UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1999
OR
[ ] 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 1-6105
Hampton Industries, Inc.
(Exact name of registrant as specified in its charter)
North Carolina 56-0482565
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
2000 Greenville Hwy., P. O. Box 614, Kinston, NC 28502-0614
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (252) 527-8011
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class: which registered:
Common Stock $1.00 par value per share American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of The Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
----- -----
As of November 12, 1999 there were 5,553,374 shares of common
stock outstanding.
<TABLE>
HAMPTON INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 25, September 26, December 26,
1999 1998 1998
------------- ------------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 244,612 $ 240,583 $ 282,375
Accounts receivable - net 38,682,753 40,190,056 32,322,955
Inventories 79,014,587 50,432,973 35,593,471
Deferred income tax assets 361,062 409,145 361,062
Other current assets 2,748,572 2 847,178 944,952
------------ ------------ -----------
Total current assets 121,051,586 92,119,935 69,504,815
Property, plant, and equipment-net 20,225,545 17,647,010 19,866,851
Assets held for disposal - net 566,849 504,928 566,849
Investments in and advances to
unconsolidated affiliates 989,175 756,576 761,384
Other assets 2,458,595 3,351,545 2,103,008
------------ ------------ -----------
$145,291,750 $114,379,994 $92,802,907
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable-banks and current
maturities of long-term debt $ 53,636,496 $ 37,385,573 $18,923,100
Uncleared Checks 1,151,690 2,073,248 2,110,149
Accounts payable 14,688,832 5,799,495 6,164,437
Accrued liabilities 2,870,844 3,945,804 3,570,372
Income taxes (36,941) 1,158,346 -
------------- ------------ ------------
Total current liabilities 73,310,921 50,362,466 30,768,058
Deferred income tax liabilities 1,401,916 996,793 1,401,916
Long-term debt 14,302,420 3,748,351 302,420
Retirement plan obligations 3,966,982 3,733,580 3,988,847
------------- ------------ -----------
91,982,239 58,841,190 36,461,241
Stockholders' equity 53,309,511 55,538,804 56,341,666
------------- ------------ -----------
$145,291,750 $114,379,994 $92,802,907
============= ============ ===========
</TABLE>
Note: The consolidated balance sheet at December 26, 1998 has been taken from
the audited financial statements and condensed.
See notes to consolidated financial statements.
- -1-
<TABLE>
HAMPTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
--------------------------- --------------------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 50,169,967 $ 60,454,140 $118,020,288 $128,942,333
Cost of products sold 37,505,415 45,634,208 86,464,002 96,678,973
------------ ------------ ------------ ------------
Gross margin 12,664,552 14,819,932 31,556,286 32,263,360
------------ ------------ ------------ ------------
Selling, general and
administrative 12,927,361 10,453,736 34,315,595 27,830,043
Equity in earnings of
unconsolidated
affiliates (45,321) (67,259) (109,851) (121,321)
------------ ------------ ------------ ------------
Operating (loss) income (217,488) 4,433,455 (2,649,458) 4,554,638
------------ ------------ ------------ ------------
Other (income) expense:
Rental income (237,002) (220,387) (702,202) (696,788)
(Gain) loss on disposal
of fixed assets (3,402) 47 80,125 (1,751)
Other (income)
expense-net (16,934) 46,271 (36,212) (43,248)
Interest expense 1,301,860 1,158,425 2,880,300 2,597,541
------------ ------------ ------------ ------------
1,044,522 984,356 2,222,011 1,855,754
------------ ------------ ------------ ------------
(Loss) income before
income tax (benefit)
provision (1,262,010) 3,449,099 (4,871,469) 2,698,884
Income tax (benefit)
provision (470,000) 1,368,000 (1,840,000) 1,086,000
------------ ------------ ------------ ------------
Net (loss) income $ (792,010) $ 2,081,099 $ (3,031,469) $ 1,612,884
============ ============ ============ ============
Basic (loss) earnings
per common share ($.14) $.37 ($.55) $.29
==== ==== ==== ====
Weighted average
common shares
outstanding 5,553,374 5,553,071 5,553,374 5,551,994
========= ========= ========= =========
Diluted (loss)
earnings per share ($.14) $.37 ($.55) $.29
==== ==== ==== ====
Weighted average
common shares
outstanding and
common share
equivalents
(Common share
equivalents
have been excluded
for 1999 because
they are
anti-dilutive) 5,553,374 5,643,956 5,553,374 5,646,547
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
- -2-
<TABLE>
HAMPTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Additional
Common Stock paid-in Retained
Shares Amount Capital Earnings
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance December 26,1998 5,715,069 $5,715,069 $37,220,042 $18,283,899
Stock dividend 571,350 571,350 1,928,308 (2,500,344)
Net (loss) (3,031,469)
--------- ---------- ----------- -----------
Balance September 25,1999 6,286,419 $6,286,419 $39,148,350 $12,752,086
========= ========== =========== ===========
Total
Treasury Stock Stockholders'
Shares Amount Equity
--------- ---------- -----------
<S> <C> <C> <C>
Balance December 26,1998 666,406 $4,877,344 $56,341,666
Stock options exercised
Stock dividend 66,639 (686)
Net income (3,031,469)
--------- ---------- -----------
Balance September 25,1999 733,045 $4,877,344 $53,309,511
========= ========== ===========
</TABLE>
See notes to consolidated financial statements
- -3-
<TABLE>
HAMPTON INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Thirty-nine Weeks Ended
--------------------------------
September 25, September 26,
1999 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (3,031,469) $ 1,612,884
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Amortization 637,121 598,155
Depreciation 1,610,727 1,469,221
Deferred income taxes - (4,000)
LIFO credit (157,338) (277,251)
Reserve for doubtful accounts and
allowances 321,000 (430,000)
Retirement plan obligations (21,865) (179,900)
Loss on sale of fixed assets 80,125 1,751
Equity in earnings of
unconsolidated affiliates (109,851) (121,321)
Changes in current assets and current
liabilities:
Accounts receivable (6,680,798) (15,446,229)
Inventories on a FIFO basis (43,263,778) (19,798,725)
Other current assets (1,803,620) (332,875)
Uncleared Checks (958,459) (1,117,260)
Accounts payable 8,524,395 3,347,897
Accrued liabilities (700,215) 243,722
Income taxes (36,941) 1,090,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (45,590,966) (29,343,931)
----------- -----------
INVESTING ACTIVITIES:
Additions to fixed assets (1,395,951) (762,412)
Additions to software (665,993) (627,245)
Proceeds from sale of fixed assets 12,398 669,802
(Increase) decrease in investments
in and advances to unconsolidated
affiliates (117,940) 67,900
Increase in other assets (992,707) (1,276,247)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES: (3,160,193) (1,928,202)
----------- ------------
FINANCING ACTIVITIES:
Stock options exercised 18,438
Additions to debt - Banks 49,164,129 31,684,000
Payments on debt - Other (450,733) (361,666)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES: 48,713,396 31,340,772
----------- -----------
(DECREASE) INCREASE IN CASH (37,763) 68,639
CASH AT BEGINNING OF PERIOD 282,375 171,944
----------- -----------
CASH AT END OF PERIOD $ 244,612 $ 240,583
=========== ===========
Cash paid during the period:
- Interest $ 2,122,610 $ 1,930,204
=========== ===========
- Income taxes $ 39,963 $ 41,050
=========== ===========
NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stock Dividend $ 2,500,343 3,701,546
=========== ===========
</TABLE>
See notes to consolidated financial statements.
- -4-
HAMPTON INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 25, 1999 and September 26, 1998 is unaudited.)
1. BASIS OF PRESENTATION
The consolidated balance sheets as of September 25, 1999 and
September 26, 1998 and the consolidated statements of operations and
cash flows for the thirteen and thirty-nine week periods then ended
have been prepared by the Company, without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 25, 1999 and
September 26, 1998 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the audited financial statements and notes thereto
included in the Company's December 26, 1998 Annual Report to
shareholders. The results of operations for the period ended
September 25, 1999 are not necessarily indicative of the operating
results for the full year.
Certain reclassifications have been made to the consolidated
financial statements of September 26, 1998 to conform to classifications
used at September 25,1999.
2. CREDIT FACILITY
On May 5, 1999, the Company entered into a new credit facility
with The Chase Manhattan Bank, as Agent ("New Facility"). The New
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 New Facility were used to repay the outstanding
indebtedness under the Company's previously existing bank line of
credit.
Availability under the New Facility is based on a formula of
eligible accounts receivable and eligible inventory, determined
monthly, and provides for a seasonal over-advance of up to $10,000,000
within the $100,000,000 maximum line of credit. At the end of July
and August, the Company's borrowings exceeded the calculated
availability. These violations were waived. The Credit Agreement
was amended to reflect the changed financial results due to
effects of the Hurricane Floyd. Direct borrowings bear interest at
the London Interbank Offered Rate plus the applicable margin (as
defined in the New Facility) or the Prime Rate, at the option of the
Company. The applicable margin is determined by a ratio of adjusted
E.I.B.I.T.A. to interest expense. Borrowings are collateralized by
accounts receivable, inventory and general intangibles of the Company
and its subsidiaries. The New Facility expires in May 2002.
The New Facility contains financial covenants relating to minimum
levels of net income, interest coverage, capital expenditures,
leverage, 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 .1875 of 1% per annum on the unused
portion of the total facility plus certain other administrative costs.
Outstanding borrowings under the current facility amounted to
$64,000,000 at September 25, 1999 as compared to $36,792,000 at the
same time in 1998, under the previous facility agreement. A total of
$14,000,000 of the outstanding borrowings under the New Facility have
been classified as Long Term Debt. Net working capital at September
25, 1999 was $47,741,000 as compared to $41,757,000 in 1998. The
working capital ratio as of September 25, 1999 was 1.7:1 as compared
to 1.8:1 at the same time in 1998.
- -5-
3. STOCKHOLDERS' EQUITY
The Board of Directors declared a 10% stock dividend in 1998 and
1999. The dividends were payable on July 2nd to stockholders of record
on June 2nd of both years. Basic and diluted (loss) earnings per share have
been restated for all periods presented to reflect the stock
dividends. Stock options have also been restated to reflect the stock
dividends.
4. STOCK OPTIONS
The Company has a non-qualified stock option plan (the "Plan")
under which there are presently reserved 1,165,230 shares of common
stock. A committee designated by the Board of Directors administers
the Plan. 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. The exercise price of
options is equal to the fair market value on the date of each grant.
The exercise price may be paid in cash, common stock of the Company,
or a combination thereof. A summary of the changes in common stock
options during 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Price Weighted
Number of Range per Average Price
Shares Share per Share
--------- ------------- -------------
<S> <C> <C> <C>
Outstanding at December 27,1997 471,537 $3.72 - $7.85 $4.51
Granted 399,905 $5.99 - $6.09 $6.00
Exercised (4,114) $3.72 $3.72
Canceled (23,716) $3.72 - $7.85 $4.95
---------- ------------- -----
Outstanding at December 26,1998 843,612 $3.72 - $7.64 $5.21
Granted 34,950 $4.13 - $4.20 $4.14
Exercised - - -
Canceled (21,780) $3.72 - $7.23 $5.78
---------- ------------- -----
Outstanding at September 25,1999 856,782 $3.72 - $7.64 $5.15
========== ============= =====
</TABLE>
As of September 25, 1999, there were 308,429 shares exercisable
- -6-
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 $724,400 for the grants
prior to 1998, $896,000 for the 1998 grants, and $38,900 for
grants prior to 1998, $896,000 for the 1998 grants, and $38,900 for
the 1999 grants. These amounts would be expensed at the rate of 20%
per annum over the options' vesting period. The assumptions used in
the option-pricing model includes 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 (loss) income per share would
be as follows:
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended Thirty-nine Weeks Ended
September 25, 1999 September 26,1998
------------------ -----------------
<S> <C> <C>
Net (loss) income
- as reported ($3,031,468) $1,612,884
========== =========
- pro forma ($3,172,374) $1,505,326
========== =========
Basic net (loss) earnings
per common share
- as reported ($0.55) $0.29
===== ====
- pro forma ($0.57) $0.29
===== ====
Diluted net (loss) earnings
per common share
- as reported ($0.55) $0.29
===== ====
- pro forma ($0.57) $0.27
===== ====
</TABLE>
Common share equivalents for 1999 have been excluded because they are
anti-dilutive.
5. SUBSEQUENT EVENTS
On Novemeber 8,1999, the Company entered into a committment
to obtain a mortage on the building located at 15 West 34th Street
in New York. This mortgage will be for $11,000,000 with an amortization
term of twenty-five years, paid quarterly, and based on a spread over
the 10 year U.S. Treasury Bond index. This rate will be established
approximately three days prior to closing. It is anticipated that
this financing will close prior to the end of November. Proceeds of
this loan will be used to repay the existing mortgages in the amount
of approximately $3,750,000, and to reduce the borrowings under the
Credit Facility. This mortgage is permitted under the existing
Credit Facility and will not change any provisions with that facility.
As a result of the continued shift of sales to branded product,
the Company has reviewed both its sourcing of product and the organization
of the sales and administrative functions of the corporation. A
restructuring plan that will result in pre-tax restructuring charges
of approximately $1,300,000 in the fourth quarter has been adopted.
One manufacturing plant in Warrenton, North Carolina will be closed
during the first quarter of 2000, and certain positions in sales and
administration will be eliminated. This plan will result in a reduction
of approximately 125 employees, which represents approximately 8% of the
total workforce at the end of 1998.
- -7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table summarizes the operating data for the periods indicated:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- --------------------------
September 25, September 26, September 25, September 26,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 74.8 75.5 73.3 75.0
------ ------ ------ ------
Gross margin 25.2 24.5 26.7 25.0
Selling, general and
administrative 25.8 17.3 29.1 21.6
Equity in earnings
of unconsolidated
affiliates ( .1) ( .1) ( .1) ( .1)
------ ------ ------ ------
Operating (loss)
income ( .4) 7.3 (2.2) 3.5
Other (income)
expense:
Rental income ( .5) ( .4) ( .6) ( .5)
(Gain)loss on
disposal of
fixed assets - - .1 -
Other (income)
expense - net - .1 - ( .1)
Interest expense 2.6 1.9 2.4 2.0
------ ------ ------ ------
(Loss) income before
income tax
(benefit) provision (2.5) 5.7 (4.1) 2.1
Net (loss) income (1.6)% 3.4% (2.6)% 1.3%
====== ====== ====== ======
</TABLE>
THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999 AS COMPARED TO
THE THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998
Net sales decreased by $10,284,000 or 17.0% for the quarter.
Sales of branded product increased by $1,637,000 to 62.4% of total
sales as compared to 49.1% of total sales in the 1998 quarter. Sales
of Kaynee, Dickies, Joe Boxer, Nautica, and Spalding were the
principal contributors to the increased sales volume. Non branded
products sales decreased by $11,921,000. Gross profit decreased in
absolute dollars by $2,155,000 during the quarter ended September 25,1999,
as compared to the same period in 1998. As a percent of sales, gross
margin percent increased to 25.2% from 24.5% in the prior year's period.
Increased sales of branded product were the primary reason for the
increased gross margin percentage.
During September, Hurricane Floyd and the resulting flood
significantly affected the Company's operations. Beginning a week prior to
the arrival of the hurricane, the ports from Miami to Norfolk began to close
as the hurricane neared. These closures caused delays in clearing product
through customs. For the two and a half days that Kinston was directly affected
by the hurricane, associates could not report to work, nor could product be
shipped. Subsequently, Kinston and Eastern North Carolina were affected by the
worst flooding in recorded history. For approximately one week most
roads in and around Kinston were closed, which impacted our
associates' ability to come to work and also interrupted both receiving
and shipping of product by trucking lines. It is estimated that delays in
shipments amounted to approximatley $10,000,000 as a direct result of the
hurrincane and subsequent flooding.
- -8-
In April, the Company converted to new operating and distribution
systems. This conversion caused delays in shipments to customers, which
are estimated to be approximately $8,000,000 through the end of the third
quarter. Due to inefficiencies experienced in the distribution centers
as a result of the conversion, shipping expenses increased by approximately
$825,000 for the quarter.
Selling, general and administrative expenses increased by
$2,474,000, including the increased shipping costs mentioned above, or
23.7% during the quarter ended September 25, 1999, as compared to the
prior year. As a percent of sales, it increased to 25.5% compared to
17.3% for the third quarter 1998. Compensation costs increased by
$705,000 over the prior year. Royalty and freight expenses increased
by $167,000 and $160,000.
Operating loss for the thirteen weeks ended September 25,1999 was
$217,000, as compared to an operating profit of $4,433,000 in the prior
year period.
Interest expense increased by $143,000 in the current quarter due
to higher borrowing in 1999 to support higher inventory levels.
THIRTY-NINE WEEKS ENDED SEPTEMBER 25, 1999 AS COMPARED TO
THE THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1998
Net sales decreased by $10,922,000 or 8.5% for the thirty-nine
weeks ended September 25, 1999 as compared to the comparable 1998
period. Sales of branded product increased by $12,855,000 to 59.0% of
total sales from 44.0% in the prior period. Increased sales of the
Nautica, Spalding, Dickies, Justin, Joe Boxer, and Kaynee brands were
the principal contributors to the increased sales volume. Non branded
product sales decreased by $23,777,000. Gross profit decreased in
absolute dollars by $707,000 during the thirty-nine weeks ended
September 25,1999. As a percent of sales, gross margin percent improved
to 26.7% from 25.0% for the respective periods. Increased sales of
branded product were the primary reason for the gross margin percentage.
During September, Hurricane Floyd and the resulting flood
significantly affected the Company's operations. Beginning a week prior to
the arrival of the hurricane, the ports from Miami to Norfolk began to
close as the hurricane neared. These closures caused delays in clearing product
through customs. For the two and a half days that Kinston was directly
affected by the hurricane, associates could not report to work, nor could any
product be shipped. Subsequently, Kinston and Eastern North Carolina were
affected by the worst flooding in recorded history. For approximately
one week most roads in and around Kinston were closed, which
impacted our associates ability to come to work and interrupted both
receiving and shipping of product by trucking lines. It is estimated
that delays in shipments amounted to approximately $10,000,000 as a direct
result of the Hurricane and subsequent flooding.
In April, the Company converted to new operating and distribution
systems. This conversion caused delays in shipments to customers, which are
estimated to be approximately $8,000,000 through the end of the third quarter.
Due to inefficiencies experienced in the distribution centers as a result of
the conversion, shipping expenses increased by approximately $1,422,000.
This increase was primarily the result of additional payroll expense and
consulting fees.
Selling, general and administrative expenses increased by
$6,486,000, including the increased shipping costs mentioned above, or 23.3%
during the thirty-nine weeks ended September 25,1999 as compared to the
comparable 1998 period. As a percent of sales, it increased to 29.1%
compared to 21.6% for the third quarter 1998. Compensation, royalties,
advertising, freight, and outlet store rental expenses increased by
$1,440,000, $735,000, $579,000, $362,000, and $251,000 respectfully
from the prior period. For the thirty-nine weeks ended September 25,1999,
$88,000 of conversion related expenses were capitalized as
compared to $662,000 in the comparable 1998 period.
- -9-
Operating loss for the thirty-nine weeks ended September 25,1999
was $2,649,458 as compared to an operating profit of $4,554,638 in the
prior period.
Interest expense increased by $283,000 in the current quarter due
to higher borrowing in 1999 to support higher inventory levels.
Liquidity and Capital Resources
On May 5, 1999, the Company entered into a new credit
facility with The Chase Manhattan Bank, as Agent ("New Facility").
The New 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 New Facility were used to repay the
outstanding indebtedness under the Company's previously existing bank
line of credit.
Availability under the New Facility is based on a formula of
eligible accounts receivable and eligible inventory, determined
monthly, and provides for a seasonal over-advance of up to $10,000,000
within the $100,000,000 maximum line of credit. At the end of July and
August, the Company's borrowings exceeded the calculated availability.
These violations were waived. The Credit Agreement was amended to
reflect the changed financial results due to the effects of the
Hurricane Floyd. Direct borrowings bear interest at the London
Interbank Offered Rate plus the applicable margin (as defined in the
New Facility) or the Prime Rate, at the option of the Company. The
applicable margin is determined by a ratio of adjusted E.I.B.I.T.A. to
interest expense. Borrowings are collateralized by accounts
receivable, inventory and general intangibles of the Company and its
subsidiaries. The New Facility expires in May 2002.
The New Facility contains financial covenants relating to minimum
levels of net income, interest coverage, capital expenditures, and
leverage 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 .1875 of 1% per annum on the unused
portion of the total facility plus certain other administrative costs.
Outstanding borrowings under the new facility amounted to
$64,000,000 at September 25, 1999 as compared to $36,792,000 at the
same time in 1998 and $14,708,000 at December 26, 1998. Outstanding
letters of credit amounted to $18,439,000 at September 25, 1999 as
compared to $23,108,000 at September 26, 1998 and $18,465,000 at
December 26, 1998. Net working capital at September 25, 1999 was
$47,705,000 as compared to $47,741,000 in 1998. The working capital
ratio as of September 25, 1999 was 1.7:1 as compared to 1.8:1 at the
same time in 1998
Net cash used in operating activities amounted to $45,591,000 for
the thirty-nine week period ended September 25, 1999. Cash used in
operating activities relates principally to an increase in inventories
of $43,264,000 and accounts receivable of 6,681,000, which was offset
by an increase in accounts payable of $8,524,000. Cash used in
operating activities in the comparable prior-year period amounted to
$29,344,000 and relates primarily to an increase in inventories of
$19,799,000 and accounts receivable of 15,446,000 which was offset by
an increase in accounts payable of $3,348,000.
- -10-
Net cash used in investing activities in the current thirty-nine
week period ended September 25, 1999 was $3,160,000. This amount
principally consists of additions to fixed assets of $1,396,951,
software of $665,993, and other assets of $993,000. The additions to
fixed assets and software were primarily in support of the systems
conversion. The increase in other assets is due to unamortized in-
store fixtures costs, which are being amortized over 36 months, and
the cash value of company owned insurance policies. During the
thirty-nine weeks ended September 25, 1999, $542,000 was spent on
fixtures and the related amortization cost was $637,000. The cash
value of company owned life insurance policies increased by $200,000.
Net cash used in investing activities for the comparable prior year
period amounted to $1,928,000.
Net cash provided by financing activities in the current thirty-
nine week period ended September 25, 1999 was $48,713,000. This
amount principally consists of increased bank debt of $49,164,000.
Net cash provided by financing activities for the prior years
comparable period amounted to $31,341,000 and principally consists of
increased bank debt of $31,684,000.
The Company's backlog of orders at September 25, 1999 was
approximately $109,870,000 of which $90,168,000 is scheduled to be
shipped in 1999, as compared to $103,680,000 of which $74,776,000 was
scheduled to be shipped in 1998. Actual sales in the fourth quarter
of 1998 were $61,388,000. Management believes that the sales to date,
the order backlog and anticipated new orders will be sufficient to
meet the Company's 1999 sales goals.
Management believes that the credit available under the Credit
Facility together with the cash expected to be generated from
operations will be adequate to support the Company's operating
requirements for the foreseeable future.
Year 2000 Issues
The Company has been in the process of assessing the various
issues related to the year 2000 system problems for the past two
years. As a result of its initial studies, management decided to
convert all information systems to new computer hardware and software.
All hardware and software have been certified as year 2000 compliant
by the providers. Beginning in the fall of 1996 the process of
converting systems was begun and was completed during the second
quarter of 1999. During 1997 and 1998 conversion of the financial
systems, accounts payable, accounts receivable, payroll and human
resources was completed. Also, the Company's internal network of
LAN's, WAN's and other communication systems have been converted to
new 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 were determined to be year 2000 compliant.
In the first quarter of 1998 testing began on these systems. Starting
in the third quarter of 1998 and continuing into the first quarter of
1999, the process of converting data onto the new systems began. On
March 28, 1999 conversion to these new systems was made. Customer
orders are being received, production is being issued, inventory is
being tracked and customer orders are being shipped and invoiced on
the new systems. Certain inefficiencies were encountered as a result
of this conversion. Currently, additional labor is required to ship
customer orders. During the second quarter, significant expenses were
incurred for the new systems training of warehouse personnel. While a
second physical inventory was taken during April, continual cycle
counts have been required to insure inventory accuracy. Progress and
productivity are being measured on a daily basis and improvements are
continually being made. Consultants were retained to provide
recommendations to improve the efficiency of the shipping operations.
- -11-
An internal team has addressed non-information technology
systems, which include items such as burglar and fire alarms, copiers,
elevators and various sewing equipment, and determined them to be year
2000 compliant.
The Company has been 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. The Company has received verification from active
suppliers that they will be year 2000 compliant.
The Company sells to approximately 3,300 customers. Forty of
these customers account for approximately 70% of 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 had
ongoing dialogue with these customers in order to insure that 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. Risks associated with these non-compliant customers
would be excess bad debts or lower sales volume if such customers were
to cease operations but 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.
While there can be no absolute assurance that the Company will
successfully address all year 2000 issues in a timely basis, the
Company is operating all of its systems in year 2000 compliance based
on certification by the providers. Contingency plans are in place in
the event that the Company is at risk in regard to suppliers,
customers or its own internal hardware and software. Contingency
plans include, but are not be limited to consideration of alternative
sources of supply, customer communication plans and plant and business
response plans.
The Company believes the year 2000 project is substantially complete.
The project will be continually monitored to react to any unforseen
difficulties which may arise. In addition, there can be no
assurance that customers, suppliers and service providers on whom 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.
Except for the historical information contained herein, the
matters outlined in the management's discussion and analysis include
forward looking statements that involve risks and uncertainties,
including quarterly fluctuation in results, retail sell rates for the
Company's products which may result in more or less orders than those
anticipated and the impact of competitive products and pricing. In
addition, other risks and uncertainties are detailed from tiin the Company's
SEC reports, including the report on Form 10-K for the year ended
December 26, 1998.
- -12-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunder duly authorized.
HAMPTON INDUSTRIES, INC.
Registrant
S/STEVEN FUCHS
_____________________________________
Steven Fuchs, President
S/FRANK E. SIMMS
_____________________________________
Frank E. Simms, Chief Financial Officer
Date: November 12,1999
- -13-
19
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