------------------------------------------
Net assets in liquidation $17,105,000 $16,987,000
=========================================================================================================
See notes to condensed consolidated financial statements
(2)
FAB INDUSTRIES, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
PERIOD FROM NOVEMBER 27, 2004 THRU FEBRUARY 26, 2005 (UNAUDITED)
Net assets in liquidation at November 27, 2004 $16,987,000
===========
Changes in net assets in liquidation:
Interest and dividend income 182,000
Net loss on investment securities (56,000)
Net other operating income 51,000
Increase in estimated costs of liquidation (59,000)
---------
118,000
-----------
Net assets in liquidation at February 26, 2005 $17,105,000
===========
See notes to condensed consolidated financial statements.
(3)
FAB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 13 WKS ENDED
--------------------
February 28, 2004
--------------------
(unaudited)
Net sales $ 10,141,000
Cost of goods sold 9,712,000
------------
Gross profit 429,000
Operating Expenses:
Selling, general and administrative expenses 1,676,000
Other expense (Note 9) 250,000
Gain on sale of fixed assets (685,000)
------------
Total operating expenses 1,241,000
------------
Operating loss (812,000)
------------
Other income:
Interest and dividend income 222,000
Net gain (loss) on investment securities 168,000
------------
Total other income 390,000
------------
Loss before taxes (422,000)
Income tax benefit (130,000)
------------
Net loss $ (292,000)
============
Loss per share: (Note 4)
Basic $ (0.06)
Diluted $ (0.06)
Cash dividends declared per share $ 3.00
See notes to condensed consolidated financial statements.
(4)
FAB INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 13 WKS ENDED
--------------------
February 28, 2004
--------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (292,000)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for doubtful accounts 100,000
Depreciation and amortization 407,000
Deferred income taxes (52,000)
Net loss on investment securities (168,000)
Gain on disposition of fixed assets (685,000)
Decrease (increase) in:
Accounts receivable 1,765,000
Inventories 50,000
Other current assets 64,000
Other assets (68,000)
(Decrease) increase in:
Accounts payable 459,000
Accruals and other liabilities (151,000)
-----------
Net cash provided by
operating activities 1,429,000
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,000)
Proceeds from dispositions of property and equipment 1,364,000
Acquisition of investment securities (2,157,000)
-----------
Net cash used in
investing activities (815,000)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in cash and cash equivalents 614,000
Cash and cash equivalents, beginning of period 3,397,000
-----------
Cash and cash equivalents, end of period $ 4,011,000
See notes to condensed consolidated financial statements.
(5)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of presentation: (unaudited)
These financial statements should be read in conjunction with the financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended November 27, 2004. These financial statements supercede and replace
the financial information for the 13 weeks ended, and as of, February 26, 2005
contained in the Company's press release dated May 11, 2005, which was furnished
as an exhibit to its Current Report on Form 8-K dated May 11, 2005. That
preliminary financial information had not been reviewed by the Company's
auditors prior to the release thereof, as noted by the Company in its press
release. These financial statements have been prepared following the review by
the Company's auditors and contain adjustments to the preliminary information
contained in the press release. In the opinion of management, all adjustments
(consisting solely of adjustments to the estimated value of assets and costs of
liquidation and other recurring estimates) necessary for a fair statement of the
results of the liquidation of the Company for the interim period have been
recorded.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
reporting period. Examples of such estimates include, but are not limited to,
the accounting for contingencies and estimated costs of liquidation, which
represents the estimate of the costs to be incurred during liquidation. Actual
results could differ from those estimates.
The Company's Board of Directors adopted resolutions dated March 1, 2002, which
authorized, subject to stockholders approval, the sale of the Company's business
pursuant to a Plan of Liquidation and Dissolution (the "Plan"). The Company's
stockholders approved the Plan at the Company's annual meeting on May 30, 2002.
The Company engaged the investment banking firm of McFarland Dewey & Co., LLC in
November 2002 to assist it with the sale of the Company's business. McFarland
Dewey contacted numerous potential acquirers during the course of this
eighteen-month process. On October 14, 2003, the Company announced that it had
yet to receive any bona-fide offers to acquire the business as a going concern.
Following that announcement, on October 23, 2003, the Company received a
preliminary offer from a management-led buyout group to acquire the business, as
a going concern, for $3.75 per share. The Company subsequently announced on
November 14, 2003, that a stockholder filed a lawsuit, naming as defendants, the
Company and each of its directors, seeking class-action certification,
preliminary and permanent injunctions against the proposed management-led
buyout, and unspecified damages. The preliminary offer from the management-led
buyout group was subsequently withdrawn.
The Company continued the auction process following the withdrawal of the
management-led buyout group's preliminary offer. On March 10, 2004, the Company
paid a $3.00 per share liquidating distribution. Following this liquidating
distribution, the auction process resulted in the Company receiving three
non-binding initial indications of interest from unaffiliated third parties, at
prices ranging from $1.50 per share to $2.25 per share and a non-binding initial
indication of interest from SSJJJ, at a price of $2.83 per share. A Special
Committee of the Company's Board of Directors, (the "Special Committee")
comprised solely of independent directors, was formed to evaluate SSJJJ's
preliminary indication of interest. After further discussions between the
Special Committee and SSJJJ, SSJJJ indicated that it may be willing make a
binding offer of $2.80 per share to purchase the Company's business as a going
concern. SSJJJ informed the Special Committee on August 9, 2004, that it would
not be making a binding offer at that time to purchase the Company's business.
On August 11, 2004, the Company announced that it suspended its formal auction
process because it failed to receive a binding offer to purchase the Company's
business as a going concern.
The Company announced on March 9, 2005 that it had received a preliminary
non-binding indication of interest from SSJJJ Manufacturing Co., Inc., an
acquisition vehicle owned by several members of the Company's management,
including Steven Myers, the Company's President and Chief Operating Officer
("SSJJJ"), to acquire the business, as a going concern, at a price of $2.80 per
share. A Special Committee of the Company's Board of Directors, comprised solely
of independent directors, is currently evaluating SSJJJ's preliminary
non-binding indication of interest. Additionally, the Company recently has been
contacted by other persons who have expressed an interest in considering making
an offer to acquire all or a portion of the Company's assets. The Special
Committee will evaluate any offers that may be submitted on or before May 26,
2005 by any such persons. There can be no assurance that any such offers will be
received or if received that they will be satisfactory to the Special Committee
or result in a sale transaction.
(6)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Under the Plan, if the Company's business is not sold prior to May 30, 2005, the
Company will be required to transfer its assets and liabilities to a liquidating
trust for the benefit of the Company's stockholders. If the Company's assets and
liabilities are transferred to a liquidating trust on May 30, 2005, the
Company's stock transfer books will close and its common stock will be delisted
from trading on the AMEX effective on the close of business on May 30, 2005.
Thereafter, certificates representing shares of Company common stock will not be
assignable or transferable on the books of the Company, except by will,
intestate succession or by operation of law. Thus, at such time, it will no
longer be possible for the Company's stockholders to publicly trade the
Company's stock and the proportionate interests of all of the Company's
stockholders will be fixed on the basis of their respective stock holdings at
the close of business on May 30, 2005. After such date, any distributions made
by the Company will be made solely to the stockholders of record at the close of
business on May 30, 2005, except as may be necessary to reflect subsequent
transfers recorded on the Company's books from any transfers by will, intestate
succession or by operation of law. The interests in any liquidating trust will
not be transferable.
Since May 30, 2005 is not a business day, the transfer to the liquidating trust
will take place on May 27, 2005 and Fab's stock transfer books will close and
its common stock will be delisted from trading on AMEX on the close of business
on May 27, 2005.
There can be no assurance that the Company will be able to sell its business as
a going concern or that the sale of its business and assets will generate
proceeds to the stockholders in an amount equal to or greater than the market
price of its stock or the liquidation value of its assets.
Due to the uncertainty as to whether the Company will be sold prior to May 30,
2005, the Company determined that it is more appropriate to present the
Company's financial statements on a liquidation basis. Therefore, the Company
changed its basis of accounting to the liquidation basis as of November 27,
2004.
The amount of distributions ultimately available to be made to shareholders upon
the final liquidation of the Company may differ from the "net assets in
liquidation" recorded in the accompanying statements of Net Assets in
Liquidation as a result of future changes in settlement of liabilities and
obligations and actual costs of liquidation. The amounts realizable on the
assets may differ from the "net assets in liquidation" recorded in the
accompanying statements of Net Assets in Liquidation based on numerous factors
including timing of sales, market conditions and the quality of the assets at
the time of sale.
Under the liquidation basis of accounting, assets are stated at their estimated
net realizable value and liabilities are stated at their anticipated settlement
amounts, which approximates the $17,105,000 net orderly liquidation value.
Included in the liabilities, the Company accrued $11,648,000 in costs of
liquidation representing the estimate of the costs to be incurred during
liquidation, however, actual costs could vary from those estimates.
(7)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Liabilities, including estimated costs of liquidation, consist of the following:
(UNAUDITED)
FEBRUARY 26, 2005 NOVEMBER 27, 2004
----------------- -----------------
Accounts payable and accrued liabilities $ 8,411,000 $ 9,008,000
ESTIMATED COSTS OF LIQUIDATION:
Compensation and benefits 6,191,000 6,191,000
Defined benefit pension plan 2,092,000 2,033,000
Legal audit and tax services 1,250,000 1,250,000
Insurance 450,000 450,000
Other costs, including leases, property taxes,
utilities, maintenance, repairs, stationery
supplies, postage, and security 1,665,000 1,665,000
11,648,000 11,589,000
Total liabilities $20,059,000 $20,597,000
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is party to equity option contract as part of its investing
activities. Option contracts are contractual agreements that give the purchaser
the right, but not the obligation, to purchase or sell a financial instrument at
a predetermined exercise price. In return for this right, the purchaser pays a
premium to the seller of the option. By selling or writing options, the Company
receives a premium and becomes obligated during the term of the option to
purchase or sell a financial instrument at a predetermined exercise price if the
option is exercised, and assumes the risk of not being able to enter into a
closing transaction if a liquid secondary market does not exist.
In accordance with SFAS No. 133, the Company's policy is to recognize all
derivatives instruments as either assets or liabilities on the balance sheet at
fair value. Changes in fair value are recognized in the income statement in the
period in which they occur. Derivatives are not used for trading purposes.
Derivatives are used to hedge against fluctuations in the market value of equity
securities.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company's stock option plans were terminated subsequent to the fiscal year
ended November 30, 2002 and there has been no stock compensation expense under
the disclosure-only provision of SFAS No.123 subsequent thereto.
(8)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. Cash and cash equivalents consist of the following (in thousands):
(Unaudited)
February 26, 2005 November 27, 2004
----------------- -----------------
Cash and cash equivalents $ 530 $ 639
3. Investment Securities:
At February 26, 2005 and November 27, 2004, investment securities
available-for-sale consisted of the following (in thousands):
Fair
February 26, 2005 (unaudited) Cost Value
----------------------------------- ------- -------
Equities $ 6,626 $ 6,771
U.S. Treasury obligations 7,674 7,658
Corporate bonds 250 0
Money market 4,971 4,971
------- -------
$19,521 $19,400
Fair
November 28, 2004 Cost Value
----------------------------------- ------- -------
Equities $ 6,516 $ 6,651
U.S. Treasury obligations 11,132 11,112
Corporate bonds 1,591 1,339
Money Market 153 153
------- -------
$19,392 $19,255
(9)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. Investment Securities (continued):
During the three months ended February 26, 2005, the Company invested a portion
of it's investment securities in equity consisting of a portfolio of Standard
and Poor's 100 ("S&P 100") common stocks, the fair value of which varies
consistently with changes in the S&P 100 index. To hedge against fluctuations in
the market value of the portfolio, the Company has purchased short-term S & P
100 index put options and sold short-term S & P 100 index call options. Although
the Company uses these instruments to hedge against fluctuations in the market
value of the securities, the Company has not elected to use hedge accounting.
All gains and losses from the use of these instruments are included in the
income statement in the period that they occur. Included in the Company's equity
investment securities at February 26, 2005 and November 27, 2004 are short term
S & P 100 index put options with a fair value of $56,160 and $74,120,
respectively and short term S & P 100 index call options sold, not yet purchased
with a fair value of $17,280 and $20,710, respectively.
The Company has agreements with various brokerage firms to carry its account as
a customer. The brokers have custody of the Company's securities and, from time
to time, cash balances, which may be due from these brokers. These securities
and/or cash positions serve as collateral for any amounts due to brokers or as
collateral for securities sold short or securities purchased on margin. The
securities and/or cash positions also serve as collateral for potential defaults
of the Company.
The Company is subject to credit risk if the brokers are unable to repay
balances due or deliver securities in their custody. It is the policy of the
Company to limit the amount of credit exposure to any one financial institution.
The Company has received confirmation indicating that, with respect to
investment securities, each custodian with the exception of one custodian
maintains appropriate insurance coverage. During fiscal 2004 and the three
months ended February 26, 2005, that custodian had an average balance of
approximately $6.3 million, and $6.0 million, respectively, of the Company's
cash under investment, which from time to time during such periods was invested
entirely in equity securities. At February 26, 2005, that custodian had
approximately $6.0 million of the Company's cash under investments, with a
majority invested in equities. The Company's investment policy currently permits
up to 50% of the Company's portfolio to be held by the custodian. On May 4,
2005, that custodian's account was closed.
4. Loss Per Share:
Basic and diluted loss per share for the 13 weeks ended February 28, 2004 are
calculated as follows:
WEIGHTED
NET AVERAGE PER-SHARE
LOSS SHARES AMOUNT
--------- ---------- ----------
For the 13 weeks ended February 28, 2004: $(292,000) 5,215,031 $(0.06)
(10)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Litigation:
On November 10, 2003, a class action suit was filed against the Company in
Delaware Chancery Court. The complaint asserts claims against the Company and
certain of its officers and directors based on the management buy-out proposal
at a price allegedly lower than the cash value and book value of the Company's
shares and which was an allegedly interested transaction, the amendment to Mr.
Bitensky's employment contract, the Company's failure to seek stockholder
approval for the management buyout and the Company's failure to file a
certificate of dissolution with the Delaware Secretary of State. The complaint
alleges such actions constitute violations of defendant's fiduciary duties as
well as the provisions of the Delaware General Corporation Law.
The complaint does not seek a specific amount of damages, and seeks to enjoin
defendants from effectuating the planned management buyout. The company served
an answer to the complaint on December 11, 2003.
On each of November 21 and November 26, 2003 class action lawsuits were
initiated against the Company in Delaware Chancery Court asserting substantially
the same allegations as those described above.
The Company believes that each of the claims described above is without merit.
Further, certain of the claims described above have been rendered moot by the
withdrawal of preliminary offer by management-led buyout to acquire the Company.
By petition dated September 9, 2004, plaintiff requested that all of its claims
be dismissed because they have been rendered moot by the withdrawal of the
management buy-out and there is no current plan to effectuate a sale of the
Company's assets. Plaintiff also petitioned the Court for an award of reasonable
attorney's fees in the amount of $300,000 and attorney's expenses of $13,794.05
(the "Fee Petition") because plaintiff's claim conferred a benefit on the
Company's public stockholders by preventing the consummation of the proposed
management buy-out and preserving the value of the public stockholders'
investment in the Company stock. The Company opposed the petition.
On December 29, 2004, the Court of Chancery of the State of Delaware denied the
Fee Petition. The Court concluded that the Fee Petition should be denied as
plaintiff's claims either were not meritorious when filed or, to the extent that
they were, they are not yet moot.
Following that decision, plaintiff moved for summary judgment on its claims
relating to the Company's alleged failure to timely file a certificate of
dissolution and seeking a declaration that the plan of dissolution (the "Plan")
is invalid for failure to require a shareholder vote before the sale of all of
the Company's assets. The motions were fully briefed and argued before the Court
on April 12, 2005. On May 2, 2005, the court issued its opinion holding that the
Plan is valid in its entirety and that the Company has not violated Delaware law
by not yet filing its certificate of dissolution. The court stated that the
Company may negotiate and agree to a sale before the certificate of dissolution
is filed, but that the sale cannot be consummated until the certificate of
dissolution has become effective. The court concluded that once the dissolution
becomes effective, Fab may consummate a sale of its assets without a shareholder
vote.
A number of claims and lawsuits are pending against the Company. It is
impossible at this time for the Company to predict with any certainty the
outcome of such litigation. However, management is of the opinion based upon
information presently available, that it is unlikely that any liability would be
material in relation to the Company's consolidated financial position.
(11)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. Derivative Financial Instruments Held or Issued
The Company is party to equity option contracts as part of its investing
activities. Option contracts are contractual agreements that give the purchaser
the right, but not the obligation, to purchase or sell a financial instrument at
a predetermined exercise price. In return for this right, the purchaser pays a
premium to the seller of the option. By selling or writing options, the Company
receives a premium and becomes obligated during the term of the option to
purchase or sell a financial instrument at a predetermined exercise price if the
option is exercised, and assumes the risk of not being able to enter into a
closing transaction if a liquid secondary market does not exist. At February 26,
2005, included in the Company's equity investment securities are short term S &
P 100 index put options with a fair value of $56,160 and short term S & P 100
index call options sold, not yet purchased with a fair value of $17,280.
(12)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. Segment Information:
The Company adopted SFAS No. 131 "Disclosure About Segments of an Enterprise and
Related Information" in fiscal 1999. SFAS No. 131 requires companies to report
information on segments using the way management organizes segments within the
company for making operating decisions and assessing financial performance.
The Company's chief operating decision-maker is considered to be the Chief
Executive Officer (CEO). The Company's CEO evaluates both consolidated and
disaggregated financial information in deciding how to allocate resources and
assess performance. The Company has identified three reportable segments based
upon the primary markets it serves: Apparel Fabrics, Home Fashions, Industrial
Fabrics and Accessories and Other.
Apparel Fabrics: The Company's basic warp and circular knit fabrics are sold to
manufacturers of outerwear, intimate apparel, loungwear, and activewear. These
fabrics are sold primarily in piece dyed form, as well as in "PFP" (prepared for
print), and heat transfer print configurations.
The Company's wide elastic fabrics are sold to manufacturers of intimate
apparel, foundation, swimwear, athleticwear, aerobicwear, sportswear, and
healthcare products.
The Company's lace products are sold to manufacturers of intimate apparel,
hosiery, ladies sportswear, children's wear, swimwear, accessories, and hobbies
and crafts.
Home Fashions and Accessories: The Company utilizes its internally manufactured
fabrics and laces to produce flannel and satin sheets, blankets, comforters, and
other bedding-related products which are sold to specialty retail stores,
catalog and mail order companies and airlines through the Company's subsidiary,
Salisbury Manufacturing Corporation.
Other: Included in this segment is (1) Gem Urethane Corporation, (2) the
Over-the-Counter Retail operation and (3) sales of industrial and other
miscellaneous fabrics.
The Company's subsidiary, Gem Urethane Corporation produces a line of bonded
products for manufacturers of environmental, healthcare, industrial and consumer
products.
Gem also performs commission laminating for various manufacturers of consumer
products. Fire resistant fabrics are sold to manufacturers in the seating,
transportation, and military markets though its subsidiary Sandel International
Corporation.
The Company also sells its fabric and laces to "Over-the-Counter" retail
customers throught the Company's retail manufacturing operations, which are
located at the Company's Salisbury Manufacturing plant.
Specialized, engineered fabrics are sold to manufacturers of industrial,
healthcare, medical, and military products.
(13)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. Segment Information (continued):
The accounting policy of the reportable segments are the same as those described
in Summary of Accounting Policies. The Company neither allocates to the segments
nor bases segment decisions on the following:
- Interest and dividend income
- Interest and other expense
- Net gain on investment securities
- Income tax expense or benefit
Many of the Company's assets are used by multiple segments. While certain assets
such as Inventory and Property, Plant and Equipment are identifiable by segment,
an allocation of the substantial remaining assets is not meaningful.
The 13 weeks ended February 28, 2004, includes gain on the sale of fixed assets
of $685,000. Of this, $441,000 in the 13 weeks ended February 28, 2004 belongs
to the Other Segment and the balance applied to the Apparel Segment. In
addition, Apparel Segment includes $250,000 reserve for environmental costs. As
of February 26, 2005, accounts receivable, inventory and plant and equipment are
valued at net orderly liquidation value. In addition, other assets were
decreased to liquidation value.
(in thousands)
Home Fashions
FIRST QUARTER ENDED 02/26/05 and Accessories
---------------
(UNAUDITED) APPAREL OTHER TOTAL
Segment assets (1) $6,372 $398 $1,029 $7,799
(in thousands)
Home Fashions
FIRST QUARTER ENDED 02/28/04 and Accessories
---------------
(UNAUDITED) APPAREL OTHER TOTAL
External sales $6,990 $1,233 $1,918 $10,141
Intersegment sales 1,049 15 42 1,106
Operating income/(loss) (1,383) (77) 648 (812)
Segment assets 11,080 1,141 1,651 13,872
PROFIT OR LOSS (UNAUDITED) 2004
Total operating loss for segments $ (812)
Total other income 390
-------
Loss before income tax expense or benefit (422)
======
(1) As of February 26, 2005, accounts receivable, inventory and plant and
equipment are valued at net orderly liquidation value. In addition, other assets
were decreased to liquidation value.
(14)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. Commitments and Contingencies
Employment Agreement:
On July 25, 2003, the Company and Mr. Bitensky amended the employment agreement
between the Company and Mr. Bitensky dated as of March 1, 1993 to provide that
at such time as the Company is sold or liquidated pursuant to the Plan, in lieu
of the annual consulting fees due under such an agreement over the five year
consulting period provided therein, Mr. Bitensky will receive a lump sum payment
equal to the aggregate net present value of each payment due under such
agreement, such present value to be determined utilizing the prevailing prime
rate at the time of the payment, as determined by the Board.
Such amendment to the Employment Agreement also provides that Mr. Bitensky
relinquishes his right under the terms of the original agreement to require the
Company to purchase upon his death approximately $10,000,000 of shares of Common
Stock from his estate. In consideration of Mr. Bitensky's relinquishing such
right, the Company agreed to transfer to Mr. Bitensky ownership of the three
life insurance policies on Mr. Bitensky's life owned by the Company.
Other:
The Company has a letter of credit with its insurance provider for $100,000.
9. Other Expense:
The Company recorded an accrual of $250,000 for environmental costs in the
quarter ending February 28, 2004. The accrual represents the estimated costs
associated with a lagoon cleaning process as per North Carolina State
requirements to eliminate odors in a lagoon, which is located next to one of our
plants. The lagoon process has been completed and all associated costs
associated with this process have been paid.
10. Benefit Plans:
During the first quarter of fiscal 2004, the Company adopted the interim
disclosure provisions of SFAS No. 132 (revised 2003), "Employers' Disclosure
about Pensions and Other Postretirement Benefits, an Amendment of FASB
Statements no. 87, 88 and 106 and a Revision of FASB Statement No. 132".
(15)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
This statement revises employers' disclosures about pension plans and other post
retirement benefit plans. The following table summarizes the components of net
periodic benefit cost for the Company. (In thousands):
Three months ended
------------------------------------
Feb. 26, 2005 Feb. 28, 2004
----------------- ------------------
Service Service Cost $ 36 $ 40
Interest cost 44 54
Expected return on assets (35) (36)
Net loss recognized 5 8
Amortization of prior service cost 9 9
----------------- ------------------
Net periodic benefit cost $59 $75
----------------- ------------------
The Company contributed $ 50,000 during the period, December 1, 2004 through
February 26, 2005. In addition, the Company contributed $270,000 on March 15,
2005.
Pension Obligation:
The Company maintains a non-contributory defined benefit pension plan (Fab
Industries, Inc. Hourly Employees' Retirement Plan) which covers substantially
all hourly employees. The Plan provides benefits based on the participants'
years of service.
An estimate of the liability associated with terminating the plan for
underfunding of the hourly plan would be approximately $2.1 million. This will
be assessed by the Pension Benefit Guarantee Corporation. This has been included
in the estimated costs of liquidation. The Company plans to terminate the
non-contributory defined benefit pension plan and distribute the lump sum
payment to its participants on transfer of the Company's assets to the
liquidating trust.
(16)
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The domestic textile industry has been negatively affected by a flow of low cost
foreign imports and market conditions since 1998.
In the opinion of management, all adjustments (consisting solely of adjustments
to the estimated value of assets and costs of liquidation and other recurring
estimates) necessary for a fair statement of the results of the liquidation of
the Company for the interim period have been recorded.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the amounts of revenues and expenses during the
reporting period. Examples of such estimates include, but are not limited to,
the accounting for contingencies and estimated costs of liquidation, which
represents the estimate of the costs to be incurred during liquidation. Actual
results could differ from those estimates.
The Company's Board of Directors adopted resolutions dated March 1, 2002, which
authorized, subject to stockholders approval, the sale of the Company's business
pursuant to a Plan of Liquidation and Dissolution (the "Plan"). The Company's
stockholders approved the Plan at the Company's annual meeting on May 30, 2002.
The Company engaged the investment banking firm of McFarland Dewey & Co., LLC in
November 2002 to assist it with the sale of the Company's business. McFarland
Dewey contacted numerous potential acquirers during the course of this
eighteen-month process. On October 14, 2003, the Company announced that it had
yet to receive any bona-fide offers to acquire the business as a going concern.
Following that announcement, on October 23, 2003, the Company received a
preliminary offer from a management-led buyout group to acquire the business, as
a going concern, for $3.75 per share. The Company subsequently announced on
November 14, 2003, that a stockholder filed a lawsuit, naming as defendants, the
Company and each of its directors, seeking class-action certification,
preliminary and permanent injunctions against the proposed management-led
buyout, and unspecified damages. The preliminary offer from the management-led
buyout group was subsequently withdrawn.
The Company continued the auction process following the withdrawal of the
management-led buyout group's preliminary offer. On March 10, 2004, the Company
paid a $3.00 per share liquidating distribution. Following this liquidating
distribution, the auction process resulted in the Company receiving three
non-binding initial indications of interest from unaffiliated third parties, at
prices ranging from $1.50 per share to $2.25 per share and a non-binding initial
indication of interest from SSJJJ, at a price of $2.83 per share. A Special
Committee of the Company's Board of Directors, (the "Special Committee")
comprised solely of independent directors, was formed to evaluate SSJJJ's
preliminary indication of interest. After further discussions between the
Special Committee and SSJJJ, SSJJJ indicated that it may be willing make a
binding offer of $2.80 per share to purchase the Company's business as a going
concern. SSJJJ informed the Special Committee on August 9, 2004, that it would
not be making a binding offer at that time to purchase the Company's business.
On August 11, 2004, the Company announced that it suspended its formal auction
process because it failed to receive a binding offer to purchase the Company's
business as a going concern.
(17)
The Company announced on March 9, 2005 that it had received a preliminary
non-binding indication of interest from SSJJJ Manufacturing Co., Inc., an
acquisition vehicle owned by several members of the Company's management,
including Steven Myers, the Company's President and Chief Operating Officer
("SSJJJ"), to acquire the business, as a going concern, at a price of $2.80 per
share. A Special Committee of the Company's Board of Directors, comprised solely
of independent directors, is currently evaluating SSJJJ's preliminary
non-binding indication of interest. Additionally, the Company recently has been
contacted by other persons who have expressed an interest in considering making
an offer to acquire all or a portion of the Company's assets. The Special
Committee will evaluate any offers that may be submitted on or before May 26,
2005 by any such persons. There can be no assurance that any such offers will be
received or if received that they will be satisfactory to the Special Committee
or result in a sale transaction.
Under the Plan, if the Company's business is not sold prior to May 30, 2005, the
Company will be required to transfer its assets and liabilities to a liquidating
trust for the benefit of the Company's stockholders. If the Company's assets and
liabilities are transferred to a liquidating trust on May 30, 2005, the
Company's stock transfer books will close and its common stock will be delisted
from trading on the AMEX effective on the close of business on May 30, 2005.
Thereafter, certificates representing shares of Company common stock will not be
assignable or transferable on the books of the Company, except by will,
intestate succession or by operation of law. Thus, at such time, it will no
longer be possible for the Company's stockholders to publicly trade the
Company's stock and the proportionate interests of all of the Company's
stockholders will be fixed on the basis of their respective stock holdings at
the close of business on May 30, 2005. After such date, any distributions made
by the Company will be made solely to the stockholders of record at the close of
business on May 30, 2005, except as may be necessary to reflect subsequent
transfers recorded on the Company's books from any transfers by will, intestate
succession or by operation of law. The interests in any liquidating trust will
not be transferable.
There can be no assurance that the Company will be able to sell its business as
a going concern, that the Company will be able to liquidate all of its assets
prior to May 30, 2005, or that the sale of its business and assets will generate
proceeds to the stockholders in an amount equal to or greater than the market
price of its stock or the liquidation value of its assets at the time of sale.
Due to the uncertainty as to whether the Company will be sold prior to May 30,
2005, the Company determined that it is more appropriate to present the
Company's financial statements on a liquidation basis. Therefore, the Company
changed its basis of accounting to the liquidation basis as of November 27,
2004.
The amount of distributions ultimately available to be made to shareholders upon
the final liquidation of the Company may differ from the "net assets in
liquidation" recorded in the accompanying statements of Net Assets in
Liquidation as a result of future changes in settlement of liabilities and
obligations and actual costs of liquidation. The amounts realizable on the
assets may differ from the "net assets in liquidation" recorded in the
accompanying statements of Net Assets in Liquidation based on numerous factors
including timing of sales, market conditions and the quality of the assets at
the time of sale.
Under the liquidation basis of accounting, assets are stated at their estimated
net realizable value and liabilities are stated at their anticipated settlement
amounts, which approximates the $17,105,000 net orderly liquidation value.
Included in the liabilities, the Company accrued $11,648,000 in costs of
liquidation representing the estimate of the costs to be incurred during
liquidation, however, actual costs could vary from those estimates.
(18)
At February 26, 2005, the following represent the Company's estimated costs
and expenses of liquidation:
ESTIMATED COSTS OF LIQUIDATION:
Compensation and benefits $6,191,000
Defined benefit pension plan 2,092,000
Legal audit and tax services 1,250,000
Insurance 450,000
Other costs, including leases, property taxes,
utilities, maintenance, repairs, stationery
supplies, postage, and security 1,665,000
$11,648,000
Liquidity and Capital Resources
Due to the uncertainty as to whether the Company will be sold prior to May 30,
2005, the Company and its accountants, BDO Siedman, LLP, have determined that it
is more appropriate to present the Company's financial statements on a
liquidation basis. Therefore, the Company changed its basis of accounting to the
liquidation basis as of November 27, 2004. If the Company is not sold by May 30,
2005, all assets and liabilities will be transferred to a liquidating trust. The
liquidating trust would then succeed to all our remaining assets, liabilities
and obligations.
As of February 26, 2005, our assets consisted of $19,930,000 of cash and cash
equivalents and investment securities available for sale, $6,324,000 for
accounts receivable, $1,717,000 for inventories, $3,111,000 for other assets and
$6,082,000 for property, plant and equipment. Our liabilities consist of
$8,411,000 for accounts payable, accruals and other liabilities and $11,648,00
for estimated cost of liquidation. The net assets in liquidation is $17,105,000.
The amounts realizable on the assets may differ from the "net assets in
liquidation" recorded in the accompanying statements of Net Assets in
Liquidation based on numerous factors including timing of sales, market
conditions and the quality of the assets.
Commitments:
On July 25, 2003, the Company and Mr. Bitensky amended the employment agreement
between the Company and Mr. Bitensky dated as of March 1, 1993 to provide that
at such time as the Company is sold or liquidated pursuant to the Plan, in lieu
of the annual consulting fees due under such an agreement over the five year
consulting period provided therein, Mr. Bitensky will receive a lump sum payment
equal to the aggregate net present value of each payment due under such
agreement, such present value to be determined utilizing the prevailing prime
rate at the time of the payment, as determined by the Board.
Such amendment to the Employment Agreement also provides that Mr. Bitensky
relinquishes his right under the terms of the original agreement to require the
Company to purchase upon his death approximately $10,000,000 of shares of Common
Stock from his estate. In consideration of Mr. Bitensky's relinquishing such
right, the Company agreed to transfer to Mr. Bitensky ownership of the three
life insurance policies on Mr. Bitensky's life owned by the Company.
(19)
Off Balance Sheet Arrangements:
The Company does not utilize off Balance Sheet arrangements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the period. The critical
accounting policies that affect the Company's more complex judgments and
estimates are described in the Company's Annual Report on Form 10-K for the
fiscal year ended November 27, 2004.
FORWARD-LOOKING INFORMATION
Certain statements in this report are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. All
forward-looking statements involve risks and uncertainties. In particular, any
statement contained herein, in press releases, written statements or other
documents filed with the Securities and Exchange Commission, or in our
communications and discussions with investors and analysts in the normal course
of business including, but not limited to, meetings, phone calls and conference
calls, regarding the sale of our assets pursuant to a plan of liquidation and
dissolution, as well as expectations with respect to future sales and operating
efficiencies prior to a sale of the company, are subject to known and unknown
risks, uncertainties and contingencies, many of which are beyond our control and
which may cause actual results, performance or achievements to differ materially
from anticipated results, performances or achievements. Forward-looking
statements, which are based on certain assumptions and describe our future
plans, strategies, and expectations, are generally identifiable by the use of
words "may", "should", "expect", "anticipate", "estimate" "believe" "intend" or
"project" or the negative of them or other variations of them or comparable
terminology.
Factors that could have a material adverse effect on our operations and future
prospects include, but are not limited to: our ability to find qualified buyers
for our assets; overall economic and business conditions; our continuing ability
to support the demand for our goods and services; competitive factors in the
industries in which we compete; changes in government regulation; changes in tax
requirements (including tax rate changes, new tax laws and revised tax law
interpretations); interest rate fluctuations and other capital market
conditions, including foreign currency rate fluctuations; material contingencies
provided for in a sale of our assets; de-listing of our common stock from the
American Stock Exchange; our ability to retain key employees through any wind
down period; and any litigation arising as a result of our plan to wind down our
operations. These risks and uncertainties should be considered in evaluating any
forward-looking statements contained in this quarterly report on Form 10-Q.
We undertake no obligation to update or revise a forward-looking statement,
whether as a result of new information, future events, or otherwise, other than
required by law.
(20)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to risk of fluctuations in the market value of
equity securities. To manage this exposure, the Company uses
derivatives to hedge against fluctuations in the market value of equity
securities. The Company's policy is to recognize all derivative
instruments as either assets or liabilities on the balance sheet at
fair value. Changes in the fair value are recognized in the income
statement in the period in which they occur. Derivatives are not used
for trading purposes. At February 26, 2005, included in the Company's
equity investment securities are short term S & P 100 index put options
with a fair value of $56,160 and short term S & P 100 index call
options sold, not yet purchased with a fair value of $17,280. We
believe this is our only area of market risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Our Chief Executive
Officer and Chief Financial Officer, have concluded, based on their
evaluation, as of the end of the period covered by this report, that
our disclosure controls and procedures (as defined in the Securities
and Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)) are (1)
effective to ensure that material information required to be disclosed
by us in reports filed or submitted by us under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and
forms, and (2) designed to ensure the material information required to
be disclosed by us in such reports is accumulated, organized and
communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriated, to allow timely decisions
regarding required disclosure.
(b) INTERNAL CONTROL OVER FINANCIAL REPORTING: There were no significant
changes in the Company's internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities and
Exchange Act of 1934, as amended) that occurred during the Company's
most recent quarter that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over
financial reporting.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute assurance
that the objectives of the system will be met. In addition, the design
of any control system is based in part upon certain assumptions about
the likelihood of future events. Because of these and other inherent
limitations of control systems, there is only reasonable assurance that
our controls will succeed in achieving their stated goals under all
potential future conditions.
(21)
ITEM 6. EXHIBITS
31.1 Certification by Samson Bitensky pursuant to Section 302 of the
Sarbanes-Oxley Act.
31.2 Certification by David A. Miller pursuant to Section 302 of the
Sarbanes-Oxley Act.
32.1 Certification by Samson Bitensky pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2 Certification by David A. Miller pursuant to 18 U.S.C. Section 1350,
as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act.
(22)
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.
Dated: May 24, 2005 FAB INDUSTRIES, INC.
By: /s/ Samson Bitensky
-----------------------
Samson Bitensky
Chairman of the Board
and Chief Executive Officer
By: /s/ David A. Miller
-----------------------------
David A. Miller
Vice President-Finance,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
(23)