-----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, OXw5Pk2O5qlGJNJmKGlIknppD3himEFwKABrrU27HbTEKALmuhvfqcZyCfz8w/oV q8SjKYN1My78SubE7XHAnw== 0000950142-03-000397.txt : 20030228 0000950142-03-000397.hdr.sgml : 20030228 20030228170610 ACCESSION NUMBER: 0000950142-03-000397 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030228 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: 1934 Act SEC FILE NUMBER: 001-05901 FILM NUMBER: 03587425 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 form10k2002.txt FAB INDUSTRIES, INC. 2002 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 For the fiscal year ended November 30, 2002 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ 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 [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of The Act) Yes [_] No [X] The aggregate market value at June 3, 2002 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 $29,000,000. 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 11, 2003, there were outstanding 5,238,015 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 120 days after the end of the fiscal year covered by this Annual Report on Form 10K 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....................................................4 Item 3. Legal Proceedings.............................................5 Item 4. Submission of Matters to a Vote of Security-Holders...........6 PART II........................................................................6 Item 5. Market for Common Equity and Related Stockholder Matters......7 Item 6. Selected Consolidated Financial Data..........................7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..13 Item 8. Financial Statements and Supplementary Data..................13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................13 PART III......................................................................14 Item 10. Directors and Executive Officers............................14 Item 11. Executive Compensation......................................15 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................................15 Item 13. Certain Relationships and Related Transactions..............15 Item 14. Controls and Procedures.....................................15 PART IV.......................................................................16 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................16 PART I ITEM 1. BUSINESS Fab Industries, Inc. was incorporated on April 21, 1966, under the laws of the State of Delaware and is a successor by merger to previously existing businesses. References in this Annual Report to "Fab" or "us" or "our" or "the Company" mean Fab Industries, Inc. and its subsidiaries on a consolidated basis, unless the context otherwise requires. We have been a leader in the domestic textile industry since we were founded. We are a major manufacturer of warp and circular knit fabrics, raschel laces, and laminated fabrics. We also produce comforters, sheets, blankets and other bedding products. The Company's Board of Directors has determined that it is in the best interests of its stockholders to sell the Company's textile business as a going concern. In order to maximize stockholder value, the Board of Directors adopted resolutions dated March 1, 2002 which authorized, subject to stockholder approval, the sale of the Company's business pursuant to a Plan of Liquidation and Dissolution (the "Plan"). The Company's stockholders approved the Plan at the Company's annual meeting on May 30, 2002. The Plan provides the Company's officers and directors will continue to operate the Company's textile business in its current fashion and pursue a sale of the business as a going concern. The Company's Board of Directors has approved the engagement of McFarland Dewey & Co., LLC financial advisors in November 2002 to assist with the sale of the business. There can be no assurance, however, that the Company will be successful in selling its business or if it does sell the business, that it will be able to recover the full value of its property, plant and equipment. On May 30, 2002, the Company's Board of Directors declared an initial liquidating distribution of $10.00 per share, which was paid on June 24, 2002, with a record date of June 10, 2002. Accordingly, $52,380,000 was paid on June 24, 2002. In addition, pursuant to resolutions adopted by the Company's Board of Directors, upon approval of the Plan by the stockholders, the Employee Stock Ownership Plan (the "ESOP") was terminated and all shares of common stock of the Company then held in the ESOP suspense account (86,456 shares) were transferred to the Company, and held as treasury stock, in exchange for the cancellation of the outstanding loan in the amount of $3,957,000 from the Company to the ESOP. The liquidating distribution paid on the ESOP shares allocated to participants are being held in a money market account under the ESOP and the shares plus the liquidating distribution will be paid to participants following approval of the ESOP plan termination by the Internal Revenue Service. Pursuant to resolutions adopted by the Company's Board of Directors and documentation sent to and returned to the Company by option holders, effective immediately following stockholder approval of the Plan, all outstanding options under the Company's 1997 Stock Incentive Plan became vested, and all options as to which optionees (including employees and directors) had returned to the Company the appropriate forms (representing options held by all but one optionee, who exercised via payment to the Company) were exercised through the issuance of loans from the Company to the optionees with stock of the optionees held as collateral by the Company until the loans have been satisfied. These loans receivable have been recorded as a reduction of stockholders' equity as of November 30, 2002. As of November 30, 2002, the balance of the loans outstanding was $221,000. OPERATIONS Fab is a leading supplier of knitted fabrics and lace in the domestic textile industry. The Company currently operates in three segments: (1) Apparel Fabrics, (2) Home Fashions and Accessories, and (3) Other, consisting of the Gem Urethane operation, the Over-the-Counter Retail operation, located at the Salisbury Manufacturing facility, and Industrial Fabrics. 1 APPAREL FABRICS The Company's textile fabrics are sold to a wide variety of manufacturers of ready-to-wear and intimate apparel for women and children, including dresses and sportswear, children's sleepwear, activewear, swimwear, and recreational apparel. These fabrics are sold and marketed through the Company's Warp Knit and Circular Knit Business Units. The fabrics are sold primarily in piece dyed form, as well as "PFP" (prepared for printing), and heat transfer printed configurations. Fab's raschel lace products are sold to manufacturers of intimate apparel products consisting of lingerie, daywear, panty, bra and foundations, ladies' sportswear, children's wear, swimwear, home furnishing, accessories, and hobby and crafts. The Company's laces are sold in both narrow and all-over constructions. Narrow band laces are offered with scalloped or galloon edges in rigid and stretch constructions. All-over laces are offered with either straight or galloon edges in rigid and stretch constructions utilizing both spandex and helenca nylon. Fab's lace products are sold to manufacturers of intimate apparel through the Raval Designer and Wiener Lace divisions. The Raval Lace division sells and markets laces to manufacturers and jobbers of dresses and sportswear, blouses, other related outwear industries, and to the home furnishing and bedding industry. The Company's subsidiary, SMS Textiles, Inc. ("SMS"), specializes in wide elastic fabrics for sale to manufacturers of intimate apparel, swimwear, athleticwear, and sportswear. Fab's Lida Stretch Fabrics Division specializes in circular knit products blending nylon, cotton, polyester, and rayon with spandex to create stretch fabrics in a variety of constructions. These fabrics are sold as piece and yarn dyes to the ready-to-wear, aerobicwear, swimwear, and intimate apparel markets. The broad range of products includes jerseys, ribs, jacquards, and failles. The Company also offers a comprehensive line of heat transfer prints for sleepwear, robewear, outerwear, and activewear applications. HOME FASHIONS AND ACCESSORIES The Company sells its fabrics and laces directly to manufactures in the home fashion and bedding-related industries. In addition, Fab utilizes its own fabrics and laces to internally produce flannel and satin sheets, blanket products, comforters, and other bedding-related products, which are sold to specialty stores, catalogue and mail order companies, airlines and cruise lines, and health care institutions through the Company's subsidiary, Salisbury Manufacturing Corporation. OTHER Included in this segment is (1) Gem Urethane Corporation, (2) the Over-the-Counter Retail operation, and (3) Industrial and other miscellaneous non-apparel fabrics. The Company's subsidiary, Gem Urethane produces a line of ultrasonically, hot melt adhesive, flame and adhesive bonded products for apparel, environmental, health care, industrial, and consumer markets. 2 In addition, Gem Urethane does toll laminating and converting for these markets as well as a fire resistant fabric, Sandel(R), through its subsidiary Sandel International, to the seating, transportation and military markets. The Company also sells its fabrics and laces to the over-the-counter retail market through its retail manufacturing operation located at the Salisbury Manufacturing plant. Internally produced fabrics and laces are transported to the Salisbury Manufacturing facility where the fabrics and laces are "doubled and rolled" on specialized equipment, packaged, and then shipped to various over-the counter retail customers. The Company also manufactures various engineered fabrics for specific industrial and institutional end-uses, including Velcro-UBL (unbroken loop) constructions, laminating and coating substrates, linings, and filtration. GENERAL We engage in research and product development activities to create new fabrics and styles to meet the continually changing demands of our customers. Direct expenditures in this area aggregated $3,206,000 in fiscal 2000, $1,999,000 in fiscal 2001, and $1,690,000 in fiscal 2002. Through these efforts, we have 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, we have also developed a full line of flannel and satin sheets and blankets, including specialty blankets for the airline and cruise lines, and health care institutions. While we use various trademarks and trade names in the promotion and sale of our products, we do not believe that the loss or expiration of any such trademark or trade name would have a material adverse effect on our operations. We market our products primarily through our full-time sales personnel, as well as independent representatives located throughout the United States and abroad. We do not believe our 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 2002, no single customer or group of affiliated customers accounted for more than 10% of the year's net sales. Our export sales are not material. SUPPLIES OF RAW MATERIALS We have not experienced difficulties in obtaining sufficient yarns, chemicals, dyes and other raw materials and supplies to maintain full production. We do not depend upon any single source of supply, and alternative sources are available for most of the raw materials used in our business. INVENTORIES We maintain adequate inventories of yarns and other raw materials to ensure an uninterrupted production flow. Greige and finished goods are maintained as inventory to meet varying customer demand and delivery requirements. We must maintain adequate working capital, because credit terms available to customers normally exceed credit terms extended to us by suppliers of raw materials. 3 COMPETITION Fab is engaged in a highly competitive global business which is based largely upon price, product quality, service and general consumer demand for the Company's finished goods. The portion of imported textile goods sold in the United States has increased substantially in the past few years, adversely impacting domestically manufactured textile products and the number of domestic manufacturers of such products. Our sales have declined from approximately $151,000,000 in 1998 to approximately $63,000,000 in 2002, largely as a result of increased foreign competition. SEGMENT INFORMATION See Note 14 of the Notes to Consolidated Financial Statements. EMPLOYEES At February 8, 2003, the Company employed approximately 620 people, of whom approximately 585 are employed by our subsidiaries. The employees are not represented by unions. We consider relations with our employees to be satisfactory. The number of our employees has declined from approximately 1,600 at the end of 1998 to approximately 620 on February 8, 2003. ITEM 2. PROPERTIES. The Company conducts its manufacturing operations in Lincolnton and Salisbury, North Carolina, and Amsterdam, New York. Yarn receiving and storage, dye and chemical receiving and storage, knitting operations, and dyeing and finishing operations are conducted at the Mohican Mills facility. These operations more specifically include tricot (warp knit) and raschel warping, tricot knitting, raschel lace knitting, wide elastic/stretch raschel knitting, circular and double-knit knitting, dyeing, framing, surface finishing including sueding, napping, shearing, heat transfer printing, lace separation, all facility-wide quality operations, laboratory testing and certification, yielding, packaging, and shipping. The Mohican Mills facility also processes and serves as a warehouse for griege and finished fabrics and lace. The Salisbury facility is the site of our consumer and institutional finished products manufacturing, the Over-The-Counter Retail Operation, and the Company's Mill Outlet Store. The Gem Urethane plant in Amsterdam, New York utilizes approximately 106,000 square feet for production. Fab closed two manufacturing plants, Travis Knits in Cherryville, North Carolina and Adirondack Knitting in Amsterdam, New York, during the first week of July 2001. In addition, on November 16, 2001, Fab closed its manufacturing plant in Maiden, North Carolina. The manufacturing operations of each of these facilities were consolidated into the Company's Mohican Mills facility located in Lincolnton, North Carolina. The Company is attempting to sell its plants in Cherryville and Maiden, North Carolina. Over the past two years, the Company has reduced the floor space of its executive offices and showroom facilities in its New York City headquarters. The following table sets forth the location of each of Fab's current manufacturing facilities, its current principal use, if any, approximate floor space and, where leased, the lease expiration date. There are no mortgages or other encumbrances on any of our facilities. All the Company's operating facilities are in good operating condition and repair. 4
APPROXIMATE LEASE LOCATION PRINCIPAL USE FLOOR SPACE EXPIRATION DATE - -------- ------------- ----------- --------------- Lincolnton, Dyeing and finishing, 630,550 sq.ft. (1) North Carolina raschel and tricot knitting, circular single and double knitting, tricot and raschel warping, printing and warehousing. Lincolnton, North Carolina Warehouse 55,000 sq. ft. (1) Maiden, North Carolina (3) 224,013 sq.ft. (1) Salisbury, North Carolina Manufacturing finished consumer 125,000 sq.ft. (1) and institutional products and retail and over-the- counter fabrics Amsterdam, New York Laminated fabrics, fire fighting 106,000 sq.ft. (2) material manufacturing operations and bonding and laminating Cherryville, North Carolina (3) 197,000 sq. ft. (1) New York, New York Executive offices and showroom 5,753 sq. ft 7/31/05 facilities - --------------------------- (1) Company owned. (2) The lease currently runs from month to month. (3) These facilities were closed during 2001 and are currently subject to a brokerage sale agreement. Manufacturing operations were consolidated into Fab's Mohican Mills facility located in Lincolnton, North Carolina.
All of our facilities are constructed of brick, steel or concrete, and we consider all facilities to be adequate and in good operating condition and repair. ITEM 3. LEGAL PROCEEDINGS. During the fall of 1999, San Francisco Network ("SFN") commenced an action in the Superior Court of California, Marin County, against the Company and the Company's Salisbury Manufacturing Corporation ("Salisbury") subsidiary. The action related to an agreement between SFN and Salisbury (whose performance the Company guaranteed), pursuant to which Salisbury was licensed to use the Karen Neuburger trademark for branded bedding products. The case was removed to the United States District Court of California. Salisbury and the Company denied any wrongdoing and asserted affirmative claims against SFN and certain of its principals. On March 14, 2002, at a court-ordered conference, the Company settled this issue without admitting liability. On April 12, 2002, the Company paid SFN $750,000 in exchange for a complete release of all claims. A number of claims and lawsuits are pending against the Company. It is impossible at this time for the Company to predict with any certainty the outcome of such litigation. However, management is of the opinion, based upon information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would be material in relation to the Company's consolidated financial position or results of operations. 5 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. Not Applicable PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Fab'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 2002 HIGH LOW ----------- ---- --- First Quarter........................... $ 18.70 $ 12.75 Second Quarter.......................... $ 19.05 $ 17.50 Third Quarter........................... $ 8.67 $ 7.70 Fourth Quarter.......................... $ 9.00 $ 6.90 FISCAL 2001 ----------- First Quarter........................... $ 14.87 $ 11.30 Second Quarter.......................... $ 15.00 $ 11.50 Third Quarter........................... $ 14.50 $ 13.75 Fourth Quarter.......................... $16.25 $12.55 At February 6, 2003, there were approximately 479 holders of record of Common Stock. For fiscal 2001, quarterly dividends of $.10 per share were declared on February 22, 2001, May 3, 2001, August 15, 2001 and November 27, 2001. On May 30, 2002, the Company's Board of Directors declared an initial liquidating distribution of $10.00 per share, which was paid on June 24, 2002, with a record date of June 10, 2002. Accordingly, $52,380,000 was paid on June 24, 2002. The payment of further cash dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the status of the sale of our business, our earnings, our capital requirements and our financial condition. Subsequent to November 30, 2002, the Company has terminated all of its stock option plans. As a result, currently, there are no options outstanding or available for grant. 6 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. (in thousands, except for share and per share data)
AS AT OR FOR THE FISCAL YEAR ENDED -------------------------------------------------------------------------- NOVEMBER DECEMBER DECEMBER NOVEMBER NOVEMBER 30, 2002 1, 2001 2, 2000 (1) 27, 1999 28, 1998 -------- ------- -------- -------- -------- Net Sales $62,965 $80,036 $118,185 $128,889 $151,436 Income (loss) before taxes 3,010 (15,488) 4,178 (338) 8,017 on income (3) Net income (loss) (3) 1,970 (8,623) 3,033 517 6,017 Earnings (loss) per share: Basic .38 (1.64) .57 .10 1.07 Diluted .38 (1.64) .57 .10 1.06 Total assets 81,229 131,528 151,412 152,178 160,403 Long-term debt -- 311 362 409 486 Stockholders' equity 64,571 113,503 123,855 123,788 130,527 Book value 12.33 21.79 23.45 22.91 23.38 per share (2) Cash dividends per share 10.00 .40 .475 .70 .70 Weighted average number of shares outstanding: Basic 5,222,812 5,258,353 5,336,958 5,414,687 5,627,788 Diluted 5,222,812 5,258,353 5,336,958 5,419,130 5,665,194 - --------------------- (1) Fifty-three week period. (2) Computed by dividing stockholders' equity by the number of shares outstanding at year-end. (3) Fiscal year ended December 1, 2001 amounts include asset impairment and restructuring charges of $14,530,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CRITICAL ACCOUNTING ESTIMATES Our critical accounting estimates are those which we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates, the underlying judgments and uncertainties used to make them and the likelihood that materially different estimates would be reported under different conditions or using different assumptions, is set forth below: 7 Accruals and Contingencies We periodically assess the potential liabilities related to any lawsuits or claims brought against us, as well as for other known unasserted claims, including environmental, legal and tax matters. While it is typically very difficult to determine the timing and ultimate outcome of these matters, we use our best judgment to determine if it is probable that we will incur an expense related to the settlement or final adjudication of such matters and whether a reasonable estimation of such probable loss, if any, can be made. In assessing probable losses, we make estimates of the amount of insurance recoveries, if any. We accrue a liability when we believe a loss is probable and the amount of the loss can be reasonably estimated, in accordance with the provisions of SFAS No. 5, "Accounting for Contingencies," as amended. See Note 9 in the accompanying financial statements for additional information concerning our contingencies. Given the inherent uncertainty related to the eventual outcome of these matters and potential insurance recoveries, it is possible that all or some of these matters may be resolved for amounts materially different from any provisions or disclosures that we may have made with respect to their resolution. In addition as new information becomes available, we may need to reassess the amount of probable liability that needs to be accrued related to our contingencies. All such revisions in our estimates could materially impact our results of operations and financial position. We maintain an accrual for workers compensation, which is classified as other current liabilities in our consolidated balance sheets. We determine the adequacy of the accrual by periodically evaluating our historical experience and trends related to workers compensation claims and payments, information provided to us by our insurance broker and industry experience and trends. If such information indicates that our accrual is overstated or understated, we will adjust the assumptions utilized in our methodologies and reduce or provide for additional accruals as appropriate. Revenue Recognition We recognize our revenues upon shipment of the related goods. Allowances for estimated returns are provided when sales are recorded. Bad Debt We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Impairment of Long-lived Assets Whenever events or circumstances indicate that the carrying values of long-lived assets (including property, plant and equipment) may be impaired, we perform an analysis to determine the recoverability of the asset's carrying value. The carrying value of the asset includes the original purchase price (net of depreciation) plus the value of all capital improvements (net of depreciation). If the analysis indicates that the carrying value is not recoverable from future cash flows, we write down the asset to its estimated fair value and recognize an impairment loss. The estimated fair value is based on what we estimate the current sale price of the asset to be based on comparable sales information or other estimates of the asset's value. Any impairment losses we recognize are recorded as operating expenses. In 2001, we recognized $13.2 million of impairment losses. We did not recognize any impairment losses in 2002 or 2000. 8 We make estimates of the undiscounted cash flows from the expected future operations of the asset. In projecting the expected future operations of the asset, we base our estimates on future budgeted earnings before interest expense, income taxes, depreciation and amortization, or EBITDA, amounts and use growth assumptions to project these amounts out over the expected life of the underlying asset. If actual conditions differ from those in our assumptions, the actual results of each asset's actual future operations could be significantly different from the estimated results we used in our analysis. Our operating results are also subject to the risks set forth under "Summary of Accounting Policies - Risk and Uncertainties." RESULTS OF OPERATIONS FISCAL 2002 COMPARED TO FISCAL 2001 Net sales for fiscal 2002 were $62,965,000 as compared to $80,036,000 in fiscal 2001, a decrease of 21.3%. The decrease was caused substantially by lower volume as business conditions within the domestic textile industry remained depressed, and low-cost foreign imports continued to take a toll on the U.S. textile manufacturing sector. These factors have negatively impacted sales and production. Apparel external sales for fiscal 2002 were $51.3 million, a decrease of $9.6 million or 15.8%, as compared to $60.9 million for fiscal 2001. Home Fashions and Accessories external sales for fiscal 2002 were $4.7 million, a decrease of $5.7 million or 55.0%, as compared to $10.4 million for fiscal 2001. Other external sales for fiscal 2002 were $7.0 million, a decrease of $1.8 million or 19.9%, as compared to $8.8 million for fiscal 2001. The decreases across our segments were due to a flood of low-priced imports from Asia, weak market conditions and a weak economy which has continued to take a toll on the U.S. textile manufacturing sector. The apparel and home fashions segments implemented measures beginning in fiscal 2001 to reduce operating costs including a reduction in the number of employees which reduced fixed overhead. Gross margins as a percentage of sales increased to 10.4% from 1.9% as compared to similar 2001 period. A more favorable product mix and the consolidation of three manufacturing facilities, combined with a reduction in costs due to employee terminations, a decrease in depreciation expense and other related costs resulted in the higher margins. Due to lower average FIFO cost levels, LIFO inventory reserves decreased by $96,000 and $1,518,000 in fiscal 2002 and fiscal 2001, respectively. Management projects that in fiscal 2003 that gross margins will be fairly consistent with fiscal 2002 results tempered, however, by the continuing deterioration in domestic textile manufacturing due to foreign imports and currency valuation issues. The financial results for the fiscal year ended December 1, 2001 include a charge of $14,530,000, which includes $13,230,000 for the writedown of fixed assets to fair value less costs of disposal. Such fixed assets are comprised of machinery and equipment from the knitting, dyeing, and finishing activities of the business, and also include the building facilities in North Carolina. The marketability of the assets held for disposal are subject to worldwide economic conditions which can affect the sale of such buildings and machinery. Additionally, for the fiscal year ended December 1, 2001, the Company expended approximately $1,300,000 to remove and transfer machinery and equipment to the Company's Mohican Mills facility which was included in the asset impairment and restructuring charges. 9 Selling, general and administrative expenses decreased by $2,376,000, or 24.4% as compared to fiscal year 2001. The decrease in expenses resulted primarily from the reduction in the number of employees and related expenses, moving executive offices and showroom facilities to smaller premises and the continued effectiveness of the cost containment programs. This decrease also resulted from the gain on sale of fixed assets totaling $817,000 for fiscal 2002. In March 2002, the Company settled a dispute without admitting liability for $750,000. See Note 16 to the consolidated financial statements. Apparel operating loss for fiscal 2002 was $0.7 million as compared to a operating loss of $22.3 million for fiscal 2001. A more favorable product mix and the consolidation of three manufacturing facilities, combined with a reduction in costs resulted in higher margins. In fiscal 2001, the financial results include a charge for impairment of fixed assets and restructuring charges of approximately $13.8 million. Home Fashions and Accessories operating loss for fiscal 2002 was $1.1 million compared to a operating income of $0.7 million for fiscal 2001. These decreases were due primarily to lower sales volume. Additionally, in fiscal 2002 the financial results includes a charge of $750,000 for settlement of a dispute without admitting liability. See Note 16 to the consolidated financial statements. Other segments operating income for fiscal 2002 was $0.2, million compared to an operating loss of $1.1 million for fiscal 2001. Higher margins and reduction of costs increased operating income. In fiscal 2001, the financial results include a charge of approximately $750,000 for impairment of fixed assets and a restructuring charge. Interest and dividend income decreased by $1,876,000, or 43.7% as compared to fiscal 2001. On June 24, 2002, the Company distributed an initial liquidating distribution of $10.00 per share, or $52,380,000. Accordingly, the Company had lower average invested balances which were invested primarily in United States Treasury obligations resulting in lower risks and lower yields. The Company realized gains from the sale of investment securities of $2,179,000 in fiscal 2002 as compared to $3,025,000 in fiscal 2001. The effective income tax rate for fiscal 2002 was 34.6% compared to a tax benefit of 44.3% for fiscal 2001. The fiscal 2001 tax benefit included approximately $1.5 million of certain tax reserves recorded in prior years, which were reversed in the fourth quarter of fiscal 2001 due to changes in estimates for tax contingency items. As a result of these factors, the Company generated net income of $1,970,000, or $.38 basic and diluted per share in fiscal 2002. In fiscal 2001, the Company had a net loss of $8,623,000 which included asset impairment and restructuring charges of $9,590,000 net of income tax benefit. For fiscal 2001, basic and diluted losses per share were $1.64, including asset impairment and restructuring charges of $1.82 per share. FISCAL 2001 COMPARED TO FISCAL 2000 Net sales for fiscal 2001 were $80,036,000 as compared to $118,185,000 in fiscal 2000, a decrease of 32.3% (fiscal 2000 had 53 weeks). Such decreases were caused substantially by lower volume as continued weakness in the economy, market conditions and unfair foreign competition have adversely affected the domestic textile industry. Apparel external sales for fiscal 2001 were $60.9 million, a decrease of $33 million or 35%, as compared to $93.9 million for fiscal 2000. Home Fashions and Accessories external sales for fiscal 2001 were $10.4 million, a decrease of $3.9 million or 27%, as compared to $14.3 million for fiscal 2000. 10 Other external sales for fiscal 2001 were $8.8 million, a decrease of $1.2 million or 12%, as compared to $10 million for fiscal 2000. The decreases across our segments were due to the current economic downturn, continued weakness in the domestic textile industry and foreign competition. Gross margins as a percentage of sales declined from 9.7% to 1.9%. Lower sales volume and the consolidation of three of our manufacturing facilities reduced operating rates at production facilities. Due to lower average FIFO cost levels, LIFO inventory reserves decreased by $1,518,000 in fiscal 2001, compared to an increase in LIFO inventory reserve of $228,000 due to higher FIFO unit material costs in fiscal 2000. With the Company's decrease in costs relating to employee terminations, and the future decrease in depreciation expenses and other related costs, management is hopeful that gross margins will show an improvement over last year's performance tempered, however, by the continuing deterioration in domestic textile manufacturing due to foreign imports and currency valuation issues. The Company, in an on-going effort to restore operations to acceptable levels of profitability by eliminating over-capacities, during the first week of July 2001, closed two of its manufacturing plants, Travis Knits in Cherryville, North Carolina and Adirondack Knitting in Amsterdam, New York. The knitting, dyeing and finishing activities of these two operations were consolidated into Fab's Mohican Mills facility in Lincolnton, North Carolina. The Company also completed the closure of its Maiden, North Carolina facility as of November 16, 2001 and also transferred its knitting and warping operations to the Mohican Mills facility. As a result of the consolidation of the manufacturing facilities and the announcement to pursue a sale of the business as part of a plan of liquidation, the results for fiscal year ended December 1, 2001 include asset impairment and restructuring charges of $14,530,000, including $13,230,000 for the writedown of fixed assets to fair value less costs of disposal. Such fixed assets are comprised of machinery and equipment from the knitting, dyeing, and finishing activities of the business, and also include the building facilities in North Carolina. Management believes the marketability of the assets held for disposal are subject to worldwide economic conditions which can affect the sale of such buildings and machinery. Additionally, for the fiscal year ended December 1, 2001, the Company expended approximately $1,300,000 to remove and transfer machinery and equipment to the Company's Mohican Mills facility which was included in the asset impairment and restructuring charges. The Company expects to incur expenditures to maintain the facilities to be disposed of until such sales occur. The above charges for the asset impairment and restructuring charges apply mainly to the apparel segment with a small portion to the other segment. Selling, general and administrative expenses decreased by $2,717,000, or 21.8% as compared to fiscal year 2000. Reduced expenses related primarily to the reduced number of employees and a reduction of half of the floor space of the Company's executive offices and showroom facilities in the New York City headquarters. In addition, expenses decreased as a result of the continued effectiveness of expense and cost containment programs. Apparel operating loss for fiscal 2001 was $22.3 million, a decrease of $20.2 million or 957%, as compared to $2.1 million for fiscal 2000. Lower sales volume and the consolidation of three of our manufacturing facilities reduced operating rates at production facilities. In addition, the financial results include a charge for impairment of fixed assets and restructuring charges of approximately $13.8 million. Lower selling margins also contributed to the increase in operating loss, notwithstanding a reduction in selling, general and administrative expenses. Home Fashions and Accessories operating income for fiscal 2001 was $674,000, a decrease of $443,000 or 40%, as compared to $1.1 million for fiscal 2000. These decreases were due primarily to lower sales volume and a lower gross margin decreased operating gains. 11 Other operating loss for fiscal 2001 was $1.1 million, a decrease of $1.0 million or 2,689%, as compared to $39,000 for fiscal 2000. These decreases were due primarily to lower sales volume and a charge of approximately $750,000 for impairment of fixed assets and a restructuring charge. Interest and dividend income increased by $289,000, or 7.2% as compared to fiscal year 2000, because of higher invested balances. We realized gains from the sale of investment securities of $3,025,000 in fiscal 2001 as compared to $1,300,000 in fiscal 2000. We realized a tax benefit for fiscal 2001 which had an effective tax rate of 44.3%, as compared to an effective income tax rate of 27.4% in fiscal 2000. Fiscal 2001's tax benefit includes approximately $1.5 million of certain tax reserves recorded in prior years, which were reversed in the fourth quarter of fiscal 2001 due to changes in estimates for tax contingency items. As a result of these factors, the Company had a net loss of $8,623,000 including the asset impairment and restructuring charges of $9,590,000 net of income tax benefit in fiscal 2001, compared to net income of $3,033,000 in fiscal 2000. For fiscal 2001, basic and diluted losses per share were $1.64, including asset impairment and restructuring charges of $1.82 per share, compared to basic and diluted earnings per share of $0.57 in fiscal 2000. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities in fiscal 2002 amounted to $8,758,000, as compared to $10,074,000 in fiscal 2001. Of this decrease, major changes were as follows: $3,285,000 relates to comparative changes in accounts receivable, $3,134,000 to inventories, $2,466,000 to depreciation and amortization, $556,000 to gain on disposition of fixed assets, and $13,241,000 to non-cash assets impairment and restructuring charges. These decreases were offset by $10,953,000 increase in net income, $6,593,000 in deferred income taxes, $219,000 to current and other assets, $846,000 to net gain on investment securities and $2,697,000 attributable to accounts payable, accruals and other liabilities. For the fiscal year ended November 30, 2002, proceeds from sales of investment securities were $38,650,000 as compared to the acquisitions of $15,681,000 in investment securities for the fiscal year ended December 1, 2001. For the fiscal year ended November 30, 2002, the Company used proceeds for the initial distribution of $10.00 per share or $52,380,000. In the fiscal year ended December 1, 2001 approximately $12,000,000 of the net acquisitions of invested securities was in cash and cash equivalents. The Company has invested these funds in high quality investment grade taxable bonds. Our investment securities, all classified as available-for-sale, had a fair market value of $45,551,000 and $82,021,000 at fiscal year-end 2002 and 2001, respectively. See Note 2 of the Notes to Consolidated Financial Statements for further details about the investment portfolio. Capital expenditures for fiscal 2002 were $225,000 as compared to $703,000 in fiscal 2001. Stockholders' equity was $64,571,000, or $12.33 book value per share at the end of fiscal 2002, as compared to $113,503,000, or $21.79 book value per share, at the previous fiscal year end. The reduction in stockholders' equity was primarily due to the liquidating dividend of $10.00 per share or $52,380,000 declared on May 30, 2002 by the Company's Board of Directors, which was paid on June 24, 2002. Management believes that our current financial position is adequate to satisfy working capital requirements and to internally fund any future expenditures to maintain our manufacturing facilities for the next twelve months. 12 INFLATION Management does not believe that the effects of inflation have had a significant impact on our consolidated financial statements. FORWARD-LOOKING INFORMATION Certain statements in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties. In particular, any statement contained herein, in press releases, written statements or other documents filed with the Securities and Exchange Commission, or in our communications and discussions with investors and analysts in the normal course of business including, but not limited to, meetings, phone calls and conference calls, regarding the sale of our assets pursuant to a plan of liquidation and dissolution, as well as expectations with respect to future sales and operating efficiencies prior to a sale of the company, are subject to known and unknown risks, uncertainties and contingencies, many of which are beyond our control and which may cause actual results, performance or achievements to differ materially from anticipated results, performances or achievements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of them or other variations of them or comparable terminology. Factors that could have a material adverse effect on our operations and furutre prospects include, but are not limited to: our ability to find qualified buyers for our assets; overall economic and business conditions; our continuing ability to support the demand for our goods and services; competitive factors in the industries in which we compete; changes in government regulation; changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations); interest rate fluctuations and other capital market conditions, including foreign currency rate fluctuations; material contingencies provided for in a sale of our assets; de-listing of our common stock from the American Stock Exchange; our ability to retain key employees through any wind down period; and any litigation arising as a result of our plan to wind down our operations. These risks and uncertainties should be considered in evaluating any forward-looking statements contained in the Form 10-K. We undertake no obligation to update or revise an forward-looking statement, whether as a result of new information, future events, or otherwise, other than required by law. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See "Summary of Accounting Policies - Risks And Uncertainties" and "-Investments" in the Consolidated Financial Statements attached hereto. See also Note 2 of the Notes to Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Consolidated Financial Statements Schedules attached hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As previously reported on our Current Report on Form 8-K dated September 17, 2001 and our Annual Report on Form 10-K for the fiscal year ended December 1, 2001, by letter dated September 11, 2001, Ernst & Young, LLP ("Ernst & Young") resigned as our independent accountants. Ernst & Young's resignation became effective on September 25, 2001, the date that we engaged BDO Seidman, LLP as our new independent public accountants. 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS. EXECUTIVE OFFICERS The following table sets forth certain information concerning our executive officers as of February 13, 2003. NAME AGE POSITIONS AND OFFICES Samson Bitensky............ 83 Chairman of the Board of Directors and Chief Executive Officer Steven Myers............... 54 President, Chief Operating Officer David A. Miller............ 65 Vice President-Finance, Treasurer, and Chief Financial Officer Jerry Deese................ 51 Vice President-Controller of Plant Operations Sam Hiatt ................. 55 Vice President-Sales Mark J. Goldberg........... 54 Vice President Bruce Chroback............. 41 Assistant Treasurer and Controller Each of our executive officers serves at the pleasure of the Board of Directors and until his or her successor is duly elected and qualified. SAMSON BITENSKY was one of Fab's founders in 1966 and has served as Chairman of the Board of Directors and Chief Executive Officer of Fab since such time. Mr. Bitensky also served as President of Fab from 1970 until May 1, 1997. STEVEN MYERS, an attorney, has been employed by Fab 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 1, 1997 and Co-President, Chief Operating Officer from May 1, 1997 to November 27, 2001. On November 27, 2001, he became President, Chief Operating Officer upon the retirement of our former Co-President, Stanley August. Mr. Myers is the son-in-law of Mr. Bitensky. DAVID A. MILLER has been employed by Fab since 1966 and has served as 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 Fab 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. SAM HIATT has been employed by Fab since 1978 and previously had various management responsibilities in the warp knit area. He has served as Vice President-Sales since May 12, 1998. MARK J. GOLDBERG has been employed by Fab in various financing and operational capacities since 1983. He was the Director of Corporate Planning from 1999 until 2001 and he has served as Vice President since May 3, 2001. BRUCE S. CHROBACK, a C.P.A., has been employed by Fab since 1996 and has held various senior financial positions with the Company. He has served as Assistant Treasurer and Controller since May 3, 2001. 14 Other information required by this item is incorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K 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 our definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K 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 our definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from our definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K pursuant to Regulation 14A. ITEM 14. CONTROLS AND PROCEDURES (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing date of this Annual Report on Form 10-K (the "Evaluation Date")), have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared. (b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls and procedures subsequent to the date of their evaluation, nor any significant deficiencies or material weaknesses in such internal controls and procedures requiring corrective actions. As a result, no corrective actions were taken. 15 PART IV ITEM 15. 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 Consolidated Financial Statements Schedules at page S-2. (3) Exhibit List 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. 3.5 - Amendment to the Amended and Restated By-laws, incorporated by reference to Exhibit 3.5 of the Company's Annual Report on Form 10-K for the fiscal year ended November 27, 1999. 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. 16 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. 17 10.21 - Third Lease Modification Agreement dated April 24, 2000 between 200 Madison Associates, L.P. and the Company, incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended November 30, 2001. *10.22 - Fourth Lease Modification Agreement dated April 11, 2002 between 200 Madison Associates, L.P. and the Company. 10.23 - 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. 10.24 - 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. 10.25 - Form of indemnification agreement between the Company and its officers and directors, incorporated by reference to Exhibit 10.20 to the 1993 10-K. 10.26 - Fab Industries, Inc. Employee Stock Ownership Plan effective as of Nov. 25, 1991, incorporated by reference to Exhibit 10.24 to the 1993 10-K. 10.27 - Amendment dated September 21, 1995 to the Employee Stock Ownership Plan, incorporated by reference to Exhibit 10.27 to the 1995 10-K. 10.28 - Fab Industries, Inc. Non-Qualified Executive Retirement Plan dated as of November 30, 1990, incorporated by reference to Exhibit 10.25 to the 1993 10-K. 10.29 - Fab Industries, Inc. 1997 Stock Incentive Plan, incorporated by reference to Exhibit A to the Proxy Statement dated May 6, 1999, File No. 1-5901. 10.30 - Fab Industries, Inc. 2001 Stock Incentive Plan, incorporated by reference to Exhibit B to the Proxy Statement dated April 2, 2001, File No. 1-5901. *10.31 - Form of loan agreement, dated May 30, 2002, entered into between Fab Industries, Inc. and certain of its executive officers and directors. 21 - Subsidiaries of the Company, incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 2, 2000. *99.1 - Certification of Chief Executive Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *99.2 - Certification of Chief Financial Officer pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - --------------------- * Filed herewith. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 18 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FORM 10-K ITEM 8 FISCAL YEARS ENDED NOVEMBER 30, 2002, DECEMBER 1, 2001 AND DECEMBER 2, 2000 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FORM 10-K ITEM 8 FISCAL YEARS ENDED NOVEMBER 30, 2002, DECEMBER 1, 2001, AND DECEMBER 2, 2000 F-1 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONTENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3 REPORT OF INDEPENDENT AUDITORS F-4 CONSOLIDATED FINANCIAL STATEMENTS: Balance sheets F-5 Statements of operations F-6 Statements of stockholders' equity F-7 Statements of cash flows F-8 SUMMARY OF ACCOUNTING POLICIES F-9 - F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-17 - F-43 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 accompanying consolidated balance sheets of Fab Industries, Inc. and subsidiaries as of November 30, 2002 and December 1, 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for the fiscal years then ended. Our audits also included the 2002 and 2001 schedule listed in the index on page S-2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 provides a reasonable basis for our opinion. As discussed in the summary of accounting policies, on March 1, 2002, the Company's Board of Directors adopted resolutions, which authorize, subject to stockholders approval, the sale of the business pursuant to a plan of liquidation. The Company's stockholders approved the Plan at the Company's annual meeting on May 30, 2002. 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 at November 30, 2002 and December 1, 2001, and the results of their operations and their cash flows for the fiscal years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related schedule presents fairly, in all material respects, the information set forth therein for the fiscal years ended November 30, 2002 and December 1, 2001. /s/ BDO SEIDMAN, LLP - -------------------- New York, New York February 15, 2003 F-3 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Fab Industries, Inc. We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of Fab Industries, Inc. and subsidiaries for the year ended December 2, 2000. Our audit also included the 2000 financial statement schedule listed in the index on page S-2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations of Fab Industries, Inc. and subsidiaries and their cash flows for the year ended December 2, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related 2000 financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP - --------------------- Charlotte, North Carolina February 16, 2001 F-4 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ================================================================================
NOVEMBER 30, 2002 DECEMBER 1, 2001 - --------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT: Cash and cash equivalents (Note 1) $ 3,146,000 $ 6,742,000 Investment securities available-for-sale (Note 2) 45,551,000 82,021,000 Accounts receivable, net of allowance of $1,000,000 and $600,000 for doubtful accounts 7,548,000 10,668,000 Inventories (Note 3) 8,386,000 12,335,000 Other current assets 867,000 1,617,000 - --------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 65,498,000 113,383,000 PROPERTY, PLANT AND EQUIPMENT - NET (NOTE 4) 12,007,000 14,065,000 DEFERRED TAX ASSET (NOTE 8) 528,000 826,000 OTHER ASSETS (NOTE 7) 3,196,000 3,254,000 - --------------------------------------------------------------------------------------------------------------------- $81,229,000 $131,528,000 ===================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Accounts payable $ 2,858,000 $ 3,661,000 Corporate income and other taxes 1,980,000 1,787,000 Accrued payroll and related expenses 903,000 1,318,000 Dividends payable -- 521,000 Other current liabilities 940,000 816,000 Deferred income taxes (Note 8) 9,000 269,000 - --------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 6,690,000 8,372,000 OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT MATURITIES (NOTE 5) -- 311,000 OTHER NONCURRENT LIABILITIES (NOTE 7) 2,968,000 2,342,000 - --------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 9,658,000 11,025,000 - --------------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 9) REDEEMABLE COMMON STOCK (NOTE 9) 7,000,000 7,000,000 - --------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (NOTES 2, 6, 7, AND 9): Preferred stock, $1 par value - shares authorized 2,000,000; none issued -- -- Common stock, $.20 par value - shares authorized 15,000,000; issued 6,724,944 and 6,591,944 1,345,000 1,319,000 Additional paid-in capital -- 6,967,000 Retained earnings 100,455,000 144,224,000 Loan to employee stock ownership plan -- (3,957,000) Accumulated other comprehensive gain 229,000 334,000 Cost of common stock held in treasury - 1,486,929 and 1,383,574 shares (37,237,000) (35,384,000) Notes receivable from stockholders (Note 6) (221,000) -- - --------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 64,571,000 113,503,000 - --------------------------------------------------------------------------------------------------------------------- $81,229,000 $131,528,000 =====================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ================================================================================
===================================================================================================================== FISCAL YEAR ENDED - --------------------------------------------------------------------------------------------------------------------- NOVEMBER 30, DECEMBER 1, DECEMBER 2, 2002 2001 2000 (1) - --------------------------------------------------------------------------------------------------------------------- NET SALES (NOTE 14) $ 62,965,000 $ 80,036,000 $ 118,185,000 COST OF GOODS SOLD 56,412,000 78,518,000 106,756,000 - --------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 6,553,000 1,518,000 11,429,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,372,000 9,748,000 12,465,000 ASSET IMPAIRMENT AND RESTRUCTURING CHARGES (NOTE 12) -- 14,530,000 -- OTHER EXPENSE (NOTE 16) 750,000 -- -- - --------------------------------------------------------------------------------------------------------------------- OPERATING LOSS (1,569,000) (22,760,000) (1,036,000) - --------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSES): Interest and dividend income (Note 11) 2,413,000 4,289,000 4,000,000 Interest expense (13,000) (42,000) (86,000) Net gain on investment securities (Note 2) 2,179,000 3,025,000 1,300,000 - --------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INCOME 4,579,000 7,272,000 5,214,000 - --------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES ON INCOME 3,010,000 (15,488,000) 4,178,000 INCOME TAX EXPENSE (BENEFIT) (NOTE 8) 1,040,000 (6,865,000) 1,145,000 - --------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 1,970,000 $ (8,623,000) $ 3,033,000 ===================================================================================================================== EARNINGS (LOSS) PER SHARE (NOTE 13): Basic $ .38 $ (1.64) $ .57 Diluted $ .38 $ (1.64) $ .57 ===================================================================================================================== CASH DIVIDENDS DECLARED PER SHARE $ 10.00 $ .40 $ .475 =====================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. (1) 53 WEEKS F-6 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ================================================================================
- ---------------------------------------------------------------------------------------------------------------------------- COMMON STOCK ACCUMULATED ----------------------- ADDITIONAL LOAN TO OTHER NUMBER PAID-IN RETAINED EMPLOYEE STOCK COMPREHENSIVE TOTAL OF SHARES AMOUNT CAPITAL EARNINGS OWNERSHIP PLAN INCOME (LOSS) - ---------------------------------------------------------------------------------------------------------------------------- Balance, November 27, 1999 123,788,000 6,591,944 1,319,000 6,967,000 154,445,000 (5,537,000) (411,000) Net income - fiscal 2000 3,033,000 -- -- -- 3,033,000 -- -- Change in net unrealized holding gain on investment securities available-for-sale, net of taxes 114,000 -- -- -- -- -- 114,000 -------- -- Total comprehensive income 3,147,000 -- -- -- -- -- -- Cash dividends (2,531,000) -- -- -- (2,531,000) -- -- Purchase of treasury stock (1,339,000) -- -- -- -- -- -- Payment of loan from ESOP 790,000 (Note 7) -- -- -- -- 790,000 -- - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 2, 2000 123,855,000 6,591,944 1,319,000 6,967,000 154,947,000 (4,747,000) (297,000) Net loss - fiscal 2001 (8,623,000) -- -- -- (8,623,000) -- -- Change in net unrealized holding gain on investment securities available-for-sale, net of taxes 631,000 -- -- -- -- -- 631,000 -------- Total comprehensive loss (7,992,000) -- -- -- -- -- -- Cash dividends (2,100,000) -- -- -- (2,100,000) -- -- Purchase of treasury stock (1,050,000) -- -- -- -- -- -- Payment of loan from ESOP 790,000 (Note 7) -- -- -- -- 790,000 -- - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 1, 2001 113,503,000 6,591,944 1,319,000 6,967,000 144,224,000 (3,957,000) 334,000 Net income - fiscal 2002 1,970,000 -- -- -- 1,970,000 -- -- Minimum pension liability adjustment of $164,000, net of tax benefit of $59,000 (105,000) -- -- -- -- -- (105,000) --------- --------- Total comprehensive income 1,865,000 -- -- -- -- -- -- Cash dividends (52,380,000) -- -- (6,641,000) (45,739,000) -- -- Acceleration of stock 418,000 options (Note 6) -- -- 418,000 -- -- -- Exercise of stock options 1,445,000 (Note 6) 133,000 26,000 1,640,000 -- -- -- Purchase of treasury stock (280,000) -- -- 17,000 -- -- -- Termination of Employee Stock Ownership Plan -- -- -- (2,401,000) 3,957,000 -- - ---------------------------------------------------------------------------------------------------------------------------- Balance, November 30, 2002 $64,571,000 6,724,944 $1,345,000 -- $100,455,000 -- $229,000 - ---------------------------------------------------------------------------------------------------------------------------- ============================================================================================================================
- -------------------------------------------------------------------- TREASURY STOCK NOTES ------------------------ RECEIVABLE NUMBER FROM OF SHARES COST STOCKHOLDERS - -------------------------------------------------------------------- Balance, November 27, 1999 (1,188,389) (32,995,000) Net income - fiscal 2000 -- -- -- Change in net unrealized holding gain on investment securities available-for-sale, net of taxes -- -- -- Total comprehensive income -- -- -- Cash dividends -- -- -- Purchase of treasury stock (122,069) (1,339,000) -- Payment of loan from ESOP (Note 7) -- -- -- - -------------------------------------------------------------------- Balance, December 2, 2000 (1,310,458) (34,334,000) -- Net loss - fiscal 2001 -- -- -- Change in net unrealized holding gain on investment securities available-for-sale, net of taxes -- -- -- Total comprehensive loss -- -- -- Cash dividends -- -- -- Purchase of treasury stock (73,116) (1,050,000) -- Payment of loan from ESOP (Note 7) -- -- -- - -------------------------------------------------------------------- Balance, December 1, 2001 (1,383,574) (35,384,000) -- Net income - fiscal 2002 -- -- -- Minimum pension liability adjustment of $164,000, net of tax benefit of $59,000 -- -- -- Total comprehensive income -- -- -- Cash dividends -- -- -- Acceleration of stock options (Note 6) -- Exercise of stock options (Note 6) -- -- (221,000) Purchase of treasury stock (16,899) (297,000) -- Termination of Employee Stock Ownership Plan (86,456) (1,556,000) -- - -------------------------------------------------------------------- Balance, November 30, 2002 (1,486,929) $(37,237,000) $(221,000) - -------------------------------------------------------------------- ==================================================================== SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 FAB INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 10)
============================================================================================================================ NOVEMBER 30, DECEMBER 1, DECEMBER 2, FISCAL YEAR ENDED 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,970,000 $ (8,623,000) $ 3,033,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for doubtful accounts 400,000 400,000 850,000 Depreciation and amortization 2,143,000 4,609,000 5,864,000 Deferred income taxes 38,000 (6,555,000) 335,000 Non-cash asset impairment and restructuring charges -- 13,241,000 -- Compensation relating to acceleration of stock options 418,000 -- -- Net gain on investment securities (2,179,000) (3,025,000) (1,300,000) Gain on disposition of fixed assets (817,000) (261,000) (106,000) Decrease (increase) in: Accounts receivable 2,720,000 6,005,000 3,494,000 Inventories 3,949,000 7,083,000 4,584,000 Other current assets 750,000 922,000 (324,000) Other assets 58,000 (333,000) 558,000 Increase (decrease) in: Accounts payable (804,000) (1,871,000) (1,659,000) Accruals and other liabilities 112,000 (1,518,000) 833,000 - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 8,758,000 10,074,000 16,162,000 - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (225,000) (703,000) (1,403,000) Proceeds from sale of property and equipment 957,000 725,000 379,000 Proceeds from sales of investment securities 38,650,000 -- 2,816,000 Acquisition of investment securities -- (15,681,000) (5,839,000) - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 39,382,000 (15,659,000) (4,047,000) - ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (280,000) (1,050,000) (1,339,000) Principal repayment on loan to employee stock ownership plan -- 790,000 790,000 Dividends (52,901,000) (2,108,000) (2,949,000) Exercise of stock options 1,445,000 -- -- - ---------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (51,736,000) (2,368,000) (3,498,000) - ---------------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (3,596,000) (7,953,000) 8,617,000 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,742,000 14,695,000 6,078,000 - ---------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,146,000 $ 6,742,000 $ 14,695,000 ============================================================================================================================
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ BUSINESS Fab Industries, Inc. (the "Company") is a major manufacturer of knitted apparel fabrics, including laces and finished home products, as well as laminated fabrics. The Company's sales in fiscal 2002, 2001 and 2000 were primarily made to customers in the United States. The Company's Board of Directors has determined that it is in the best interests of its stockholders to sell the Company's business as a going concern. In order to maximize stockholder value, the Board of Directors adopted resolutions dated March 1, 2002 which authorized, subject to stockholder approval, the sale of the Company's business pursuant to a Plan of Liquidation and Dissolution (the "Plan"). The Company's stockholders approved the Plan at the Company's annual meeting on May 30, 2002. The Plan provides the Company's officers and directors will continue to operate the Company's business in its current fashion and pursue a sale of the business as a going concern. The Company's Board of Directors has approved the engagement of McFarland Dewey & Co., LLC financial advisors in November 2002 to assist with the sale of the business. The accompanying financial statements have been prepared on a going concern basis. There can be no assurance, however, that the Company will be successful in selling its business or if it does sell the business, that it will be able to recover the full value of its assets, particularly its property, plant and equipment. On May 30, 2002, the Company's Board of Directors declared an initial liquidating distribution of $10.00 per share, which resulted in a payment to stockholders of $52,380,000 in June 2002. PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany transactions and balances have been eliminated. F-9 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ FISCAL YEAR The Company's fiscal year ends on the Saturday closest to November 30. Each of fiscal 2002 and 2001 had fifty-two weeks, and fiscal 2000 had fifty-three 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 and assumptions. 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. The Company is subject to credit risk if the brokers are unable to repay balances due or deliver securities in their custody. By policy, the Company limits the amount of credit exposure to any one financial institution. The Company has received confirmation indicating that, with respect to investment securities, each custodian with the exception of one custodian maintains appropriate insurance coverage. During fiscal 2002 and fiscal 2001, that custodian had approximately $10 million and $16 million, respectively, of the Company's cash under investment which from time to time during such periods was invested entirely in equity securities. At November 30, 2002, that custodian had approximately $10 million of the Company's cash under investments, which were invested in U.S. Treasury obligations. In June 2002, the Company liquidated $8,000,000 from that custodian as part of the liquidating dividend. The Company's investment policy currently permits up to 25% of the Company's portfolio to include equity securities. F-10 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ Concentrations of credit risk with respect to trade receivables are limited due to the diverse group of manufacturers, wholesalers and retailers to whom the Company sells. The Company reviews a customer's credit history before extending credit. The Company further reduces its credit risk by factoring, without recourse, a variable amount of trade receivables. As of November 30, 2002 and December 1, 2001, 11% and 18%, respectively, of the accounts receivable outstanding were due from factors. The Company has established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. F-11 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ CASH EQUIVALENTS 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-12 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ DERIVATIVE FINANCIAL The Company is party to equity option INSTRUMENTS HELD OR ISSUED contracts as part of its investing activities. Option contracts are contractual agreements that give the purchaser the right, but not the obligation, to purchase or sell a financial instrument at a predetermined exercise price. In return for this right, the purchaser pays a premium to the seller of the option. By selling or writing options, the Company receives a premium and becomes obligated during the term of the option to purchase or sell a financial instrument at a predetermined exercise price if the option is exercised, and assumes the risk of not being able to enter into a closing transaction if a liquid secondary market does not exist. In accordance with SFAS No. 133, the Company's policy is to recognize all derivatives instruments as either assets or liabilities on the balance sheet at fair value. Changes in fair value are recognized in the income statement in the period in which they occur. Derivatives are not used for trading purposes. Derivatives are used to hedge against fluctuations in the market value of equity securities. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. 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. During fiscal 2001, the Company recorded asset impairment and restructuring charges. See Note 12 of the notes to the consolidated financial statements. RESEARCH AND DEVELOPMENT Research and development costs are charged to COSTS expenses in the year incurred and amounted to $1,690,000, $1,999,000, and $3,206,000 in fiscal 2002, 2001 and 2000, respectively. F-13 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ STOCK-BASED COMPENSATION In fiscal 1997, the Company became subject to SFAS 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. TAXES ON INCOME The Company follows the liability method of accounting for income taxes. Accordingly, deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. EARNINGS (LOSS) PER SHARE Basic earnings (loss) 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 2002, 2001, and 2000 resulted entirely from dilutive stock options. For fiscal 2002, 2001 and 2000, potentially dilutive securities that related to shares issuable upon the exercise of stock options granted by the Company were excluded, as their effect was antidilutive. See Note 13 of notes to the consolidated financial statements. REVENUE RECOGNITION The Company recognizes its revenues upon shipment of the related goods. Allowances for estimated returns are provided when sales are recorded. F-14 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standard Board (FASB) issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. FAS 141 and FAS 142 are effective for all business combinations completed after June 30, 2001. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The Company will adopt FAS 142 on December 1, 2002, the beginning of fiscal 2003. The Company does not believe the adoption of FAS 142 will impact its results of operations or financial position. In August 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30 for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company will adopt FAS 144 as of December 1, 2002, the beginning of fiscal 2003, and it does not expect that the adoption of the Statement will have a significant impact on the Company's financial position and results of operations. F-15 FAB INDUSTRIES, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================================================================ In July 2002, the FASB issued FAS No. 146, "Accounting for Restructuring Costs". FAS 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under FAS 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. FAS 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. FAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS 146, a company may not restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under Emerging Issues Task Force Issue 94-3. The Company does not anticipate that the adoption of FAS 146 will have a material effect on its results of operations or financial position. RECLASSIFICATIONS Certain prior fiscal years' accounts have been reclassified for comparative purposes. F-16 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. CASH AND CASH Cash and cash equivalents at November 30, 2002 EQUIVALENTS and December 1, 2001 consisted of the following (in thousands):
2002 2001 --------------------------------------------------------------------------------- Cash $ 526 $ 155 Taxable and tax-free short-term debt instruments 2,620 6,587 --------------------------------------------------------------------------------- $3,146 $6,742 =================================================================================
2. INVESTMENT SECURITIES Investment securities available-for-sale at November 30, 2002 and December 1, 2001 consisted of the following (in thousands):
GROSS GROSS UNREALIZED UNREALIZED COST HOLDING GAIN HOLDING LOSS FAIR VALUE -------------------------------------------------------------------------------- November 30, 2002: Equities $ 750 $ -- $ -- $ 750 U.S. Treasury obligations 32,411 617 -- 33,028 Corporate bonds 7,748 194 (254) 7,688 Money market 4,085 -- -- 4,085 -------------------------------------------------------------------------------- $44,994 $ 811 $ (254) $ 45,551 ================================================================================ December 1, 2001: Equities $ 798 $ -- $ (15) $ 783 U.S. Treasury obligations 47,240 316 (16) 47,540 Corporate bonds 32,288 721 (450) 32,559 Money market 1,139 -- -- 1,139 -------------------------------------------------------------------------------- $81,465 $ 1,037 $ (481) $ 82,021 ================================================================================
F-17 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 30, 2002 and December 1, 2001, by contractual maturity are as shown below: NOVEMBER 30, 2002 DECEMBER 1, 2001 --------------------------- ----------------------------- Cost Fair value Cost Fair value - -------------------------------------------------------------------------------- Maturing in one year or less $ 10,064 $ 10,067 $ 29,983 $ 30,005 Maturing after one year through five years 28,054 28,520 35,321 35,781 Maturing after five years through ten years 259 264 8,130 8,161 Ten years and over 1,782 1,865 6,094 6,152 - -------------------------------------------------------------------------------- $40,159 $40,716 $79,528 $80,099 ================================================================================ Gross and net realized gains and losses on sales of investment securities were: 2002 2001 2000 - -------------------------------------------------------------------------------- Gross realized gains $ 6,653 $ 6,619 $ 4,214 Gross realized losses (4,474) (3,594) (2,914) - -------------------------------------------------------------------------------- Net realized gain $ 2,179 $ 3,025 $ 1,300 ================================================================================ Other comprehensive income for fiscal 2002, 2001, and 2000 consisted of the following (in thousands): 2002 2001 2000 - -------------------------------------------------------------------------------- Unrealized holding gains arising during the year, net of tax $1,307 $2,446 $894 Reclassification adjustment, net of tax (1,307) (1,815) (780) - -------------------------------------------------------------------------------- Other comprehensive income, net of tax $ -- $ 631 $114 ================================================================================ F-18 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ During fiscal 2002, the Company invested a portion of its securities in equity consisting of a portfolio of Standard and Poor's 100 ("S&P 100") common stocks, the fair value of which varies consistently with changes in the S&P 100 index. To hedge against fluctuations in the market value of the portfolio, the Company has purchased short-term S&P 100 index put options and sold short-term S&P 100 call options. At November 30, 2002 and December 1, 2001, the Company had no such investments, but will continue to invest in such equities in the future. Realized gains or (losses) on purchased short-term S&P 100 index put options and sold short-term S&P 100 call options during fiscal 2002, 2001, and 2000 were approximately ($1,463,000), $925,000 and $2,217,000, respectively. The Company has agreements with various brokerage firms to carry its account as a customer. The brokers have custody of the Company's securities and, from time to time, cash balances which may be due from these brokers. These securities and/or cash positions serve as collateral for any amounts due to brokers or as collateral for securities sold short or securities purchased on margin. The securities and/or cash positions also serve as collateral for potential defaults of the Company. F-19 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 3. INVENTORIES Inventories at November 30, 2002 and December 1, 2001 consisted of the following (in thousands, except for percentages):
-------------------------------------------------------------------------------- 2002 2001 -------------------------------------------------------------------------------- Raw materials $ 2,131 $ 3,036 Work-in-process 2,717 4,083 Finished goods 3,538 5,216 -------------------------------------------------------------------------------- $ 8,386 $12,335 ================================================================================ Approximate percentage of inventories valued under LIFO method 62% 56% ================================================================================ Excess of FIFO valuation over LIFO valuation $ 1,614 $ 1,710 ================================================================================
In fiscal 2002 and 2001, the liquidation of certain LIFO layers increased cost of goods sold by $503,000 and $1,909,000, respectively. The inventories in these LIFO layers were acquired at higher costs than current costs. F-20 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 4. PROPERTY, PLANT AND Property, plant and equipment at EQUIPMENT November 30, 2002 and December 1, 2001 consisted of the following (in thousands):
2002 2001 ----------------------------------------------------------------------------- Land and improvements $ 682 $ 682 Buildings and improvements 8,377 11,304 Machinery and equipment 70,431 74,275 Trucks and automobiles 1,742 1,742 Office equipment 681 681 Leasehold improvements 929 929 Assets held for sale 2,786 1,482 ----------------------------------------------------------------------------- 85,628 91,095 Less: Accumulated depreciation and amortization 73,621 77,030 ----------------------------------------------------------------------------- $ 12,007 $ 14,065 =============================================================================
5. OBLIGATIONS UNDER Obligations under capital leases at CAPITAL LEASES November 30, 2002 and December 1, 2001 consisted of the following (in thousands):
2002 2001 -------------------------------------------------------------------------------- Obligations under capital leases -- $339 through 2006 payable in monthly installments of $11 including interest at 10% per annum Less: Current maturities (included with other current liabilities) -- 28 -------------------------------------------------------------------------------- - $311 ================================================================================
During fiscal 2002, the capital lease liability was forgiven by the lessor, resulting in other income of $339,000, which was included in selling, general and administrative expenses for fiscal 2002. F-21 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 6. STOCK COMPENSATION STOCK OPTION PLAN PLANS In May 2001 and May 1997, the Board of Directors adopted and the shareholders approved two new stock option plans providing for the grant of up to 200,000 shares and 175,000 shares of common stock, respectively, at any time over the next ten years from the date such plans were adopted. These stock option plans have been terminated subsequent to the fiscal year ended November 30, 2002. Pursuant to resolutions adopted by the Company's Board of Directors and documentation sent to and returned to the Company by option holders, effective immediately following stockholder approval of the Plan on May 30, 2002, all outstanding options under the Company's 1997 Stock Incentive Plan became vested, and all options as to which optionees (including employees and directors) had returned to the Company the appropriate forms (representing options held by all but one optionee, who exercised via payment to the Company) were exercised through the issuance of loans from the Company to the optionees, with stock of the optionees held as collateral by the Company until the loans have been satisfied. These loans receivable have been recorded as a reduction of stockholders' equity as of November 30, 2002. The original amount of the loans issued to employees to exercise their options was approximately $1,495,000, of which approximately $1,274,000 was repaid prior to the fiscal year ending November 30, 2002. These options are subject to variable accounting at each reporting period, until the related loans are repaid. No compensation cost was recorded at November 30, 2002 related to variable accounting since the market price per option did not change significantly from the date the options were exercised to November 30, 2002. As of November 30, 2002, the balance of the loans outstanding was $221,000. Based on the acceleration of certain stock options, the Company recorded a charge of approximately $418,000 to compensation expense and an increase to additional paid-in capital. As of November 30, 2002, there were no outstanding options under either the 2001 stock option plan or the 1997 stock option plan. F-22 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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 (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000 -------------------------------------------------------------------------------- Pro forma net income (loss) $1,840 ($8,652) $3,008 Pro forma earnings (loss) per share - diluted $0.35 ($1.65) $0.56 ================================================================================
There were no options granted in fiscal 2002. The weighted average fair value of options granted was $3.67 and $2.45 per share in fiscal 2001 and 2000, 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 2001 and 2000 grants: ------------------------------------------- Dividends $.40 to $.70 per share Volatility 21.4% to 29.2% Risk-free interest 4.54% to 5.00% Expected term 1 to 10 years =========================================== F-23 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Data regarding the Company's stock option plan follows:
WEIGHTED AVERAGE EXERCISE PRICE SHARES PER SHARE --------------------------------------------------------------------------------- Shares under option, November 27, 1999 269,750 $18.19 Options granted 54,000 11.06 Options exercised -- -- Options canceled (161,050) (21.58) --------------------------------------------------------------------------------- Shares under option, December 2, 2000 162,700 12.47 Options granted 8,000 12.75 Options exercised -- -- Options canceled (27,500) (12.25) --------------------------------------------------------------------------------- Shares under option, December 1, 2001 143,200 12.53 Options granted -- -- Options exercised (133,000) 12.51 Options canceled (10,200) 12.70 --------------------------------------------------------------------------------- Shares under option, November 30, 2002 -- -- ================================================================================= --------------------------------------------------------------------------------- Options exercisable at: December 2, 2000 24,140 13.75 December 1, 2001 47,280 12.72 November 30, 2002 -- -- =================================================================================
F-24 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. The compensation element related to such shares is recognized ratably over the five-year restriction period. Compensation expense related to the above restricted shares was $0 for fiscal 2002, 2001 and 2000. No restricted stock was awarded in fiscal 2002, 2001 or 2000 and no restricted stock was outstanding as of November 30, 2002. This restricted stock plan was terminated subsequent to fiscal year ended November 30, 2002. 7. 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 2002, 2001 and 2000 were $144,000, $181,000 and $241,000, 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 2002, 2001 and 2000 were $41,000, $52,000 and $57,000, respectively. Benefits payable under this plan amounting to $1,898,000 and $2,107,000 at November 30, 2002 and December 1, 2001, respectively, are included in other noncurrent liabilities. These liabilities are fully funded by plan assets of equal amounts, which are included in other assets. F-25 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ PENSION PLAN The Company maintains a non-contributory defined benefit pension plan (Fab Industries, Inc. Hourly Employees' Retirement Plan) which covers substantially all hourly employees. The Plan provides benefits based on the participants' years of service. F-26 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The following tables provide a reconciliation of the changes in the Plan's benefit obligations and fair value of assets and a statement of the funded status of the Plan for fiscal 2002 and 2001:
2002 2001 ------------------ ------------------ RECONCILIATION OF THE BENEFIT OBLIGATION Obligation at beginning of year $3,513,000 $3,588,000 Service cost 177,000 246,000 Interest cost 246,000 284,000 Amendments 51,000 -- Curtailment 27,000 55,000 Actuarial loss 267,000 721,000 Benefit payments (969,000) (1,381,000) ------------------------------------- Obligation at end of year $3,312,000 $3,513,000 ===================================== 2002 2001 ------------------------------------- RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value of plan assets at beginning of year $3,855,000 $5,522,000 Actual return on plan assets (net of expenses) (409,000) (286,000) Benefit payments (969,000) (1,381,000) ------------------------------------- Fair value of plan assets at end of year $2,477,000 $3,855,000 ===================================== 2002 2001 ------------------------------------- FUNDED STATUS Funded status $(835,000) $342,000 Unrecognized prior service cost 293,000 372,000 Unrecognized actuarial (gain) loss 164,000 (797,000) ------------------------------------- Net amount recognized $(378,000) $ (83,000) =====================================
F-27 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The following table provides the amounts recognized in the consolidated balance sheets as of November 30, 2002 and December 1, 2001:
2002 2001 ------------------------------------ Accrued benefit liability (included in other noncurrent liabilities) $ (835,000) $ (83,000) Intangible pension asset (included in other assets) 293,000 -- Accumulate other comprehensive loss (Net of tax effect below) 105,000 -- Deferred tax asset 59,000 -- ------------------------------------ Net amount recognized $ (378,000) $ (83,000) ====================================
The following table provides the components of the net periodic (benefit) cost for the Plan for fiscal 2002 and 2001:
2002 2001 ------------------------------------ Service cost $ 177,000 $ 246,000 Interest cost on projected benefit obligation 246,000 284,000 Expected return on plan assets (300,000) (430,000) Amortization of prior service cost 45,000 74,000 Amortization of net gain (35,000) (156,000) Recognized (gain) loss due to curtailment and settlement 161,000 ( 72,000) ==================================== Net periodic pension cost (credit) $ 294,000 $ ( 54,000) ====================================
Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. Gains and losses in excess of 10% of the greater of the benefit obligations and the market-related value of assets are amortized over the average remaining service period of active participants. The weighted average assumptions used in the measurement of the Company's benefit obligations for fiscal 2002 and 2001 are shown in the following table: 2002 2001 ---------------- Discount rate 6.75% 7.25% Expected return on plan assets 8.00% 8.00% F-28 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ EMPLOYEE STOCK OWNERSHIP PLAN The Company had an Employee Stock Ownership Plan ("ESOP") which covered 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 was 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. The Company accounted 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 were recorded for financial reporting purposes as the ESOP shares became allocable to the plan participants. All ESOP shares were considered outstanding in the determination of earnings (loss) per share. The portion of the common stock dividends declared relating to ESOP shares totaled $0, $104,000 and $161,000 for fiscal 2002, 2001 and 2000, respectively. Of these amounts, $0, $65,000 and $90,000 for fiscal 2002, 2001 and 2000, respectively, related to allocated shares and $0, $39,000 and $71,000 for fiscal 2002, 2001 and 2000, respectively, related to unallocated shares. The dividends related to the unallocated shares were applied towards the $790,000 annual principal installments referred to above. Pursuant to resolutions adopted by the Company's Board of Directors, upon approval of the Plan by the stockholders on May 30, 2002, the ESOP was terminated and all shares of common stock of the Company then held in the ESOP suspense account (86,456 shares) were transferred to the Company, and held as treasury stock, in exchange for the cancellation of the outstanding loan in the amount of $3,957,000 from the Company to the ESOP. The Company recorded the related treasury stock at the fair market value on the date of the termination, which resulted in a $2.4 million charge to additional paid-in-capital. F-29 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ As of November 30, 2002 and December 1, 2001, ESOP shares information was as follows:
2002 2001 -------------------------------------------------------------------------------- Allocated -- 142,822 Committed to be released -- 18,889 In suspense -- 67,567 -------------------------------------------------------------------------------- Total shares held by ESOP -- 229,278 ================================================================================
The net charges to earnings for fiscal 2002, 2001 and 2000 were as follows (in thousands):
2002 2001 2000 -------------------------------------------------------------------------------- Contribution to ESOP $ -- $1,048 $1,150 Less: Interest income on loan to ESOP -- 296 547 -------------------------------------------------------------------------------- Net charge to earnings $ -- $ 752 $ 603 ================================================================================
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. 8. INCOME TAXES Provisions (benefits) for Federal, state and local income taxes for fiscal 2002, 2001 and 2000 consisted of the following components (in thousands):
2002 2001 2000 ------------------------------------------------------------------------------ Current: Federal $ 902 $ (469) $ 734 State and local 100 159 77 ------------------------------------------------------------------------------ 1,002 (310) 811 Deferred: Federal and state 38 (6,555) 334 ------------------------------------------------------------------------------ $1,040 $ (6,865) $1,145 ==============================================================================
F-30 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The net deferred tax liability at November 30, 2002 and December 1, 2001 consisted of the following (in thousands):
2002 2001 ------------------------------------------------------------------------------------ Long-term portion: Gross deferred tax liability (asset) for: Excess depreciation for tax purposes $ 619 $ 306 Future tax deductions for employee benefit plans (1,118) (1,185) Pension obligation (59) -- Other 30 53 ------------------------------------------------------------------------------------ Net long-term asset (528) (826) ------------------------------------------------------------------------------------ Current portion: Gross deferred tax liability (asset) for: Accounts receivable - Section 475 adjustment (204) 218 Net unrealized holding gain on investment securities available-for-sale, included in stockholders' equity 249 222 ESOP contribution accrued for tax purposes -- 430 Other (36) (601) ------------------------------------------------------------------------------------ Net current liability 9 269 ------------------------------------------------------------------------------------ Net deferred tax asset $ (519) $ (557) ====================================================================================
F-31 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The provision (benefit) for income taxes differed from the amount computed by applying the statutory federal income tax rate of 34.0% for fiscal 2002, 2001 and 2000 to income (loss) before income taxes due to the following:
2002 2001 2000 ----------------------------------------------------------------------------- (Tax effect in thousands) Federal tax expense (benefit) at statutory rate $ 513 $(5,266) $1,421 State and local income taxes, net of Federal benefit 66 105 51 Tax-free interest income and dividends received deduction (119) (147) (338) Change in estimates for tax contingency and other 580 (1,557) 11 ----------------------------------------------------------------------------- Income tax expense (benefit) $1,040 $(6,865) $1,145 =============================================================================
In the fourth quarter of fiscal 2001, the Company reversed approximately $1.5 million of certain tax reserves recorded in prior years, due to changes in estimates for tax contingency items. 9. COMMITMENTS AND STOCK REPURCHASE CONTINGENCIES The Company has an agreement with the Chairman of the Board of Directors and Chief Executive Officer 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 2003. As a result of this feature, $7 million has been classified as redeemable common stock, for all periods presented. F-32 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ LEASE The Company leases its New York City offices and showrooms until 2005, at average minimum annual rentals of $112,000 plus escalation and other costs. Rental expense for operating leases in fiscal 2002, 2001 and 2000 aggregated $495,000, $679,000 and $901,000, 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) --------------------------------------------- 2003 $133 2004 135 2005 91 --------------------------------------------- $359 ============================================= LITIGATION A number of claims and lawsuits are pending against the Company. It is impossible at this time for the Company to predict with any certainty the outcome of such litigation. However, management is of the opinion, based upon information presently available, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would be material in relation to the Company's consolidated financial position or results of operations. F-33 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 10. STATEMENT OF CASH FLOWS Cash outlays (net refunds) for corporate income taxes and interest for fiscal 2002, 2001 and 2000 were as follows (in thousands): CORPORATE INCOME TAXES INTEREST --------------------------------------------- 2002 $ 156 $ 13 2001 438 42 2000 (53) 86 ============================================= F-34 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ NONCASH INVESTING AND FINANCING ACTIVITIES In fiscal 2002, 2001 and 2000, net unrealized holding gains of $0, $1,051,000 and $190,000, respectively, less related income taxes of $0, $420,000 and $76,000, on investment securities available-for-sale were recorded as increases in stockholders' equity. 11. INTEREST AND DIVIDEND Interest and dividend income for the past INCOME three fiscal years were as follows (in thousands):
INTEREST INCOME DIVIDEND INCOME TOTAL ----------------------------------------------------------------- 2002 $2,164 $249 $2,413 2001 4,123 166 4,289 2000 3,877 123 4,000 =================================================================
12. ASSET IMPAIRMENT AND In the second quarter of fiscal 2001, the RESTRUCTURING CHARGES Company implemented a restructuring plan to consolidate several manufacturing facilities. As a result, the Company's fiscal year ended December 1, 2001 financial results include a charge for impairment of fixed assets held for sale of $5,958,000 for the writedown of fixed assets held for disposal to their fair value less costs to dispose. The consolidation of manufacturing facilities is an effort to restore the operations to an acceptable level of profitability by eliminating over-capacities at the manufacturing level in response to the continued weakness in the economy and market conditions that have adversely affected the domestic textile industry. The fixed assets held for disposal are comprised of buildings, machinery and equipment from the knitting, dyeing and finishing activities of the business. The marketability of the assets held for disposal are subject to worldwide economic conditions which can affect the sale of such buildings and machinery. During the fiscal year ended December 1, 2001, the Company had expended approximately $1,300,000 to remove and transfer machinery and equipment to the Company's Mohican Mills facility as part of the consolidation of the Company's manufacturing facilities. F-35 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ As a result, in accordance with FAS No. 121, the Company reviewed long-lived assets to be held and used for impairment and, in the fourth quarter of 2001, recorded an impairment charge of approximately $7,272,000 relating to fixed assets. The Company continues to utilize the majority of its property, plant and equipment, however, there can be no assurance that the Company will sell its assets or if it does sells its assets, that it will be able to recover the full value of its assets, particularly its property, plant and equipment. F-36 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 13. EARNINGS (LOSS) Basic and diluted earnings (loss) per share PER SHARE for the fiscal years ended November 30, 2002, December 1, 2001 and December 2, 2000 are calculated as follows:
------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- WEIGHED NET INCOME AVERAGE (LOSS) SHARES PER SHARE AMOUNT ------------------------------------------------------------------------------------------- Fiscal year ended November 30, 2002: Basic earnings per share $1,970,000 5,222,812 $ .38 ================ Effect of assumed exercise of employee stock options -- -- ------------------------------------------------------------------------------------------- Diluted earnings per share $1,970,000 5,222,812 $ .38 =========================================================================================== Fiscal year ended December 1, 2001: Basic loss per share $(8,623,000) 5,258,353 $(1.64) ================ Effect of assumed exercise of employee stock options -- -- ------------------------------------------------------------------------------------------- Diluted loss per share $(8,623,000) 5,258,353 $(1.64) =========================================================================================== Fiscal year ended December 2, 2000: Basic earnings per share $3,033,000 5,336,958 $ .57 ================ Effect of assumed exercise of employee stock options -- -- ------------------------------------------------------------------------------------------- Diluted earnings per share $3,033,000 5,336,958 $ .57 ===========================================================================================
F-37 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ During fiscal 2002, all outstanding options were either exercised or cancelled. Options to purchase 143,200, and 162,700 shares of common stock were outstanding during fiscal 2001 and 2000, respectively, but were not included in the computation of diluted earnings per share, as their effect would be anti-dilutive. F-38 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 14. SEGMENT INFORMATION The Company adopted SFAS No. 131 "Disclosure About Segments of an Enterprise and Related Information" in fiscal 1999. SFAS No. 131 requires companies to report information on segments using the way management organizes segments within the company for making operating decisions and assessing financial performance. The Company's chief operating decision-maker is considered to be the Chief Executive Officer (CEO). The Company's CEO evaluates both consolidated and disaggregated financial information in deciding how to allocate resources and assess performance. The Company has identified three reportable segments based upon the primary markets it serves: Apparel Fabrics, Home Fashions, Industrial Fabrics and Accessories. Apparel Fabrics: The Company is a major manufacturer of warp and circular knit fabrics and raschel laces. 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, swimwear, and recreational apparel. Home Fashions and Accessories: While sales primarily to manufacturers of home furnishings, the Company used its own textile fabrics internally to produce flannel and satin sheets, blanket products, comforters, and other bedding products which it sells to specialty stores, catalogue and mail order companies, airlines and cruise lines, and health care institutions. Other: The Company produces a line of ultrasonically, hot melt adhesive, flame and adhesive bonded products for apparel, environmental, health care, industrial and consumer markets. The Company's textile fabrics are sold to manufacturers servicing the residential and contract markets. The Company sells fabrics to vendors in the over the counter markets. The accounting policy of the reportable segments are the same as those described in Summary of Accounting Policies (Business F-9). The Company neither allocates to the segments nor bases segment decisions on the following: - Interest and dividend income - Interest expense - Net gain on investment securities - Income tax expense or benefit Many of the Company's assets are used by multiple segments. While certain assets such as Inventory and Property, Plant and Equipment are identifiable by segment, an allocation of the substantial remaining assets is not meaningful. For the 52 weeks ending December 1, 2001, charges for the asset impairment and restructuring charges apply mainly to the apparel segment with a small portion to the other segment. The 52 weeks ended November 30, 2002 include a litigation settlement in the amount of $750,000, which is included in the Home Fashions and Accessories segment (see Note 16). F-39 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ During all years presented, no single customer or group of affiliated customers accounted for more than 10% of the year's net sales. The following are segment revenues and income (loss) by reportable segments for the fiscal years 2002, 2001, and 2000.
HOME FASHIONS 2002 APPAREL AND ACCESSORIES OTHER TOTAL - ---- ------- --------------- ----- ----- External sales $51,269 $4,673 $7,023 $62,965 Intersegment sales 3,860 22 372 4,254 Operating income/(loss) (679) (1,085) 195 (1,569) Depreciation expense 1,600 51 327 1,978 Segment assets 16,629 1,005 2,543 20,177 Capital expenditures -- -- 225 225 HOME FASHIONS 2001 APPAREL AND ACCESSORIES OTHER TOTAL - ---- ------- --------------- ----- ----- External sales $60,884 $10,382 $8,770 $80,036 Intersegment sales 9,781 44 326 10,151 Operating income/(loss) (22,346) 674 (1,088) (22,760) Depreciation expense 3,919 54 477 4,450 Segment assets 21,844 1,454 2,867 26,165 Capital expenditures 374 -- 302 676 HOME FASHIONS 2000 APPAREL AND ACCESSORIES OTHER TOTAL - ---- -------- --------------- ----- ----- External sales $93,901 $14,269 $10,015 $118,185 Intersegment sales 12,324 51 342 12,717 Operating income/(loss) (2,114) 1,117 (39) (1,036) Depreciation expense 5,171 55 463 5,689 Segment assets 44,671 1,579 4,375 50,625 Capital expenditures 922 4 318 1,244
F-40 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
REVENUES 2002 2001 2000 ---- ---- ---- Total external sales for segments $ 62,965 $ 80,036 $ 118,185 Intersegment sales for segments 4,254 10,151 12,717 Elimination of intersegment sales (4,254) (10,151) (12,717) ------------------------------------------------- Total consolidated sales $ 62,965 $ 80,036 $ 118,185 ================================================= PROFIT OR LOSS Total operating loss for segments $ (1,569) $ (22,760) $ (1,036) Total other income 4,579 7,272 5,214 ------------------------------------------------- Income (loss) before taxes on income $ 3,010 $ (15,488) $ 4,178 ================================================= ASSETS Total segments assets $ 20,177 $ 26,165 $ 50,625 Assets not allocated to segments 61,052 105,363 100,787 ------------------------------------------------- Total consolidated assets $ 81,229 $ 131,528 $ 151,412 ================================================= OTHER SIGNIFICANT ITEMS Depreciation expense $ 1,978 $ 4,450 $ 5,689 Not allocated to segments 165 159 175 ------------------------------------------------- Consolidated total $ 2,143 $ 4,609 $ 5,864 ================================================= Capital expenditures $ 225 $ 676 $ 1,244 Not allocated to segments -- 27 159 ------------------------------------------------- Consolidated total $ 225 $ 703 $ 1,403 =================================================
F-41 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 15. QUARTERLY Quarterly earnings were as follows (in FINANCIAL DATA thousands, except for earnings per share): (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL --------------------------------------------------------------------------------------------------------------------------- Fiscal 2002: Net sales $ 14,250 $ 17,362 $ 17,920 $ 13,433 $ 62,965 Gross profit 1,107 2,424 2,362 660 6,553 Net income (loss) (677) 1,626 1,010 11 1,970 Earnings (loss) per share: Basic $ (0.13) $ 0.31 $ 0.19 $ 0.00 $ 0.38 Diluted $ (0.13) $ 0.31 $ 0.19 $ 0.00 $ 0.38 =========================================================================================================================== Fiscal 2001: Net sales $ 20,005 $ 23,002 $ 19,901 $ 17,128 $ 80,036 Gross profit (loss) (152) 857 659 154 1,518 Net loss (1,042) (4,393) (1,320) (1,868) (8,623) Loss per share: Basic $ (0.20) $ (0.83) $ (0.25) $ (.36) $ (1.64) Diluted $ (0.20) $ (0.83) $ (0.25) $ (.36) $ (1.64) ===========================================================================================================================
Net loss includes $5,958,000, $967,000 and $7,605,000 for second, third and fourth quarter 2001 respectively, and $14,530,000 for the 52 weeks ending December 1, 2001 for asset impairment and restructuring charges. F-42 FAB INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 16. OTHER EXPENSE During the fall of 1999, San Francisco Network ("SFN") commenced an action in the Superior Court of California, Marin County, against the Company and the Company's Salisbury Manufacturing Corporation ("Salisbury") subsidiary. The action relates to an agreement between SFN and Salisbury (whose performance the Company guaranteed), pursuant to which Salisbury was licensed to use the Karen Neuburger trademark for branded bedding products. The case was removed to the United States District Court of California. Salisbury and the Company denied any wrongdoing and asserted affirmative claims against SFN and certain of its principals. On March 14, 2002, at a court ordered conference, the Company settled this issue without admitting liability. On April 12, 2002, the Company paid SFN $750,000 in exchange for a compete release of all claims. F-43 FAB INDUSTRIES, INC. AND SUBSIDIARIES ------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS SCHEDULES FORM 10-K FISCAL YEARS ENDED NOVEMBER 30, 2002, DECEMBER 1, 2001, AND DECEMBER 2, 2000 S-1 FAB INDUSTRIES, INC. AND SUBSIDIARIES INDEX ----- SCHEDULE: PAGE 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) (2) BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER BALANCE AT DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR - ----------------------------------------------------------------------------------------------------------- Fiscal year ended November 30, 2002: Allowance for doubtful Accounts $ 600 $400(i) $ -- $ -- $ 1,000 Fiscal year ended December 1, 2001: Allowance for doubtful Accounts $ 300 $400(i) $ -- $ (100)(ii) $ 600 Fiscal year ended December 2, 2000: Allowance for doubtful Accounts $ 1,500 $850(i) $ -- $(2,050)(ii) $ 300 ===========================================================================================================
(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, Fab has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized. FAB INDUSTRIES, INC. By: /s/ Samson Bitensky --------------------------- Samson Bitensky Chairman of the Board and Chief Executive Officer Date: February 28, 2003 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 28, 2003 Chairman of the Board, Chief Executive Officer, and - --------------------------- Director (Principal Executive Officer) Samson Bitensky /s/ David A. Miller February 28, 2003 Vice President - Finance, Treasurer, and Chief Financial - --------------------------- Officer (Principal Financial and Accounting Officer) David A. Miller /s/ Martin B. Bernstein February 28, 2003 Director - --------------------------- Martin B. Bernstein /s/ Lawrence H. Bober February 28, 2003 Director - --------------------------- Lawrence H. Bober /s/ Frank S. Greenberg February 28, 2003 Director - --------------------------- Frank S. Greenberg /s/ Susan B. Lerner February 28, 2003 Director - --------------------------- Susan B. Lerner /s/ Richard Marlin February 28, 2003 Director - --------------------------- Richard Marlin /s/ Steven E. Myers February 28, 2003 Director, President and Chief Operating - --------------------------- Officer Steven E. Myers
CERTIFICATION - ------------- I, Samson Bitensky, certify that: 1. I have reviewed this annual report on Form 10-K of Fab Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 28, 2003 /s/ Samson Bitensky ----------------------- Samson Bitensky Chief Executive Officer CERTIFICATION - ------------- I, David A. Miller, certify that: 1. I have reviewed this annual report on Form 10-K of Fab Industries, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 28, 2003 /s/ David A. Miller ----------------------- David A. Miller Chief Financial Officer EX-10 3 ex1022_form10k2002.txt EXHIBIT 10.22 EXHIBIT 10.22 ------------- FOURTH AMENDMENT TO LEASE THIS FOURTH AMENDMENT TO LEASE (the "AGREEMENT") dated as of April 11, 2002 by and between 200 MADISON ASSOCIATES, L.P., a Delaware limited partnership having an office c/o George Comfort & Sons, Inc., 200 Madison Avenue, New York, New York 10016 ("LANDLORD") and FAB INDUSTRIES, INC., a Delaware corporation with an office at 200 Madison Avenue, New York, New York 10016 ("TENANT"). W I T N E S S E T H: WHEREAS, Landlord's predecessor-in-interest entered into a lease with the Tenant dated December 8, 1988 which lease was amended by a Lease Modification Agreement dated April 2, 1991, a Second Lease Modification Agreement (the "SECOND LEASE MODIFICATION AGREEMENT") dated May 23, 1996 and Landlord and Tenant have entered into a Third Amendment to Lease ("THIRD AMENDMENT") dated as of April 24, 2000 (as so amended, the "LEASE") with respect to a portion of the seventh (7th) floor (the "EXISTING Premises") of the building (the "BUILDING") known as 200 Madison Avenue, located in the City, County and State of New York, as more particularly described therein; WHEREAS, Landlord and Tenant desire to relocate Tenant from the Existing Premises to Suite 2300, consisting of a portion of the twenty-third (23rd) floor of the Building, as depicted by cross-hatching on EXHIBIT "A" attached hereto (the "PREMISES") pursuant to the terms, covenants and conditions hereinafter set forth; and WHEREAS, the parties desire to modify, amend and supplement the Lease as hereinafter provided. NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00) paid by Tenant to Landlord and for other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, the parties hereby agree to modify, amend and supplement the Lease as follows: 1. Initially capitalized words used in this Agreement but not otherwise defined herein shall have the meanings ascribed thereto in the Lease. 2. Landlord and Tenant hereby confirm that the expiration date of the Lease is July 31, 2005 (the "EXPIRATION DATE"). 3. On the date the Landlord substantially completes the Landlord's Work (as hereinafter defined) (such date referred to as the "EFFECTIVE DATE"), time being of the essence, Tenant shall vacate and surrender the Existing Premises to Landlord. Effective as of the Effective Date, the Existing Premises shall be deemed deleted from the Lease and the term "PREMISES", as that term is used in the Lease, shall refer only to the Premises and not the Existing Premises. From the date of this Agreement through the Effective Date, the Tenant may continue to occupy the Existing Premises until the 2 Landlord substantially completes the Landlord's Work and the obligations of Tenant hereunder shall be unaffected thereby and the Tenant shall continue to pay rent and additional rent as set forth in the Lease for the Existing Premises. It is hereby understood and agreed that Tenant shall not be required to relocate to the Premises until the Tenant's telephone and computer systems are operating in the Premises and accordingly, the Tenant hereby agrees to promptly order and coordinate the performance of such work in the Premises following the execution of this Agreement by the Landlord; PROVIDED, HOWEVER, that if Tenant does not take reasonable steps in order to transfer the aforementioned systems to the Premises within thirty (30) days after the Effective Date, then the Landlord at the expense of the Tenant may take reasonable commercial steps to relocate such systems to the Premises. Provided Tenant's telephones and computer systems are operating. Tenant hereby agrees to vacate and surrender the Existing Premises to the Landlord and move into the Premises not later than two (2) business days following the date the Landlord substantially completes the Landlord's Work. Landlord shall provide the Tenant with oral notice that the Landlord's Work is substantially complete. If the Tenant does not vacate and surrender the Existing Premises in accordance with the terms and conditions of this Agreement, then the Tenant shall be responsible to pay (i) the Fixed Rent and additional rent under the Existing Lease and (ii) the rent and additional rent payable under this Agreement with respect to the Premises and (iii) any actual damages incurred by the Landlord as a result of the Tenant's failure to vacate, surrender and deliver the Existing Premises to the Landlord in accordance with the terms of this Agreement. The Tenant hereby agrees that it shall, in good faith, use its reasonable commercial efforts in order to coordinate the relocation of its telephone system to the Premises with the Landlord's performance of the Landlord's Work so as not to delay the Tenant's relocation from the Existing Premises to the Premises. 4. (a) From and after the Effective Date and in lieu of the amounts set forth in Section 4 of the Third Amendment, Tenant shall pay fixed rent (herein, the "FIXED RENT") for the Premises in the amount of One Hundred Forty Thousand Nine Hundred Forty-Eight Dollars and Fifty Cents ($140,948.50) per annum payable in equal monthly installments in the amount of Eleven Thousand Seven Hundred Forty-Five Dollars and Seventy-One Cents ($11,745.71) per month for the period commencing on the Effective Date through and including the Expiration Date. (b) Tenant shall continue to pay all items of fixed rent and additional rent payable under the Lease through and including the day immediately preceding the Effective Date. The Tenant shall pay the Fixed Rent to Landlord in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in advance, in equal monthly installments on the first day of each month during the term, at the office of Landlord as set forth above, or such other place as Landlord may designate, without any set-off, counterclaim or deduction whatsoever. 5. The provisions of Section 4 of the Third Amendment shall be of no force and effect as of the Effective Date. From and after the Effective Date, and notwithstanding anything contained herein to the contrary, provided Tenant shall not be in default beyond applicable notice, grace and cure periods of its obligations under this 3 Lease, Tenant shall be entitled to receive credits against the fixed annual rent (and not any item of additional rent) payable hereunder in the amount of One Thousand Four Hundred Fifty-Two Dollars and Ninety-Five Cents ($1,452.95) per month for the period from the Effective Date through and including July 31, 2005 (the "ABATEMENT"). 6. Tenant shall continue to pay additional rent pursuant to the terms and conditions of the Lease throughout the Lease term, PROVIDED, HOWEVER, that effective as of the Effective Date, the term "PERCENTAGE" as set forth in Section 40.3 of the Lease shall be deemed modified and shall be deemed to be "0.959%." Tenant shall continue to pay tax escalation additional rent pursuant to the terms and conditions of the Lease, unamended hereby, through and including the day preceding the Effective Date. 7. From and after the Effective Date, and in lieu of the amounts set forth in Section 6 of the Third Amendment (but the amounts set forth in the Third Amendment shall continue to be effective through the day immediately preceding the Effective Date). Tenant shall pay the following amounts to the Landlord: (a) Eight Thousand Six Hundred Twenty-Nine Dollars and Thirty-Two Cents ($8,629.32) per annum payable in equal monthly installments in the amount of Seven Hundred Nineteen Dollars and Eleven Cents ($719.11) for the period from the Effective Date through and including April 30, 2003; (b) Ten Thousand Four Hundred Seventy Dollars and Forty Cents ($10,470.40) per annum payable in equal monthly installments in the amount of Eight Hundred Seventy-Two Dollars and Fifty-Three Cents ($872.53) for the period from May 1, 2003 through and including April 30, 2004; (c) Twelve Thousand Four Hundred Twenty-Six Dollars and Fifty-Four Cents ($12,426.54) per annum payable in equal monthly installments in the amount of One Thousand Thirty-Five Dollars and Fifty-Five Cents ($1,035.55) for the period from May 1, 2004 through and including April 30, 2005; (d) Fourteen Thousand Four Hundred Ninety-Seven Dollars and Thirty-Nine Cents ($14,497.39) per annum payable in equal monthly installments in the amount of One Thousand Two Hundred Eight Dollars and Twelve Cents ($1,208.12) for the period from May 1, 2005 through the expiration of the term of the Lease. 8. Prior to the Effective Date, Tenant shall continue to pay for electricity furnished to the Existing Premises in accordance with Article 41 of the Lease on a rent inclusion basis. From and after the Effective Date and IN ADDITION TO the Fixed Rent set forth herein, the Tenant shall pay Seventeen Thousand Two Hundred Fifty-Nine Dollars ($17,259.00) per annum payable in equal monthly installments in the amount of the One Thousand Four Hundred Thirty-Eight Dollars and Twenty-Five Cents ($1,438.25) per month, which amount shall be subject to increases, but not decreases, in accordance with Article 41 of the Lease. Tenant shall pay such monthly payments on the first day of each month during the Lease term together with monthly installments of fixed rent due hereunder. 4 9. Tenant acknowledges and represents to Landlord that it has inspected the Premises and that it is fully familiar with the physical condition and state of repair thereof, and Tenant does hereby agree to accept same in its current condition and state of repair, subject to any and all defects therein, latent or otherwise, "AS IS," and Landlord shall have no obligation to do any work or make any installation, repair or alteration of any kind to or in respect thereof, except as elsewhere in this Agreement otherwise expressly provided. Further, the taking of possession of the Premises or any portion or portions thereof by Tenant shall be conclusive evidence that same was in satisfactory condition at the time such possession is so taken. Tenant, at its sole cost and expense, shall be obligated to make all improvements to the Premises that are necessary for the conduct of Tenant's business and operations. Tenant hereby acknowledges that Landlord has fully performed any obligations under the Lease (as so amended) which require the Landlord to perform any work in the Existing Premises. Notwithstanding anything to the contrary set forth in this Agreement or the Lease, the Landlord, at its cost and expense, shall (i) replace the missing ceiling tiles in the Premises, (ii) paint the Premises using Building standard materials in Building standard colors and (iii) shampoo and clean the carpeting in the carpeted area of the Premises (collectively, the "LANDLORD'S WORK"). Tenant hereby acknowledges that Landlord has fully performed any obligations under the Lease which require the Landlord to perform any work in the Existing Premises. 10. Tenant shall surrender and vacate the Existing Premises on or before the Effective Date, in broom clean as is condition, as if the Effective Date was the expiration date set forth in the Lease, ordinary wear and tear excepted. Time shall be of the essence as to such date. Additionally, if Tenant shall fail to remove its property from the Existing Premises by the Effective Date, time being of the essence, then Landlord, without being guilty of any trespass and without being held liable at law or in equity for such removal, may at its option remove and store Tenant's property at the cost and expense of Tenant and Tenant hereby releases Landlord of and from any and all liability by reason thereof. 11. By their respective execution of this Agreement, Landlord and Tenant each represents and warrants to the other, as to itself that it has the full right, power and authority to enter into this Agreement and is in good standing in its jurisdiction of formation and duly qualified to conduct business in the State of New York. 12. Tenant acknowledges and agrees that, as of the date hereof, its obligations under the Lease, as modified and amended by this Agreement, are not subject to any reduction, limitation, impairment or termination for any reason whatsoever, including, without limitation, any claim of waiver, release, surrender or compromise and are not subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of any of the Tenant's obligations under the Lease, as modified by this Agreement, or otherwise, arising prior to the date of this Agreement. 13. The provisions of the Lease relating to notices are hereby modified so that all notices to Landlord shall be addressed as follows: Landlord at c/o George 5 Comfort & Sons, Inc., 200 Madison Avenue, New York, New York, Attention: Mr. Peter Duncan, with a copy to Loeb Partners Realty LLC, 521 Fifth Avenue, New York, New York 10175, Attention: Mr. Joseph Lesser and Handsman & Kaminsky LLP, 101 East 52nd Street, 10th Floor, New York, New York 10022, Attention: David S. Handsman, Esq. Notices to Tenant shall be addressed to the Tenant at the Premises. 14. Tenant represents and warrants that it has not dealt with any broker in connection with this Agreement other than George Comfort & Sons, Inc. (the "BROKER") and Tenant does hereby indemnify and agree to hold Landlord harmless from and against any and all liability, loss, claim, damage, cost or expense (including, without limitation, reasonable attorneys' fees and disbursements) arising out of or in connection with claims for commission made against Landlord by any broker, finder or like agent who claims to have dealt with Tenant in connection with the execution and delivery of this Agreement (other than the Broker). Landlord shall pay the Broker any commission payable in connection with this Agreement pursuant to separate agreement. This provision shall survive the expiration of the Lease. 15. (a) Tenant shall have the option (the "RENEWAL OPTION") to extend the term of this Lease for one (1) additional period of two (2) years (the "RENEWAL TERM"). The Renewal Term shall commence on the date immediately succeeding the Expiration Date and end on the anniversary of the Expiration Date, provided that (i) this Lease shall not have been previously terminated in accordance with the terms thereof, (ii) Tenant (and any affiliates that are entitled to occupy the Premises in accordance with the terms and conditions of this Lease) shall occupy the entire Premises for the conduct of its business and (iii) no default shall have occurred and be continuing beyond the expiration of any applicable notice or cure periods (x) on the date Tenant gives Landlord written notice (the "RENEWAL NOTICE") of Tenant's election to exercise the Renewal Option, or (y) on the Expiration Date. The Renewal Option may be exercised with respect to the entire Premises only and shall be exercisable by Tenant delivering the Renewal Notice to Landlord at least seven (7) months prior to the Expiration Date. Time is of the essence with respect to the giving of the Renewal Notice. Upon the giving of the Renewal Notice with respect to the Renewal Term, Tenant shall have no further right or option to extend or renew the Term of this Lease. (b) If Tenant exercises the Renewal Option, the Renewal Term shall be upon the same terms, covenants and conditions as those contained in this Lease, except that (i) the fixed Rent shall be deemed to mean the Fixed Rent as determined pursuant to subparagraph (c) of this Section 15, (ii) Tenant shall not be entitled to any credit against the Fixed Rent and (iii) the provisions of subparagraph (a) of this Section 15 concerning Tenant's right to renew the Term shall not be applicable during the Renewal Term. (c) The Fixed Rent for the Premises for the Renewal Term shall be the annual fair market rental value of the Premises (the "FAIR MARKET RENT") as of the first day of the Renewal Term (the "RENTAL Value") as determined by Owner, but under no circumstances shall the Fixed Rent for the Renewal Term be less than the aggregate of the Fixed Rent and the Additional Rent payable by Tenant for the year 6 immediately preceding the first month of the Renewal Term; provided, however, that the Fair Market Rent for the first (1st) year of the Renewal Term shall be ninety-five percent (95%) of the annual fair market rental value and the Fair Market Rent for the second (2nd) year of the Renewal Term shall be the annual fair market rental value. The Fair Market Rent shall be determined based upon all relevant factors and assuming that Owner has had a reasonable time to locate a tenant who rents with the knowledge of uses to which the Premises can be adapted, and that neither Owner nor the prospective tenant is under any compulsion to rent. (d) If Tenant exercises the Renewal Option, for purposes of determining the Fair Market Rent, the following procedures shall apply: (i) The Fair Market Rent shall be determined by Owner on the basis of the highest and best use (or such other use as may be permitted under applicable Legal Requirements) of the Premises assuming that the Premises are free and clear of all leases and tenancies (including this Lease) whether improved or unimproved except, however, that the Fair Market Rent shall not be less than the total Fixed Rent and additional rent payable by Tenant with respect to the year immediately preceding the Renewal Term in question. (ii) Owner shall give Tenant written notice (the "RENT NOTICE") not later than nine (9) months prior to the Expiration Date (but in no event later than sixty (60) days after the date Tenant delivers the Renewal Notice to the Owner) which Rent Notice shall set forth Owner's determination of the Fair Market Rent ("OWNER'S DETERMINATION"). (iii) If Owner's Determination exceeds the Fixed Rent payable by Tenant on the Expiration Date then Tenant shall give Owner written notice ("TENANT'S NOTICE"), within 30 days after Tenant's receipt of the Rent Notice, as to whether Tenant accepts or disputes Owner's Determination. If Tenant in Tenant's Notice accepts Owner's Determination or if Tenant fails or refuses to give Tenant's Notice as aforesaid, Tenant shall be deemed to have accepted Owner's Determination for the Renewal Term in accordance with the terms of this Section 15. If Tenant in Tenant's Notice disputes Owner's Determination, then Tenant's Notice shall contain Tenant's determination of the Fair Market Rent ("TENANT'S DETERMINATION") as well as the name of an independent real estate appraiser ("TENANT'S CONSULTANT"), to act as Tenant's representative if Owner does not accept Tenant's Determination. (iv) Owner shall give Tenant written notice ("OWNER'S NOTICE"), within 20 days after Owner's receipt of Tenant's Determination, as to whether Owner accepts or disputes Tenant's Determination. If Owner in Owner's Notice disputes Tenant's Determination, Owner shall appoint an independent real estate appraiser ("OWNER'S CONSULTANT") to act as Owner's representative. Not later than ten (10) Business Days after Tenant's receipt of Owner's Notice, Tenant's Consultant and Owner's Consultant shall meet (in person or by telephone) to mutually agree upon the determination of the Fair Market Rent, and their determination shall be final and binding upon the parties. If Owner's Consultant and Tenant's Consultant shall be unable to reach 7 such determination within 20 days after Tenant's receipt of Owner's Notice, both of the Consultants shall each designate their final fair market rents, if they have changed from the initial determination, and shall jointly select a third independent real estate appraiser ("THIRD CONSULTANT") whose fee shall be borne equally by Owner and Tenant. In the event that Owner's Consultant and Tenant's Consultant shall be unable to jointly agree on the designation of the Third Consultant within five days after they are requested to do so by either party, then the parties agree to allow the American Arbitration Association or any successor organization to designate the Third Consultant in accordance with the rules, regulations and/or procedures then obtaining of the American Arbitration Association or any successor organization. (v) The Third Consultant shall conduct such hearings and investigations as he may deem appropriate and shall, within 20 days after the date of designation of the Third Consultant, chose either Owner's or Tenant's Determination, as it may be modified at the time of their selection of the Third Consultant, and such choice by the Third Consultant shall be conclusive and binding upon Owner and Tenant. Each party shall pay its own counsel fees and expenses, if any, in connection with any arbitration under this subparagraph, including the expenses and fees of any Consultant selected by it in accordance with the provisions hereof. Any Consultant appointed pursuant to this Section 15 shall be an independent real estate appraiser with at least ten years' experience in leasing and valuation of properties which are similar in character to the Building, a member of the American Institute of Appraisers of the National Association of Real Estate Boards, a member of the Society of Real Estate Appraisers, and shall not have any personal or business relationship with the either Owner or Tenant which might be, or have the appearance of, a conflict of interest. The Consultants shall not have the power to add to, modify or change any of the provisions of this Lease. (e) After a determination has been made of the Rental Value for the Renewal Term, the parties shall execute and deliver to each other an instrument setting forth the Rental Value for the Renewal Term as hereinabove determined. (f) If the final determination of the Rental Value shall not be made on or before the first day of the Renewal Term in accordance with the provisions of this Section 15, pending such final determination Tenant shall continue to pay, as the Fixed Rent for such Renewal Term, an amount equal to the Fixed Rent and all Additional Rent payable for the year immediately preceding the Renewal Term. In all instances Tenant shall continue to pay all Additional Rent as set forth in the Lease. If, based upon the final determination hereunder of the Rental Value, the payments made by Tenant on account of the Fixed Rent for such portion of the Renewal Term were (i) less than the Rental Value payable for the Renewal Term, Tenant shall pay to Owner the amount of such deficiency within ten (10) days after demand therefor or (ii) greater than the Rental Value payable for the Renewal Term, Owner, at its option but within thirty (30) days of the final determination of Rental Value, shall either refund to Tenant or credit towards the next payment or payments of Fixed Rent, the amount of such excess until the excess, if any, has been fully credited to Tenant. 8 16. Tenant shall continue to pay all items of Fixed Rent and additional rent payable under the Lease for the Existing Premises through the Effective Date and Tenant's obligations in respect thereof shall survive the Effective Date. 17. The submission of this Agreement to Tenant shall not be construed as an offer or a binding agreement, nor shall the Tenant have any rights with respect thereto, unless and until Landlord shall execute a copy of this Agreement and unconditionally deliver same to Tenant. 18. Except as expressly modified, amended and supplemented by this Agreement, all of the terms, covenants and conditions of the Lease shall remain in full force and effect. 19. This Agreement may not be changed orally but only by written agreement signed by both parties. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first written above. 200 MADISON ASSOCIATES, L.P. By: /s/ Alan L. Gordon ----------------------------------- Name: Alan L. Gordon Title: Vice President FAB INDUSTRIES, INC. By: /s/ Steven Myers ----------------------------------- Name: Steven Myers Title: President/Chief Operating Officer STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 5th day of April in the year 2002 before me, the undersigned, personally appeared Steven Myers, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his /their signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. /s/ Maryann McAuliffe -------------------------------------- Notary Public - Maryann McAuliffe [stamp of Maryann McAuliffe] EX-10 4 ex1030_form10k2002.txt EXHIBIT 10.30 EXHIBIT 10.30 ------------- SECURED RECOURSE PROMISSORY NOTE as of May 30, 2002 New York, New York $___________ FOR VALUE RECEIVED, _____________ (the "Borrower") unconditionally promises to pay to the order of FAB INDUSTRIES, INC., a Delaware corporation having an office at 200 Madison Avenue, New York, New York 10016 (the "Company"), or its successors and assigns, at the Company's said address or at such other place as the Company may from time to time designate to the Borrower, in writing, the principal amounts advanced to the Borrower of [Dollar Amount] ($________) (the "Loan"), in lawful money of the United States of America, together with interest thereon at the Interest Rate (as defined below), on May 30, 2003, or such earlier date as such amount shall become due and payable in accordance with the terms of this promissory note (as amended, modified or supplemented from time to time, this "Note"). The Borrower has chosen to exercise stock options and become a stockholder of the Company. In order to exercise such stock options, the Borrower must pay to the Company no later than the date of exercise, the "total exercise price" of such stock option. The Company is hereby making the Loan in the amount of the "total exercise price" pursuant to Section 8 of the Stock Option Agreement(s) by and between the Company and the Borrower. This Note is secured by and entitled to the benefits of the Pledge Agreement (as defined below). 1. DEFINITIONS. As used in this Note, the following terms shall have the meanings set forth below. Defined terms in this Note shall include in the singular number the plural and in the plural the singular. "BUSINESS DAY" means any day not a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close. "COLLATERAL" has the meaning ascribed to it in the Pledge Agreement. "INTEREST RATE" means a per annum interest rate equal to 3.5%. "OBLIGATIONS" means all amounts, direct or indirect, contingent or absolute, of every type and description, and at any time existing, owing by the Borrower to the Company solely pursuant to the terms of this Note or the Pledge Agreement. "PLEDGE AGREEMENT" means the Pledge Agreement, dated the date hereof, between the Borrower, as pledgor, and the Company, as pledgee, as amended, modified or supplemented from time to time. "PLEDGED SHARES" has the meaning ascribed to it in the Pledge Agreement. 2 2. INTEREST. (a) The unpaid principal amount of the Loan shall bear interest from the date hereof until paid in full at a fixed rate per annum equal to the Interest Rate. All accrued and unpaid interest on the Loan shall be payable at maturity (whether by acceleration or otherwise), and after such maturity, on demand. (b) Interest at the Interest Rate shall be calculated based on a year of 365 days, for the actual number of days for which any principal is outstanding hereunder. (c) Overdue principal, and to the extent permitted by applicable law, overdue interest in respect of the Loan and any other overdue amount payable hereunder, shall bear interest at a rate per annum equal to the Interest Rate PLUS two percent (2%). 3. PREPAYMENT AND REPAYMENT. (a) The Borrower shall have the right to prepay the principal amount of the Loan, in whole or in part, at any time and from time to time, upon at least five (5) days' prior written notice to the Company, without premium or penalty, provided that the Borrower pays to the Company at the same time (i) all accrued and unpaid interest on the principal amount of the Loan so prepaid and (ii) all other Obligations other than the remaining outstanding principal and interest thereon, if any, then due and payable by the Borrower to the Company under this Note or the Pledge Agreement. (b) The Borrower shall repay the entire outstanding principal amount of the Loan, together with all accrued and unpaid interest thereon, and all other Obligations then due and payable, on the earliest to occur of the following: (i) May 30, 2003; and (ii) the date that is thirty (30) days after the date on which the Borrower's employment with the Company terminates. (c) Any and all distributions or dividends paid by the Company on the Pledged Shares while the Loan is outstanding shall first be used by the Company to make a payment, in the name of the Borrower, on the Loan. (d) All payments received under this Section 3 shall be applied, first, to the payment of costs, fees or expenses due hereunder or under the Pledge Agreement, second, to the payment of accrued and unpaid interest and then to the payment of principal. 4. METHOD OF PAYMENT. All payments under this Note shall be made in lawful money of the United States of America. Whenever any payment to be made under this Note shall be stated to be due on a day which is not a Business Day, the due date therefor shall be extended to the next succeeding Business Day. All payments made by the Borrower hereunder shall be made without setoff, counterclaim or other defense. 3 5. COVENANTS. The Borrower hereby covenants and agrees that from the date hereof and until the Obligations shall have paid in full, he will: (a) Promptly advise the Company in writing of any material litigation filed by or against the Borrower and any event that has occurred that would constitute an "Event of Default," as defined in Section 6 hereof. (b) Use or cause the Company to use the proceeds of the Loan solely to pay the "total exercise price" of the options exercised by the Borrower on the date hereof. 6. EVENTS OF DEFAULT. Upon the occurrence of any of the following specified events (each an "Event of Default"): (a) the Borrower shall fail to make any payment under this Note within 30 days when due; (b) any representation or warranty made by the Borrower under this Note or the Pledge Agreement shall be untrue in any material respect on the date as of which made or deemed made; (c) the Borrower shall default in the due performance or observance by him of Section 5(b) of this Note or Section 7(a) of the Pledge Agreement, and such default continues unremedied for ten (10) Business Days following written notice from the Company; (d) the Borrower shall default in the due performance or observance by him of any other term, covenant or agreement in this Note or the Pledge Agreement and such default shall continue unremedied for a period of at least ten (10) Business Days after notice from the Company; or (e) (i) the Borrower commences any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to the Borrower, or seeking to adjudicate the Borrower bankrupt or insolvent, or seeking reorganization, composition, extension or other such relief with respect to the Borrower or the Borrower's debts, or seeking appointment of a receiver, trustee, custodian or other similar official for all or any substantial part of the Borrower's assets (a "bankruptcy action"); (ii) the Borrower becomes the debtor named in any bankruptcy action which results in the entry of an order for relief or any such adjudication or appointment remains undismissed or undischarged for a period of sixty (60) days; or (iii) the Borrower makes a general assignment for the benefit of his creditors; or (iv) the Borrower generally fails to, or shall admit in writing his inability to, pay a material portion of his debts as they become due; 4 then, in an any such event, and at such time thereafter as any Event of Default shall then be continuing, the Company may, by written notice to the Borrower, provided that the Loan is not then to be forgiven under Section 3(b) hereof, declare the principal of and any accrued interest in respect of the Loan and all other Obligations to be, whereupon, the same shall become, forthwith due and payable (PROVIDED, that if any Event of Default described in clause (e) above shall occur, such acceleration shall occur automatically without the giving of any such notice), without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower and/or enforce its rights under the Pledge Agreement, as well as any and all rights and remedies available at law or in equity. 7. FULL RECOURSE. The Borrower hereby agrees and covenants that the Company shall have full recourse against the Borrower for the payment of the Obligations. The Borrower waives any right it may have to require that any resort be made by the Company to any collateral securing the Obligations and agrees that the Company may enforce its rights hereunder, prior to or without, any resort to such collateral. 8. OBLIGATIONS ABSOLUTE AND UNCONDITIONAL. The Borrower acknowledges his irrevocable, absolute and unconditional obligation to repay the Obligations in full irrespective of, and the Borrower hereby irrevocably waives any defenses it may now or hereafter have in any way relating to, the cancellation or forfeiture of any of the Collateral. 9. NON-WAIVER. The failure of either party hereto, at any time, to exercise any of his options or any other rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to the exercise of any of his options or rights at a later date. All rights and remedies of each party hereto shall be cumulative and may be pursued singly, successively or together, at the option of such party. The acceptance by the Company hereto of any partial payment shall not constitute a waiver of any default or of any of the Company's rights under this Note. No waiver of any rights hereunder shall be deemed to be made by any party hereto unless the same shall be in writing, duly signed on behalf of such party; and each such waiver shall apply only with respect to the specific instance involved, and shall in no way impair the rights or the obligations of the Borrower or the Company in any other respect at any other time. No modification or amendment of this Note shall be effective unless the same shall be in writing, duly signed on behalf of each party hereto. 10. MISCELLANEOUS. (a) All notices required or permitted by this Note or the Pledge Agreement to be given to any party shall be in writing and shall be delivered personally, or sent by certified mail, return receipt requested, or by Federal Express or similar overnight service, prepaid recorded delivery, addressed as follows: 5 If to the Borrower/Pledgor: [Name] [Address] If to the Company: Fab Industries, Inc. 200 Madison Avenue New York, New York 10016 Attn: David A. Miller and shall be deemed to have been duly given when so delivered personally or, if mailed or sent by overnight courier, upon delivery; PROVIDED, that a refusal by a party to accept delivery shall be deemed to constitute receipt. (b) The Borrower agrees to pay on demand all reasonable costs and expenses, if any (including reasonable attorney's fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) by the Company of its rights under this Note or the Pledge Agreement. (c) The provisions of this Note shall bind and inure to the benefit of the Borrower and his heirs and representatives, successors and assigns and the Company and its successors and assigns; PROVIDED, HOWEVER, that no assignment or other transfer of the Borrower's rights or obligations hereunder shall be made or be effective without the Company's prior written consent, nor shall it relieve the Borrower of his obligations hereunder, PROVIDED FURTHER, HOWEVER, that the Company may assign this Note without the consent of the Borrower. (d) Anything in this Note to the contrary notwithstanding, in no event shall the Borrower be obligated to make any payment of interest or late charges, and in no event shall the Company be entitled to receive payment of any such interest or charges, if and to the extent that such payment would violate any usury laws of the State of New York applicable to this Note. If payment of any such interest or charges is made by the Borrower and received by the Company and such payment is in violation of such usury laws, the portion of such payment which exceeds the maximum allowable by or under such usury laws shall not be or be deemed to be interest or late charges, but instead shall be applied in reduction of the principal amount outstanding under this Note. (e) The provisions of this Note shall be construed and interpreted in accordance with the laws of the State of New York without regard to principles of conflicts of laws thereof. The invalidity, illegality or unenforceability of any provision of this Note shall not affect or impair the validity, legality or enforceability of the remainder of this Note, and to this end, the provisions of this Note are declared to be severable. (f) This Note and the acknowledgment hereto may be executed in any number of counterparts, each of which shall be an original, but all of which shall together constitute one and the same instrument. 6 (g) This Note and the Pledge Agreement together contain the entire agreement and understanding of the parties with respect to the subject matter contained herein and supersedes all prior communications, representations and negotiations with respect thereto as of the date hereof. _______________________________ [Borrower] Acknowledged and Agreed: FAB INDUSTRIES, INC. By: ___________________________ Name: Title: EX-99 5 ex991_form10k2002.txt EXHIBIT 99.1 EXHIBIT 99.1 ------------ FAB INDUSTRIES, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annaul Report of Fab Industries, Inc. (the "Company") on Form 10-K for the period ending November 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Samson Bitensky, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Samson Bitensky - --------------------------- Samson Bitensky Chief Executive Officer February 28, 2003 EX-99 6 ex992_form10k2002.txt EXHIBIT 99.2 EXHIBIT 99.2 ------------ FAB INDUSTRIES, INC. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Fab Industries, Inc. (the "Company")on Form 10-K for the period ending November 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David A. Miller, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ David A. Miller - ---------------------------- David A. Miller Chief Financial Officer February 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----