UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended October 2, 1999.
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 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 November 10, 1999
- ------------------------------ ----------------------------
Common Stock, $0.10 Par Value 4,043,463
1
HAMPSHIRE GROUP, LIMITED
INDEX TO FORM 10-Q
October 2, 1999
PART I - FINANCIAL INFORMATION Page
Item 1 - Financial Statements
Unaudited Consolidated Balance Sheets as of October 2, 1999,
September 26, 1998 and audited December 31, 1998 3
Unaudited Consolidated Statements of Operations for the Three
Month Periods and Nine Month Periods Ended October 2, 1999
and September 26, 1998 5
Unaudited Consolidated Statements of Comprehensive Income
for the Three Month Periods and Nine Month Periods Ended
October 2, 1999 and September 26, 1998 6
Unaudited Consolidated Statements of Cash Flows for the Nine
Month Periods Ended October 2, 1999 and September 26, 1998 7
Notes to Unaudited Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signature Page 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Oct. 2, Sept. 26, Dec. 31,
1999 1998 1998*
------- -------- -------
Current assets:
Cash and cash equivalents $ 993 $ 878 $ 13,886
Available-for-sale securities 368 530 549
Accounts receivable trade - net 38,646 41,654 24,194
Other accounts receivable 1,718 3,792 914
Notes receivable 2,098 358 514
Inventories 39,110 49,856 20,789
Deferred tax asset 4,030 3,265 4,006
Hosiery assets held for sale - net - - 774
Other current assets 972 754 597
-------- -------- --------
Total current assets 87,935 101,087 66,223
Property, plant and equipment - net 11,414 14,759 13,677
Real property investments - net 11,793 7,142 8,679
Long-term investments 5,422 5,085 5,238
Trading securities held in retirement trust 1,438 776 1,087
Deferred tax asset 2,416 2,326 2,416
Intangible assets - net 2,699 3,069 3,390
Other assets 28 150 138
-------- -------- --------
Total assets $123,145 $134,394 $100,848
======== ======== ========
<FN>
* Derived from the December 31, 1998 audited consolidated balance sheet.
(The accompanying notes are an integral part of these
unaudited financial statements.)
</FN>
3
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
Oct. 2, Sept. 26, Dec. 31,
1999 1998 1998 *
------ -------- -------
Current liabilities:
Borrowings under lines of credit $ 21,177 $ 35,380 -
Current portion of long-term debt 1,425 2,511 $ 1,782
Accounts payable 6,552 7,722 5,772
Accrued expenses and other liabilities 7,422 10,126 7,386
-------- -------- --------
Total current liabilities 36,576 55,739 14,940
Long-term debt 21,022 21,210 20,777
Deferred compensation 2,173 1,282 1,728
-------- -------- --------
Total liabilities 59,771 78,231 37,445
-------- -------- --------
Stockholders' equity:
Common stock 418 423 425
Additional paid-in capital 27,713 27,845 28,276
Retained earnings 36,804 29,372 35,459
Accumulated other comprehensive loss (229) (203) (188)
Treasury stock (1,332) (1,274) (569)
-------- -------- --------
Total stockholders' equity 63,374 56,163 63,403
-------- -------- --------
Total liabilities and
stockholders' equity $123,145 $134,394 $100,848
======== ======== ========
<FN>
* Derived from the December 31, 1998 audited consolidated balance sheet.
(The accompanying notes are an integral part of these
unaudited financial statements.)
</FN>
4
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Month Nine Month
Periods Ended Periods Ended
---------------------- -------------------
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1999 1998 1999 1998
-------- --------- -------- ---------
Net sales $54,425 $53,929 $94,001 $98,863
Cost of goods sold 43,386 42,667 75,657 79,193
------- ------ ------- -------
Gross profit 11,039 11,262 18,344 19,670
Other revenue 396 110 794 288
------- ------ ------- -------
11,435 11,372 19,138 19,958
Selling, general and
administrative expenses 6,587 6,692 16,880 17,155
Asset impairment charge - 2,500 - 2,500
------- ------ ------- -------
Income from operations 4,848 2,180 2,258 303
Other income (expense):
Interest expense (761) (828) (1,448) (1,202)
Other 454 101 1,063 473
------- ------ ------- -------
Income (loss) before income taxes 4,541 1,453 1,873 (426)
Provision for income tax 730 749 375 416
------- ------ ------- -------
Income (loss) from continuing
operations 3,811 704 1,498 (842)
Loss from discontinued operations,
net of income taxes - (41) - (453)
------- ------ ------- -------
Net income (loss) $ 3,811 $ 663 $ 1,498 ($1,295)
======= ====== ======= =======
Income (loss) per share Basic $0.94 $0.17 $0.36 ($0.20)
from continuing operations ===== ===== ===== ======
Diluted $0.90 $0.16 $0.35 ($0.20)
===== ===== ===== ======
Net income (loss) per share: Basic $0.94 $0.16 $0.36 ($0.31)
===== ===== ===== ======
Diluted $0.90 $0.15 $0.35 ($0.31)
===== ===== ===== ======
Weighted average number Basic 4,055 4,138 4,116 4,127
of shares outstanding ===== ===== ===== ======
Diluted 4,249 4,466 4,292 4,127
===== ===== ===== ======
<FN>
(The accompanying notes are an integral part of these
unaudited financial statements.)
</FN>
5
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Month Periods Ended
-------------------------------------
Oct. 2, 1999 Sept. 26, 1998
---------------- -------------------
Net income for the period $3,811 $663
------ ----
Other comprehensive income (loss)
Unrealized holding gains (losses) on
securities arising during periods ($116) ($232)
Reclassification adjustment for
amounts included in net income 12 (16)
---- ----
Other comprehensive (loss) (104) (248)
Income tax benefit 38 92
------ ----
Other comprehensive (loss) (66) (156)
------ ----
Comprehensive income $3,745 $507
====== ====
Nine Month Periods Ended
-------------------------------------
Oct. 2, 1999 Sept. 26, 1998
---------------- -------------------
Net income (loss) for the period $1,498 ($1,295)
------ ------
Other comprehensive income (loss)
Unrealized holding gains (losses) on
securities arising during periods ($24) $ 45
Reclassification adjustment for
amounts included in net income (40) (225)
--- -----
Other comprehensive (loss) (64) (180)
Income tax benefit 23 66
------ ------
Other comprehensive (loss) (41) (114)
------ ------
Comprehensive income (loss) $1,457 ($1,409)
====== ======
<FN>
(The accompanying notes are an integral part of these
unaudited financial statements.)
</FN>
6
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Month Periods Ended
------------------------------
Oct. 2, 1999 Sept. 26, 1998
------------ --------------
Cash flows from operating activities:
Net income (loss) $ 1,498 ($ 1,295)
Loss from discontinued operations, net of taxes - 453
-------- --------
Income (loss) from continuing operations 1,498 (842)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 3,462 3,224
Gain on disposition of equipment (15) (11)
Asset impairment charge - 2,500
Net change in operating assets and liabilities:
Receivables (17,902) (26,995)
Inventories (18,321) (29,897)
Other assets (370) (554)
Accounts payable 780 3,004
Accrued expenses and other liabilities (82) 1,917
Deferred compensation 445 365
-------- --------
Net cash used in continuing operations (30,505) (47,289)
Net cash provided by (used in) discontinued
operations 3,812 (3,418)
-------- --------
Net cash used in operating activities (26,693) (50,707)
-------- --------
Cash flows from investing activities:
Real property purchases and other investments (3,530) (7,336)
Notes receivable (1,584) (290)
Purchases of trading securities held in
retirement trust (351) (89)
Capital expenditures (798) (2,752)
Proceeds from sales of property and equipment 24 25
Business purchase price settlement (375) -
-------- --------
Net cash used in investing activities (6,614) (10,442)
Cash flows from financing activities: -------- --------
Net borrowings under lines of credit 21,177 35,380
Proceeds from issuance of long-term debt 1,257 16,886
Repayments of long-term debt (1,260) (2,108)
Treasury stock purchased - net (760) (134)
-------- --------
Net cash provided by financing activities 20,414 50,024
-------- --------
Net decrease in cash and cash equivalents (12,893) (11,125)
Cash and cash equivalents at beginning of period 13,886 12,003
-------- --------
Cash and cash equivalents at end of period $ 993 $ 878
======== ========
(Continued on following page)
7
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(continued)
Nine Month Periods Ended
------------------------------
Oct. 2, 1999 Sept. 26, 1998
------------ --------------
Cash Flows Supplemental Information
- -----------------------------------
Interest paid $1,573 $1,075
Net income tax paid (refund) (449) 679
Non-Cash Investing Activity
- ---------------------------
Settlement of San Francisco Knitworks, Inc.
purchase price dispute-return of Company stock
held in escrow $725 -
<FN>
(The accompanying notes are an integral part of these
unaudited financial statements.)
</FN>
8
HAMPSHIRE GROUP, LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
- ------------------------------
The consolidated financial statements are unaudited and include the accounts of
Hampshire Group, Limited and its subsidiaries, substantially all of which are
wholly-owned (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. The results of operations
and assets of the Hosiery Division have been accounted for as discontinued
operations. These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of the management of the Company, the unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair statement of the results
of operations for the interim periods presented. 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, 1998, included in the Company's Annual Report on Form 10-K.
Certain reclassifications have been made to data from the previous year to
conform with the presentation of the current year and to recognize the
discontinuation of the Hosiery Division.
NOTE 2. EARNINGS PER SHARE
- ---------------------------
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Set forth in the table below is a reconciliation
by period of the numerator and the denominator used in the basic and diluted
earnings per share ("EPS") computations.
For Three Month Period Ended Oct. 2, 1999 Numerator Denominator Per Share
(in thousands, except per share data) Income Shares Amount
- -------------------------------------------------------------------------------
Basic EPS
- ---------
Net income $3,811 4,055 $0.94
- -------------------------------------------------------------------------------
Diluted EPS
- -----------
Effect of dilutive securities:Options/warrants - 194 -
Net income $3,811 4,249 $0.90
- -------------------------------------------------------------------------------
For Three Month Period Ended Sept. 26, 1998 Numerator Denominator Per Share
(in thousands, except per share data) Income (Loss) Shares Amount
- --------------------------------------------------------------------------------
Basic EPS
- ---------
Income from continuing operations $704 4,138 $0.17
Loss from discontinued operations (41) 4,138 (0.01)
---- -----
Net income $663 4,138 $0.16
- -------------------------------------------------------------------------------
Diluted EPS
- -----------
Effect of dilutive securities:Options/warrants - 328 -
Income from continuing operations $704 4,466 $0.16
Loss from discontinued operations (41) 4,466 (0.01)
---- -----
Net income $663 4,466 $0.15
- -------------------------------------------------------------------------------
9
For Nine Month Period Ended Oct. 2, 1999 Numerator Denominator Per Share
(in thousands, except per share data) Income Shares Amount
- -------------------------------------------------------------------------------
Basic EPS
- ---------
Net income $1,498 4,116 $0.36
- -------------------------------------------------------------------------------
Diluted EPS
- -----------
Effect of dilutive securities:Options/warrants - 176 -
Net income $1,498 4,292 $0.35
- -------------------------------------------------------------------------------
For Nine Month Period Ended Sept. 26, 1998 Numerator Denominator Per Share
(in thousands, except per share data) Income (Loss) Shares Amount
- -------------------------------------------------------------------------------
Basic EPS
- ---------
Loss from continuing operations ($ 842) 4,127 ($0.20)
Loss from discontinued operations (453) 4,127 (0.11)
------ -----
Net loss ($1,295) 4,127 ($0.31)
- -------------------------------------------------------------------------------
Diluted EPS
- -----------
Effect of dilutive securities:Options/warrants - - -
Loss from continuing operations ($ 842) 4,127 ($0.20)
Loss from discontinued operations (453) 4,127 (0.11)
------ ----
Net loss ($1,295) 4,127 ($0.31)
- ------------------------------------------------------------------------------
NOTE 3. INVENTORIES
- --------------------
A summary of inventories by component is as follows:
(in thousands)
Oct. 2, 1999 Sept. 26, 1998 Dec. 31, 1998
------------ -------------- -------------
Finished goods $32,403 $33,590 $14,904
Work-in-progress 3,945 8,658 3,460
Raw materials and supplies 4,701 4,207 4,126
------- ------- -------
41,049 46,455 22,490
Less - LIFO reserve (1,939) (1,755) (1,701)
Inventory of discontinued operation - 5,156 -
------- ------- -------
Net inventories $39,110 $49,856 $20,789
======= ======= =======
NOTE 4. TRADING ASSETS HELD IN RETIREMENT TRUST
- ------------------------------------------------
Under a plan adopted by the Company in 1997, senior executives are permitted to
defer annually a portion of their compensation. These deferrals are invested in
certain mutual funds that have been classified as trading securities and shown
in the long-term asset section to match the corresponding long-term deferred
compensation liability.
NOTE 5. CREDIT FACILITIES
- --------------------------
The Company has a revolving credit facility with three participating commercial
banks. The credit facility consists of a $55 million combined line of credit and
letter of credit facility through May 24, 2000. Advances under the facility are
limited to the lesser of: (1) $55 million, or (2) the sum of (a) 85% of the
eligible accounts receivable, and (b) a seasonal adjustment, based on inventory
levels, of up to $12 million from March 1 to October 31.
10
Advances under the facility bear interest at the bank's prime rate or, at the
option of the Company, a fixed rate for a fixed term. The loan is collateralized
by the trade accounts receivable of Hampshire Designers, Inc. and its
subsidiaries, excluding certain factored trade accounts receivable. In addition,
letters of credit issued under the facility are collateralized by the inventory
shipped pursuant to the letters of credit. The Company has pledged as collateral
the common stock of its subsidiaries and such subsidiaries guarantee the
performance of the Company. The Revolving Credit Agreement contains covenants
which require certain financial performance and restrict certain payments by the
Company and the Restricted Subsidiaries, defined as Hampshire Designers, Inc.
and its subsidiaries. As of October 2, 1999, the Company was in compliance with
all such covenants.
The Company also has two other credit facilities of $5 million in the aggregate
and an additional letter of credit facility in the amount of $4 million.
NOTE 6. SALE OF SENIOR NOTES
- -----------------------------
In June 1998, the Company sold senior notes (the "Senior Notes") in the
principal amount of $15 million to two insurance companies. The Senior Notes,
which bear interest at a rate of 7.05% per annum, are payable in equal annual
installments beginning January 2, 2002 through January 2, 2008. The Senior Notes
are collateralized pari passu with the Company's revolving credit facilities.
The Senior Notes Agreement contains covenants which require certain financial
performance and restrict certain payments by the Company and the Restricted
Subsidiaries, defined as Hampshire Designers, Inc. and its subsidiaries. As of
October 2, 1999, the Company was in compliance with all such covenants.
NOTE 7. DISCONTINUED OPERATIONS
- --------------------------------
On June 1, 1999, Hampshire Designers, Inc. ("Designers"), a subsidiary of the
Company, sold assets of its Hosiery Division consisting of inventory, certain
machinery and equipment and prepaid expenses, to Vision Legwear, LLC, a North
Carolina limited liability company ("Purchaser"), for a purchase price of
$4,600,000. The purchase price consisted of $500,000 in cash paid at the
Closing; a note in the amount of $1,883,000 bearing interest at 8.25% per annum,
due January 1, 2006, and collateralized by the machinery and equipment which was
sold (the "8.25% Note"); a Class A redeemable, non-voting unit of the Purchaser
in the amount of $175,000; a Class B non-voting unit of the Purchaser in the
amount of $100,000; the assumption by the Purchaser of current liabilities of
Designers in the amount of $850,000; and the assumption by the Purchaser of a
note of Designers in the amount of $1,092,000, bearing interest at 7.45% per
annum and due July 1, 2002, requiring Purchaser to make monthly installments in
the amount of $38,829, for which the Company remains primarily liable. Designers
also remains contingently liable with respect to the obligations of Designers
which were assumed by the Purchaser as part of the purchase price.
In addition, Designers leased two manufacturing plants to the Purchaser for a
period of three years on a triple net basis with annual rent of $126,000. The
Purchaser has an option to purchase the plants for $840,000 at the end of the
lease or to extend the lease for three additional years at an increased annual
rent. Designers also leased to the Purchaser certain machinery and equipment
required for the manufacture of hosiery and located at the two plants, for a
period of four years at an annual rent of $324,000. The Purchaser has an option
at the end of the lease to either renew the lease at fair market rental value
for one year, or purchase the machinery and equipment at fair market value. The
Company has agreed to provide consulting services to the Purchaser for three
years, not exceeding 20 hours per month, for a monthly fee of $8,333.
11
Designers has agreed with The CIT Group/Commercial Services, Inc., which is
providing working capital financing to the Purchaser, to subordinate its rights
under the two leases and the 8.25% Note for a period of 120 days after any
default under the leases or the 8.25% Note which would otherwise permit
Designers to terminate the leases or enforce the obligation of the Purchaser to
pay the unpaid principal of the 8.25% Note.
VL Holdings, LLC, a North Carolina limited liability company, owned by Fritz
Schulte, President of the Hosiery Division at the date of sale, and six other
management employees of the Hosiery Division at the time of sale, owns 67.08% of
the Class B voting units of the Purchaser.
The difference between the book basis of the assets sold and the selling price
has been established as a reserve against the 8.25% Note, and no gain on the
sale will be recognized until such time as collection on the Note is reasonably
assured and the Company is reasonably assured that it has been relieved of its
primary responsibilities under the $1,092,000 note assumed by the Purchaser.
NOTE 8. RECENT ACCOUNTING STANDARDS
- ------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which applies to all entities
and establishes accounting and reporting standards for derivative instruments.
SFAS 133, as amended by SFAS 137, which delayed SFAS 133's effective date by one
year, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Upon adoption the effect must be recognized as a cumulative effect of
an accounting change in either income or other comprehensive income, depending
upon whether the derivative is designated and effective as a hedge and, if so,
the type of hedge. The Company has not yet completed its analysis of the effects
of adopting SFAS 133 in 2001.
NOTE 9. INDUSTRY SEGMENTS AND DATA BY GEOGRAPHICAL AREAS
- ---------------------------------------------------------
The Company operates in two industry segments - Sweaters and Investments. The
Sweater segment includes sales of apparel, primarily women's and men's tops,
both knitted and woven. The products are sold to customers throughout the United
States of America including major department stores, specialty retail stores and
catalog companies. Although the Company sells sweaters throughout the year, the
sweater business is highly seasonal, with approximately 75% of sales occurring
in the fall and winter months. The Investments segment makes investments both
domestically and internationally, principally in real property and equity
securities.
12
Industry Segment Data
Three Month Nine Month
Periods Ended Periods Ended
------------------- ------------------
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1999 1998 1999 1998
------- -------- ------- --------
Net sales Sweaters $54,425 $53,929 $94,001 $98,863
Other revenue Investments 396 110 794 288
-----------------------------------------
$54,821 $54,039 $94,795 $99,151
- -------------------------------------------------------------------------------
Gross profit Sweaters $11,039 $11,262 $18,344 $19,670
(as percent of sales) 20.3% 20.9% 19.5% 19.9%
- -------------------------------------------------------------------------------
Revenue by geographic United States $54,676 $54,039 $94,612 $99,115
area Europe 145 - 183 36
-----------------------------------------
$54,821 $54,039 $94,795 $99,151
- -------------------------------------------------------------------------------
Operating profit (loss)
from continuing Sweaters $5,247 $5,297 $3,620 $4,275
operations Corporate (493) (639) (1,572) (1,464)
Investments 94 22 210 (8)
Asset impairment charge - (2,500) - (2,500)
-----------------------------------------
$4,848 $2,180 $2,258 $ 303
- -------------------------------------------------------------------------------
Income (loss) before Sweaters $3,205 $3,162 ($ 643) ($ 38)
income tax from Corporate 1,466 852 2,780 2,156
continuing operations Investments (130) (2,561) (264) (2,544)
-----------------------------------------
$4,541 $1,453 $1,873 ($ 426)
(as percent of sales) 8.3% 2.7% 2.0% (0.4%)
- -------------------------------------------------------------------------------
Depreciation and Sweaters $ 999 $1,092 $3,096 $3,128
amortization Corporate 6 5 18 17
Investments 213 37 348 79
-----------------------------------------
$1,218 $1,134 $3,462 $3,224
- -------------------------------------------------------------------------------
Capital expenditures Sweaters $122 $1,529 $789 $2,744
Corporate 4 3 9 3
Investments - 5 - 5
-----------------------------------------
$126 $1,537 $798 $2,752
- -------------------------------------------------------------------------------
Oct. 2, Sept. 26, Dec. 31,
1999 1998 1998
------- -------- ------
Long-lived assets United States $19,925 $19,432 $19,464
Europe 3,282 2,469 2,892
-------------------------------
$23,207 $21,901 $22,356
- --------------------------------------------------------------------
Total identifiable Sweaters $94,242 $104,413 $60,080
assets Corporate 8,655 7,352 21,566
Investments 20,248 13,442 15,505
------------------------------
123,145 125,207 97,151
Assets of discontinued operation - 9,187 3,697
------------------------------
$123,145 $134,394 $100,848
- --------------------------------------------------------------------
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This quarterly report on Form 10-Q contains forward-looking information and
statements that involve risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding the Company's expectations
of the impact of the Year 2000 issue and the results of operations. The
Company's actual results, performance or achievements could differ materially
from the results expressed in or implied by these forward-looking statements
which are made only as of the date hereof.
RESULTS OF OPERATIONS
- ---------------------
Nine Month Periods Ended October 2, 1999 and September 28, 1998
- ---------------------------------------------------------------
Net sales for the Company from continuing operations for the nine month period
ended October 2, 1999, were $94,001,000, compared with $98,863,000 for the same
period in 1998. Of the 4.9% decline, approximately 4% is attributed to reduced
sales due to competitive market conditions. The balance of the decline resulted
from the loss of sales of a designer sweater business sold in the third quarter
of 1998.
For the first nine month period of 1999, compared with the same period of the
prior year, excluding sales of the designer business sold in 1998, aggregate
unit volume of sales increased 5.9%. Increased volume was experienced in both
the ladies and men's lines.
A shift in product mix to lower priced merchandise has resulted in a 10.4%
decrease in the average sales price. The Company has responded to the price
competition by increasing its purchases of sweaters from foreign sources. More
than half of the sweaters sold by the Company are produced by foreign
contractors.
Gross profit, as a function of net sales, for the first nine month period of
1999 was 19.5%, compared with 19.9% for the prior year. While competition has
resulted in reduced selling prices, the Company has been successful in
maintaining its gross margin. The stable gross margin can be attributed
primarily to two factors: the Company has increased its purchases from foreign
contractors, which results in lower cost, and has achieved improved operating
efficiencies in its own manufacturing facilities.
Selling, general and administrative expenses for continuing operations for the
nine month period ended October 2, 1999, were $16,880,000, compared with
$17,155,000, for the same period of 1998, a decrease of 1.6%. The decrease
resulted primarily from the elimination of the designer sweater business, sold
in the third quarter of 1998. A 5.9% reduction in general and administrative
expenses was offset by increases in selling and shipping expenses which were
higher, as a percentage of net sales, from the increase in unit volume.
The income from continuing operations, for 1998, included a provision of
$2,500,000 for asset impairments, principally to reflect the devaluation of the
ruble on certain Russian investments. This amounted to $0.56 per share on a
diluted basis.
Interest expense for the first nine month period of 1999 was $1,448,000 compared
with $1,202,000 for the same period of the previous year. The Senior Notes,
outstanding in the current year, were sold in June 1998. The interest on these
notes for the first nine month period of 1999 was $793,000, and for the same
period for 1998 was $264,000. Interest expense from the Senior Notes was
partially offset by reduced borrowing against the revolving credit lines. In the
current year, the Company first borrowed against its revolving credit lines on
July 1, and had a balance of $21.2 million outstanding at the end of the third
quarter. In 1998, the Company began borrowing against its revolving credit lines
early in April and had a balance of $35.4 million outstanding at the end of the
third quarter. Interest income, included in other income, was $447,000 for the
nine month period ended October 2, 1999 compared with $155,000 for the same
period last year.
14
The Company, through its investment subsidiary, Hampshire Investments, Limited
("Hampshire Investments"), as of October 2, 1999, had invested $17.2 million in
long-term investments. Rental revenues for the nine month period ended October
2, 1999, were $794,000, which resulted in an operating profit for the subsidiary
of $210,000 for the period. Hampshire Investments primarily invests in real
estate, both domestic and international, and in corporate equities.
Three Month Periods Ended October 2, 1999 and September 28, 1998
- ----------------------------------------------------------------
Net sales for the Company from continuing operations for the third quarter of
1999, were $54,425,000, compared with $53,929,000 for the same period in 1998.
The increase resulted primarily from sales in the women's fashion import and the
men's designer branded sweaters. Increases reflect the purchase of sweaters from
foreign contractors which represent more than fifty percent (50%) of the
sweaters sold by the Company.
For the third quarter of 1999, compared with the same period of the prior year,
aggregate unit volume of sales increased approximately 11.6%. The average sales
price decreased 10.7%, primarily due to a shift in product mix to lower-priced
merchandise and a competitive market.
Gross profit, as a function of net sales, for the third quarter of 1999 was
20.3% compared with 20.9%. The reduction resulted primarily from lower selling
prices.
Selling, general and administrative expenses for continuing operations for the
quarter ended October 2, 1999, were $6,587,000 compared with $6,692,000 for the
same period of 1998, a decrease of approximately 1.6%. The decrease resulted
from reductions in general and administrative expenses which was offset by
increases in selling and shipping expenses from the increased volume.
In the third quarter of 1998, the Company recorded a provision of $2.5 million
for asset impairments, principally to reflect the devaluation of the ruble on
certain Russian investments. This amounted to a reduction of $0.56 per share on
a diluted basis.
Interest expense for the third quarter of 1999 was $761,000 compared with
$828,000 for the same period of the previous year. The decrease resulted from
reduced borrowing in the current year.
Rental revenues of Hampshire Investments for the quarter ended October 2, 1999,
were $396,000 which resulted in an operating profit of $94,000.
SEASONALITY
- -----------
More than seventy percent of the Company's sweater sales occur in the second
half of the year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary liquidity and capital requirements of the Company are to fund
working capital for current operations consisting of funding the build-up in
inventories and accounts receivable (which reach their maximum requirements in
the third quarter), servicing long-term debt, funding capital expenditures and
making investments, through Hampshire Investments, in assets not used in the
sweater business of the Company. The primary sources to meet the liquidity and
capital requirements include funds generated from operations and borrowings
under revolving credit lines and long-term debt.
Net cash used for the nine month period ended October 2, 1999 totaled
$12,893,000, which was used primarily for the accumulation of inventory for
shipments to occur later in the year and buildup of accounts receivable, from
shipments made late in the quarter. Capital expenditures for the nine month
period totaled $798,000. The Company anticipates that capital expenditures for
the balance of the fiscal year will not exceed $150,000.
The Company, through Hampshire Investments makes investments in assets unrelated
to the Company's sweater business, intended to diversify the earnings base of
the Company. During the first nine month period of 1999, Hampshire Investments
employed $5,114,000 for new investments in such assets.
15
The Company has a credit facility with three participating commercial banks. The
credit facility consists of a $55 million combined line of credit and letter of
credit facility through May 24, 2000. Advances under the facility are limited to
the lesser of: (1) $55 million, or (2) the sum of (a) 85% of the eligible
accounts receivable, and (b) a seasonal adjustment, based on inventory level of
up to $12 million from March 1 to October 31.
Advances under the facility bear interest at the bank's prime rate, or at the
option of the Company, a fixed rate of LIBOR plus 1.5% for a fixed term. The
loan is collateralized pari passu with the Senior Notes by the trade accounts
receivable of Hampshire Designers and its subsidiaries, excluding certain
factored trade accounts receivable. The Company has pledged, as additional
collateral, the common stock of its subsidiaries and such subsidiaries guarantee
the performance of the Company. Letters of credit issued under the facility are
collateralized by the inventory shipped pursuant to the letters of credit. The
credit agreement contains covenants which require certain financial performance
and restrict certain payments by the Company and the Restricted Subsidiaries
(defined as Hampshire Designers, Inc. and its Subsidiaries). As of October 2,
1999, the Company was in compliance with all such covenants. At the end of the
third quarter, the Company had an outstanding balance against the credit line of
$21.2 million and outstanding letters of credit of $9.5 million against all
lines. Approximately $42.4 million was available for borrowing under the
Company's credit facilities at October 2, 1999.
In December 1998, the Board of Directors of the Company approved a plan to
discontinue the operations and sell the assets of the Hosiery Division, which
was engaged in the manufacture and sale of ladies' and children's hosiery and
socks. Accordingly, the operating results of the Hosiery Division have been
presented as discontinued operations in the accompanying financial statements.
In June 1999, the Company sold substantially all of the assets and business of
the Hosiery Division to Vision Legwear, LLC, a company controlled by the former
president of the Hosiery Division. Collection of trade accounts receivable
retained by the Company plus proceeds received at closing totaled $3.6 million.
In June 1998, the Company sold Senior Notes in the principal amount of $15
million to two insurance companies. The Senior Notes bear interest at a rate of
7.05% per annum and are payable in equal annual installments beginning January
2, 2002 through January 2, 2008. The Senior Notes are collateralized pari passu
with the Company's revolving credit facility. The Senior Note Agreement contains
covenants which require certain financial performance and restrict certain
payments by the Company and the Restricted Subsidiaries (defined as Hampshire
Designers, Inc. and its Subsidiaries). As of October 2, 1999, the Company was in
compliance with all such covenants.
The Board of Directors of the Company has authorized management to purchase from
time-to-time, in the open market, up to 140,000 shares of its common stock. Some
of which is to be reissued for shares under the Company's Stock Option Plan and
Common Stock Purchase Plan. During the first nine month period of 1999, the
Company purchased 113,430 shares of common stock for $986,000. The Company
issued 21,292 shares for $226,000 under the Company's stock benefit plans under
this same period.
Management believes its cash flow from operations and borrowings under its
revolving and long-term credit lines will provide adequate resources to meet its
operational needs and capital requirements for the foreseeable future.
YEAR 2000 READINESS
- -------------------
The Company uses a significant number of computer software programs and embedded
operating systems that were not originally designed to process dates beyond
1999. The Company has implemented a project to ensure that the Company's systems
will function properly in the Year 2000 and thereafter. The Company has
completed an on-site test of the operating systems at the corporate office by
rolling forward the computer clock. Minimal problems were found, which were
corrected promptly. Final testing of the systems of the manufacturing
subsidiaries are in process and are expected to be completed by November 30,
1999. The Company's use of other equipment that is date sensitive to the Year
2000 is minimal and the Company does not believe there are any significant
exposures.
16
The Company believes that the conversion of all critical operating systems and
software programs has been completed. However, in the Company's most reasonably
likely worse case scenario, some portion of a critical system may not function
properly. If a critical system temporarily fails to perform properly, the
Company will invoke its contingency plan to correct the problem. In this event,
the Company will incur extra costs for salaries and for independent expert
assistance.
The direct costs of projects solely intended to correct Year 2000 problems are
estimated at less than $1 million, of which approximately $950,000 has been
expended to date. With the exception of approximately $100,000 for outside
purchases of software enhancement, all other costs have been expensed as
incurred. The Company does not expect any cost increases above its current
estimates to have a material effect on its financial results. The Company has
been in contact with its significant suppliers and customers with which its
systems interface regarding Year 2000 compliance and does not anticipate any
problems relating to the exchange of data.
The preceding discussion of the Year 2000 issue includes forward-looking
statements reflecting management's current assessments and estimates and which
involve risks and uncertainties. Various factors could cause actual results to
materially vary from those expected by such assessments and forward-looking
statements. Factors that might affect the timely and satisfactory completion of
the Year 2000 project include, but are not limited to, vendor representations
and timely corrections of hardware or software problems, the readiness of key
utilities, suppliers and customers, and similar uncertainties. The Company's
management of the project is an ongoing process involving continual evaluation.
Unanticipated problems could emerge or anticipated problems could be more
difficult to solve than anticipated.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which applies to all entities
and establishes accounting and reporting standards for derivative instruments.
SFAS 133, as amended by SFAS 137, which delayed SFAS 133's effective date by one
year, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Upon adoption the effect must be recognized as a cumulative effect of
an accounting change in either income or other comprehensive income, depending
upon whether the derivative is designated and effective as a hedge and, if so,
the type of hedge. The Company has not yet completed its analysis of the effects
of adopting SFAS 133 in 2001.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
The long term debt of the Company is at fixed interest rates which were at
market when the debt was issued and which approximates market interest rates at
October 2, 1999. The short-term debt of the Company has variable interest rates
based on the prime rate of the financial institution purchasing the debt. The
Company had $21.2 million of short-term debt on October 2, 1999.
In purchasing sweaters from foreign manufacturers, the Company uses letters of
credit which require the payment of dollars upon receipt of bills of lading for
the sweaters.
Hampshire Investments does not issue or own foreign indebtedness. Hampshire
Investments either purchases foreign-based assets with dollars or with foreign
currency purchased with dollars. Real properties which are owned by Hampshire
Investments and which are located outside the United States are leased for
dollars and not foreign currency. The primary market risk which Hampshire
Investments has with respect to foreign currencies is the impact that
fluctuations in such currencies have on the businesses of the lessees of such
real property and on the foreign-based businesses and the foreign based funds in
which Hampshire Investments owns equity securities.
Hampshire Investments limits its risk in the common stock of publicly traded
apparel companies primarily by limiting the amount of its investments. In
addition to following all of its investments closely, Hampshire Investments
limits the market risk of its investments by limiting the amount of the
aggregate investments such that investments may not exceed 50% of annual net
income of the Company on a cumulative basis.
18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on
its consolidated financial condition or results of operations.
Item 2 and 3 are not applicable and have been omitted.
Item 4 - Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
quarter ended October 2, 1999.
Item 5 is not applicable and has been omitted.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
---------- -------------------------------------------------
(27) Financial Data Schedule (electronic filing only)
b) Reports on Form 8-K filed during the quarter
A report on Form 8-K was filed on October 14, 1999 and a related Form 8-K/A
was filed on October 29, 1999 regarding the Change of Independent
Accountants from PricewaterhouseCoopers LLP to Deloitte & Touche LLP.
19
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 15, 1999 /s/ Ludwig Kuttner
- ------------------------ ----------------------------------
Ludwig Kuttner
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 /s/ Charles W. Clayton
- ------------------------ -----------------------------------
Charles W. Clayton
Vice President, Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20