ITEM 1. BUSINESS
(a) General Development of Business
Hampton Industries, Inc. and its subsidiaries and divisions (herein referred to as "Hampton" or "Company") are engaged in the business of manufacturing and selling apparel.
Hampton, a North Carolina Corporation, is the successor of several predecessor corporations, the first of which was incorporated in 1925 in the State of New York under the name of Hampton Shirt Co.
(b) Financial Information about Industry Segments
Hampton has been engaged in one line of business in excess of five years; reference is made to the financial statements included herein under ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
(c) Narrative Description of Business
The Company is engaged in the business of manufacturing and selling apparel and operates in one industry segment. Substantially all sales to third party customers are made to destinations in the United States. The products consist principally of men's and boys' shirts and men's and women's sleepwear, which are produced domestically and in Central America. In addition, sport and dress shirts, sweaters, activewear, outerwear and swimtrunks, for both men and boys are imported from unaffiliated sources located primarily in the Far East. Hampton's products are principally sold at retail under private labels. Branded apparel is becoming an increasingly important part of the Company's business and is manufactured and sold under the following licenses:
LICENSE PRODUCT CATEGORY Nautica for Boys' Boys' apparel Rawlings Men's and boys' activewear Spalding (1) Men's activewear Dickies Men's casual and rugged sportshirts Justin (1) Men's and boys' western wear Bugle Boy Men's and boys' sleepwear and robes Charles Goodnight (1) Ladies sleepwear and robes Warner Brothers Men's sleepwear and robes and children's robes and novelty apparel Joe Boxer (2) Boys', girls' and children's apparel
(1) Initial sales occurred in 1998. (2) Initial sales will occur in 1999.
Hampton owns the following trademarks:
TRADEMARK PRODUCT CATEGORY Kaynee Boys' and girl's school uniforms Le Tigre Men's and boys' sportswear Campus Men's and boys' sportswear Flipbox Boys' sportswear - -1- Hampton designs its line of apparel which is manufactured from various combinations of man-made and natural fibers which are readily available from a number of sources both domestically and imported. Hampton has no long-term contracts with any supplier. The average domestic production cycle is approximately five weeks from the time the fabric is scheduled for cutting until the finished product is received at the Company's distribution centers. The production cycle for goods imported or manufactured in Central America is approximately ten weeks, while the lead time for goods imported from the Far East can be as long as six months. The design and production specifications for imported products are provided to the manufacturers by Hampton.
Hampton's products are sold throughout the United States, to approximately 2,620 customers including most of the country's leading national and regional retail chains and department stores. Sales are made by a nationwide sales staff of 69 salesmen, including 49 field representatives at the end of 1998. Sales offices are located in New York, and at the Company's executive and administrative headquarters in Kinston, North Carolina. As of December 26, 1998 the Company had approximately 925 full-time associates domestically and approximately 600 associates in the Caribbean. Hampton is not a party to any collective bargaining agreements, has never experienced a strike or work stoppage, and believes that it maintains satisfactory relationships with its associates.
Hampton's largest customers accounted for approximately 26% and 31% of consolidated sales volume in 1998 and 1997, respectively. Wal- Mart Stores, Inc. and J.C. Penney Co. are large multi-outlet retail chains who purchase a broad range of Hampton's products through a variety of their merchandising departments. There are no contracts with either customer for continued business. The following is a breakdown of their respective sales volume:
1998 1997 1996
J.C. Penney Co. 14% 16% 15% Wal-Mart Stores, Inc. 12% 15% 16%
The following is a breakdown of sales by apparel categories:
1998 1997 1996
Men's shirts and sportswear 31% 34% 40% Boys' shirts and sportswear 31% 30% 26% Ladies' sleepwear 12% 13% 13% Men's sleepwear 13% 13% 12% Activewear 12% 9% 7% Other 1% 1% 2%
Sales of licensed products accounted for 41%, 31% and 23% of the consolidated sales for 1998 and the prior two years, respectively.
The following reflects the Company's sourcing of its products: 1998 1997 1996
Imports 58% 51% 56% Caribbean 24% 29% 24% Domestic 18% 20% 20%
All foreign purchases are contracted for in U.S. Dollars; therefore, there is no currency risk. - -2- As of February 28, 1999, Hampton's backlog of orders was approximately $108,524,000 as compared to $109,105,000 on the same date in 1998. The orders are believed to be firm and are expected to be shipped during the current fiscal year.
The apparel industry is highly competitive as to style, quality and price. Hampton competes with many other manufacturers and suppliers in each of its products.
EXECUTIVE OFFICERS OF REGISTRANT
First year appointed to Name and age Office current office
David Fuchs(74) Chairman and Chief Executive Officer 1975 Steven Fuchs(39) President 1996 Roger M. Eichel(50) Senior Vice President and Secretary 1993 Robert J. Stiehl,Jr.(63) Executive Vice President- Operations, Treasurer, and Assistant Secretary 1995 Frank E. Simms(50) Chief Financial Officer and Vice President of Finance 1997
Each of the above named was appointed for one year or until the election of a successor. Immediately following the Annual Meeting of Shareholders to be held on May 18, 1999, the board will elect officers for the following year term. There is no arrangement or understanding between any of the above pursuant to which they were appointed as Officers. Steven Fuchs has an employment contract that, among other things, determines compensation due to separation of employment.
All of the Executive Officers above named, except Robert J. Stiehl, Jr. and Frank Simms are related family members. Steven Fuchs is the son of David Fuchs, and Roger Eichel is David Fuchs' son-in- law.
David Fuchs has held his current executive position for in excess of five years. Steven Fuchs was elected to his present position in January, 1996. From 1993 to January 1996, Steven Fuchs was the President of Hampton Shirt Co. (a subsidiary). Prior to 1993, he held various positions with the Company. Roger Eichel was elected to his present position in May, 1993 and prior thereto, he was Secretary of the Company. Robert J. Stiehl, Jr. was elected to his present position in January 1995. For in excess of five years prior thereto, he was Vice President - Finance. Frank Simms was elected Chief Financial Officer in November 1997 and had previously been Vice President of Finance since May 1995. Prior to joining Hampton he was the Chief Financial Officer of Riverside Manufacturing Co. for in excess of five years.
David Fuchs, Steven Fuchs and Roger Eichel are also Directors of the Company.
ITEM 2.
ITEM 2. PROPERTIES
Hampton operates three domestic manufacturing plants, one manufacturing plant in the Caribbean and three domestic distribution centers. The Company's sales and merchandising personnel occupy a building located in New York City. Hampton's principal executive and - -3- administrative offices are located in North Carolina. All of these properties are owned by the Company. The New York office is subject to a mortgage loan. The executive and administrative offices located in North Carolina are financed through an Industrial Revenue Bond issued by a state governmental agency. All bonds and mortgages are guaranteed by the Company and are secured by the underlying assets.
The Company believes that its plants and facilities are in good repair and adequate in respect to its foreseeable needs. The machinery and equipment utilized in its facilities are considered by management to be modern and efficient.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no significant legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None - -4- PART II ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Principal Market
The principal market on which Hampton's Common Stock is traded is the American Stock Exchange under the symbol HAI.
(b) Stock Price and Dividend Information
The Company has not paid a cash dividend on its common stock since 1973. The Board of Directors declared a 10% common stock dividend which was paid on July 2, 1998 to stockholders of record on June 2, 1998. Market prices per share have been restated for all periods presented to reflect the stock dividend. The present credit agreement includes restrictive covenants which, among other things, prevent the payment of cash dividends.
(c) Approximate Number of Holders of Common Stock
The number of holders of record of Hampton's Common Stock as of December 26, 1998 was approximately 306, including, as a single holder of record, brokerage firms having more than one stockholder account. - -5- ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The Company has not paid cash dividends on its common stock since 1973. The Board of Directors declared a 10% common stock dividend which was paid on July 2, 1998 to stockholders of record on June 2, 1998. Basic and diluted earnings per share and outstanding stock options have been restated for all periods presented to reflect the stock dividend.
The Company uses the LIFO method of costing principally all of its inventories to more fairly present the results of operations by matching current costs with current revenues. The LIFO method had the effect of increasing net earnings by $514,500 ($.10 per share) in 1998, decreasing net earnings by $404,900 ($.08 per share) in 1997 and increasing net earnings by $553,900 ($.11 per share) in 1996. Inventories increased in 1998. Income realized as a result of inventory liquidation was not significant in 1997 and $668,200 ($.13 per share) in 1996.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analyses of the consolidated results of operations and financial conditions should be read in conjunction with the accompanying financial statements and related notes to provide additional information concerning the Company's financial activities and conditions. - -6- Results of Operations
The Company is engaged in the business of manufacturing and selling apparel and operates in one industry segment. Substantially all sales to third party customers are made to destinations in the United States. The products consist principally of men's and boys' shirts and men's and women's sleepwear, which are produced domestically and in Central America. In addition, sport and dress shirts, sweaters, activewear, outerwear and swimtrunks, for both men and boys are imported from unaffiliated sources located primarily in the Far East.
Fiscal 1998 Versus Fiscal 1997
Net sales for 1998 increased by $27,290,000 or 16.7%. An increase of 1.9% in the average selling price per dozen is primarily reflective of a small change in product mix. Total dozens shipped increased by 14.6%. Branded product represented 40.7% of net sales in 1998 as compared to 31.2% in 1997. The increase in sales of branded product was $26,606,000 for 1998.
Gross profit increased by $7,602,000 for 1998. As a percent of sales this represented an increase of 0.8%, from 22.7% in 1997 to 23.5% in 1998. The improvement in the gross profit was due primarily to the increased sales. Sales of branded products generally have higher margins than non-branded products. However, gross profit was negatively impacted by an increase in allowances of approximately $859,000. Late deliveries of product resulted in an increase of - -7- allowances of approximately $400,000 and the unseasonable warm weather resulted in an additional increase of approximately $275,000 to major department stores.
Selling, general and administrative expenses increased by $4,426,000 in 1998. As a percent of sales there was a decrease from 20.8% in 1997 to 20.2% in 1998. Increases in royalty expense of $1,223,000 and advertising expenses of $849,000 were primarily due to the increase in sales of branded product. As a result of the introduction of new brands for 1998 and planned expanded offerings in 1999, sample expense increased by $940,000 during 1998. During 1998, compensation and related fringe benefits increased by approximately $1,556,000 as a result of the Company expanding its management team in a variety of supporting roles and the effect of the costs related to certain individuals that were hired in 1997 who were on the payroll for the full year of 1998.
A portion of the Company's corporate office building in New York is leased to third parties. Operations related to this are classified as Rental Income - net.
Interest expense increased by $878,000 from 1997. This is the result of an increased level of borrowing during the year in order to support higher levels of receivables and inventory to support the increased sales volume.
The effective tax rate increased to 36.7% in 1998 from 34.0% in 1997. The rate in 1997 was favorable impacted by the utilization of net operating loss carryfowards for which reserves had been previously established in 1996.
Fiscal 1997 Versus Fiscal 1996
Net sales for 1997 increased by 1.4%. An increase of 2.4% in the average selling price was partially offset by a decline of 1.0% in units shipped. The increase in average selling price is primarily due to the greater influence of the "branded" product sales.
Gross profit margins increased by $2,093,000 for 1997. As a percent of sales this represented an increase of 0.9%, from 21.8% in 1996 to 22.7% in 1997, which is primarily attributable to increase sales of branded product. Gross profit was negatively impacted in 1997 due to an increase in allowances provided to customers of approximately $761,000. Also, as a result of late delivery of product, approximately $963,000 was incurred for air shipments which occurred primarily in the fourth quarter.
Selling, general and administrative expenses increased by $4,698,000 in 1997. As a percent of sales there was an increase from 18.2% in 1996 to 20.8% in 1997. Royalty and advertising expenses were 2.4% as compared to 2.1% of sales in 1996, increasing by $541,000 in 1997. Sales of "Branded" product, for which royalty expense is recorded, increased from 23.3% of sales in 1996 to 27.5% in 1997. During 1997, the Company expanded its management team. Three new divisional presidents were hired as well as a new Vice President of Corporate Marketing. Certain other individuals were hired in design, sales and sales administration. These new positions along with certain related terminations resulted in an increase in recruiting and severance expenses of $744,000. Compensation and related fringe benefits increased by approximately $1,815,000 in 1997 as compared to 1996.
During 1997 several new license agreements were entered into which will not contribute to sales until 1998. The development of these new brands negatively impacted 1997 by $1,129,000. - -8- A portion of the Company's corporate office building in New York is leased to third parties. Operations related to this are classified as Rental Income - net.
During 1996 gains on sale of property were $656,191. In 1997 losses on sale of property were $64,279.
Interest expense decreased by $495,000 from 1996. This decline is the result of a lower level of borrowing during the year which resulted from lower average levels of receivables and inventory.
The effective tax rate increased to 34.0% in 1997 from 31.6% in 1996. The rate differential is impacted by the utilization of jobs credit carryovers and reversal of prior year over accruals and the equity in earnings of the unconsolidated subsidiary which is not subject to U. S. federal taxation until such earnings are repatriated.
Liquidity and Capital Resources
On May 3, 1996, the Company entered into a credit facility with BNY Financial Corporation, as Agent ("Existing Facility"). The Existing Facility provides for a maximum line of credit of $100,000,000, which includes both direct loans and letters of credit. The initial proceeds of the Existing Facility were used to repay the outstanding indebtedness under the Company's previously existing bank line of credit.
Availability under the Existing Facility is based on a formula of eligible accounts receivable and eligible inventory and provides for a seasonal overadvance of up to $13,500,000 within the $100,000,000 maximum line of credit. Direct borrowings bear interest at the London Interbank Offered Rate, plus the applicable margin (as defined in the Existing Facility) or the Prime Rate, at the option of the Company. Borrowings are collateralized by accounts receivable, inventory and general intangibles of the Company and its subsidiaries and the Existing Facility expires in May 1999. Amounts outstanding at December 26, 1998 have been classified as short-term since the facility expires on May 3, 1999.
The Existing Facility contains financial covenants, including but not limited to, tangible net worth and interest coverage, restricts fixed asset purchases and does not allow for the payment of cash dividends. The Company is not required to maintain compensating balances, however, it is required to pay a fee of 1/4% of 1% per annum on the unused portion of the total facility and certain other administrative costs.
On January 29, 1999, the Company entered into an agreement with the Chase Manhattan Bank, as agent for a new credit facility ("New Facility"). It is anticipated that this New Facility will close on May 3, 1999 at the time the Existing Facility expires. The term of the New Facility is for a period of three years and provides for a line of credit of $80,000,000. However, at the Company's option, the line may be increased to $100,000,000 during the period of May1 through October 31 of each year. Direct borrowings will bear interest at the London Interbank Offered Rate, plus the applicable margin (as defined) or the Prime Rate, at the option of the Company. Borrowings will be collateralized by accounts receivable, inventory and general intangibles of the Company. The New Facility will contain financial covenants, including but not limited to a restriction on the payment of dividends, minimum levels of earnings, maintenance of certain ratios and a monthly measure of credit usage as compared to a formula based on collateral. Seasonal overadvances of up to $10,0000,000 will be allowed. - -9- At December 26, 1998 the Company did not meet the Minimum tangible net worth, Fixed charge coverage ratio and the minimum E.B.I.T.D.A. covenants of its Existing Facility. A wavier for these violations was received on March 11, 1999. Management is confident that the new credit facility will close on or before May 3, 1999, when the existing credit facility expires. Management believes that the line of credit that will become available under the New Facility, together with the cash expected to be generated from operations, will be adequate to meet the Company's financing needs for the foreseeable future.
Outstanding borrowings under the Existing Facility amounted to $14,708,000 at December 26, 1998 as compared to $5,108,000 in 1997. The increased borrowings were primarily used to finance the increased level of accounts receivable and inventories. At December 26, 1998, the Company had unused lines of credit of $19,634,000 for direct borrowings or the issuance of letters of credit. This availability is in addition to the outstanding direct borrowings of $14,708,000 and letters of credit of $18,465,000 outstanding at the end of 1998. Net working capital as of the end of 1998 was $38,737,000 as compared to $40,648,000 in 1997. The working capital ratio at the end of 1998 was 2.3:1 as compared to 3.7:1 in 1997.
During 1998, cash used in operations approximated $5,600,000 which primarily related to higher levels of accounts receivables and inventories. In 1997, cash used by operations was approximately $2,000,000. In 1997, an increase in inventory levels was the primary reason for the use of funds.
Additions to fixed assets, which represented normal replacement and upgrading of equipment, were approximately $1,700,000 funded from operations and $408,000 funded from capitalized leases in 1998 as compared to $1,033,000 in 1997. Expenditures for software cost were approximately $2,100,000 in 1998 as compared to $294,000 in the prior year. The 1998 amount is comprised of $1,061,000 of personnel cost related to the new computer systems and $1,039,000 of software cost. These costs will be amortized over a period of five years beginning in 1999. Capital expenditures for fixed assets in 1999 are expected to be equal to the 1998 levels while expenditures for software and related personnel costs are expected to decrease substantially. Management anticipates such expenditures will be financed from operations.
The increase in other assets in 1998 is due to unamortized in- store fixture costs which are being amortized over 36 months. During 1998, $496,000 was spent on fixtures as compared to $1,217,000 in 1997. Amortization of these costs was $731,000 in 1998 as compared to $470,000 in 1997. Also, personnel costs related to the design and implementation of the new computer systems of $1,061,000 is included in fixed assets and will be amortized over a period of five years beginning in 1999. During 1998 approximately $1,075,000 was spent on purchased software which is primarily related to the conversion of the business systems. These costs are amortized over five years. In order to provide funding for the Supplemental Retirement Plan for Key Employees, the Company began a program of purchasing life insurance policies on the lives of the participants. Beginning January 1998 the Company instituted a Nonqualified Deferred Compensation Plan for Key Executive Employees which is also funded by Company owned life insurance policies. The cash surrender value of these policies was $601,000 at December 26, 1998.
During the second quarter ending June 27, 1998, the Company granted 363,550 common stock options at an average exercise price of $6.60 per option. The Board of Directors declared a 10% stock dividend which was paid on July 2, 1998, to stockholders of record on June 2, 1998. For - -10- the twelve months ended December 26, 1998, 3,740 options have been exercised and 19,910 options were cancelled. As of December 26, 1998, 133,210 options were exercisable.
In 1993, the Company entered into two joint ventures in Central America for the purpose of producing apparel under the Caribbean Basin Incentive program or as imports. Effective December 1, 1996, the Company purchased the 50% ownership interest of its joint venture partner in one of the ventures for $1,267,000. This entity has been consolidated since the date of acquisition. This transaction resulted in recording goodwill of $240,000 which is being amortized over 10 years. The Company continues to maintain a 50% interest in the other joint venture.
Year 2000 Issues
The Company has been in the process of assessing the various issues related to the year 2000 for the past two years. As a result of its initial studies, in 1996 management decided to convert all information systems to new computer hardware and software. All new hardware and software have been certified by the appropriate vendors as being year 2000 compliant. To date, the financial systems; accounts payable, accounts receivable, payroll and human resources have been completed. Also, the Company's internal network of LAN's, WAN's and other communication systems have been converted to year 2000 compliant systems.
The systems that maintain and manage customer orders, inventory and production are critical to the Company's success. In the fall of 1997, systems were identified and purchased that would meet the Company's requirements and be year 2000 compliant. In the first quarter of 1998 testing began on these new systems. All significant functions have been successfully tested. Starting in the third quarter of 1998 and continuing into the fourth quarter, the process of converting data onto the new systems began. During late November and December 1998, a complete "parallel" of the new systems was begun to insure that all critical functions are addressed. It is expected that on March 31, 1999 the conversion process will be completed and all information systems will have been successfully installed.
Over this time period approximately $1,000,000 has been spent on hardware systems, which includes computer hardware, infared scanners, printers and telephone systems. Expenditures for software has approximated $750,000. The personnel cost related to the design and implementation of the systems is approximately $1,060,000 and has been included in fixed assets.
Non-information technology systems, which include items such as burglar and fire alarms, copiers, elevators and various sewing equipment are being addressed by an internal team and it is expected that all of these systems will be year 2000 compliant by end of the second quarter of 1999. This project is approximately 75% complete. No major expenditures are anticipated for these areas.
The Company is also reviewing its external relationships to address potential year 2000 impacts arising from interfaces with customers, suppliers and service providers. The Company is currently communicating with its significant suppliers and key customers to assess their ability to meet their sales and purchasing obligations despite the year 2000 issue, and will continue to monitor this into the year 2000. By the end of the second quarter of 1999, the Company will have verified that all significant suppliers which will have Company production in process at the end of 1999, will be year 2000 compliant. This process is approximately 75% complete. - -11- The Company sells to approximately 2,600 customers. Forty of these customers account for approximately 70% of the total sales. These customers represent the largest retailers in the United States. A majority of these customers maintain a trading partnership with the Company through E.D.I. transactions. As a result, the Company has continuous dialogue with these customers in order to determine whether they will be year 2000 compliant. Surveys are being sent to the remaining customers to attempt to determine the extent of their compliance with year 2000 issues. Risk associated with this group of customers would be excess bad debts or lower sales volume if they cease operations and no single customer would have a material adverse affect on the Company if it ceased operations. However, if a large group of these customers ceased operations the Company would be negatively impacted. Management is unable to quantify this risk at this time.
For 1998 the Company imported approximately 58% of its total product and 24% was manufactured in the Caribbean area. These areas are critical to the Company's success. Both sources of product require that the product is shipped on the ocean, then clear U.S. Customs and then utilize domestic transportation systems. Should the year 2000 problem significantly affect either the U.S. Customs or transportation systems, disruption of receiving product would occur which would result in material adverse affect on the operating results or financial condition. It is not feasible for the Company to assess the ability of these entities to be year 2000 compliant.
While there can be no absolute assurance that the Company will successfully address all year 2000 issues in a timely basis, it is anticipated that the Company will have all of its systems in compliance by the end of the second quarter of 1999.
Management does not plan to develop contingency plans that relate to key systems. Contingency plans will be developed in the event that the Company determines that it is at risk with suppliers, customers or manufacturing systems. Contingency plans will include, but will not be limited to consideration of alternative sources of supply, customer communication plans, plant and business response plans.
The Company believes the year 2000 project will be completed prior to the year 2000. However, considerable work remains to be accomplished in a limited period of time and unforeseen difficulties may arise which could adversely affect the Company's ability to complete its systems modifications correctly, completely, on time and/or within its cost estimate. In addition, there can be no assurance that customers, suppliers and service providers on which the Company relies will resolve their year 2000 issues accurately, thoroughly and on time. Failure to complete the year 2000 project by the year 2000 could have a material adverse affect on future operating results and financial condition.
Impact of Inflation
General inflation in the economy has increased operating expenses of most businesses. The Company has provided compensation increases generally in line with the inflation rate and incurred higher prices for materials, goods and services. The Company continually seeks methods of reducing cost and streamlining operations while maximizing efficiency through improved internal operating procedures and controls. While the Company is subject to inflation as described above, management believes that inflation currently does not have a material effect on the Company's operating results, but there can be no assurance that this will continue to be so in the future. - -12- New Financial Accounting Standards
During Fiscal 1997, the Financial Accounting Standards Board issued the following accounting standards: Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130); and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). The Company has adopted SFAS No. 130 and SFAS No. 131 in the current fiscal year. Neither standard has had a material impact on the Company.
Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. As such, final results could differ from estimates or expectations due to factors such as, information currently available is preliminary and incomplete, government regulation and policies may change from that anticipated in present business decisions, business conditions in the retail environment and market prices for raw materials may change to a degree that existing plans may have to be substantially revised. For any of these factors, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. - -13-
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Hampton Industries, Inc.
We have audited the accompanying consolidated balance sheets of Hampton Industries, Inc. and subsidiaries as of December 26, 1998 and December 27, 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 26, 1998, December 27, 1997 and December 28, 1996. Our audits also included the financial statement schedule listed in the index at Item 14 (a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Hampton Industries, Inc. and subsidiaries as of December 26, 1998 and December 27, 1997, and the results of their operations and their cash flows for the years ended December 26, 1998, December 27, 1997 and December 28, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
S/Deloitte & Touche LLP ________________________
February 26, 1999 (March 11, 1999 as to Note F) New York, New York - -14-
See notes to consolidated financial statements - -15-
See notes to consolidated financial statements. - -16-
See notes to consolidated financial statements. - -17-
See notes to consolidated financial statements. - -18-
HAMPTON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 26, 1998, DECEMBER 27, 1997 AND DECEMBER 28, 1996 1997 AND DECEMBER 28, 1996
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business The Company is engaged in the business of manufacturing and selling apparel and operates in one industry segment. Substantially all sales to third party customers are made to destinations in the United States. The products consist principally of men's and boys' shirts and men's and women's sleepwear, which are produced domestically and in Central America. In addition, sport and dress shirts, sweaters, activewear, outerwear and swimtrunks, for both men and boys are imported from unaffiliated sources located primarily in the Far East.
Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany profits, transactions and balances have been eliminated. The Company has an investment in a 50% owned but not controlled entity which is accounted for by the equity method.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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.
Inventories Inventories are carried at the lower of cost or market value. As described in Note B, the cost of substantially all inventory is determined by the last-in, first-out (LIFO) method.
Fixed Assets Expenditures for buildings, equipment and improvements are capitalized and depreciated or amortized on a straight-line basis over their estimated useful lives. Estimated useful lives of assets are based upon the following ranges: land improvements, 30 years, buildings and leasehold improvements, 30 to 35 years, machinery and equipment, 3 to 15 years and furniture and fixtures, 5 to 10 years.
In-Store Displays The costs for in-store point of sale displays for certain customers are borne by the Company in whole or in part. Such costs are capitalized as other assets and amortized over a thirty-six month period.
Deferred Financing Costs The costs associated with obtaining the Company's Existing Credit facility have been deferred and are being amortized over the term of the agreement. - -19- Capitalized Conversion Costs As a result of the conversion of the Company's computer systems, incremental personnel and related fringe benefit expense of those individuals directly involved in this process have been capitalized in accordance with the provisions of Statement of Position ("S.O.P.") 98-1. Such costs are capitalized as software costs along with other software purchased from third parties and are amortized over a five year period.
Evaluation of Long-Lived Assets Long-lived assets are assessed for recoverability on an ongoing basis. In evaluating the fair value and future benefits of long-lived assets, their carrying value would be reduced by the excess, if any, of the long-lived asset over management's estimate of the anticipated undiscounted future net cash flows of the related long-lived asset. There were no adjustments to the carrying amount of long-lived assets in the years ended December 26, 1998 and December 27, 1997 resulting from the Company's evaluation.
Revenue Recognition Sales are recognized upon shipment of product, which is when title passes to the customer. No sales made on consignment. All returns are required to be authorized by the Company and reserves are provided for estimated returns.
Income Taxes Deferred income taxes are provided to reflect the tax effect of temporary differences between financial statement income and taxable income in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Basic and Diluted Earnings per Common Share The Company has adopted the provisions of Statement of Financial Accounting Standard No. 128 "Earnings per share" (the "Statement"). The Statement establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock such as employee stock options. The Statement replaces the presentation of primary earnings per share with a presentation of basic earnings per share and also requires, among other things, dual presentation of basic and diluted earnings per share for all entities with complex capital structures. Basic earnings per share excludes dilution and is computed by dividing net earnings by the weighted-average number of shares outstanding for each period presented. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding plus dilutive potential common shares which will result from the exercise of stock options.
- -20- Stock Options and Warrants Financial Accounting Standards Board Statement Number 123, "Accounting for Stock-Based Compensation" which encourages, but does not require, companies to recognize compensation expense of grants for stock, stock options and other equity instruments to employees based on fair value. The Company has elected to continue to follow the provisions of APB Opinion 25 and related Interpretations in accounting for employee stock options.
Fair Value of Financial Instruments For financial instruments including cash, accounts receivable and payable, accruals, notes payable - banks and current maturities of long-term debt, it was assumed that the carrying amount approximated fair value because of their short maturity. The carrying amount of the non-current portion of mortgage notes due through the year 2000, all of which bear interest at floating rates, are also assumed to approximate their fair values.
Investments In and Advances to Unconsolidated Affiliate The investment in the remaining joint venture is carried on the equity basis, which approximates the Company's equity in the unconsolidated entity's underlying net book value. Advances due from the unconsolidated entity were $261,844 and $284,130 at December 26, 1998 and December 27, 1997 respectively.
Principally all inventories are valued at the lower of last-in, first-out (LIFO) cost or market. Information related to the first-in, first-out (FIFO) method may be useful in comparing operating results to those of companies not on the LIFO method. On a supplemental basis, if inventories had been valued at the lower of FIFO cost or market, inventories at December 26, 1998 and December 27, 1997 would have been approximately $39,800,000 and $35,300,000, respectively. The LIFO valuation method had the effect of increasing net earnings by $514,500 ($.10 per share) in1998, decreasing net earnings by $404,900 ($.08 per share) in 1997 and increasing net earnings by $553,900 ($.11 per share) in 1996. Inventories increased in 1998. Income realized as a result of inventory liquidation was not significant in 1997 and was $668,200 ($.13 per share) in 1996. Inventory in transit of $1,934,496 in 1998 and $4,675,046 in 1997 are included in finished goods. - -21-
- -22-
Net operating loss carryforwards for state income tax purposes expire as follows: [CAPTION] Year Amount [S] [C] 1999 $1,088,704 2000 2,115,777 2001 1,529,629 2002 64,688 Thereafter 1,291,382 ---------- $6,090,180 ==========
Annual maturities of debt are as follows:
1999 $18,923,100 2000 73,320 Thereafter 229,100 ----------- $19,225,520 ===========
(i) On May 3, 1996, the Company entered into a credit facility with BNY Financial Corporation, as Agent ("Existing Facility"). The Existing Facility provvides for a maximum line of credit of $100,000,000, which includes both direct loans and letters of credit. The initial proceeds of the Existing Facility were used to repay the outstanding indebtedness under the Company's previously existing bank line of credit.
Availability under the Existing Facility is based on a formula of eligible accounts receivable and eligible inventory and provides for a seasonal overadvance of up to $13,500,000 within the $100,000,000 maximum line of credit. Direct borrowings bear interest at the London Interbank Offered Rate, plus the applicable margin (as defined in the Existing Facility) or the Prime Rate, at the option of the Company. Borrowings are collateralized by accounts receivable, inventory and general intangibles of the Company and its subsidiaries and the Existing Facility expires in May 1999. Amounts outstanding at December 26, 1998 have been classified as short-term since the facility expires on May 3, 1999.
The Existing Facility contains financial covenants, including but not limited to, tangible net worth and interest coverage, restricts fixed asset purchases and does not allow for the payment of cash dividends. The Company is not required to maintain compensating balances, however, it is required to pay a fee of 1/4% of 1% per annum on the unused portion of the total facility and certain other administrative costs.
On January 29, 1999, the Company entered into an agreement with the Chase Manhattan Bank, as agent for a new credit facility ("New Facility"). It is anticipated that this New Facility will close on May 3, 1999 at the time the Existing Facility expires. The term of the New Facility is for a period of three years and provides for a line of credit of $80,000,000. However, at the Company's option, the line may be increased to $100,000,000 during the period of May1 through October 31 of each year. Direct borrowings will bear interest at the London Interbank Offered Rate, plus the applicable margin (as defined) or the Prime Rate, at the option of the Company. Borrowings will be collateralized by accounts receivable, inventory and general intangibles of the Company. The New Facility will contain - -24- financial covenants, including but not limited to a restriction on the payment of dividends, minimum levels of earnings, maintenance of certain ratios and a monthly measure of credit usage as compared to a formula based on collateral. Seasonal overadvances of up to $10,0000,000 will be allowed.
At December 26, 1998 the Company did not meet the Minimum tangible net worth, Fixed charge coverage ratio and the minimum E.B.I.T.D.A. covenants of its Existing Facility. A wavier for these violations was received on March 11, 1999. Management is confident that the new credit facility will close on or before May 3, 1999, when the existing credit facility expires. Management believes that the line of credit that will become available under the New Facility, together with the cash expected to be generated from operations, will be adequate to meet the Company's financing needs for the foreseeable future.
(ii) The mortgage notes and capitalized lease obligations are collateralized by building and property having a carrying value at December 26, 1998 of approximately $5,190,078. The effective interest rate on the aggregate amount of capitalized leases at December 26, 1998 was 6%. The effective interest rate on the mortgage note due in 2000 at December 26, 1998 was 7.41%.
At December 26, 1998, letters of credit amounting to approximately $18,644,539 were outstanding which relate to purchase commitments issued to foreign suppliers of approximately $29,364,169.
G. STOCKHOLDERS' EQUITY
Preferred Stock The Company has authorized 14,140.5 shares of $7 cumulative First Preferred Stock, par value of $100, none of which is issued. In addition, the Company has authorized 1,000,000 shares of Second Preferred Stock, par value of $1, none of which has been issued. The Board of Directors is authorized to fix designations, relative rights, preferences and limitations on the stock at the time of issuance.
Common Stock The Board of Directors declared a 10% common stock dividend which was paid on July 2, 1998 to stockholders of record on June 2, 1998. Basic and diluted earnings per share and outstanding stock options have been restated for all periods presented to reflect the stock dividend. The Company has a non-qualified stock option plan (the "Plan") under which there are presently reserved 1,059,000 shares of stock. The Plan is administered by a committee designated by the Board of Directors. Options granted to eligible employees are exercisable in increments of 20% annually. Stock to be offered under the Plan consists of shares, whether authorized but unissued or reacquired by the Company, of common stock of the Company. - -25-
As of December 26, 1998, 135,850 shares were exercisable.
The Company applies the provisions of APB Opinion 25 and related Interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for the foregoing options. The excess, if any, of the fair market value of shares on the measurement date over the exercise price is charged to operations each year as the options become exercisable. Had compensation cost for these options been determined using the Black-Scholes option- pricing model described in FASB Statement 123, the Company would have recorded aggregate compensation expense of approximately $490,100 for the grants prior to 1996, $234,300 for the 1997 grants and $896,000 for the 1998 grants. These amounts would be expensed at the rate of 20% per annum over the option's vesting period. The assumptions used in the option-pricing model include risk-free interest rates from 5.5% to 6.7%, expected volatility of 30.9% to 39.3% and a 5 year expected life. The pro forma impact of following the provisions of FASB Statement 123 on the Company's operations and income per share would be as follows:
- -26- H. PROFIT SHARING PLANS
The Company has a Qualified Profit Sharing and Retirement Plan (the "Plan") that covers all associates of the Company. During 1996, 1997 and 1998, the Company made a matching contribution of 40% of the deferral amount that the associates elect to make (as limited by the Internal Revenue Service Code) and has set the matching contribution rate for 1999 at 40%. The Company has the option of changing the matching contribution each year, the right to amend, modify or terminate the Plan.
The Company also maintains a Supplemental Retirement Plan for Key Employees (the Supplemental Plan) to permit certain key associates to defer receipt of current compensation in order to provide retirement and death benefits on behalf of such associates. Company profit sharing credits are determined at the discretion of the Board of Directors. Amounts of profit sharing credits are vested in the same manner as vesting occurs under the Company's Qualified Profit Sharing and Retirement Savings Plan. An annual return equal to the Moody's AAA Corporate bond rate is added to each participant deferred compensation account balance and employer profit sharing credit account balance. The Company may provide supplemental profit sharing credits to one or more active participants in the Supplemental Plan, the amount of which shall be determined by the Board of Directors in its sole and absolute discretion. The participants in this Supplemental Plan are no longer able to make salaried deferral contributions to this plan.
The Supplemental Plan is not intended to be a qualified plan under the provisions of the Internal Revenue Code. It is intended to be unfunded and, therefore, all compensation deferred under the Supplemental Plan is held by the Company and commingled with its general assets. However, in 1998, the Company purchased life insurance policies on the lives of the participants of which it is the beneficiary. It is the intention of the Company that distributions under the Supplemental Plan will continue to be made from general assets of the Company until such time that the cash surrender value of these policies will provide the funding necessary for the payment of future benefits to the participants.
Effective January 1, 1998, the Company adopted a Nonqualified Deferred Compensation Plan for Key Executives (the "Deferred Executive Plan") to permit certain key executives to defer a portion of compensation in order to provide retirement and death benefits on behalf of such employees. The Company may provide a matching contribution to the Deferred Executive Plan. The Company may provide supplemental profit sharing credits which are determined at the discretion of the Board of Directors. Amounts of matching contributions and profit sharing credits are vested in the same manner as vesting occurs under the Company's Qualified Profit Sharing and Retirement Savings Plan. For 1998 the Company established a matching rate of 20% of the executives' deferrals. For 1999 the Company has established a matching rate of 40% of the executives' deferrals. The Deferred Executive Plan is not intended to be a qualified plan under the provisions of the Internal Revenue Code. It is intended to be unfunded and, therefore, all compensation deferred under the Deferred Executive Plan is held by the Company and commingled with its general assets. However, executives' deferrals and the Company's match are deposited each month in Company owned insurance contracts. Within these contracts the employees have the option of selecting a variety of investments. The return on these underlying investments will determine the amount of earnings credit. The Company has the option of changing the matching contribution each year and the right to amend, modify or terminate the Deferred Executive Plan. - -27-
Effective January 1, 1999, the Company adopted a Nonqualified Deferred Compensation Plan for Key Employees (the "Deferred Key Plan") to permit certain key employees to defer receipt of current compensation up to a maximum of $10,000 per year in order to provide retirement and death benefits on behalf of such employees. The Company may provide a matching contribution to the Deferred Key Plan. The Company may provide supplemental profit sharing credits which are determined at the discretion of the Board of Directors. Amounts of matching contributions and profit sharing credits are vested in the same manner as vesting occurs under the Company's Qualified Profit Sharing and Retirement Savings Plan. For 1999 the Company has established a matching rate of 40% of the employees deferrals. The Deferred Plan is not intended to be a qualified plan under the provisions of the Internal Revenue Code. It is intended to be unfunded and, therefore, all compensation deferred under the Deferred Key Plan is held by the Company and commingled with its general assets. However, employee deferrals and the Company's match are deposited each month in Company owned insurance contracts. Within these contracts the employees have the option of selecting a variety of investments. The return on these underlying investments will determine the amount of earnings credit. The Company has the option of changing the matching contribution each year and the right to amend, modify or terminate the Deferred Key Plan.
I. SELECTED QUARTERLY DATA (UNAUDITED)
- -28- J. CONCENTRATION OF CREDIT RISK
Trade receivables potentially subject the Company to credit risk. The Company extends credit to its customers based upon an evaluation of the customer's financial condition and credit history and generally does not require collateral. The Company has historically incurred minimal credit losses. The Company's broad range of customers includes many large multi- outlet retail chains, two of which account for a significant percentage of sales volume, as follows:
J.C. Penney Co., Inc. 14% 16% 15% Wal-Mart Stores, Inc. 12% 15% 16%
K. LITIGATION
The Company and its subsidiaries are party to various legal actions arising in the ordinary course of business. In management's opinion, the ultimate disposition of these matters will not have a material adverse effect on its financial condition or results of operations.
ITEM 9.
ITEM 9. DISAGREEMENTS OF ACCOUNTING AND FINANCIAL DISCLOSURE
None - -29- PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" on page 2 of the Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders, which information is incorporated herein by reference. Also see information contained under the caption "Executive Officers of Registrant" on page 2 hereof.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Officers and Directors" on page 4 of the Registrant's 1999 Proxy Statement, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities" on page 1 of the Registrant's 1999 Proxy Statement, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Transactions with Management" on page 9 of the Registrant's 1999 Proxy Statement, which information is incorporated herein by reference. - -30- PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. Financial Statements
The following consolidated financial statements of Hampton Industries, Inc. and its subsidiaries are included in Part II, Item 8:
Independent Auditors' Report ___________________________________14
Consolidated balance sheets - December 26, 1998 and December 27, 1997 _________________________________________________________15
Consolidated statements of operations - years ended December 26, 1998, December 27, 1997 and December 28, 1996 ____________________16
Consolidated statements of stockholders' equity - years ended December 26, 1998, December 27, 1997 and December 28, 1996 ___________________17
Consolidated statements of cash flows - years ended December 26, 1998, December 27, 1997 and December 28, 1996 ___________________18
Notes to consolidated financial statements __________________19-29
(a)2. Financial Statement Schedule
Schedule II - Valuation and qualifying accounts_________________32
All other schedules have been omitted because they are inapplicable or not required, or the information is included elsewhere in the financial statements or notes thereto.
(a)3. Exhibits
Exhibit No. 21 - Subsidiaries of the Company ___________________33
(b) Reports on Form 8-K
None - -31- HAMPTON INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
NOTES:
(A) Recoveries of accounts previously written off. (B) Uncollectible accounts written off.
- -32- Exhibit 21
HAMPTON INDUSTRIES, INC.
Subsidiaries
Name State of Incorporation Hamptex, Inc. North Carolina IGM CORP., S.A. DE C.V. El Salvador
Hampton owns 100% of the outstanding stock of each subsidiary and they are included in the consolidated financial statements. - -33- SIGNATURES
Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Hampton Industries, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HAMPTON INDUSTRIES, INC.
S/DAVID FUCHS _____________________________________ David Fuchs, Chairman and Director
S/STEVEN FUCHS _____________________________________ Steven Fuchs, President and Director
S/ROGER M. EICHEL _____________________________________ Roger M. Eichel, Senior Vice President and Secretary
S/ROBERT J. STIEHL, JR. _____________________________________ Robert J. Stiehl, Jr., Executive Vice President - Operations and Treasurer
S/FRANK E. SIMMS _____________________________________ Frank E. Simms, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report had been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:
S/HERBERT L. ASH S/SOL SCHECHTER ______________________________ _____________________________________ Herbert L. Ash, March 12, 1999 Sol Schechter, March 12, 1999 (Director) (Director)
S/PAUL CHUSED S/BARBARA HENAGAN ______________________________ _____________________________________ Paul Chused, March 12, 1999 Barbara Henagan, March 12, 1999 (Director) (Director)
The Company's annual report to stockholders and proxy material is to be furnished to its security holders subsequent to the filing of the annual report on this form. Copies of such material will be furnished to the Commission when it is sent to security holders. - -34-