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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 MAY 28, 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 TRUST
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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)
FAB INDUSTRIES, INC.
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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 8/10/2005, there were 5,215,031 Units of the registrant outstanding.
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EXPLANATORY NOTE.
As more fully described in this Quarterly Report of Form 10-Q, as of
the close of business on May 27, 2005, Fab Industries, Inc. (referred to
hereinafter as the "Company") transferred all of its assets and liabilities into
a liquidating trust called the Fab Industries Trust (referred to hereinafter as
the "Trust") and cancelled all of its issued and outstanding stock. This
Quarterly Report on Form 10-Q is being filed by the Trust as successor to the
Company. All references to the Company from and after May 27, 2005 shall be
deemed to be references to the Trust.
FAB INDUSTRIES TRUST AND SUBSIDIARIES
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Statement of Net Assets in Liquidation at May 28, 2005
(unaudited) and November 27, 2004 1
Statement of changes in Net Assets in Liquidation for the 26
Weeks ended May 28, 2005 (unaudited) 2
Condensed Consolidated Statements of Operations
13 Weeks ended May 29, 2004 (unaudited) 3
Condensed Consolidated Statements of Operations
26 Weeks ended May 29, 2004 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
26 Weeks ended May 29, 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 20
Item 4. Controls and Procedures 20
Item 6. Exhibits 21
SIGNATURES 22
i
FAB INDUSTRIES TRUST AND SUBSIDIARIES
STATEMENT OF NET ASSETS IN LIQUIDATION
(UNAUDITED)
ASSETS: MAY 28, 2005 NOVEMBER 27, 2004
Cash and cash equivalents $ 795,000 $ 639,000
Investment securities available-for-sale 18,813,000 19,255,000
Accounts receivable 6,690,000 7,057,000
Inventories 1,440,000 1,517,000
Other assets 3,030,000 3,034,000
Property, plant and equipment 6,142,000 6,082,000
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TOTAL ASSETS 36,910,000 37,584,000
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LIABILITIES:
Accounts payable 3,860,000 3,570,000
Corporate income and other taxes 480,000 819,000
Accrued payroll and related expenses 802,000 983,000
Other liabilities 5,711,000 3,636,000
Estimated cost of liquidation 9,556,000 11,589,000
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TOTAL LIABILITIES 20,409,000 20,597,000
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Net assets in liquidation $16,501,000 $16,987,000
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See notes to condensed consolidated financial statements
1
FAB INDUSTRIES TRUST AND SUBSIDIARIES
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
PERIOD FROM NOVEMBER 27, 2004 THRU MAY 28, 2005 (UNAUDITED)
Net assets in liquidation at November 27, 2004 $16,987,000
Reductions in net assets in liquidation:
Interest and dividend income 268,000
Net gain on investment securities 183,000
Net other operating loss (937,000)
--------
(486,000)
--------
Net assets in liquidation at May 28, 2005 $16,501,000
===========
See notes to condensed consolidated financial statements.
2
FAB INDUSTRIES TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 13 WKS ENDED
--------------------
May 29, 2004
-------------
(unaudited)
Net sales $14,596,000
Cost of goods sold 12,285,000
-------------
Gross profit 2,311,000
Operating Expenses:
Selling, general and administrative expenses 1,993,000
Gain on sale of fixed assets (322,000)
--------------
Total operating expenses 1,671,000
--------------
Operating income 640,000
--------------
Other income:
Interest and dividend income 108,000
Net gain on investment securities 434,000
--------------
Total other income 542,000
--------------
Income before taxes 1,182,000
Income tax expense 415,000
-------------
Net income $ 767,000
=============
Income per share: (Note 4)
Basic $ 0.15
Diluted $ 0.15
Cash dividends declared per share $ 3.00
See notes to condensed consolidated financial statements.
3
FAB INDUSTRIES TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 26 WKS ENDED
--------------------
May 29, 2004
------------
(unaudited)
Net sales $24,737,000
Cost of goods sold 21,997,000
------------
Gross profit 2,740,000
Operating Expenses:
Selling, general and administrative expenses 3,669,000
Gain on sale of fixed assets (1,007,000)
Other expense (Note 8) 250,000
------------
Total operating expenses 2,912,000
------------
Operating loss (172,000)
------------
Other income:
Interest and dividend income 330,000
Net gain on investment securities 602,000
------------
Total other income 932,000
------------
Income before taxes 760,000
Income tax expense 285,000
------------
Net income $ 475,000
============
Income per share: (Note 4)
Basic $ 0.09
Diluted $ 0.09
Cash dividends declared per share $ 3.00
See notes to condensed consolidated financial statements.
4
FAB INDUSTRIES TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 26 WKS ENDED
--------------------
MAY 29, 2004
------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $475,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for doubtful accounts 350,000
Depreciation and amortization 815,000
Deferred income taxes (52,000)
Net gain on investment securities (602,000)
Gain on disposition of fixed assets (1,007,000)
Decrease (increase) in:
Accounts receivable (1,455,000)
Inventories 212,000
Other current assets 287,000
Other assets 24,000
(Decrease) increase in:
Accounts payable 1,198,000
Accruals and other liabilities 899,000
-----------
Net cash provided by
operating activities 1,144,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (40,000)
Proceeds from dispositions of property and equipment 1,738,000
Proceeds from sales of investment securities 11,253,000
------------
Net cash provided by
investing activities 12,951,000
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends (15,645,000)
-----------
Decrease in cash and cash equivalents (1,550,000)
Cash and cash equivalents, beginning of period 3,397,000
-----------
Cash and cash equivalents, end of period $1,847,000
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 Fab Industries, Inc.'s Annual
Report on Form 10-K for the year ended November 27, 2004.
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. Under the Plan, the Company was required to transfer
its assets and liabilities to a liquidating trust for the benefit of the
Company's stockholders on May 30, 2005, if the Company's business has not been
sold by such date.
The Company announced on May 27, 2005 that it entered into a definitive
agreement for the "as is, where is" sale, on a going concern basis of all it's
assets and the assumption of all it's liabilities to SSJJJ Manufacturing, LLC,
an acquisition vehicle owned by several members of the Company's management,
including Steven Myers, the Company's President and Chief Operating Officer
("SSJJJ") at a cash price of $3.15 per share, for an aggregate consideration of
$16,427,347. The purchase price will be paid at the closing of the transaction
by having the Company retain an amount of cash equal to $16,427,347, with any
cash shortfall from such amount to be paid by SSJJJ.
The closing on the asset sale is subject to the Trust, as successor to
the Company, reaching final settlement of its previously disclosed shareholder
litigation. The Company and the plaintiffs have entered into a Stipulation of
Settlement pursuant to which the shareholder litigation will be dismissed if the
court approves such settlement. A settlement hearing has been scheduled for
September 21, 2005. At the settlement hearing, the court will, among other
things, determine whether or not to approve the settlement of the shareholder
litigation.
Since the closing of the sale of the Company's assets and liabilities
to SSJJJ was subject to the final settlement of the shareholder litigation and
could not close on or prior May 30, 2005, all of the Company's assets and
liabilities were transferred to a liquidating trust (the "Fab Industries Trust")
on May 27, 2005. In addition, in accordance with the terms of the Plan, the
Company's stock transfer books closed effective as of the close of business on
May 27, 2005 and its common stock was delisted from trading on the AMEX.
Consequently, Friday May 27, 2005, was the last day the Company's common stock
traded on the AMEX. The Company also filed its certificate of dissolution,
effective as of the close of business on Friday, May 27, 2005, at which time all
of the Company assets, including the definitive agreement for the sale of the
business to SSJJJ, and all of the Company's liabilities, were transferred to the
Fab Industries Trust. As of the
6
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
close of business on May 27, 2005, certificates representing shares of Company
common stock are no longer assignable or transferable, except by will, intestate
succession or by operation of law and the proportionate interests of all the
Company's stockholders in the trust was fixed on the basis of their respective
stock holdings at the close of business on Friday, May 27, 2005. After such
date, any distributions made by the Trust will be made solely to the
stockholders of record of the Company at the close of business on May 27, 2005,
except as may be necessary to reflect subsequent transfers by will, intestate
succession or by operation of law. The interests in the trust are not
transferable, except by will, intestate succession or by operation of law. The
trustee of the trust is Mr. Samson Bitensky, the Company's Chairman and Chief
Executive Officer and the trust has a three-year duration.
On June 3, 2005, the Pension Benefit Guaranty Corporation ("PBGC")
commenced a proceeding to terminate the Fab Industries, Inc. Hourly Employees'
Retirement Plan (the "Retirement Plan") as of May 30, 2005, pursuant to the
PBGC-initiated termination procedures set out in Section 4042 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The Trust expects
that it will soon either (i) agree to termination of the Retirement Plan on the
basis proposed by PBGC, or (ii) initiate a so-called "standard" termination
under Section 4041 of ERISA. In either such case, the Trust expects that it will
pay the underfunding shortfall either to the Retirement Plan (in the case of a
standard termination) or to the PBGC on behalf of the Retirement Plan (in
connection with a PBGC-initiated termination). Based on estimates recently
received from the Trust's actuaries, the termination underfunding shortfall at
July 31, 2005 is estimated to be approximately $2 million.
The Trust's financial statements are presented on a liquidation basis
as the Trust's assets and liabilities were transferred to the liquidating trust.
The amount of distributions ultimately available to be made to shareholders upon
the final liquidation of the Trust 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.
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 $16,501,000 net orderly liquidation
value. Included in the liabilities, the Trust accrued $9,556,000 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)
-----------
MAY 28, 2005 NOVEMBER 27, 2004
------------ -----------------
Accounts payable and accrued liabilities $10,853,000 $9,008,000
ESTIMATED COSTS OF LIQUIDATION:
Compensation and benefits 6,191,000 6,191,000
Defined benefit pension plan (1) -- 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
--------- ---------
9,556,000 11,589,000
--------- ----------
Total liabilities $20,409,000 $20,597,000
=========== ===========
(1) $2,007,000 of defined benefit plan transferred to accounts payable and
accrued liabilities.
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.
2. Cash and cash equivalents consist of the following (in thousands):
(UNAUDITED)
MAY 28, 2005 NOVEMBER 27, 2004
------------ -----------------
Cash and cash equivalents $ 795 $ 639
======== =======
8
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
3. Investment Securities:
At May 28, 2005 and November 27, 2004, investment securities
available-for-sale consisted of the following (in thousands):
FAIR
MAY 28, 2005 (UNAUDITED) COST VALUE
----------------------------------- ------------ ---------
U.S. Treasury obligations 18,466 18,508
Corporate bonds 250 0
Money market 305 305
-------- ---------
$ 19,021 $ 18,813
======== =========
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
======== =========
The Trust has agreements with various brokerage firms to carry its
account as a customer. The brokers have custody of the Trust'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 Trust.
The Trust 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
Trust to limit the amount of credit exposure to any one financial institution.
The Trust has received confirmation indicating that, with respect to investment
securities, each custodian maintains appropriate insurance coverage.
9
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
4. Earnings Per Share:
Basic and diluted earnings per share for the 13 weeks and 26 weeks
ended May 29, 2004 are calculated as follows:
WEIGHTED
NET AVERAGE PER-SHARE
INCOME SHARES AMOUNT
------ ------ ------
For the 13 weeks ended May 29, 2004: $767,000 5,215,031 $0.15
-------- --------- -----
For the 26 weeks ended May 29, 2004: $475,000 5,215,031 $0.09
-------- --------- -----
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.
10
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
5. Litigation continued:
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.
The closing on the asset sale is subject to the Trust, as successor to
the Company, reaching final settlement of its previously disclosed shareholder
litigation. The Company and the plaintiffs have entered into a Stipulation of
Settlement pursuant to which the shareholder litigation will be dismissed if the
court approves such settlement. A settlement hearing has been scheduled for
September 21, 2005. At the settlement hearing, the court will, among other
things, determine whether or not to approve the settlement of the shareholder
litigation.
On June 3, 2005, the Pension Benefit Guaranty Corporation ("PBGC")
commenced a court proceeding to terminate the Fab Industries, Inc. Hourly
Employees' Retirement Plan (the "Retirement Plan") as of May 30, 2005, pursuant
to the PBGC-initiated termination procedures set out in Section 4042 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Trust
expects that it will soon either (i) agree to termination of the Retirement Plan
on the basis proposed by PBGC, or (ii) initiate a so-called "standard"
termination under Section 4041 of ERISA. In either such case, the Trust expects
that it will pay the underfunding shortfall either to the Retirement Plan (in
the case of a standard termination) or to the PBGC on behalf of the Retirement
Plan (in connection with a PBGC-initiated termination). Based on estimates
recently received from the Trust's actuaries, the termination underfunding
shortfall at July 31, 2005 is estimated to be approximately $2 million.
A number of claims and lawsuits are pending against the Trust. It is
impossible at this time for the Trust 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 Trust's consolidated financial position.
11
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
6. 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 Trust's chief operating decision-maker is considered to be the
Chief Executive Officer (CEO). The Trust's CEO evaluates both consolidated and
disaggregated financial information in deciding how to allocate resources and
assess performance.
12
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
6. Segment Information (continued):
The Trust 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 Trust's basic warp and circular knit fabrics are
sold to manufacturers of outerwear, intimate apparel, loungewear, 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 Trust's wide elastic fabrics are sold to manufacturers of intimate
apparel, foundation, swimwear, athleticwear, aerobicwear, sportswear, and
healthcare products.
The Trust'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 Trust 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 Trust'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 Trust'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 Trust also sells its fabric and laces to "Over-the-Counter" retail
customers through the Company's retail manufacturing operations, which are
located at the Trust's Salisbury Manufacturing plant.
Specialized, engineered fabrics are sold to manufacturers of
industrial, healthcare, medical, and military products.
The accounting policy of the reportable segments are the same as those
described in Summary of Accounting Policies. The Trust 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
13
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
6. Segment Information (continued):
Many of the Trust'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 26 weeks and 13 weeks ended May 29, 2004 includes gain on the sale
of fixed assets of $1,007,000 and $322,000. Of this, $441,000 in the 26 weeks
ended May 29, 2004 belongs to the Other Segment and the balance applied to the
Apparel Segment. In addition, for the 26 weeks ended May 29, 2004 the Apparel
Segment includes $250,000 reserve for environmental costs.
(in thousands)
HOME
FASHIONS AND
26 WEEKS ENDED 05/28/05 APPAREL ACCESSORIES OTHER TOTAL
----------------------- ------- ----------- ----- -----
(UNAUDITED)
Segment assets (1) $6,145 $384 $1,053 $7,582
(in thousands)
HOME
FASHIONS AND
26 WEEKS ENDED 05/29/04 APPAREL ACCESSORIES OTHER TOTAL
----------------------- ------- ----------- ----- -----
(UNAUDITED)
External sales $17,724 $2,595 $4,418 $24,737
Intersegment sales 1,657 25 96 1,778
Operating income/(loss) (1,478) 186 1,120 (172)
Segment assets 11,060 941 1,572 13,573
PROFIT OR LOSS (UNAUDITED) 26 WEEKS ENDED 5/29/04
-------------------------- ----------------------
Total operating loss for segments $ (172)
Total other income 932
------
Income before taxes on income $ 760
======
HOME
FASHIONS AND
13 WEEKS ENDED 05/29/04 APPAREL ACCESSORIES OTHER TOTAL
----------------------- ------- ----------- ----- -----
(UNAUDITED)
External sales $10,734 $1,362 $2,500 $14,596
Intersegment sales 608 10 54 672
Operating income/(loss) (95) 263 472 640
14
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
PROFIT OR LOSS (UNAUDITED) 13 WEEKS ENDED 5/29/04
-------------------------- ----------------------
Total operating income for segments $ 640
Total other income 542
-------
Income before taxes on income $ 1,182
=======
(1) As of May 28, 2005, accounts receivable, inventory and plant and equipment
are valued at net orderly liquidation value. In addition, other assets were
decreased to liquidation value.
7. 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. On June 22,
2005, Mr. Bitensky received a lump sum payment of $1,157,474.
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 Trust has a letter of credit with its insurance provider for $100,000.
8. 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.
15
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
9. 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".
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 Trust.
(IN THOUSANDS):
SIX MONTHS ENDED
-------------------------
May 28, 2005 May 29, 2004
-------------------------
Service Cost $ 72 $ 80
Interest cost 88 108
Expected return on assets (70) (72)
Net loss recognized 10 16
Amortization of prior service cost 18 18
-------------------------
Net periodic benefit cost $ 118 $ 150
=========================
The Trust contributed $320,000 during the period, December 1, 2004
through May 28, 2005. In addition, the Trust contributed $95,000 on June 15,
2005.
Pension Obligation:
On June 3, 2005, the Pension Benefit Guaranty Corporation ("PBGC") commenced a
proceeding to terminate the Retirement Plan as of May 30, 2005, pursuant to the
PBGC-initiated termination procedures set out in Section 4042 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The Trust expects
that it will soon either (i) agree to termination of the Retirement Plan on the
basis proposed by PBGC, or (ii) initiate a so-called "standard" termination
under Section 4041 of ERISA. In either such case, the Trust expects that it will
pay the underfunding shortfall either to the Retirement Plan (in the case of a
standard termination) or to the PBGC on behalf of the Retirement Plan (in
connection with a PBGC-initiated termination). Based on estimates recently
received from the Trust's actuaries, the termination underfunding shortfall at
July 31, 2005 is estimated to be approximately $2 million. This underfunding
shortfall has been included in other liabilities.
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 Trust 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. Under the Plan, the Company was required to transfer
its assets and liabilities to a liquidating trust for the benefit of the
Company's stockholders on May 30, 2005, if the Company's business has not been
sold by such date.
The Company announced on May 27, 2005 that it entered into a definitive
agreement for the "as is, where is" sale, on a going concern basis of all it's
assets and the assumption of all it's liabilities to SSJJJ Manufacturing, LLC,
an acquisition vehicle owned by several members of the Company's management,
including Steven Myers, the Company's President and Chief Operating Officer
("SSJJJ") at a cash price of $3.15 per share, for an aggregate consideration of
$16,427,347. The purchase price will be paid at the closing of the transaction
by having the Company retain an amount of cash equal to $16,427,347, with any
cash shortfall from such amount to be paid by SSJJJ.
The closing on the asset sale is subject to the Trust, as successor to
the Company, reaching final settlement of its previously disclosed shareholder
litigation. The Company and the plaintiffs have entered into a Stipulation of
Settlement pursuant to which the shareholder litigation will be dismissed if the
court approves such settlement. A settlement hearing has been scheduled for
September 21, 2005. At the settlement hearing, the court will, among other
things, determine whether or not to approve the settlement of the shareholder
litigation.
Since the closing of the sale of the Company's assets and liabilities
to SSJJJ was subject to the final settlement of the shareholder litigation and
could not close on or prior May 30, 2005, all of the Company's assets and
liabilities were transferred to a liquidating trust, Fab Industries Trust, on
May 27, 2005. In addition, in accordance with the terms of the Plan, the
Company's stock transfer books closed effective as of the close of business on
May 27, 2005 and its common stock was delisted from trading on the AMEX.
Consequently, Friday May 27, 2005, was the last day the Company's common stock
traded on the AMEX. The Company also filed its certificate of dissolution,
effective as of the close of business on Friday, May 27, 2005, at which time all
of the
17
Company assets, including the definitive agreement for the sale of the business
to SSJJJ, and all of the Company's liabilities, were transferred to the Fab
Industries Trust. As of the close of business on May 27, 2005, certificates
representing shares of Company common stock are no longer assignable or
transferable, except by will, intestate succession or by operation of law and
the proportionate interests of all the Company's stockholders in the trust was
fixed on the basis of their respective stock holdings at the close of business
on Friday, May 27, 2005. After such date, any distributions made by the Trust
will be made solely to the stockholders of record of the Company at the close of
business on May 27, 2005, except as may be necessary to reflect subsequent
transfers by will, intestate succession or by operation of law. The interests in
the trust are not transferable, except by will, intestate succession or by
operation of law. The trustee of the trust is Mr. Samson Bitensky, the Company's
Chairman and Chief Executive Officer and the trust has a three-year duration.
The Trust's financial statements are presented on a liquidation basis
as the Trust's assets and liabilities were transferred to the liquidating trust.
The amount of distributions ultimately available to be made to shareholders upon
the final liquidation of the Trust 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.
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 $16,501,000 net orderly liquidation
value. Included in the liabilities, the Trust accrued $9,556,000 in costs of
liquidation representing the estimate of the costs to be incurred during
liquidation; however, actual costs could vary from those estimates.
At May 28, 2005, the following represent the Trust's estimated costs and
expenses of liquidation:
ESTIMATED COSTS OF LIQUIDATION:
Compensation and benefits $6,191,000
Legal audit and tax services 1,250,000
Insurance 450,000
Other costs, including leases, property taxes, 1,665,000
utilities, maintenance, repairs, stationery supplies, ----------
postage, and security
$9,556,000
==========
Liquidity and Capital Resources
The Trust's financial statements are presented on a liquidation basis
as the Company's assets and liabilities were transferred to the liquidating
trust.
As of May 28, 2005, our assets consisted of $19,608,000 of cash and
cash equivalents and investment securities available for sale, $6,690,000 for
accounts receivable, $1,440,000 for inventories, $3,030,000 for other assets and
$6,142,000 for property, plant and equipment. Our liabilities consist of
$10,853,000 for accounts payable, accruals and other liabilities and $9,556,00
for estimated cost of liquidation. The net assets in liquidation are
$16,501,000. The amounts
18
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. On June 22,
2005, Mr. Bitensky received a lump sum payment of $1,157,474.
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.
OFF BALANCE SHEET ARRANGEMENTS:
The Trust 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 Trust'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,
19
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; 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Trust is not exposed to any risk of fluctuations in the market
value of equity securities.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES: Our principal
executive officer and principal 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 principal
executive officer and principal 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 Trust'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
20
control systems, there is only reasonable assurance that our controls
will succeed in achieving their stated goals under all potential future
conditions.
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.
21
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: August 11, 2005
FAB INDUSTRIES TRUST
By: /s/ Samson Bitensky
-----------------------------
Samson Bitensky, Trustee
(principal executive officer)
By: /s/ David A. Miller
-----------------------------
David A. Miller
(principal financial officer)
22