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 2, 2005.
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 6, 2005
----------------------------- ----------------------------
Common Stock, $0.10 Par Value 4,080,129
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 2, 2005, April 3, 2004 and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Income for
the Three Months Ended April 2, 2005 and April 3, 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended April 2, 2005 and April 3, 2004 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
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 2 Changes in Securities 17
Item 5 Other Information 17
Item 6 Exhibits 18
Signatures 19
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)
April 2, April 3, Dec. 31,
ASSETS 2005 2004 2004*
- ------ -------- -------- ---------
Current assets:
Cash and cash equivalents $ 25,891 $ 61,038 $ 31,214
Short-term investments 46,811 5,000 49,440
Accounts receivable trade - net 33,213 29,013 31,776
Account receivable - other 155 481 1,292
Inventories 12,051 10,997 10,393
Other current assets 6,054 4,904 5,857
-------- -------- --------
Total current assets 124,175 111,433 129,972
Fixed assets - net 1,462 1,510 1,318
Goodwill 8,020 8,020 8,020
Other assets 1,800 2,673 1,470
-------- -------- --------
$135,457 $123,636 $140,780
======== ======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 1,886 $ 1,932 $ 1,901
Accounts payable 10,031 6,390 8,156
Accrued expenses and other liabilities 10,856 16,357 19,141
-------- -------- --------
Total current liabilities 22,773 24,679 29,198
Senior notes - less current portion 3,750 5,637 3,750
Deferred compensation 3,103 2,473 2,940
-------- -------- --------
Total liabilities 29,626 32,789 35,888
-------- -------- --------
STOCKHOLDERS' EQUITY
Common Stock, $0.10 par value; issued
4,761,911, 4,761,911, 4,761,911; and
outstanding 4,111,629, 4,081,971
and 4,100,570 476 476 476
Additional paid-in capital 34,007 32,795 33,682
Retained earnings 93,383 80,793 93,114
Treasury stock (22,035) (23,217) (22,380)
-------- -------- --------
Total stockholders' equity 105,831 90,847 104,892
-------- -------- --------
$135,457 $123,636 $140,780
======== ======== ========
<FN>
* Derived from the December 31, 2004 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 Months Ended
-----------------------
April 2, April 3,
2005 2004
------- -------
Net sales $58,077 $54,397
Cost of goods sold 43,726 41,981
------- -------
Gross profit 14,351 12,416
Selling, general and
administrative expenses 13,357 12,297
------- -------
Income from operations 994 119
Other income (expense):
Interest income 388 272
Interest expense (147) (163)
Other 13 19
------- -------
Income before income taxes 1,248 247
Provision for income taxes 500 100
------- -------
Net income $ 748 $ 147
======= =======
Net income per share - Basic $0.18 $0.04
===== =====
Diluted $0.18 $0.03
===== =====
Weighted average number
of shares outstanding - Basic 4,103 4,077
===== =====
Diluted 4,125 4,204
===== =====
<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 Months Ended
-----------------------
April 2, April 3,
2005 2004
------- -------
Cash flows from operating activities:
Net income $ 748 $ 147
Adjustments to reconcile income from operations
to net cash (used in) provided by operating activities:
Depreciation 230 198
Gain on sale of property (20) -
Net deferred compensation expenses for executives 171 324
Net change in operating assets and liabilities:
Receivables (300) (848)
Inventories (1,658) 11,052
Other assets (133) (102)
Accounts payable, accrued expenses and other liabilities (6,085) (8,138)
------- -------
Net cash (used in) provided by operating activities (7,047) 2,633
------- -------
Cash flows from investing activities:
Sales of short-term investments 30,056 10
Purchase of short-term investments (27,427) -
Capital expenditures - net (354) (41)
Purchase of securities in deferred compensation fund
(402) -
------- -------
Net cash provided by (used in) investing activities 1,873 (31)
------- -------
Cash flows from financing activities:
Repayment of long-term debt (15) (14)
Proceeds from issuance of treasury stock 118 168
Purchase of treasury stock (252) -
------- -------
Net cash (used in) provided by financing activities (149) 154
------- -------
Net (decrease) increase in cash and cash equivalents (5,323) 2,756
Cash and cash equivalents - beginning of period 31,214 58,282
------- -------
Cash and cash equivalents - end of period $25,891 $61,038
======= =======
- --------------------------------------------------------------------------------------
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Income taxes $3,777 $2,971
Interest 1 1
Non-cash activity:
Treasury stock from options exercised 384 -
Tax benefit relating to Common Stock Plans 325 110
<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, 2004, included in the Company's Annual
Report on Form 10-K.
Certain reclassifications have been made to data of the previous year to conform
to the presentation of the current year.
Note 2 - Summary of Critical and Other Significant Accounting Policies
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis management evaluates its estimates, including those related to
allowances for markdowns, customer returns and adjustments, doubtful accounts,
inventory reserves and income taxes payable. Management bases its estimates on
historical experience and on various other assumptions that management believes
to be reasonable under the circumstances, the results of which form a basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, management
believes that its estimates, including those for the above described items, are
reasonable and that the actual results will not vary significantly from the
estimated amounts.
-6-
The following critical accounting policies relate to the more significant
judgments and estimates used in the preparation of the consolidated financial
statements:
Allowances for Customer Returns and Adjustments
- -----------------------------------------------
The Company reserves allowances for customer returns, trade discounts, co-op
advertising, customer chargebacks, and for sales and markdown allowances given
to the customer normally at the end of the selling seasons, which enable
customers to markdown the retail sales prices. The estimates for these
allowances and discounts are based on a number of factors, including: (a)
historical experience, (b) industry trends, and (c) specific agreements or
negotiated amounts with customers.
Further, while the Company believes that it has negotiated all substantial sales
and markdown allowances with its customers for the season recently completed,
additional allowances for the spring season are anticipated and have been
provided for and others may be requested by customers for the concluded seasons.
Likewise, should the financial condition of the Company's customers or other
parties improve and result in payments or favorable settlements of previously
reserved amounts, the Company may reduce its recorded allowances.
Reserves for Doubtful Accounts of Customers
- -------------------------------------------
The Company maintains reserves for doubtful accounts of its customers. The
estimates for these reserves are based on aging of the trade accounts receivable
and specific information obtained by the Company on the financial condition and
current credit worthiness of customers. The Company does not normally require
collateral for its trade receivables. The accounts of certain high-risk
customers are factored with financial institutions or the Company purchases
credit insurance for a portion of such accounts. If the financial condition of
the Company's customers were to deteriorate and impair the ability of the
customers to make payments on their accounts, the Company may be required to
increase its allowances by recording addition reserves for doubtful accounts.
Inventory Reserves
- ------------------
The Company analyzes out-of-season merchandise on an individual SKU basis to
determine reserves, if any, that may be required to reduce the carrying value to
net realizable value. Additionally, the Company provides reserves for current
season merchandise whose carrying value is expected, based on historical
experience, to exceed its net realizable value. Factors considered in evaluating
the requirement for reserves include product styling, color, current fashion
trends and quantities on hand. Some of the Company's products are "classics" and
remain saleable from one season to the next and therefore no reserves are
generally required on these products. An estimate is made of the market value,
less expense to dispose and a normal profit margin, of products whose value is
determined to be impaired. If these products are ultimately sold at less than
estimated amounts, additional reserves may be required. Likewise, if these
products are sold for more than estimated amounts, reserves may be reduced.
Also, the following accounting policies significantly affect the preparation of
the consolidated financial statements:
-7-
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, including Hampshire Designers, Item-Eyes and Keynote Services.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
- ----------------
Cash equivalents consist of highly liquid investments with initial maturities of
ninety days or less. A significant amount of the Company's cash and cash
equivalents are on deposit in financial institutions and exceed the maximum
insurable deposit limits.
Short-Term Investments
- ----------------------
Short-term investments consist primarily of AAA rated auction bonds which
normally have a 35 day liquidity. These investments are classified as "available
for sale".
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method ("FIFO") for all inventory.
Fixed Assets
- ------------
Fixed assets are recorded at cost. The Company provides for depreciation using
the straight-line method over the estimated useful lives of the assets.
Additions and major replacements or improvements are capitalized, while minor
replacements and maintenance costs are charged to expense as incurred. The cost
and accumulated depreciation of assets sold or retired are removed from the
accounts and any gain or loss is included in the results of operations for the
period of the transaction.
Impairment of Long-Lived Assets
- -------------------------------
The Company evaluates the carrying value of its long-lived assets based on
criteria set forth in Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and
records impairment losses on such assets when indicators of impairment are
present and the undiscounted cash flow estimates to be generated by those assets
are less than the assets' carrying amount. Management has evaluated the carrying
value of its long-lived assets and has determined that no impairment existed as
of April 2, 2005.
Goodwill
- --------
Goodwill represents the excess of cost over net assets acquired in connection
with the acquisition of certain businesses. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" are not amortized. Rather, goodwill is
reviewed for impairment during the fourth quarter of each year or more often
should impairment indicators exist. There has been no goodwill impairment
recorded since adoption of SFAS No. 142.
Financial Instruments
- ---------------------
The Company's financial instruments primarily consist of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
long-term debt. The carrying amounts of the financial instruments are considered
a reasonable estimate of their fair value at April 2, 2005, due to the
short-term nature of the items.
-8-
Revenue Recognition
- -------------------
The Company recognizes sales revenue upon shipment of goods to customers, net of
the Company's estimate for co-op advertising, returns and allowances.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses.
Shipping Costs
- --------------
Costs to ship products to customers are expensed as incurred and are included in
selling, general and administrative expenses.
Income Taxes
- ------------
Income taxes are recognized for financial reporting purposes during the period
in which transactions enter into the determination of income, with deferred
taxes being provided for temporary differences between the basis for financial
reporting purposes and the basis for income tax reporting purposes.
Earnings Per Common Share
- -------------------------
Basic earnings per common share are computed by dividing net income by the
weighted-average number of shares outstanding for the period. Diluted earnings
per common share are computed similarly; however, it is adjusted for the effects
of the assumed exercise of the Company's outstanding stock options.
Note 3 - Inventories
A summary of inventories by component is as follows:
April 2, April 3, Dec. 31,
(In thousands) 2005 2004 2004
- ------------------------------------------------------------------
Finished goods $11,973 $10,682 $10,212
Work-in-progress 11 15 43
Raw materials and supplies 67 300 138
------- ------- -------
Total $12,051 $10,997 $10,393
======= ======= =======
Note 4 - 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.
-9-
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 April 2, 2005, the Company had no
outstanding borrowings and $65.0 million outstanding under letters of credit,
which includes approximately $2.8 million related to finished goods in-transit
that have been included in accounts payable in the accompanying balance sheet.
At April 2, 2005, the Company had availability under the Revolving Credit
Facility for borrowing of approximately $3.0 million.
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 April 2, 2005.
Note 5 - Earnings Per Share
Set forth in the table below is reconciliation by year of the numerator (income
or (loss) and the denominator (shares) of the basic and diluted earnings per
share ("EPS") computations.
Three Months Ended Three Months Ended
April 2, 2005 April 3, 2004
----------------------------------------------------------------
(In thousands, Numerator Denominator Per Share Numerator Denominator Per Share
except per share data) Income Shares Amount Income Shares Amount
----------------------------------------------------------------
Basic EPS:
Net income $748 4,103 $0.18 $147 4,077 $0.04
Effect of dilutive - 22 - - 127 (0.01)
securities-options ----------------------------------------------------------------
Diluted EPS:
Net income $748 4,125 $0.18 $147 4,204 $0.03
================================================================
Note 6 - Stock Split and Buyback
On March 17, 2005, the Board of Directors of the Company approved a two-for-one
stock split of outstanding common stock payable June 28, 2005 to stockholders of
record at the close of business as on May 31, 2005. As a result of the stock
split, stockholders of record will be entitled to receive one additional share
of common stock for each share of common stock held on the June record date. The
stock split will result in the distribution of approximately 4,080,000
additional shares of common stock. Upon completion of the stock split, the
number of outstanding shares of common stock will be approximately 8,160,000. On
June 1, 2005, the Company's common stock will begin trading on NASDAQ at the new
split-adjusted price.
-10-
Pro forma earnings per share amounts on a post-split basis would be as follows:
Three Months Ended
------------------------------------
April 2, 2005 April 3, 2004
------------- -------------
Net income per share
Basic -
As reported $0.18 $0.04
----- ------
Pro forma $0.09 $0.02
----- ------
Diluted -
As reported $0.18 $0.03
----- ------
Pro forma $0.09 $0.015
----- ------
The Board of Directors of the Company also approved the repurchase of up to
200,000 shares (400,000 shares post-split) of the Company's outstanding common
stock. The repurchase will be conducted through open market or privately
negotiated transactions over an indefinite period.
Note 7 - Contingencies
The Company is, from time to time, involved in litigation incidental to the
conduct of its business. Management believes that no currently pending
litigation to which it is a party will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
During the fourth quarter of 2002, the Company was advised that certain of its
suppliers would not be able to deliver finished product as agreed. As a result
of the failure of the suppliers to meet these obligations, the Company
established a reserve in the amount of $7,540,000 for estimated losses for
matters arising from these events. At April 2, 2005, these matters remain
unresolved.
-11-
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
- --------------------------
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 is engaged exclusively in the apparel business through two
wholly-owned subsidiaries - Hampshire Designers, which primarily designs and
sell women's and men's sweaters, and Item-Eyes, which designs and sells a broad
line of women's woven and knit related 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 outsources the manufacture of its products, principally due to lower
labor costs. The Company's established international sourcing network of
manufacturers are located throughout the world, with the majority of the
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 continues to believe that one of its greatest exposures is the
uncertainty arising from the elimination of quotas (the right to import the
products) as of January 1, 2005 on imported products and the impact this will
have on international trade, particularly in the apparel industry. This
uncertainty includes any action that might be taken by the United States
government as it monitors the effect of increased quantities, if any, on
imported apparel in the retail market. 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.
-12-
The Company, however, does not believe that the elimination of quotas will
reduce the Company's cost to purchase its products. A portion of the price paid
for quotas was used by foreign governments to subsidize the manufacture of the
products. The elimination of quotas 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 continue to put downward
pressure on prices. As a result of the foregoing, the Company does not believe
that it has or will benefit from the elimination of quotas.
In a highly competitive retail climate the Company continues to remain focused
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 in advance of the dates on which products are to
be delivered to customers. However 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.
RESULTS OF OPERATIONS
Three Months Ended April 2, 2005 and April 3, 2004
Net Sales
- ---------
Net sales for the three months ended April 2, 2005 were $58,077,000, compared
with $54,397,000 for the same period last year, an increase of $3,680,000 or
6.8%. The increase resulted from additional net sales of women's related
separates of approximately $12,100,000, offset in part by a decrease of
approximately $8,400,000 in net sales of sweaters. The Company shipped
approximately 5,000 dozen less units, or 1.0%, during the three months ended
April 2, 2005 compared with the same period last year. The average net sales
price per unit for the three months ended April 2, 2005 increased 7.8%, compared
with the same period last year, primarily due to the mix in product shipped.
Shipments of men's sweaters are not significant for this period of the year.
Gross Profit
- ------------
Gross profit for the three months ended April 2, 2005 was $14,351,000, compared
with $12,416,000 for the same period last year. The $1,935,000 increase resulted
primarily from the increased net sales during the current three-month period. In
addition the gross profit comparison has been affected by a $1,200,000 reserve
for estimated incremental customs costs related to importing merchandise from
one of its suppliers established in the same period the prior year. As a
percentage of net sales, gross profit margin was 24.7% for the three-month
period of 2005, compared with 22.8% for the same period last year.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses were $13,357,000 for the
three months ended April 2, 2005, compared with $12,297,000 for the same period
last year. The increase of $1,060,000 resulted primarily from the increase in
expenses incurred from the higher net sales in the current three-month period.
As a percentage of net sales, SG&A expenses were 23.0% for the three-month
period of 2005, compared with 22.6% for the same period last year.
-13-
Interest Income
- ---------------
Interest income for the three months ended April 2, 2005 was $388,000, compared
with $272,000 for the same period last year. The increase resulted from higher
average returns on investments and slightly higher amounts invested during the
current three-month period.
Interest Expense
- ----------------
Interest expense for the three months ended April 2, 2005 was $147,000, compared
with $163,000 for the same period last year. The decrease resulted from lower
average borrowings during the period ended April 2, 2005. Average borrowings
during the three-month period ended April 2, 2005 were $5,644,000, compared with
$7,577,000 for the same period last year.
Income Taxes
- ------------
The Company's provision for income tax for the three months ended April 2, 2005
was $500,000 compared with $100,000 for the same period last year. The effective
income tax rate was 40.1% for the three months ended April 2, 2005, compared
with 40.5% for the same period last year.
Net Income
- ----------
As a result of the foregoing, the Company had net income for the three months
ended April 2, 2005 of $748,000, or $0.18 per diluted share, compared with net
income of $147,000, or $0.03 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 consists of annual principal payments of
approximately $1.9 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 $7,047,000 for the three months ended
April 2, 2005, as compared with net cash provided by operating activities of
$2,633,000 in the same period last year. Net cash used in operating activities
during the three months ended April 2, 2005 resulted primarily from a decrease
in accounts payable, accrued expenses and other liabilities of $6,085,000 and an
increase in inventory of $1,658,000, offset in part by net income for the
current period of $748,000. The decrease in accounts payable, accrued expenses
and other liabilities resulted primarily from the payment of 2004 incentive
bonus compensation and income taxes.
Net cash provided by operating activities for the three months ended April 2,
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
-14-
$8,138,000. This activity resulted primarily from seasonality of the Company's
business and its decision to minimize the men's business to be done in the
spring.
Net cash provided by investing activities was $1,873,000 for the three months
ended April 2, 2005, as compared with net cash used in investing activities of
$31,000 for the same period last year. For the period ended April 2, 2005 the
Company had net sales of short-term investments of $2,629,000 as compared to
$10,000 for the same period the prior year. During the three-month periods ended
April 2, 2005 and April 3, 2004 the Company used $354,000 and $41,000,
respectively, on net capital expenditures. Additionally during the three month
period ended April 2, 2005 the Company purchased securities in a deferred
compensation fund for $402,000.
Net cash used in financing activities of operations was $149,000 for the three
months ended April 2, 2005, as compared with net cash provided by financing
activities of $154,000 for the same period last year. During the three months
ended April 2, 2005 and April 3, 2004, the Company repaid long-term debt of
$15,000 and $14,000, respectively, and had proceeds from the issuance of
treasury stock of $118,000 and $168,000, respectively.
The balance sheets of April 2, 2005 when compared with April 3, 2004 the higher
balances of inventories, account receivable and accounts payable are due to the
increased sales volume for spring 2005, primarily in the women's related
separate products. At April 3, 2004 in accrued expense and other liabilities the
Company had accrued for approximately $2,600,000 due to a customer, had a
reserve of approximately $1,150,000 for settlement of a contract matter and had
an additional reserve of approximately $1,000,000 for an open issue with US
Customs. The resolution of these matters was the primary reason for the decrease
in accrued expense and other liabilities at April 3, 2005.
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 April 2, 2005, the Company had no outstanding borrowings
and $65.0 million outstanding under letters of credit, which includes
approximately $2.8 million related to finished goods in-transit that have been
included in accounts payable in the accompanying balance sheet. At April 2,
2005, the Company had availability under the Revolving Credit Facility for
borrowing of approximately $3.0 million.
Both the Credit Facility and the Senior Notes contain financial covenants and
covenants that restrict certain payments by the Company. The financial covenants
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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 April 2, 2005.
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.
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 10-K for the year ended
December 31, 2004.
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 April 2, 2005. 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 April 2, 2005 (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 "Exchange 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.
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Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
There have not been any changes in the Company's internal control over financial
reporting during the three months ended April 2, 2005 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. 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 2 - Changes in Securities
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE
Maximum
Number of
Total Number of Shares that May
Total Number Average Shares Purchased Yet Be
of Shares Price Per as Part of Publicly Purchase Under
Period Purchased Share Announced Plans the Plans
- ---------------------------- ------------------------------------------------------
Month No. 1
- -----------
Jan. 1 - Jan. 29 8,131 $31.00 8,131 12,144
Month No. 2
- -----------
Jan. 30 - Feb. 26 - - - -
Month No. 3
- -----------
Feb. 27 - April 2 - - - -
----------------------------------------------------------
Total 8,131 $31.00 8,131 12,144
==========================================================
Item 5 - Other Information
Stock Split and Buyback
- -----------------------
On March 17, 2005, the Board of Directors of the Company approved a two-for-one
stock split of outstanding common stock payable June 28, 2005 to stockholders of
record at the close of business as on May 31, 2005. As a result of the stock
split, stockholders of record will be entitled to receive one additional share
of common stock for each share of common stock held on the June record date. The
stock split will result in the distribution of approximately 4,080,000
additional shares of common stock. Upon completion of the stock split, the
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number of outstanding shares of common stock will be approximately 8,160,000. On
June 1, 2005, the Company's common stock will begin trading on NASDAQ at the new
split-adjusted price.
Pro forma earnings per share amounts on a post-split basis would be as follows:
Three Months Ended
----------------------------------
April 2, 2005 April 3, 2004
------------- -------------
Net income per share
Basic -
As reported $0.18 $0.04
----- -----
Pro forma $0.09 $0.02
----- -----
Diluted -
As reported $0.18 $0.03
----- -----
Pro forma $0.09 $0.015
----- ------
The Board of Directors of the Company also approved the repurchase of up to
200,000 shares (400,000 shares post-split) of the Company's outstanding common
stock. The repurchase will be conducted through open market or privately
negotiated transactions over an indefinite period.
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.
32.1 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.
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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 6, 2005 /s/ Ludwig Kuttner
---------------- -----------------------------------------
Ludwig Kuttner
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 6, 2005 /s/ Charles W. Clayton
---------------- -----------------------------------------
Charles W. Clayton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 6, 2005 /s/ Roger B. Clark
---------------- -----------------------------------------
Roger B. Clark
Vice President Finance
(Principal Accounting Officer)
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