Hampshire 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2009

OR

o 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: 000-20201

HAMPSHIRE GROUP, LIMITED

(Exact name of registrant as specified in its charter)

Delaware	06-0967107
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
114 W. 41st Street, New York, New York	10036
(Address of principal executive offices)	(Zip Code)

(212) 840-5666
(Registrant’s telephone number, including area code)

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. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( §233.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). Yeso Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if smaller reporting company)

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Number of shares of common stock outstanding as of July 31, 2009: 5,469,165

HAMPSHIRE GROUP, LIMITED

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly and Year to Date Periods Ended June 27, 2009

“SAFE HARBOR” STATEMENT	ii
PART I—FINANCIAL INFORMATION	1
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3. Quantitative and Qualitative Disclosures About Market Risk	19
Item 4. Controls and Procedures	19
PART II—OTHER INFORMATION	20
Item 1. Legal Proceedings	20
Item 1A. Risk Factors	20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 6. Exhibits	21
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

i

“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

From time to time, we make oral and written statements that may constitute “forward looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward looking statements made in this Quarterly Report on Form 10-Q (the “Quarterly Report”), as well as those made in other filings with the SEC.

Forward looking statements can be identified by our use of forward looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Such forward looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties, and changes in plans that could cause actual results to differ materially from those described in the forward looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward looking statements include, but are not limited to, those described in Part I, Item 2 of this Form 10-Q and underRisk Factorsset forth in Part I, Item 1A of our Form 10-K for the fiscal year ended December 31, 2008.

We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions, or circumstances on which any forward looking statement is based.

As used herein, except as otherwise indicated by the context, the terms “Hampshire,” “Company,” “we,” and “us” are used to refer to Hampshire Group, Limited and its wholly-owned subsidiaries.

ii

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value and shares)	June 27, 2009			December 31, 2008
Current assets:
Cash and cash equivalents	$	21,354		$	35,098
Restricted cash		13,523			—
Accounts receivable, net		7,818			27,881
Other receivables		2,821			4,007
Inventories, net		18,606			10,911
Other current assets		7,371			2,672
Assets of discontinued operations		300			246
Total current assets		71,793			80,815
Fixed assets, net		12,414			13,207
Other assets		3,731			4,684
Total assets	$	87,938		$	98,706
Current liabilities:
Current portion of long-term debt	$	19		$	30
Accounts payable		14,047			7,759
Accrued expenses and other liabilities		10,414			11,137
Liabilities of discontinued operations		509			503
Total current liabilities		24,989			19,429
Long-term debt less current portion		—			3
Other long-term liabilities		14,370			14,477
Total liabilities		39,359			33,909
Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $0.10 par value, 1,000,000 shares authorized; none issued		—			—
Series A junior participating preferred stock, $0.10 par value, 10,000 shares authorized at June 27, 2009 and December 31, 2008; none issued		—			—
Common stock, $0.10 par value, 10,000,000 shares authorized; 8,243,784 shares issued at June 27, 2009 and December 31, 2008		824			824
Additional paid-in capital		36,079			36,079
Retained earnings		32,074			48,292
Treasury stock, 2,774,619 shares at cost at June 27, 2009 and December 31, 2008		(20,398	)		(20,398	)
Total stockholders’ equity		48,579			64,797
Total liabilities and stockholders’ equity	$	87,938		$	98,706

See accompanying notes to the financial statements.

1

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations

	Three Months Ended						Six Months Ended
(In thousands, except per share data)	June 27, 2009			June 28, 2008			June 27, 2009			June 28, 2008
Net sales	$	20,968		$	32,897		$	50,045		$	72,660
Cost of goods sold		15,929			23,912			38,834			54,340
Gross profit		5,039			8,985			11,211			18,320
Selling, general, and administrative expenses		8,747			13,366			19,683			28,072
Restructuring charges		3,416			441			3,416			441
Special costs		1,072			490			3,005			968
Tender offer related costs		102			—			1,109			—
Loss from operations		(8,298	)		(5,312	)		(16,002	)		(11,161	)
Other income (expense):
Interest income		37			309			146			766
Interest expense		(35	)		(38	)		(83	)		(76	)
Other, net		(25	)		18			(26	)		(7	)
Loss from continuing operations before income taxes		(8,321	)		(5,023	)		(15,965	)		(10,478	)
Income tax provision (benefit)		110			(1,902	)		206			(4,023	)
Loss from continuing operations		(8,431	)		(3,121	)		(16,171	)		(6,455	)
Loss from discontinued operations, net of taxes		(22	)		(1,898	)		(47	)		(2,341	)
Net loss	$	(8,453	)	$	(5,019	)	$	(16,218	)	$	(8,796	)
Basic loss per share:
Loss from continuing operations	$	(1.54	)	$	(0.40	)	$	(2.96	)	$	(0.82	)
Loss from discontinued operations, net of taxes		(0.01	)		(0.24	)		(0.01	)		(0.30	)
Net loss	$	(1.55	)	$	(0.64	)	$	(2.97	)	$	(1.12	)
Diluted loss per share:
Loss from continuing operations	$	(1.54	)	$	(0.40	)	$	(2.96	)	$	(0.82	)
Loss from discontinued operations, net of taxes		(0.01	)		(0.24	)		(0.01	)		(0.30	)
Net loss	$	(1.55	)	$	(0.64	)	$	(2.97	)	$	(1.12	)
Weighted average number of shares outstanding:
Basic weighted average number of common shares outstanding		5,469			7,860			5,469			7,860
Diluted weighted average number of common shares outstanding		5,469			7,860			5,469			7,860

See accompanying notes to the financial statements.

2

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statement of Stockholders’ Equity

					Additional										Total
	Common Stock				Paid-In		Retained			Treasury Stock					Stockholders’
(In thousands, except shares)	Shares		Amount		Capital		Earnings			Shares		Amount			Equity
Balance at December 31, 2008		8,243,784	$	824	$	36,079	$	48,292			2,774,619	$	(20,398	)	$	64,797
Net loss		—		—		—		(16,218	)		—		—			(16,218	)
Balance at June 27, 2009		8,243,784	$	824	$	36,079	$	32,074			2,774,619	$	(20,398	)	$	48,579

See accompanying notes to the financial statements.

3

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows

	Six Months Ended
(In thousands)	June 27, 2009			June 28, 2008
Cash flows from operating activities:
Net loss	$	(16,218	)	$	(8,796	)
Less: Loss from discontinued operations, net of taxes		(47	)		(2,341	)
Loss from continuing operations		(16,171	)		(6,455	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization		1,098			832
Loss on sale or disposal of fixed assets		14			127
Deferred income tax benefit		—			(4,305	)
Deferred compensation expense, net		—			100
Excess tax benefits from share-based payment arrangements		—			(85	)
Changes in operating assets and liabilities:
Receivables, net		21,303			13,765
Inventories, net		(7,695	)		(11,095	)
Other assets		(3,628	)		(845	)
Liabilities		5,436			3,852
Net cash provided by (used in) continuing operating activities		357			(4,109	)
Net cash provided by (used in) discontinued operations		(94	)		9,758
Net cash provided by (used in) operating activities		263			5,649
Cash flows from investing activities:
Capital expenditures		(270	)		(9,101	)
Cash restricted for the collateralization of letters of credit		(13,523	)		—
Proceeds from the sale of fixed assets		4			—
Net cash provided by (used in) continuing investing activities		(13,789	)		(9,101	)
Net cash provided by (used in) discontinued operations		—			3,724
Net cash provided by (used in) investing activities		(13,789	)		(5,377	)
Cash flows from financing activities:
Repayment of long-term debt		(14	)		(26	)
Excess tax benefits from share-based payment arrangements		—			85
Capitalized credit facility costs		(204	)		(492	)
Net cash provided by (used in) financing activities		(218	)		(433	)
Net increase (decrease) in cash and cash equivalents		(13,744	)		(161	)
Cash and cash equivalents at beginning of period		35,098			48,431
Cash and cash equivalents at end of period	$	21,354		$	48,270

See accompanying notes to the financial statements.

4

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Hampshire Group, Limited and its subsidiaries (the “Company” or “Hampshire”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and according to instructions from the United States Securities and Exchange Commission (“SEC”) for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2008.

The information included herein is not necessarily indicative of the annual results that may be expected for the year ending December 31, 2009, but does reflect all adjustments (which are of a normal and recurring nature) considered, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. In addition, the Company’s revenues are highly seasonal, causing significant fluctuations in financial results for interim periods. The Company sells apparel throughout the year but over 70% of its annual sales in recent years have occurred in the third and fourth quarters, primarily due to the large concentration of sweaters in the product mix and seasonality of the apparel industry in general.

Special Costs

In 2006, the Audit Committee (the “Audit Committee”) of the Board of Directors (the “Board”) commenced an investigation related to, among other things, the misuse and misappropriation of assets for personal benefit, certain related party transactions, tax reporting, internal control deficiencies, financial reporting, and accounting for expense reimbursements, in each case involving certain members of the Company’s former management (“Audit Committee Investigation”).

On December 3, 2007, the Company purchased an insurance policy that insures a person who was a director or an officer of the Company for purposes of the Company’s 2005/2006 directors’ and officers’ insurance policy against litigation brought either by any director or officer of the Company who was terminated during 2006 or by the Company directly (“Special D&O Insurance”). The policy provides coverage of $7.5 million, has a term of six years, and cost $4.1 million including taxes and fees. This payment was treated as a prepaid expense and included in “Other current assets” and “Other assets” as the policy covers a six year period. The Company recognized expense related to this policy in the amount of $0.2 million in the three month periods ended June 27, 2009 and June 28, 2008. The Company recognized expense related to this policy in the amount of $0.3 million in the year to date periods ended June 27, 2009 and June 28, 2008 and in the amount of $1.1 million from inception through June 27, 2009. If the Company enters into settlements and releases with all of its former officers who were terminated during 2006, the remaining value of the policy will be expensed at that time. If, however, such settlements and releases are not entered into, the Company anticipates recognizing $0.7 million in annual expense in each year from 2009 through 2012 and $0.6 million in 2013, which is the end of the policy term.

The Company reports certain costs as “Special Costs” including, but not limited to, the costs associated with the Audit Committee Investigation, the assessment and remediation of certain tax exposures, the restatement of the financial statements which resulted from the findings of the Audit Committee Investigation, investigations by the SEC and the U.S. Attorney’s Office, a stockholder derivative suit, Nasdaq Global Market listing related costs, the Special D&O Insurance expense, legal and other expenses related to the now settled arbitration and litigation with Ludwig Kuttner, the Company’s former Chief Executive Officer, Chairman and director, legal matters involving former employees Charles Clayton and Roger Clark, and other matters investigated by the Audit Committee. See Note 5 —Commitments and Contingencies.

Special Costs incurred since inception of the Audit Committee Investigation were approximately $17.5 million through June 27, 2009. The Company expects to incur additional costs in connection with the lawsuit against Messrs. Clayton and Clark and related matters. The Company cannot predict the total cost, but believes that future costs could be material.

Stock Options

The Company did not record any expense related to equity awards, as no equity-based compensation was awarded during the three and six month periods ended June 27, 2009 or for the three years ended December 31, 2008. No stock options or other forms of equity based compensation were outstanding or exercised during the three and six month periods ended June 27, 2009 and June 28, 2008.

5

Recent Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“FAS”) No. 168, “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles.” This standard replaces FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes only two levels of GAAP, authoritative and nonauthoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. The Company will begin to use the new guidelines and numbering system prescribed by the Codification when referring to GAAP in the third quarter of fiscal 2009. The Codification was not intended to change or alter existing GAAP, and it will have no material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued FAS No. 165, “Subsequent Events.” This standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. FAS No. 165 is effective for fiscal years and interim periods ended after June 15, 2009. The Company evaluated subsequent events through August 7, 2009, the issuance date of our consolidated financial statements for the period ended June 27, 2009, as this is the date on which we filed such financial statements on Form 10-Q with the SEC.

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. See Note 9 —Fair Value Measurementsfor further discussion regarding fair value measures.

Financial Accounting Staff Bulletin Staff Position (“FSP”) 157-2 (“FSP FAS 157-2”) delayed the effective date of FAS 157 until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company adopted the standard for all nonfinancial assets and nonfinancial liabilities effective January 1, 2009, which had no material impact on the consolidated financial statements.

In March 2009, the FASB released Proposed Staff Position FAS 157-e, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (“FAS 157-e”). This proposal provides additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in FAS No. 157. FAS 157-e is effective for interim periods ending after June 15, 2009. The Company adopted the standard in the quarter ended June 27, 2009, which had no material impact on the consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). This FSP provided additional guidance for estimating fair value in accordance with FAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. This FSP also included guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009 and is applied prospectively. The Company adopted the standard in the quarter ended June 27, 2009, which had no material impact on the consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principle Bulletin (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). This proposal amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair values of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The proposal also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the standard in the quarter ended June 27, 2009, which had no material impact on the consolidated financial statements.

6

Note 2 — Credit Facility

On February 15, 2008, the Company amended and restated its 2003 Revolving Credit Facility by entering into an Amended and Restated Credit Agreement and Guaranty (the “Credit Facility”) with HSBC Bank USA, National Association (“HSBC”), other financial institutions named therein as bank parties (together with HSBC, the “Banks”), and HSBC, as Letter of Credit Issuing Bank and as Agent for the Banks. The Credit Facility provided up to $125.0 million for revolving credit loans and trade letters of credit with a $10.0 million sub-limit for standby letters of credit and expires on April 30, 2013. The Company’s Amended and Restated Credit Agreement includes certain financial and other covenants, including a covenant that the Company maintain a fixed charge ratio of consolidated earnings before interest, taxes, depreciation, and amortization of not less than 1.25 to 1.0 of certain fixed charges on the last day of each fiscal quarter on a rolling four quarter basis.

Based on the Company’s results for 2008, the Company determined on March 13, 2009 that it was not in compliance with the Credit Facility’s consolidated fixed charge ratio covenant and thus could not borrow or issue letters of credit under the Credit Facility.

The Company entered into a letter agreement, dated as of April 2, 2009, with HSBC, pursuant to which HSBC reserved all rights and remedies under the Credit Facility and the Company acknowledged that HSBC may, but is not obligated to, continue to issue trade letters of credit subject to the terms and conditions of the Credit Facility and provided that such new letters of credit are secured by cash and cash equivalents at 105% of their aggregate face amount deposited in an account maintained at HSBC. The Company entered into a second letter agreement dated as of May 12, 2009, with HSBC, pursuant to which HSBC and the Company acknowledged that HSBC may, but is not obligated to, continue to issue standby letters of credit subject to the terms and conditions of the Credit Facility and provided that such new standby letters of credit are secured by cash and cash equivalents at 100% of their aggregate face amount deposited in an account maintained at HSBC.

On August 7, 2009, the Company and the Banks amended the Credit Facility (the “Amended Facility”) and the Company is now in compliance with the covenants of the Amended Facility. The cash collateral and other requirements of the letter agreements were fully rescinded and replaced by terms and conditions of the Amended Facility. See Note 11— Subsequent Events.

At June 27, 2009, there were no outstanding borrowings and there were approximately $13.5 million outstanding under letters of credit, which were collateralized by cash reflected asRestricted cash on the unaudited condensed consolidated balance sheet. If the Company was in compliance with the Credit Facility at June 27, 2009, its borrowing availability would have been approximately $20.0 million, including cash collateral.

Note 3 — Inventories

Inventories at June 27, 2009 and December 31, 2008 consisted of the following:

(In thousands)	June 27, 2009			December 31, 2008
Finished goods	$	19,268		$	13,118
Raw materials and supplies		24			54
		19,292			13,172
Less: reserves		(686	)		(2,261	)
Inventories, net	$	18,606		$	10,911

7

Note 4 — Loss Per Share

Set forth in the table below is the reconciliation by quarter of the numerator (loss from continuing operations) and the denominator (shares) for the computation of basic and diluted loss from continuing operations per share:

	Numerator			Denominator		Per Share
(In thousands, except per share data)	Income (Loss)			Shares		Amount
Three months ended June 27, 2009:
Basic loss from continuing operations	$	(8,431	)		5,469	$	(1.54	)
Effect of dilutive securities:
Preferred rights		—			—		—
Diluted loss from continuing operations	$	(8,431	)		5,469	$	(1.54	)
Three months ended June 28, 2008:
Basic loss from continuing operations	$	(3,121	)		7,860	$	(0.40	)
Effect of dilutive securities:
None outstanding		—			—		—
Diluted loss from continuing operations	$	(3,121	)		7,860	$	(0.40	)
Six months ended June 27, 2009:
Basic loss from continuing operations	$	(16,171	)		5,469	$	(2.96	)
Effect of dilutive securities:
Preferred rights		—			—		—
Diluted loss from continuing operations	$	(16,171	)		5,469	$	(2.96	)
Six months ended June 28, 2008:
Basic loss from continuing operations	$	(6,455	)		7,860	$	(0.82	)
Effect of dilutive securities:
None outstanding		—			—		—
Diluted loss from continuing operations	$	(6,455	)		7,860	$	(0.82	)

There was no equity based compensation outstanding during the six month periods ended June 27, 2009 and June 28, 2008.

Note 5 — Commitments and Contingencies

Prior to 2003, the Company was advised that certain of its suppliers would not be able to deliver finished product as agreed. In connection with this situation, the Company established a reserve in the amount of $7.5 million during 2002 for costs of past inventory purchases which had not yet been paid to the supplier and other matters arising from these events and has accordingly adjusted the reserve for ongoing activity. The reserve balance was $5.1 million at June 27, 2009 for such unresolved matters. The Company has bonus agreements with certain members of current and former management which are contingent upon the release of the aforementioned reserve established for past inventory purchases. If the Company determines that this reserve is no longer needed and is released, the bonus payments could be as much as $0.4 million.

On March 7, 2008, the Company filed a complaint in the Court of Chancery of the State of Delaware for the County of New Castle (the “Court”), against Messrs. Kuttner, Clayton, and Clark. On August 4, 2008, the Company entered into a Stock Purchase and Settlement Agreement and Mutual Releases with Ludwig Kuttner, his wife, Beatrice Ost-Kuttner, his son, Fabian Kuttner, and a limited liability company controlled by him, K Holdings LLC (together, the “Kuttner Parties”). Under the Agreement, the Company and Ludwig Kuttner resolved any ongoing and potential litigation between them related to the Audit Committee Investigation and the Kuttner Parties sold all of the stock of the Company that they owned to the Company.

On September 10, 2008 and September 19, 2008, Mr. Clayton and Mr. Clark (see Note 1— Basis of Presentation), respectively, filed answers with respect to the claims that the Company filed against them on March 7, 2008, as well as counterclaims against the Company. Mr. Clayton and Mr. Clark denied the Company’s claims against them and asserted claims against the Company for, among other things, certain compensation and benefits related to the termination of their employment with the Company and defamation and other damages allegedly stemming from the Company’s issuance of certain press releases related to the Audit Committee Investigation. The filings did not specify the aggregate amount of damages sought by Messrs. Clayton and Clark. The Company intends to vigorously defend against such claims.

8

On September 22, 2008, Mr. Clayton filed a complaint against certain of the Company’s directors and officers. Mr. Clayton’s complaint asserted claims against those directors and officers for, among other things, contribution in the event that Mr. Clayton is found liable to the Company for damages in relation to the Company’s complaint against him and defamation and other damages allegedly stemming from the Company’s issuance of certain press releases related to the Audit Committee Investigation. In accordance with the Company’s bylaws and agreements with the directors and officers, the Company will indemnify the directors and officers if they are held liable to Mr. Clayton for damages and the Company will advance them legal fees incurred in their defense. The Company has been advised that the directors and officers intend to vigorously defend against such claims.

Substantial discovery in the litigation with Messrs. Clayton and Clark has been completed. On June 12, 2009, the Company and its directors and officers who are parties to the litigation filed a motion for summary judgment. The motion seeks a grant of summary judgment in favor of the Company on certain of its claims against Messrs. Clayton and Clark, including its claim for breach of fiduciary duty. It also seeks the dismissal of certain of Messrs. Clayton’s and Clark’s counterclaims against the Company, as well as certain aspects of Mr. Clayton’s complaint against the Company’s directors and officers. Oral argument on the motion for summary judgment is scheduled for September 2, 2009, and a trial is currently scheduled to commence in October 2009.

Note 6 — Taxes

As of June 27, 2009, the Company’s unaudited condensed consolidated balance sheet reflects a liability for unrecognized tax benefits of $7.1 million, including $2.6 million of accrued interest and penalties. The Company anticipates that total unrecognized tax benefits will decrease by approximately $2.9 million, including interest and penalties of approximately $1.0 million, due to the settlement of certain state and local income tax liabilities or the expiration of statutes of limitation within the next twelve months. The Company currently has both U.S. net operating loss carrybacks and carryforwards. Upon examination, one or more of these net operating loss carrybacks or carryforwards may be limited or disallowed. The statute of limitations with respect to the Company’s federal income tax returns remains open for tax years 2005 and beyond. With limited exceptions, the statute of limitations for state income tax returns remains open for tax years 2002 and beyond. The Company also files income tax returns in Hong Kong for which tax years 2005 and beyond remain open to examination by the Hong Kong Inland Revenue Department.

Commencing with the fourth quarter of 2008, the Company determined it was more likely than not, based on all of the relevant evidence in accordance with GAAP that all of its deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be recognized. Excluding the effect of valuation allowances on the Company’s deferred tax assets, the Company would have realized an income tax benefit of $3.4 million and $6.2 million due to the losses incurred in the quarter and year to date periods ended June 27, 2009, respectively. The effective income tax rate from continuing operations for the quarter and year to date periods ended June 27, 2009, without the impact of these valuation allowances, would have been 40.5% and 39.0%, respectively, as compared to 37.9% and 38.4% for the quarter and year to date periods ended June 28, 2008, respectively.

The Company’s 2006 federal income tax return is currently under examination by the Internal Revenue Service. Also, the Company’s 2002-2005 municipal income tax returns are currently under examination.

Note 7 — Dispositions and Discontinued Operations

The Company continually reviews its portfolio of labels, business lines, and divisions to evaluate whether they meet profitability and performance requirements and are in line with the Company’s business focus. As a part of this review, the Company has disposed and discontinued operations of certain divisions as outlined below.

In 2007, the Company sold certain assets of its Marisa Christina division and ceased its domestic activities. During 2007, the Company also sold the inventory, trade names, and certain other assets of its David Brooks division and assigned certain obligations of its David Brooks division to the buyer of the Marisa Christina assets.

On April 15, 2008, the Company sold certain assets of its Shane Hunter division including inventory, trademarks, and other assets to a buyer which included former members of Shane Hunter’s management. The total purchase price was approximately $3.7 million. In addition, the buyer assumed $0.1 million of liabilities of Shane Hunter. During the year ended December 31, 2008, the Company recognized a pre-tax loss on the transaction of $3.5 million due to, among other things, the write off of an intangible, severance, transaction related costs, and certain facility lease expenses.

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The Company retained the remaining assets of Shane Hunter including approximately $14.0 million gross accounts receivable as of April 14, 2008 that were collected as of December 31, 2008. The funds from the sale of assets and the liquidation of the remaining assets were used to provide additional funds for operations and other general corporate purposes.

In accordance with GAAP, these unaudited condensed consolidated financial statements reflect the results of operations and financial position of the Marisa Christina, David Brooks, and Shane Hunter divisions separately as discontinued operations.

The assets and liabilities of the discontinued operations are presented in the unaudited condensed consolidated balance sheets under the captionsAssets of discontinued operationsandLiabilities of discontinued operations.

The underlying assets and liabilities of the discontinued operations at June 27, 2009 and December 31, 2008 were as follows:

(In thousands)	June 27, 2009		December 31, 2008
Other receivables	$	221	$	161
Other current assets		—		6
Other assets		79		79
Assets of discontinued operations	$	300	$	246
Accounts payable	$	273	$	263
Accrued expenses and other liabilities		236		240
Liabilities of discontinued operations	$	509	$	503

The operating results for the discontinued operations for the three and six month periods ended June 27, 2009 and June 28, 2008 were as follows:

	Three Months Ended						Six Months Ended
(In thousands)	June 27, 2009			June 28, 2008			June 27, 2009			June 28, 2008
Net sales	$	—		$	1,531		$	—		$	16,607
Gross profit (loss)	$	—		$	350		$	—		$	4,077
Loss on discontinued operations before income taxes	$	(22	)	$	(950	)	$	(47	)	$	(312	)
Loss on sale of business		—			(2,252	)		—			(3,652	)
Benefit for income taxes		—			1,304			—			1,623
Loss from discontinued operations, net of taxes	$	(22	)	$	(1,898	)	$	(47	)	$	(2,341	)

Note 8 — Restructuring Charges

During the past several fiscal years, the Company initiated two restructuring programs.

In May 2008, the Company initiated a restructuring and cost reduction plan (the “2008 Restructuring”) that involved the reduction of its workforce and included the consolidation and relocation of some of its operations, including the closing of its Hauppauge, New York office. In addition to the reduction in workforce, the 2008 Restructuring eliminated certain non-payroll expenses. Key objectives of the 2008 Restructuring included the consolidation of the Company’s women’s divisions into one New York office and the consolidation of certain back office functions into the Company’s South Carolina office. The total personnel reductions during 2008 related to the 2008 Restructuring consisted of approximately 41 employees primarily located in the New York metropolitan region and South Carolina.

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In April 2009, the Company initiated a second restructuring and cost reduction plan (the “2009 Restructuring”) designed to significantly reduce its fixed cost structure, improve its return on invested capital, increase its operating efficiency and better position itself for the long term. The Company initiated the second and final phase of the 2009 Restructuring in the third quarter of 2009 that includes a reduction of 93 employees with the vast majority of the activities relating to the Company’s Asian operations. The components of the 2009 Restructuring includes a net reduction of over 160 employees, or approximately 50% of the Company’s global workforce, a compensation reduction program applicable to senior-level employees, the elimination of the Company’s 401(k) matching contribution, the reorganization of certain operating functions, and the consolidation of New York and Asian operations. The reduction in the Company’s workforce was necessitated by reduced sales volume and the outsourcing of certain functions. The 2009 Restructuring eliminated positions at every level of the Company. The 2009 Restructuring is expected to be completed during the fourth quarter of 2009. Selling, general, and administrative expenses in the unaudited condensed consolidated statement of operations were reduced in the three months ended March 28, 2009 for employee benefit reserves of approximately $0.2 million reversed as a result of the 2009 Restructuring. During the quarter ended June 27, 2009, 2009 Restructuring charges incurred were $3.4 million, and the Company anticipates incurring additional 2009 Restructuring charges of approximately $1.0 million during 2009.

The following summarizes the charges recognized for the 2008 and 2009 Restructuring programs through the periods ended June 27, 2009 and June 28, 2008:

	Three Months Ended				Six Months Ended
(In thousands)	June 27, 2009		June 28, 2008		June 27, 2009		June 28, 2008
Personnel reductions	$	2,717	$	432	$	2,717	$	432
Other costs		699		9		699		9
Total	$	3,416	$	441	$	3,416	$	441

A reconciliation of the beginning and ending liability balances for restructuring costs included in the liabilities section of the consolidated balance sheet is shown below:

	Three Months Ended
	June 27, 2009									June 28, 2008
	Personnel			Other						Personnel			Other
(In thousands)	Reductions			Costs			Total			Reductions			Costs			Total
Beginning of period	$	—		$	—		$	—		$	—		$	—		$	—
Costs charged to expense		2,717			864			3,581			432			9			441
Costs paid or settled		(2,669	)		(14	)		(2,683	)		(298	)		(9	)		(307	)
End of period	$	48		$	850		$	898		$	134		$	—		$	134

	Six Months Ended
	June 27, 2009									June 28, 2008
	Personnel			Other						Personnel			Other
(In thousands)	Reductions			Costs			Total			Reductions			Costs			Total
Beginning of period	$	72		$	—		$	72		$	—		$	—		$	—
Costs charged to expense		2,717			864			3,581			432			9			441
Costs paid or settled		(2,741	)		(14	)		(2,755	)		(298	)		(9	)		(307	)
End of period	$	48		$	850		$	898		$	134		$	—		$	134

Personnel reductions and other costs, which consist primarily of exit costs related to leased facilities and included the reversal of $0.2 million in deferred rent, were charged toRestructuring chargesin the consolidated statement of operations in the three and six month periods ended June 27, 2009 and June 28, 2008.

Note 9 — Fair Value Measurements

GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

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The standard describes three levels of inputs that may be used to measure fair value:

Level 1- Quoted prices in active markets for identical assets or liabilities.

Level 2- Fair values utilize inputs other than quoted prices that are observable for the asset or liability, and may include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability.

Level 3- Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents information about the Company’s assets measured at fair value on a recurring basis at June 27, 2009, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

	Fair Value Measurements at Reporting Date Using
	Quoted Prices
	in Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Unobservable
(In thousands)	Assets		Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		June 27, 2009
Cash and cash equivalents and restricted cash	$	34,877	$	—	$	—	$	34,877

Note 10 — Tender Offer

The Company announced on February 24, 2009 that it reached a definitive agreement (the “Merger Agreement”) to be acquired by NAF Acquisition Corp. (“NAF”), a direct wholly owned subsidiary of NAF Holdings II, LLC (“Parent”).

On April 26, 2009, the Company received a letter from NAF stating that NAF was terminating the Merger Agreement effective immediately, as a result of one or more alleged breaches of covenants and agreements on the part of the Company. On April 27, 2009, the Company replied (the “Letter”) to NAF’s letter stating that it believed that NAF’s allegations were without merit and that no circumstances existed to allow NAF to terminate the agreement. Pursuant to the Letter, the Company terminated the Merger Agreement and reserved all rights against NAF and its affiliates, and against Efrem Gerszberg, the principal of Parent under his personal guarantee.

On July 14, 2009, the Company received a letter from counsel to NAF and Parent advising the Company that NAF and Parent are contemplating litigation against the Company stemming from the terminated Merger Agreement and requesting the Company to preserve certain documents related to its dealing with NAF and Parent.

During the quarter and year to date periods ended June 27, 2009, the Company has incurred approximately $0.1 million and $1.1 million, respectively, in costs, primarily professional fees, related to the Merger Agreement, which were recorded inTender offer related costsin the unaudited condensed consolidated statement of operations. From the commencement of these activities in 2008, the Company incurred $1.5 million in such costs through June 27, 2009.

Note 11 — Subsequent Events

Amended Facility

As of August 7, 2009 the Company amended the Credit Facility with the Banks to reduce and convert the facility to a $48.0 million asset based revolving credit facility including trade letters of credit with a $10.0 million sub-limit for standby letters of credit. The Amended Facility expires on June 30, 2011 and is secured by substantially all assets of the Company. Borrowings under the Amended Facility are limited by the lesser of $48.0 million or a formula which considers cash, accounts receivable and inventory. Interest rates under the Amended Facility vary with the prime rate or LIBOR. The Amended Facility includes certain covenants which include minimum earnings before interest, taxes, depreciation and amortization (excluding certain charges), maximum capital expenditures, minimum availability, minimum liquidity, letters of credit tied to booked orders, and limitations on when direct debt is permitted. The Amended Facility has other customary provisions for periodic reporting, monitoring, and fees.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains statements that are forward looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed elsewhere in this report. This discussion should be read in conjunction with the discussion of forward-looking statements, the financial statements, and the related notes and the other statistical information included in this report.

DISCUSSION OF FORWARD-LOOKING STATEMENTS

This report contains statements which may constitute “forward looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward looking statements. The words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words are meant to identify such forward looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward looking statements include, but are not limited to, those described in our Annual Report for the fiscal year ended December 31, 2008 under Item 1A —Risk Factorsand in Part II, Item 1A —Risk Factorsin this Form 10-Q, and include the following risk factors:

• A prolonged period of depressed consumer spending;

• Lack of an established public trading market for our common stock;

• Decreases in business from or the loss of any one of our key customers;

• Financial instability experienced by our customers;

• Loss of or inability to renew certain licenses;

• Change in consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers and consumers;

• Use of foreign suppliers for raw materials and manufacture of our products;

• Failure of our manufacturers to use acceptable ethical business practices;

• Failure to deliver quality products in a timely manner;

• Problems with our distribution system and our ability to deliver products;

• Labor disruptions at port, our suppliers, manufacturers, or distribution facilities;

• Chargebacks and margin support payments;

• Failure, inadequacy, interruption, or security lapse of our information technology;

• Failure to compete successfully in a highly competitive and fragmented industry;

• Challenges integrating any business we may acquire;

• Unanticipated expenses beyond the amount reserved on our balance sheet or unanticipated cash payments related to the ultimate resolution of income and other possible tax liabilities;

• Loss of certain key personnel which could negatively impact our ability to manage our business;

• Investigations by the SEC and the United States Attorney of the Southern District of New York related to prior Audit Committee investigations;

• Potential future restatements of our prior financial statements;

• Our stockholders’ rights plan potentially adversely affects existing stockholders;

• Risks related to the current global credit crisis; and

• Ongoing and potential litigation.

We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions, or circumstances on which any forward looking statement is based.

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OVERVIEW

Hampshire Group, Limited is a designer, sourcer and marketer of women’s and men’s sweaters, wovens and knits, and related sportswear in the United States. As a holding company, we operate through our wholly-owned subsidiaries: Hampshire Designers, Inc. and Item-Eyes, Inc. The Company was established in 1977 and is incorporated in the state of Delaware.

Hampshire Designers, Inc. is comprised of both our women’s knitwear division, known as Hampshire Designers, and our men’s division, known as Hampshire Brands, which together represent what we believe is one of the leading designers and marketers of sweaters in North America. Item-Eyes, Inc. is a designer and marketer of related sportswear for women.

Our products, both branded and private label, are marketed in the moderate and better markets through multiple channels of distribution including national and regional department stores. All of our divisions source their product with quality manufacturers. Keynote Services, Limited, our Hong Kong based subsidiary, assists with our sourcing needs and provides quality control.

Our primary strength is our ability to design, develop, source, and deliver quality products within a given price range, while providing superior levels of customer service. We have developed international sourcing abilities that permit us to deliver quality merchandise at a competitive price to our customers.

Our divisions source the manufacture of their product with factories primarily located in Southeast Asia. Our products are subject to increasing prices, which we try to offset by achieving sourcing efficiencies, controlling costs in other parts of our operations and, when necessary, passing along a portion of our cost increases to our customers through higher selling prices. We purchase our products from international suppliers in U.S. dollars.

The apparel market is highly competitive. Competition is primarily based on product design, price, quality, and service. We face competition from apparel designers, manufacturers, importers, licensors, and our own customers’ private label programs, many of which are larger and have greater financial and marketing resources than we have available to us.

Tender Offer

The Company announced on February 24, 2009 that it reached a definitive agreement (the “Merger Agreement”) to be acquired by NAF Acquisition Corp. (“NAF”), a direct wholly owned subsidiary of NAF Holdings II, LLC (“Parent”).

On April 26, 2009, the Company received a letter from NAF stating that NAF was terminating the Merger Agreement effective immediately, as a result of one or more alleged breaches of covenants and agreements on the part of the Company. On April 27, 2009, the Company replied (the “Letter”) to NAF’s letter stating that it believed NAF’s allegations were without merit and that no circumstances existed to allow NAF to terminate the agreement. Pursuant to the Letter, the Company also terminated the Merger Agreement and reserved all rights against NAF and its affiliates, and against Efrem Gerszberg the principal of Parent under his personal guarantee. See Note 10 —Tender Offerto the financial statements.

On July 14, 2009, the Company received a letter from counsel to NAF and Parent advising the Company that NAF and Parent are contemplating litigation against the Company stemming from the terminated Merger Agreement and requesting the Company to preserve certain documents related to its dealing with NAF and Parent.

Management and Board of Directors Changes

On July 29, 2009, Richard A. Mandell resigned as President and Chief Executive Officer, a position he had held since April 15, 2009. Mr. Mandell continues as a director of the Company. Heath L. Golden, who had been serving as Executive Vice President and Chief Operating Officer of the Company, became President and Chief Executive Officer and a director of the Company. On April 15, 2009, Michael S. Culang resigned as the President, Chief Executive Officer and member of the Board of Directors of the Company.

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On July 29, 2009, Howard L. Zwilling became President of our women’s division, which consists of our Hampshire Designers and Item Eyes businesses. Mr. Zwilling joined Hampshire with more than 30 years of operational and merchandising expertise in the retail industry and a strong knowledge of the women’s apparel sector from former leadership roles at Jones Apparel Group, McNaughton Apparel Group and Miss Erika Inc. Mr. Zwilling most recently served as Group Chief Executive Officer of Jones Apparel Group’s Moderate Sportswear business, where he maintained full operating responsibility for Miss Erika and Pappagallo, as well as such other brands as Joneswear, Joneswear Studio, Evan Picone, Bandolino, Norton McNaughton, Nine & Company and Rena Rowan.

Effective July 2, 2009, Maura M. Langley resigned as Vice President of Accounting and Reporting, Principal Accounting Officer, and Assistant Secretary. Jonathan W. Norwood, Vice President, Chief Financial Officer, and Treasurer, was appointed Principal Accounting Officer, which is a position he held prior to the fourth quarter of 2008.

On May 8, 2009, the Board elected Harvey L. Sperry as Chairman of the Board, effective immediately. The Board also elected Irwin W. Winter, Mr. Sperry and Herbert Elish to the Company’s Audit Committee, with Mr. Winter serving as chairman. The Board also elected Messrs. Elish, Sperry and Winter to the Company’s Compensation Committee, with Mr. Elish serving as chairman. The Board also elected Messrs. Sperry, Elish and Winter to the Company’s Nominating Committee, with Mr. Sperry serving as chairman.

Messrs. Joel H. Goldberg and Michael L. Jackson resigned as directors on March 26, 2009 and May 1, 2009, respectively.

RESULTS OF CONTINUING OPERATIONS

Quarterly Comparison — Three Months Ended June 27, 2009 and June 28, 2008

Net Sales

Net sales decreased by 36.3% to $21.0 million for the three months ended June 27, 2009 compared with $32.9 million for the same period last year. The $11.9 million decrease resulted from a decline in volume, principally in our women’s wear businesses, and lower average selling prices due to larger customer allowances as outlined in the table below:

	Quarterly Rate/Volume
				Percentage of
(Dollars in thousands)	Dollars			2008
Net sales quarter ended June 28, 2008	$	32,897			100.0	%
Volume		(11,432	)		(34.8	%)
Average net selling prices		(497	)		(1.5	%)
Net sales quarter ended June 27, 2009	$	20,968			63.7	%

We believe that the decrease in the volume of our 2009 second quarter net sales reflects the weak retail market and the impact of customers who filed for bankruptcy in 2008. If these retail conditions persist, our net sales and operating results will be adversely affected.

Gross Profit

Gross profit for the three months ended June 27, 2009 was $5.0 million compared with $9.0 million for the same period last year, which reflected a decrease in net sales and a gross profit percentage of 24.0% of net sales for the three months ended June 27, 2009 compared with 27.3% of net sales for the same period last year. The decrease in the gross profit percentage was primarily due to an increase in customer allowances in the current weak retail market and an increase in the average unit cost.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the three months ended June 27, 2009 were $8.7 million compared with $13.4 million for the same period last year. The decrease in 2009 as compared to 2008 was primarily due to the combined effect of lower compensation and facility expenses, largely due to the 2008 and 2009 Restructurings (See Note 8 —Restructuring Chargesto the financial statements), a decline in shipping costs due to lower volumes in the current period, and the reversal of certain accruals related to non-income tax liabilities for which the statute of limitations lapsed.

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Restructuring Charges

Restructuring charges for the three months ended June 27, 2009 were $3.4 million compared with $0.4 million for the same period last year and consists primarily of termination benefits and lease exit costs. The increase in the current period was the result of a more substantial plan initiated in April 2009 that eliminated positions at all levels of the Company and consolidated locations as compared to the prior period. We anticipate incurring additional restructuring costs of approximately $1.0 million in 2009.

We believe that the 2009 and 2008 restructuring activities will result in annualized savings from selling, general and administrative expenses of $9.3 million and $3.1 million, respectively. (See Note 8 —Restructuring Chargesto the financial statements)

Special Costs

During the three months ended June 27, 2009, Special costs were $1.1 million as compared to $0.5 million for the same period last year. The increase in the current period was principally for legal fees. We expect to incur additional costs in connection with the legal matters involving Messrs. Clayton and Clark (See Note 1 —Basis of Presentationand Note 5 —Commitments and Contingenciesthe financial statements) and certain other matters. We cannot predict the total cost but believe that future costs could be material.

Tender Offer Related Costs

During the three months ended June 27, 2009, we incurred approximately $0.1 million in costs, primarily professional fees, related to the Merger Agreement. (SeeTender Offerand Note 10 —Tender Offerto the financial statements) There were no such costs in the three months ended June 27, 2008. From the commencement of these activities in 2008, we incurred $1.5 million in such costs through June 27, 2009.

Income Taxes

Our provision for income taxes for the quarter ended June 27, 2009 of $0.1 million is comprised of interest and penalties on income tax reserves. Commencing with the fourth quarter of 2008, we determined, in accordance with GAAP, it was more likely than not, based on all of the relevant evidence that all of our deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be realized. Excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of $3.4 million or an effective tax rate of 40.5% due to the losses incurred in the quarter ended June 27, 2009. (See Note 6 —Taxes to the financial statements)

The quarter ended June 28, 2008 preceded our determination that all of our deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be realized and we recorded an income tax benefit of $1.9 million resulting in a 37.9% effective tax rate.

Year to Date Comparison — Six Months Ended June 27, 2009 and June 28, 2008

Net Sales

Net sales decreased by 31.1% to $50.0 million for the six months ended June 27, 2009 compared with $72.7 million for the same period last year. The $22.7 million decrease resulted from a decline in volume, principally in our women’s wear businesses, and lower average selling prices due to larger customer allowances as outlined in the table below:

	Year to Date Rate/Volume
				Percentage of
(Dollars in thousands)	Dollars			2008
Net sales six months ended June 28, 2008	$	72,660			100.0	%
Volume		(22,019	)		(30.3	%)
Average net selling prices		(596	)		(0.8	%)
Net sales six months ended June 27, 2009	$	50,045			68.9	%

We believe that the decrease in the volume in our first six months of 2009 net sales reflects the weak retail market and the impact of customers who filed for bankruptcy in 2008. If these retail conditions persist, our net sales and operating results will be adversely affected.

Gross Profit

Gross profit for the six months ended June 27, 2009 was $11.2 million compared with $18.3 million for the same period last year, which reflected a decrease in net sales and a gross profit percentage of 22.4% of net sales for the six months ended June 27, 2009 compared with 25.2% of net sales for the same period last year. The decrease in the gross profit percentage was primarily due to an increase in customer allowances in the weak retail market and an increase in the average unit cost.

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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the six months ended June 27, 2009 were $19.7 million compared with $28.1 million for the same period last year. The decrease in 2009 as compared to 2008 was primarily due to the combined effect of lower compensation and facility expenses, largely due to the 2008 and 2009 Restructurings (See Note 8 —Restructuring Chargesto the financial statements), a decline in shipping costs due to lower volumes in the current period, and the reversal of certain accruals related to non-income tax liabilities for which the statute of limitations lapsed.

Restructuring Charges

Restructuring charges for the six months ended June 27, 2009 were $3.4 million compared with $0.4 million for the same period last year and consists primarily of termination benefits and lease exit costs. The increase in the current period was the result of a more substantial plan initiated in April 2009 that eliminated positions at all levels of the Company and consolidated locations as compared to the prior period. (See Note 8 —Restructuring Chargesto the financial statements)

Special Costs

During the six months ended June 27, 2009, Special Costs were $3.0 million as compared to $1.0 million for the same period last year. The increase in the current period was principally for legal fees. We expect to incur additional costs in connection with the legal matters involving Messrs. Clayton and Clark and (See Note 1 —Basis of Presentationand Note 5Commitments and Contingencies to the financial statements) certain other matters. We cannot predict the total cost but believe that future costs could be material.

Tender Offer Related Costs

During the six months ended June 27, 2009, we incurred approximately $1.1 million in costs, primarily professional fees, related to the Merger Agreement. (SeeTender Offerand Note 10 —Tender Offerto the financial statements) There were no such costs in the six months ended June 27, 2008. From the commencement of these activities in 2008, we incurred $1.5 million in such costs through June 27, 2009.

Income Taxes

Our provision for income taxes for the six months ended June 27, 2009 of $0.2 million is comprised of interest and penalties on income tax reserves.

Commencing with the fourth quarter of 2008, we determined, in accordance with GAAP, it was more likely than not, based on all of the relevant evidence that all of our deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be realized. Excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of $6.2 million or an effective tax rate of 39.0% due to the losses incurred in the six months ended June 27, 2009. (See Note 6 —Taxesto the financial statements)

The six months ended June 28, 2008 preceded our determination that all of our deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be realized and we recorded an income tax benefit of $4.0 million resulting in a 38.4% effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity and capital requirements are to fund working capital for current operations, consisting of funding the seasonal buildup in inventories and accounts receivable and funding markdown allowances. Due to the seasonality of the business, we generally reach our maximum borrowing under our revolving Credit Facility during the third quarter of the year. Our primary sources of funds to meet our liquidity and capital requirements include funds generated from operations and borrowings under our revolving credit facility.

On February 15, 2008, we amended and restated our 2003 Revolving Credit Facility by entering into a $125.0 million Amended and Restated Credit Agreement and Guaranty (the “Credit Facility”) with HSBC Bank USA, National Association (“HSBC”), other financial institutions named therein as bank parties (together with HSBC, the “Banks”), and HSBC, as Letter of Credit Issuing Bank and as Agent for the Banks (“Agent”). Our Amended and Restated Credit Agreement included certain financial and other covenants, including a covenant that Hampshire maintain a fixed charge ratio of consolidated earnings before interest, taxes, depreciation, and amortization of not less than 1.25 to 1.0 of certain fixed charges on the last day of each fiscal quarter on a rolling four quarter basis.

Based on our 2008 results, we determined on March 13, 2009 that we were not in compliance with the Credit Facility’s consolidated fixed charge ratio covenant and thus could not borrow or issue letters of credit under the Credit Facility.

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We entered into a letter agreement, dated as of April 2, 2009, with HSBC, pursuant to which HSBC reserved all rights and remedies under the Credit Facility and we acknowledged that HSBC may, but is not obligated to, continue to issue trade letters of credit subject to the terms and conditions of the Credit Facility and provided that such new letters of credit are secured by cash and cash equivalents at 105% of their aggregate face amount deposited in an account maintained at HSBC. On May 12, 2009, we entered into a second letter agreement with HSBC pursuant to which we acknowledged that HSBC may, but is not obligated to, continue to issue standby letters of credit subject to the terms and conditions of the Credit Facility and provided that such new standby letters of credit are secured by cash and cash equivalents at 100% of their aggregate face amount deposited in an account maintained at HSBC.

On August 7, 2009, we amended the Credit Facility (the “Amended Facility”) with the Banks to reduce and convert the facility to a $48.0 million asset based revolving credit facility including trade letters of credit with a $10.0 million sub-limit for standby letters of credit. The reduction in size reflects our current business needs and the success we have had in convincing our vendors to accept open terms rather than requiring letters of credit. The financial covenants have been adjusted to provide us with greater flexibility in the operation of our businesses. We believe fees and interest rates under the facility increased to current market rates, although much of this increase will be offset by the reduction in the size of the facility.

The Amended Facility expires on June 30, 2011 and is secured by substantially all assets of the Company. Borrowings under the Amended Facility are limited by the lesser of $48.0 million or a formula which considers cash, accounts receivable and inventory. Interest rates under the Amended Facility vary with the prime rate or LIBOR. The Amended Facility includes certain covenants which include minimum earnings before interest, taxes, depreciation and amortization (net of certain charges), maximum capital expenditures, minimum availability, minimum liquidity, letters of credit tied to booked orders, and limitations on when direct debt is permitted. We expect to be in compliance with the covenants for the next twelve months, though there can be no assurance as compliance is dependent on our future operating performance. The cash collateral and other requirements of the letter agreements were fully rescinded and replaced by terms and conditions in the Amended Facility. The Amended Facility has other customary provisions for periodic reporting, monitoring, and fees.

At June 27, 2009, there were no outstanding borrowings and there were approximately $13.5 million outstanding under letters of credit which were collateralized by cash and reflected asRestricted cashon the unaudited condensed consolidated balance sheet. If we were in compliance with the Credit Facility at June 27, 2009, our borrowing availability would have been approximately $20.0 million, including cash collateral.

Net cash provided by continuing operating activities was $0.4 million for the six months ended June 27, 2009 as compared with $4.1 million used for the same period last year. The change was primarily the result of favorable changes in receivables, inventory, and liability balances in the current period as compared to the prior period partially offset by an increase in the loss from continuing operations and changes in other assets balances in the current period.

At June 27, 2009, letters of credit outstanding were approximately $13.5 million as compared to $49.5 million at June 28, 2008, primarily the result of the Company achieving better terms with vendors. Our deposits with vendors, part of Other current assets, increased approximately $3.4 million from December 31, 2008.

We sold certain assets of our Shane Hunter subsidiary during April 2008 and retained approximately $14.0 million in gross accounts receivable, and $0.2 million of those gross receivables remained uncollected at June 28, 2009. These collections represent the primary component of the $9.8 million of net cash contributed by discontinued operations during 2008.

Net cash used in continuing investing activities was $13.8 million for the six months ended June 27, 2009 as compared with $9.1 million used for the same period last year. The increase in the use of cash in the current period was primarily the result of cash collateral required for letters of credit resulting from the non-compliance of the Credit Facility fixed charge ratio covenant. Capital expenditures primarily related to the build out of our office in New York that accounted for the use of cash in the prior period.

Proceeds of $3.7 million from the disposition of certain assets of our Shane Hunter subsidiary during April 2008 represent the primary component of cash flows provided by investing activities contributed by discontinued operations during 2008.

We believe that the borrowings available to us under the Amended Facility along with cash flow from operations will provide adequate resources to meet our capital requirements and operational needs for the next twelve months.

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INFLATION

We are subject to increased prices for the products we source due to both inflation and exchange rate fluctuations. We have historically managed to lessen the impact of inflation by achieving sourcing efficiencies, controlling costs in other parts of our operations and, when necessary, passing along a portion of our cost increases to our customers through higher selling prices.

OFF-BALANCE SHEET ARRANGEMENTS

We utilize letters of credit and are party to operating leases. It is currently not our general business practice to have material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2008. See Note 1 —Basis for Presentationto the financial statements regarding Recent Accounting Pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk in the area of changing interest rates. During the first six months of fiscal year 2009, there were no significant changes in our exposure to market risks. See Item 7A in our Annual Report for the year ended December 31, 2008, which was filed with the SEC on April 9, 2009, for a discussion regarding our exposure to market risks. The impact of a hypothetical 100 basis point increase in interest rates on our variable rate debt (borrowings under the Credit Facility) would have had no material effect in the six months ended June 27, 2009 due to the fact that there were no short-term borrowings during the period.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that were in place, as of June 27, 2009. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective as of June 27, 2009.

Changes in Internal Control Over Financial Reporting

During the three months ended March 28, 2009, we converted to a new software platform for accounting. The accounting software implementation did not materially affect, nor is it expected to adversely affect, our internal control over financial reporting as the internal controls for the accounting functions for the implemented accounting software were, in most instances, the same or very similar to the internal controls used for the predecessor accounting software, and the software implemented is a more robust platform that enabled us to employ internal controls not possible under the previous software platform.

During the three months ended June 27, 2009, Michael S. Culang resigned as the President, Chief Executive Officer and member of the Board of Directors of Hampshire Group, Limited. On that same day, Richard A. Mandell, a director, was elected President and Chief Executive Officer. On July 29, 2009, Heath L. Golden, who had been serving as Executive Vice President and Chief Operating Officer of the Company, became President and Chief Executive Officer and a director of the Company. Richard A. Mandell remained a director of the Company. The departure of Mr. Culang did not materially affect, nor is it expected to adversely affect, our internal control over financial reporting as Mr. Culang was replaced by a director who is very knowledgeable about the Company, who served as a member of the Audit Committee, and has substantial senior executive experience. We also believe that Mr. Mandell stepping down as President and Chief Executive did not materially affect, nor is it expected to adversely affect, our internal control over financial reporting as Mr. Mandell was replaced by an executive, Mr. Golden, who is very knowledgeable about the Company and its internal controls through the previous positions he held with the Company as General Counsel, Secretary, Vice President of Administration, Executive Vice President and Chief Operating Officer.

Maura M. Langley resigned as Vice President of Accounting and Reporting, Principal Accounting Officer, and Assistant Secretary effective July 2, 2009. The departure of Ms. Langley did not materially affect, nor is it expected to adversely affect, our internal control over financial reporting as Jonathan W. Norwood, Vice President, Chief Financial Officer, and Treasurer, was appointed Principal Accounting Officer, which is a position he held prior to the fourth calendar quarter of 2008. We believe our accounting personnel augmented by a consultant also make it likely that the departure of Ms. Langley did not materially affect, nor is it expected to adversely affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of litigation and certain related matters, please see Note 5 of Part I, Item 1, entitledCommitments and Contingencies, and Part I, Item 2 entitledLegal and Compliance Matters.

In addition, the Company is from time to time involved in other litigation incidental to the conduct of its business, none of which is expected to be material to its business, financial condition, or operations.

Item 1A. Risk Factors.

A description of the risk factors associated with our business is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2008. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE

							Maximum
					Total Number of		Number of Shares
	Total				Shares Purchased		that May Yet be
	Number of		Average		as Part of Publicly		Purchased Under
	Shares		Price Paid		Announced Plans		Such Plans or
Period	Purchased		per Share		or Programs		Programs
March 29, 2009 — May 2, 2009		—	$	—		—
May 3, 2009 — May 30, 2009		—		—		—
May 31, 2009 — June 27, 2009		—		—		—
Total		—	$	—		—		1,036,490

Under Board approved plans announced on March 17, 2005 and April 26, 2006, the Company may purchase up to 400,000 and 1,000,000 shares, respectively, of our common stock. The plans do not have an expiration date. The maximum number of shares that may yet be purchased under such plans was 1,036,490 at June 27, 2009. The Company suspended purchases under the plans upon the commencement of the Audit Committee Investigation.

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Item 6.  Exhibits.

(a) The following exhibits are filed as part of this Report:

10.1	Second Amended and Restated Credit Agreement and Guaranty among HSBC Bank USA as agent, the Banks named therein and Hampshire Group, Limited, dated August 7, 2009 filed herein.
31.1	Certification of Principal Executive Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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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, thereunto duly authorized.

	Hampshire Group, Limited
Date: August 7, 2009	By:	/s/ Heath L. Golden
		Heath L. Golden
		Chief Executive Officer and President (Principal Executive Officer)
		/s/ Jonathan W. Norwood
		Jonathan W. Norwood
		Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

EXHIBIT
NUMBER		DESCRIPTION
	10.1	Second Amended and Restated Credit Agreement and Guaranty among HSBC Bank USA as agent, the Banks named therein and Hampshire Group, Limited, dated August 7, 2009 filed herein.
	31.1	Certification of Principal Executive Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Principal Financial Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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