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 1, 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 by check mark whether the registrant is a shell company (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 4, 2005
- ----------------------------- ----------------------------
Common Stock, $0.10 Par Value 8,102,005
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 1, 2005, October 2, 2004 and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Income for
the Nine Months and Three Months Ended October 1, 2005 and
October 2, 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 1, 2005 and October 2, 2004 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
Item 4 Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Unregistered Sale of Equity Securities
and Use of Proceeds 18
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)
Oct. 1, Oct. 2, Dec. 31,
2005 2004 2004*
ASSETS ---------------------------------
Current assets:
Cash and cash equivalents $ 5,498 $ 94 $ 31,214
Short-term investments - - 49,440
Accounts receivable trade - net 87,647 87,022 31,776
Accounts receivable - other 308 1,001 1,292
Inventories 48,327 45,086 10,393
Other current assets 7,090 6,451 5,857
--------------------------------
Total current assets 148,870 139,654 129,972
Fixed assets - net 1,951 1,520 1,318
Goodwill 8,020 8,020 8,020
Other assets 3,169 2,777 1,470
--------------------------------
$162,010 $151,971 $140,780
================================
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 4,721 $ 1,915 $ 1,901
Borrowings under line of credit - 1,700 -
Accounts payable 22,389 27,870 8,156
Accrued expenses and other liabilities 19,314 17,549 19,141
--------------------------------
Total current liabilities 46,424 49,034 29,198
Notes payable - less current portion 86 4,687 3,750
Deferred compensation 4,038 2,723 2,940
--------------------------------
Total liabilities 50,548 56,444 35,888
--------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $0.10 par value; issued
8,243,784, 4,761,911 and 4,761,911; and
outstanding 8,116,609, 4,074,615 and
4,100,570 824 476 476
Additional paid-in capital 34,069 32,900 33,682
Retained earnings 79,041 85,439 93,114
Treasury stock (2,472) (23,288) (22,380)
--------------------------------
Total stockholders' equity 111,462 95,527 104,892
--------------------------------
$162,010 $151,971 $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)
Nine Months Ended Three Months Ended
-------------------- --------------------
Oct. 1, Oct. 2, Oct. 1, Oct. 2,
2005 2004 2005 2004
-------------------- --------------------
Net sales $220,305 $196,753 $123,592 $116,104
Cost of goods sold 167,433 147,402 93,659 86,771
-------------------- --------------------
Gross profit 52,872 49,351 29,933 29,333
Selling, general and
administrative expenses 43,403 40,441 18,031 17,618
-------------------- --------------------
Income from operations 9,469 8,910 11,902 11,715
Other income (expense):
Interest expense (365) (496) (106) (169)
Interest income 1,102 634 153 119
Non-recurring income 4,622 - - -
Other 81 20 53 -
-------------------- --------------------
Income before income taxes 14,909 9,068 12,002 11,665
Provision for income taxes 6,250 3,675 5,075 4,725
-------------------- --------------------
Net income $ 8,659 $ 5,393 $ 6,927 $ 6,940
==================== ====================
Net income per share * Basic $1.06 $0.66 $0.85 $0.85
==================== ====================
Diluted $1.05 $0.65 $0.85 $0.84
==================== ====================
Weighted average number
of shares outstanding * Basic 8,180 8,142 8,155 8,118
==================== ====================
8,216 8,254 8,186 8,218
Diluted ==================== ====================
<FN>
(*) Weighted average number of shares outstanding and net income
per share have been adjusted for the two-for-one stock split
effective June 28, 2005.
(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. 1, Oct. 2,
2005 2004
-----------------------
Cash flows from operating activities:
Net income $ 8,659 $ 5,393
Adjustments to reconcile income from operations
to net cash provided by (used in) operating activities:
Depreciation 693 598
Net deferred compensation expenses for executives 1,041 574
Net change in operating assets and liabilities:
Receivables (54,887) (59,377)
Inventories (37,934) (23,037)
Other assets 701 (1,753)
Accounts payable, accrued expenses and other liabilities 12,956 14,639
----------------------
Net cash used in operating activities (68,771) (62,963)
----------------------
Cash flows from investing activities:
Sales of short-term investments 76,867 5,010
Purchase of short-term investments (27,427) -
Capital expenditures - net (1,185) (451)
Purchase of securities in deferred compensation fund (1,796) -
----------------------
Net cash provided by investing activities 46,459 4,559
----------------------
Cash flows from financing activities:
Net borrowings under line of credit - 1,700
Proceeds from issuance of treasury stock 439 542
Repayment of long-term debt (985) (981)
Purchase of treasury stock (2,858) (1,045)
----------------------
Net cash (used in) provided by financing activities (3,404) 216
----------------------
Net decrease in cash and cash equivalents (25,716) (58,188)
Cash and cash equivalents - beginning of period 31,214 58,282
----------------------
Cash and cash equivalents - end of period $ 5,498 $ 94
======================
Supplementary disclosure of cash flow information: Cash paid during the period
for:
Income taxes $6,970 $3,395
Interest 236 320
Non-cash activity:
Treasury stock from options exercised 384 -
Tax benefit relating to Common Stock Plans 331 215
Fixed assets acquired through long-term debt 141 -
<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 condensed 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 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.
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 customers normally at the end of
the selling seasons. 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.
-6-
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 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
additional reserves for doubtful accounts.
Inventory Reserves. The Company analyzes out-of-season merchandise on an
individual SKU basis to determine the amount of 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:
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 inter-company 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.
-7-
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 October 1, 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 October 1, 2005, due
to the short-term nature of the items.
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:
Oct. 1, Oct. 2, Dec. 31,
(In thousands) 2005 2004 2004
- -----------------------------------------------------------------
Finished goods $48,315 $44,785 $10,212
Work-in-progress - 12 43
Raw materials and supplies 12 289 138
--------------------------------
Total $48,327 $45,086 $10,393
================================
-8-
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.
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 1, 2005, the Company had no
outstanding borrowings and $30.9 million outstanding under letters of credit,
which includes $4.2 million related to finished goods in-transit that have been
included in accounts payable in the accompanying balance sheet. At October 1,
2005, the Company had availability under the Revolving Credit Facility for
borrowing of approximately $69.1 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 limits
capital expenditures and restricted payments to a specified maximum amount.
Both the Credit Agreement and the Senior Notes contain an aggregate limit of
$1,500,000 on the repurchase of the Company's common stock. As of October l,
2005, the Company had repurchased a net amount of $2,516,000 of its common stock
and had made commitments to repurchase an additional amount of $351,000. Upon
request of the Company, the banks' party to the Credit Agreement have provided a
waiver of the default and have amended the Credit Agreement to permit the
Company to repurchase an aggregated $10,000,000 of its common stock. The holders
of the Senior Notes have not waived the default. In the absence of such waiver,
the Company has elected to prepay the remaining balance of $4,687,500 Senior
Notes outstanding, which amount will be subject to a prepayment penalty of
approximately $160,000. Since the Company will be making full payment of the
outstanding balnace of the Senior Notes on November 14, 2005, the total balance
outstanding has been classified as a current liability in the balance sheet as
of October 1, 2005.
Note 5 - Non-Recurring Income From Recovery of Improper Payments
During the second quarter of 2005, the Company discovered that two former
employees had been receiving commissions from a former vendor, which were not
disclosed to the Company and were received in violation of Company policy. The
commissions related to purchases made by the Company during the years 2000
through 2002. The Company had previously terminated its relationship with this
vendor in 2002 for unrelated reasons.
Management reported the misconduct to the Company's Audit Committee, who then
engaged outside counsel to conduct an independent review of the matter.
The Company considered pursuing legal remedies against the former employees but
reached a settlement prior to the commencement of proceedings. Pursuant to the
settlement, the Company received $4,622,000 net of expenses incurred in
connection with the investigation and settlement of the matter. The settlement
has been included as "non-recurring income" in the consolidated statement of
income for the nine months ended October 1, 2005, due to the unusual nature of
-9-
the item. In addition, the Company recouped from one of the former employees
$1,391,000 relating to an employment contract termination settlement recorded in
the fourth quarter of 2004.
Note 6 - Earnings Per Share
Set forth in the table below is a reconciliation by year of the numerator
(income) and the denominator (shares) of the basic and diluted earnings per
share ("EPS") computations.
Nine Months Ended Nine Months Ended
October 1, 2005 October 2, 2004
------------------------------- --------------------------------
(In thousands, except per share data) Numerator Denominator Per Share Numerator Denominator Per Share
Income Shares Amount Income Shares * Amount
------------------------------- --------------------------------
Basic EPS:
Net income $8,659 8,180 $1.06 $5,393 8,142 $0.66
Effect of dilutive securities-options - 36 (0.01) - 112 (0.01)
------------------------------- --------------------------------
Diluted EPS:
Net income $8,659 8,216 $1.05 $5,393 8,254 $0.65
=============================== ================================
- --------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
October 1, 2005 October 2, 2004
------------------------------- --------------------------------
(In thousands, except per share data) Numerator Denominator Per Share Numerator Denominator Per Share
Income Shares Amount Income Shares * Amount
------------------------------- --------------------------------
Basic EPS:
Net income $6,927 8,155 $0.85 $6,940 8,118 $0.85
Effect of dilutive securities-options - 31 - - 100 (0.01)
------------------------------- --------------------------------
Diluted EPS:
Net income $6,927 8,186 $0.85 $6,940 8,218 $0.84
=============================== ================================
<FN>
*Adjusted for the two-for-one stock split effective June 28, 2005.
</FN>
Note 7 - Stock Split and Buyback
On March 17, 2005, the Board of Directors of the Company approved a two-for-one
stock split of issued 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 received one additional share of common stock for
each share of common stock held on the record date. The stock split resulted in
the distribution of 4,121,892 additional shares of common stock, which included
640,082 shares used from the Company's treasury stock account. Upon completion
of the stock split, the number of issued shares of common stock was 8,243,784 of
which 83,400 shares were held as treasury stock. The number of shares and per
share data for all periods presented have been adjusted to reflect the stock
split.
-10-
On March 17, 2005, the Board of Directors of the Company also approved the
repurchase of up to 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 8 - 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. In connection
with this situation, the Company established a reserve in the amount of
$7,540,000 for costs of inventory purchases arising from these events. At
October 1, 2005, these matters remain unresolved.
Note 9 - Subsequent Event
On October 3, 2005, the Company, through its wholly owned subsidiary SB
Corporation, consummated the acquisition of the David Brooks(R) business from
the Kellwood Company. The assets purchased, consisting of inventory and trade
name, were acquired for $2,460,000 in cash. Under the terms of the purchase
agreement, the Company will make additional payments to the Kellwood Company
through 2008 based on the net sales of products bearing the name David Brooks.
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 (excluding customers of David Brooks),
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.
-11-
The Company out sources 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, of
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
manufacturers in foreign markets. The government has yet to respond to the
request.
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
anticipate an effect on near term gross profit or earnings 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. The Company, however, 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.
As reported in the second quarter of 2005, the Company became aware that two
former employees had been receiving commissions from a former vendor, which had
not been disclosed to the Company and were received in violation of Company
policy. These commissions related to purchases made by the Company during the
years 2000 through 2002. The Company had previously terminated its relationship
with this vendor in 2002 for unrelated reasons.
The Company reached a settlement prior to the commencement of legal proceedings.
Pursuant to the settlement, the Company received $4,622,000 net of expenses
incurred in connection with the investigation and settlement of the matter. The
settlement, exclusive of the recoupment, has been included in the consolidated
statement of income for the nine months ended October 1, 2005 as "non-recurring
income", due to the unusual nature of the item. In addition, the Company
recouped from one of the former employees $1,391,000 relating to an employment
contract termination settlement recorded in the fourth quarter of 2004.
-12-
Acquisition of the David Brooks(R)
On October 3, 2005, the Company, through its wholly owned subsidiary SB
Corporation, consummated the acquisition of the David Brooks(R) business from
the Kellwood Company. David Brooks has a longstanding reputation for supplying
comfort and fashion in the women's "better" priced market and is an
implementation of Hampshire's diversification and expansion strategy. Net sales
for the business for 2006 are projected to be $12 range. David Brooks' products
are sold through upscale department stores and over 800 specialty stores in the
United States.
The assets, consisting of inventory and trade name, were acquired for $2,460,000
in cash. Under the terms of the purchase agreement, the Company will pay a
royalty to the Kellwood Company on the net sales of products using the name
David Brooks(R) through 2008.
RESULTS OF OPERATIONS
Nine Months Ended October 1, 2005 and October 2, 2004
Net Sales
Net sales for the nine months ended October 1, 2005 were $220,305,000, compared
with $196,753,000 for the same period last year, an increase of $23,552,000 or
12.0%. The increase resulted from additional net sales of women's related
separates, offset in part by a decrease in net sales of sweaters. The Company
shipped approximately 177,000 dozen more units, or 10.1%, during the nine months
ended October 1, 2005, compared with the same period last year. The average net
sales price per unit for the nine months ended October 1, 2005 increased 1.7%,
compared with the same period last year, primarily due to the product mix.
Gross Profit
Gross profit for the nine months ended October 1, 2005 was $52,872,000, compared
with $49,351,000 for the same period last year. The $3,521,000 increase resulted
primarily from the increased net sales during the current nine-month period. As
a percentage of net sales, gross profit margin was 24.0% for the nine-month
period of 2005, compared with 25.1% for the same period last year. The decrease
in gross profit margin resulted primarily from higher allowances granted to
customers in the current period and the product mix.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $43,403,000 for the
nine months ended October 1, 2005, compared with $40,441,000 for the same period
last year. The increase of $2,962,000 resulted primarily from the increase in
expenses incurred from the higher net sales in the current nine-month period. As
a percentage of net sales, however, SG&A expenses for the nine-month period of
2005 were 19.7%, compared with 20.6% for the same period last year.
Interest Income
Interest income for the nine months ended October 1, 2005 was $1,102,000,
compared with $634,000 for the same period last year. The increase resulted from
higher average returns on investments and slightly higher amounts invested
during the current nine-month period.
Interest Expense
Interest expense for the nine months ended October 1, 2005 was $365,000,
compared with $496,000 for the same period last year. The decrease resulted from
lower average borrowings during the period ended October 1, 2005. Average
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borrowings during the nine-month period ended October 1, 2005 were $5,321,000,
compared with $7,241,000 for the same period last year.
Non-Recurring Income
As previously described, during the nine months ended October 1, 2005, the
Company reported non-recurring income of $4,622,000, net of expenses.
Income Taxes
The Company's provision for income tax for the nine months ended October 1, 2005
was $6,250,000 compared with $3,675,000 for the same period last year. For the
nine months ended October 1, 2005, $1,867,000 of the tax provision for the
period relates specifically to the non-recurring income described above,
resulting in an income tax provision of $4,383,000 for income exclusive of
non-recurring income. The effective income tax rate was 41.9% for the nine
months ended October 1, 2005, compared with 40.9% for the year ended December
31, 2004. The increase in the effective tax rate primarily resulted from a shift
in the applicable state income taxes.
Net Income
As a result of the foregoing, the Company had net income for the nine months
ended October 1, 2005 of $8,659,000, or $1.05 per diluted share, compared with
$5,393,000, or $0.65 per diluted share for the same period last year. For the
nine months ended October 1, 2005, exclusive of the non-recurring income, net of
related income taxes, the Company had a net income of $5,904,000, or $0.72 per
diluted share.
Three Months Ended October 1, 2005 and October 2, 2004
Net Sales
Net sales for the three months ended October 1, 2005 were $123,592,000, compared
with $116,104,000 for the same period last year, an increase of $7,488,000 or
6.5%. The increase resulted from additional net sales of both women's related
separates and sweaters. The Company shipped approximately 53,000 dozen more
units, or 5.4%, during the three months ended October 1, 2005 compared with the
same period last year. The average net sales price per unit for the three months
ended October 1, 2005 increased 1.0%, compared with the same period last year,
primarily due to the product mix.
Gross Profit
Gross profit for the three months ended October 1, 2005 was $29,933,000,
compared with $29,333,000 for the same period last year. The $600,000 increase
resulted primarily from the increased net sales during the current three-month
period. As a percentage of net sales, gross profit margin was 24.2% for the
three-month period of 2005, compared with 25.3% for the same period last year.
The decrease in gross profit margin resulted primarily from higher allowances
granted to customers in the current period and the product mix.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $18,031,000 for the
three months ended October 1, 2005, compared with $17,618,000 for the same
period last year. The increase of $413,000 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, however, SG&A expenses for the three-month
period of 2005 were 14.6%, compared with 15.2% for the same period last year.
Interest Income
Interest income for the three months ended October 1, 2005 was $153,000,
compared with $119,000 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.
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Interest Expense
Interest expense for the three months ended October 1, 2005 was $106,000,
compared with $169,000 for the same period last year. The decrease resulted from
lower average borrowings during the period ended October 1, 2005. Average
borrowings during the three-month period ended October 1, 2005 were $4,812,000,
compared with $6,744,000 for the same period last year.
Income Taxes
The Company's provision for income tax for the three months ended October 1,
2005 was $5,075,000 compared with a benefit of $4,725,000 for the same period
last year. The effective income tax rate was 42.3% for the three months ended
October 1, 2005, compared with 40.9% for the year ended December 31, 2004. The
increase in the effective tax rate primarily resulted from a shift in the
applicable state income taxes.
Net Income
As a result of the foregoing, the Company had net income for the three months
ended October 1, 2005 of $6,927,000, or $0.85 per diluted share, compared with
net income of $6,940,000, or $0.84 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 working capital requirement 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 $68,771,000 for the nine months ended
October 1, 2005, as compared with net cash used in operating activities of
$62,963,000 for the same period last year. Net cash used in operating activities
during the nine months ended October 1, 2005 resulted primarily from an increase
in inventory of $37,934,000 and an increase in accounts receivable of
$54,887,000 offset by an increase in accounts payable, accrued expenses and
other liabilities of $12,956,000.
Net cash used in operating activities for the nine months ended October 1, 2004
resulted primarily from increase in inventory of $23,037,000 and an increase in
accounts receivable of $59,377,000 offset by an increase in accounts payable,
accrued expenses and other liabilities of $14,639,000. This activity for both
periods resulted primarily from the normal seasonality of the Company's
business.
Net cash provided by investing activities was $46,459,000 for the nine months
ended October 1, 2005, as compared with net cash provided by investing
activities of $4,559,000 for the same period last year. For the period ended
October 1, 2005 the Company had net sales of short-term investments of
$49,440,000 as compared to $5,010,000 for the same period the prior year. During
the nine-month periods ended October 1, 2005 and October 2, 2004 the Company
used $1,185,000 and $451,000, respectively, on net capital expenditures.
Additionally, during the nine-month period ended October 1, 2005, the Company
purchased securities in a deferred compensation fund for $1,796,000.
Net cash used in financing activities was $3,404,000 for the nine months ended
October 1, 2005, as compared with net cash provided by financing activities of
$216,000 for the same period last year. During the nine months ended October 1,
2005 and October 2, 2004, the Company repaid long-term debt of $985,000 and
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$981,000, respectively, purchased treasury stock in the amount of $2,858,000 and
$1,045,000, respectively, and had proceeds from the issuance of treasury stock
of $439,000 and $542,000, respectively. Additionally during the nine months
ended October 2, 2004, the Company had net borrowings under its line of credit
in the amount of $1,700,000.
On March 17, 2005, the Board of Directors of the Company approved a two-for-one
stock split of issued 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 received one additional share of common stock for
each share of common stock held on the record date. To complete the distribution
the Company elected to use approximately 640,000 shares of treasury stock, which
was relieved at weighted average costs with the difference off-set in retained
earnings. Distribution of the stock split resulted in distribution of
approximately 4,120,000 additional shares of common stock. Upon completion of
the stock split, the number of shares of common stock issued was approximately
8,240,000.
On March 17, 2005, the Board of Directors of the Company also approved the
repurchase of up to 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.
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 1, 2005, the Company had no outstanding
borrowings, had no cash deposited in a pledged account, and $30.9 million
outstanding under letters of credit, which includes approximately $4.2 million
related to finished goods in-transit that have been included in accounts payable
in the accompanying balance sheet. At October 1, 2005, the Company had
availability under the Revolving Credit Facility for borrowing of approximately
$69.1 million. At October 2, 2004, there was $1.7 million outstanding in
borrowings under its Credit Facility.
Both the Credit Facility 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 limits
capital expenditures and restricted payments to a specified maximum amount.
Both the Credit Agreement and the Senior Notes contain an aggreagte limit on the
repurchase of the Company's common stock. As of October 1, 2005, the Company had
repurchased a net amount of $2,516,000 of its common stock and had made
commitments to repurchase an additional of $1,500,000. As of October l, 2005,
the Company had repurchased a net amount of $2,516,000 of its common stock and
had made commitments to repurchase an additional amount of $351,000. Upon
request of the Company, the banks party to the Credit Agreement have provided a
waiver of the default and have amended the Credit Agreement to permit the
Company to repurchase an aggregated $10,000,000 of its common stock. The holders
of the Senior Notes have not waived the default. In the absence of such waiver,
the Company has elected to prepay the remaining balance of $4,687,500 Senior
Notes outstanding, which amount will be subject to a prepayment penalty of
approximately $160,000. Since the Company will be making full payment of the
outstanding balance of the Senior Notes on November 14, 2005, the total balance
outstanding has been classified as a current liability in the balance sheet as
of October 1, 2005.
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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 October 1, 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 October 1, 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.
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 1, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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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 - Unregistered Sale of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE
Total Number of Max Number of Shares
Total Number Average Price Shares Purchased that May Yet Be
Of Net Shares Price Per as Part of Publicly Purchased Under the
Period Purchased Share Announced Plans (1) Plans
- ------------------------------------------------------------------------------------------
Month No. 1
July 3 - July 30 1,100 $19.90 1,100 -
Month No. 2
July 31 - Aug. 27 - - - -
Month No. 3
Aug. 27 - Oct. 1 42,675 24.00 42,675 -
- ------------------------------------------------------------------------------------------
Total 43,775 $23.90 43,775 320,513
==========================================================================================
<FN>
(1) These repurchases were made under a plan announced on May 9, 2005 for the
purchase of up to 400,000 shares of common stock. The plan does not have an
expiration date.
</FN>
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: November 8, 2005 /s/ Ludwig Kuttner
---------------- -----------------------------
Ludwig Kuttner
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2005 /s/ Charles W. Clayton
---------------- -----------------------------
Charles W. Clayton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 8, 2005 /s/ Roger B. Clark
---------------- -----------------------------
Roger B. Clark
Vice President Finance
(Principal Accounting Officer)
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