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 April 3, 2004.
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 May 4, 2004
----------------------------- ----------------------------
Common Stock, $0.10 Par Value 4,085,615
HAMPSHIRE GROUP, LIMITED
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
April 3, 2004 and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Income
for the Three-Month Periods Ended April 3, 2004 and
March 29, 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three-Month Periods Ended April 3, 2004 and
March 29, 2003 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 14
Item 4 - Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
- 2 -
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
April 3, Dec. 31,
2004 2003*
ASSETS ----------------------
Current assets:
Cash and cash equivalents $ 66,038 $ 63,292
Accounts receivable trade - net 30,092 29,450
Notes and other accounts receivable 481 646
Inventories 10,997 22,049
Other current assets 6,979 6,842
---------------------
Total current assets 114,587 122,279
Fixed assets - net 1,510 1,667
Goodwill 8,020 8,020
Other assets 666 1,208
---------------------
Total assets $124,783 $133,174
=====================
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 1,932 $ 1,932
Accounts payable 6,084 12,599
Accrued expenses and other liabilities 17,742 19,846
---------------------
Total current liabilities 25,758 34,377
Long-term debt; less current portion 5,637 5,651
Other long-term liabilities 2,541 2,724
---------------------
Total liabilities 33,936 42,752
---------------------
STOCKHOLDERS' EQUITY
Common Stock, $0.10 par value; 4,761,911
(4/3/04) and 4,761,911 (12/31/03) shares
issued and 4,081,971 (4/3/04) and 4,067,721
(12/31/03) shares outstanding 476 476
Additional paid-in capital 32,795 32,685
Retained earnings 80,793 80,964
Treasury stock (23,217) (23,703)
---------------------
Total stockholders' equity 90,847 90,422
---------------------
Total liabilities and stockholders' equity $124,783 $133,174
=====================
<FN>
*Derived from the December 31, 2003 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 INCOME
(in thousands, except per share data)
Three-Month Periods Ended
-------------------------
April 3, March 29,
2004 2003
---------------------
Net sales $54,397 $51,167
Cost of goods sold 41,981 38,601
-------------------
Gross profit 12,416 12,566
Selling, general and administrative expenses 12,297 11,442
-------------------
Income from operations 119 1,124
Other income (expense):
Interest income 272 218
Interest expense (163) (206)
Other 19 28
-------------------
Income from continuing operations before
income taxes 247 1,164
Provision for income taxes 100 453
-------------------
Income from continuing operations 147 711
Income from discontinued operations,
net of income taxes of $222 - 391
-------------------
Net income $ 147 $ 1,102
===================
Basic income per share -
Income from continuing operations $0.04 $ 0.15
Income from discontinued operations - 0.08
-------------------
Net income $0.04 $ 0.23
===================
Diluted income per share -
Income from continuing operations $0.03 $ 0.15
Income from discontinued operations - 0.08
-------------------
Net income $0.03 $ 0.23
===================
Weighted average number of
shares outstanding - Basic 4,077 4,693
===================
Diluted 4,204 4,819
===================
<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)
Three-Month Periods Ended
-------------------------
April 3, March 29,
2004 2003
---------------------
Cash flows from operating activities:
Net income $ 147 $ 1,102
Income from discontinued operations - (391)
-------------------
Income from continuing operations 147 711
Adjustments to reconcile income from continuing operations
to net cash provided by (used in) operating activities:
Depreciation 198 207
Net deferred compensation costs for executive officers 324 54
Tax benefit relating to Common Stock Plans 110 -
Net change in operating assets and liabilities:
Receivables (498) (4,609)
Inventories 11,052 1,876
Other assets (102) 590
Accounts payable, accrued expenses
and other liabilities (8,619) (19,370)
-------------------
Net cash provided by (used in)continuing
operating activities 2,612 (20,541)
-------------------
Cash flows from investing activities:
Capital expenditures (41) (148)
Proceeds from loans 21 63
-------------------
Net cash used in investing activities (20) (85)
-------------------
Cash flows from financing activities:
Repayment of long-term debt (14) (13)
Proceeds from issuance of treasury stock 168 197
Purchases of treasury stock - (713)
-------------------
Net cash provided by (used in) financing activities 154 (529)
-------------------
Discontinued operations:
Net cash provided by discontinued operations - 297
-------------------
Net increase (decrease) in cash and cash equivalents 2,746 (20,858)
Cash and cash equivalents - beginning of period 63,292 66,893
-------------------
Cash and cash equivalents - end of period $66,038 $46,035
===================
- -------------------------------------------------------------------------------
Supplementary disclosure of cash flow information:
Cash paid during the period for: Interest $ 1 $ 13
Income taxes 2,971 4,253
Income taxes paid for period ended March 29, 2003 include amounts related
to discontinued operations.
<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 wholly-owned subsidiaries (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 condensed
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, 2003, 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. As discussed in Note 4,
"Discontinued Operations", in October 2003, the Company concluded the disposal
of Hampshire Investments, Limited, its investment subsidiary and accordingly,
the results of operations of the investment segment have been classified as
discontinued operations for all periods presented.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are the same as those applied at
December 31, 2003 and disclosed in the Company's audited consolidated financial
statements and notes thereto for the year ended December 31, 2003, included in
the Company's Annual Report on Form 10-K.
Stock Based Compensation
- ------------------------
The Company has elected to continue to follow the intrinsic value method of
accounting as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), to account for employee
stock options. Under APB 25, no compensation expense is recognized unless the
exercise price of the Company's employee stock options is less than the market
price of the underlying stock on the date of grant. The Company has not recorded
compensation expense in the periods presented because stock options were granted
at the fair market value of the underlying stock on the date of grant.
- 6 -
The following information regarding net income and earnings per share prepared
in accordance with Statement of Financial Account Standards ("SFAS") 123 has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS 123. The resulting effect on net
income and earnings per share pursuant to SFAS 123 is not likely to be
representative of the effects on net income and earnings per share pursuant to
SFAS 123 in future periods, due to subsequent periods including additional
grants and periods of vesting. There were no options granted during the
three-month period ended April 3, 2004. During the three-month period ended
March 29, 2003, 1,000 options were granted. The fair value of options was
estimated at the date of grant using a Black-Scholes option valuation model with
the following weighted-average assumptions for the three-month period ended
March 29, 2003: risk-free interest rates of 4.1%; dividend yield of 0%; expected
volatility of 39.7%; expected life of 4.2 years; and a weighted-average fair
value of options granted of $7.02.
For purposes of disclosures pursuant to SFAS 123 as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure", the
estimated fair value of options is amortized to expense over the options'
vesting period.
The following table illustrates the effect on reported net income and earnings
per share had the Company applied the fair value recognition provisions of SFAS
123 to stock-based employee compensation (in thousands, except per share
amounts):
Three-Month Periods Ended
-------------------------
April 3, March 29,
2004 2003
--------------------
Income from continuing operations: As reported $ 147 $1,102
Less-Compensation cost, net of tax 1 13
-----------------
Pro forma $ 146 $1,089
- --------------------------------------------------------------------------
Basic earnings per share: As reported $0.04 $0.23
-----------------
Pro forma $0.04 $0.23
- --------------------------------------------------------------------------
Diluted earnings per share: As reported $0.03 $0.23
-----------------
Pro forma $0.03 $0.23
- --------------------------------------------------------------------------
NOTE 3. INVENTORIES
A summary of inventories by component is as follows:
(in thousands)
April 3, Dec. 31,
2004 2003
---------------------
Finished goods $ 8,390 $14,217
Finished goods in-transit 2,292 6,606
Work-in-progress 15 465
Raw materials and supplies 300 879
-------------------
10,997 22,167
Less - Excess of current cost
over LIFO carrying value - (118)
-------------------
Total $10,997 $22,049
===================
During the three-month period ended April 3, 2004 the Company liquidated
all inventories previously costed on the last-in, first-out (LIFO) basis.
- 7 -
NOTE 4. DISCONTINUED OPERATIONS
On October 8, 2003, the Company completed the disposition of Hampshire
Investments, Limited ("HIL"), the investment subsidiary of the Company. A
special committee of the Board of Directors ("Board"), comprised of independent
directors, was responsible for the disposal because Ludwig Kuttner, Chairman and
Chief Executive Officer, and other members of management of the Company
participated as purchasers. HIL made investments both domestically and
internationally, principally in real property.
Certain HIL assets were sold to K Holdings, LLC, a company controlled by Ludwig
Kuttner, for a purchase price of 250,000 shares of the Company's Common Stock.
Subsequently, all of the outstanding shares of capital stock of HIL were
exchanged with an investor group consisting of Mr. Kuttner, Peter Woodworth, a
Director of the Company, and Charles Clayton, Secretary and Treasurer of the
Company, for 450,000 shares of the Company's Common Stock. Mr. Clayton
subsequently was appointed interim Chief Financial Officer.
The fair market value of the Company's Common Stock received in the two
transactions was $23,905,000 based on a price of $34.15 per share, as reported
by NASDAQ at the market close on October 7, 2003, the trading day prior to the
date on which the transactions were consummated. The transactions resulted in a
loss from disposal of approximately $6,433,000, including the related income tax
expense of $192,000. This loss, including disposal costs of $950,000, was
recognized as a loss from disposal of discontinued operations in the
consolidated statement of income for the year ended December 31, 2003. Of the
reported loss from the disposal of the discontinued operations, approximately
$5,560,000 is attributable to the disposal of the capital stock of HIL. Under
the Internal Revenue Code Section 355, the transaction is characterized as a
tax-free spin-off and accordingly, the Company is not entitled to deduct this
loss because it represents a loss on the distribution of property by the Company
in exchange for its own Common Stock. Therefore, no tax benefit has been
provided for this loss in the consolidated financial statements.
In accordance with the guidance of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", HIL has been accounted for as a discontinued
operation, and the financial information for all prior periods presented have
been reclassified to report HIL as a discontinued operation.
The rental revenue and pretax income for HIL which are included in the income
from discontinued operation activities in the consolidated statement of income
are summarized as follows (in thousands):
Three-Month Period Ended
------------------------
March 29, 2003
--------------
Rental Revenue $827
Pre-tax income 613
- -------------------------------------------------------------------------------
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46, among other things, provides guidance on identifying variable interest
entities ("VIE") and determining when assets, liabilities, non-controlling
interests, and operating results of a VIE should be included in a company's
consolidated financial statements, and also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. In
- 8 -
December 2003, the FASB issued a revision to FIN 46 to clarify some of the
provisions of the original interpretation and to exempt certain entities from
its requirements. The additional guidance explains how to identify a VIE and how
an enterprise should assess its interest in an entity to decide whether to
consolidate that entity. Application of revised FIN 46 was required for public
companies with interest in "special purpose entities" for periods ending after
December 15, 2003. Application for public entities for all other types of
entities was required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 had no impact on the Company's operating results or
financial position, since the Company has not entered into such arrangements.
Interpretation No. 45 provides guidance on the disclosure to be made by the
guarantor about its obligation under certain guarantees that it has issued. The
disclosure requirements are effective for the financial statements of periods
ending after December 15, 2002. At April 3, 2004 and March 29, 2003, the Company
and various consolidated subsidiaries of the Company are borrowers under the
Revolving Credit Facility and Senior Notes (the "Facilities") (see Note 6). The
Facilities are guaranteed by either the Company and/or various consolidated
subsidiaries of the Company in the event that the borrower(s) default under the
provisions of the Facilities. The guarantees are in effect for the period of the
related Facilities. All guarantees outstanding, or in respect to liabilities,
are included in the consoldiated balance sheet.
NOTE 6. REVOLVING CREDIT FACILITY
On August 15, 2003, the Company entered into a new Revolving Credit Facility
("Revolving Credit Facility") with six participating commercial banks, with HSBC
Bank USA as agent. The Revolving Credit Facility, which matures on April 30,
2007, provides for secured borrowings up to $100 million in revolving line of
credit borrowings and letters of credit. Advances under the line of credit are
limited to the lesser of: (1) $100 million less outstanding letters of credit;
or (2) the sum of 85% of eligible accounts receivable, 50% of eligible inventory
(subject to seasonal limits) of the Company's subsidiaries (defined as Hampshire
Designers and Item-Eyes), and 50% of outstanding eligible letters of credit
issued through this Revolving Credit Facility, plus seasonal overadvances in the
periods of highest requirements.
Advances under the Revolving Credit Facility bear interest at either the bank's
prime rate less .25% or, at the option of the Company, a fixed rate of LIBOR
plus 1.80%, for a fixed term. The loan is collateralized, pari passu with the
Company's senior notes payable to two insurance companies ("Senior Notes"),
principally by the trade accounts receivable and inventories of the Company's
subsidiaries and a pledge of the common stock of the subsidiaries. At April 3,
2004 there was $46.8 million outstanding under letters of credit, which includes
$1.7 million related to finished goods in-transit that have been included in
accounts payable in the accompanying balance sheet. No advances were outstanding
under the Revolving Credit Facility at April 3, 2004 or December 31, 2003, which
resulted in availability for borrowing of approximately $4.9 million under the
Revolving Credit Facility at April 3, 2004.
Both the Revolving Credit Facility and the Senior Notes contain covenants which
require certain financial performance and restrict certain payments by the
Company. The financial performance covenants require, among other things, that
the Company maintain specified levels of consolidated net worth, not exceed a
specified consolidated leverage ratio, achieve a specified fixed charge ratio
and limit capital expenditures to a specified maximum amount. The Company was in
compliance with the financial performance covenants and restrictions at April 3,
2004.
- 9 -
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
EXECUTIVE OVERVIEW
The Company, after the October 8, 2003 disposal of the investment segment,
derives its revenues exclusively from the apparel industry by designing,
sourcing and marketing women's and men's sweaters and a broad line of women's
woven and knit separates. The Company sells to approximately 250 retail
customers, primarily in the United States, including most major department
stores, mass merchants, specialty retail stores and catalog companies. The
Company's apparel business is highly seasonal with the majority of sales
occurring in the third and fourth quarters of the year.
The Company outsources the manufacture of its products, principally due to lower
labor costs available through the Company's established international network of
sources. Substantially all of the products sold by the Company are supplied by
international manufacturing sources. With the Company's dependence on these
international sources, failure of any of these suppliers to ship products 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 of its customers or
cause customers to cancel orders, refuse to accept delivery of products or
demand reduced prices.
For the quarter ended April 3, 2004, the Company had an increase in net sales,
when compared to the same period of the prior year, primarily resulting from
increased shipments of women's sweaters and related separates. These increases
were partially offset by reduced sales of men's sweaters resulting from the
Company's decision to minimize the business to be done for the spring season in
men's product, which reflects the market for men's sweaters.
The Company believes that there remains an unusually high amount of uncertainty
for the remainder of the year due to the unclear outlook for retail sales, the
expiration of quota agreements on December 31, 2004, questions about cotton
pricing, and the fluctuation of foreign currencies in relation to the dollar.
The Company will remain focused on the customers' needs both in terms of
quality, value and service and will attempt to minimize its exposure from
foreign suppliers by placing contracts for production as far in advance as
reasonably possible and taking early delivery of Spring 2005 product.
DISPOSAL OF INVESTMENT COMPANY IN 2003
On October 8, 2003, the Company disposed of its investment subsidiary, Hampshire
Investments, Limited ("HIL") after the Board of Directors (the "Board")
determined that the Company should concentrate on the apparel business. A
special committee of the Board, consisting of independent directors, was
responsible for the disposal of HIL because Ludwig Kuttner, Chairman and Chief
Executive Officer, and other members of management of the Company participated
as purchasers. HIL made investments both domestically and internationally,
principally in real property.
- 10 -
Certain assets of HIL were sold to K Holdings, LLC, a company controlled by Mr.
Kuttner, for a purchase price consisting of 250,000 shares of the Company's
common stock. The Company then exchanged all of the outstanding shares of
capital stock of HIL with an investor group including Mr. Kuttner, Peter
Woodworth, a Director of the Company, and Charles Clayton, Secretary and
Treasurer of the Company, for 450,000 shares of the Company's common stock. Mr.
Clayton subsequently was appointed interim Chief Financial Officer.
The fair market value of the Company's common stock received in the two
transactions was $23,905,000 based on a price of $34.15 per share, as reported
by NASDAQ as of the close of the market on October 7, 2003, the trading day
prior to the date on which the transactions were consummated. The transactions
resulted in a loss from the disposal of approximately $6,433,000, including the
related income tax expense of $192,000. This loss, including disposal costs, was
recognized as a loss from disposal of discontinued operations in the
consolidated statement of operations for the third quarter and the year ended
December 31, 2003. Of the reported loss, approximately $5,560,000 is
attributable to the disposition of the capital stock of Hampshire Investments,
Limited, the Company's investment subsidiary. Pursuant to Internal Revenue Code
Section 355, the transaction is characterized as a tax-free spin off and the
Company is not entitled to deduct this loss because it represents a loss on
disposition of property by the Company in exchange for its own Common Stock.
Therefore, no tax benefit has been provided for this loss in the consolidated
financial statements.
The disposal of HIL has been accounted for as a discontinued operation and,
accordingly, the financial information for all prior periods presented have been
reclassified to report HIL as a discontinued operation.
RESULTS OF CONTINUING OPERATIONS
Three-Month Periods Ended April 3, 2004 and March 29, 2003
- ----------------------------------------------------------
Net Sales
- ---------
Net sales for the three-month period ended April 3, 2004 were $54,397,000,
compared to $51,167,000 for the same period last year, an increase of $3,230,000
or 6.3%. The increase resulted from higher sales of women's sweaters and women's
related separates, offset by decreases in sales of men's sweaters. Units shipped
in the three-month period ended April 3, 2004 exceeded units shipped during the
same period last year by approximately 42,000 dozen, or 9.2%. The average net
sales price per unit declined 2.5% primarily due to the higher than usual
shipments of off priced product during the quarter ended April 3, 2004 and the
continued heavy demands from customers for allowances in a very competitive
retail market.
Gross Profit
- ------------
Gross profit for the three-month period ended April 3, 2004 was $12,416,000,
compared to $12,566,000 for the same period last year, a decrease of $150,000 or
1.2%. As a percentage of net sales, gross profit margins were 22.8% for the
three-month period of 2004, compared with 24.6% for the same period last year.
The decrease in gross profit margins primarily resulted from establishing a $1.2
million reserve for estimated incremental customs costs related to importing
merchandise from one of its suppliers.
- 11 -
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses were $12,297,000 for the
three-month period ended April 3, 2004, compared to $11,442,000 for the same
period last year, an increase of $855,000 or 7.5%. As a percentage of net sales,
SG&A expenses were 22.6% for the three-month period of 2004, compared with 22.4%
for the same period last year. The increase primarily resulted from additional
marketing, designing, shipping and related expenses caused by the increased unit
volume in the three-month period ended April 3, 2004.
Interest Expense
- ----------------
Interest expense for the three-month period ended April 3, 2004 was $163,000,
compared to $206,000 for the same period last year, a decrease of $43,000 or
20.9%. The decrease resulted from lower average borrowings during the period
ended April 3, 2004. Average borrowings during the three-month period ended
April 3, 2004 were $7,577,000, compared to $9,507,000 for the same period last
year.
Interest Income
- ---------------
Interest income for the three-month period ended April 3, 2004 was $272,000,
compared to $218,000 for the same period last year, an increase of $54,000 or
24.8%. The increase primarily resulted from higher cash balances during the
period ended April 3, 2004.
Income Taxes
- ------------
The Company's income tax provision for the three-month period ended April 3,
2004 was $100,000, compared to $453,000 for the same period last year. The
effective income tax rate was 40.5% for the three-month period ended April 3,
2004, compared to 38.9% for the same period last year.
Income from Continuing Operations
- ---------------------------------
As a result of the foregoing, net income from continuing operations for the
three-month period ended April 3, 2004 was $147,000, or $0.03 per diluted share,
compared to $711,000, or $0.15 per diluted share, for the same period last year,
a decrease of $564,000.
Income from Discontined Operations
- ----------------------------------
Income from discontinued operations for the three-month period ended March 29,
2003 was $391,000, net of income taxes of $222,000. Included in the income was a
gain on the sale of an investment of $310,000 and a net gain from the sale of
real property of $132,000.
Net Income
- ----------
As a result of the foregoing, net income of the Company for the three-month
period ended April 3, 2004 was $147,000, or $0.03 per diluted share, compared to
$1,102,000, or $0.23 per diluted share, for the same period last year.
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, servicing long-term debt and funding
capital expenditures. Due to the seasonality of the business, the Company
generally reaches its maximum borrowing under its revolving credit facility
during the third quarter of the year. The primary sources to meet the liquidity
and capital requirements include funds generated from operations, borrowings
under revolving credit lines and long-term debt.
At April 3, 2004, the Company had cash and cash equivalents totaling
$66,038,000.
- 12 -
Net cash provided by operating activities was $2,612,000 for the three-month
period ended April 3, 2004, as compared to net cash used in operating activities
for continuing operations of $20,541,000 in the same period last year. Net cash
provided by operating activities during the period ended April 3, 2004 resulted
primarily from a decrease in inventory of $11,052,000, offset by a decrease in
accounts payable, accrued expenses and other liabilities of $8,619,000. This
activity resulted primarily from the seasonality of the Company's business and
its decision to minimize the men's business to be done for the spring season.
Net cash used in operating activities of continuing operations during the period
ended March 29, 2003 resulted primarily from a decrease in accounts payable,
accrued expenses and other liabilities of $19,370,000, which among other things,
included the payment of 2002 incentive bonus compensation and income taxes, that
were substantially higher than those paid in the current period.
Net cash used in investing activities was $20,000 for the period ended April 3,
2004, as compared to net cash used in investing activities of continuing
operations of $85,000 for the same period last year. During the periods ended
April 3, 2004 and March 29, 2003, the Company used $41,000 and $148,000,
respectively, on capital expenditures.
Net cash provided by financing activities of operations was $154,000 for the
period ended April 3, 2004, as compared to net cash used in financing activities
of continuing operations of $529,000 for the same period last year. During the
period ended March 29, 2003 the Company purchased approximately 35,500 shares of
its Common Stock for $713,000. As of April 3, 2004 and March 29, 2003, the
Company had no borrowings under its credit facility.
Net cash provided by discontinued operations for the period ended March 29, 2003
was $297,000. Hampshire Investments, Limited, the discontinued operation, made
investments, both domestically and internationally, primarily in real property.
The net cash provided by the discontinued operations principally resulted from
operations which included the sale of an investment and the sale of real
property.
On August 15, 2003, the Company entered into a new Revolving Credit Facility
("Revolving Credit Facility") with six participating commercial banks, with HSBC
Bank USA as agent. The Revolving Credit Facility, which matures on April 30,
2007, provides for secured borrowings up to $100 million in revolving line of
credit borrowings and letters of credit. Advances under the line of credit are
limited to the lesser of: (1) $100 million less outstanding letters of credit;
or (2) the sum of 85% of eligible accounts receivable, 50% of eligible inventory
(subject to seasonal limits) of the Company's subsidiaries (defined as Hampshire
Designers and Item-Eyes), and 50% of outstanding eligible letters of credit
issued through this Revolving Credit Facility, plus seasonal overadvances in the
periods of highest requirements.
Advances under the Revolving Credit Facility bear interest at either the bank's
prime rate less 0.25% or, at the option of the Company, a fixed rate of LIBOR
plus 1.80%, for a fixed term. The loan is collateralized, pari passu with the
Senior Notes, principally by the trade accounts receivable and inventories of
the Company's subsidiaries and a pledge of the common stock of the subsidiaries.
At April 3, 2004 there was $46.8 million outstanding under letters of credit,
which includes $1.7 million related to finished goods in-transit that have been
included in accounts payable in the accompanying balance sheet. No advances were
outstanding under the Revolving Credit Facility at April 3, 2004 or December 31,
2003, which resulted in availability for borrowing of approximately $4.9 million
under the Revolving Credit Facility at April 3, 2004.
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Both the Revolving Credit Facility and the Senior Notes contain covenants which
require certain financial performance and restrict certain payments by the
Company. The financial performance covenants require, among other things, that
the Company maintain specified levels of consolidated net worth, not exceed a
specified consolidated leverage ratio, achieve a specified fixed charge ratio
and limit capital expenditures to a specified maximum amount. The Company was in
compliance with the financial performance covenants and restrictions at April 3,
2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46, among other things, provides guidance on identifying variable interest
entities ("VIE") and determining when assets, liabilities, non-controlling
interests, and operating results of a VIE should be included in a company's
consolidated financial statements, and also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. In
December 2003, the FASB issued a revision to FIN 46 to clarify some of the
provisions of the original interpretation and to exempt certain entities from
its requirements. The additional guidance explains how to identify a VIE and how
an enterprise should assess its interest in an entity to decide whether to
consolidate that entity. Application of revised FIN 46 was required for public
companies with interest in "special purpose entities" for periods ending after
December 15, 2003. Application for public entities for all other types of
entities was required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 had no impact on the Company's operating results or
financial position, since the Company has not entered into such arrangements.
Interpretation No. 45 provides guidance on the disclosure to be made by the
guarantor about its obligation under certain guarantees that it has issued. The
disclosure requirements are effective for the financial statements of periods
ending after December 15, 2002. At April 3, 2004 and March 29, 2003, the Company
and various consolidated subsidiaries of the Company are borrowers under the
Revolving Credit Facility and Senior Notes (the "Facilities") (see Note 6). The
Facilities are guaranteed by either the Company and/or various consolidated
subsidiaries of the Company in the event that the borrower(s) default under the
provisions of the Facilities. The guarantees are in effect for the period of the
related Facilities. All guarantees outstanding, or in respect to liabilities,
are included in the consoldiated balance sheet.
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 to changes in costs for raw
materials for the Company's products.
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 April 3,
2004. 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.
In purchasing apparel from foreign manufacturers, the Company uses letters of
credit that require the payment of U.S. 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.
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Item 4 - Controls and Procedures
Disclosure Controls and Procedures
- ----------------------------------
The Company, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, 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 Securities Exchange Act of
1934, as of April 3, 2004 (the "Evaluation Date"). Based on the evaluation
performed, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in recording, processing, summarizing and
reporting in the periods specified in the SEC's rules and forms the information
required to be disclosed by the Company in its reports filed or furnished under
the Exchange Act.
Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
There have not been any changes in the Company's internal control over financial
reporting during the fiscal year ended April 3, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is from time to time involved in 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 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
- ----------- ----------------------------------------------------------------
31.1 Certification of Chief 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 Chief 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 Certification of Chief Executive Officer and Chief Financial
Officer of Hampshire Group, Limited pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b) Reports on Form 8-K filed during the quarter
1. On March 8, 2004, the Company filed a current report on Form 8-K
reporting an Item 9 Regulation FD disclosure regarding the release
of the Company's financial results for the year and quarter ended
December 31, 2003.
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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
(Registrant)
Date May 11, 2004 /s/ Ludwig Kuttner
------------------------ ------------------------------------
Ludwig Kuttner
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
Date May 11, 2004 /s/ Charles W. Clayton
------------------------ -------------------------------------
Charles W. Clayton
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date May 11, 2004 /s/ Roger B. Clark
------------------------ -------------------------------------
Roger B. Clark
Vice President Finance
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------------------------------------
31.1 Certification of Chief 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 Chief 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 Certification of Chief Executive Officer and Chief Financial
Officer of Hampshire Group, Limited pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.