Hampshire 10Q 2009 Q3 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 September 26, 2009


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 (State or other jurisdiction of incorporation or organization)		06-0967107 (I.R.S. Employer Identification No.)

114 W. 41st Street, New York, New York (Address of principal executive offices)		10036 (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. Yes þ No o

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). Yes o No o

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
(Do not check if smaller reporting company)

Smaller reporting companyþ

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

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

HAMPSHIRE GROUP, LIMITED

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly and Year to Date Periods Ended September 26, 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		20
Item 4. Controls and Procedures		20
PART II—OTHER INFORMATION		21
Item 1. Legal Proceedings		21
Item 1A. Risk Factors		21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 6. Exhibits		22
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

“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.

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)	September 26, 2009			December 31, 2008
Current assets:
Cash and cash equivalents	$	1,551		$	35,098
Accounts receivable, net		40,757			27,881
Other receivables		2,891			4,007
Inventories, net		34,043			10,911
Other current assets		3,955			2,672
Assets of discontinued operations		310			246

Total current assets		83,507			80,815
Fixed assets, net		11,753			13,207
Other assets		3,848			4,684

Total assets	$	99,108		$	98,706


Current liabilities:
Current portion of long-term debt	$	11		$	30
Accounts payable		26,699			7,759
Accrued expenses and other liabilities		10,583			11,137
Liabilities of discontinued operations		512			503

Total current liabilities		37,805			19,429

Long-term debt less current portion		115			3
Other long-term liabilities		13,181			14,477

Total liabilities		51,101			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 September 26, 2009 and December 31, 2008; none issued		—			—
Common stock, $0.10 par value, 10,000,000 shares authorized; 8,243,784 shares issued at September 26, 2009 and December 31, 2008		824			824
Additional paid-in capital		36,079			36,079
Retained earnings		31,502			48,292
Treasury stock, 2,774,619 shares at cost at September 26, 2009 and December 31, 2008		(20,398	)		(20,398	)

Total stockholders’ equity		48,007			64,797

Total liabilities and stockholders’ equity	$	99,108		$	98,706

See accompanying notes to the financial statements.

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


	Three Months Ended						Nine Months Ended
	September 26,			September 27,			September 26,			September 27,
(In thousands, except per share data)	2009			2008			2009			2008
Net sales	$	50,869		$	80,962		$	100,914		$	153,622
Cost of goods sold		39,815			63,003			78,649			117,343

Gross profit		11,054			17,959			22,265			36,279
Selling, general, and administrative expenses		9,725			14,393			29,408			42,465
Restructuring charges		768			96			4,184			537
Special costs		588			1,360			3,593			2,328
Tender offer related costs		944			56			2,053			56

Income (loss) from operations		(971	)		2,054			(16,973	)		(9,107	)
Other income (expense):
Interest income		12			106			158			872
Interest expense		(114	)		(24	)		(197	)		(100	)
Other, net		(285	)		1,666			(311	)		1,659

Income (loss) from continuing operations before income taxes		(1,358	)		3,802			(17,323	)		(6,676	)
Income tax provision (benefit)		(785	)		957			(579	)		(3,066	)

Income (loss) from continuing operations		(573	)		2,845			(16,744	)		(3,610	)
Income (loss) from discontinued operations, net of taxes		1			(133	)		(46	)		(2,474	)

Net income (loss)	$	(572	)	$	2,712		$	(16,790	)	$	(6,084	)

Basic income (loss) per share:
Income (loss) from continuing operations	$	(0.10	)	$	0.44		$	(3.06	)	$	(0.49	)
Income (loss) from discontinued operations, net of taxes		—			(0.02	)		(0.01	)		(0.33	)

Net income (loss)	$	(0.10	)	$	0.42		$	(3.07	)	$	(0.82	)

Diluted income (loss) per share:
Income (loss) from continuing operations	$	(0.10	)	$	0.44		$	(3.06	)	$	(0.49	)
Income (loss) from discontinued operations, net of taxes		—			(0.02	)		(0.01	)		(0.33	)

Net income (loss)	$	(0.10	)	$	0.42		$	(3.07	)	$	(0.82	)


Weighted average number of shares outstanding:
Basic weighted average number of common shares outstanding		5,469			6,441			5,469			7,383

Diluted weighted average number of common shares outstanding		5,469			6,441			5,469			7,383

See accompanying notes to the financial statements.

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		—		—		—		(16,790	)		—		—			(16,790	)

Balance at September 26, 2009		8,243,784	$	824	$	36,079	$	31,502			2,774,619	$	(20,398	)	$	48,007

See accompanying notes to the financial statements.

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


	Nine Months Ended
(In thousands)	September 26, 2009			September 27, 2008
Cash flows from operating activities:
Net loss	$	(16,790	)	$	(6,084	)
Less: Loss from discontinued operations, net of taxes		(46	)		(2,474	)

Loss from continuing operations		(16,744	)		(3,610	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization		1,927			1,352
Loss on sale or disposal of fixed assets		286			179
Deferred income tax benefit		—			(2,310	)
Deferred compensation expense, net		—			92
Excess tax benefits from share-based payment arrangements		—			(102	)
Changes in operating assets and liabilities:
Receivables, net		(11,713	)		(27,018	)
Inventories, net		(23,132	)		(29,229	)
Other assets		(70	)		(567	)
Liabilities		17,149			12,554

Net cash provided by (used in) continuing operating activities		(32,297	)		(48,659	)
Net cash provided by (used in) discontinued operations		(194	)		9,046

Net cash provided by (used in) operating activities		(32,491	)		(39,613	)
Cash flows from investing activities:
Capital expenditures		(282	)		(9,475	)
Increase in cash restricted for the collateralization of letters of credit		(13,523	)		—
Decrease in cash restricted for the collateralization of letters of credit		13,523			—
Proceeds from the sale of fixed assets		25			—

Net cash provided by (used in) continuing investing activities		(257	)		(9,475	)
Net cash provided by (used in) discontinued operations		—			3,724

Net cash provided by (used in) investing activities		(257	)		(5,751	)
Cash flows from financing activities:
Proceeds from credit facility		—			16,325
Repayment of credit facility		—			(6,550	)
Purchase of treasury stock		—			(11,952	)
Repayment of long-term debt		(22	)		(34	)
Excess tax benefits from share-based payment arrangements		—			102
Capitalized credit facility costs		(777	)		(521	)

Net cash provided by (used in) financing activities		(799	)		(2,630	)

Net increase (decrease) in cash and cash equivalents		(33,547	)		(47,994	)
Cash and cash equivalents at beginning of period		35,098			48,431

Cash and cash equivalents at end of period	$	1,551		$	437

See accompanying notes to the financial statements.

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 Company evaluated subsequent events through the date that the unaudited consolidated financial statements were issued and filed with the SEC, which was November 5, 2009. There were no material subsequent events that required recognition or disclosure other than those disclosed in Note 11 —Subsequent Events.

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. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from these estimates and assumptions. 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 September 26, 2009 and September 27, 2008. The Company recognized expense related to this policy in the amount of $0.5 million in the year to date periods ended September 26, 2009 and September 27, 2008 and in the amount of $1.3 million from inception through September 26, 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 $18.1 million through September 26, 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.

Equity Based Compensation

The Company did not record any expense related to equity awards, as no equity-based compensation was awarded during the three and nine month periods ended September 26, 2009. No stock options or other forms of equity based compensation were outstanding or exercised during the three and nine month periods ended September 26, 2009 and September 27, 2008.

Accounting Standards Updates

In June 2009, 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 (codified as Accounting Standards Codification^TM (“ASC”) Topic 105) establishes the FASB ASC as the single source of authoritative nongovernmental U.S. GAAP. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We adopted the provisions of the standard on September 26, 2009, which had no 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 FSP (codified as ASC Topic 820-10-65-1) amended 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 FSP also amended 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 was 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.

In September 2006, the FASB issued FAS No. 157 (codified as ASC 820), “Fair Value Measurements” (“FAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. The following amendments to FAS No. 157 were effective in 2009:

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 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.” This FSP (codified as ASC Topic 820-10-65-4) 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 was 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 August 2009, the FASB issued Accounting Standards Update No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). ASU 2009-05 amends the Fair Value Measurements and Disclosures Topic of the FASB ASC by providing additional guidance clarifying the measurement of liabilities at fair value. ASU 2009-05 is effective for the Company for the reporting period ending December 31, 2009. The Company does not expect the adoption of ASU 2009-05 to have a significant impact on the consolidated financial statements.

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 was to expire on April 30, 2013. The Company’s Credit Facility included 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.

On August 7, 2009, the Company and the Banks amended and restated the Credit Facility (the “Amended Facility”) and the Company is now in compliance with the covenants of the Amended Facility. The Amended Facility with the Banks reduced and converted 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 is scheduled to expire on June 30, 2011 and is secured by substantially all assets of the Company. Aggregate borrowing availability under the Amended Facility is limited to 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. Cash collateral and other requirements of the letter agreements executed after March 13, 2009 were fully rescinded and replaced by terms and conditions of the Amended Facility. The Amended Facility has other customary provisions for periodic reporting, monitoring, and fees.

At September 26, 2009, there were no outstanding borrowings, and there were approximately $6.8 million outstanding under letters of credit. Borrowing availability was approximately $41.2 million at September 26, 2009.

Note 3 — Inventories

Inventories at September 26, 2009 and December 31, 2008 consisted of the following:


(In thousands)	September 26, 2009			December 31, 2008
Finished goods	$	34,598		$	13,118
Raw materials and supplies		43			54

		34,641			13,172
Less: reserves		(598	)		(2,261	)

Inventories, net	$	34,043		$	10,911

Note 4 — Earnings (Loss) Per Share

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


	Numerator			Denominator		Per Share
(In thousands, except per share data)	Income (Loss)			Shares		Amount
Three months ended September 26, 2009:
Basic loss from continuing operations	$	(573	)		5,469	$	(0.10	)
Effect of dilutive securities:
Preferred rights		—			—		—

Diluted loss from continuing operations	$	(573	)		5,469	$	(0.10	)

Three months ended September 27, 2008:
Basic earnings from continuing operations	$	2,845			6,441	$	0.44
Effect of dilutive securities:
None outstanding		—			—		—

Diluted earnings from continuing operations	$	2,845			6,441	$	0.44


Nine months ended September 26, 2009:
Basic loss from continuing operations	$	(16,744	)		5,469	$	(3.06	)
Effect of dilutive securities:
Preferred rights		—			—		—

Diluted loss from continuing operations	$	(16,744	)		5,469	$	(3.06	)

Nine months ended September 27, 2008:
Basic loss from continuing operations	$	(3,610	)		7,383	$	(0.49	)
Effect of dilutive securities:
None outstanding		—			—		—

Diluted loss from continuing operations	$	(3,610	)		7,383	$	(0.49	)

There was no equity based compensation outstanding during the nine month periods ended September 26, 2009 and September 27, 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 September 26, 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 the Kuttner Parties exchanged releases 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, 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 seek monetary damages. The Company intends to vigorously defend against such claims.

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.

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 sought 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 sought 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 was held on September 2, 2009. The Court dismissed Mr. Clayton’s claim for intentional infliction of emotional distress against the Company, as well as his defamation claim against the Company’s directors and officers. The Court denied the remainder of Hampshire’s motion. A trial that was originally scheduled to commence in October 2009 has been rescheduled for December 2009.

Note 6 — Taxes

As of September 26, 2009, the Company’s unaudited condensed consolidated balance sheet reflects a liability for unrecognized tax benefits of $6.1 million, including $2.4 million of accrued interest and penalties. The Company anticipates that total unrecognized tax benefits will decrease by approximately $2.5 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 2006 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 2006 and beyond remain open to examination by the Hong Kong Inland Revenue Department.

The Company recorded approximately $1.4 million and $1.9 million of previously unrecognized tax benefits, including interest and penalties of approximately $0.4 million and $0.6 million, during the quarters ended September 26, 2009 and September 27, 2008, respectively, due to the expiration of various statutes.

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 $1.3 million and $7.5 million due to the losses incurred in the quarter and year to date periods ended September 26, 2009, respectively. The effective income tax rate from continuing operations for the quarter and year to date periods ended September 26, 2009, without the impact of these valuation allowances, would have been 93.7% and 43.2%, respectively, as compared to 25.2% and 45.9% for the quarter and year to date periods ended September 27, 2008, respectively.

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. 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.

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 September 26, 2009 and December 31, 2008 were as follows:


(In thousands)	September 26, 2009		December 31, 2008
Other receivables	$	231	$	161
Other current assets		—		6
Other assets		79		79

Assets of discontinued operations	$	310	$	246


Accounts payable	$	236	$	263
Accrued expenses and other liabilities		276		240

Liabilities of discontinued operations	$	512	$	503

The operating results for the discontinued operations for the three and nine month periods ended September 26, 2009 and September 27, 2008 were as follows:


	Three Months Ended					Nine Months Ended
(In thousands)	September 26, 2009		September 27, 2008			September 26, 2009			September 27, 2008
Net sales	$	—	$	—		$	—		$	16,607
Gross profit	$	—	$	—		$	—		$	4,077

Income (loss) on discontinued operations before income taxes	$	1	$	(105	)	$	(46	)	$	(417	)
Loss on sale of business		—		(28	)		—			(3,680	)
Benefit for income taxes		—		—			—			1,623

Income (loss) from discontinued operations, net of taxes	$	1	$	(133	)	$	(46	)	$	(2,474	)

Note 8 — Restructuring Charges

In each of the two most recent fiscal years, the Company has initiated and implemented a restructuring program.

In May 2008, the Company initiated a restructuring and cost reduction plan (the “2008 Restructuring”) that involved a 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.

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 components of the 2009 Restructuring included a net reduction of over 170 employees, or approximately 50% of the Company’s global workforce, with approximately 110 associated with its China operations, 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, which resulted in the elimination of positions at every level of the Company.

The Company initiated the second phase of the 2009 Restructuring in the third quarter of 2009, which included a reduction of 101 employees with the majority of the activities relating to the Company’s Asian operations. The 2009 Restructuring is expected to be completed during the fourth quarter of 2009. During the nine month period ended September 26, 2009, Restructuring charges incurred were $4.2 million. The Company anticipates incurring additional 2009 Restructuring charges of approximately $0.2 million during the final phase of the 2009 Restructuring in the fourth quarter of 2009.

The following summarizes the charges recognized for the 2009 and 2008 Restructuring programs through the periods ended September 26, 2009 and September 27, 2008:


	Three Months Ended				Nine Months Ended
(In thousands)	September 26, 2009		September 27, 2008		September 26, 2009		September 27, 2008
Personnel reductions	$	743	$	50	$	3,460	$	482
Other costs		25		46		724		55

Total	$	768	$	96	$	4,184	$	537

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


	Three Months Ended
	September 26, 2009									September 27, 2008
	Personnel			Other						Personnel			Other
(In thousands)	Reductions			Costs			Total			Reductions			Costs			Total
Beginning of period	$	48		$	850		$	898		$	134		$	—		$	134
Costs charged to expense		743			25			768			50			46			96
Costs paid or settled		(516	)		(121	)		(637	)		(100	)		(21	)		(121	)

End of period	$	275		$	754		$	1,029		$	84		$	25		$	109


	Nine Months Ended
	September 26, 2009									September 27, 2008
	Personnel			Other						Personnel			Other
(In thousands)	Reductions			Costs			Total			Reductions			Costs			Total
Beginning of period	$	72		$	—		$	72		$	—		$	—		$	—
Costs charged to expense		3,460			889			4,349			482			55			537
Costs paid or settled		(3,257	)		(135	)		(3,392	)		(398	)		(30	)		(428	)

End of period	$	275		$	754		$	1,029		$	84		$	25		$	109

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 in the quarter ended June 27, 2009, were charged toRestructuring chargesin the consolidated statement of operations in the three and nine month periods ended September 26, 2009 and September 27, 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. 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 September 26, 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

Description

(Level 1)

(Level 2)

(Level 3)

September 26, 2009

Cash equivalents

233

—

233

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., a direct wholly owned subsidiary of NAF Holdings II, LLC (together with NAF Acquisition Corp., “NAF”). 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 September 28, 2009, the Company entered into a settlement and mutual release agreement (“Settlement”) with NAF, pursuant to which the Company and NAF settled and discharged all claims related to and arising under the Merger Agreement and any ancillary agreements entered into in connection with the negotiation and execution of the Merger Agreement. Under the terms of the Settlement, the Company agreed to reimburse NAF for approximately $0.8 million of approximately $2.1 million in transaction related expenses incurred by NAF in connection with the Merger Agreement.

During the quarter and year to date periods ended September 26, 2009, the Company has incurred approximately $0.9 million and $2.1 million, respectively, in costs related to the Merger Agreement which were recorded in “Tender offer related costs” in the unaudited condensed consolidated statement of operations. The Settlement reimbursement is reflected in both periods. From the commencement of these activities in 2008, the Company has incurred $2.4 million in such costs through September 26, 2009.

Note 11 — Subsequent Events

On October 21, 2009, the Company adopted stock and cash incentive compensation plans, which will be administered by the Board or a committee appointed by the Board.

The Hampshire Group, Limited 2009 Stock Incentive Plan (the “Stock Plan”) is designed to assist the Company in attracting, retaining, motivating, and rewarding key employees, officers, directors, and consultants, and promoting the creation of long-term value for stockholders of the Company by closely aligning the interests of these individuals with those of the stockholders. The Stock Plan permits the Company to award eligible persons nonqualified stock options, restricted stock, and other stock-based awards. In connection the adoption of the Stock Plan, the Board approved grants of restricted stock under the Stock Plan totaling 847,500 shares, which consisted of grants to employees, named executive officers, and directors. Ten percent of each award of restricted stock will be subject to time-based vesting with the remaining 90% of each award subject to performance-based vesting.

The Hampshire Group, Limited 2010 Cash Incentive Bonus Plan (the “Bonus Plan”) pursuant to which it will grant annual performance-based bonuses to certain of its employees. The goal of the Bonus Plan is to align the annual interests of the Company’s management and other key employees with those of the Company and its stockholders by providing a cash bonus incentive for meeting annual goals set by the Board of Directors of the Company. Target bonus amounts under the Bonus Plan will be a percentage of each participant’s base salary, and actual bonus amounts paid under the Bonus Plan will depend on the extent to which annual performance metrics are achieved.

On November 4, 2009, the Company renewed its licensing agreement for three years for the design, production and distribution of men’s sweaters under the Geoffrey Beene® brand.

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.

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 price increases, 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.

In April 2009, we initiated a restructuring and cost reduction plan (the “2009 Restructuring”) designed to significantly reduce our fixed cost structure, improve our return on invested capital, increase our operating efficiency and better position the Company for the long term. In the quarter ended September 26, 2009, we remained focused on our restructuring efforts as we decentralized our sourcing operations, amended and restated our Credit Facility, and recruited industry veteran Howard Zwilling, to revitalize our women’s business. 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.

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. At September 26, 2009, there were no outstanding borrowings from the Amended Facility as compared to $9.8 million at September 27, 2008. Letters of credit outstanding were approximately $6.8 million as compared to $39.4 million at September 26, 2009 and September 27, 2008, respectively. We believe the reduction in borrowing and letters of credit in 2009 as compared to 2008 was primarily the result of achieving better terms with our vendors. We had approximately $41.2 million of availability in the Amended Facility at September 26, 2009.

Our selling, general, and administrative expenses for the three months ended September 26, 2009 were $9.7 million compared with $14.4 million for the same period last year, largely the result of the 2009 Restructuring and a 2008 restructuring. We believe that the 2009 and 2008 restructurings will result in annualized savings from selling, general and administrative expenses of approximately $10.0 million and $3.1 million, respectively.

Tender Offer

Change in Independent Accountants

On September 28, 2009, we dismissed Deloitte & Touche, LLP as our independent registered public accountants. Concurrently, and upon the recommendation and approval of the Audit Committee, we engaged BDO Seidman, LLP as our independent registered public accountants for the fiscal year ended December 31, 2009. See “Item 4.01 Changes in Registrant’s Certifying Accountant” in our Form 8-K filed with the SEC on October 2, 2009.

Compensation Plans

On October 21, 2009, we adopted stock and cash incentive compensation plans, which will be administered by the Board of Directors (“Board”) or a committee appointed by the Board.

The Hampshire Group, Limited 2009 Stock Incentive Plan (the “Stock Plan”) is designed to assist us in attracting, retaining, motivating, and rewarding key employees, officers, directors, and consultants, and promoting the creation of long-term value for stockholders of the Company by closely aligning the interests of these individuals with those of our stockholders. The Stock Plan permits us to award eligible persons nonqualified stock options, restricted stock, and other stock-based awards. In connection with the adoption of the Stock Plan, the Board approved grants of restricted stock under the Stock Plan totaling 847,500 shares, which consisted of grants to employees, named executive officers, and directors. Ten percent of each award of restricted stock will be subject to time-based vesting with the remaining 90% of each award subject to performance-based vesting.

In addition, we adopted The Hampshire Group, Limited 2010 Cash Incentive Bonus Plan (the “Bonus Plan”) pursuant to which we will grant annual performance-based bonuses to certain of our employees. The goal of the Bonus Plan is to align the annual interests of our management and other key employees with those of the Company and our stockholders by providing a cash bonus incentive for meeting annual goals set by the Board of Directors of the Company. Target bonus amounts under the Bonus Plan will be a percentage of each participant’s base salary, and actual bonus amounts paid under the Bonus Plan will depend on the extent to which annual performance metrics are achieved.

RESULTS OF CONTINUING OPERATIONS

Quarterly Comparison — Three Months Ended September 26, 2009 and September 27, 2008

Net Sales

Net sales decreased by 37.2% to $50.9 million for the three months ended September 26, 2009 compared with $81.0 million for the same period last year. The $30.1 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
(Dollars in thousands)	Dollars			Percentage of 2008
Net sales quarter ended September 27, 2008	$	80,962			100.0	%
Volume		(25,285	)		(31.2	%)
Average net selling prices		(4,808	)		(6.0	%)

Net sales quarter ended September 26, 2009	$	50,869			62.8	%

We believe that the decrease in the volume of our 2009 third 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 September 26, 2009 was $11.1 million compared with $18.0 million for the same period last year, which reflected a decrease in net sales and a gross profit percentage of 21.7% of net sales for the three months ended September 26, 2009 compared with 22.2% 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 current weak retail market.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the three months ended September 26, 2009 were $9.7 million compared with $14.4 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 employee related 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 timing of certain marketing costs, which we expect to incur in the fourth quarter of 2009 and which were incurred in the third quarter of 2008.

Restructuring Charges

Restructuring charges for the three months ended September 26, 2009 were $0.8 million compared with $0.1 million for the same period last year and consisted primarily of termination benefits. The increase in the current period was the result of a plan initiated in April 2009, which eliminated positions at all levels and consolidated certain locations as compared to the prior period. (See Note 8 —Restructuring Chargesto the financial statements) We anticipate incurring additional restructuring costs of approximately $0.2 million during the remainder of 2009.

We believe that the 2009 and 2008 restructuring activities will result in annualized savings from selling, general and administrative expenses of approximately $10.0 million and $3.1 million, respectively.

Special Costs

During the three months ended September 26, 2009, Special Costs were $0.6 million as compared to $1.4 million for the same period last year. Special Costs were higher in the prior period as we entered into a stock purchase and settlement agreement and mutual releases with Ludwig Kuttner and certain affiliates during August 2008. (See Note 1 —Basis of Presentationand Note 5 —Commitments and Contingenciesthe financial statements) We expect to incur additional costs in connection with the legal matters involving Messrs. Clayton and Clark 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 September 26, 2009, we incurred approximately $0.9 million in Settlement costs, related to the Settlement. (SeeTender Offerand Note 10 —Tender Offerto the financial statements) There were $0.1 million of such costs in the three months ended September 27, 2008. From the commencement of these activities in 2008, we incurred $2.4 million in such costs through September 26, 2009.

Income Taxes

Our income tax benefit for the quarter ended September 26, 2009 of $0.8 million was the result of the release of certain tax reserves that reached their applicable statute of limitations, which were offset by the accrual of additional interest and penalties on remaining income tax reserves. The tax reserves released consisted of approximately $1.4 million of previously unrecognized tax benefits, including interest and penalties of approximately $0.4 million.

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 $1.3 million or an effective tax rate of 93.7% due to the losses incurred in the quarter ended September 26, 2009. (See Note 6 —Taxesto the financial statements)

The quarter ended September 27, 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 provision of $1.0 million resulting in a 25.2% effective tax rate. We recorded approximately $1.9 million of previously unrecognized tax benefits, including interest and penalties of approximately $0.6 million, during the quarter ended September 27, 2008 due to the expiration of various statutes.

Year to Date Comparison — Nine Months Ended September 26, 2009 and September 27, 2008

Net Sales

Net sales decreased by 34.3% to $100.9 million for the nine months ended September 26, 2009 compared with $153.6 million for the same period last year. The $52.7 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
(Dollars in thousands)	Dollars			Percentage of 2008
Net sales nine months ended September 27, 2008	$	153,622			100.0	%
Volume		(47,274	)		(30.8	%)
Average net selling prices		(5,434	)		(3.5	%)

Net sales nine months ended September 26, 2009	$	100,914			65.7	%

We believe that the decrease in the volume in our first nine 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 nine months ended September 26, 2009 was $22.3 million compared with $36.3 million for the same period last year, which reflected a decrease in net sales and a gross profit percentage of 22.1% of net sales for the nine months ended September 26, 2009 compared with 23.6% 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.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the nine months ended September 26, 2009 were $29.4 million compared with $42.5 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, the reversal of certain accruals related to non-income tax liabilities for which the statute of limitations lapsed and the timing of certain marketing costs which we expect to incur in the fourth quarter of 2009 and which were incurred during the third quarter of 2008.

Restructuring Charges

Restructuring charges for the nine months ended September 26, 2009 were $4.2 million compared with $0.5 million for the same period last year and consisted primarily of termination benefits and lease exit costs. The increase in the current period was the result of a plan initiated in April 2009, which 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) We anticipate incurring additional restructuring costs of approximately $0.2 million during the remainder of 2009.

Special Costs

During the nine months ended September 26, 2009, Special Costs were $3.6 million as compared to $2.3 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 Contingenciesto 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 nine months ended September 26, 2009, we incurred approximately $2.1 million in costs, primarily professional fees, related to the Merger Agreement and Settlement. (SeeTender Offerand Note 10 —Tender Offerto the financial statements) There were $0.1 million of such costs in the nine months ended September 27, 2008. From the commencement of these activities in 2008, we incurred $2.4 million in such costs through September 26, 2009.

Income Taxes

Our income tax benefit for the nine months ended September 26, 2009 of $0.6 million was the result of the release of certain tax reserves that reached their applicable statute of limitations, which were offset by the accrual of additional interest and penalties on remaining income tax reserves. The tax reserves released during the quarter ended September 26, 2009 consisted of approximately $1.4 million of previously unrecognized tax benefits, including interest and penalties of approximately $0.4 million.

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 $7.5 million or an effective tax rate of 43.2% due to the losses incurred in the nine months ended September 26, 2009. (See Note 6 —Taxesto the financial statements)

The nine months ended September 27, 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 $3.1 million resulting in a 45.9% effective tax rate. We recorded approximately $1.9 million of previously unrecognized tax benefits, including interest and penalties of approximately $0.6 million, during the quarter ended September 27, 2008 due to the expiration of various statutes.

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 and fourth quarters 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.

On August 7, 2009, we amended and restated our 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 is scheduled to expire on June 30, 2011 and is secured by substantially all assets of the Company. Aggregate borrowing availability under the Amended Facility is limited to 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. Cash collateral and other requirements of the letter agreements executed after March 13, 2009 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 September 26, 2009, there were no outstanding borrowings from the Amended Facility with approximately $41.2 million of availability. At September 26, 2009, letters of credit outstanding were approximately $6.8 million as compared to $39.4 million at September 27, 2008, primarily the result of the Company achieving better terms with vendors.

Net cash used by continuing operating activities was $32.3 million for the nine months ended September 26, 2009 as compared with $48.7 million used for the same period last year. The change was primarily the result the decline in 2009 sales volumes and corresponding favorable changes in receivables, inventory and other assets balances as well as an increase in accounts payable due to better terms with vendors in the current period as compared to the prior period. These were offset by an increase in the loss from continuing operations.

We sold certain assets of our Shane Hunter subsidiary during April 2008 and retained approximately $14.0 million in gross accounts receivable, and $0.1 million of those gross receivables remained uncollected at September 27, 2008. These collections represent the primary component of the $9.0 million of net cash contributed by discontinued operations during 2008.

Net cash used in continuing investing activities was $0.3 million for the nine months ended September 26, 2009 as compared with $9.5 million used for the same period last year. Capital expenditure disbursements primarily related to the build out of our office in New York 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.

Net cash used in financing activities of $2.6 million in the nine months ended September 27, 2008 was primarily the result of $12.0 million in stock purchased as part of a settlement with the Kuttner parties (See Note 1 —Basis of Presentationand Note 5,Commitments and Contingenciesto the financial statements) in August 2008 somewhat offset by $9.8 million of Credit Facility net proceeds. The net cash used for the Kuttner party transaction was approximately $10.4 million.

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.

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 nine 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 nine months ended September 26, 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 September 26, 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 September 26, 2009.

We believe that there were no changes that materially affected or are expected to materially adversely affect our internal control over financial reporting. The following changes to our internal controls occurred during the quarter ended September 26, 2009:

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 of the Company, replacing Richard A. Mandell. We believe that Mr. Mandell stepping down as President and Chief Executive did not materially affect, nor is it expected to materially adversely affect, our internal control over financial reporting as Mr. Mandell was replaced by an executive, Mr. Golden, who is 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. Mr. Mandell remains a director of the Company.

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 materially 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 also believe that the departure of Ms. Langley did not materially affect, nor is it expected to materially adversely affect, our internal control over financial reporting.

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


					Total Number of		Maximum Number of
					Shares Purchased as		Shares that May Yet
	Total				Part of Publicly		be Purchased Under
	Number of Shares		Average Price Paid		Announced Plans or		Such Plans or
Period	Purchased		per Share		Programs		Programs
June 27, 2009 — August 1, 2009		—	$	—		—
August 2, 2009 — August 29, 2009		—		—		—
August 30, 2009 — September 26, 2009		—		—		—

Total		—	$	—		—		1,036,490

Item 6. Exhibits.

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

	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

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: November 5, 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)

INDEX TO EXHIBITS


EXHIBIT
NUMBER		DESCRIPTION

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Hampshire Inactive 10-Q2009 Q3 Quarterly report

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