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 October 2, 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 November 5, 2004
----------------------------- ----------------------------
Common Stock, $0.10 Par Value 4,074,615
HAMPSHIRE GROUP, LIMITED
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
October 2, 2004 and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations
for the Nine Months and Three Months Ended October 2, 2004
and September 27, 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 2, 2004 and September 27,
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 16
Item 4 - Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits 17
Signatures 18
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act 20
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 22
-2-
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Oct. 2, Dec. 31,
ASSETS 2004 2003*
- ------ ------- -------
Current assets:
Cash and cash equivalents $ 94 $ 63,292
Accounts receivable trade - net 89,102 29,450
Notes and other receivable 1,001 646
Inventories 45,086 22,049
Other current assets 8,526 6,842
---------------------
Total current assets 143,809 122,279
Fixed assets - net 1,520 1,667
Goodwill 8,020 8,020
Other assets 770 1,208
---------------------
Total assets $154,119 $133,174
=====================
LIABILITIES
- -----------
Current liabilities:
Current portion of long-term debt $ 1,915 $ 1,932
Borrowings under line of credit 1,700 -
Accounts payable 27,870 12,599
Accrued expenses and other liabilities 19,629 19,846
---------------------
Total current liabilities 51,114 34,377
Long-term debt - less current portion 4,687 5,651
Other long-term liabilities 2,791 2,724
---------------------
Total liabilities 58,592 42,752
---------------------
STOCKHOLDERS' EQUITY
- --------------------
Common Stock, $0.10 par value,
4,761,911 and 4,761,911 shares issued and
4,074,615 and 4,067,721 shares outstanding 476 476
Additional paid-in capital 32,900 32,685
Retained earnings 85,439 80,964
Treasury stock (23,288) (23,703)
---------------------
Total stockholders' equity 95,527 90,422
---------------------
Total liabilities and stockholders' equity $154,119 $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 OPERATIONS
(In thousands, except per share data)
Nine Months Ended Three Months Ended
--------------------------------------------
Oct. 2, Sept. 27, Oct. 2, Sept. 27,
2004 2003 2004 2003
--------------------------------------------
Net sales $196,753 $180,164 $116,104 $97,036
Cost of goods sold 147,402 135,722 86,771 72,668
--------------------------------------------
Gross profit 49,351 44,442 29,333 24,368
Selling, general and
administrative expenses 40,441 37,062 17,618 16,377
--------------------------------------------
Income from operations 8,910 7,380 11,715 7,991
Other income (expense):
Interest income 634 623 119 85
Interest expense (496) (645) (169) (245)
Miscellaneous 20 95 - 11
--------------------------------------------
Income from continuing operations
before income taxes 9,068 7,453 11,665 7,842
Provision for income taxes 3,675 2,825 4,725 2,977
---------------------------------------------
Income from continuing operations 5,393 4,628 6,940 4,865
Loss from discontinued operations
net of income taxes - (5,343) - (5,730)
----------------------------------------------
Net income (loss) $5,393 ($ 715) $6,940 ($ 865)
==============================================
Basic income (loss) per share -
Income from continuing operations $1.32 $0.98 $1.71 $1.02
Loss from discontinued operations - (1.13) - (1.21)
---------------------------------------------
Net income (loss) $1.32 ($0.15) $1.71 ($0.18)
=============================================
Diluted income (loss) per share -
Income from continuing operations $1.31 $0.95 $1.69 $1.00
Loss from discontinued operations - (1.10) - (1.18)
---------------------------------------------
Net income (loss) $1.31 ($0.15) $1.69 ($0.18)
=============================================
Weighted average number
of shares outstanding - Basic 4,071 4,724 4,059 4,751
=============================================
Diluted 4,127 4,851 4,109 4,863
=============================================
<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 Months Ended
----------------------
Oct. 2, Sept. 27,
2004 2003
----------------------
Cash flows from operating activities:
Net income (loss) $ 5,393 ($ 715)
Loss from discontinued operations - 5,343
----------------------
Income from continuing operations 5,393 4,628
Adjustments to reconcile income from continuing operations
to net cash used in operating activities:
Depreciation 598 586
Net deferred compensation expenses for executive officers 574 162
Tax benefit relating to Common Stock Plans 215 -
Net change in operating assets and liabilities:
Receivables (60,028) (44,245)
Inventories (23,037) (40,077)
Other assets (1,753) 27
Accounts payable, accrued expenses and other liabilities 15,054 (6,716)
----------------------
Net cash used in continuing operating activities (62,984) (85,635)
----------------------
Cash flows from investing activities:
Capital expenditures - net (451) (692)
Proceeds from collection of loans 21 188
----------------------
Net cash used in investing activities (430) (504)
----------------------
Cash flows from financing activities:
Net borrowings under line of credit 1,700 22,679
Repayment of long-term debt (981) (978)
Proceeds from issuance of common stock - 524
Proceeds from issuance of treasury stock 542 185
Purchase of treasury stock (1,045) (1,255)
----------------------
Net cash provided by financing activities 216 21,155
----------------------
Discontinued operations:
Net cash provided by discontinued operations - 98
----------------------
Net decrease in cash and cash equivalents (63,198) (64,886)
Cash and cash equivalents - beginning of period 63,292 66,893
----------------------
Cash and cash equivalents - end of period $ 94 $ 2,007
======================
- ----------------------------------------------------------------------------------------
Supplementary disclosure of cash flow information:
Cash paid during the period for: Income taxes $3,395 $5,721
======================
Interest $ 320 $ 946
======================
<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, these financial statements 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 to the presentation of the current year. As discussed in Note 4,
"Discontinued Operations", in October 2003, the Company disposed of Hampshire
Investments, Limited, its investment subsidiary. 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 as 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 to account for employee stock options as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, no compensation expense is recognized unless the
exercise price of the 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 all stock options have
been granted at the fair market value of the underlying stock on the date of
grant.
The following information regarding net income and earnings per share prepared
in accordance with Statement of Financial Account Standards ("SFAS") 123 has
-6-
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.
There were no options granted during the nine months ended October 2, 2004.
During the nine months ended September 27, 2003, options to purchase 1,000
shares of the Company's Common Stock were granted. The fair value of these
options was estimated at the date of grant using a Black-Scholes option
valuation model with the following weighted-average assumptions for the nine
months ended September 27, 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 vesting periods
of the options.
The following table illustrates the effect on reported income and income per
share from continuing operations had the Company applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation:
Nine Months Ended Three Months Ended
------------------------------------------
Oct. 2, Sept. 27, Oct. 2, Sept. 27,
(In thousands, except per share amounts) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------
Income from continuing operations, as reported $5,393 $4,628 $6,940 $4,865
Less - Compensation cost, net of taxes (5) (36) (2) (11)
------------------------------------------
Pro forma net income $5,388 $4,592 $6,938 $4,854
- ------------------------------------------------==========================================
Basic earnings per share: As reported $1.32 $0.98 $1.71 $1.02
Pro forma $1.32 $0.97 $1.71 $1.02
- ------------------------------------------------------------------------------------------
Diluted earnings per share: As reported $1.31 $0.95 $1.69 $1.00
Pro forma $1.31 $0.95 $1.69 $1.00
- ------------------------------------------------------------------------------------------
Note 3 - Inventories
- --------------------
A summary of inventories by component is as follows:
Oct 2, Dec. 31,
(In thousands) 2004 2003
- -----------------------------------------------------------------------------
Finished goods $36,162 $14,217
Finished goods in-transit 8,623 6,606
Work-in-progress 12 465
Raw materials and supplies 289 879
----------------------
45,086 22,167
Less-Excess of current cost over LIFO carrying value - (118)
----------------------
Total $45,086 $22,049
======================
The Company has liquidated all inventories previously costed on the last-in,
first-out (LIFO) basis.
-7-
Note 4 - Discontinued Operations
- --------------------------------
On October 8, 2003, the Company disposed of Hampshire Investments, Limited
("Hampshire Investments"), 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.
Certain assets of Hampshire Investments were sold to K Holdings, LLC, a company
controlled by Mr. Kuttner, for a purchase price of 250,000 shares of the
Company's Common Stock. The Company then exchanged all of the outstanding shares
of capital stock of Hampshire Investments 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 Chief Financial Officer of
the Company.
The fair market value of the Company's Common Stock received in the two
transactions set forth above 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 $5,901,000,
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. Approximately $5,560,000 of the reported loss from the
disposal of the discontinued operations was attributable to the disposal of the
capital stock of Hampshire Investments, Limited. Pursuant to Internal Revenue
Code Section 355, the transaction is characterized as a tax free spin-off.
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 was 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", Hampshire Investment has been accounted for
as a discontinued operation, and the financial information for all prior periods
presented have been reclassified to report Hampshire Investments as a
discontinued operation.
The rental revenue and income (loss) for Hampshire Investments that are included
in the loss from discontinued operation activities in the consolidated statement
of operations are summarized as follows:
Nine Months Three Months
Ended Ended
(In thousands) Sept. 27, 2003 Sept. 27, 2003
- ------------------------------------------------------------------------------
Rental revenue from discontinued operations $2,596 $885
=============================
Operating income before income taxes $871 $242
Provision for income taxes 313 71
-----------------------------
Income from discontinued operations 558 171
Loss on disposal of discontinued operations,
net of income taxes (5,901) (5,901)
-----------------------------
Net loss from discontinued operations ($5,343) ($5,730)
=============================
-8-
Note 5 - Revolving Credit Facility
- ----------------------------------
The Company has a Revolving Credit Agreement ("Credit Facility") with six
participating commercial banks, with HSBC Bank USA as agent. The 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), 50% of
outstanding eligible letters of credit issued pursuant to the Credit Facility,
and cash on deposit in a pledged account, if any, plus seasonal over advances in
the periods of highest requirements.
Advances under the 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 Company's
Senior Notes ("Senior Notes"), principally by the trade accounts receivable,
inventory, cash on deposit in a pledged account, if any, and a pledge of the
common stock of the subsidiaries. At October 2, 2004 there was $33.3 million
outstanding under letters of credit, which includes $8.6 million related to
finished goods in-transit that has been included in accounts payable in the
accompanying balance sheet. At October 2, 2004, advances outstanding under the
Credit Facility were $1.7 million, which resulted in availability for borrowing
of $65.0 million as of that date.
Both the Credit Agreement and the Senior Notes contain financial covenants and
covenants that 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 to 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 covenants and restrictions at October 2, 2004.
Note 6 - Earnings Per Share
- ---------------------------
Set forth in the table below is a reconciliation by year of the numerator
(income or (loss0) and the denominator (shares) for the basic and diluted
earnings per share ("EPS") computations.
Nine Months Ended Nine Months Ended
October 2, 2004 September 27, 2003
------------------------------- -------------------------------
Numerator Denominator Per Share Numerator Denominator Per Share
(In thousands, except per share data) Income Shares Amount Income Shares Amount
- -------------------------------------- ------------------------------- -------------------------------
Basic EPS:
Income from continuing operations $5,393 $1.32 $4,628 $0.98
Loss from discontinued operations - - (5,343) (1.13)
------------------------------- -------------------------------
Net income (loss) $5,393 4,071 $1.32 ($ 715)) 4,724 ($0.15)
Effect of dilutive securities-options - 56 (0.01) - 127 -
=============================== ===============================
Dilute EPS:
New income (loss) $5,393 4,127 $1.31 ($ 715) 4,851 ($0.15)
=============================== ===============================
-9-
Three Months Ended Three Months Ended
October 2, 2004 September 27, 2003
------------------------------- -------------------------------
Numerator Denominator Per Share Numerator Denominator Per Share
(In thousands, except per share data) Income Shares Amount Income Shares Amount
- -------------------------------------- ------------------------------- -------------------------------
Basic EPS:
Income from continuing operations $6,940 $1.71 $4,865 $1.02
Loss from discontinued operations - - (5,730) (1.21)
------------------------------- -------------------------------
Net income (loss) $6,940 4,059 $1.71 ($ 865)) 4,751 ($0.18)
Effect of dilutive securities-options - 50 (0.02) - 112 -
=============================== ===============================
Dilute EPS:
New income (loss) $6,940 4,109 $1.69 ($ 865) 4,863 ($0.18)
=============================== ===============================
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, that
reflect the Company's current views with respect to future events. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to publish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events. Readers are also
urged to review and consider carefully the various disclosures made by the
Company in its Annual Report on Form 10-K and other Securities and Exchange
Commission filings, which advise interested parties of the factors that affect
the Company's business.
Executive Overview
- ------------------
The Company derives its revenues exclusively from the apparel industry by
designing and selling women's and men's sweaters and women's woven and knit
separates. The Company sells to approximately 250 retail customers, primarily in
the United States, including major department stores, mass merchants, specialty
retail stores and catalog companies. The Company's business is highly seasonal
with the majority of sales occurring in the third and fourth quarters of the
year.
The Company purchases its products from manufacturers throughout the world
through its established international sourcing network, with the majority of
manufacturers being located in South East Asia. With the Company's dependence on
international sources, the failure of any of these manufacturers to ship
products to the Company in a timely manner, failure of the manufacturers to meet
required quality standards or delays in the shipments clearing United States
Customs could cause the Company to miss delivery dates to its customers. The
failure to make timely deliveries could expose the Company to liability to its
customers or cause customers to cancel orders or demand reduced prices for late
delivery.
The Company is not able to forecast with any certainty its sales for the
remainder of the year due to the competitive retail environment and uncertain
outlook for retail sales.
With the expiration of the quotas on December 31, 2004, it is anticipated that
the quantity of previously restricted products shipped to the United States will
-10-
greatly increase. A large increase in the volume may place undue burdens on
international transportation systems, the United States' ports receiving the
shipments and the United States Customs offices processing the entries. The
United States government reserves the right to limit the quantities of
individual categories of products imported if it is determined that there has
been a disruption in the domestic markets resulting from the increased volumes
being received in the United States. A coalition of United States textile and
apparel industry trade groups has requested the United States' government to
protect product categories including products which the Company purchases from
manufactures in foreign markets. The government has yet to respond to the
request.
The Company believes that the elimination of the quota (the right to import the
products) will not reduce the Company's cost to purchase these products. A
portion of the price currently paid for the quota is used by foreign governments
to subsidize the manufacture of the products. The elimination of the quota may
result in manufacturers requiring higher prices for their products. Further,
each participant in the supply chain may view the expiration of the quotas as an
opportunity to increase the prices they charge. At the same time, the Company's
customers may seek reduced prices. As a result of the foregoing, the Company
does not believe that it will benefit from the elimination of quotas.
The Company will continue to focus on its customers' needs in terms of quality,
value and service. The Company will attempt to minimize its exposure from
foreign manufacturing by placing its contracts for production as far in advance
as reasonably possible and by scheduling delivery of products well in advance of
the dates on which products are to be delivered to customers.
Disposal of Investment Company in 2003
- --------------------------------------
On October 8, 2003, the Company disposed of its investment subsidiary, Hampshire
Investments, Limited ("Hampshire Investments") 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 Hampshire Investments because Ludwig Kuttner,
Chairman and Chief Executive Officer, and other members of management of the
Company participated as purchasers.
Certain assets of Hampshire Investments 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 Hampshire Investments 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 Chief
Financial Officer of the Company.
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 $5,901,000, 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 operations for the third quarter and the year
ended December 31, 2003. Of the reported loss, approximately $5,560,000 was
attributable to the disposition of the capital stock of Hampshire Investments.
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 was provided for
this loss in the consolidated financial statements.
-11-
The disposal of Hampshire Investments has been accounted for as a discontinued
operation and, accordingly, the financial information for all prior periods
presented have been reclassified to report Hampshire Investments as a
discontinued operation.
RESULTS OF CONTINUING OPERATIONS
Nine Months Ended October 2, 2004 and September 27, 2003
- --------------------------------------------------------
Net Sales
- ---------
Net sales for the nine months ended October 2, 2004 were $196,753,000, compared
with $180,164,000 for the same period last year, an increase of $16,589,000. A
significant amount of the Company's products are scheduled and delivered in the
last week of each calendar month. The nine-month period for the current year
included an additional week, as compared with the prior nine-month period, which
is the primary reason for the increase in net sales in the current period. The
Company shipped approximately 150,000 dozen more units, or 9.3%, during the nine
months ended October 2, 2004 when compared with the same period last year. The
average net sales price per unit declined 0.1% for the nine months ended October
2, 2004 compared with the same period last year.
Gross Profit
- ------------
Gross profit for the nine months ended October 2, 2004 was $49,351,000, compared
with $44,442,000 for the same period last year. The increase resulted from the
increased net sales during the current nine-month period. As a percentage of net
sales, gross profit margin was 25.1% for the nine-month period of 2004, compared
with 24.7% for the same period last year.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses were $40,441,000 for the
nine months ended October 2, 2004, compared with $37,062,000 for the same period
last year. The increase of $2,983,000 resulted primarily from the increase in
expenses incurred because of the increased sales. As a percentage of net sales,
SG&A expenses were 20.6% for the nine-month period of 2004, compared with 20.6%
for the same period last year.
Interest Income
- ---------------
Interest income for the nine months ended October 2, 2004 was $634,000, compared
with $623,000 for the same period last year. The increase resulted from higher
average investments during the current nine-month period.
Interest Expense
- ----------------
Interest expense for the nine months ended October 2, 2004 was $496,000,
compared with $645,000 for the same period last year. The decrease resulted from
lower average borrowings during the period ended October 2, 2004, offset in part
by lower interest rates. Average borrowings during the nine months ended October
2, 2004 were $7,241,000, compared with $11,917,000 for the same period last
year.
Income Taxes
- ------------
The Company's provision for income tax for the nine months ended October 2, 2004
was $3,675,000 compared with $2,825,000 for the same period last year. The
effective income tax rate was 40.5% for the nine months ended October 2, 2004,
compared with 37.9% for the same period last year. The effective income tax rate
for the prior year approximates the Company's actual rate for the year ended
December 31, 2003.
-12-
Income from Continuing Operations
- ---------------------------------
As a result of the foregoing, the Company had income from continuing operations
for the nine months ended October 2, 2004 of $5,393,000, or $1.31 per diluted
share, compared with $4,628,000, or $0.95 per diluted share for the same period
last year.
Loss from Discontinued Operations
- ---------------------------------
The Company had a loss from discontinued operations for the nine months ended
September 27, 2003 of $5,343,000, net of income taxes of $434,000, or loss of
$1.10 per diluted share.
Net Income/Loss
- ---------------
As a result of the foregoing, the Company had net income for the nine months
ended October 2, 2004 of $5,393,000, or $1.31 per diluted share, compared with a
net loss of $715,000, or loss of $0.15 per diluted share for the same period
last year.
Three Months Ended October 2, 2004 and September 27, 2003
- ---------------------------------------------------------
Net Sales
- ---------
Net sales for the three months ended October 2, 2004 were $116,104,000, compared
with $97,036,000 for the same period last year, an increase of $19,068,000. A
significant amount of the Company's products are scheduled and delivered in the
last week of each calendar month. The three-month period for the current year
included an additional week, which is the primary reason for the increase in net
sales in the current period. The Company shipped approximately 164,000 dozen
more units, or 19.9%, during the three months ended October 2, 2004 when
compared with the same period last year. The average net sales price per unit
declined 0.2% for the three months ended October 2, 2004, compared with the same
period the prior year.
Gross Profit
- ------------
Gross profit for the three months ended October 2, 2004 was $29,333,000,
compared with $24,368,000 for the same period last year. The increase resulted
from increased sales during the current period. As a percentage of net sales,
gross profit margin was 25.3% for the three-month period of 2004, compared with
25.1% for the same period last year.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses were $17,618,000 for the
three months ended October 2, 2004, compared with $16,377,000 for the same
period last year. The increase of $1,241,000 resulted primarily from the
increase in expenses incurred because of increased sales. As a percentage of net
sales, SG&A expenses were 15.2% for the three-month period of 2004, compared
with 16.9% for the same period last year.
Interest Income
- ---------------
Interest income for the three months ended October 2, 2004 was $119,000,
compared with $85,000 for the same period last year. The increase resulted from
higher average investments during the current three-month period, offset in part
by a lower rate of return on investments during the period ended October 2,
2004.
Interest Expense
- ----------------
Interest expense for the three months ended October 2, 2004 was $169,000,
compared with $245,000 for the same period last year. The decrease resulted from
-13-
lower average borrowings during the period ended October 2, 2004, offset in part
by lower interest rates. Average borrowings during the three months ended
October 2, 2004 were $6,744,000, compared with $15,539,000 for the same period
last year.
Income Taxes
- ------------
The Company's provision for income taxes for the three months ended October 2,
2004 was $4,725,000, compared with $2,977,000 for the same period last year. The
effective income tax rate was 40.5% for the three months ended October 2, 2004,
compared with 38.0% for the same period last year. The effective income tax rate
for the prior year approximates the Company's actual rate for the year ended
December 31, 2003.
Income from Continuing Operations
- ---------------------------------
As a result of the foregoing, the Company had income from continuing operations
for the three months ended October 2, 2004 of $6,940,000, or $1.69 per diluted
share, compared with income of $4,865,000, or $1.00 per diluted share, for the
same period last year.
Loss from Discontinued Operations
- ---------------------------------
Loss from discontinued operations for the three months ended September 27, 2003
was $5,730,000, net of income taxes of $192,000, or a loss of $1.18 per diluted
share.
Net Income/Loss
- ---------------
As a result of the foregoing, the Company had net income for the three months
ended October 2, 2004 of $6,940,000, or $1.69 per diluted share, compared with a
net loss of $865,000, or a loss of $0.18 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, which consists of funding the seasonal
buildup in inventories and accounts receivable and servicing long-term debt.
Long-term debt service principally consist of annual payments less than $2.0
million. 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.
Net cash used in operating activities was $62,984,000 for the nine months ended
October 2, 2004, as compared with net cash used in operating activities for
continuing operations of $85,635,000 in the same period last year. Net cash used
in operating activities during the nine months ended October 2, 2004 resulted
primarily from an increase in inventory of $23,037,000 and an increase in
accounts receivable of $60,028,000, offset by an increase in accounts payable,
accrued expenses and other liabilities of $15,054,000. The increases in
inventory, accounts receivable, and accounts payable, accrued expenses and other
liabilities resulted from increased sales during the third quarter and
additional scheduled shipments for the fourth quarter. The increase in inventory
includes $8,623,000 of in-transit inventory shipped under letters of credit, for
which the liability has been recorded in accounts payable.
Net cash used in operating activities of continuing operations for the nine
months ended September 27, 2003 resulted primarily from the seasonal increase in
-14-
accounts receivable of $44,245,000 and inventory of $40,077,000 and a decrease
in accounts payable, accrued expenses and other liabilities of $6,716,000, which
were less in the current period due to payment of 2002 income taxes and
incentive bonuses that were substantially higher than those paid in the current
period.
Net cash used in investing activities was $430,000 for the nine months ended
October 2, 2004, as compared with net cash used in investing activities from
continuing operations of $504,000 for the same period last year. During the
periods ended October 2, 2004 and September 27, 2003, the Company used $451,000
and $692,000, respectively, for capital expenditures.
Net cash provided by financing activities of operations was $216,000 for the
nine months ended October 2, 2004, as compared with net cash provided by
financing activities from continuing operations of $21,155,000 for the same
period last year. During the nine months ended October 2, 2004 and September 27,
2003, the Company repaid long-term debt of $981,000 and $978,000, respectively,
and purchased 36,000 shares of its Common Stock for $1,045,000 and 54,519 shares
of its Common Stock for $1,255,000, respectively. As of October 2, 2004 and
September 27, 2003, the Company had borrowings under its credit facility of
$1,700,000 and $22,679,000, respectively.
Net cash provided by discontinued operations for the period ended September 27,
2003 was $98,000. Net cash provided by the discontinued operations principally
resulted from the sale of investments and the sale of real property offset in
part by the purchase of an investment.
The Company maintains a Revolving Credit Agreement ("Credit Facility") with six
participating commercial banks, with HSBC Bank USA as agent. The 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; cash deposited in a pledged account; 50% of eligible inventory
(subject to seasonal limits); 50% of outstanding eligible letters of credit
issued pursuant to the Credit Facility, plus seasonal over advances in the
periods of highest requirements.
Advances under the 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 Company's
Senior Notes ("Senior Notes"), principally by the trade accounts receivable;
cash deposited in a pledged account; inventory and a pledge of the common stock
of the subsidiaries. At October 2, 2004, there was $1.7 million outstanding in
borrowings and $33.3 million outstanding under letters of credit, which includes
approximately $8.6 million related to finished goods in-transit that have been
included in accounts payable in the accompanying balance sheet. At October 2,
2004, the Company had availability under the Revolving Credit Facility for
borrowing of approximately $65.0 million.
Both the Credit Facility and the Senior Notes contain financial covenants and
covenants that restrict certain payments by the Company. The financial covenants
require, among other things, that the Company maintain specified levels of
consolidated net worth, not to 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 October 2, 2004.
Management believes that cash flow from operations, available borrowings under
the credit facility and long-term borrowings will provide adequate resources to
meet the Company's capital requirements and operational needs for the
foreseeable future.
-15-
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
There have been no changes to the Company's significant accounting policies and
estimates as set forth in the Annual Report on Form 1k0-K for the year ended
December 31, 2003.
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
risks including reduction in the value of the dollar, changes in interest rates
and increased costs for its products.
The long-term debt of the Company is at fixed interest rates, which was at
market when the debt was issued, but was above market on October 2, 2004. The
short-term debt of the Company is at 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.
In purchasing apparel from foreign manufacturers, the Company uses letters of
credit that require the payment in U.S. currency 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.
Item 4 - Controls and Procedures
Disclosure Controls and Procedures
- ----------------------------------
As of October 2, 2004 (the "Evaluation Date"), 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 (the
"Exchanged Act"). 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 and reporting the information required by the Exchange Act for the
period indicated.
Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
There have not been any changes in the Company's internal control over financial
reporting during the nine months ended October 2, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
-16-
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. Management of 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
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 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 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)
/s/ Ludwig Kuttner
Date: November 5, 2004
-------------------- -------------------------------------
Ludwig Kuttner
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles W. Clayton
Date: November 5, 2004
-------------------- --------------------------------------
Charles W. Clayton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ Roger B. Clark
Date: November 5, 2004
-------------------- --------------------------------------
Roger B. Clark
Vice President Finance
(Principal Accounting Officer)
-18-
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 pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-19-