-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H8dCmzQTJAyw1Y4+at2heRhYREtQFJInmavfaJnuxqz8xwiRuZwpd9/DEduZUjBy Gjj8Zrc5PKpaS2MASgL24w== 0000922423-99-000364.txt : 19990301 0000922423-99-000364.hdr.sgml : 19990301 ACCESSION NUMBER: 0000922423-99-000364 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981128 FILED AS OF DATE: 19990226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FAB INDUSTRIES INC CENTRAL INDEX KEY: 0000034136 STANDARD INDUSTRIAL CLASSIFICATION: KNITTING MILLS [2250] IRS NUMBER: 132581181 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05901 FILM NUMBER: 99552394 BUSINESS ADDRESS: STREET 1: 200 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2122799000 MAIL ADDRESS: STREET 1: 200 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10016 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended November 28, 1998 Commission file number 1-5901 - ------------------------------------------- ----------------------------- FAB INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-2581181 ---------------------------- ------------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 200 Madison Avenue, New York, NY 10016 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 212-592-2700 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $.20 par value American Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: Share Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_] The aggregate market value at February 23, 1999 of shares of the Registrant's Common Stock, $.20 par value (based upon the closing price per share of such stock on the Composite Tape for issues listed on the American Stock Exchange), held by non-affiliates of the registrant was approximately $72,000,000. Solely for the purposes of this calculation, shares held by directors and executive officers of the Registrant and members of their respective immediate families sharing the same household have been excluded. Such exclusion should not be deemed a determination or an admission by the Registrant that such individuals are, in fact, affiliates of the Registrant. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: At February 23, 1999, there were outstanding 5,414,738 shares of Common Stock, $.20 par value. Documents Incorporated by Reference: Certain portions of the Registrant's definitive proxy statement to be filed not later than March 29, 1999 pursuant to Regulation 14A are incorporated by reference in Items 10 through 13 of Part III of this Annual Report on Form 10-K. FAB INDUSTRIES, INC. INDEX TO FORM 10-K
Item Number Page - ----------- ---- PART I......................................................................................1 Item 1. Business..................................................................1 Item 2. Properties................................................................3 Item 3. Legal Proceedings.........................................................4 Item 4. Submission of Matters to a Vote of Security-Holders.......................5 PART II.....................................................................................6 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....6 Item 6. Selected Consolidated Financial Data......................................7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............11 Item 8. Financial Statements and Supplementary Data..............................11 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................................................11 PART III...................................................................................12 Item 10. Directors and Executive Officers of the Registrant.......................12 Item 11. Executive Compensation...................................................12 Item 12. Security Ownership of Certain Beneficial Owners and Management...........12 Item 13. Certain Relationships and Related Transactions...........................12 PART IV....................................................................................13 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........13 SIGNATURES.................................................................................17
PART I Item 1. Business Fab Industries, Inc. (together with its subsidiaries, the "Company") was incorporated on April 21, 1966, under the laws of the State of Delaware and is a successor by merger to previously existing businesses. The Company is a major manufacturer of warp and circular knit fabrics, raschel laces, and polyurethane coated fabrics. The Company's textile fabrics are sold to a wide variety of manufacturers of ready-to-wear and intimate apparel for men, women and children, including dresses and sportswear, children's sleepwear, activewear and swimwear, recreational apparel, home furnishings, over-the-counter fabrics, industrial fabrics, upholstery fabrics for residential and contact markets, and health care and consumer products. Fabrics are sold primarily in piece dyed form, as well as "PFP" (Prepared For Printing), and heat transfer printed configurations. While sales are primarily to manufacturers of finished goods, the Company also uses its own textile fabrics internally to produce 100% cotton jersey (T-Shirt) sheets, flannel and satin sheets, as well as blankets, comforters and other bedding products which the Company sells to department and specialty stores, catalogue and mail order companies, as well as airlines and health care institutions. The Company's raschel lace products are sold to manufacturers of intimate apparel through its Raval Designer - Wiener Lace divisions. The Raval Lace division also produces raschel laces for sale to manufacturers and jobbers of sportswear, dress, blouse and other related outerwear industries. The Company's subsidiary, SMS Textiles, Inc., manufactures wide elastic fabrics for sale to manufacturers of intimate apparel and swimwear. The Company's Lida Stretch Fabrics Division specializes in products utilizing spandex to create stretch fabrics. A wide variety of constructions and fibers are combined with spandex fiber to create a diversified product line. These fabrics are sold as piece dyes, yarn dyes and prints to the ready-to-wear, aerobic wear, swimwear and intimate apparel markets. The Company also offers a comprehensive line of heat transfer prints for sleepwear, robewear, outerwear and activewear applications in both traditional and contemporary patterns. The Company's subsidiary, Gem Urethane Corporation, produces a line of polyurethane coated fabrics and a variety of flame, adhesive and ultrasonically bonded items for apparel, accessories, health care, environmental and industrial products. Gem also markets a fire resistant material, SANDEL, through its subsidiary Sandel International, Inc. Sandel is a silica-based material coated with high performance polymeric compounds that enables it to stop fire from spreading, even at temperatures of up to 1800 degrees Fahrenheit. The Company engages in research and product development activities to create new fabrics and styles to meet the continually changing demands of its customers. Direct expenditures in this area aggregated $3,875,000 in fiscal 1996, $3,869,000 in fiscal 1997 and $3,625,000 in fiscal 1998. Through these efforts, the Company has developed a full line of proprietary knitted fabrics for sale to manufacturers of men's, women's and children's apparel in both domestic and foreign markets. Similarly, the Company has also developed a full line of proprietary sheets and blankets, including specialty blankets for the airline industry. While the Company uses various trademarks and trade names in the promotion and sale of its products, it does not believe that the loss or expiration of any such trademark or trade name would have a material adverse effect on its operations. The Company markets its products primarily through its full-time sales personnel, as well as independent representatives located throughout the United States and abroad. In cooperation with yarn producers, it employs advertisements in various media as a marketing tool. The Company also markets its products on its web site: www.fab-industries.com. Historically, the Company's business reflects minor seasonal fluctuations. Somewhat higher sales occur in the second and third fiscal quarters, as a result of purchases by customers in anticipation of Fall and Holiday apparel sales. First and fourth fiscal quarter sales tend to be lower as apparel customers limit their orders to refilling smaller inventory requirements after Fall and Holiday sales and forecasting customer reorders for Spring and Summer fabrications. The Company does not believe its backlog of firm orders is a material indicator of future business trends, because goods subject to such orders are shipped within two to ten weeks, depending on the availability of yarn and other raw materials. On average, orders are filled within six weeks. During fiscal 1998, no single customer or group of affiliated customers accounted for more than 10% of the year's net sales or the year-end accounts receivable balance. The Company's export sales are not material. Supplies of Raw Materials The Company has not experienced difficulties in obtaining sufficient yarns, chemicals, dyes and other raw materials and supplies to maintain full production. The Company does not depend upon any single source of supply, and alternative sources are available for most of the raw materials used in its business. Inventories The Company maintains adequate inventories of yarns and other raw materials to insure an uninterrupted production flow. Greige and finished goods are maintained as inventory to meet varying customer demand and delivery requirements. The Company must maintain adequate working capital, because credit terms available to customers normally exceed credit terms extended to the Company by suppliers of raw materials. Competition The Company is engaged in a highly competitive business which is based largely upon product quality, service and price and general consumer demand for the finished goods utilizing the Company's products. There are more than 20 other manufacturers for its products. The Company believes that it is one of the major manufacturers of warp and circular knit, raschel lace and polyurethane products in the United States. The proportion of imported textile goods sold in the United States has increased substantially in the past few years, adversely impacting domestically 2 manufactured textile products and the number of domestic manufacturers of such products. As a result of significant expenditures on production equipment, the Company's strong financial position and increased capacity have enabled it to capture a larger share of the now smaller domestic textile market. Employees The Company employs approximately 1,600 people, of whom approximately 1,500 are employed by the Company's subsidiaries. The employees are not represented by unions. The Company considers relations with its employees to be satisfactory. Acquisitions In April 1998, the Company acquired certain assets and business of SMS Textile Mills, Inc., which manufactured, marketed and distributed a full line of wide elastic fabrics. In May 1998, the Company acquired substantially all of the assets of Lida Stretch Fabrics, Inc., which was a leading domestic manufacturer of circular knit stretch fabrics. Item 2. Properties. The Company conducts its manufacturing operations in owned facilities located in Lincolnton, Maiden, Cherryville and Salisbury, North Carolina and Allentown, Pennsylvania, and in leased facilities located in Amsterdam, New York. All of the Company's facilities are operated mostly on a five day-a-week basis. The Company's knitting, dyeing-finishing and printing operations are conducted at the Lincolnton facility. These operations include warp and raschel knitting, various types of dyeing, framing, lace separating, sueding, shearing, napping, calendaring and heat-transfer printing. Dyeing-finishing operations are also conducted at the Cherryville facility. The Lincolnton and Cherryville facilities also process and serve as warehouses for greige goods, manufactured and shipped from the Company's Amsterdam and Maiden plants. At the Maiden plant facility, the Company conducts a variety of manufacturing operations, including warping for the tricot and lace machines and single and double knitting of fabrics. The Salisbury facility is the site of the Company's consumer and institutional products manufacturing, retail and over-the-counter operations. The Company's Amsterdam facilities are devoted to tricot warping and knitting and warehousing. Approximately 106,000 square feet in one of the Company's Amsterdam plants is used for the production of a line of polyurethane coated fabrics and a variety of flame, adhesive and ultrasonically bonded items. The Company's Allentown, Pennsylvania facility is devoted to wide elastic fabric knitting. The following table sets forth the location of each of the Company's manufacturing facilities, its principal use, approximate floor space, and, where leased, the lease expiration date. No facility owned by the Company is subject to any encumbrance. 3 Approximate Lease Location Principal Use Floor Space Expiration Date - -------- ------------- ----------- --------------- Lincolnton, Dyeing and finishing, 630,550 sq.ft. (1) North Carolina raschel and tricot warp knitting, printing and warehouse Lincolnton, Warehouse 55,000 sq.ft. (1) North Carolina Maiden, Warping, circular single and 224,013 sq.ft. (1) North Carolina double knitting and warehouse Salisbury, Manufacturing finished 125,000 sq.ft. (1) North Carolina consumer and institutional products and retail and over-the- counter fabrics Amsterdam, Polyurethane coating, 106,000 sq.ft. 12/31/99 (2) New York fire fighting material manufacturing operations and bonding and laminating Amsterdam, Warping, tricot knitting and 367,000 sq.ft. 12/31/06 (2) New York warehouse Cherryville, Dyeing and finishing, and 197,000 sq.ft. (1) North Carolina warehouse Allentown, Wide elastic fabric knitting 35,000 sq.ft. (1) Pennsylvania New York, Executive offices and 33,000 sq.ft 4/30/06 New York showroom facilities
- ---------- (1) Owned by the Company. (2) Capitalized building lease - See note 5 of Notes to Consolidated Financial Statements. All of the Company's facilities are constructed of brick, steel or concrete, and the Company considers all facilities to be adequate and in good operating condition and repair. Item 3. Legal Proceedings. Neither the Company nor any of its subsidiaries or properties is subject to any material pending legal proceedings. 4 Item 4. Submission of Matters to a Vote of Security-Holders. Not Applicable Executive Officers of the Company The following table sets forth certain information concerning the executive officers of the Company as of February 23, 1999.
Name Age Positions and Offices - ---- --- --------------------- Samson Bitensky................. 79 Chairman of the Board of Directors and Chief Executive Officer Stanley August.................. 67 Vice Chairman Steven Myers.................... 50 Co-President, Chief Operating Officer David A. Miller................. 61 Vice President-Finance, Treasurer and Chief Financial Officer Jerry Deese..................... 47 Vice President-Controller of Plant Operations Sam Hiatt....................... 51 Vice President-Sales Sherman S. Lawrence............. 80 Secretary
Each of the Company's executive officers serves at the pleasure of the Board of Directors and until his or her successor is duly elected and qualifies. Samson Bitensky was among the founders of the Company in 1966 and has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since such time. Mr. Bitensky also served as President of the Company from 1970 until May 1, 1997. Stanley August has been employed by the Company since 1980 and previously served as General Sales Manager of its Circular Knit Division and as Vice President - Sales. Mr. August served as Vice President - Fabric Operations from 1987 until 1992 and as Vice President from March 1992 to May 1997, and has served as Vice Chairman since May 1, 1997. Steven Myers, an attorney, has been employed by the Company in various senior administrative and managerial capacities since 1979. He served as Vice President - Sales for more than five years prior to May 1988 and as Vice President from May 1988 to May 1997, and has served as Co-President, Chief Operating Officer since May 1, 1997. Mr. Myers is the son-in-law of Mr. Bitensky. David A. Miller has been employed by the Company since 1966 and has served as its Controller from 1973 until December 7, 1995, as Vice President Finance and Treasurer since December 7, 1995, and as Chief Financial Officer since May 1, 1997. Jerry Deese has been employed by the Company in various senior administrative and managerial capacities since 1978. Mr. Deese served as Divisional Controller from 1994 until 1998 and has served as Vice President-Controller of Plant Operations since May 12, 1998. 5 Sam Hiatt has been employed by the Company since 1978 and previously had various management responsibilities in the warp knit area. He has served as Vice President-Sales since May 12, 1998. Sherman S. Lawrence has served as a Director of the Company since 1966 and as Secretary since 1968. Mr. Lawrence has been a practicing attorney since 1942 and has served as co-counsel to the Company since 1966. PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on the American Stock Exchange, Inc. (ticker symbol - FIT). The table below sets forth the high and low sales prices of the Common Stock during the past two fiscal years. Fiscal 1998 High Low ----------- ---- --- First Quarter......................................... $33 1/2 $30 Second Quarter........................................ $33 3/8 $26 15/16 Third Quarter......................................... $29 1/2 $23 1/2 Fourth Quarter........................................ $23 3/4 $19 3/8 Fiscal 1997 ----------- First Quarter......................................... $ 28 3/4 $26 1/8 Second Quarter........................................ $ 31 1/4 $28 Third Quarter......................................... $ 33 $30 1/4 Fourth Quarter........................................ $ 32 1/2 $29 7/16 At February 23, 1999, there were approximately 539 holders of record of Common Stock. For fiscal 1997, quarterly dividends of $.175 per share were declared on February 27, 1997, May 19, 1997, August 13, 1997 and November 25, 1997. For fiscal 1998, quarterly dividends of $.175 per share were declared on February 19, 1998, May 12, 1998, August 12, 1998 and November 24, 1998. The payment of further cash dividends will be at the discretion of the Board of Directors and will depend upon, among other things, earnings, capital requirements and the financial condition of the Company. 6 Item 6. Selected Consolidated Financial Data.
As at or for the fiscal year ended ---------------------------------- November 28, November 29, November 30, December 2, December 3, 1998 1997 1996 1995 1994 (2) (In thousands, except share data) Net Sales $ 151,436 $ 160,935 $ 156,136 $ 182,000 $ 189,753 Income before taxes on income 8,017 13,529 12,596 13,760 22,428 Net income 6,017 9,394 8,796 9,410 15,093 Earnings per share: Basic 1.07 1.65 1.52 1.57 2.44 Diluted 1.06 1.63 1.51 1.56 2.40 Total assets 160,403 163,524 160,980 161,027 163,133 Long-term debt 486 556 620 678 731 Stockholders' equity 137,527 137,892 133,888 132,932 129,533 Book value per share (1) 24.63 24.26 23.25 22.42 21.52 Cash dividends per share .70 .70 .70 .685 .64 Weighted average number of shares outstanding: Basic 5,627,788 5,705,624 5,797,228 5,981,690 6,189,831 Diluted 5,665,194 5,752,895 5,841,138 6,037,374 6,280,795
- ---------- (1) Computed by dividing stockholders' equity by the number of shares outstanding at year-end. (2) Fifty-three weeks. 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Fiscal 1998 Compared to Fiscal 1997 Net sales for fiscal 1998 were $151,436,000 as compared to $160,935,000 in fiscal 1997, a decrease of 5.9%. The Asian financial crisis, which began a year ago, is taking a sustained toll on the U.S. manufacturing sector and, because of steep currency devaluations, U.S. firms are forced to compete against a flood of cheap imports and falling demand for U.S. goods overseas. These factors have continued to exert downward pressure on the Company's sales level. Gross margins as a percentage of sales declined from 14.6% to 12.1%. Lower sales volume reduced operating schedules at manufacturing plants. In addition, the Company incurred start-up costs in connection with its recent acquisitions of Lida Stretch Fabrics, a manufacturer of circular knit stretch fabrics, and SMS Textiles, a manufacturer of wide elastic fabrics. In fiscal 1998, a reduction in LIFO inventory reserves arising principally from lower average FIFO cost levels benefited margins in the amount of $1,703,000 compared to $863,000 in fiscal 1997. Selling, shipping and administrative expenses remained relatively constant but as a percentage of sales increased from 9.3% to 9.8% primarily because of lower sales volume. An increase in selling expenses of approximately $2.0 million, attributable primarily to the acquisitions of Lida Stretch Fabrics, SMS Textiles and JBJ Fabrics (acquired in October 1997), was offset by lower incentive-based compensation and other related expenses. Interest and dividend income decreased by $301,000 as a result of lower average available balances. The effective income tax rate for the year was 24.9% as compared to 30.6% in fiscal 1997. The decline was primarily attributable to a proportionately higher percentage of tax exempt interest as a percentage of pre-tax income in fiscal 1998. As a result of these factors, net income declined to $6,017,000 from $9,394,000 and as a percentage of sales decreased to 4.0% from 5.8%. In fiscal 1998, the Company adopted SFAS No. 128, "Earnings per Share." Under SFAS No. 128, the Company is presenting both basic earnings per share and diluted earnings per share and has restated the 1997 and 1996 fiscal year amounts to conform to the provisions of SFAS No. 128. For fiscal 1998, basic earnings per share were $1.07 compared to $1.65 last fiscal year and diluted earnings per share were $1.06 compared to $1.63 last year. Fiscal 1997 Compared to Fiscal 1996 Net sales for the 1997 fiscal year were $160,935,000 as compared to $156,136,000 in fiscal 1996, an increase of $4,799,000 or 3.1%. Certain of the Company's products enjoyed stronger customer demand during the year and divisional product mix was more favorable. 8 Gross profit margins for the year remained fairly constant as a percentage of sales. The improved product mix and the Company's cost control programs more than offset lower plant utilization rates. Due to lower average FIFO cost levels, LIFO inventory reserves decreased by $863,000 in fiscal 1997 and $742,000 in fiscal 1996. Selling, shipping and administrative expenses increased by $771,000, or 5.4%, and as a percentage of sales remained relatively constant. Selling, shipping and administrative costs increased principally as a result of increased selling expenses attributable to the Company's sales growth. Interest and dividend income increased by $170,000, or 4.6%. The Company realized gains from the sale of investment securities of $1,139,000 compared to $540,000 in fiscal 1996. The effective income tax rate for the year was relatively unchanged from fiscal 1996. As a result of these factors, net income increased to $9,394,000 from $8,796,000 and as a percentage of sales increased to 5.8% from 5.6%. Earnings per share, which are based upon the weighted average number of shares outstanding (5,705,624 vs. 5,797,228), were $1.65 as compared to $1.52 in fiscal 1996. There was no stock option related dilution in either year. Liquidity and Capital Resources Net cash provided by operating activities in fiscal 1998 amounted to $4,573,000, as compared to $11,388,000 in fiscal 1997. Of this decrease, $4,620,000 relates to comparative changes in inventories, $2,440,000 to accounts payable, accruals and other liabilities, and $3,377,000 to lower net income. These decreases were offset by changes of $1,227,000 in deferred income taxes, $968,000 in accounts receivable, $948,000 in other current assets and other assets and $491,000 in depreciation and amortization. In fiscal 1998, net proceeds from sales of investment securities were approximately $18.8 million, as compared to net acquisition of investment securities of approximately $4.0 million in fiscal 1997. The Company's investment securities, all classified as available-for-sale, had a fair market value of $48,233,000 and $66,068,000 at fiscal year-end 1998 and 1997, respectively. See Note 2 to the consolidated financial statements for further details about the Company's investment portfolio. In addition, approximately $15.6 million was invested in the purchase of property, plant and equipment, including capital expenditures in connection with the Lida Stretch Fabrics and SMS Textiles acquisitions. During fiscal 1998, the Company repurchased 114,699 shares of its common stock at a cost of $3,524,000 (an average price of $30.72). Subsequent to the end of fiscal 1998, the Company repurchased an additional 172,125 shares at an average price of $18.57. The Company intends to continue to purchase its shares of common stock from time-to-time, as market conditions warrant and price criteria are met. During fiscal 1998, the Company declared regular quarterly dividends totaling $0.70 per share. 9 Stockholders' equity was $137,527,000 or $24.63 book value per share, as compared to $137,892,000, or $24.26 book value per share, at the previous fiscal year-end. Management believes that the current financial position of the Company is more than adequate to internally fund any future expenditures to maintain, modernize and expand its manufacturing facilities, pay dividends and make acquisitions of textile related businesses if criteria relating to indebtedness, market expansion and existing management are met. Inflation The Company does not believe the effects of inflation have had a significant impact on the consolidated financial statements. Compliance with Year 2000 The Company has devoted significant resources and has taken steps in an attempt to make the transition to the year 2000 successful and without incident. Management has initiated a Company wide program to prepare the Company's computer systems, hardware, devices and other equipment for year 2000 compliance. An inventory of hardware and software is being completed, including the Company's centralized information system department, distributed technologies, and process control and non-technical components such as checks and forms. A primary plan for remediation of the Company's legacy systems is in place, and system and program changes are being implemented and tested as they become ready. The Company has established a corporate task force to monitor the progress toward the resolution of identified year 2000 issues. All known system corrections are expected to be completed by June 30, 1999. The Company expects to incur internal staff costs as well as other expenses necessary to prepare its systems for the year 2000, including costs for outside consultants. The Company expects to resolve year 2000 compliance issues primarily through normal upgrades of its software or, when necessary, through replacement of existing software with year 2000 compliant applications. As of February 15, 1999, the Company has incurred approximately $75,000 of external costs to address the Company's year 2000 issues. The total cost of this effort is still being evaluated, but is not expected to be material to the Company's results of operations or financial condition. However, there can be no assurance that such corrections can be completed on schedule or within estimated costs or can successfully address the year 2000 compliance issues. The Company has provided information regarding the status of its year 2000 compliance to customers who requested. The Company is in the process of asking its major customers and suppliers to certify that they are year 2000 compliant or, if they are not yet so compliant, to provide the Company with a description of their plans to become so. If the Company's present efforts to address the year 2000 compliance issues are not successful, or if customers, suppliers and other third parties with which the Company conducts business do not successfully address such issues, the Company's business, results of operations and financial condition could be materially and adversely affected. 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 10 uncertainties. In particular, any statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission, or in the Company's communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding the consummation and benefits of future acquisitions, as well as expectations with respect to future sales, operating efficiencies and product expansion, are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond the control of the Company, which may cause actual results, performance or achievements to differ materially from anticipated results, performances or achievements. Factors that might affect such forward looking statements include, among other things, overall economic and business conditions; the demand for the Company's goods and services; competitive factors in the industries in which the Company competes; 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; economic and political conditions in international markets, including governmental changes and restrictions on the ability to transfer capital across borders; the ability to achieve anticipated synergies and other cost savings in connection with acquisitions; the timing, impact and other uncertainties of future acquisitions; and the Company's ability and its customers' and suppliers' ability to replace, modify or upgrade computer programs in order to adequately address the Year 2000 issue. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See Note 2 on page F-14. Item 8. Financial Statements and Supplementary Data. See pages F-1 and S-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. 11 PART III Item 10. Directors and Executive Officers of the Company. See Part I, Item 4. "Executive Officers of the Company." Other information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than March 29, 1999 pursuant to Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended ("Regulation 14A"). Item 11. Executive Compensation. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than March 29, 1999 pursuant to Regulation 14A. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than March 29, 1999 pursuant to Regulation 14A. Item 13. Certain Relationships and Related Transactions. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed not later than March 29, 1999 pursuant to Regulation 14A. 12 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(1) Financial Statements: See the Index to Consolidated Financial Statements at page F-2. (2) Financial Statement Schedules: See the Index to Financial Statements Schedules at page S-2. (3) Exhibits. Exhibit Description of Exhibit ------- ---------------------- 3.1 - Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 27, 1993 (the "1993 10-K"). 3.2 - Amended and Restated By-laws, incorporated by reference to Exhibit 3.2 to the 1993 10-K. 3.3 - Certificate of Amendment of Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 3, 1994 (the "1994 10-K"). 3.4 - Amendments to the Amended and Restated By-laws, incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K for the fiscal year ended November 29, 1997. 4.1 - Specimen of Common Stock Certificate, incorporated by reference to Exhibit 4-A to Registration Statement No. 2-30163, filed on November 4, 1968. 4.2 - Rights Agreement dated as of June 6, 1990 between the Company and Manufacturers Hanover Trust Company, as Rights Agent, which includes as Exhibit A the form of Rights Certificate and as Exhibit B the Summary of Rights to purchase Common Stock, incorporated by reference to Exhibit 4.2 to the 1993 10-K. 4.3 - Amendment to the Rights Agreement between the Company and Manufacturers Hanover Trust Company dated as of May 24, 1991, incorporated by reference to Exhibit 4.3 to the 1993 10-K. 13 10.1 - 1987 Stock Option Plan of the Company, incorporated by reference to Exhibit 10.1 to the 1993 10-K. 10.2 - Employment Agreement dated as of March 1, 1993, between the Company and Samson Bitensky, incorporated by reference to Exhibit 10.2 to the 1993 10 -K. 10.3 - Fab Industries, Inc. Hourly Employees Retirement Plan (the "Retirement Plan"), incorporated by reference to Exhibit 10.3 to the 1993 10-K. 10.4 - Amendment to the Retirement Plan effective December 11, 1978, incorporated by reference to Exhibit 10.4 to the 1993 10-K. 10.5 - Amendment to the Retirement Plan effective December 1, 1981, incorporated by reference to Exhibit 10.5 to the 1993 10-K. 10.6 - Amendment to the Retirement Plan dated November 21, 1983, incorporated by reference to Exhibit 10.6 to the 1993 10-K. 10.7 - Amendment to the Retirement Plan dated August 29, 1986, incorporated by reference to Exhibit 10.7 to the 1993 10-K. 10.8 - Amendment to the Retirement Plan effective as of December 1, 1989, incorporated by reference to Exhibit 10.8 to the 1993 10-K. 10.9 - Amendment to the Retirement Plan dated September 21, 1995, incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 2, 1995 (the "1995 10-K"). 10.10 - Fab Lace, Inc. Employees Profit Sharing Plan (the "Profit Sharing Plan"), incorporated by reference to Exhibit 10.9 to the 1993 10-K. 10.11 - Amendment to the Profit Sharing Plan effective December 1, 1978, incorporated by reference to Exhibit 10.10 to the 1993 10-K. 10.12 - Amendment dated December 1, 1985 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.11 to the 1993 10-K. 10.13 - Amendment dated February 5, 1987 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.12 to the 1993 10-K. 14 10.14 - Amendment dated December 24, 1987 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.13 to the 1993 10-K. 10.15 - Amendment dated June 30, 1989 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.14 to the 1993 10-K. 10.16 - Amendment dated February 1, 1991 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.15 to the 1993 10-K. 10.17 - Amendment dated September 1, 1995 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.17 to the 1995 10-K. 10.18 - Lease dated as of December 8, 1988 between Glockhurst Corporation, N.V. and the Company, incorporated by reference to Exhibit 10.16 to the 1993 10-K. 10.19 - Lease Modification Agreement dated April 2, 1991 between Glockhurst Corporation, N.V. and the Company, incorporated by reference to Exhibit 10.17 to the 1993 10-K. 10.20 - Second Lease Modification Agreement dated May 23, 1996 between 200 Madison Associates, L.P., and the Company, incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.21 - Lease dated as of March 1, 1979 between City of Amsterdam Industrial Development Agency and Gem Urethane Corp., incorporated by reference to Exhibit 10.18 to the 1993 10-K. 10.22 - Lease dated as of January 1, 1977 between City of Amsterdam Industrial Development Agency and Lamatronics Industries, Inc., incorporated by reference to Exhibit 10.19 to the 1993 10-K. 10.23 - Form of indemnification agreement between the Company and its officers and directors, incorporated by reference to Exhibit 10.20 to the 1993 10-K. 10.24 - Company's Employee Stock Ownership Plan effective as of Nov. 25, 1991, incorporated by reference to Exhibit 10.24 to the 1993 10-K. 15 10.25 - Amendment dated September 21, 1995 to the Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.27 to the 1995 10-K. 10.26 - Company's Non-Qualified Executive Retirement Plan dated as of November 30, 1990, incorporated by reference to Exhibit 10.25 to the 1993 10-K. 21 - Subsidiaries of the Company incorporated by reference to Exhibit 21 to the 1994 10-K. *23 - Consent of BDO Seidman, LLP. **27 - Financial Data Schedule pursuant to Article 5 of Regulation S-X. - ---------- * Filed herewith. ** Filed with EDGAR version only. (b) Reports on Form 8-K: None 16 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FORM 10-K ITEM 8 FISCAL YEARS ENDED NOVEMBER 28, 1998, NOVEMBER 29, 1997 AND NOVEMBER 30, 1996 F-1 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONTENTS Report of independent certified public accountants F-3 Consolidated financial statements: Balance sheets F-4 Statements of income F-5 Statements of stockholders' equity F-6 Statements of cash flows F-7 Summary of accounting policies F-8 - F-12 Notes to consolidated financial statements F-13 - F-31 F-2 Report Of Independent Certified Public Accountants The Board of Directors and Stockholders Fab Industries, Inc. New York, New York We have audited the consolidated balance sheets of Fab Industries, Inc. and subsidiaries as of November 28, 1998 and November 29, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years in the period ended November 28, 1998. We have also audited the schedule listed in the index on page S-2. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fab Industries, Inc. and subsidiaries as of November 28, 1998 and November 29, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended November 28, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP New York, New York February 16, 1999 F-3
Fab Industries, Inc. and Subsidiaries Consolidated Balance Sheets November 28, 1998 November 29, 1997 ======================================================================================================================== Assets Current: Cash and cash equivalents (Note 1) $ 6,078,000 $ 4,574,000 Investment securities available-for-sale (Note 2) 48,233,000 66,068,000 Accounts receivable, net of allowance of $1,000,000 and $900,000 for doubtful accounts (Note 13) 27,979,000 28,872,000 Inventories (Note 3) 32,213,000 28,270,000 Other current assets 1,727,000 2,051,000 - ------------------------------------------------------------------------------------------------------------------------ Total current assets 116,230,000 129,835,000 Property, plant and equipment - net (Note 4) 40,021,000 30,009,000 Other assets (Note 8) 4,152,000 3,680,000 - ------------------------------------------------------------------------------------------------------------------------ $ 160,403,000 $ 163,524,000 ======================================================================================================================== Liabilities and Stockholders' Equity Current: Accounts payable $ 9,110,000 $ 8,862,000 Corporate income and other taxes 768,000 2,568,000 Accrued payroll and related expenses 1,980,000 3,649,000 Dividends payable 977,000 994,000 Other current liabilities 495,000 966,000 Deferred income taxes (Note 9) 1,538,000 778,000 - ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 14,868,000 17,817,000 Obligations under capital leases, net of current maturities (Note 5) 486,000 556,000 Other noncurrent liabilities (Note 8) 2,817,000 2,779,000 Deferred income taxes (Note 9) 4,705,000 4,480,000 - ------------------------------------------------------------------------------------------------------------------------ Total liabilities 22,876,000 25,632,000 - ------------------------------------------------------------------------------------------------------------------------ Commitments (Notes 8 and 10) Stockholders' equity (Notes 2, 6, 7, 8 and 10): Preferred stock, $1 par value - shares authorized 2,000,000; none issued -- -- Common stock, $.20 par value - shares authorized 15,000,000; issued 6,588,444 and 6,572,994 1,318,000 1,315,000 Additional paid-in capital 6,903,000 6,562,000 Retained earnings 164,714,000 162,629,000 Loan to employee stock ownership plan (6,327,000) (7,117,000) Net unrealized holding gain on investment securities available-for-sale, net of taxes 550,000 636,000 Unearned restricted stock compensation (1,000) (27,000) Cost of common stock held in treasury - 1,005,081 and 890,382 shares (29,630,000) (26,106,000) - ------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 137,527,000 137,892,000 - ------------------------------------------------------------------------------------------------------------------------ $ 160,403,000 $ 163,524,000 ======================================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements. F-4
Fab Industries, Inc. and Subsidiaries Consolidated Statements of Income ============================================================================================================ Fiscal year ended - ------------------------------------------------------------------------------------------------------------ November 28, November 29, November 30, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Net sales (Note 13) $ 151,436,000 $ 160,935,000 $ 156,136,000 Cost of goods sold 133,147,000 137,389,000 133,466,000 - ------------------------------------------------------------------------------------------------------------ Gross profit 18,289,000 23,546,000 22,670,000 Selling, shipping and administrative expenses 14,872,000 14,921,000 14,150,000 - ------------------------------------------------------------------------------------------------------------ Operating income 3,417,000 8,625,000 8,520,000 - ------------------------------------------------------------------------------------------------------------ Other income (expenses): Interest and dividend income (Note 12) 3,529,000 3,830,000 3,660,000 Interest expense (75,000) (65,000) (124,000) Net gain on investment securities (Note 2) 1,146,000 1,139,000 540,000 - ------------------------------------------------------------------------------------------------------------ Total other income 4,600,000 4,904,000 4,076,000 - ------------------------------------------------------------------------------------------------------------ Income before taxes on income 8,017,000 13,529,000 12,596,000 Taxes on income (Note 9) 2,000,000 4,135,000 3,800,000 - ------------------------------------------------------------------------------------------------------------ Net income $ 6,017,000 $ 9,394,000 $ 8,796,000 ============================================================================================================ Earnings per share (Note 14): Basic $ 1.07 $ 1.65 $ 1.52 Diluted $ 1.06 $ 1.63 $ 1.51 ============================================================================================================ Cash dividends declared per share $ .70 $ .70 $ .70 ============================================================================================================ See accompanying summary of accounting policies and notes to consolidated financial statements. F-5
Fab Industries, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity ============================================================================================================= Fiscal years ended November 28, 1998, November 29, 1997 and November 30, 1996 - ------------------------------------------------------------------------------------------------------------- Common stock ------------------------ Number Additional Retained Total of shares Amount paid-in capital earnings - ------------------------------------------------------------------------------------------------------------- Balance, December 2, 1995 $ 132,932,000 6,549,894 $ 1,309,000 $ 6,150,000 $ 152,473,000 Net income - fiscal 1996 8,796,000 -- -- -- 8,796,000 Cash dividends (4,046,000) -- -- -- (4,046,000) Exercise of stock options 228,000 14,300 4,000 224,000 -- Purchase of treasury stock (5,401,000) -- -- -- -- Compensation under restricted stock plan (Note 6) 206,000 -- -- 36,000 -- Change in net unrealized holding gain on investment securities available-for- sale, net of taxes 383,000 -- -- -- -- Payment of loan from ESOP (Note 8) 790,000 -- -- -- -- - ------------------------------------------------------------------------------------------------------------- Balance, November 30, 1996 133,888,000 6,564,194 1,313,000 6,410,000 157,223,000 Net income - fiscal 1997 9,394,000 -- -- -- 9,394,000 Cash dividends (3,988,000) -- -- -- (3,988,000) Exercise of stock options 154,000 8,800 2,000 152,000 -- Purchase of treasury stock (2,406,000) -- -- -- -- Compensation under restricted stock plan (Note 6) 31,000 -- -- -- -- Change in net unrealized holding gain on investment securities available-for- sale, net of taxes 29,000 -- -- -- -- Payment of loan from ESOP (Note 8) 790,000 -- -- -- -- - ------------------------------------------------------------------------------------------------------------- Balance, November 29, 1997 137,892,000 6,572,994 1,315,000 6,562,000 162,629,000 Net income - fiscal 1998 6,017,000 -- -- -- 6,017,000 Cash dividends (3,932,000) -- -- -- (3,932,000) Exercise of stock options 344,000 15,450 3,000 341,000 -- Purchase of treasury stock (3,524,000) -- -- -- -- Compensation under restricted stock plan (Note 6) 26,000 -- -- -- -- Change in net unrealized holding gain on investment securities available-for- sale, net of taxes (86,000) -- -- -- -- Payment of loan from ESOP (Note 8) 790,000 -- -- -- -- - ------------------------------------------------------------------------------------------------------------- Balance, November 28, 1998 $ 137,527,000 6,588,444 $ 1,318,000 $ 6,903,000 $ 164,714,000 - ------------------------------------------------------------------------------------------------------------- =============================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-6
Fab Industries, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity ======================================================================================================================== Fiscal years ended November 28, 1998, November 29, 1997 and November 30, 1996 - ------------------------------------------------------------------------------------------------------------------------ ======================================================================================================================== Loan to Treasury stock employee Net unrealized Unearned -------------------- stock holding gain restricted stock Number ownership plan (loss) compensation of shares Cost - ------------------------------------------------------------------------------------------------------------------------ Balance, December 2, 1995 $ (8,697,000) $ 224,000 $ (228,000) (619,635) $ (18,299,000) Net income - fiscal 1996 -- -- -- -- -- Cash dividends -- -- -- -- -- Exercise of stock options -- -- -- -- -- Purchase of treasury stock -- -- -- (186,804) (5,401,000) Compensation under restricted stock plan (Note 6) -- -- 170,000 -- -- Change in net unrealized holding gain on investment securities available-for- sale, net of taxes -- 383,000 -- -- -- Payment of loan from ESOP (Note 8) 790,000 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Balance, November 30, 1996 (7,907,000) 607,000 (58,000) (806,439) (23,700,000) Net income - fiscal 1997 -- -- -- -- -- Cash dividends -- -- -- -- -- Exercise of stock options -- -- -- -- -- Purchase of treasury stock -- -- -- (83,943) (2,406,000) Compensation under restricted stock plan (Note 6) -- -- 31,000 -- -- Change in net unrealized holding gain on investment securities available-for- sale, net of taxes -- 29,000 -- -- -- Payment of loan from ESOP (Note 8) 790,000 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Balance, November 29, 1997 (7,117,000) 636,000 (27,000) (890,382) (26,106,000) Net income - fiscal 1998 -- -- -- -- -- Cash dividends -- -- -- -- -- Exercise of stock options -- -- -- -- -- Purchase of treasury stock -- -- -- (114,699) (3,524,000) Compensation under restricted stock plan (Note 6) -- -- 26,000 -- -- Change in net unrealized holding gain on investment securities available-for- sale, net of taxes -- (86,000) -- -- -- Payment of loan from ESOP (Note 8) 790,000 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------ Balance, November 28, 1998 $ (6,327,000) $ 550,000 $ (1,000) (1,005,081) $ (29,630,000) - ------------------------------------------------------------------------------------------------------------------------ ======================================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements.
F-6
Fab Industries, Inc. And Subsididaries Consolidated Statements of Cash Flows (Note 11) ======================================================================================================================= Fiscal year ended - ----------------------------------------------------------------------------------------------------------------------- November 28, November 29, November 30, 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 6,017,000 $ 9,394,000 $ 8,796,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful accounts 400,000 400,000 400,000 Depreciation and amortization 5,555,000 5,064,000 5,477,000 Deferred income taxes 1,042,000 (185,000) 61,000 Compensation under restricted stock plan 26,000 31,000 206,000 Net gain on investment securities (1,146,000) (1,139,000) (540,000) Decrease (increase) in: Accounts receivable 493,000 (475,000) 6,020,000 Inventories (3,943,000) 677,000 (1,680,000) Other current assets 324,000 (107,000) 26,000 Other assets (472,000) (989,000) (254,000) Increase (decrease) in: Accounts payable 248,000 (3,214,000) (585,000) Accruals and other liabilities (3,971,000) 1,931,000 (704,000) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,573,000 11,388,000 17,223,000 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of property, plant and equipment (15,567,000) (4,870,000) (4,101,000) Proceeds from sales of investment securities 18,838,000 3,185,000 9,660,000 Acquisition of investment securities -- (7,183,000) (14,687,000) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 3,271,000 (8,868,000) (9,128,000) - ----------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Purchase of treasury stock (3,524,000) (2,406,000) (5,401,000) Principal repayment on loan to employee stock ownership plan 790,000 790,000 790,000 Dividends (3,950,000) (4,002,000) (4,077,000) Exercise of stock options 344,000 154,000 228,000 - ----------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (6,340,000) (5,464,000) (8,460,000) - ----------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 1,504,000 (2,944,000) (365,000) Cash and cash equivalents, beginning of year 4,574,000 7,518,000 7,883,000 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 6,078,000 $ 4,574,000 $ 7,518,000 ======================================================================================================================== See accompanying summary of accounting policies and notes to consolidated financial statements. F-7
Fab Industries, Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Business Fab Industries, Inc. (the "Company") is a major manufacturer of knitted textile fabrics, laces and finished home products, as well as polyurethane coated fabrics. Sales of textile products comprised substantially all of the Company's sales in fiscal 1998, 1997 and 1996, and such sales were primarily made to United States customers. Accordingly, the Company considers itself to be operating in a single segment business. Principles The financial statements include the accounts of of Consolidation the Company and its subsidiaries, all of which are wholly owned. Significant intercompany transactions and balances have been eliminated. Fiscal Year The Company's fiscal year ends on the Saturday closest to November 30. Fiscal 1998, 1997 and 1996 had fifty-two weeks. Risks And Uncertainties 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 reporting period. Actual results could differ from those estimates. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, investment securities, and trade receivables. The Company places its cash and cash equivalents with high credit quality financial institutions. By policy, the Company limits the amount of credit exposure to any one financial institution and receives confirmation indicating that, with respect to investment securities, each custodian (with the exception of one custodian holding equity securities with a market value of approximately $6.9 million at November 28, 1998) maintains appropriate insurance coverage to protect the Company's investment portfolio. Concentrations of credit risk with respect to trade receivables are limited due to the diverse group of manufacturers, F-8 Fab Industries, Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ wholesalers and retailers to whom the Company sells (see Note 13). The Company reviews a customer's credit history before extending credit. The Company has established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Investments The Company follows Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115 addresses accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Investments in such securities are to be classified as either held-to-maturity, trading, or available-for-sale. The Company classifies all of its investments as available-for-sale. The investments are recorded at their fair value and the unrealized gain or loss, net of income taxes, is recorded in stockholders' equity. Gains and losses on sales of investment securities are computed using the specific identification method. Inventories Inventories are valued at the lower of cost or market. For a portion of the inventories, cost is determined by the last-in, first-out (LIFO) method with the balance being determined by the first-in, first-out (FIFO) method. F-9 Fab Industries, Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Property, Plant and Property, plant and equipment are stated at cost. Equipment Depreciation is computed using principally the straight-line method. The range of estimated useful lives is 15 to 33 years for buildings and building improvements, 4 to 10 years for machinery and equipment, 10 years for leasehold improvements and 5 years for trucks and automobiles. Long-Lived Assets The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell. Research and Research and development costs are charged to Development Costs expenses in the year incurred and amounted to $3,625,000, $3,869,000 and $3,875,000 in fiscal 1998, 1997 and 1996, respectively. Stock-Based In fiscal 1997, the Company became subject to SFAS Compensation No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which allows either the intrinsic or fair value method. SFAS No. 123 encourages, but does not require, entities to adopt the fair value method in place of the intrinsic value method as provided for in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. When the Company adopted SFAS No. 123, it elected to retain the intrinsic value method. The required fair value disclosures are included in the notes to the consolidated financial statements. F-10 Fab Industries, Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Taxes on Income The Company follows the liability method of accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). Provision is made for deferred income taxes which result from various temporary differences, principally relating to the use of accelerated depreciation for tax purposes. Earnings Per Share Effective in fiscal 1998, earnings per share is calculated in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), which requires companies to present basic and diluted earnings per share. Basic earnings per share is based on the weighted average number of common shares outstanding during the fiscal year. Diluted earnings per share is based on the weighted average number of common shares and dilutive potential common shares outstanding during the fiscal year. The Company's dilutive potential common shares outstanding during fiscal 1998, 1997 and 1996 resulted entirely from dilutive stock options. The Company has restated earnings per share for fiscal 1997 and 1996 to conform to the provisions of SFAS 128. Revenue Recognition The Company recognizes substantially all of its revenues upon shipment of the related goods. Allowances for estimated returns are provided when sales are recorded. Pending Accounting In June 1997, the FASB issued SFAS No. 130, Pronouncements "Reporting Comprehensive Income." This Statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. It does not, however, require a specific format for the Statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. The Company is in the process of determining its preferred format. This Statement is effective for fiscal years beginning after December 15, 1997. F-11 Fab Industries, Inc. and Subsidiaries Summary of Accounting Policies ================================================================================ Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement establishes standards for the manner in which public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. This Statement is effective for financial statements for periods beginning after December 15, 1997, and the Company is currently evaluating the impact of the Statement on its financial reporting. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which standardizes the disclosure requirements for pensions and other postretirement benefits. The adoption of SFAS No. 132 in fiscal 1999 is not expected to materially impact the Company' In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires companies to recognize all derivative contracts at their fair values, as either assets or liabilities on the balance sheet. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (1) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, or (2) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. While management is still reviewing the statement, it believes the adoption of this statement will not have a material effect on the Company's consolidated financial position, results of operations or cash flows and any effect will generally be limited to the form and content of its disclosures. F-12 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1. Cash and Cash Cash and cash equivalents at November 28, 1998 and Equivalents November 29, 1997 consisted of the following (in thousands): 1998 1997 ------------------------------------------------------------ Cash $1,458 $1,360 Tax-free short-term debt instruments 4,620 3,214 ------------------------------------------------------------ $6,078 $4,574 ============================================================ 2. Investment Investment securities available-for-sale at Securities November 28, 1998 and November 29, 1997 consisted of the following (in thousands): Gross Gross unrealized unrealized Cost holding holding Fair gain loss value - -------------------------------------------------------------------------------- 1998: Equities $ 9,885 $ 331 $ (55) $ 10,161 U.S. Treasury obligations 14 -- -- 14 Tax-exempt obligations 32,719 686 (13) 33,392 Corporate bonds 4,698 139 (171) 4,666 - -------------------------------------------------------------------------------- $ 47,316 $ 1,156 $ (239) $ 48,233 ================================================================================ 1997: Equities $ 8,568 $ 389 $ (44) $ 8,912 U.S. Treasury obligations 24 -- -- 24 Tax-exempt obligations 51,118 526 (26) 51,618 Corporate bonds 5,298 216 -- 5,514 - -------------------------------------------------------------------------------- $ 65,008 $ 1,131 $ (70) $ 66,068 ================================================================================ F-13 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The carrying values and approximate fair values of investments in debt securities available-for-sale, at November 28, 1998 and November 29, 1997, by contractual maturity are as shown below: November 28, 1998 November 29, 1997 ----------------- ----------------- Cost Fair value Cost Fair value ----------------------------------------------------------- Maturing in one year or less $ 1,927 $ 1,931 $ 8,377 $ 8,416 Maturing after one year through five years 28,126 28,745 39,704 40,269 Maturing after five years through ten years 7,378 7,396 8,359 8,471 ----------------------------------------------------------- $37,431 $38,072 $56,440 $57,156 =========================================================== Gross and net realized gains and losses on sales of investment securities were: 1998 1997 1996 --------------------------------------------------------- Gross realized gains $ 3,826 $ 2,371 $ 1,518 Gross realized losses (2,680) (1,232) (978) --------------------------------------------------------- Net realized gain $ 1,146 $ 1,139 $ 540 ========================================================= Approximately $6.9 million of the Company's equity investment securities at November 28, 1998 consists 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 call options. At November 28, 1998, the notional amounts of the put and call options were $6.8 million and $6.9 million, respectively. F-14 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 3. Inventories Inventories at November 28, 1998 and November 29, 1997 consisted of the following (in thousands, except for percentages): 1998 1997 ---------------------------------------------------- Raw materials $ 9,090 $ 9,132 Work-in-process 14,177 9,781 Finished goods 8,946 9,357 ---------------------------------------------------- $32,213 $28,270 ==================================================== Approximate percentage of inventories valued under LIFO method 50% 65% ==================================================== Excess of FIFO valuation over LIFO valuation $ 4,595 $ 6,298 ==================================================== The reduction in the LIFO reserve during fiscal 1998 was primarily attributable to a decline in the average cost of yarn purchased during the year. 4. Property, Plant and Property, plant and equipment at November 28, 1998 Equipment and November 29, 1997 consisted of the following (in thousands): F-15 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 1998 1997 ----------------------------------------------------------- Owned by the Company: Land and improvements $ 698 $ 698 Buildings and improvements 13,877 13,041 Machinery and equipment 109,252 94,885 Trucks and automobiles 1,662 1,631 Office equipment 681 681 Leasehold improvements 808 808 ----------------------------------------------------------- 126,978 111,744 Property under capital leases: Land 18 18 Buildings and improvements 1,432 1,432 ----------------------------------------------------------- 128,428 113,194 Less: Accumulated depreciation and amortization 88,407 83,185 ----------------------------------------------------------- $ 40,021 $ 30,009 =========================================================== 5. Obligations Under Obligations under capital leases at November 28, Capital Leases 1998 and November 29, 1997 consisted of the following (in thousands): 1998 1997 ------------------------------------------------------- Obligations under capital leases through 2006 payable in monthly installments of $11 including interest at 10% per annum $514 $584 Less: Current maturities (included with other current liabilities) 28 28 ------------------------------------------------------- $486 $556 ======================================================= Aggregate installments on obligations under capital leases maturing after one year are as follows: F-16 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Fiscal year ending (in thousands) 2000 $ 79 2001 85 2002 91 2003 97 Thereafter 134 -------------------------------------------------- $ 486 ================================================== 6. Stock Stock Option Plan Compensation Plans Under the Company's 1987 stock option plan, which terminated in May 1997, the Company was able to grant to key employees either nonqualified or incentive stock options to purchase up to a maximum of 650,000 shares of common stock at the fair market value at the date of the grant. In May 1997, the Board of Directors adopted and the shareholders approved a new stock option plan providing for the grant of up to 175,000 shares of common stock at any time over the next ten years. In general, the terms of the 1997 plan are similar to the Company's previous stock option plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the Company's stock option plans. If the Company had elected to recognize compensation costs based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated below: (Dollars in thousands, except per share data) 1998 1997 1996 --------------------------------------------------------------- Pro forma net income $ 5,794 $ 9,233 $ 8,665 Pro forma earnings per share - diluted $ 1.02 $ 1.60 $ 1.48 =============================================================== F-17 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The weighted average fair value of options granted was $7.04, $10.29, $8.30 per share in fiscal 1998, 1997 and 1996, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for fiscal 1998, 1997 and 1996 grants: -------------------------------------------------- Dividends $.70 per share Volatility 27.5% Risk-free interest 4.37% to 6.7% Expected term 5 to 10 years ================================================== Data regarding the Company's stock option plan follows: Weighted average exercise price Shares per share ----------------------------------------------------------------------------- Shares under option, December 2, 1995 129,200 $17.45 Options granted 50,000 27.46 Options exercised (14,300) 15.96 Options canceled (10,000) 26.26 ----------------------------------------------------------------------------- Shares under option, November 30, 1996 154,900 20.25 Options granted 64,000 29.77 Options exercised (8,800) 17.50 Options canceled (3,000) 33.88 ----------------------------------------------------------------------------- Shares under option, November 29, 1997 207,100 23.11 Options granted 20,000 29.10 Options exercised (15,450) 22.32 Options canceled (39,000) (30.29) ----------------------------------------------------------------------------- Shares under option, November 28, 1998 172,650 22.26 ============================================================================= ----------------------------------------------------------------------------- Options exercisable at: November 30, 1996 113,700 $17.57 November 29, 1997 125,900 19.37 November 28, 1998 125,010 20.01 ============================================================================= F-18 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The following summarizes information about shares under option in the respective exercise price ranges at November 28, 1998:
Weighted average Weighted average Range of exercise Weighted average exercise price Number exercise price price per share Number outstanding remaining life per share exercisable per share - --------------------------------------------------------------------------------------------------------------------------- $15.44 - $19.00 84,050 2.44 $16.06 84,050 $16.06 22.06 - 31.44 88,600 9.61 28.14 40,960 28.12 - --------------------------------------------------------------------------------------------------------------------------- 172,650 125,010 ===========================================================================================================================
The shares authorized but not granted under the Company's stock option plans were 165,000 at November 28, 1998 and 175,000 at November 29, 1997. Common stock reserved for options totaled 172,650 shares at November 28, 1998 and 207,100 shares at November 29, 1997. F-19 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Restricted Stock Plan The Company has a restricted stock plan which awards shares of common stock previously held in its treasury to key employees. Shares are awarded in the name of the employee, who has all rights of a shareholder, subject to certain restrictions or forfeiture. Vesting occurs over a five-year period from the date the shares were awarded. Dividends associated with the shares are held by the Company and vest over the same five-year period. During fiscal 1991, 60,000 shares were awarded and were recorded at their quoted market value at the date of grant of $26 per share, or $1,560,000. The compensation element related to such shares was recognized ratably over the five-year restriction period. During fiscal 1996 and 1994, an additional 2,400 shares and 1,000 shares, respectively, were awarded under terms similar to those described above. Compensation expense related to the above restricted shares for fiscal 1998, 1997 and 1996 was $26,000, $31,000 and $170,000, respectively. 7. Stockholder The Company has a Stockholder Rights Plan (the Rights Plan "Plan") whereby each stockholder has received a distribution of rights for each common share held. The rights will become exercisable and will detach from the common shares a specified time after any person becomes the beneficial owner of 20% or more of the Company's common shares, or commences a tender or exchange offer which, if consummated, would result in any person becoming the beneficial owner of 30% or more of the Company's common shares. Once exercisable, each right will entitle the holder, other than the acquiring person, to purchase, for the rights purchase price, common shares having a market value of twice the right's purchase price. F-20 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ If, following an acquisition of 20% or more of the Company's common shares, the Company is involved in any merger or other business combination or sells or transfers more than 50% of its assets or earnings power, each right will entitle the holder to purchase, for the rights purchase price, common shares of the other party to such transaction having a market value of twice the right's purchase price. The Company may redeem the rights at a price of $0.01 per right at any time prior to a specified period of time after a person has become the beneficial owner of 20% or more of the Company's common shares. The rights attach to all of the Company's common shares outstanding as of June 6, 1990, or subsequently issued, and expire on June 6, 2000. 8. Benefit Plans Profit Sharing Plans A qualified plan, which covers the majority of salaried employees, provides for discretionary contributions up to a maximum of 15% of eligible salaries. The distribution of the contribution to the Plan's participants is based upon their annual base compensation. Contributions for fiscal 1998, 1997 and 1996 were $308,000, $429,000 and $439,000, respectively. The Company also has a nonqualified, defined contribution retirement plan for key employees who are ineligible for the salaried employees' qualified profit sharing plan. Contributions for fiscal 1998, 1997 and 1996 were $59,000, $94,000 and $98,000, respectively. Benefits payable under this plan amounting to $2,501,000 and $2,047,000 at November 28, 1998 and November 29, 1997, respectively, are included in other noncurrent liabilities. These liabilities are fully funded by plan assets of equal amounts, which are included in other assets. Pension Plan The Company's defined benefit plan covers all eligible hourly production employees. The benefits are based on years of service. Contributions are intended to provide benefits attributable to both past and future services. F-21 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The net periodic pension cost of the defined benefit plan for fiscal 1998, 1997 and 1996 is as follows (in thousands): 1998 1997 1996 ----------------------------------------------------------------------- Service cost $ 272 $ 181 $ 178 Interest cost on projected benefit obligation 264 179 161 Actual return on plan assets 119 (1,590) (1,267) Net amortization and deferral (687) 1,117 924 ----------------------------------------------------------------------- Net periodic pension cost $ (32) $ (113) $ (4) ======================================================================= The following table presents a reconciliation of the funded status of the plan for fiscal 1998 and 1997 (in thousands): 1998 1997 --------------------------------------------------------------------- Accumulated benefit obligations including vested benefits of $(3,970) and $(3,468) $(4,200) $(3,690) ===================================================================== Projected benefit obligation for service rendered to date $(4,200) $(3,690) Plans assets at fair value, primarily listed stocks 4,987 5,593 --------------------------------------------------------------------- Projected plan assets in excess of benefit obligation 787 1,903 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (1,573) (2,766) Unrecognized prior service cost 833 906 Unrecognized net asset at transition being recognized over 11 years - (28) --------------------------------------------------------------------- Prepaid pension costs included in other current assets $ 47 $ 15 ===================================================================== F-22 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The average discount rate was 6-1/2% in fiscal 1998, 7% in fiscal 1997 and 7-1/2% in fiscal 1996, and the expected rate of return on assets for both fiscal 1998 and 1997 was 8%. Employee Stock Ownership Plan The Company has an Employee Stock Ownership Plan ("ESOP") which covers all full-time employees who have completed one year of service. In 1991, the ESOP purchased 340,000 shares of common stock from the Chairman of the Board of Directors and President of the Company for $34.875 per share, which represented 5.5% of the Company's then outstanding common stock. The ESOP was funded by the Company, pursuant to a loan pledge agreement for $11,857,000. The loan is payable by the ESOP to the Company from contributions to be made in fifteen equal annual principal installments plus interest at the prime rate. Employee rights to the common shares vest over a seven-year period and are payable at retirement, death, disability or termination of employment. Annual principal installments of $790,000 plus interest at prime are paid by the ESOP to the Company. The balance on the ESOP indebtedness at November 28, 1998 of $6,327,000 is reflected as a reduction of the Company's stockholders' equity in the consolidated balance sheets. The Company accounts for the ESOP shares in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position No. 76-3. ESOP contributions are recorded for financial reporting purposes as the ESOP shares become allocable to the plan participants. All ESOP shares are considered outstanding in the determination of earnings per share. F-23 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The portion of the common stock dividends declared relating to ESOP shares totaled $218,000, $227,000 and $232,000 for fiscal 1998, 1997 and 1996, respectively. Of these amounts, $102,000, $89,000 and $75,000 for fiscal 1998, 1997 and 1996, respectively, related to allocated shares and $116,000, $138,000 and $157,000 for fiscal 1998, 1997 and 1996, respectively, related to unallocated shares. The dividends related to the unallocated shares are being applied towards the $790,000 annual principal installments referred to above. As of November 28, 1998 and November 29, 1997, ESOP shares information was as follows: 1998 1997 ----------------------------------------------------------- Allocated 154,829 141,041 Committed to be released 24,488 26,716 In suspense 128,966 151,226 ----------------------------------------------------------- Total shares held by ESOP 308,283 318,983 =========================================================== The net charges to earnings for fiscal 1998, 1997 and 1996 were as follows (in thousands): 1998 1997 1996 ----------------------------------------------------------------- Contribution to ESOP $1,176 $1,242 $1,297 Less: Interest income on loan to ESOP 605 691 738 ----------------------------------------------------------------- Net charge to earnings $ 571 $ 551 $ 559 ================================================================= The contribution to the ESOP is allocated between costs of goods sold and operating expenses; the interest income is included in interest and dividend income. F-24 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 9. Income Taxes Provisions for Federal, state and local income taxes for fiscal 1998, 1997 and 1996 consisted of the following components (in thousands): 1998 1997 1996 ------------------------------------------------------------- Current: Federal $ 881 $3,876 $3,415 State and local 77 444 324 ------------------------------------------------------------- 958 4,320 3,739 Deferred: Federal and state 1,042 (185) 61 ------------------------------------------------------------- $2,000 $4,135 $3,800 ============================================================= The net deferred tax liability at November 28, 1998 and November 29, 1997 consisted of the following (in thousands): 1998 1997 ----------------------------------------------------------------------- Long-term portion: Gross deferred tax liability (asset) for: Excess depreciation for tax purposes $5,989 $5,648 Future tax deductions for employee benefit plans (1,284) (1,168) ----------------------------------------------------------------------- Net long-term liability 4,705 4,480 ----------------------------------------------------------------------- Current portion: Gross deferred tax liability (asset) for: Accounts receivable - Section 475 adjustment 855 - Net unrealized holding gain on investment securities available-for-sale, included in stockholders' equity 367 424 ESOP contribution accrued for tax purposes 422 408 Other (106) (54) ----------------------------------------------------------------------- Net current liability 1,538 778 ----------------------------------------------------------------------- Net deferred tax liability $6,243 $5,258 ======================================================================= F-25 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ The differences between the Company's effective tax rate and the Federal statutory tax rate for fiscal 1998, 1997 and 1996 arose from the following: 1998 1997 1996 ----------------------------------------------------------------------- (% of pretax income) Federal tax expense at statutory rate 34.0% 35.0% 35.0% State and local income taxes, net of Federal benefit 2.3 2.5 2.4 Tax-free interest income and dividends received deduction (11.1) (6.5) (6.4) Other (.3) (.4) (.8) ----------------------------------------------------------------------- Effective tax rate 24.9% 30.6% 30.2% ======================================================================= 10. Commitments Stock Repurchase The Company has an agreement with the Chairman of the Board of Directors and President ("Chairman") which provides that, in the event of the Chairman's death, his estate has the option to sell, and the Company the obligation to purchase, certain stock owned by the Chairman. The amount of stock subject to purchase is equal to the lesser of $7 million or 10% of the book value of the Company at the end of the year immediately following his death, plus the $3 million proceeds from insurance on his life for which the Company is the beneficiary. The agreement extends automatically from year to year unless either party gives notice of cancellation at least six months prior to the then current expiration date. The current expiration date is March 2000. F-26 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Lease The Company leases its New York City offices and showrooms until 2006, at average minimum annual rentals of $503,000 until April 2001 and $660,000 thereafter until April 2006, plus escalation and other costs. The Company has the option to cancel the lease effective April 2001. Rental expense for operating leases in fiscal 1998, 1997 and 1996 aggregated $986,000, $605,000 and $643,000, respectively. Future minimum annual payments over the remaining noncancellable term of the Company's New York City operating lease are as follows: Fiscal year ending (in thousands) -------------------------------------------------- 1999 $ 530 2000 559 2001 235 -------------------------------------------------- $1,324 ================================================== 11. Statement of Cash Cash outlays for corporate income taxes and Flows interest for fiscal 1998, 1997 and 1996 were as follows (in thousands): Corporate income taxes Interest ------------------------------------------------- 1998 $2,907 $ 75 1997 3,545 65 1996 3,840 124 ================================================= F-27 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Noncash Investing and Financing Activities In fiscal 1998, 1997 and 1996, net unrealized holding gains (losses) of $(143,000), $48,000 and $639,000, respectively, less related income taxes of $(57,000), $19,000 and $256,000, on investment securities available-for-sale, were recorded as increases (decreases) in stockholders' equity. 12. Interest and Interest and dividend income for the past three Dividend Income fiscal years were as follows (in thousands): Interest income Dividend income Total -------------------------------------------------- 1998 $3,184 $345 $3,529 1997 3,654 176 3,830 1996 3,505 155 3,660 ================================================== 13. Major Customer During fiscal 1998, no single customer or group of affiliated customers accounted for more than 10% of the year's net sales or the year-end accounts receivable balance. For fiscal 1997 and 1996, sales to a group of customers affiliated through common control accounted for approximately 10% and 12% of net sales, respectively. The receivables from this group of customers represented approximately 12% of the November 29, 1997 accounts receivable balance. F-28 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 14. Earnings Per Basic and diluted earnings per share for the Share fiscal years ended November 28, 1998, November 29, 1997 and November 30, 1996 are calculated as follows: Weighed Average Per Share Net Income Shares Amount ------------------------------------------------------------------------------ Fiscal year ended November 28, 1998: Basic earnings per share $6,017,000 5,627,788 $1.07 ============ Effect of assumed conversion of employee stock options 37,406 ------------------------------------------------------------------------------ Diluted earnings per share $6,017,000 5,665,194 $1.06 ============================================================================== Fiscal year ended November 29, 1997: Basic earnings per share $9,394,000 5,705,624 $1.65 ============ Effect of assumed conversion of employee stock options 47,271 ------------------------------------------------------------------------------ Diluted earnings per share $9,394,000 5,752,895 $1.63 ============================================================================== Fiscal year ended November 30, 1996: Basic earnings per share $8,796,000 5,797,228 $1.52 ============ Effect of assumed conversion of employee stock options 43,910 ------------------------------------------------------------------------------ Diluted earnings per share $8,796,000 5,841,138 $1.51 ============================================================================== F-29 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ Options to purchase 46,000, 52,000 and 13,000 shares of common stock with prices ranging from $28.50 to $33.88 were outstanding during fiscal 1998, 1997 and 1996, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during such fiscal years. F-30 Fab Industries, Inc. and Subsidiaries Notes to Consolidated Financial Statements ================================================================================ 15. Quarterly Quarterly earnings were as follows (in thousands, Financial Data except for earnings per share): (unaudited)
First Second Third Fourth quarter quarter quarter quarter* Total - ------------------------------------------------------------------------------------------------------------------------ Fiscal 1998: Net sales $ 34,251 $ 39,761 $ 39,571 $ 37,853 $ 151,436 Cost of goods sold 29,918 33,403 34,430 35,396 133,147 Net income 1,735 2,334 1,665 283 6,017 Earnings per share: Basic $ 0.31 $ 0.41 $ 0.30 $ .05 $ 1.07 Diluted $ 0.30 $ 0.41 $ 0.30 $ .05 $ 1.06 ======================================================================================================================== Fiscal 1997: Net sales $ 35,475 $ 42,940 $ 41,775 $ 40,745 $ 160,935 Cost of goods sold 31,427 36,601 35,009 34,352 137,389 Net income 1,650 2,395 2,640 2,709 9,394 Earnings per share: Basic $ 0.29 $ 0.42 $ 0.46 $ 0.48 $ 1.65 Diluted $ 0.28 $ 0.42 $ 0.46 $ 0.47 $ 1.63 ========================================================================================================================
* As a result of lower than previously anticipated operating results, the fourth quarter of fiscal 1998 reflects a reduction of incentive-based compensation expenses and effective income tax rates from amounts estimated in prior quarters, the aggregate of which increased net income by approximately $1,085. F-31 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FORM 10-K ITEM 14 FISCAL YEARS ENDED NOVEMBER 28, 1998, NOVEMBER 29, 1997 AND NOVEMBER 30, 1996 S-1 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONTENTS Schedule: II. Valuation and qualifying accounts S-3 S-2 Schedule II Fab Industries, Inc. and Subsidiaries Valuation and Qualifying Accounts (In thousands) ================================================================================
Col. A Col. B Col. C Col. D Col. E ------ ------ ------ ------ ------ Additions ---------------------------- (1) Balance at Charged to (2) beginning of costs and Charged to Balance at Description year expenses other accounts Deductions end of year - ------------------------------------------------------------------------------------------------------------------ Fiscal year ended November 28, 1998: Allowance for doubtful accounts $900 $400(i) $ - $(300)(ii) $1,000 Fiscal year ended November 29, 1997: Allowance for doubtful accounts $600 $400(i) $ - $(100)(ii) $ 900 Fiscal year ended November 30, 1996: Allowance for doubtful accounts $500 $400(i) $ - $(300)(ii) $ 600 ==================================================================================================================
(i) Current year's provision. (ii) Accounts receivable written-off, net of recoveries. S-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FAB INDUSTRIES, INC. (Company) By: /s/ Samson Bitensky -------------------------------------- Samson Bitensky Chairman of the Board and Chief Executive Officer Date: February 26, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Date Capacity in Which Signed - --------- ---- ------------------------ /s/ Samson Bitensky February 26, 1999 Chairman of the Board, Chief Executive - ------------------------ Officer and Director (Principal Executive Samson Bitensky Officer) /s/ David A. Miller February 26, 1999 Vice President - Finance, Treasurer and - ------------------------ Chief Financial Officer David A. Miller (Principal Financial and Accounting Officer) /s/ Sherman S. Lawrence February 26, 1999 Secretary and Director - ------------------------ Sherman S. Lawrence /s/ Martin Bernstein February 26, 1999 Director - ------------------------ Martin Bernstein February 26, 1999 Director - ------------------------ Lawrence Bober /s/ Frank Greenberg February 26, 1999 Director - ------------------------ Frank Greenberg /s/ Susan Lerner February 26, 1999 Director - ------------------------ Susan Lerner /s/ Richard Marlin February 26, 1999 Director - ------------------------ Richard Marlin
17 INDEX TO EXHIBITS Page Number In Sequentially Exhibit Description of Exhibit Numbered Copy 3.1 - Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended November 27, 1993 (the "1993 10-K"). 3.2 - Amended and Restated By-laws, incorporated by reference to Exhibit 3.2 to the 1993 10-K. 3.3 - Certificate of Amendment of Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 3, 1994 (the "1994 10-K"). 3.4 - Amendments to the Amended and Restated By-laws, incorporated by reference to Exhibit 3.4 of the Company's Annual Report on Form 10-K for the fiscal year ended November 29, 1997. 4.1 - Specimen of Common Stock Certificate, incorporated by reference to Exhibit 4-A to Registration Statement No. 2-30163, filed on November 4, 1968. 4.2 - Rights Agreement dated as of June 6, 1990 between the Company and Manufacturers Hanover Trust Company, as Rights Agent, which includes as Exhibit A the form of Rights Certificate and as Exhibit B the Summary of Rights to purchase Common Stock, incorporated by reference to Exhibit 4.2 to the 1993 10-K. 4.3 - Amendment to the Rights Agreement between the Company and Manufacturers Hanover Trust Company dated as of May 24, 1991, incorporated by reference to Exhibit 4.3 to the 1993 10-K. 10.1 - 1987 Stock Option Plan of the Company, incorporated by reference to Exhibit 10.1 to the 1993 10-K. 10.2 - Employment Agreement dated as of March 1, 1993, between the Company and Samson Bitensky, incorporated by reference to Exhibit 10.2 to the 1993 10 -K. 10.3 - Fab Industries, Inc. Hourly Employees Retirement Plan (the "Retirement Plan"), incorporated by reference to Exhibit 10.3 to the 1993 10-K. 10.4 - Amendment to the Retirement Plan effective December 11, 1978, incorporated by reference to Exhibit 10.4 to the 1993 10-K. 10.5 - Amendment to the Retirement Plan effective December 1, 1981, incorporated by reference to Exhibit 10.5 to the 1993 10-K. 10.6 - Amendment to the Retirement Plan dated November 21, 1983, incorporated by reference to Exhibit 10.6 to the 1993 10-K. 10.7 - Amendment to the Retirement Plan dated August 29, 1986, incorporated by reference to Exhibit 10.7 to the 1993 10-K. 10.8 - Amendment to the Retirement Plan effective as of December 1, 1989, incorporated by reference to Exhibit 10.8 to the 1993 10-K. 10.9 - Amendment to the Retirement Plan dated September 21, 1995, incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 2, 1995 (the "1995 10-K"). 10.10 - Fab Lace, Inc. Employees Profit Sharing Plan (the "Profit Sharing Plan"), incorporated by reference to Exhibit 10.9 to the 1993 10-K. 10.11 - Amendment to the Profit Sharing Plan effective December 1, 1978, incorporated by reference to Exhibit 10.10 to the 1993 10-K. 10.12 - Amendment dated December 1, 1985 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.11 to the 1993 10-K. 10.13 - Amendment dated February 5, 1987 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.12 to the 1993 10-K. 10.14 - Amendment dated December 24, 1987 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.13 to the 1993 10-K. 10.15 - Amendment dated June 30, 1989 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.14 to the 1993 10-K. 10.16 - Amendment dated February 1, 1991 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.15 to the 1993 10-K. 10.17 - Amendment dated September 1, 1995 to the Profit Sharing Plan, incorporated by reference to Exhibit 10.17 to the 1995 10-K. 10.18 - Lease dated as of December 8, 1988 between Glockhurst Corporation, N.V. and the Company, incorporated by reference to Exhibit 10.16 to the 1993 10-K. 10.19 - Lease Modification Agreement dated April 2, 1991 between Glockhurst Corporation, N.V. and the Company, incorporated by reference to Exhibit 10.17 to the 1993 10-K. 10.20 - Second Lease Modification Agreement dated May 23, 1996 between 200 Madison Associates, L.P., and the Company, incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 1996. 10.21 - Lease dated as of March 1, 1979 between City of Amsterdam Industrial Development Agency and Gem Urethane Corp., incorporated by reference to Exhibit 10.18 to the 1993 10-K. 10.22 - Lease dated as of January 1, 1977 between City of Amsterdam Industrial Development Agency and Lamatronics Industries, Inc., incorporated by reference to Exhibit 10.19 to the 1993 10-K. 10.23 - Form of indemnification agreement between the Company and its officers and directors, incorporated by reference to Exhibit 10.20 to the 1993 10-K. 10.24 - Company's Employee Stock Ownership Plan effective as of Nov. 25, 1991, incorporated by reference to Exhibit 10.24 to the 1993 10-K. 10.25 - Amendment dated September 21, 1995 to the Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.27 to the 1995 10-K. 10.26 - Company's Non-Qualified Executive Retirement Plan dated as of November 30, 1990, incorporated by reference to Exhibit 10.25 to the 1993 10-K. 21 - Subsidiaries of the Company incorporated by reference to Exhibit 21 to the 1994 10-K. *23 - Consent of BDO Seidman, LLP. **27 - Financial Data Schedule pursuant to Article 5 of Regulation S-X. - ---------- * Filed herewith. ** Filed with EDGAR version only. EX-23 2 CONSENT OF INDEPENDENT CERT. PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Fab Industries, Inc. New York, New York We hereby consent to the incorporation by reference in the Prospectus constituting a part of the Registration Statement on Form S-8 filed August 11, 1997, the Registration Statement on Form S-8 filed June 28, 1993, the Registration Statement on Form S-3 filed January 31, 1992 and the Registration Statement on Form S-8 filed June 9, 1989 of our report dated February 16, 1999 relating to the consolidated financial statements and schedule of Fab Industries, Inc. and subsidiaries appearing in the Company's Annual Report on Form 10-K for the year ended November 28, 1998. We also consent to the reference to us under the caption "experts" in the Prospectus forming a part of such Registration Statements. /s/ BDO SEIDMAN, LLP New York, New York February 26, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED NOVEMBER 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS NOV-28-1998 NOV-30-1997 NOV-28-1998 6,078 48,233 28,979 1,000 32,213 116,230 128,428 88,407 160,403 14,868 486 0 0 1,318 136,209 160,403 151,436 151,436 133,147 133,147 14,872 400 75 8,017 2,000 6,017 0 0 0 6,017 1.07 1.06
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