Hampshire 10-Q 2010 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 October 2, 2010

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). YesoNoo

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 November 1, 2010: 6,243,860

HAMPSHIRE GROUP, LIMITED

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended October 2, 2010

“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	18
Item 4. Controls and Procedures	18
PART II-OTHER INFORMATION	19
Item 1. Legal Proceedings	19
Item 1A. Risk Factors	19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 6. Exhibits	20
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 “Form 10-Q”), 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,” “forecast,” “foresee,” 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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)	October 2, 2010			December 31, 2009
Current assets:
Cash and cash equivalents	$	1,575		$	33,365
Accounts receivable, net		39,972			21,708
Other receivables		8,837			7,663
Inventories, net		27,819			8,137
Other current assets		3,884			1,606
Assets of discontinued operations		9			152
Total current assets		82,096			72,631
Fixed assets, net		9,940			11,283
Other assets		2,216			3,015
Total assets	$	94,252		$	86,929
Current liabilities:
Current portion of long-term debt	$	36		$	39
Accounts payable		22,767			7,256
Accrued expenses and other liabilities		7,054			5,557
Liabilities of discontinued operations		473			572
Total current liabilities		30,330			13,424
Long-term debt less current portion		52			79
Other long-term liabilities		14,225			14,577
Total liabilities		44,607			28,080
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.10 par value, 1,000,000 shares authorized at October 2, 2010 and December 31, 2009, respectively; none issued		—			—
Series A junior participating preferred stock, $0.10 par value, 10,000 shares authorized at October 2, 2010 and December 31, 2009, respectively; none issued		—			—
Common stock, $0.10 par value, 10,000,000 shares authorized; 8,243,784 shares issued at October 2, 2010 and December 31, 2009		824			824
Additional paid-in capital		30,837			29,948
Retained earnings		32,684			42,246
Treasury stock, 1,999,924 and 1,927,119 shares at cost at October 2, 2010 and December 31, 2009, respectively		(14,700	)		(14,169	)
Total stockholders’ equity		49,645			58,849
Total liabilities and stockholders’ equity	$	94,252		$	86,929

See accompanying notes to the financial statements.

1

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

	Three Months Ended						Nine Months Ended
	October 2,			September 26,			October 2,			September 26,
(In thousands, except per share data)	2010			2009			2010			2009
Net sales	$	52,739		$	50,869		$	87,941		$	100,914
Cost of goods sold		42,156			39,815			69,491			78,649
Gross profit		10,583			11,054			18,450			22,265
Selling, general, and administrative expenses		9,296			9,725			25,262			29,408
Restructuring charges		—			768			—			4,184
Special costs		65			588			4,480			3,593
Tender offer related costs		—			944			—			2,053
Income (loss) from operations		1,222			(971	)		(11,292	)		(16,973	)
Other income (expense):
Interest income		24			12			68			158
Interest expense		(145	)		(114	)		(391	)		(197	)
Other, net		(28	)		(285	)		(108	)		(311	)
Income (loss) from continuing operations before income taxes		1,073			(1,358	)		(11,723	)		(17,323	)
Income tax benefit		(2,295	)		(785	)		(2,173	)		(579	)
Income (loss) from continuing operations		3,368			(573	)		(9,550	)		(16,744	)
Income (loss) from discontinued operations, net of taxes		(71	)		1			(12	)		(46	)
Net income (loss)	$	3,297		$	(572	)	$	(9,562	)	$	(16,790	)
Basic income (loss) per share:
Income (loss) from continuing operations	$	0.60		$	(0.10	)	$	(1.72	)	$	(3.06	)
Loss from discontinued operations, net of taxes		(0.01	)		—			—			(0.01	)
Net income (loss)	$	0.59		$	(0.10	)	$	(1.72	)	$	(3.07	)
Diluted income (loss) per share:
Income (loss) from continuing operations	$	0.60		$	(0.10	)	$	(1.72	)	$	(3.06	)
Loss from discontinued operations, net of taxes		(0.01	)		—			—			(0.01	)
Net income (loss)	$	0.59		$	(0.10	)	$	(1.72	)	$	(3.07	)
Weighted average number of shares outstanding:
Basic weighted average number of common shares outstanding		5,556			5,469			5,554			5,469
Diluted weighted average number of common shares outstanding		5,556			5,469			5,554			5,469

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, 2009		8,243,784	$	824	$	29,948		$	42,246			1,927,119		$	(14,169	)	$	58,849
Net loss		—		—		—			(9,562	)		—			—			(9,562	)
Restricted stock grants		—		—		(478	)		—			(65,000	)		478			—
Restricted stock forfeitures		—		—		1,004			—			136,500			(1,004	)		—
Stock based compensation		—		—		363			—			—			—			363
Purchase of treasury shares		—		—		—			—			1,305			(5	)		(5	)
Balance at October 2, 2010		8,243,784	$	824	$	30,837		$	32,684			1,999,924		$	(14,700	)	$	49,645

See accompanying notes to the financial statements.

3

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

	Nine Months Ended
(In thousands)	October 2, 2010			September 26, 2009
Cash flows from operating activities:
Net loss	$	(9,562	)	$	(16,790	)
Less: Loss from discontinued operations, net of taxes		(12	)		(46	)
Loss from continuing operations		(9,550	)		(16,744	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization		1,858			1,927
Loss on sale or disposal of fixed assets		34			286
Stock based compensation		363			—
Deferred compensation expense		(58	)		—
Changes in operating assets and liabilities:
Receivables, net		(19,535	)		(11,713	)
Inventories, net		(19,531	)		(23,132	)
Other assets		(42	)		(70	)
Liabilities		16,453			17,149
Net cash provided by (used in) continuing operating activities		(30,008	)		(32,297	)
Net cash provided by (used in) discontinued operations		(215	)		(194	)
Net cash provided by (used in) operating activities		(30,223	)		(32,491	)
Cash flows from investing activities:
Acquisition of a business		(1,210	)		—
Capital expenditures		(139	)		(282	)
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		(1,349	)		(257	)
Net cash provided by (used in) discontinued operations		—			—
Net cash provided by (used in) investing activities		(1,349	)		(257	)
Cash flows from financing activities:
Purchase of treasury stock		(5	)		—
Repayment of long-term debt		(30	)		(22	)
Capitalized credit facility costs		(183	)		(777	)
Net cash provided by (used in) financing activities		(218	)		(799	)
Net increase (decrease) in cash and cash equivalents		(31,790	)		(33,547	)
Cash and cash equivalents at beginning of period		33,365			35,098
Cash and cash equivalents at end of period	$	1,575		$	1,551

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 Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2009.

The information included herein is not necessarily indicative of the annual results that may be expected for the year ending December 31, 2010, 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 approximately 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.

The Company has evaluated subsequent events from the date of the unaudited condensed consolidated balance sheet through the date the financial statements were issued. During this period, no material recognizable subsequent events were identified, except as discussed in Note 2 —Credit Facility.

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 (the “Audit Committee Investigation”).

On December 3, 2007, the Company purchased an insurance policy that insured 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 Policy”). The Special D&O Insurance Policy provided coverage of $7.5 million, had a term of six years, and cost $4.1 million including taxes and fees. This payment was treated as a prepaid expense as the policy covered a six year period and amortized at a rate of approximately $0.7 million per year.

As discussed in Note 5 hereto, in August 2010, the Company entered into settlements with the two remaining former officers who were terminated during 2006, and therefore, the remaining value of the Special D&O Insurance Policy totaling $2.4 million was written off at July 3, 2010. The Company recognized expense related to this policy of $0.2 million in the three month period ended September 26, 2009. The Company recognized expense related to the Special D&O Insurance Policy in the amount of $2.7 million in the year to date period ended October 2, 2010 as compared with $0.5 million in the year to date period ended September 26, 2009.

The Company reports certain costs asSpecial Costsincluding, 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 and other expenses related to the now settled litigation 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 $23.5 million through October 2, 2010. All litigation related to the Audit Committee Investigation has now been resolved, and thus, the Company does not expect to incur significant expenses associated with the Audit Committee Investigation after the third quarter of 2010.

5

Accounting Standard Updates

The following accounting pronouncements have been issued and will be effective for the Company in or after fiscal year 2010:

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-06,“Fair Value Measurements and Disclosures,”which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The guidance is effective for annual and interim reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual and interim periods beginning after December 15, 2010. The Company adopted these amendments in the first quarter of 2010 and the adoption did not have a material impact on the disclosures of the Company’s unaudited condensed consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09“Subsequent Events — Amendments to Certain Recognition and Disclosure Requirements”(“ASU 2010-09”),which amends FASB ASC Topic 855,Subsequent Events,so that SEC filers no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. ASU No. 2010-09 was effective immediately and the Company adopted these new requirements in the first quarter of 2010. The adoption did not have a material impact on the disclosures of the Company’s unaudited condensed consolidated financial statements.

Note 2 — Credit Facility

On August 7, 2009, the Company and its lenders amended and restated its credit facility (the “Prior 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 Prior Facility with the Banks was 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 Prior Facility was scheduled to expire on June 30, 2011 and was secured by substantially all assets of the Company. Aggregate borrowing availability under the Prior Facility was limited to the lesser of $48.0 million or a formula which considers cash, accounts receivable and inventory. Interest rates under the Prior Facility varied with the prime rate or the London Interbank Offered Rate (“LIBOR”). The Prior Facility included certain covenants, which included 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 was permitted. The Prior Facility had other customary provisions for periodic reporting, monitoring, and fees. On October 28, 2010, the Company entered into a new credit agreement (referred to as the “New Credit Facility”) with Wells Fargo Capital Finance, LLC. The New Credit Facility replaced the Prior Facility in its entirety. In addition, approximately $0.3 million of the remaining value of unamortized capitalized loan costs with the Prior Facility was written off as of the date of termination.

The New Credit Facility is a $50.0 million asset based revolving credit facility, including trade and standby letters of credit, with a $30.0 million sub-limit for letters of credit. The New Credit Facility has a term of four years, matures on October 28, 2014, and is secured by substantially all assets of the Company and each of its domestic subsidiaries. Revolving credit loans are limited to a borrowing base, which considers cash deposited into a restricted account, accounts receivable and inventory. The New Credit Facility contains customary conditions precedent to each borrowing, including absence of defaults, no material adverse change, accuracy of representation and warranties, and a fixed charge coverage covenant that takes effect only when and so long as the Company does not meet minimum liquidity requirements, which adjust based on the seasonality of the Company’s business. The New Credit Facility is designed to provide working capital and letters of credit that will be used primarily for the purchase and importation of inventory and for general corporate purposes.

The Company, at its discretion, may prepay outstanding obligations in whole or part together with accrued interest at any time. The New Credit Facility requires prepayment of outstanding obligations and accrued interest upon certain events, including certain asset sales or receipt of insurance proceeds. The New Credit Facility also contains customary provisions that enable Wells Fargo Capital Finance, LLC to accelerate payment of outstanding obligations under the New Credit Facility upon certain events, including, among others, non-payment of amounts due under the New Credit Facility, breach of a fixed charge coverage ratio (which is applicable only so long as the Company does not meet minimum liquidity requirements), insolvency, bankruptcy, a change of control of the Company, and if certain liens on the collateral securing the obligations under the New Credit Facility fail to be perfected.

6

The obligations under the New Credit Facility are secured by (i) a first priority security interest in certain assets of the Company and the domestic subsidiaries of the Company that are party to the New Credit Facility, in their capacity as guarantors, (ii) a pledge of all issued and outstanding common stock of each operating domestic subsidiary of the Company, and (iii) an assignment of proceeds of insurance covering collateral.

Interest accrues on outstanding indebtedness under revolving credit loans at an annual rate, equal to: (a) the LIBOR Rate (as defined in the New Credit Facility) plus 2.50% for obligations with a LIBOR based interest rate, or (b) a base rate equal to 1.75% plus the greatest of (i) the Federal Funds Rate (as defined in the New Credit Facility) plus 0.50%, (ii) one-month LIBOR rate plus 1.50%, and (iii) the prime rate of interest announced, from time to time, by Wells Fargo Capital Finance, LLC at its principal office. All interest is calculated on the basis of actual number of days elapsed based on a 360 day year. In addition, the New Credit Facility requires the Company to pay certain customary fees, costs, and expenses of Wells Fargo Capital Finance, LLC.

At October 2, 2010, there were no outstanding borrowings under the Prior Facility and approximately $10.8 million outstanding under letters of credit. Borrowing availability was approximately $37.2 million at October 2, 2010.

Note 3 — Inventories

Inventories at October 2, 2010 and December 31, 2009 consisted of the following:

(In thousands)	October 2, 2010			December 31, 2009
Finished goods	$	28,016		$	8,340
Raw materials and supplies		365			37
		28,381			8,377
Less: reserves		(562	)		(240	)
Inventories, net	$	27,819		$	8,137

Note 4 — Income (loss) Per Share

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

	Numerator			Denominator		Per Share
(In thousands, except per share data)	Income (Loss)			Shares		Amount
Three months ended October 2, 2010:
Basic income from continuing operations	$	3,368			5,556	$	0.60
Effect of dilutive securities:
Preferred rights		—			—		—
Restricted stock		—			—		—
Diluted income from continuing operations	$	3,368			5,556	$	0.60
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	)

7

	Numerator			Denominator		Per Share
(In thousands, except per share data)	Income (Loss)			Shares		Amount
Nine months ended October 2, 2010:
Basic loss from continuing operations	$	(9,550	)		5,554	$	(1.72	)
Effect of dilutive securities:
Preferred rights		—			—		—
Restricted stock		—			—		—
Diluted loss from continuing operations	$	(9,550	)		5,554	$	(1.72	)
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	)

Potentially dilutive shares were excluded from the calculation of dilutive shares because their effect would have been anti-dilutive, which totaled 695,250 as of October 2, 2010. There were no potentially dilutive shares as of September 26, 2009.

Note 5 — Commitments and Contingencies

In 2006, the Audit Committee of the Board commenced the Audit Committee 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.

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. Ludwig Kuttner, Charles Clayton, and Roger Clark, former members of management. On August 4, 2008, the Company entered into a Stock Purchase and Settlement Agreement and Mutual Releases with Mr. 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 of ongoing and potential claims, and the Kuttner Parties sold all of the stock of the Company that they owned to the Company for approximately $12.0 million and Mr. Kuttner made a $1.6 million payment 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, defamation and other damages.

On September 22, 2008, Mr. Clayton filed a third-party 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, defamation and other damages allegedly stemming from the Company’s issuance of certain press releases related to the Audit Committee Investigation.

On June 12, 2009, the Company and its directors and officers who are parties to the litigation filed a motion for summary judgment. On September 2, 2009, the Court granted the motion in part and 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 the Company’s motion and set the remainder of the parties’ claims for trial.

On December 21-24, 2009, the Court held a trial on the Company’s claims, Clayton’s and Clark’s counterclaims, and Clayton’s third-party claims. On July 12, 2010, the Court issued its Memorandum Opinion. Before entering a final judgment, the Court required supplemental briefing regarding the computation of the amount of damages to be paid. Prior to the Court entering a final judgment on the damages issues, the Company and Messrs. Clayton and Clark reached settlements as to the outstanding matters between them. The Company and Mr. Clark settled the outstanding matters, including potential claims for indemnification for reimbursement of certain legal costs incurred, for a payment to Mr. Clark of approximately $0.4 million. The Company and Mr. Clayton settled the outstanding matters, including potential claims for indemnification of certain legal costs incurred, for payment to Mr. Clayton of approximately $1.0 million, net of a disgorgement of $0.4 million of bonuses previously paid to Mr. Clayton.

8

Note 6 — Taxes

As of October 2, 2010, the Company’s unaudited condensed consolidated balance sheet reflects a liability for unrecognized tax benefits of approximately $5.8 million, including approximately $2.1 million of accrued interest and penalties. The Company anticipates that total unrecognized tax benefits will decrease by approximately $1.6 million, including interest and penalties of approximately $0.4 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 Company elected to carry back its 2009 federal net operating loss to tax years 2004 and 2005. As a result, the Company recognized an income tax benefit of $7.7 million included inOther receivablesin the unaudited condensed consolidated balance sheet, of which, $1.1 million was recognized during the quarter ended October 2, 2010 and $6.6 million was recognized during the quarter ended December 31, 2009. Also, as a result of this election, the statute of limitations with respect to the Company’s federal income tax returns were re-opened for tax years 2004 and 2005, which resulted in the recognition of $1.1 million and $0.9 million in associated income tax expense in quarters ended October 2, 2010 and December 31, 2009, respectively. In addition, the Company recorded approximately $2.3 million and $1.4 million of previously unrecognized tax benefits, including interest and penalties of approximately $1.0 million and $0.4 million, during the quarters ended October 2, 2010 and September 26, 2009, respectively, due to the expiration of various statutes. Thus, the statute of limitations with respect to the Company’s federal income tax returns are open for tax years 2004 and 2005, up to the amount of the 2009 federal net operating loss carryback, and 2007 and beyond. With limited exceptions, the statute of limitations for state income tax returns remain open for tax years 2006 and beyond. During the second quarter, the Company was notified that its 2006, 2007 and 2008 municipal income tax returns are currently under examination by the New York taxing authorities. The Company also files income tax returns in Hong Kong for which tax years 2007 and beyond remain open to examination by the Hong Kong Inland Revenue Department.

Commencing with the fourth quarter of 2008, the Company determined, in accordance with GAAP, it was more likely than not, based on all of the relevant evidence, that its deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be realized. For the nine months ended October 2, 2010, excluding the valuation allowances on its deferred tax assets, the Company would have recognized a tax benefit of approximately $5.7 million or an effective tax rate of 48.5%. For the nine months ended September 26, 2009, excluding the valuation allowances on its deferred tax assets, the Company would have recognized a tax benefit of approximately $7.5 million or an effective tax rate of 43.2%.

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 and David Brooks divisions and ceased their activities. During 2008, the Company sold certain assets of its Shane Hunter division and ceased its activities. 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 October 2, 2010 and December 31, 2009 were as follows:

(In thousands)	October 2, 2010		December 31, 2009
Other receivables	$	9	$	152
Assets of discontinued operations	$	9	$	152
Accrued expenses and other liabilities	$	473	$	572
Liabilities of discontinued operations	$	473	$	572

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The operating results for the discontinued operations for the three and nine month periods ended October 2, 2010 and September 26, 2009 were as follows:

	Three Months Ended					Nine Months Ended
	October 2,			September 26,		October 2,			September 26,
(In thousands)	2010			2009		2010			2009
Net sales	$	—		$	—	$	—		$	—
Gross profit	$	—		$	—	$	—		$	—
(Loss) income on discontinued operations before income taxes	$	(71	)	$	1	$	(12	)	$	(46	)
Income tax provision		—			—		—			—
(Loss) income from discontinued operations, net of taxes	$	(71	)	$	1	$	(12	)	$	(46	)

Note 8 — Restructuring Charges

The Company initiated and implemented restructuring and cost reduction programs in May 2008 and April 2009 that significantly reduced its fixed cost structure. The restructuring programs eliminated positions at every level of the Company and included the consolidation of divisions and back office functions as well as the reorganization of certain operating functions. In addition to personnel reductions, the cost reduction programs also eliminated certain non-payroll costs. Both the 2008 and 2009 restructuring programs were complete at the end of their respective fiscal years. There were no charges related to the restructuring programs recognized during the three and nine month periods ended October 2, 2010. There was approximately $0.8 million and $4.2 million of restructuring charges incurred during the three and nine month periods ended September 26, 2009, respectively.

A reconciliation of the beginning and ending liability balances for restructuring costs included in theAccrued expenses and other liabilitiesandOther long-term liabilitiessections of the unaudited condensed consolidated balance sheet is shown below:

	Three Months Ended
	October 2, 2010								September 26, 2009
	Personnel		Other						Personnel			Other
(In thousands)	Reductions		Costs			Total			Reductions			Costs			Total
Beginning of period	$	—	$	719		$	719		$	48		$	850		$	898
Costs charged to expense		—		—			—			743			25			768
Costs paid or settled		—		(144	)		(144	)		(516	)		(121	)		(637	)
End of period	$	—	$	575		$	575		$	275		$	754		$	1,029

	Nine Months Ended
	October 2, 2010									September 26, 2009
	Personnel			Other						Personnel			Other
(In thousands)	Reductions			Costs			Total			Reductions			Costs			Total
Beginning of period	$	32		$	1,210		$	1,242		$	72		$	—		$	72
Costs charged to expense		—			—			—			3,460			889			4,349
Costs paid or settled		(32	)		(635	)		(667	)		(3,257	)		(135	)		(3,392	)
End of period	$	—		$	575		$	575		$	275		$	754		$	1,029

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 unaudited condensed consolidated statement of operations in the three and nine month periods ended September 26, 2009.

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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.

As of October 2, 2010, the Company did not have any assets measured at fair value on a recurring basis that would require disclosure based on the fair value hierarchy of valuation techniques described above.

Note 10 — Tender Offer

The Company announced on February 24, 2009 that it had 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. The Company has not incurred significant expenses related to the tender offer since the Settlement and believes that it will not incur any significant expenses related thereto in the future.

The Company did not incur any expenses related to the Merger Agreement during the nine month period ended October 2, 2010. During the three and nine month periods ended September 26, 2009, the Company incurred approximately $0.9 million and $2.1 million, respectively, in costs 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 approximately $2.4 million in such costs through December 31, 2009.

Note 11 — Acquisition

On May 20, 2010, the Company, through its wholly owned subsidiary Hampshire Acquisition Sub, LLC, a Delaware limited liability company, consummated the acquisition of certain assets of S. Kuhlman, LLC and S Kuhlman Wholesale LLC (collectively, “Scott James™”). Scott James™ is a men’s specialty retailer and wholesale provider of apparel. Scott James™ operated two stores and a wholesale business that sells primarily to upscale specialty stores. The Company acquired Scott James™ to broaden its customer base, diversify its sales channels and grow its gross margin.

The acquisition date fair value of the consideration transferred totaled approximately $1.4 million, which consisted of approximately $1.2 million in cash and approximately $0.2 million in contingent consideration. The contingent consideration is in the form of incentive compensation that may be earned by a former principal of Scott James™, a current Company employee, if Scott James™ achieves certain annual sales goals for 2010 through 2012. This fair value measurement is estimated using a probability-weighted discounted cash flow model and is classified within level 3 of the fair value hierarchy as defined by the FASB Codification. As of October 2, 2010, there were no significant changes in the range of outcomes for the contingent consideration recognized as a result of the acquisition, although the recognized amount decreased slightly as a result of minor changes in estimates. As of October 2, 2010, approximately $0.2 million in contingent consideration is included inOther long-term liabilitiesin the unaudited condensed consolidated balance sheet.

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (net of a reduction to fixed assets as a purchase price adjustment):

	May 20, 2010
(In thousands)	(As adjusted)
Assets
Inventories	$	151
Other current assets		50
Fixed assets		46
Goodwill		1,196
Total assets acquired	$	1,443
Liabilities
Accrued expenses and other liabilities	$	6
Other long term liabilities		227
Total liabilities assumed	$	233
Purchase price (net assets acquired)	$	1,210

The Company recognized approximately $1.2 million of goodwill in the acquisition based on the enhancement of the Company’s creative design and retail industry and sourcing relationships through the acquired employees. The Company expects a range of approximately $1.0 million to $1.2 million in goodwill to be deductible for tax purposes. A reconciliation of the beginning and ending carrying balance for goodwill included inOther assetsin the unaudited condensed consolidated balance sheet is shown below:

(In thousands)	Goodwill
Goodwill acquired on May 20, 2010	$	1,182
Purchase price adjustment from fixed assets		14
Goodwill as of October 2, 2010	$	1,196

The Company incurred approximately $0.1 million of acquisition related costs during the nine month period ended October 2, 2010. These costs were recorded inSelling, general, and administrative expensesin the unaudited condensed consolidated statement of operations.

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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,” “forecast,” “foresee,” 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, 2009 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;

• Chargebacks and margin support payments;

• 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 and the increase of related costs;

• 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;

• 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 have acquired or 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;

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

• Risks related to the global economic, political and social conditions.

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

Our product mix, which has a high concentration of sweaters, skews our revenues to the third and fourth quarters, which accounted for approximately 70% of our net sales in 2009. Inventory begins to rise in the second quarter and typically peaks during the third quarter before descending to its cyclical low in the fourth quarter. Trade receivable balances rise commensurately with sales. Cash balances follow the cycle as inventory is purchased, product is sold, and trade receivables are collected. Funding inventory and pending trade receivable collections deplete cash balances, generally requiring draws from our revolving credit facility in the third or fourth quarters. Our income or loss from continuing operations has generally been correlated with revenue, as a large percentage of our profits have historically been generated in the third and fourth fiscal quarters.

We are a provider of women’s and men’s sweaters, wovens and knits, and a designer and marketer of branded apparel in the United States. As a holding company, we operate through our wholly-owned subsidiaries: Hampshire Designers, Inc. and Item-Eyes, Inc. which in turn hold our operating divisions — Women’s and Men’s. We were established in 1976 and are incorporated in the state of Delaware.

Our Women’s division is comprised of both our women’s knitwear business, known as Hampshire Designers, Inc. and our women’s related sportswear business, known as Item Eyes. Our Men’s division, known as Hampshire Brands, offers both sweaters and sportswear.

In May 2010, we acquired certain assets of S. Kuhlman, LLC and S Kuhlman Wholesale LLC (collectively, “Scott James™”). Scott James™ is a men’s specialty retailer and wholesale provider of apparel. Scott James™ operates one store, located in Boston, and a wholesale business that sells primarily to upscale specialty stores. We acquired Scott James™ to broaden our customer base, diversify our sales channels and grow our gross margin.

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 and chain stores. All of our divisions source their product with what we believe are quality manufacturers. Keynote Services, Limited, our subsidiary based in China, 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 competitive prices 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 possible, 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.

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RESULTS OF CONTINUING OPERATIONS

Quarterly Comparison — Three Months Ended October 2, 2010 and September 26, 2009

Net Sales

Net sales increased by $1.9 million to $52.7 million for the three months ended October 2, 2010 compared with $50.8 million for the same period last year. The 3.7% increase resulted from an overall increase of volume, along with higher average selling prices in our women’s wear business, partially offset by a decline in selling prices from our men’s wear business. The overall increase in volume is due to the fact that the 2010 third quarter included approximately $5.6 million in incremental shipments to customers during the final week ended October 2, 2010, that was not included in the prior year third quarter ended September 26, 2009. The reconciliation of net sales is outlined in the table below:

	Quarterly Rate/Volume
				Percentage
(Dollars in thousands)	Dollars			of 2009
Net sales quarter ended September 26, 2009	$	50,869			100.0	%
Volume		4,456			8.8	%
Average net selling prices		(2,586	)		(5.1	)%
Net sales quarter ended October 2, 2010	$	52,739			103.7	%

Although net sales increased overall for the three month period ended October 2, 2010 compared to the corresponding prior year period, the upward trend is not expected to continue through year-end as we will have one less week of peak shipping and the current retail environment has led to decreased customer orders and increased retailer discounts due to continuing weak consumer spending. These combined factors will have an adverse effect on our net sales and operating results for the remainder of 2010.

Gross Profit

Gross profit for the three months ended October 2, 2010 was $10.6 million compared with $11.1 million for the same period last year, which reflected a decrease in gross profit percentage, which was 20.1% of net sales for the three months ended October 2, 2010 compared with 21.7% of net sales for the same period last year. The decrease in gross profit percentage was primarily due to an increase in cost of goods sold from our women’s wear business and lower average selling prices in our men’s wear business. We confront increasing inflationary pressures in our cost of goods, including those caused by rising costs in transportation, labor and materials, particularly cotton. To the extent we cannot pass these increases onto our customers, our future results will be adversely affected.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses declined by 4.4% to $9.3 million for the three months ended October 2, 2010 compared with $9.7 million for the same period last year. This $0.4 million decrease was partly due to lower compensation and employee related expenses, largely due to the 2009 cost reduction program (See Note 8 —Restructuring Chargesto the financial statements) and additional expense reductions made in 2010.

Restructuring Charges

There were no charges related to the restructuring programs recognized during the three months ended October 2, 2010. Restructuring charges for the three months ended September 26, 2009 were $0.8 million and consisted primarily of termination benefits and lease exit costs. The decrease in the current period was the result of the completion of the 2009 restructuring program at the end of last year. (See Note 8 —Restructuring Chargesto the financial statements)

Special Costs

During the three months ended October 2, 2010, special costs were $0.1 million as compared to $0.6 million for the same period last year. (See Note 1 —Basis of Presentationand Note 5 —Commitments and Contingenciesto the financial statements) The decrease is due principally to the entry into settlements during the current period with Messrs. Clayton and Clark, which resolved all litigation related to the Audit Committee Investigation. As a result, expenses associated with the Audit Committee Investigation were minimal in the third quarter of 2010.

Tender Offer Related Costs

We believe there will be no significant costs related to the NAF Acquisition Corp. tender offer in 2010 as the matter was settled in 2009. (See Note 10 —Tender Offerto the financial statements) There were $0.9 million of such costs incurred in the three months ended September 26, 2009.

Income Taxes

Our income tax benefit for the quarter ended October 2, 2010 of $2.3 million was primarily due to the release of certain tax reserves, in the amount of $2.3 million, that reached their applicable statute of limitations, somewhat offset by the accrual of additional interest and penalties on remaining income tax reserves. The tax reserves released during the quarter ended October 2, 2010 consisted of approximately $2.3 million of previously unrecognized tax benefits, including interest and penalties of approximately $1.0 million. The 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 somewhat 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.

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Commencing with the fourth quarter of 2008, we determined, in accordance with accounting principles generally accepted in the United States of America (“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. For the quarter ended October 2, 2010, excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $0.6 million, or a negative effective tax rate of 55.7%. For the quarter ended September 26, 2009, excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $1.3 million or an effective tax rate of 93.7%. (See Note 6 —Taxesto the financial statements)

Year to Date Comparison — Nine Months Ended October 2, 2010 and September 26, 2009

Net Sales

Net sales decreased by $13.0 million to $87.9 million for the nine months ended October 2, 2010 compared with $100.9 million for the same period last year. The 12.9% decrease resulted from lower average selling prices in all businesses coupled with a decline in volume in our women’s wear business, somewhat offset by an increase in our men’s wear business. Our men’s wear business volume increase reflects the addition of a spring season line with a major customer. The reconciliation of net sales is outlined in the table below:

	Year to Date Rate/Volume
				Percentage
(Dollars in thousands)	Dollars			of 2009
Net sales nine months ended September 26, 2009	$	100,914			100.0	%
Volume		(6,824	)		(6.8	)%
Average net selling prices		(6,149	)		(6.1	)%
Net sales nine months ended October 2, 2010	$	87,941			87.1	%

We expect net sales compared to 2009 to decrease in the fourth quarter as the current retail environment has led to decreased customer orders and increased retailer discounts due to continuing weak consumer spending. These combined factors will have an adverse effect on our net sales and operating results for the remainder of 2010.

Gross Profit

Gross profit for the nine months ended October 2, 2010 was $18.5 million compared with $22.3 million for the same period last year, which reflected a decrease in net sales as well as a decrease in gross profit percentage, which was 21.0% of net sales for the nine months ended October 2, 2010 compared with 22.1% of net sales for the same period last year. The decrease in gross profit percentage is due to lower average selling prices. We confront increasing inflationary pressures in our cost of goods, including those caused by rising costs in transportation, labor and materials, particularly cotton. To the extent we cannot pass these increases onto our customers, our future results will be adversely affected.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses declined by 14.1% to $25.3 million for the nine months ended October 2, 2010 compared with $29.4 million for the same period last year. This $4.1 million decrease was primarily due to the combined effect of lower compensation and facility expenses, largely due to the 2009 cost reduction program (See Note 8 —Restructuring Chargesto the financial statements) and additional expense reductions in 2010.

Restructuring Charges

There were no charges related to the restructuring programs recognized during the nine months ended October 2, 2010. Restructuring charges for the nine months ended September 26, 2009 were $4.2 million and consisted primarily of termination benefits and lease exit costs. The decrease in the current period was the result of the completion of the 2009 restructuring program at the end of last year. (See Note 8 —Restructuring Chargesto the financial statements)

Special Costs

During the nine months ended October 2, 2010, special costs were $4.5 million as compared to $3.6 million for the same period last year. The increase is due principally to the entry into settlements with Messrs. Clayton and Clark totaling approximately $1.4 million and the $2.4 million write off of the remaining value of the special D&O insurance policy (as discussed in Note 1 —Basis of Presentationto the financial statements), somewhat offset by higher legal fees incurred in the prior period. All litigation related to the Audit Committee Investigation has now been resolved, and thus, we do not expect to incur significant expenses associated with the Audit Committee Investigation going forward.

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Tender Offer Related Costs

We believe there will be no significant costs related to the NAF Acquisition Corp. tender offer in 2010 as the matter was settled in 2009. (See Note 10 —Tender Offerto the financial statements) There were $2.1 million of such costs incurred in the nine months ended September 26, 2009.

Income Taxes

Our income tax benefit for the nine months ended October 2, 2010 of $2.2 million was primarily due to the release of certain tax reserves, in the amount of $2.2 million, that reached their applicable statute of limitations, which were somewhat offset by the accrual of additional interest and penalties on remaining tax reserves. The tax reserves released during the nine months ended October 2, 2010 consisted of approximately $2.4 million of previously unrecognized tax benefits, including interest and penalties of approximately $1.1 million. 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 tax reserves. The tax reserves released during the nine months 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. For the nine months ended October 2, 2010, excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $5.7 million or an effective tax rate of 48.5%. For the nine months ended September 26, 2009, excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $7.5 million or an effective tax rate of 43.2%. (See Note 6 —Taxesto the financial statements).

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 borrow 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 August 7, 2009, we, in conjunction with our lenders, amended and restated our credit facility (the “Prior 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 Prior Facility with the Banks was 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. On October 28, 2010, the Company entered into a new credit agreement (referred to as the “New Credit Facility”) with Wells Fargo Capital Finance, LLC. The New Credit Facility replaced our prior facility in its entirety.

The New Credit Facility is a $50.0 million asset based revolving credit facility, including trade and standby letters of credit, with a $30.0 million sub-limit for letters of credit. The New Credit Facility has a term of four years, matures on October 28, 2014 and is secured by substantially all assets of the Company and each of its domestic subsidiaries. Revolving credit loans are limited to a borrowing base, which considers cash deposited into a restricted account, accounts receivable and inventory. The New Credit Facility contains customary conditions precedent to each borrowing, including absence of defaults, no material adverse change, accuracy of representation and warranties, and a fixed charge coverage covenant that takes effect only so long as the Company does not meet minimum liquidity requirements, which adjust based on the seasonality of the Company’s business. The New Credit Facility is designed to provide working capital and letters of credit that will be used primarily for the purchase and importation of inventory and for general corporate purposes.

The Company, at its discretion, may prepay outstanding obligations in whole or part together with accrued interest at any time. The New Credit Facility requires prepayment of outstanding obligations and accrued interest upon certain events, including certain asset sales or receipt of insurance proceeds. The New Credit Facility also contains customary provisions that enable Wells Fargo Capital Finance, LLC to accelerate payment of outstanding obligations under the New Credit Facility upon certain events, including, among others, non-payment of amounts due under the New Credit Facility, breach of a fixed charge coverage ratio (which is applicable only so long as the Company does not meet minimum liquidity requirements), insolvency, bankruptcy, a change of control of the Company, and if certain liens on the collateral securing the obligations under the New Credit Facility fail to be perfected.

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The obligations under the New Credit Facility are secured by (i) a first priority security interest in certain assets of the Company and the domestic subsidiaries of the Company that are party to the New Credit Facility, in their capacity as guarantors, (ii) a pledge of all issued and outstanding common stock of each operating domestic subsidiary of the Company, and (iii) an assignment of proceeds of insurance covering collateral.

At October 2, 2010, there were no outstanding borrowings under the Prior Facility and approximately $10.8 million outstanding under letters of credit. Borrowing availability was approximately $37.2 million at October 2, 2010.

We believe that the borrowings available to us under the New Credit 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 possible, passing along a portion of our cost increases to our customers through higher selling prices. We confront increasing inflationary pressures in our cost of goods, including those caused by rising costs in transportation, labor and materials, particularly cotton. To the extent we cannot pass these increases onto our customers, our future results will be adversely affected.

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, 2009. See Note 1 —Basis of Presentationto the financial statements regarding Accounting Standard Updates.

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 2010, there were no significant changes in our exposure to market risks. See Item 7A in our Annual Report for the year ended December 31, 2009, which was filed with the SEC on March 22, 2010, 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 Prior Facility) would have had no material effect in the nine months ended October 2, 2010 due to the fact that there were insignificant short-term borrowings on our Prior Facility during the period.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission. Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the Company’s system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.

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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 October 2, 2010. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 2, 2010.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the nine months ended October 2, 2010 that have materially affected, or are reasonably likely to materially 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.

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, 2009. 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		Average		Shares Purchased		that May Yet be
	Number of		Price		as Part of Publicly		Purchased Under
	Shares		Paid per		Announced Plans		the Plans or
Period	Purchased		Share		or Programs		Programs
July 4, 2010 – July 31, 2010		—	$	—		—		872,195
August 1, 2010 – August 28, 2010		—		—		—		872,195
August 29, 2010 – October 2, 2010		—		—		—		774,695	*
Total		—	$	—		—		774,695

* In conjunction with the departure of a former employee of the Company, 97,500 non-vested shares that were originally granted under The Hampshire Group, Limited 2009 Stock Incentive Plan, adopted on October 21, 2009 (the “Plan”), were forfeited. The Plan allows employees to satisfy their applicable withholding tax obligations by using shares of common stock that would otherwise be deliverable upon the vesting of the restricted stock.

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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

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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: November 12, 2010	By:	/s/ Heath L. Golden
		Heath L. Golden
		President and Chief Executive Officer (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
	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