UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 28, 2002.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from _______ to _______.
Commission File No. 000-20201
HAMPSHIRE GROUP, LIMITED
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-0967107
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
215 COMMERCE BOULEVARD
ANDERSON, SOUTH CAROLINA 29625
(Address, Including Zip Code, of Registrant's Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (864) 225-6232
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 and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Title of Each Class Number of Shares Outstanding
of Securities as of November 5, 2002
----------------------------- ----------------------------
Common Stock, $0.10 Par Value 4,717,219
HAMPSHIRE GROUP, LIMITED
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
------
Item 1-Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
September 28, 2002, September 29, 2001 and December 31, 2001 3
Unaudited Condensed Consolidated Statements of Operations
for the Nine-Month and Three-Month Periods Ended
September 28, 2002 and September 29, 2001 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended September 28, 2002 and
September 29, 2001 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3-Quantitative and Qualitative Disclosures About Market Risk 15
Item 4-Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1-Legal Proceedings 17
Item 6-Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications:
Pursuant to Section 302 of the Sarbanes-Oxley Act 19
Pursuant to Section 906 of the Sarbanes-Oxley Act 21
- 2 -
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Sept. 28, Sept. 29, Dec. 31,
2002 2001 2001*
-------- -------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 877 $ 650 $ 28,686
Accounts receivable trade-net 80,579 74,286 34,691
Notes and other accounts receivable-net 1,038 1,386 1,429
Inventories 54,343 59,677 26,739
Other current assets 5,697 4,156 5,623
-------- -------- --------
Total current assets 142,534 140,155 97,168
Property, plant and equipment-net 2,232 2,324 2,170
Real property investments-net 31,250 28,418 29,380
Long-term investments-net 4,537 4,781 3,806
Goodwill 8,020 9,056 8,020
Other assets 3,731 4,821 4,393
-------- -------- --------
Total assets $192,304 $189,555 $144,937
======== ======== ========
LIABILITIES
- -----------
Current liabilities:
Current portion of long-term debt $ 2,995 $ 6,721 $ 7,721
Borrowings under line of credit 34,431 55,729 -
Accounts payable 13,516 8,556 5,418
Accrued expenses and other liabilities 16,659 10,508 16,714
-------- -------- --------
Total current liabilities 67,601 81,514 29,853
Long-term debt 21,032 21,932 21,738
Subordinated notes payable - 1,150 -
Deferred compensation 2,209 1,938 2,117
-------- -------- --------
Total liabilities 90,842 106,534 53,708
-------- -------- --------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 472 467 471
Additional paid-in capital 31,350 30,940 31,229
Retained earnings 69,183 51,709 59,581
Accumulated other comprehensive gain (loss) 458 (88) 76
Treasury stock (1) (7) (128)
-------- -------- --------
Total stockholders' equity 101,462 83,021 91,229
-------- -------- --------
Total liabilities and stockholders' $192,304 $189,555 $144,937
equity ======== ======== ========
<FN>
*Derived from the December 31, 2001 audited consolidated balance sheet.
(The accompanying notes are an integral part of these unaudited
financial statements.)
</FN>
- 3 -
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Nine-Month Three-Month
Periods Ended Periods Ended
------------------- -------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales $183,529 $163,574 $109,134 $100,451
Cost of goods sold 132,082 125,419 79,044 75,330
-------- -------- -------- --------
Gross profit 51,447 38,155 30,090 25,121
Rental revenue 2,298 1,778 819 630
-------- -------- -------- --------
53,745 39,933 30,909 25,751
Selling, general and
administrative expenses 36,989 32,244 15,872 13,879
Net investments transactions
and impairment charges (42) (34) (54) 7
-------- -------- -------- --------
Income from operations 16,798 7,723 15,091 11,865
Other income (expense):
Interest expense (1,495) (2,524) (517) (1,285)
Interest income 373 612 61 219
Other (270) (283) (142) (269)
-------- -------- -------- --------
Income before income taxes 15,406 5,528 14,493 10,530
Provision for income taxes 5,800 2,300 5,460 4,025
-------- -------- -------- --------
Net income $ 9,606 $ 3,228 $ 9,033 $ 6,505
======== ======== ======== ========
Net income per share - Basic $2.04 $0.69 $1.92 $1.39
===== ===== ===== =====
Diluted $1.99 $0.69 $1.86 $1.39
===== ===== ===== =====
Weighted average number of
shares outstanding - Basic 4,709 4,645 4,716 4,666
===== ===== ===== =====
Diluted 4,833 4,670 4,855 4,684
===== ===== ===== =====
<FN>
(The accompanying notes are an integral part of these unaudited
financial statements.)
</FN>
- 4 -
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine-Month
Periods Ended
-------------------
Sept. 28, Sept. 29,
2002 2001
--------- -------
Cash flows from operating activities:
Net income $ 9,606 $ 3,228
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,483 1,917
Provision for bad debts and uncollectible notes 195 1,394
Loss on disposal of property 109 2
Net deferred compensation costs and other 423 269
Net impairment and other investments activity (42) (34)
Net change in operating assets and liabilities:
Receivables (45,707) (40,291)
Inventories (27,604) (26,455)
Other assets 69 719
Accounts payable 8,098 (2,592)
Accrued expenses and other liabilities (55) 469
------- -------
Net cash used in operating activities (53,425) (61,374)
------- -------
Cash flows from investing activities:
Capital expenditures (640) (248)
Proceeds from sale of real property and other investments 211 880
Purchase of real property and other investments (2,650) (6,634)
Net proceeds from loans and advances to investees 203 1,878
------- -------
Net cash used in investing activities (2,876) (4,124)
------- -------
Cash flows from financing activities:
Net borrowings under line of credit 34,431 55,729
Proceeds from issuance of long-term debt 697 2,181
Repayment of long-term debt (6,881) (2,445)
Proceeds from issuance of common stock 122 206
Proceeds from issuance of treasury stock 123 66
Purchases of treasury stock - (106)
------- -------
Net cash provided by financing activities 28,492 55,631
------- -------
Net decrease in cash and cash equivalents (27,809) (9,867)
Cash and cash equivalents - beginning of period 28,686 10,517
------- -------
Cash and cash equivalents - end of period $ 877 $ 650
======= =======
- -----------------------------------------------------------------------------
Supplementary disclosure of cash flow information:
Cash paid during the period for: Interest $ 1,216 $ 2,532
Income taxes 7,311 2,142
<FN>
(The accompanying notes are an integral part of these unaudited
financial statements.)
</FN>
- 5 -
HAMPSHIRE GROUP, LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- ------------------------------
The consolidated financial statements are unaudited and include the accounts of
Hampshire Group, Limited and its subsidiaries, substantially all of which are
wholly-owned (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by such generally accepted accounting
principles for complete financial statements.
In the opinion of the management of the Company, the unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair statement of the results
of operations for the interim periods presented, with no material retroactive
adjustments. The results of operations for interim periods are not indicative of
the results that may be expected for a full year due to the seasonality of the
business. These interim unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto for the year ended December 31, 2001, included in the
Company's Annual Report on Form 10-K.
Certain reclassifications have been made to data from the previous year to
conform with the presentation of the current year.
NOTE 2. INVENTORIES
- --------------------
A summary of inventories by component is as follows:
(in thousands)
Sept. 28, Sept. 29, Dec. 31,
2002 2001 2001
-------- -------- --------
Finished goods $52,710 $55,874 $21,922
Work-in-progress 392 2,000 1,697
Raw materials and supplies 1,337 2,732 3,774
------- ------- -------
54,439 60,606 27,393
Less - Excess of current cost
over LIFO carrying value (96) (929) (654)
------- ------- -------
Total $54,343 $59,677 $26,739
======= ======= =======
NOTE 3. COMPREHENSIVE INCOME
- -----------------------------
Comprehensive income consists of net income, plus certain changes in assets and
liabilities that are not included in net income, but are instead reported within
a separate component of stockholders' equity under accounting principles
generally accepted in the United States of America. At September 28, 2002 and
September 29, 2001, the Company had one item, unrealized gain or loss on foreign
currency translation, that remains a component of other comprehensive income as
set forth on the following page:
- 6 -
(in thousands)
Nine-Month Three-Month
Periods Ended Periods Ended
-------------------- --------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
-------- -------- -------- --------
Net income $9,606 $3,228 $9,033 $6,505
Foreign currency translation
adjustment 382 (13) (82) 88
------ ------ ------ ------
Comprehensive income $9,988 $3,215 $8,951 $6,593
====== ====== ====== ======
NOTE 4. RECENT ACCOUNTING STANDARDS
- ------------------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets", on January 1, 2002. SFAS 142
discontinues the practice of amortizing goodwill and intangible assets that have
indefinite useful lives and initiates an annual review for impairment. As of the
date of adoption, the Company had unamortized goodwill of $8,020,000. A
reconciliation of the previously reported net income and income per share for
the nine-month and three-month periods ended September 29, 2001 to the amounts
adjusted for the reduction of amortization expense, net of the related income
tax effect, is as follows:
(in thousands, except per share data)
Nine-month period ended Sept. 29, 2001 Net Income Basic EPS Diluted EPS
- -------------------------------------- ---------- --------- -----------
As previously reported $3,228 $0.69 $0.69
Add: amortization adjustment 371 0.08 0.08
------ ----- -----
Adjusted $3,599 $0.77 $0.77
====== ===== =====
Three-month period ended Sept. 29, 2001 Net Income Basic EPS Diluted EPS
- --------------------------------------- ---------- --------- -----------
As previously reported $6,505 $1.39 $1.39
Add: amortization adjustment 94 0.02 0.02
------ ----- -----
Adjusted $6,599 $1.41 $1.41
====== ===== =====
During the second quarter of 2002, the Company completed its initial assessment
of goodwill for impairment in accordance with SFAS 142 and determined that there
was no impairment. In accordance with SFAS 142, goodwill will be tested for
impairment at least annually and more frequently if circumstances indicate it
may be impaired. The Company anticipates performing the annual impairment test
during the fourth quarter of each year.
The Company adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", on January 1, 2002. SFAS 144 addresses financial reporting
for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS
121 and the accounting and reporting provisions of APB 30 related to the
disposal of a segment of a business. The adoption of SFAS 144 had no material
effect on the Company's financial position, results of operations or cash flows.
The Company adopted Emerging Issues Task Force ("EITF") 01-9, "Accounting for
Consideration by a Vendor to a Customer or a Reseller of the Vendor's Products",
on January 1, 2002. EITF 01-9 addresses whether consideration from a vendor to a
reseller of the vendor's product is (a) an adjustment to the selling prices of
the vendor's products and, therefore should be deducted from revenue when
recognized in the vendor's income statement, or (b) a cost incurred by the
- 7 -
vendor for assets or services received from the reseller and, therefore should
be included as a cost or an expense when recognized in the vendor's income
statement. The adoption of EITF 01-9 requires reclassification of cooperative
advertising expenses from Selling, General and Administrative ("SG&A") expense
as a reduction from revenues. As a result of such retroactive reclassification
of cooperative advertising, net sales, gross profit and SG&A expenses each
decreased by $2,188,000 and $1,485,000 for the nine-month periods of 2002 and
2001, respectively, and decreased by $1,614,000 and $1,166,000 for the
three-month periods of 2002 and 2001, respectively, with no effect on net
income.
Accounting Standard Not Yet Adopted - In June 2002, the FASB issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires that a liability for the cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS No. 146
also established that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with earlier adoption
encouraged. The Company is in the process of reviewing the effect, if any, that
the adoption of SFAS 146 will have on its financial position, results of
operations and cash flows.
NOTE 5. CONTINGENCIES
- ----------------------
In October 2002, Alarm Acquisition Company, LLC filed a complaint against
Hampshire Investments, Limited, the Company's Chief Executive Officer, and
certain other parties unaffiliated with the Company. The action was commenced in
the General Court of Justice, Superior Court Division, of Mecklenburg County,
North Carolina. The plaintiff alleges, among other things, breach of contract,
tortious interference with contract, unfair and deceptive trade practices, fraud
and negligent misrepresentation, and seeks damages of $6,000,000 and punitive
damages. Management believes that the claims contained in the action are without
merit and the Company intends to vigorously defend against the claims.
The Company is from time to time involved in other litigation incidental to the
conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
consolidated financial condition, results of operations, or cash flow.
Substantially all the Company's product is imported from independent foreign
suppliers. The failure of these suppliers to ship product to the Company in a
timely manner or to meet required standards could cause the Company to miss
delivery date requirements from its customers. The failure to make timely
deliveries could expose the Company to liability from its customers or cause
customers to cancel orders, refuse to accept delivery of product or demand
reduced prices. Subsequent to the end of the third quarter, the Company was
informed that a major foreign supplier is under investigation for customs
violations and will no longer deliver product, including product in transit. The
Company has taken steps to replace the foreign supplier, however, product may
not be replaced in time to meet customer delivery dates. In addition, in the
third quarter, a 10-day West Coast port shutdown occurred, which has caused
delays in the Company receiving products. Because of the above, the delivery of
product may be disrupted which could have an impact on the fourth quarter.
- 8 -
NOTE 6. INDUSTRY SEGMENTS DATA
- -------------------------------
The Company operates in two industry segments - Apparel and Investments. The
Apparel segment includes sales of apparel, whose principal products are women's
and men's sweaters and women's related separates. The products are sold to
customers throughout the United States of America, including major department
stores, specialty retail stores and catalog companies. Some of the Company's
major customers operate both retail and mail order businesses; therefore, it is
not possible for the Company to determine sales to the individual markets. The
Investments segment makes investments both domestically and internationally,
principally in real property. Costs associated with the Company's Investment
rental activities are included in selling, general, and administrative expenses
and amounted to $1,670,000 and $1,444,000 for the nine-month periods ended
September 28, 2002 and September 29, 2001, respectively, and $495,000 and
$524,000 for the three-month periods then ended, respectively.
(in thousands)
Industry Segments Data Nine-Month Three-Month
Periods Ended Periods Ended
-------------------- --------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
-------- -------- -------- --------
Net sales Apparel $183,529 $163,574 $109,134 $100,451
Rental revenue Investments 2,298 1,778 819 630
-------- -------- -------- --------
$185,827 $165,352 $109,953 $101,081
- ----------------------------------------------------- --------------------
Gross profit Apparel $51,447 $38,155 $30,090 $25,121
(as percent of net sales) 28.0% 23.3% 27.6% 25.0%
- ----------------------------------------------------- --------------------
Income (loss) from Apparel $18,610 $ 8,911 $16,086 $12,129
operations Investments 670 368 378 99
Corporate (2,482) (1,556) (1,373) (363)
------- ------- ------- -------
$16,798 $ 7,723 $15,091 $11,865
- ----------------------------------------------------- -------------------
Interest expense Apparel $ 69 $ 226 $ 20 $ 98
Investments 525 638 131 228
Corporate 901 1,660 366 959
------ ------ ---- ------
$1,495 $2,524 $517 $1,285
===================================================== ===================
Sept. 28, Sept. 29, Dec. 31,
2002 2001 2001
-------- -------- --------
Total identifiable Apparel $146,576 $147,485 $ 74,903
assets Investments 37,070 33,980 34,527
Corporate 8,658 8,090 35,507
-------- -------- --------
$192,304 $189,555 $144,937
- -----------------------------------------------------------------
- 9 -
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains forward-looking information and
statements that involve risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding the results of operations.
The Company's actual results, performance or achievements could differ
materially from the results expressed in, or implied by these forward-looking
statements, which are made only as of the date hereof.
Substantially all the Company's product is imported from independent foreign
suppliers. The failure of these suppliers to ship product to the Company in a
timely manner or to meet required standards could cause the Company to miss
delivery date requirements from its customers. The failure to make timely
deliveries could expose the Company to liability from its customers or cause
customers to cancel orders, refuse to accept delivery of product or demand
reduced prices. Subsequent to the end of the third quarter, the Company was
informed that a major foreign supplier is under investigation for customs
violations and will no longer deliver product, including product in transit. The
Company has taken steps to replace the foreign supplier, however, product may
not be replaced in time to meet customer delivery dates. In addition, in the
third quarter, a 10-day West Coast port shutdown occurred, which has caused
delays in the Company receiving products. Because of the above, the delivery of
product may be disrupted which could have an impact on the fourth quarter.
SEASONALITY
The Company's apparel business is highly seasonal with the majority of sales
occurring in the third and fourth quarters of the year. Accordingly, the Company
historically experiences losses or minimal operating profits during the first
and second quarters of the year.
RESULTS OF OPERATIONS
Nine-month Periods Ended September 28, 2002 and September 29, 2001
- ------------------------------------------------------------------
Net Sales
- ---------
Net sales for the nine-month period ended September 28, 2002 were $183,529,000,
compared to $163,574,000 for the same period last year, an increase of
$19,955,000 or 12.2%. Units shipped in the nine-month period ended September 28,
2002 exceeded units shipped during the same period last year by approximately
267,000 dozen, or 21.0%. The increase was primarily due to an increase in sales
of women's sweaters and related separates. The average sales price per unit
declined 7.3% primarily due to a shift in product mix.
Gross Profit
- ------------
Gross profit for the nine-month period ended September 28, 2002 was $51,447,000,
compared to $38,155,000 for the same period last year, an increase of
$13,292,000 or 34.8%. As a percentage of net sales, gross profit margins were
28.0% for the nine-month period of 2002, compared with 23.3% for the same period
last year. The increase in gross profit is attributed primarily to an increase
in unit volume of women's sweaters and related separates sold and cost
efficiencies.
- 10 -
Rental Revenue
- --------------
Rental revenue from the Investments segment for the nine-month period ended
September 28, 2002 was $2,298,000, compared to $1,778,000 for the same period
last year, an increase of $520,000 or 29.2%. The increase in revenues resulted
primarily from leasing recently renovated domestic rental property.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the Company were
$36,989,000 for the nine-month period ended September 28, 2002, compared to
$32,244,000 for the same period last year, an increase of $4,745,000 or 14.7%.
As a percentage of net sales, SG&A expenses were 20.1% for the nine-month period
of 2002, compared with 19.7% for the same period last year. SG&A expenses for
the Apparel segment were $32,575,000 for the nine-month period ended September
28, 2002, compared to $28,883,000 for the same period last year, an increase of
$3,692,000 or 12.8%. The increase primarily resulted from additional marketing,
designing, shipping and related expenses caused by the increased sales volume in
the nine-month period ended September 28, 2002 and year-end bonus accruals. The
nine-month period ended September 29, 2001 included an additional $1,200,000
reserve with respect to a promissory note issued to the Company from the sale of
certain manufacturing assets in 2000 (the "Promissory Note"). The nine-month
period ended September 28, 2002 did not include any amortization of goodwill
because of the adoption of SFAS 142 on January 1, 2002. The nine-month period
ended September 29, 2001 included $636,000 amortization of goodwill. SG&A
expenses for the Investments segment were $1,670,000 for the nine-month period
ended September 28, 2002, compared to $1,444,000 for the same period last year,
an increase of $226,000 or 15.7%. The increase resulted primarily from
additional depreciation expense on the recently renovated domestic rental
property, which increased to $920,000 for the nine-month period in 2002,
compared to $730,000 for the same period in 2001.
Interest Expense
- ----------------
Interest expense for the nine-month period ended September 28, 2002 was
$1,495,000, compared to $2,524,000 for the same period last year, a decrease of
$1,029,000 or 40.8%. The decrease primarily resulted from reduced borrowings
during the period ended September 28, 2002. Average borrowings during the
nine-month period ended September 28, 2002 were $29,946,000, compared to
$43,366,000 for the same period last year.
Interest Income
- ---------------
Interest income for the nine-month period ended September 28, 2002 was $373,000,
compared to $612,000 for the same period last year, a decrease of $239,000 or
39.1%. The decrease primarily resulted from lower interest rates on short term
investments and because no interest was received on the Promissory Note during
the period ended September 28, 2002.
Income Taxes
- ------------
The Company's income tax provision for the nine-month period ended September 28,
2002 was $5,800,000, compared to $2,300,000 for the same period last year. The
effective income tax rate decreased to 37.6% for the nine-month period ended
September 28, 2002, compared to 41.6% for the same period last year, due to
changes in composition of income among the Company's consolidated entities and
the donation of certain real property in 2002, valued at approximately
$1,800,000.
Net Income
- ----------
Net income for the nine-month period ended September 28, 2002 was $9,606,000, or
- 11 -
$1.99 per diluted share, compared to $3,228,000, or $0.69 per diluted share, for
the same period last year, an increase of $6,378,000.
Three-Month Periods Ended September 28, 2002 and September 29, 2001
- -------------------------------------------------------------------
Net Sales
- ---------
Net sales for the three-month period ended September 28, 2002 were $109,134,000,
compared to $100,451,000 for the same period last year, an increase of
$8,683,000 or 8.6%. Units shipped in the three-month period ended September 28,
2002 exceeded units shipped during the same period last year by approximately
146,000 dozen, or 19.9%. The increase was primarily due to an increase in sales
of sweaters and related women's separates. The average sales price per unit
declined 9.4% due primarily to a shift in the product mix.
Gross Profit
- ------------
Gross profit for the three-month period ended September 28, 2002 was
$30,090,000, compared to $25,121,000 for the same period last year, an increase
of $4,969,000 or 19.8%. As a percentage of net sales, gross profit margins were
27.6% for the three-month period of 2002, compared with 25.0% for the same
period last year. The increase in gross profit is attributed primarily to an
increase in unit volume of sweaters and related women's separates sold and cost
efficiencies.
Rental Revenue
- --------------
Rental revenue from the Investments segment for the three-month period ended
September 28, 2002 was $819,000, compared to $630,000 for the same period last
year, an increase of $189,000 or 30.0%. The increase in revenues resulted
primarily from leasing recently renovated domestic rental property.
Selling, General and Administrative Expenses
- --------------------------------------------
SG&A expenses for the Company were $15,872,000 for the three-month period ended
September 28, 2002, compared to $13,879,000 for the same period last year, an
increase of $1,993,000 or 14.4%. As a percentage of net sales, SG&A expenses
were 14.6% for the three-month period of 2002, compared with 13.8% for the same
period last year. SG&A expenses for the Apparel segment were $13,917,000 for the
three-month period ended September 28, 2002, compared to $12,631,000 for the
same period last year, an increase of $1,286,000 or 10.2%. The increase
primarily resulted from additional marketing, designing, shipping and related
expenses caused by the increased sales volume in the three-month period of 2002
and year-end bonus accruals. The three-month period ended September 29, 2001
included an additional $1,200,000 reserve with respect to the Promissory Note.
The three-month period ended September 28, 2002 did not include any amortization
of goodwill because of the adoption of SFAS 142 on January 1, 2002. The
three-month period ended September 29, 2001 included $212,000 amortization of
goodwill. SG&A expenses for the Investments segment were $495,000 for the
three-month period ended September 28, 2002, compared to $524,000 for the same
period last year, a decrease of $29,000 or 5.5%.
Interest Expense
- ----------------
Interest expense for the three-month period ended September 28, 2002 was
$517,000, compared to $1,285,000 for the same period last year, a decrease of
$768,000 or 59.8%. The decrease primarily resulted from reduced borrowings
during the period ended September 28, 2002. Average borrowings during the
three-month period ended September 28, 2002 were $34,657,000, compared to
$64,088,000 for the same period last year.
- 12 -
Interest Income
- ---------------
Interest income for the three-month period ended September 28, 2002 was $61,000,
compared to $219,000 for the same period last year, a decrease of $158,000 or
72.1%. The decrease primarily resulted from lower interest rates on short term
investments and because no interest was received on the Promissory Note during
the period ended September 28, 2002.
Income Taxes
- ------------
The Company's income tax provision for the three-month period ended September
28, 2002 was $5,460,000, compared to $4,025,000 for the same period last year.
The effective income tax rate decreased to 37.7% for the three-month period
ended September 28, 2002, compared to 38.2% for the same period last year, due
to changes in composition of income among the Company's consolidated entities
and the donation of certain real property in 2002, valued at approximately
$1,800,000.
Net Income
- ----------
Net income for the three-month period ended September 28, 2002 was $9,033,000,
or $1.86 per diluted share, compared to $6,505,000, or $1.39 per diluted share,
for the same period last year, an increase of $2,528,000.
LIQUIDITY AND CAPITAL RESOURCES
The primary liquidity and capital requirements of the Company are to fund
working capital for current operations, consisting of funding the buildup in
inventories and accounts receivable (which historically reach their maximum
requirements in the third quarter), servicing long-term debt and funding capital
expenditures and investments. The primary sources to meet the liquidity and
capital requirements include funds generated from operations, borrowings under
revolving credit lines and long-term debt.
Net cash used in operating activities was $53,425,000 for the nine-month period
ended September 28, 2002, as compared to $61,374,000 in the same period last
year. Net cash used in operating activities during the nine-month period ended
September 28, 2002 resulted from net changes in the working capital accounts of
$65,199,000, primarily offset by net income of $9,606,000. Net cash used in
operating activities during the nine-month period ended September 29, 2001
resulted from $68,150,000 of net changes in the working capital accounts,
primarily offset by net income of $3,228,000. The changes in working capital
accounts resulted primarily from a build up of inventories for shipments in the
fourth quarter of both years and an increase in accounts receivables from
increased sales during the third quarter of both years.
Net cash used in investing activities was $2,876,000 for the nine-month period
ended September 28, 2002, as compared to net cash used in investing activities
of $4,124,000 for the same period last year. During the nine-month periods ended
September 28, 2002 and September 29, 2001, the Company used $2,650,000 and
$6,634,000, respectively, to purchase or renovate real property and make other
investments. Additionally, during the nine-month period ended September 29,
2001, the Company received payments of $1,878,000 against notes receivable,
primarily the Promissory Note, and received $880,000 from the sale of certain
Hampshire Investment assets. There were no similar collections on the Promissory
Note or significant sales of Hampshire Investment assets in fiscal 2002.
- 13 -
Net cash provided by financing activities was $28,492,000 for the nine-month
period ended September 28, 2002, as compared to $55,631,000 for the same period
last year. At September 28, 2002 and September 29, 2001, the Company had net
borrowings under lines of credit of $34,431,000 and $55,729,000, respectively,
primarily for working capital requirements. Additionally during the nine-month
periods ended September 28, 2002 and September 29, 2001, the Company used
$6,881,000 and $2,445,000, respectively, for the repayment of long-term debt.
The Company's Revolving Credit Facility, which matures on September 5, 2003,
provides a secured credit facility of up to $97.9 million in revolving line of
credit borrowings and letters of credit. At September 28, 2002, the Company had
outstanding borrowings under the line of credit of $34.4 million and $15.9
million outstanding letters of credit. At September 28, 2002, based on a
borrowing formula, the Company had approximately $47.4 million available for
borrowing under the Revolving Credit Facility.
Both the Revolving Credit Facility and the Senior Notes Agreement (the "Senior
Note Agreements") contain covenants which require certain financial performance
and restrict certain payments by the Company, including advances to Hampshire
Investments, Limited and its subsidiaries (the "Non-Restricted Subsidiary"). The
Company was in compliance with all financial performance covenants and
restrictions at September 28, 2002.
The Company's trade account receivables and inventories are pledged as
collateral, pari passu, under the Revolving Credit Facility and the Senior Note
Agreements. Certain of the Company's real property is pledged as collateral for
mortgages given by the Company's Non-Restricted Subsidiary. The Agreements
restrict the sale of assets, payments by the Company of cash dividends to
stockholders, the repurchase of Company common stock and investments in and
loans to the Non-Restricted Subsidiary. The Senior Note Agreements also require
that during any 12-month period there must be a period of 45 consecutive days
where there is no outstanding short-term debt. The Company was in compliance
with these provisions at September 28, 2002.
The Company, through its Non-Restricted Subsidiary, finances real property
investments through mortgages and construction loans. The Company's Chief
Executive Officer has guaranteed certain indebtedness of the Non-Restricted
Subsidiary, for which he is paid a fee.
NEW ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets", on January 1, 2002. SFAS 142
discontinues the practice of amortizing goodwill and intangible assets that have
indefinite useful lives and initiates an annual review for impairment. As of the
date of adoption, the Company had unamortized goodwill of $8,020,000. A
reconciliation of the previously reported net income and income per share for
the nine-month and three-month periods ended September 29, 2001 to the amounts
adjusted for the reduction of amortization expense, net of the related income
tax effect, is as follows:
(in thousands, except per share data)
Nine-month period ended Sept. 29, 2001 Net Income Basic EPS Diluted EPS
- -------------------------------------- ---------- --------- -----------
As previously reported $3,228 $0.69 $0.69
Add: amortization adjustment 371 0.08 0.08
------ ----- -----
Adjusted $3,599 $0.77 $0.77
====== ===== =====
- 14 -
Three-month period ended Sept. 29, 2001 Net Income Basic EPS Diluted EPS
- --------------------------------------- ---------- --------- -----------
As previously reported $6,505 $1.39 $1.39
Add: amortization adjustment 94 0.02 0.02
------ ----- -----
Adjusted $6,599 $1.41 $1.41
====== ===== =====
During the second quarter of 2002, the Company completed its initial assessment
of goodwill for impairment in accordance with SFAS 142 and determined that there
was no impairment. In accordance with SFAS 142, goodwill will be tested for
impairment at least annually and more frequently if circumstances indicate it
may be impaired. The Company anticipates performing the annual impairment test
during the fourth quarter of each year.
The Company adopted SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", on January 1, 2002. SFAS 144 addresses financial reporting
for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS
121 and the accounting and reporting provisions of APB 30 related to the
disposal of a segment of a business. The adoption of SFAS 144 had no material
effect on the Company's financial position, results of operations or cash flows.
The Company adopted Emerging Issues Task Force ("EITF") 01-9, "Accounting for
Consideration by a Vendor to a Customer or a Reseller of the Vendor's Products",
on January 1, 2002. EITF 01-9 addresses whether consideration from a vendor to a
reseller of the vendor's product is (a) an adjustment to the selling prices of
the vendor's products and, therefore should be deducted from revenue when
recognized in the vendor's income statement, or (b) a cost incurred by the
vendor for assets or services received from the reseller and, therefore should
be included as a cost or an expense when recognized in the vendor's income
statement. The adoption of EITF 01-9 requires reclassification of cooperative
advertising expenses from Selling, General and Administrative ("SG&A") expense
as a reduction from revenues. As a result of such retroactive reclassification
of cooperative advertising, net sales, gross profit and SG&A expenses each
decreased by $2,188,000 and $1,485,000 for the nine-month periods of 2002 and
2001, respectively, and decreased by $1,614,000 and $1,166,000 for the
three-month periods of 2002 and 2001, respectively, with no effect on net
income.
Accounting Standard Not Yet Adopted - In June 2002, the FASB issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires that a liability for the cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS No. 146
also established that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with earlier adoption
encouraged. The Company is in the process of reviewing the effect, if any, that
the adoption of SFAS 146 will have on its financial position, results of
operations and cash flows.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and product market prices and rates. The Company is exposed to market
risk in the areas of changing interest rates and fluctuations of currency
exchange rates. The Company is also exposed to market risk due to changes in
costs for raw materials for the Company's products.
- 15 -
Substantially all of the long-term debt of the Company is at fixed interest
rates, which were at market when the debt was issued, but are primarily above
market on September 28, 2002. The short-term debt of the Company has variable
rates based on the prime interest rate of the lending institutions, or at the
option of the Company, a fixed rate based on LIBOR for a fixed term on the
Revolving Credit Facility. The impact of a 100 basis point increase in interest
rates on the Company's variable debt would be to increase interest expense for
2002 by approximately $32,000 for both the nine-month and the three-month
periods.
In purchasing apparel from foreign manufacturers, the Company uses letters of
credit that require the payment of dollars upon receipt of bills of lading for
the products. Prices are fixed in U.S. dollars at the time the letters of credit
are issued.
With the exception of Hampshire Praha, the Company's 70% owned subsidiary,
Hampshire Investments does not issue or own foreign indebtedness. Further, the
foreign indebtedness of Hampshire Praha is not material to the Company's
consolidated operations. Hampshire Investments either purchases foreign based
assets with U.S. dollars or with foreign currency purchased with U.S. dollars,
on or near the purchase date. Real property owned by Hampshire Investments and
located outside the United States is leased for either U.S. dollars or other
stable currencies. The primary foreign currency risk for Hampshire Investments
is the impact of fluctuations that such currencies have on the businesses of the
lessees of real property owned by Hampshire Investments.
Item 4 - Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports filed
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules, regulations and related forms, and
that such information is accumulated and communicated to the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Within the 90 days prior to the filing date of this quarterly report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls and procedures
subsequent to the date the Company completed its evaluation. Therefore, no
corrective actions were required to be taken.
- 16 -
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
In October 2002, Alarm Acquisition Company, LLC filed a complaint against
Hampshire Investments, Limited, the Company's Chief Executive Officer, and
certain other parties unaffiliated with the Company. The action was commenced in
the General Court of Justice, Superior Court Division, of Mecklenburg County,
North Carolina. The plaintiff alleges, among other things, breach of contract,
tortious interference with contract, unfair and deceptive trade practices, fraud
and negligent misrepresentation, and seeks damages of $6,000,000 and punitive
damages. Management believes that the claims contained in the action are without
merit and the Company intends to vigorously defend against the claims.
The Company is from time to time involved in other litigation incidental to the
conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
consolidated financial condition, results of operations, or cash flow.
Item 2 - Changes in Securities and Use of Proceeds
Not applicable.
Item 3 - Defaults in Senior Securities
Not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters sumitted to a vote of security holders during the quarter
ended September 28, 2002.
Item 5 - Other Information
Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are
incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2001 and Part IV, Item (a)(3)
therein.
b) Reports on Form 8-K filed during the quarter
There were no reports filed on Form 8-K during the quarter ended
September 28, 2002.
- 17 -
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
(Registrant)
Date: November 7, 2002 /s/ Ludwig Kuttner
------------------------ --------------------------
Ludwig Kuttner
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 2002 /s/ William W. Hodge
----------------------- ---------------------------
William W. Hodge
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
- 18 -
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Ludwig Kuttner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hampshire Group,
Limited;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ Ludwig Kuttner
-------------------------------------
Ludwig Kuttner
President and Chief Executive Officer
- 19 -
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, William W. Hodge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hampshire Group,
Limited;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002
/s/ William W. Hodge
------------------------------------------
William W. Hodge
Vice President and Chief Financial Officer
- 20 -
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hampshire Group, Limited (the
"Company") on Form 10-Q for the period ended September 28, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Ludwig Kuttner, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
In connection with the Quarterly Report of Hampshire Group, Limited (the
"Company") on Form 10-Q for the period ending September 28, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Ludwig Kuttner, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
Date: November 7, 2002
/s/ Ludwig Kuttner
-------------------------------------
Ludwig Kuttner
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hampshire Group, Limited (the
"Company") on Form 10-Q for the period ended September 28, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William W. Hodge, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 7, 2002
/s/ William W. Hodge
------------------------------------------
William W. Hodge
Vice President and Chief Financial Officer
- 21 -