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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the fiscal year ended December 31, 2001.
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
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Securities registered pursuant to Section 12(b) of the Act: (Title of class)
None.
Securities registered pursuant to Section 12(g) of the Act: (Title of class)
Common Stock, $0.10 Par Value.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 23, 2002, the Registrant had outstanding 4,663,476 shares of Common
Stock.
As of March 23, 2002, the aggregate market value of the outstanding shares of
the Registrant's Common Stock, par value $0.10 per share, held by non-
affiliates, computed by reference to the closing sale's price of the
Registrant's Common Stock as reported by the NASDAQ National Market, was
approximately $__ million. Shares of Common Stock held, directly or indirectly,
by each director and executive officer and by each person who owns 5% or more of
the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement, relative to its
2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
HAMPSHIRE GROUP, LIMITED
2001 ANNUAL REPORT
Table of Contents
Page
Part I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 19
Part III
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners
and Management 20
Item 13. Certain Relationships and Related Transactions 20
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 21
Signature Page 23
Report of Independent Accountants F-2
Consolidated Financial Statements F-3
Financial Statement Schedules F-28
Quarterly Financial and Stock Data F-31
2
PART I
------
ITEM 1 - BUSINESS
- -----------------
GENERAL
- -------
Hampshire Group, Limited ("Hampshire Group" or the "Company") operates two
business segments - Apparel and Investments. The Apparel segment is composed of
Hampshire Designers, Inc. ("Hampshire Designers") and Item-Eyes, Inc.
("Item-Eyes"). Hampshire Designers is the largest designer and marketer of
sweaters in North America and Item-Eyes is a leading designer and marketer of
related separates. Both Hampshire Designers and Item-Eyes source the manufacture
of their products through a network of quality manufacturers. The Investment
segment consists of Hampshire Investments, Limited and its subsidiaries
("Hampshire Investments") which invest primarily in domestic and international
real property.
Information with respect to sales, operating income and identifiable assets
attributable to the business segments appears in Management's Discussion and
Analysis of Financial Condition commencing on Page 10 of this report.
Hampshire Group, through a predecessor firm, has been engaged in the design,
manufacture (until the sale of all manufacturing facilities in 2000), and
marketing of sweaters since 1956 and Item-Eyes has been engaged in the apparel
business since 1978. In 1992, the Company had an initial public offering of one
million shares of its Common Stock.
Strengths and Strategy
- ----------------------
The Company's primary strength is its ability to design, develop, source and
deliver quality products within a given price range, while providing superior
levels of customer service. The Company has developed worldwide sourcing
abilities to broaden its product lines and to deliver quality merchandise at a
competitive price.
The process for the design and development of the Company's products depends on
whether the product is branded or private-label. In the branded business, the
products first are designed by the Company's experienced design team,
incorporating aspects of the latest fashion trends together with the consistent
appeal of the brand name. These products are further refined in collaboration
with manufacturers, resulting in a high-quality product to meet certain price
levels. For private-label business, the products are designed by the Company for
approval by the retailers.
- ---------------------------------------------------------------------------
Cautionary Disclosure Regarding Forward-Looking Statements
When used in this document in general and in the Outlook Section of Management's
Discussion and Analysis in particular, the words "expects", "anticipates" and
similar expressions are intended to identify forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. 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 republish 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 carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, in this report, as well as the Company's other filings
under the Securities Exchange Act of 1934.
- ----------------------------------------------------------------------------
3
The quality of the garments is ensured in a variety of ways. Each garment is
manufactured using the finest quality yarns and each must undergo a rigorous
quality assurance program. In some instances, multi-staged inspection processes,
including direct field audits, are performed by Company personnel, and from time
to time by customer quality control personnel. In international sourcing, the
Company, in addition to its own personnel, utilizes factory personnel, sourcing
agents, and inspection agencies to assure that the products meet our high
quality standards and the standards required by our customers.
A high level of customer service is provided by the Company's domestic
distribution facilities using the Company's Quick Response program and an
Electronic Data Interchange ("EDI") system which links the Company's computers
electronically to most of its customers. All distribution is coordinated through
the domestic distribution facilities; but goods sourced from the Far East are
distributed through public warehouses strategically located in California,
improving delivery time. By providing just-in-time delivery of merchandise
through the strategically located distribution facilities in the United States
and through sophisticated order fulfillment techniques, the Company provides an
essential service to its customers.
The acquisition of the Item-Eyes business in August 2000 accomplished several of
the Company's long-term strategies. With a broad line of coordinated sportswear,
the Item-Eyes acquisition expanded the Company's product lines; moved the
Company into new market areas with its customers; and increased the Company's
global sourcing capabilities through inclusion of a Central America sourcing
network.
To diversify the asset base, the Company established Hampshire Investments to
make long-term investments primarily in domestic and international real
properties.
APPAREL OPERATIONS
- ------------------
The Company is an apparel company whose principal products are women's and men's
branded and private-label sweaters and women's related sportswear. The Company
is a major supplier to the moderate-price sector of department stores and sells
to mass merchandisers, specialty stores and mail-order distributors.
Product Lines
- -------------
The Company has greatly expanded its product lines. A decade ago, the Company's
product line was primarily focused on women's full-fashion, Luxelon(R) sweaters
marketed under the Designers Originals(R) label. Although Designers Originals
sweaters remain an important product line, the expanded product line permits the
Company to supply many more departments of the Company's customers. Through the
1995 acquisition of Segue Limited, the Company added a business-casual line for
women and through the 2000 acquisition of Item-Eyes, a broad line of related
sportswear, including classic-woven apparel.
A line of men's sweaters has also been developed over the past six years through
strategic acquisitions. Hampshire Brands is licensed to manufacture and market
men's sweaters under the Geoffrey Beene(R), Dockers(R), Jantzen(R), Levi's(R),
Wrangler Hero(R) and Timbercreek by Wrangler(R) labels. These brands cover the
entire range of men's department store offerings, from middle-of-the-road, "main
floor" styles to fashion-forward, designer sweaters for the "better" departments
for our customers.
The Company was licensed in 2001, to manufacture and market women's sweaters
under the Docker's(R) and RIDERS(R) labels.
The product lines are sold by both the Company's sales force and independent
sales representatives with senior management participating in the presentations
to the larger accounts.
4
Products
- --------
Designers Originals(R) sweaters include the Company's traditional product for
women - classically designed, full-fashioned, fine-gauge, Luxelon(R) (acrylic)
sweaters with a cashmere feel and look - and a variety of novelty and other
sweaters. The Company recently introduced a fine-gauge, full-fashion, cotton
sweater, which has been well received.
Under the Designers Originals Studio(R) and Moving Bleu(R) labels, the Company
sells a business-casual line for women which incorporates woven fabrics in
related separates, such as blouses, pants, skirts and sweaters, in the
moderate-price category. The Company also sells solid and jacquard chenille
sweaters and seasonal theme sweaters.
Related sportswear, including blazers, pants, shirts and sweaters, and "soft
dressing", are sold by Item-Eyes under its Requirements(R) and Nouveaux(R)
labels and the private-labels of some of the Company's customers. With its
established worldwide sourcing network, the Company has the ability to respond
to market demands.
Customers
- ---------
The Company's customer base has decreased due to the consolidation of the retail
industry. However, management believes that the number of stores serviced by the
Company has not decreased. The Company has historical relationships with many of
its approximately 500 customers, which include most major department stores and
mass merchandisers, specialty stores and mail-order distributors.
Competition
- -----------
The apparel market remains highly competitive. Competition is primarily based on
product design, price, quality and service. While the Company faces competition
from manufacturers located in the United States, its primary competition comes
from manufacturers located in Southeast Asia.
The ability of the Company to compete is substantially enhanced by its financial
strength.
The foreign competitors benefit from production cost advantages, which are
offset in part by United States import quota and tariff protection. The Company
is continuing to develop international sourcing relationships in areas which
have lower manufacturing costs.
INVESTMENT OPERATIONS
- ---------------------
Hampshire Investments was established by the Company in 1997 to diversify the
asset base of the Company. At the end of 2001, the carrying value of its
investments was approximately $33 million, of which approximately 88% was in
real properties. The investment decisions of Hampshire Investments are primarily
made by the Investment Committee of the Board of Directors.
Seasonality
- -----------
Although the Company sells apparel throughout the year, the business is highly
seasonal, with approximately 76% of sales occurring during the third and fourth
quarters.
Backlog
- -------
The sales order backlog for the Apparel segment was approximately $123 million
as of March 2, 2002, compared with approximately $133 million as of March 2,
2001. The timing of the placement of seasonal orders by customers affects the
backlog; accordingly, a comparison of backlog from year to year is not
indicative of a trend in sales for the year.
5
TRADEMARKS AND LICENSES
- -----------------------
The Company considers its trademarks to have value in the marketing of its
products. The Company has entered into licensing agreements to manufacture and
market sweaters under certain trademarks for which it pays a royalty fee based
on sales. The licensing agreements are normally for a three-year initial term
with an option to renew providing that the Company achieves a specified sales
level during the term.
ELECTRONIC INFORMATION SYSTEMS
- ------------------------------
In order to schedule manufacturing, fill customer orders, transmit shipment data
to the customers' distribution centers and invoice electronically, the Company
has developed a number of integrated electronic information systems
applications. More than 70% of all orders are received electronically. These
orders are generated by the customers' computer systems based on their sales and
inventory levels. The Company electronically sends advance ship notices and
invoices to customers, which results in the timely updating of the customer's
inventory system.
CREDIT AND COLLECTION
- ---------------------
The Company manages its credit and collection functions by approving and
monitoring the credit lines of its customers. Credit limits are determined by
past payment history and financial information obtained from credit agencies and
other sources. The Company believes that its credit and collection staff has
been a significant factor in maximizing sales opportunities while minimizing bad
debt losses.
CUSTOMER CONCENTRATION
- ----------------------
The Company had sales to three major customers (defined as sales in excess of
10% of total sales) during 2001, which represented 10%, 11% and 14% of total
sales; two major customers during 2000, which represented 14% and 15% of total
sales; and three major customers in 1999, which represented 10%, 11% and 15% of
total sales. The Company's five largest customers accounted for approximately
49% of the Company's consolidated sales in 2001, compared with 50% in 2000 and
51% in 1999.
EMPLOYEES
- ---------
As of March 2, 2002, the Company had approximately 214 full-time employees and 4
part-time employees. The Company and its employees are not parties to any
collective bargaining agreements except for 13 hourly employees of Item-Eyes,
Inc., who are represented by UNITE Labor Union under an agreement expiring in
August 2004. The Company considers its relationship with its employees to be
good.
GOVERNMENTAL REGULATION
- -----------------------
The Company's business is subject to regulation by federal, state and local
governmental agencies dealing with environmental protection. The Company
believes it has operated, and intends to continue to operate, in compliance in
all material respects with these regulations.
The World Trade Organization was established in 1995 as the governing body for
international trade between the United States and 140 foreign countries. As a
result of various multilateral and bilateral agreements between the United
States and certain foreign countries negotiated under the framework established
by the World Trade Organization agreements, the Apparel segment benefits from
limited import quota and tariff protection in certain categories of its
business. These quotas and tariffs are expected to continue in some form through
6
2004. The agreements impose quotas on the amount and type of competing goods
which may be shipped into the United States from some countries. If these quotas
or tariffs were to become more restrictive or punitive, the profitability of the
Apparel segment could be adversely affected.
The North American Free Trade Agreement ("NAFTA"), approved in 1993 by the
United States, Canada and Mexico, has in most part eliminated quotas and tariffs
among these three countries.
ITEM 2 - PROPERTIES
- -------------------
The Company leases its corporate office and all of its sales offices/showrooms
and distribution center. The Company believes that all of its properties are
well maintained, in good condition and are generally suitable for their intended
use. The Company's principal properties are described in the table below.
Square Lease
Properties Footage Expiration(1)
- -------------------------------------------------------------------------------
Corporate Office - Anderson, South Carolina 10,500 04/30/06
Hampshire Designers
Sales Office and Showroom - New York, New York 24,000 08/31/11
Distribution Center - Anderson, South Carolina 57,000 04/30/06
Item-Eyes
Sales Office and Showroom - New York, New York 6,000 04/30/04
Operations Center - New York, New York 16,000 06/30/05
Administrative Offices - Hauppauge, New York 6,000 05/31/05
(1) Assuming the exercise of all options to renew.
- -------------------------------------------------------------------------------
The Company also utilizes public warehouses in New Jersey and California to
receive and distribute imported merchandise.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company's management 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 flows.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of Stockholders during the fourth quarter of
fiscal year 2001.
7
PART II
-------
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- --------------------------------------------------------------------------
The Company's Common Stock is quoted on the Nasdaq Stock Market under the symbol
"HAMP".
The following table sets forth the high and low sales prices of shares of Common
Stock as reported by the Nasdaq Stock Market.
Common Stock
-------------------
High Low
Year Ended December 31, 2000: ------ -----
- ----------------------------
First Quarter $14.50 $8.75
Second Quarter 12.75 6.87
Third Quarter 10.00 7.25
Fourth Quarter 9.12 7.25
Year Ended December 31, 2001:
- ----------------------------
First Quarter $ 9.62 $7.06
Second Quarter 10.50 8.40
Third Quarter 10.50 8.50
Fourth Quarter 13.30 8.00
As of March 23, 2002, the Company had approximately 475 stockholders of record.
The Company has not declared dividends with respect to its Common Stock. The
determination to pay dividends will be made by the Board of Directors and will
be dependent upon the Company's financial condition, results of operations,
capital requirements and such other factors as the Board of Directors may deem
relevant. The Senior Notes Agreement, as amended September 5, 2000 and the
Hampshire Group, Limited Revolving Credit Agreement of the same date, contain
covenants placing limitations on "restricted payments", which includes payment
of cash dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" in
Item 7.
8
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
INCOME STATEMENT DATA (1)
Selected Consolidated Financial Data
(in thousands, except per share data)
Year Ended December 31, 2001 2000 (2) 1999 1998 1997
- ----------------------------------------------------------------------------------
Net sales $263,485 $196,882 $151,317 $168,688 $140,807
Cost of goods sold 193,658 156,753 121,617 133,769 107,726
--------------------------------------------------
Gross profit 69,827 40,129 29,700 34,919 33,081
Rental revenue 2,594 2,281 2,005 507 43
--------------------------------------------------
72,421 42,410 31,705 35,426 33,124
Selling, general and
administrative expenses 48,668 31,666 25,111 24,971 21,156
Net loss (gain) on sale of
property, plant and equipment
and related charges 2,618 (2,308) 285 1 (3)
Net investment transactions
and impairment 876 465 394 2,267 -
-------------------------------------------------
Income from operations 20,259 12,587 5,915 8,187 11,971
Other income (expense):
Interest expense (3,431) (3,410) (1,967) (1,696) (824)
Interest income 561 1,353 729 243 363
Other (109) (214) 1,419 270 (142)
-------------------------------------------------
Income before provision for income
taxes and discontinued operations 17,280 10,316 6,096 7,004 11,368
Income tax (provision) benefit:
Current (7,503) (2,157) (563) (1,471) (2,649)
Deferred 1,303 (14) (337) 194 200
-------------------------------------------------
Income from continuing operations $11,080 $8,145 $5,196 $5,727 $8,919
=================================================
Income per share from Basic $2.38 $1.91 $1.27 $1.39 $2.27
continuing operations: =================================================
Diluted $2.37 $1.88 $1.22 $1.29 $2.00
=================================================
Weighted average number Basic 4,661 4,265 4,100 4,128 3,856
of shares outstanding: =================================================
Diluted 4,674 4,341 4,257 4,443 4,465
=================================================
9
(Page 9 Continued)
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------
December 31, 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------
Cash and cash equivalents $ 28,686 $ 10,517 $ 23,831 $ 13,886 $12,003
Working capital 67,315 58,184 56,141 51,283 36,303
Total assets 144,937 132,652 103,594 100,848 80,585
- ----------------------------------------------------------------------------------
Long-term debt (less current portion)
and deferred compensation 23,855 26,393 27,039 22,505 7,166
Total debt (3) 31,576 31,821 28,457 24,287 10,577
Stockholders' equity (4) 91,229 79,640 67,326 63,403 57,710
- ----------------------------------------------------------------------------------
Book value per share $19.44 $17.15 $16.36 $15.03 $13.96
- -----------------------------------===============================================
(1) The Income Statement Data represents only continuing operations.
(2) Includes the results of operations of Item-Eyes, Inc. from August 20,
2000, the date of acquisition.
(3) Includes long-term debt, current portion thereof, borrowing under lines
of credit, related party debt, subordinated notes and deferred compensation.
(4) No dividends were declared on Common Stock during any of the periods
presented above.
9
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth information with respect to the segments of the
Company's business (3):
Year Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Net sales Apparel $263,485 $196,882 $151,317
- -------------------------------------------------------------------------------
Gross profit Apparel 69,827 40,129 29,700
26.5% 20.4% 19.6%
- -------------------------------------------------------------------------------
Rental revenue Investments 2,594 2,281 2,005
- -------------------------------------------------------------------------------
Total revenue 266,079 199,163 153,322
- -------------------------------------------------------------------------------
Selling, general and Apparel 42,964 27,428 20,715
administrative expenses Investments (1) 2,174 1,646 1,242
Corporate (2) 3,530 2,592 3,154
-----------------------------------
48,668 31,666 25,111
(as a percent of revenue) 18.3% 15.9% 16.4%
Net loss (gain) on sale of
property, plant and equipment
and related charges 2,618 (2,308) 285
Net investment transactions
and impairment charges 876 465 394
-----------------------------------
52,162 29,823 25,790
- -------------------------------------------------------------------------------
Income from operations Apparel 24,245 13,739 8,700
Investments (456) 13 295
Corporate (3,530) (1,165) (3,080)
-----------------------------------
Income from operations 20,259 12,587 5,915
(as a percent of revenue) 7.6% 6.3% 3.9%
Interest expense (3,431) (3,410) (1,967)
Interest income 561 1,353 729
Other income (expense) (2) (109) (214) 1,419
- -------------------------------------------------------------------------------
Income from continuing
operations before income taxes $ 17,280 $ 10,316 $ 6,096
- ---------------------------------------------==================================
(1) Selling, general and administrative expenses of Hampshire Investments
include depreciation of $1,001,000, $822,000 and $624,000 for 2001, 2000
and 1999, respectively.
(2) Selling, general and administrative expenses for corporate include an
adjustment of ($158,000), ($452,000) and $744,000 for 2001, 2000 and 1999,
respectively, to compensation expense resulting from market gains (losses)
in the Company's mutual funds associated the Deferred Compensation Plan,
and other income (expense) includes a like amount of increase (decrease) in
the market value of the underlying securities.
(3) Additional segment data is provided in Note 18 of the consolidated
financial statements included in this Annual Report.
10
RESULTS OF OPERATIONS
- ---------------------
Effective August 20, 2000, (the "Acquisition Date") Hampshire Group, Limited
purchased substantially all of the assets and business of Item-Eyes, Inc., a
privately held sportswear company; and accordingly, the results of Item-Eyes
(the "Acquired Business") have been included in the results of the Company
subsequent to that date. The results of the Company, excluding the results of
the Acquired Business, are referred to herein as the existing business (the
"Existing Business").
2001 Compared With 2000
- -----------------------
Income from continuing operations of the Company for the year ended December 31,
2001 was $11,080,000, or $2.37 per share on a diluted basis, as compared with
$8,145,000, or $1.88 per share on a diluted basis, for the preceding year.
Net sales for the year ended December 31, 2001 were $263,485,000, which included
$98,033,000 of Acquired Business net sales, compared to $196,882,000 for 2000,
which included $43,995,000 of Acquired Business net sales for the period from
the Acquisition Date through December 31, 2000. The Existing Business net sales
increased $12,565,000. The 8.2 % increase in the Company's Existing Business net
sales reflected a strong demand for sweaters. For the year of 2001, compared
with 2000, aggregate unit volume of the Existing Business increased 16.9%. The
increase is a result of strong sales of women's cotton products, complemented
with greater demand for men's sweaters. A shift in product mix to lower priced
units resulted in a 7.4% decrease in the average sales price for the Existing
Business.
Gross profit for 2001 was $69,827,000 (26.5% of net sales), which included
Acquired Business gross profit of $23,244,000, compared to $40,129,000 (20.4% of
net sales) for 2000, which included $10,252,000 of Acquired Business gross
profit for the period after the Acquisition Date. The gross profit for the
Existing Business was 28.2% compared with 19.5% for the same period last year.
The increase in gross profit from the Company's Existing Business is attributed
to discontinuing less profitable product lines and the increase in unit volume
of sweaters.
Revenues for the Investment segment in 2001 were $2,594,000, compared to
$2,281,000 for 2000, an increase of $313,000. The increase in revenues resulted
primarily from the increase in the number of domestic real property investments
being renovated and leased.
Selling, general and administrative ("SG&A") expenses for the Company were
$48,668,000 in 2001, which included Acquired Business SG&A expenses of
$16,322,000, compared to $31,666,000 for 2000, which included $4,917,000 of
Acquired Business SG&A expenses for the period after the Acquisition Date. The
increase consisted of additional selling, shipping and related expenses caused
by the increased sales volume and higher bonuses due to increased income in
2001.
SG&A expenses for the Investment segment were $2,174,000 for 2001, and
$1,646,000 for 2000, an increase of $528,000. The increase resulted primarily
from additional operating expenses for property renovated and leased, selling
and operating expenses related to the sale of real property, and additional
depreciation expense, which increased to $1,001,000 in 2001 from $822,000 in
2000.
In 2000, the Company sold its sweater manufacturing assets to Glamourette/OG,
Inc. ("Glamourette"), a Puerto Rican corporation. The sale resulted in a gain of
$632,000, after recognizing $2,169,000 of exit costs associated with closing the
domestic manufacturing facilities and impairment charges of $849,000 for fixed
assets and $819,000 for goodwill (see Note 15 of the Consolidated Financial
Statements). During the fourth quarter of 2001, the Company notified Glamourette
11
that Glamourette was in default under the terms of its agreement. Subsequent to
this notice Glamourette filed for bankruptcy. As a result of these events, the
Company fully reserved the remaining balance of the promissory note due from
Glamourette, as part of the purchase price, in the amount of $3,893,000, with
$1,793,000 recognized in 2001 and $2,100,000 in 2000. Additionally, in the
Apparel segment, the Company recognized impairment in 2001 of goodwill, in the
amount of $825,000, due to the permanent decline in one of the divisional
operations and its estimated deficiencies in future cash flows.
During 2000, the Company had revenues from leased hosiery equipment of $747,000
and recognized a gain of $523,000 from the sale of this equipment (see Note 16
of the Consolidated Financial Statements) and a gain of $406,000 on the sale of
other apparel equipment and property.
In 2001, the Investments segment reported "net investment transactions and
impairment charges" of $876,000 compared to $465,000 in 2000. The amount
reported for 2001 includes an impairment charge of $1,272,000 on three European
investments; an impairment charge against the real property holdings in Russia
and Romania of $242,000; which were partially offset by the gain on the sale of
real property of $652,000 and other gains and losses. The amount reported for
2000 primarily includes an impairment charge of $300,000 on two European
investments; an impairment charge against two notes receivable of $147,000; a
loss on the sale and permanent write-down of available-for-sale securities of
$658,000; all of which were partially offset by the gain on the sale of real
property of $735,000 and other gains and losses.
Operating income in 2001, for the Apparel segment, was $24,245,000, which
included $6,922,000 Acquired Business income, compared to $13,739,000 for 2000,
which included Acquired Business income of $5,335,000 for the period after the
Acquisition Date. Income from operations of the Existing Business increased by
$8,919,000. The improvement for the Existing Business was principally due to the
increase in net sales and gross profit. The current year's Apparel operating
income for the Existing Business includes charges for the goodwill impairment as
discussed above and the write-off of the Glamourette promissory note. The prior
year's operating income included gains from both the sale of the manufacturing
facilities and from other property and equipment. The Investment segment had an
operating loss of $456,000 for 2001, compared to operating income of $13,000, a
decline of $469,000. This decline resulted from the net difference between
impairment and investment activity.
Interest income was $561,000 for 2001, compared to $1,353,000 for 2000, a
decline of $792,000. The reduction resulted primarily from the use of cash in
the purchase of the Acquired Business in August 2000 and lower average cash
balances for most of 2001.
The income tax provision was $6,200,000 for 2001, compared with $2,171,000 in
2000. The increase in the effective tax rate to 35.9% for 2001 from 21.0% for
2000 resulted from substantially all of the taxable income being generated in
the United States in 2001 versus 2000, when a larger portion of the taxable
income was generated in Puerto Rico, and such income being exempt from U.S.
federal regular income taxes pursuant to an election under Section 936 of the
Internal Revenue Code.
2000 Compared With 1999
- -----------------------
Income from continuing operations of the Company for the year ended December 31,
2000 was $8,145,000, or $1.88 per share on a diluted basis as compared with
$5,196,000, or $1.22 per share on a diluted basis, for the preceding year.
Net sales of the Company for the year ended December 31, 2000 were $196,882,000
compared to $151,317,000 in 1999. The Acquired Business accounted for
$43,995,000 in net sales, while the net sales of the Existing Business of the
Company increased 1.0% in 2000. The increased sales in the Existing Business
primarily resulted from the first year's sales of the Dockers(R) brand.
12
Gross profit of the Apparel segment in 2000 was $40,129,000, or 20.4% of net
sales, compared to $29,700,000, or 19.6% of net sales in the prior year. The
Acquired Business accounted for the additional increase in gross profit and the
0.8% difference.
Revenues of the Investment segment were $2,281,000 in 2000 compared with
$2,005,000 in 1999. The increase resulted from additional property acquired and
renovated real property units, which were leased in late 1999 and during 2000.
SG&A expenses of the Company were $31,666,000 in 2000 compared with $25,111,000
in 1999. The SG&A of the Acquired Business accounted for $4,918,000 or 75.0% of
the increase for the year. The first year sales of the Dockers(R) sweater line
also contributed to the increase in SG&A expenses.
SG&A expenses for the Investment segment were $1,646,000 in 2000 and $1,242,000
in 1999. The increase resulted primarily from additional operating expenses for
acquired property and additional depreciation expense, which increased from
$624,000 in 1999 to $822,000 in 2000.
During the second quarter of 2000, the Company sold its sweater manufacturing
assets to Glamourette, a Puerto Rican corporation. The sale resulted in a gain
of $632,000, after recognizing $2,169,000 of exit costs associated with closing
the domestic manufacturing facilities and impairment charges of $849,000 for
fixed assets and $819,000 for goodwill (see Note 15 of the Consolidated
Financial Statements).
In the fourth quarter of 2000, the Company sold the leased hosiery equipment.
The Company had revenues from leasing this equipment during 2000 of $747,000, in
addition to the $523,000 gain on the sale of the equipment (see Note 16 of the
Consolidated Financial Statements).
During 2000, the Company sold certain equipment located in Mexico and property
located in Winona, Minnesota, which resulted in a gain of $406,000. In the
fourth quarter of 1999, the Company recorded a $300,000 impairment charge for
the closing of a distribution center in Winona, Minnesota. Sales of property and
equipment during 1999 resulted in a $15,000 gain.
In 2000, the Investments segment reported "net investment transactions and
impairment charges" of $465,000 compared to $394,000 in 1999. The amount
reported for 2000 primarily includes an impairment charge of $300,000 on two
European investments; an impairment charge against two notes receivable of
$147,000; a loss on the sale and permanent write down of available-for-sale
securities of $658,000; all of which were partially offset by the gain on the
sale of real property of $735,000 and other gains and losses. In the $394,000
"net investment transactions and impairment charges" recorded in 1999, the
Company recognized an impairment charge of $425,000, which was partially offset
by other investment gains and losses.
Interest expense was $3,410,000 in 2000 and $1,967,000 in 1999. Approximately
$209,000 of this increase resulted from the additional financing of real
properties by the Investment segment. The balance of the increase in interest
expense related primarily to the financing of the acquisition of the Acquired
Business.
Interest income was $1,353,000 in 2000 compared to $729,000 in 1999. The
additional interest income resulted primarily from the cash and equivalents of
the Company during the first half of 2000 (prior to acquisition of the Acquired
Business). Also reflected in interest income is approximately $218,000 of
interest income related to the promissory note received in connection with the
sale of the sweater manufacturing facilities (see Note 15 of the Consolidated
Financial Statements) and $319,000 of interest income on the promissory note and
other obligations from the purchaser of the Hosiery Division.
13
The income tax provision was $2,171,000 in 2000 compared with $900,000 in 1999.
The increase in the effective tax rate to 21.0% for 2000 as compared to 14.8%
for the prior year resulted principally from two factors. First, a larger
percentage of the taxable income was generated in the United States in 2000
versus 1999 when a larger percentage was generated in Puerto Rico, and such
income was exempt from U.S. federal regular income taxes pursuant to an election
under Section 936 of the Internal Revenue Code. Second, the gain on the sale of
the manufacturing facilities in Puerto Rico in 2000, resulted in an additional
$600,000 provision for taxes in Puerto Rico. Because of the sale of the
manufacturing facilities in Puerto Rico, the Company expects to benefit from a
significant portion of the net operating loss carryforward. As a result, the
valuation allowance of $1,869,000, which had been recorded prior to 1999 was
reversed in 2000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary liquidity and capital requirements of the Company are to fund
working capital for current operations, consisting of funding the buildup in
inventories and accounts receivable (which historically reach their maximum
requirements in the third quarter), servicing long-term debt and funding capital
expenditures and investments. The primary sources to meet the liquidity and
capital requirements include funds generated from operations, revolving credit
lines and long-term borrowing.
The Company has its principal credit facility with a consortium of six
commercial banks with JPMorganChase, as agent. The Company's Revolving Credit
Facility, which matures on September 5, 2003, provides a secured credit facility
up to $97,937,500 in revolving line of credit borrowings and outstanding letters
of credit. Advances under the line of credit are limited to the lesser of: (1)
$97,937,500 less outstanding letters of credit; or (2) the sum of 85% of
eligible accounts receivable, 50% of eligible inventory (subject to seasonal
limits) of the Restricted Subsidiaries (defined as Hampshire Designers and
Item-Eyes), and 50% of outstanding eligible letters of credit issued through
this credit facility, plus a seasonal supplemental, less borrowings outstanding
under the Senior Notes (see below) and outstanding letters of credit.
Advances under the facility bear interest at either the bank's prime rate or, at
the option of the Company, a fixed rate of LIBOR plus 2.25%, for a fixed term.
The loan is collateralized, pari passu with the Senior Notes, principally by the
trade accounts receivable and inventories of the Company's Restricted
Subsidiaries and a pledge of the Common Stock of all subsidiaries. The Company
has also pledged as collateral two insurance policies, a $5,000,000 policy on
the life of its Chief Executive Officer and a $1,000,000 policy on the life of
the Chief Executive Officer of Item-Eyes, Inc. At December 31, 2001 there were
$9,340,000 outstanding letters of credit. No advances were outstanding under the
line of credit at December 31, 2001 or 2000, which resulted in availability for
borrowing of approximately $29,980,000 under the line of credit at December 31,
2001.
The Company also has available two other credit facilities, which provide for
international letters of credit in the aggregate amount of $2,000,000. As of
December 31, 2001, the letters of credit outstanding against these two letter of
credit facilities totaled approximately $207,000. Additionally, Hampshire
Investments, Limited, has a $1,000,000 line of credit available for its use. As
of December 31, 2001, there were no outstanding balances.
The maximum advances outstanding during 2001, under all lines of credit, was
$62,270,000. The average amount outstanding during 2001 was approximately
$16,875,000. Outstanding letters of credit under all credit lines totaled
approximately $9,547,000 at December 31, 2001.
During 1998, the Company issued $15,000,000 long-term notes to two insurance
companies (the "Senior Notes"). The Senior Notes are collateralized pari passu
with the Revolving Credit Facility. The Senior Notes bear interest at 8% with
principal due in semi-annual installments of $937,500.
14
Both the Revolving Credit Facility and the Senior Notes Agreement (the
"Agreements") contain covenants which require certain financial performance and
restrict certain payments by the Company and the Restricted Subsidiaries,
including advances to the Company's Non-Restricted Subsidiary (defined as
Hampshire Investments, Limited and its subsidiaries).
The financial performance covenants require, among other things, that the
Company maintain specified levels of consolidated net worth, not exceed a
specified consolidated leverage ratio, achieve a specified fixed charge ratio
and limit capital expenditures to a specified maximum amount. The Company was in
compliance with the financial performance covenants at December 31, 2001.
The Agreements restrict the sale of assets, payments by the Company of cash
dividends to stockholders, prepayment of Subordinated Notes, the repurchase of
Company Common Stock and investments in and loans to the Non-Restricted
Subsidiary. The Senior Notes Agreement also requires that during any
twelve-month period there must be a period of 45 consecutive days where there is
no outstanding short-term debt. The Company was in compliance with these
provisions at December 31, 2001.
The Company's other debt includes $1,863,000 of Subordinated Notes from the
acquisition of Item-Eyes and a $2,678,000 loan from Merchants National Bank. The
Company, through its Non-Restricted Subsidiary, finances real property
investments through mortgages and construction loans. The Company's Chief
Executive Officer has guaranteed the Subordinated Notes and certain indebtedness
of the Non-Restricted Subsidiary.
Future contractual obligations related to long-term debt and noncancellable
operating leases at December 31, 2001 were as follows:
Year Ended December 31, 2001
(In thousands)
Total 2002 2003 2004 2005 2006 Thereafter
----- ---- ---- ---- ---- ---- ----------
Operating leases $ 4,412 $1,300 $1,310 $ 982 $ 558 $ 262 $ -
Long term debt 29,459 7,721 3,371 5,468 2,913 2,195 7,791
-----------------------------------------------------------
Total $33,871 $9,021 $4,681 $6,450 $3,471 $2,457 $7,791
===========================================================
At December 31, 2001 the Company had cash and cash equivalents totaling
$28,686,000.
Net cash provided by operating activities was $23,865,000 for the year ended
December 31, 2001, as compared to net cash provided by operating activities of
$26,345,000 for last year. Net cash provided by operating activities in 2001 was
provided primarily from adjusted net income of $17,891,000 (after adjusting for
$2,619,000 in depreciation and amortization and $4,192,000 for asset impairment
charges) and $7,344,000 from changes in the working capital accounts. Net cash
provided by operating activities in 2000 was provided primarily from adjusted
net income of $12,738,000 (after adjusting for $3,408,000 in depreciation and
amortization and $787,000 for asset impairment charges) and $15,484,000 from
changes in the working capital accounts.
Net cash used in investing activities was $5,431,000 for the year ended December
31, 2001, as compared to net cash used in investing activities of $44,657,000
for last year. The decrease in cash used in investment activities results
primarily from $44,069,000 used in 2000 for the purchase of the Acquired
Business and $6,415,000 of cash received in 2000 from the sale of property,
plant and equipment. The Company, through the Investment segment, invests in
assets unrelated to the Company's Apparel segment. During 2001, the Investment
segment invested $8,502,000 compared to $9,039,000 during 2000.
15
Net cash used in financing activities was $265,000 for the year ended December
31 2001, as compared to net cash provided by financing activities of $4,998,000
for 2000. Proceeds from long-term debt in 2001 was $3,344,000, as compared to
$6,980,000 for last year. The majority of the long-term debt, for both periods
resulted from the Investment segment financing real property purchases and
renovations. During 2001, the Company repaid $3,953,000 of long-term debt as
compared to $2,174,000 for 2000. The Board of Directors of the Company has
authorized management to purchase from time to time, in the market, shares of
the Company's Common Stock. During 2001, the Company purchased 16,760 shares of
its Common Stock for $138,000.
Management believes that cash flow from operations, available borrowings under
the credit facilities and long-term borrowing will provide adequate resources to
meet the Company's capital requirements and operational needs for the
foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
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 the
allowance for doubtful notes and accounts, allowances for customer returns and
adjustments, inventory reserves and for impairment of real property investments,
long-term investments and other long-lived assets. 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:
Allowance For Doubtful Notes and Accounts and Customer Returns and Adjustments
- ------------------------------------------------------------------------------
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from customers or other parties failure to make payments on trade or
notes receivable due to the Company. In addition, the Company maintains
allowances for customer returns, trade discounts, customer chargebacks, and for
sales and markdown allowances given to the customer, typically at the end of the
selling seasons, enabling customers to markdown the retail sales prices of any
remaining goods on hand. The estimates for these allowances and discounts are
based on a number of factors, including: (1) historical experience, (2) aging of
the trade accounts receivable, (3) specific information obtained by the Company
on the financial condition and current credit worthiness of customers or other
parties, and (4) specific agreements or negotiated amounts with customers.
If the financial condition of the Company's customers were to deteriorate and
reduce the ability of the Company's customers to make payments on their
accounts, the Company may be required to increase its allowances by recording
additional bad debt expense. Further, while the Company believes that it has
negotiated all substantial sales and markdown allowances with its customers,
additional allowances may be requested by customers. Likewise, should the
financial condition of the Company's customers or other parties improve and
result in payments or settlements of previously reserved amounts, the Company
may be required to record a reduction in bad debt expense to reverse recorded
allowances.
16
Inventory Reserves
- ------------------
The Company analyzes out-of-season merchandise on an SKU by SKU basis to
determine reserves, if any, that may be required. Factors considered in
evaluating the reserves include product styling, color, current fashion trends
and quantities on hand. Many 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 costs
to dispose, 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.
Impairment of Long-Lived Assets
- -------------------------------
The Company's long-lived assets include real property investments, long-term
investments, property and goodwill. The Company follows the provisions of
Accounting Principles Board Opinion No. 17 ("APB 17"), "Intangible Assets," and
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting of
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." In accordance with APB 17 and SFAS 121, as applicable, management assesses
impairment of real property investments, long-term investments, property and
goodwill whenever changes or events indicate that the carrying value may not be
recoverable. In accordance with APB 17, management assesses impairment of
goodwill whenever operating trends have had other than a temporary adverse
change. Management applies a discounted cash flow approach to measure impairment
using the Company's estimated current cost of capital as the discount rate. In
accordance with SFAS 121, management writes down other long-lived assets to fair
value if, based on an analysis, the sum of the expected future undiscounted cash
flows is less than the carrying amount of the assets.
Additionally, economic conditions and other factors in foreign countries and
elsewhere affect certain of the Company's real property investments and
long-term investments. Where impairment indicators exist, management uses
available information, including estimated future undiscounted cash flows to
estimate impairment, if any. Factors could develop to cause the Company to
recognize additional impairment of long-lived assets. If the impairment
estimates are excessive, gains may be recognized upon disposal or sale of the
assets. Likewise, if insufficient impairment charges have been recorded, losses
may be recognized upon disposal or sale of the assets.
OUTLOOK
- -------
The Company believes that the primary reason for its success in recent years has
been its ability to offer classic and new products and the highest level of
quality and services to its customers. Management is committed to continue to
offer such quality and services to its customers. Management recognizes that
price competition in the apparel market can adversely affect earnings of the
Company.
The ability of the Company to compete is substantially enhanced by its financial
strength.
Over the past five years, the retail industry has consolidated through
acquisitions and mergers. Further, retailers have concentrated more volume with
a fewer number of vendors. The Company has responded by expanding its product
line in the sweater business and by acquiring Item-Eyes. By increasing its
utilization of foreign sources, the Company can offer greater variety in yarns,
styling and surface treatment at competitive prices.
Seasonality
- -----------
The Company's apparel business is highly seasonal with the majority of sales
occurring in the third and fourth quarters of the year.
17
Effects of Changing Prices
- --------------------------
The Company is subject to the effects of changing prices. It has generally been
able to pass along a majority of inflationary increases in its costs by
increasing the prices for its products; however, competitive conditions
sometimes preclude such increases.
New Accounting Standards
- ------------------------
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was
issued in June 1998 and was amended in June 2000 by SFAS 138, "Accounting for
Certain Derivative Instruments and Hedging Activities". SFAS 133 requires all
derivative instruments to be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether the derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The adoption of SFAS 133 on January 1, 2001 had no effect on the
Company's financial position, results of operations or cash flows.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142,
"Goodwill and Other Intangible Assets." These statements make significant
changes to the accounting for business combinations, goodwill, and intangible
assets. SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. The adoption of SFAS
141 had no impact on the Company's financial statements.
SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived
intangible assets and initiates an annual review for impairment. Impairment
would be examined more frequently if certain impairment indicators are
encountered. Intangible assets with a determinable useful life will continue to
be amortized over that period. This statement is effective for the Company on
January 1, 2002. Within the first six months of 2002, the Company will complete
its assessment of goodwill. Amortization expense related to goodwill for the
years ended December 31, 2001, 2000, and 1999 was $847,000, $692,000 and
$487,000, respectively.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 is effective for the Company on January 1, 2002.
The Company does not expect the adoption of the standard to have a significant
impact on the Company's financial position, or results of operations.
The FASB's Emerging Issues Task Force ("EITF") issued EITF 00-25, "Vendor Income
Statement Characterization Paid to a Reseller of the Vendor's Products", which
addresses whether consideration from a vendor to a reseller of the vendor's
product is (a) an adjustment to the selling prices of the vendor's products and,
therefore, should be deducted from revenue when recognized in the vendor's
income statement, or (b) a cost incurred by the vendor for assets or services
received from the reseller and, therefore should be included as a cost or an
expense when recognized in the vendor's income statement. EITF 00-25 is
effective for the Company on January 1, 2002. The Company is evaluating the
impact of the adoption of EITF 00-25 and has not yet determined the effect, if
any, that the adoption will have on the Company's classification of such costs
in the consolidated statements of operations.
18
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and product market prices and rates. The Company is exposed to market
risk in the areas of changing interest rates and fluctuations of currency
exchange rates. The Company is also exposed to market risk due to increased
costs for raw materials for the Company's products.
The long-term debt of the Company is at fixed interest rates, which were at
market when the debt was issued, but are primarily above market on December 31,
2001. The impact of a 100 hypothetical basis point increase in interest rates on
the Company's variable rate debt would be to increase interest expense for 2001
and 2000 by approximately $169,000 and $130,000, respectively. The short-term
debt of the Company has variable rates based on the prime interest rate of the
lending institution, 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 of dollars upon receipt of bills of lading for
the products. Prices are fixed in U.S. dollars at the time the letters of credit
are issued.
With the exception of Hampshire Praha, the Company's 70% owned Czech Republic
subsidiary, Hampshire Investments does not issue or own foreign indebtedness.
Further, the foreign indebtedness of Hampshire Praha is insignificant to the
Company's financial statements. Hampshire Investments either purchases foreign
based assets with U.S. dollars or with foreign currency purchased with U.S.
dollars, on or near the purchase date. Real property owned by Hampshire
Investments and located outside the United States is leased for either U.S.
dollars or other stable currency. The primary foreign currency risk for
Hampshire Investments is the impact of fluctuations that such currencies have on
the businesses of the lessees of real property owned by Hampshire Investments.
The Company does not currently engage in derivative financial instruments to
mitigate these market risks.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required to be presented in Item 8 is presented commencing on
Page F-1 of this Annual Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
- ------------------------------------------------------
There were no disagreements with independent accountants on accounting or
financial disclosure during the three fiscal years ended December 31, 2001, 2000
and 1999.
19
PART III
--------
Certain information required to be presented in this Part III of this Annual
Report on Form 10-K is omitted as the Registrant will file a Definitive Proxy
Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120
days after the end of the fiscal year, which is incorporated herein by reference
thereto.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information concerning the Company's directors and executive officers
required to be presented in Item 10 is incorporated herein by reference to the
Company's 2002 Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
The information concerning executive compensation required to be presented in
Item 11 is incorporated herein by reference to the Company's 2002 Proxy
Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information concerning security ownership of certain beneficial owners and
management required to be presented in Item 12 is incorporated herein by
reference to the Company's 2002 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information concerning certain relationships and related transactions
required to be presented in Item 13 is incorporated herein by reference to the
Company's 2002 Proxy Statement.
20
PART IV
-------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K.
(1) Financial Statements
(2) Financial Statement Schedules
The financial statements and financial statement schedules are listed on
the Index to the Consolidated Financial Statements on Page F-1 of this
Annual Report on Form 10-K. All other schedules have been omitted because
the required information is shown in the consolidated financial statements
or notes thereto, or they are not applicable.
(3) Exhibits
Exhibit No. Description Footnote
---------- ------------------------------------------------------ --------
Exhibits Incorporated by References:
(3)(A) Restated Certificate of Incorporation of Hampshire
Group, Limited. 1
(3)(A)(1) Certificate of Amendment to the Certificate of
Incorporation of Hampshire Group, Limited. 1
(3)(A)(2) Amended and Restated By-Laws of Hampshire Group, Limited. 1
(3)(B)(6) Merger Agreement between Hampshire Designers, Inc. and
Segue (America) Limited dated December 30, 1999. 3
(10)(A)(3) Employment Agreement between Hampshire Group, Limited
and Ludwig Kuttner dated as of January 1, 1998. 2
(10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option Plan
Amended and Restated effective June 7, 1995. 1
(10)(C)(1) Form of Hampshire Group, Limited and Affiliates Common
Stock Purchase Plan for Directors and Executives Amended
and Restated effective June 7, 1995. 1
(10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries 401(k)
Retirement Savings Plan. 1
(10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred
Compensation Plan for Directors and Executives Amended
and Restated December 30, 1997. 1
(10)(H)(1) Note Purchase Agreement between Hampshire Group, Limited
Phoenix Home Life Mutual Insurance Company and
The Ohio National Life Insurance Company dated
May 15, 1998. 2
(10)(J)(5) Renewed Lease Agreement between Hampshire Designers, Inc.
and Commerce Center Associates, Inc. for the Company's
Anderson, South Carolina corporate offices dated
August 1, 1998. 2
- ------------------------------------------------------------------------------
(Exhibits continued on next page)
21
(Exhibits continued from previous page)
Exhibit No. Description Footnote
---------- ------------------------------------------------------ --------
(10)(J)(6) Renewed Lease Agreement between Hampshire Designers,
Inc. and Commerce Center Associates, Inc. for the
Company's Anderson, South Carolina distribution center
dated August 1, 1998. 2
(10)(J)(7) Lease Agreement between Hampshire Designers, Inc. and
Peter Woodworth and Joyce Woodworth for the Winona,
Minnesota Distribution Center dated June 15, 1999. 3
(10)(M) Agreement between Glamourette Fashion Mills, Inc. and
The Commonwealth of Puerto Rico on Repatriation of
Earnings (the "Closing Agreement"), dated June 30, 1993. 1
(10)(U) Agreement between Hampshire Designers, Inc. and Vision
Legwear LLC, dated May 27, 1999 for the disposal of the
hosiery business. 4
4.1 Amendment No. 1, dated September 5, 2000 to the Note
Purchase Agreement, dated as of May 15, 1998, among the
Company, the Guarantors named therein, Phoenix Home Life
Mutual Insurance Company and the Ohio National Life
Insurance Company. 5
10.1 Asset Purchase Agreement among Vintage III, Inc.,
Hampshire Group, Limited, Item-Eyes, Inc. and certain
other parties, dated June 26, 2000. 5
10.2 Amended and Restated Credit Agreement and Guaranty among
Hampshire Group, Limited, the Guarantors named therein,
the Banks named therein and The Chase Manhattan Bank as
agent for the Banks, dated September 5, 2000. 5
10.3 Term Loan Agreement between Merchants National Bank and
Hampshire Group, Limited dated as of September 20, 2000. 6
- -------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's 1997 Annual
Report on Form 10-K.
(2) Incorporated by reference to the Company's 1998 Annual
Report on Form 10-K.
(3) Incorporated by reference to the Company's 1999 Annual
Report on Form 10-K.
(4) Incorporated by reference to the Company's June 15, 1999
Report on Form 8-K.
(5) Incorporated by reference to the Company's September 15,
2000 Report on Form 8-K.
(6) Incorporated by reference to the Company's November 9, 2000
Report on Form 8-K/A.
Exhibits filed herewith:
--------------------------------------------------------------
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K filed during the quarter.
No reports were filed on Form 8-K during the quarter ended December 31,
2001.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Anderson
and the State of South Carolina on this 27th day of March 2002.
HAMPSHIRE GROUP, LIMITED
By: /s/ LUDWIG KUTTNER
-----------------------
Ludwig Kuttner
President and Chief Executive Officer
(Principal Executive Officer)
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ LUDWIG KUTTNER Chairman of the Board of Directors, March 27, 2002
- ------------------------ President and Chief Executive Officer --------------
Ludwig Kuttner
/s/ JOEL GOLDBERG Director March 27, 2002
- ------------------------ --------------
Joel Goldberg
/s/ MICHAEL C. JACKSON Director March 27, 2002
- ------------------------ --------------
Michael C. Jackson
/s/ HARVEY L. SPERRY Director March 27, 2002
- ------------------------ --------------
Harvey L. Sperry
/s/ EUGENE WARSAW Director March 27, 2002
- ------------------------ --------------
Eugene Warsaw
/s/ PETER W. WOODWORTH Director March 27, 2002
- ------------------------ --------------
Peter W. Woodworth
/s/ WILLIAM W. HODGE Vice President and Chief Financial Officer
- ------------------------ (Principal Financial Officer and March 27, 2002
William W. Hodge Principle Accounting Officer) --------------
23
HAMPSHIRE GROUP, LIMITED
Index To Consolidated Financial Statements
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Comprehensive Income F-5
Consolidated Statements of Cash Flows F-6 - F-7
Consolidated Statements of Stockholders' Equity F-8
Notes to Consolidated Financial Statements F-9 - F-27
Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves F-28
III. Real Estate and Accumulated Depreciation F-29 - F-30
Quarterly Financial Data F-31
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders
of Hampshire Group, Limited
Anderson, South Carolina
We have audited the accompanying consolidated balance sheets of Hampshire Group,
Limited and its Subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of income, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. Our audits also included the financial statement
schedules listed in the index on F-1. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2001
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------
Deloitte & Touche LLP
Greenville, South Carolina
March 7, 2002
F-2
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2001 2000
- -------------------------------------------------------------------------------
ASSETS Current assets:
Cash and cash equivalents $ 28,686 $ 10,517
Accounts receivable trade-net 34,691 32,898
Notes and other receivables-net 1,429 3,864
Inventories-net 26,739 33,222
Deferred tax asset 5,216 3,714
Other current assets 407 588
----------------------
Total current assets 97,168 84,803
----------------------
Property, plant and equipment-net 2,170 2,644
Real property investments-net 29,380 22,793
Long-term investments-net 3,806 5,350
Notes receivable - long-term - net 521 2,473
Trading securities held in retirement trust 1,142 1,349
Deferred tax asset 2,049 2,248
Goodwill - net 8,020 9,692
Other assets 681 1,300
----------------------
$144,937 $132,652
======================
- -------------------------------------------------------------------------------
LIABILITIES Current liabilities:
Current portion of long-term debt $ 7,721 $ 5,428
Accounts payable 5,418 11,148
Accrued expenses and other liabilities 16,714 10,043
----------------------
Total current liabilities 29,853 26,619
Long-term debt, less current portion 21,738 22,777
Subordinated notes payable - 1,863
Deferred compensation 2,117 1,753
----------------------
Total liabilities 53,708 53,012
----------------------
Commitments and contingencies
- -------------------------------------------------------------------------------
STOCKHOLDERS'Common Stock, $0.10 par value; 4,707,216
EQUITY (2001) and 4,651,556 (2000) shares issued
and 4,693,142 (2001) and 4,644,993 (2000)
shares outstanding 471 465
Additional paid-in capital 31,229 30,816
Retained earnings 59,581 48,501
Accumulated other comprehensive gain (loss) 76 (75)
Treasury stock, 14,074 (2001) and 6,563
(2000) shares at cost (128) (67)
----------------------
Total stockholders' equity 91,229 79,640
----------------------
$144,937 $132,652
======================
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Net sales $263,485 $196,882 $151,317
Cost of goods sold 193,658 156,753 121,617
-----------------------------
Gross profit 69,827 40,129 29,700
Rental revenue 2,594 2,281 2,005
-----------------------------
72,421 42,410 31,705
Selling, general and administrative expenses 48,668 31,666 25,111
Net loss (gain) on sale of property, plant and
equipment and related charges 2,618 (2,308) 285
Net investment transactions and impairment charges 876 465 394
-----------------------------
Income from operations 20,259 12,587 5,915
Other income (expense):
Interest expense (3,431) (3,410) (1,967)
Interest income 561 1,353 729
Other (109) (214) 1,419
-----------------------------
Income from continuing operations before provision
for income taxes 17,280 10,316 6,096
Income tax (provision) benefit:
Current (7,503) (2,157) (563)
Deferred 1,303 (14) (337)
-----------------------------
Income from continuing operations 11,080 8,145 5,196
Gain (loss) from disposal of discontinued
operations-net of income tax provision of
$235 (2000) - 398 -
-----------------------------
Net income $ 11,080 $ 8,543 $ 5,196
=============================
- ------------------------------------------------------------------------------
Income per share from Basic $2.38 $1.91 $1.27
continuing operations: =============================
Diluted $2.37 $1.88 $1.22
=============================
Net income per share: Basic $2.38 $2.00 $1.27
=============================
Diluted $2.37 $1.97 $1.22
=============================
Weighted average number Basic 4,661 4,265 4,100
of shares outstanding: =============================
Diluted 4,674 4,341 4,257
=============================
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Net income $11,080 $8,543 $5,196
------------------------------
Other comprehensive income (loss): Unrealized
gains (losses) on securities:
Unrealized holding gains (losses) on securities
arising during periods - (128) (105)
Reclassification adjustment for amount included
in net income - 658 (127)
------------------------------
Other comprehensive gain (loss) on securities - 530 (232)
Income tax benefit (provision) on securities - (196) 86
------------------------------
Unrealized gains (losses) on securities
- 334 (146)
Foreign currency translation adjustment 151 (75) -
------------------------------
Comprehensive income $11,231 $8,802 $5,050
==============================
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HAMPSHIRE GROUP, LIMITED
Consolidated STATEMENTS of Cash Flows
(in thousands)
Year Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $11,080 $ 8,543 $ 5,196
Gain from disposal of discontinued operations - (398) -
-----------------------------
Income from continuing operations 11,080 8,145 5,196
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization 2,619 3,408 4,968
Asset impairment charges and provision for
uncollectible notes 4,192 787 725
Gain on sale of manufacturing facilities - (632) -
Gain on termination of equipment lease - (296) -
Gain on sale of real estate investment (652) (735) -
Loss (gain) on other sales of property and
equipment - (929) (15)
Loss (gain) on sale of available-for-sale
securities - 318 (127)
Deferred income tax provision (benefit) (1,303) 14 337
Deferred compensation costs for executive
officers 579 357 135
Tax benefit relating to Common Stock plans 6 26 49
Net change in operating assets and liabilities,
net of effects of acquired companies:
Receivables (880) 127 4,627
Inventories 6,483 11,943 3,389
Accounts payable (5,730) 1,083 (1,985)
Accrued expenses and other liabilities 6,671 1,939 (3,363)
Other assets 800 392 (184)
-----------------------------
Net cash provided by continuing operations 23,865 25,947 13,752
Net cash provided by discontinued
operations - 398 3,560
-----------------------------
Net cash provided by operating activities 23,865 26,345 17,312
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Cash used for business acquisition - (44,069) -
Capital expenditures (294) (186) (915)
Proceeds from sale of real estate investment 1,022 990 -
Proceeds from long-term investments 711 - -
Purchase of real property and other investments (8,502) (9,039) (8,029)
Proceeds from sales of property, plant and
equipment 11 6,415 24
Purchases of available-for-sale securities - - (308)
Proceeds from sale of available-for-sale securities - 35 545
Loans and advances to investees (560) (1,852) (1,656)
Repayments of loans and advances by investees 2,181 3,049 762
Business purchase price adjustment - - (375)
-----------------------------
Net cash used in investing activities (5,431) (44,657) (9,952)
- --------------------------------------------------------------------------------
(Consolidated Statements of Cash Flows continued on next page.)
F-6
(Consolidated Statements of Cash Flow continued from previous page.)
(in thousands)
Year Ended December 31, 2001 2000 1999
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,344 6,980 4,840
Debt issuance costs - (563) -
Repayment of long-term debt (3,953) (2,174) (1,811)
Proceeds from issuance of Common Stock 413 450 -
Repurchase of Common Stock warrants - (133) -
Payments of deferred compensation (8) (8) (8)
Proceeds from issuance of treasury stock 77 446 889
Purchases of treasury stock (138) - (1,325)
------------------------------
Net cash (used in) provided by financing
activities (265) 4,998 2,585
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 18,169 (13,314) 9,945
Cash and cash equivalents - beginning of year 10,517 23,831 13,886
------------------------------
Cash and cash equivalents - end of year $28,686 $10,517 $23,831
- -------------------------------------------------==============================
Supplementary disclosure of cash flow information
- -------------------------------------------------------------------------------
Cash paid during the year for: Interest $3,877 $2,890 $2,706
Income 4,914 413 571
Non-cash investing and financing activities:
Adjustment of purchase price-return of stock
held in escrow - - 725
Settlement of long-term debt upon sale of
real property - 1,376 -
Settlement of long-term debt upon sale of
property, plant and equipment - 1,050 -
Note receivable from sale of property,
plant and equipment - 5,118 -
Issuance of Common Stock for business
acquisition - 2,723 -
Issuance of Subordinated Notes payable for
business acquisition - 2,100 -
Treasury stock acquired from options exercised - 203 -
Sale of investments to related party, settled by
forgiveness of certain liabilities owed to
related party - 775 -
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
HAMPSHIRE GROUP, LIMITED
Consolidated STATEMENTS of Stockholders' Equity
(in thousands, except share data)
Accumulated
Additional Other
Year Ended December 31, Common Stock Paid-In Retained Comprehen- Treasury
1999, 2000 and 2001 Shares Amount Captital Earnings sive Loss Stock Total
- --------------------------------------------------------------------------------------------------------
Balance - January 1, 1999 4,218,246 $425 $28,276 $35,459 ($188) ($569) $63,403
Net income for the year - - - 5,196 - - 5,196
Escrow shares retired (90,625) (9) (716) - - - (725)
Purchase of treasury stock (149,175) - - - - (1,325) (1,325)
Shares issued under the
Common Stock plans 136,868 2 153 (473) - 1,192 874
Tax benefit relating to
Common Stock plans - - 49 - - - 49
Deferred compensation payable
in Company shares 331,478 - - - - 3,039 3,039
Shares held in trust for deferred
compensation liability (331,478) - - - - (3,039) (3,039)
Unrealized loss on available-
for-sale securities - net - - - - (146) - (146)
- --------------------------------------------------------------------------------------------------------
Balance - December 31, 1999 4,115,314 418 27,762 40,182 (334) (702) 67,326
Net income for the year - - - 8,543 - - 8,543
Shares issued for business
acquisition 395,382 40 2,683 - - - 2,723
Shares issued under warrant
exercise 72,727 7 443 - - - 450
Repurchase of stock warrants - - (98) (35) - - (133)
Purchase of treasury stock (22,657) - - - - (203) (203)
Shares issued under the
Common Stock plans 84,227 - - (189) - 838 649
Tax benefit relating to
Common Stock plans - - 26 - - - 26
Deferred compensation payable
in Company shares 345,952 - - - - 3,129 3,129
Shares held in trust for
deferred compensation
liability (345,952) - - - - (3,129) (3,129)
Reclassification adjustment on
sale of securities for amount
included in net income - - - - (334) - (334)
Unrealized loss on currency
translation - - - - (75) - (75)
- --------------------------------------------------------------------------------------------------------
Balance - December 31, 2000 4,644,993 465 30,816 48,501 (75) (67) 79,640
Net income for the year - - - 11,080 - - 11,080
Purchase of treasury stock (16,760) - - - - (138) (138)
Shares issued under the
Common Stock plans 64,909 6 407 - - 77 490
Tax benefit relating to
Common Stock plans - - 6 - - - 6
Deferred compensation payable
in Company shares 364,958 - - - - 3,229 3,229
Shares held in trust for deferred
compensation liability (364,958) - - - - (3,229) (3,229)
Unrealized gain on currency
translation - - - - 151 - 151
- --------------------------------------------------------------------------------------------------------
Balance - December 31, 2001 4,693,142 $471 $31,229 $59,581 $ 76 ($ 128) $91,229
- --------------------------------========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Organization and Summary of Critical and Other Significant
Accounting Policies
- -------------------------------------------------------------------
Organization
- ------------
Hampshire Group, Limited (the "Company"), through its subsidiaries, engages in
the apparel business and invests in real property. The Company, with
headquarters in Anderson, South Carolina, operates in two segments, Apparel and
Investments. The Company's apparel products are sold primarily in the United
States through various retail and catalog companies. The investment company,
with subsidiaries located in the United Kingdom, the Cayman Islands and the
Czech Republic, principally purchases real properties located primarily in the
United States, Russia and Eastern Europe, for the purposes of long-term
investments.
The significant accounting policies used in the preparation of the accompanying
consolidated financial statements are as follows:
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries, including Hampshire Designers, Inc. and its
subsidiaries (collectively, "Hampshire Designers"); Item-Eyes, Inc.
("Item-Eyes"), since its acquisition on August 20, 2000; and Hampshire
Investments, Limited and its subsidiaries and Hampshire Praha s.r.o. (70% owned)
located in the Czech Republic (collectively, "Hampshire Investments"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
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 the
allowance for doubtful notes and accounts, allowances for customer returns and
adjustments, inventory reserves and for impairment of real property investments,
long-term investments and other long-lived assets. 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:
Allowance For Doubtful Notes and Accounts and Customer Returns and Adjustments
- ------------------------------------------------------------------------------
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from customers or other parties failure to make payments on trade or
notes receivable due to the Company. In addition, the Company maintains
allowances for customer returns, trade discounts, customer chargebacks, and for
sales and markdown allowances given to the customer, typically at the end of the
selling seasons, enabling customers to markdown the retail sales prices of any
remaining goods on hand. The estimates for these allowances and discounts are
based on a number of factors, including: (1) historical experience, (2) aging of
the trade accounts receivable, (3) specific information obtained by the Company
F-9
on the financial condition and current credit worthiness of customers or other
parties, and (4) specific agreements or negotiated amounts with customers.
If the financial condition of the Company's customers were to deteriorate and
reduce the ability of the Company's customers to make payments on their
accounts, the Company may be required to increase its allowances by recording
additional bad debt expense. Further, while the Company believes that it has
negotiated all substantial sales and markdown allowances with its customers,
additional allowances may be requested by customers. Likewise, should the
financial condition of the Company's customers or other parties improve and
result in payments or settlements of previously reserved amounts, the Company
may be required to record a reduction in bad debt expense to reverse recorded
allowances.
Inventory Reserves
- ------------------
The Company analyzes out-of-season merchandise on an SKU by SKU basis to
determine reserves, if any, that may be required. Factors considered in
evaluating the requirement for reserves include product styling, color, current
fashion trends and quantities on hand. Many 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 costs to dispose, 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.
Impairment of Long-Lived Assets
- -------------------------------
The Company's long-lived assets include real property investments, long-term
investments, property and goodwill. The Company follows the provisions of
Accounting Principles Board Opinion No. 17 ("APB 17"), "Intangible Assets," and
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting of
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." In accordance with APB 17 and SFAS 121, as applicable, management assesses
impairment of real property investments, long-term investments, property and
goodwill and whenever changes or events indicate that the carrying value may not
be recoverable. In accordance with APB 17, management assesses impairment of
goodwill whenever operating trends have had other than a temporary adverse
change. Management applies a discounted cash flow approach to measure impairment
using the Company's estimated current cost of capital as the discount rate. In
accordance with SFAS 121, management writes down other long-lived assets to fair
value if, based on an analysis, the sum of the expected future undiscounted cash
flows is less than the carrying amount of the assets.
Additionally, economic conditions and other factors in foreign countries and
elsewhere affect certain of the Company's real property investments and
long-term investments. Where impairment indicators exist, management uses
available information, including estimated future undiscounted cash flows to
estimate impairment, if any. Factors could develop to cause the Company to
recognize additional impairment of long-lived assets. If the impairment
estimates are excessive, gains may be recognized upon disposal or sale of the
assets. Likewise, if insufficient impairment charges have been recorded, losses
may be recognized upon disposal or sale of the assets.
Also, the following accounting policies significantly affect the preparation of
the consolidated financial statements:
Cash Equivalents
- ----------------
Cash equivalents consist of highly liquid investments with initial maturities of
ninety days or less. Interest bearing amounts were approximately $26.2 million
and $8.8 million at December 31, 2001 and 2000, respectively.
F-10
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 except for
approximately 14% and 8% of the inventory at December 31, 2001 and 2000,
respectively, for which cost is determined using the last-in, first-out method
("LIFO").
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment 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.
Real Property Investments
- -------------------------
Real property investments are recorded at cost. The Company provides for
depreciation using the straight-line method over 15 years, or 39 years for new
construction, which is 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. Such gains and losses on the sale of real property investments and
impairment charges on such investments are classified as "net investment
transactions and impairment charges" in the accompanying consolidated statements
of income.
Long-Term Investments
- ---------------------
Long-term investments are recorded either at cost or by using the equity method
of accounting depending on the Company's ownership percentage in the
investments. Gains and losses from the sale of long-term investments and any
impairment charges on such investments are classified as "net investment
transactions and impairment charges" in the accompanying consolidated statements
of income.
Goodwill
- --------
Goodwill is being amortized over estimated useful lives of 10 to 15 years, on a
straight-line basis. The Company continually monitors conditions that may affect
the carrying value of its goodwill. As conditions may indicate potential
impairment of goodwill, the Company evaluates projected future undiscounted cash
flows to determine the extent of impairment, if any. See "New Accounting
Standards".
Foreign Currency Transactions and Translation
- ---------------------------------------------
Foreign currency transactions are translated into U.S. dollars at prevailing
exchange rates. The balance sheet of the Company's consolidated foreign
subsidiaries, excluding equity, was translated into U.S. dollars at current
exchange rates at year-end. The statement of operations for the Company's
consolidated foreign subsidiaries was translated at the annual average exchange
rates. Net transaction gains (losses) were not significant in 2001, 2000 or
1999.
Financial Instruments
- ---------------------
The Company's financial instruments primarily consist of cash and cash
equivalents, accounts and notes receivable, accounts payable, accrued
liabilities, long-term debt and subordinated notes payable. The fair value of
long-term debt and the subordinated notes payable is disclosed in Note 9. The
carrying amounts of the other financial instruments are considered a reasonable
estimate of fair value at December 31, 2001 and 2000, due to the short-term
nature of the items.
F-11
Revenue Recognition
- -------------------
The Company recognizes apparel sales revenue upon shipment of goods to customers
(net of the Company's estimate of returns and allowances) and rental revenue is
recognized on a straight-line basis over the terms of the related leases.
Advertising Costs
- -----------------
The Company recognizes advertising costs, including the costs of co-op
advertising arrangements, as incurred. Advertising costs were approximately
$2,936,000, $1,643,000 and $1,145,000 in 2001, 2000 and 1999, respectively, and
were recorded as a component of selling, general and administrative expenses in
the accompanying consolidated statements of income. See "New Accounting
Standards".
Shipping Costs
- --------------
The costs to ship products to customers of approximately $713,000, $562,000 and
$180,000 in 2001, 2000, and 1999, respectively, are included as a component of
selling, general and administrative expenses in the accompanying consolidated
statements of income.
Income Taxes
- ------------
Income taxes are recognized for financial reporting purposes during the year 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 is computed by dividing net income by the
weighted-average number of shares outstanding for the year. Diluted earnings per
common share is computed similarly; however, it is adjusted for the effects of
the assumed exercise of the Company's outstanding options and warrants.
Comprehensive Income
- --------------------
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. At December 31, 2001 and 2000, the Company had one item,
unrealized gain or loss on foreign currency translation, that remains a
component of other comprehensive income.
Presentation of Prior Year Data
- -------------------------------
Certain reclassifications have been made to prior year's data to conform with
the current-year presentation.
New Accounting Standards
- ------------------------
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was
issued in June 1998 and was amended in June 2000 by SFAS 138, "Accounting for
Certain Derivative Instruments and Hedging Activities". SFAS 133 requires all
derivative instruments to be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether the derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The adoption of SFAS 133 on January 1, 2001 had no effect on the
Company's financial position, results of operations or cash flows.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142,
"Goodwill and Other Intangible Assets." These Statements make significant
changes to the accounting for business combinations, goodwill, and intangible
assets. SFAS 141 eliminates the pooling-of-interests method of accounting for
business combinations. In addition, it further clarifies the criteria for
recognition of intangible assets separately from goodwill. The adoption of SFAS
141 had no impact on the Company's financial statements.
F-12
SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived
intangible assets and initiates an annual review for impairment. Impairment
would be examined more frequently if certain impairment indicators are
encountered. Intangible assets with a determinable useful life will continue to
be amortized over that period. This statement is effective for the Company on
January 1, 2002. Within the first six months of 2002, the Company will complete
its assessment of goodwill. Amortization expense related to goodwill for the
years ended December 31, 2001, 2000, and 1999 was $847,000, $692,000 and
$487,000, respectively.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial reporting for the
impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and
the accounting and reporting provisions of APB 30 related to the disposal of a
segment of a business. SFAS 144 is effective for the Company on January 1, 2002.
The Company does not expect the adoption of the standard to have a significant
impact on the Company's financial position or results of operations.
The FASB's Emerging Issues Task Force ("EITF") issued EITF 00-25, "Vendor Income
Statement Characterization Paid to a Reseller of the Vendor's Products", which
addresses whether consideration from a vendor to a reseller of the vendor's
product is (a) an adjustment to the selling prices of the vendor's products and,
therefore should be deducted from revenue when recognized in the vendor's income
statement, or (b) a cost incurred by the vendor for assets or services received
from the reseller and, therefore should be included as a cost or an expense when
recognized in the vendor's income statement. EITF 00-25 is effective for the
Company on January 1, 2002. The Company is evaluating the impact of the adoption
of EITF 00-25 and has not yet determined the effect, if any, that the adoption
will have on the Company's classification of such costs in the consolidated
statements of operations.
Note 2 - Acquisition of Assets
- ------------------------------
Effective August 20, 2000, the Company acquired substantially all the assets and
business of Item-Eyes, Inc. ("Item-Eyes"), a privately-held sportswear company.
The assets were acquired for a total of $57,288,000, which was paid as follows:
Cash, including repayment of revolving credit
line of $31,069,000 $44,069,000
Assumed liabilities - trade accounts payable, etc. 8,396,000
Issuance of Subordinated Notes payable 2,100,000
Issuance of Hampshire Group, Limited Common Stock 2,723,000 (1)
(1) Hampshire Group Limited issued 395,382 unregistered shares of
its Common Stock.
The purchase price was allocated to the net assets acquired, including the
liabilities assumed as of August 20, 2000, based upon their estimated fair
values as of that date with the remainder of approximately $8,650,000 being
recorded as goodwill.
The following unaudited pro forma financial information shows the results of
operations of the Company as though the acquisition of Item-Eyes occurred as of
January 1, 2000 or January 1, 1999, respectively. The unaudited pro forma
financial information presented below does not purport to be indicative of the
results of the continuing operations had the acquisition of Item-Eyes been
consummated as of January 1, 2000 or January 1, 1999 or of the future results of
operations of the combined businesses.
F-13
Pro Forma Pro Forma
Year Ended December 31, 2000 1999
(in thousands, except per share data) (unaudited) (unaudited)
- ----------------------------------------------------------------------
Net sales $250,819 $253,789
-------------------------
Net income $7,028 $6,824
-------------------------
Net income per share Basic $1.56 $1.52
-------------------------
Diluted $1.53 $1.47
-------------------------
Note 3 - Accounts Receivable and Major Customers
- ------------------------------------------------
The Company performs ongoing evaluations of the credit worthiness of its
customers and maintains allowances for potential credit losses. The Company
generally does not require collateral for its trade receivables. The accounts
receivable are stated net of allowances for doubtful accounts and returns and
allowances of approximately $6,830,000 and $7,042,000 at December 31, 2001 and
2000, respectively.
The Company sells principally to department stores, mail order distributors,
specialty stores, mass merchandisers and other retailers located in the United
States. The Company had sales to three major customers (defined as sales in
excess of 10% of total sales) during 2001 which represented 14%, 11% and 10% of
total sales; two major customers during 2000 which represented 15% and 14% of
total sales, and three major customers in 1999 which represented 15%, 11% and
10% of total sales. At December 31, 2001 and 2000, 38% and 32%, respectively, of
the total trade receivables were due from these customers.
Note 4 - Inventories
- --------------------
The components of inventories (in thousands) 2001 2000
at December 31, 2001 and 2000 ------------------------------------------------------------
are set forth in the adjacent Finished goods $21,922 $26,414
table. Work-in-progress 1,697 3,905
Raw materials and supplies 3,774 3,813
Approximately 14% and 8% of total ------------------------------------------------------------
inventories were valued using the 27,393 34,132
LIFO method at December 31, 2001 Less-Excess of current cost
and 2000, respectively. over LIFO carrying value (654) (910)
------------------------------------------------------------
Total $26,739 $33,222
============================================================
Note 5 - Property, Plant and Equipment Estimated
- -------------------------------------- Useful
The components of property, plant (in thousands) Lives 2001 2000
and equipment at December 31, 2001 ------------------------------------------------------------
and 2000 are set forth in the Buildings and improvements 15-45 years $ 754 $ 754
adjacent table. Leasehold improvements 5-10 years 935 934
Machinery and equipment 3-7 years 2,932 2,791
Depreciation expense was $756,000, Furniture and fixtures 3-7 years 949 988
$1,912,000 and $3,874,000, Transportation equipment 3-5 years 100 55
respectively, for the years ended ------------------------------------------------------------
December 31, 2001, 2000 and 1999. Total cost 5,670 5,522
Less-Accumulated depreciation (3,500) (2,878)
See Note 15 for further ------------------------------------------------------------
discussion regarding the sale Total $2,170 $2,644
of assets during 2000. ============================================================
F14
Note 6 - Real Property and Long-Term Investments
- ------------------------------------------------
The Company has made direct investments in real property for the purpose of
generating rental revenue and asset appreciation. These properties consist of
commercial and residential facilities in the United States and Europe and are
carried at historical cost, net of impairment charges totaling $2,092,000,
including $242,000 recognized in 2001.
Depreciation is provided over the estimated useful lives of the property,
which is 15 years, or 39 years for new construction. Depreciation expense was
$1,016,000, $822,000 and $624,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
Real Property Investments
(in thousands) 2001 2000
- ------------------------------------------------------------------------
Commercial and residential property:
United States $21,784 $17,766
Russia 3,273 3,535
Europe 7,973 5,024
- ------------------------------------------------------------------------
33,030 26,325
Less: Accumulated depreciation (3,650) (3,532)
- ------------------------------------------------------------------------
Total $29,380 $22,793
========================================================================
Long-term investments consist principally of common stock of non-publicly traded
companies and investments in real estate partnerships. Management intends that
these investments will be held on a long-term basis. The carrying values set
forth in the table below are shown net of asset impairment charges totaling
$2,647,000, including $1,272,000 recognized in 2001, $300,000 recognized in 2000
and $425,000 recognized in 1999 for certain foreign assets deemed to be
permanently impaired.
Long-Term Investments
(in thousands) 2001 2000
- ------------------------------------------------------------------------
United States $3,109 $3,381
Russia 131 131
Europe 566 1,838
- ------------------------------------------------------------------------
Total $3,806 $5,350
========================================================================
Costs associated with the Company's rental activities are included in selling,
general and administrative expense and amounted to $2,034,000, $1,646,000 and
$1,242,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
Net investment transactions and impairment charges, reported net in the
accompanying consolidated statements of operations for the years ended December
31, 2001, 2000 and 1999 are summarized in the table below.
(in thousands) 2001 2000 1999
- ------------------------------------------------------------------------
Impairment of foreign investments $1,272 $300 $425
Impairment of foreign real property 242 - -
(Gain) on sale of domestic real property (652) (735) -
Impairment of notes receivable 60 147 54
(Gain) loss on available for sale securities - 658 (133)
Other investments (gains) and losses, net (46) 95 48
- ------------------------------------------------------------------------
Total $876 $465 $394
========================================================================
F-15
Note 7 - Goodwill
- -----------------
Accumulated amortization of goodwill was $1,142,000, $2,703,000 and $3,037,000
at December 31, 2001, 2000 and 1999, respectively.
The Company recognized impairment of goodwill in 2001, due to the permanent
decline in one of the divisional operations and its estimated deficiencies in
future cash flows
Activity in goodwill for the years ended December 31, 2001, 2000 and 1999 is
summarized in the table below.
(in thousands) 2001 2000 1999
- -------------------------------------------------------------------
Balance - beginning of year $9,692 $2,553 $3,390
Amortization for the year (847) (692) (487)
Addition from acquisition of
Item-Eyes, Inc. (See Note 2) - 8,650 -
Purchase price adjustments resulting
from settlement of acquisition
contingencies - - (350)
Impairment of goodwill (825) - -
Write-off upon sale of manufacturing
facilities - (819) -
- -------------------------------------------------------------------
Balance - end of year $8,020 $9,692 $2,553
===================================================================
Note 8 - Accrued Expenses and Other Liabilities
- -----------------------------------------------
Accrued expenses and other (in thousands) 2001 2000
liabilities at December 31, ------------------------------------
2001 and 2000 are summarized Compensation $5,341 $1,675
on the adjacent table. Income taxes 4,686 2,245
Co-op advertising 1,450 1,021
Royalties 1,303 871
Other 3,934 4,231
------------------------------------
Total $16,714 $10,043
====================================
Note 9 - Borrowings
- -------------------
Revolving Credit Facilities
- ---------------------------
The Company's Revolving Credit Facility, which matures on September 5, 2003,
provides a secured credit facility up to $97.9 million in revolving line of
credit and letters of credit. Advances under the line of credit are limited to
the lesser of: (1) $97.9 million less outstanding letters of credit; or (2) the
sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject
to seasonal limits) of the Company's Restricted Subsidiaries (defined as
Hampshire Designers and Item-Eyes), and 50% of outstanding eligible letters of
credit issued through this credit facility, plus a seasonal supplemental.
Advances under the facility bear interest at either the bank's prime rate or, at
the option of the Company, a fixed rate of LIBOR plus 2.25%, for a fixed term.
The loan is collateralized, pari passu with the Senior Notes, principally by the
trade accounts receivable and inventories of the Company's Restricted
Subsidiaries and a pledge of the Common Stock of all subsidiaries. The Company
has also pledged as collateral two insurance policies, a $5 million policy on
the life of its Chairman and a $1 million policy on the life of the Chief
Executive Officer of Item-Eyes, Inc. At December 31, 2001 there were $9.3
million outstanding letters of credit. No advances were outstanding under the
line of credit at December 31, 2001 or 2000, which resulted in availability for
borrowing of approximately $30 million under the line of credit at December 31,
2001.
The Company also has available two other credit facilities, which provide for
international letters of credit in the aggregate amount of $2.0 million. As of
December 31, 2001, the letters of credit outstanding against these two letter of
credit facilities totaled approximately $207,000.
F-16
Additionally, the Company, through its Investment subsidiary, Hampshire
Investments, Limited, has a $1.0 million unsecured line of credit, for use by
this subsidiary. As of December 31, 2001, there were no outstanding balances.
Long-Term Debt - Long-term debt at December 31, 2001 and 2000 consists of the following:
- --------------
(in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
Senior Notes payable to two insurance companies due in semi-annual installments
of $937,500 commencing January 2, 2001 through 2008, plus interest at 8%
per annum, collateralized pari passu with the Revolving Credit Facility $11,250 $14,063
Debt collateralized by real property
- ------------------------------------
Note payable to a mortgage company in monthly installments of $12,326,
including interest at 7.36% through 2008 1,609 1,636
Note payable to a bank in monthly installments of $13,553, including interest at
7.50% through 2004 1,775 1,796
Note payable to a bank in monthly installments of $10,990, including interest at
9.25% through 2019 1,139 1,165
Notes payable to a foreign bank in German Marks, quarterly installments of
approximately 41,600 US Dollars, including interest at 7.5% through 2004 1,206 1,297
Notes payable to foreign bank in German Marks and Czech Koruna, quarterly
installments of approximately 89,200 US Dollars, including interest at rates
from 6.5% to 7.25% through 2015 2,937 383
Construction notes payable, maturing June and August 2002, to two banks, interest
at prime plus 0.25%, at 5.00% on December 31, 2001 3,000 2,700
Real estate note payable, interest at 8% due semi-annually, principal due
August 2003 408 -
Other notes payable due in monthly installments of $5,600, including interest at
various rates from 3.00% to 9.50%, with maturities through 2025 899 1,163
Debt collateralized by machinery and equipment
- ----------------------------------------------
Note payable in monthly installments of approximately $9,200, including interest at
5.77% through 2002 20 78
Subordinated debt (subordinated to the Revolving Credit Facility and Senior Notes)
- -----------------
Notes payable to a former shareholder of Item-Eyes in quarterly installments
of $196,250 through August 2004, plus interest at 11.5% per annum 1,657 1,853
Notes payable to former shareholders of Item-Eyes in quarterly installments of
$41,250 through February 2003, plus interest at 9.5% per annum 206 247
Unsecured debt
- --------------
Note payable to a bank in semi-annual installments of $383,412 commencing
March 20, 2001 through September 2005, with interest at the bank's
prime rate plus 0.25% (6.25% at December 31, 2001) per annum 2,678 3,000
Other notes payable 675 687
- --------------------------------------------------------------------------------------------------------
Total long-term debt 29,459 30,068
Less - Amount payable within one year (7,721) (5,428)
- --------------------------------------------------------------------------------------------------------
Amount payable after one year $21,738 $24,640
========================================================================================================
The subordinated debt and certain of the real property debt has been guaranteed
by the Company's Chief Executive Officer.
Financial Covenants
- -------------------
Both the Revolving Credit Facility and the Senior Notes Agreement (the
"Agreements") contain covenants which require certain financial performance and
restrict certain payments by the Company and the Restricted Subsidiaries,
including advances to the Company's Non-Restricted Subsidiary (defined as
Hampshire Investments, Limited and its subsidiaries).
F-17
The financial performance covenants require, among other things, that the
Company maintain specified levels of consolidated net worth, not exceed a
specified consolidated leverage ratio, achieve a specified fixed charge ratio
and limit capital expenditures to a specified maximum amount. The Company was in
compliance with the financial performance covenants at December 31, 2001.
The Agreements restrict the sale of assets, payments by the Company of cash
dividends to stockholders, prepayment of Subordinated Notes, the repurchase of
Company common stock and investments in and loans to the Non-Restricted
Subsidiary. The Senior Notes Agreement also requires that during any 12-month
period there must be a period of 45 consecutive days where there is no
outstanding short-term debt. The Company was in compliance with these provisions
at December 31, 2001.
(in thousands)
---------------------------
Maturities of long-term debt as of Year
December 31, 2001 are summarized in ---------------------------
the adjacent table. 2002 $ 7,721
2003 3,371
2004 5,468
2005 2,913
2006 2,195
Thereafter 7,791
----------------------------
Total $29,459
============================
The net book value of the assets collateralizing the debt on real property at
December 31, 2001 was approximately $25.5 million. The fair value of the
long-term debt at December 31, 2001 and 2000, based on current market interest
rates discounted to present value, is approximately $29.8 million and $28.9
million, respectively.
Note 10 - Income Taxes
- ----------------------
The domestic, Puerto Rico and (in thousands) 2001 2000 1999
foreign components of income ---------------------------------------------
(loss) from continuing opera- Domestic $18,820 $ 7,091 $2,268
tions before income taxes are Puerto Rico (469) 3,993 4,654
set forth in the adjacent table. Foreign (1,071) (768) (826)
---------------------------------------------
Income before
income taxes $17,280 $10,316 $6,096
=============================================
The components of income tax (in thousands) 2001 2000 1999
provision (benefit) for the ---------------------------------------------
years ended December 31, 2001, Current:
2000 and 1999 are set forth Federal $6,565 $ 988 $ 98
in the adjacent table. State 1,138 459 380
Puerto Rico (200) 710 85
---------------------------------------------
7,503 2,157 563
---------------------------------------------
Deferred:
Federal (1,099) (123) 469
State (204) 137 (132)
---------------------------------------------
(1,303) 14 337
---------------------------------------------
Total $6,200 $2,171 $900
=============================================
F-18
A reconciliation of the provision (benefit) for income taxes computed by
applying the statutory federal income tax rate to income from continuing
operations before income taxes and the Company's actual provision for income
taxes is set forth in the table below.
(in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------
Tax provision at federal statutory rate $6,048 $3,507 $2,073
Increase (decrease) in tax arising from:
Effect of exemption of Puerto Rico
(earnings) losses from United States tax 164 (1,358) (1,582)
Change in valuation allowance 1,310 (1,869) -
Puerto Rico taxes on income, including
withholding taxes and capital gains - 710 85
State taxes, less federal income tax benefit 607 393 119
Foreign operating losses 375 261 281
Tax benefit of capital losses (1,652) - -
Tax benefit of tax rate changes (164) - -
Adjustment to NOL carryforward (258) - -
Tax benefit of Puerto Rico amendment (200) - -
Nondeductible items 72 454 -
Other (102) 73 (76)
- ------------------------------------------------------------------------------
$6,200 $2,171 $ 900
==============================================================================
A summary of the temporary differences and carryforwards giving rise to deferred
income tax assets as of December 31, 2001 and 2000 is set forth in the table
below.
(in thousands) 2001 2000
- ------------------------------------------------------------------------------
Deferred income tax assets:
Allowances for receivables $1,085 $1,265
Inventories 1,097 252
Property, plant and equipment 511 359
Write-down of assets not currently deductible 363 59
Accrued liabilities and other temporary differences 2,658 2,138
Net operating loss carry forwards 1,551 1,850
Capital loss carryforward 1,310 -
Tax credit carry forwards - 39
- ------------------------------------------------------------------------------
Gross deferred income tax assets 8,575 5,962
- ------------------------------------------------------------------------------
Valuation allowance for deferred income tax assets
arising from capital loss carryforward (1,310) -
- ------------------------------------------------------------------------------
Net deferred income tax assets $7,265 $5,962
==============================================================================
The deferred tax assets are (in thousands) 2001 2000
recognized as follows in the --------------------------------------
accompanying consolidated balance Deferred tax asset-
sheets. current $5,216 $3,714
Deferred tax asset-
noncurrent 2,049 2,248
--------------------------------------
Total $7,265 $5,962
======================================
(in thousands)
--------------------------------------
The net operating loss carryforwards Year Regular Tax
for federal income tax purposes --------------------------------------
expire as set forth in the adjacent 2003 $ 225
table. 2004 411
2005 2,429
2009 1,366
--------------------------------------
Total $4,431
======================================
The Company generally is not permitted to utilize more than $1.7 million of the
net operating loss carryforwards in any single tax year. To the extent such net
operating loss carryforward limitation is not utilized in any tax year, it may
be carried forward to subsequent tax years and increases the subsequent years'
limitation.
Under the Puerto Rico Tax Incentives Act of 1987 (the "Act"), the Company was
granted 90% exemption from Puerto Rico income taxes of Glamourette Fashion
Mills, Inc. ("GFM"), a subsidiary of the Company, 75% exemption from property
F-19
and municipal taxes and was subject to tollgate taxes ranging from 0% to 5% on
dividends. These exemptions ceased with the sale of the Puerto Rico
manufacturing facilities in April 2000.
GFM had an election under Section 936 of the Internal Revenue Code pursuant to
which GFM's earnings were exempt from US taxes. However, dividends received from
GFM, together with certain other items, enter into the computation of the US
alternative minimum tax ("AMT"). Due to the Section 936 exemption and the
relative portion of GFM's earnings to other US taxable income in prior years,
management estimated that the Company would, more likely than not, be a
perpetual AMT taxpayer. Accordingly, since net operating losses ("NOL")
deductions are limited in calculating AMT, the Company had, prior to 1996,
determined that a valuation allowance was required with respect to NOL
carryforwards and AMT credit carryforwards. Since the assets of GFM were sold in
2000, the Company believes that it will incur regular US tax liabilities and
therefore will receive the benefit of a significant portion of the NOL.
Accordingly, the valuation allowance on the NOL and AMT carryforwards was
reversed in 2000.
The undistributed earnings of the Company's foreign subsidiaries are expected to
be permanently reinvested overseas and accordingly, deferred income taxes have
not been provided thereon.
During 2001, the Company recognized tax benefits related to capital losses
totaling $1,652,000. A valuation allowance has been established for $1,310,000,
the future tax benefit of the capital loss carryforwards, because it is
uncertain whether the Company will be able to generate capital gains to utilize
the capital loss carryforwards. The capital loss carryforward expires in 2006.
During 1999, the Internal Revenue Service made an examination of the Company's
consolidated tax return for the year ended December 31, 1996. The examination
resulted in an insignificant adjustment of the Company's income tax liability.
Note 11 - Commitments and Contingencies
- ---------------------------------------
The Company leases premises and equipment under (in thousands)
operating leases having terms from month-to-month -------------------------
to 7 years. At December 31, 2001, future minimum Year Lessee Lessor
lease payments under leases ("Lessee") having an -------------------------
initial or remaining non-cancelable term in excess 2002 $1,300 $2,167
of one year were as set forth in the adjacent table. 2003 1,310 1,645
2004 982 1,098
The Company also leases certain owned real estate 2005 558 761
properties of its Investment segment. Future 2006 262 409
minimum lease receipts by the Company for leases Thereafter - 1,037
("Lessor") having an initial or remaining non- -------------------------
cacelable term in excess of one year were as set Total $4,412 $7,117
forth in the adjacent table. =========================
Rent expense for operating leases was $1,494,000, $1,766,000 and $1,501,000 in
2001, 2000 and 1999, respectively.
Rental revenue was $2,594,000, $2,281,000 and $2,005,000 in 2001, 2000 and 1999,
respectively.
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, results of operations, or cash flow.
F-20
Note 12 - Capitalization and Warrants
- -------------------------------------
The Company's authorized capital stock consists of 10,000,000 shares of Common
Stock and 1,000,000 shares of serial preferred stock each having a par value of
$0.10 per share. No preferred stock has been issued by the Company.
In December 1990, the Company issued warrants to purchase 338,182 shares of the
Company's Common Stock through December 31, 2000, at an exercise price of $6.19
per share. The aggregate consideration for such warrants was $250,000. During
1997, the Company had repurchased 132,728 of these warrants and on December 12,
2000, the Company repurchased an additional 132,727 of these warrants at $1 per
share. The excess of the purchase price over the pro rata consideration paid
upon issue was charged against retained earnings. The 72,727 remaining warrants
were exercised on December 26, 2000.
Note 13 - Stock Options, Compensation Plans and Retirement Savings Plan
- -----------------------------------------------------------------------
In 1994, the Company registered 750,000 shares of its Common Stock under the
Securities Act of 1933, as amended, and on January 16, 2001, the Company
registered an additional 750,000 shares, as previously approved by the
Stockholders. These actions were in regards to the Hampshire Group, Limited 1992
Stock Option Plan, as amended, and the Hampshire Group, Limited Common Stock
Purchase Plan for Directors and Executives. Of these shares, 854,000 have been
issued under these plans.
Beginning in 1996, the Board of Directors of the Company authorized the
repurchase of shares of the Company's Common Stock, some of which would be used
to offset the dilution caused by the issuance of shares under the Stock Option
Plan and Stock Purchase Plan. During 2001, the Company repurchased 16,760 shares
of its Common Stock for $138,000.
The Company's repurchase of shares of Common Stock are recorded at cost as
"Treasury Stock" and result in a reduction of "Stockholders' Equity". When
treasury shares are reissued, the Company uses a weighted average cost method
and the excess of outstanding repurchased costs over reissue price is treated as
a reduction of "Retained Earnings".
Stock Options
- -------------
Options to purchase Hampshire Group, Limited Common Stock are granted at the
discretion of the Company's Board of Directors to executives and key employees
of the Company and its subsidiaries. No option may be granted with an exercise
price less than the fair market value per share of Common Stock at the date of
grant. All options have a maximum term of 10 years and become fully exercisable
after a maximum of 5 years from the date of grant.
Number of Weighted Average
Options Exercise Price
---------------------------------------------------------
Stock option activity Outstanding-January 1, 1999 412,016 $ 9.23
is set forth in the Granted 76,650 8.72
adjacent table. Exercised (143,718) 6.94
Canceled or expired (54,235) 10.95
---------------------------------------------------------
Outstanding-December 31, 1999 290,713 10.18
Granted 197,000 13.35
Exercised (53,864) 7.45
Canceled or expired (52,483) 9.72
---------------------------------------------------------
Outstanding-December 31, 2000 381,366 12.27
Granted 61,500 9.37
Exercised (34,360) 6.85
Canceled or expired (18,365) 11.60
---------------------------------------------------------
Outstanding-December 31, 2001 390,141 $12.32
=========================================================
F-21
SFAS 123, "Accounting for Stock-Based Compensation", allows companies to adopt
the fair value based method of accounting or to continue using the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options. Under APB
25, which the Company has elected not to use, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense was recognized in 2001, 2000, or
1999. Additionally, in accordance with SFAS 123, the Company is required to
disclose fair value information about its stock-based employee compensation
plans for all periods presented. If compensation expense for the Company's
stock-based compensation plans had been determined based on the fair value at
the grant dates for awards under those plans consistent with the method of SFAS
123, the Company's net income and earnings per share would have been reduced as
per the "pro forma" amounts in the accompanying table.
2001 2000 1999
In order to estimate ------------------------------------------------------
compensation cost Expected life (years) 5.9 6.5 6.2
under SFAS 123, the Expected volatility 24.3% 15.9% 22.5%
Black-Scholes model Dividend yield 0.0% 0.0% 0.0%
was employed using Risk-free interest rate 4.8% 5.5% 5.0%
the assumptions set ------------------------------------------------------
forth in the Weighted-average fair value
adjacent table. of options granted $3.02 $1.38 $2.71
======================================================
The adjacent table (in thousands) 2001 2000 1999
sets forth the ------------------------------------------------------
effect on net income Net income: As reported $11,080 $8,543 $5,196
and diluted earnings ========================
per share had compen- Pro forma $10,937 $8,390 $5,022
sation cost been ========================
determined in Diluted earnings per share:
accordance with As reported $2.37 $1.97 $1.22
SFAS 123. ========================
Pro forma $2.34 $1.93 $1.18
========================
A summary of the status of options outstanding at December 31, 2001 is set forth
in the table below.
Options Outstanding Options Exercisable
- ---------------------------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise Prices 12/31/01 Remaining Life Exercise Price 12/31/01 Exercise Price
- --------------- -------- -------------- -------------- --------- --------------
$ 7.87 - $ 8.63 86,669 5.30 $ 8.22 37,951 $ 8.24
8.90 - 10.00 74,782 3.19 9.71 - -
11.00 - 12.00 67,400 4.67 11.84 14,400 11.23
12.10 - 14.00 52,390 5.14 13.34 11,390 12.12
14.50 - 18.00 77,400 6.45 16.70 9,400 14.50
18.13 - 22.69 31,500 4.45 18.34 24,000 18.41
- ---------------------------------------------------------- -------------------------
$ 7.87 - $22.69 390,141 4.92 $12.32 97,141 $12.26
========================================================== =========================
The number of options exercisable was 97,141, 137,116 and 195,863 at December
31, 2001, 2000 and 1999, respectively.
Common Stock Purchase Plan
- --------------------------
Pursuant to the Hampshire Group, Limited 1992 Common Stock Purchase Plan for
Directors and Executives ("Stock Purchase Plan"), key executives may elect to
use up to 10% of their annual salaries and up to 40% of their annual bonuses to
purchase Common Stock of the Company. Non-employee Directors may elect to defer
their fees to purchase Common Stock of the Company. Contributions of annual
salaries, annual bonuses and non-employee director fees earned subsequent to
December 31, 2002 are not permitted.
F-22
The price at which Common Stock can be purchased under the Stock Purchase Plan,
with respect to the deferrals on the annual salaries of key executives is 90%
and for non-employee directors is 95%, of the fair market value of the Company's
Common Stock at the end of the calendar quarter. The number of shares of Common
Stock to be delivered to the Stock Purchase Plan with respect to deferrals on
the annual bonuses, is 90% of the lower of: (a) the average of the fair market
value of the Company's Common Stock at the end of each calendar quarter for the
Plan year, or (b) the fair market value of the Company's Common Stock as of the
end of the plan year.
Shares of the Company's Common Stock purchased pursuant to the Stock Purchase
Plan are distributed to the participants in accordance with their election made
prior to the deferral.
During the years 2001, 2000 and 1999, approximately $128,000, $434,000 and
$345,000, respectively, of participants' compensation, was used by the Stock
Purchase Plan to purchase Common Stock of the Company. The Company has
established a trust to which it delivers the shares of the Company's Common
Stock following the end of each plan year to satisfy such elections. The
deferred compensation liability and the Company's shares are presented as
offsetting amounts in the stockholders' equity section.
Voluntary Deferred Compensation Plan
- ------------------------------------
The Company has established the Hampshire Group, Limited Voluntary Deferred
Compensation Plan for Executives (the "Top Hat Plan"). Pursuant to the plan, key
executives could elect to defer up to 20% of the total compensation in each year
with such deferrals being invested in mutual funds external to the Company. The
Board of Directors resolved to discontinue deferrals under the Top Hat Plan for
compensation earned after December 31, 2000. During the years 2000 and 1999,
participants deferred $99,000 and $270,000, respectively, with the resulting
liability being included as deferred compensation in the accompanying
consolidated balance sheets.
To fund the deferred compensation liability, the Company has invested the
amounts deferred by the participants in certain mutual funds which are presented
as "Trading securities held in retirement trust" in the accompanying
consolidated balance sheets. The market value of these mutual funds at December
31, 2001 and 2000, was $1,142,000 and $1,349,000, respectively, which equal the
liability of the Company at the respective date. Shares of mutual funds
purchased pursuant to the Top Hat Plan are distributed to the participants in
kind, or in cash equal to the liquidation value of the shares, in accordance
with the participant's election made prior to the deferral.
Company Deferred Compensation Plans
- -----------------------------------
As a condition of their employment agreements, the Company contributes $100,000
annually to a deferred compensation plan on behalf of the Chief Executive
Officer and contributed $2,500 on behalf of the former Chief Financial Officer.
At the option of the executive, the cumulative amount may be invested in the
Company, accruing interest at 110% of the Applicable Federal Long-Term Interest
Rate, or may be invested in the Top Hat Plan.
In accordance with an unfunded deferred compensation agreement with the
President of Hampshire Designers, Inc., the Company accrued $471,000 during 2001
and $240,000 during 2000.
Retirement Savings Plan
- -----------------------
The Company has a Hampshire Group, Limited and Subsidiaries 401(k) Retirement
Savings Plan under which all employees may participate after having completed at
least one year of service and having reached the age of twenty years. The
Company's matching contribution is determined annually at the discretion of the
Board of Directors and was $125,000, $210,000 and $297,000 in 2001, 2000 and
1999, respectively. Such matching contributions vest fully after six years of
employment.
F-23
Note 14 - Related Party Transactions
- ------------------------------------
The Company leases certain buildings from an affiliated company. Ludwig Kuttner,
Chief Executive Officer of the Company, and his wife together own approximately
18% of the voting stock of the affiliate. Rent expense under such leases was
$234,000, $232,000 and $216,000 in 2001, 2000 and 1999, respectively. The
Company also leases certain buildings from a director of the Company, Peter
Woodworth, his wife and certain of his relatives. Rent expense under such leases
was $158,000, $164,000 and $201,000, respectively, for 2001, 2000 and 1999. The
terms of these leases were approved by the Board of Directors of the Company
based on independent confirmation that the leases are fair and reasonable and
are at market terms. Mr. Kuttner received a fee for guaranteeing certain of the
Company's debt of $59,000 in 2001 and $24,000 in 2000.
During 1999, Hampshire Investments made advances supported by two promissory
notes in the aggregate principal amount of $775,000. The issuers defaulted under
the notes and on March 30, 2000, the Chairman and Chief Executive Officer of the
Company purchased the notes from Hampshire Investments for their aggregate
principal amount.
Mr. Harvey L. Sperry, a director of the Company, is a retired partner in the law
firm of Willkie Farr & Gallagher, provided consulting services to the Company
and was paid $12,000 in fees during 2001.
Dr. Joel Goldberg, a director of the Company, is a principal in Career
Consultants, Inc., which has provided human resource consulting services to the
Company since 1997 and in such capacity was paid fees in the amount of $5,000,
$25,000 and $7,000 during the years 2001, 2000 and 1999, respectively.
The son of Mr. Kuttner was the independent contractor managing certain
renovations on the real property owned by the Company located in
Charlottesville, Virginia. The Company paid the contractor $34,000, $20,000 and
$10,000 during the years 2001, 2000 and 1999, respectively. The contractor will
receive as future consideration, 30% of the net cash flow of the property after
the Company has received a 10% return on its investment. Another son of the
Chairman and Chief Executive Officer of the Company worked on this project as a
subcontractor. His company was paid $70,000 in 2001 and $45,000 in 2000.
Note 15 - Sale of Assets
- ------------------------
On April 28, 2000, the Company sold all sweater manufacturing assets, except
finished goods inventory, to Glamourette/OG, Inc. ("Glamourette"), a Puerto
Rican corporation, for a sales price of $10,468,000. The sales price included a
promissory note in the amount of $8,000,000, discounted to $6,468,000, at 8.75%
per annum and due April 28, 2005. The sale resulted in a gain of $632,000 which
has been classified as "net loss (gain) on sale of property, plant and equipment
and related charges" in the accompanying consolidated statement for 2000. The
note is payable by a deduction of $0.67 per sweater purchased from Glamourette
or is payable in cash, and is partially collateralized by machinery and
equipment and by the pledge of the common stock of Glamourette. During the
fourth quarter of 2001, the Company served notice to Glamourette of default on
the loan agreement from the sale of the sweater manufacturing assets. Subsequent
to this notice Glamourette filed for bankruptcy. As a result of these
events the Company has fully reserved the unpaid balance of the promissory note
due from Glamourette in the amount of $3,893,000. The Company had reserved
$2,100,000 of the note balance in 2000 due to the deteriorating financial
condition of Glamourette and the remaining $1,793,000 was provided during 2001
based on the continued deterioration of Glamourette's financial condition.
F-24
Note 16 - Discontinued Operations
- ---------------------------------
In 1998 the Company's Board of Directors approved a plan to discontinue and sell
the assets of the Hosiery Division, which was engaged in the manufacture and
sale of ladies and children's hosiery and socks. On June 1, 1999, the Company
sold the assets of the Hosiery Division, consisting principally of inventory and
certain machinery and equipment and agreed to lease other equipment to the
purchaser. The difference between the book basis of the assets sold and the
selling price was established as a valuation reserve against an 8.25% promissory
note received as part of the consideration from the sale. No gain on the sale
was recognized pending collection of the note.
On December 5, 2000, the purchaser entered into an agreement to sell
substantially all of its assets, other than the accounts receivable, to a
competing hosiery company, which included the sale of the leased equipment. The
sales price of the leased equipment was $750,000 and was paid with a promissory
note payable in 36 equal monthly installments commencing February 1, 2001, with
interest at prime. The gain on sale of the leased equipment is included with the
net gain on sale of property, plant and equipment and related charges and the
$633,000 in proceeds received against the 8.25 % promissory note from the sale
was reported as gain from disposal of discontinued operations, net of a $235,000
provision for income taxes, during the year ended December 31, 2000.
Note 17 - 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.
For the Year 1999 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- ----------------------------------------------------------------------------------------
Basic EPS:
Net income $5,196 4,100 $1.27
Effect of dilutive securities-options/warrants - 157 (0.05)
- ----------------------------------------------------------------------------------------
Diluted EPS:
Net income $5,196 4,257 $1.22
========================================================================================
For the Year 2000 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- ----------------------------------------------------------------------------------------
Basic EPS:
Income from continuing operations $8,145 - $1.91
Gain from disposal of discontinued operations 398 - 0.09
---------------------------------------------------------------------------------------
Net income 8,543 4,265 2.00
Effect of dilutive securities-options/warrants - 76 (0.03)
- ----------------------------------------------------------------------------------------
Diluted EPS:
Net income $8,543 4,341 $1.97
========================================================================================
For the Year 2001 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- ----------------------------------------------------------------------------------------
Basic EPS:
Net income $11,080 4,661 $2.38
Effect of dilutive securities-options/warrants - 13 (0.01)
- ----------------------------------------------------------------------------------------
Diluted EPS:
Net income $11,080 4,674 $2.37
========================================================================================
F-25
Note 18 - Industry Segments and Geographical Areas
- --------------------------------------------------
The Company operates in two industry segments - Apparel and Investments. The
Apparel 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. Some of the Company's major customers operate both retail
and mail order businesses; therefore, it is not possible for the Company to
determine sales to the individual markets. The Investments segment makes
investments both domestically and internationally, principally in real property
as set forth on pages F-29 and F-30.
F-26
Note 18 - Industry Segments and Geographical Areas (continued)
- --------------------------------------------------------------
Year Ended December 31, (in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------
Net sales Apparel $263,485 $196,882 $151,317
Rental revenue Investments 2,594 2,281 2,005
--------------------------------
$266,079 $199,163 $153,322
- -----------------------------------------------------------------------------
Revenue by geographic area United States $265,018 $198,257 $152,296
Russia 437 384 303
Europe 624 522 723
--------------------------------
$266,079 $199,163 $153,322
- ---------------------------------------------================================
Gross profit Apparel $69,827 $40,129 $29,700
26.5% 20.4% 19.6%
- -----------------------------------------------------------------------------
Income (loss) from operations Apparel $24,245 $13,739 $8,700
Investments (456) 13 295
Corporate (3,530) (1,165) (3,080)
--------------------------------
$20,259 $12,587 $5,915
- ---------------------------------------------================================
Interest expense Apparel $ 321 $ 495 $ 599
Investments 868 723 514
Corporate 2,242 2,192 854
--------------------------------
$3,431 $3,410 $1,967
- ---------------------------------------------================================
Interest income Apparel $231 $255 $ 16
Investments 47 152 227
Corporate 283 946 486
--------------------------------
$561 $1,353 $729
- ---------------------------------------------================================
Income tax provision - net Apparel $5,990 $2,200 $2,453
Investments (115) 44 286
Corporate 325 (73) (1,839)
--------------------------------
$6,200 $2,171 $900
- ---------------------------------------------================================
Identifiable assets Apparel $74,903 $85,021 $52,212
Investments 34,527 29,510 24,015
Corporate 35,507 18,121 27,367
--------------------------------
$144,937 $132,652 $103,594
- ---------------------------------------------================================
Capital expenditures Apparel $ 204 $ 177 $ 843
and long-term asset Investments 8,502 9,042 8,093
expenditures Corporate 90 6 8
--------------------------------
$8,796 $9,225 $8,944
- ---------------------------------------------================================
Depreciation and Apparel $1,549 $2,390 $4,091
amortization Investments 1,001 822 636
Corporate 69 196 241
--------------------------------
$2,619 $3,408 $4,968
- ---------------------------------------------================================
Long-lived assets United States $20,808 $17,518 $20,970
excluding long-term Russia 3,285 3,218 2,766
investments Europe 7,457 4,701 2,951
--------------------------------
$31,550 $25,437 $26,687
- ---------------------------------------------================================
Long-term investments United States $3,109 $3,381 $2,268
Russia 131 131 131
Europe 566 1,838 2,138
--------------------------------
$3,806 $5,350 $4,537
- ---------------------------------------------================================
F-27
SCHEDULE II
HAMPSHIRE GROUP, LIMITED
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Charged to
beginning sales and Other Balance at
of year expenses Deductions adjustments end of year
---------------------------------------------------------
Year Ended December 31, 1999
- ----------------------------
Allowance for doubtful accounts $ 453 $ 81 ($ 99) ($ 100)(1) $ 335
Allowance for returns and adjustments 3,219 7,313 (5,543) (250)(1) 4,739
Year Ended December 31, 2000
- ----------------------------
Allowance for doubtful accounts $ 335 $ 25 ($ 95) $ 204(2) $ 469
Allowance for returns and adjustments 4,739 8,129 (8,314) 2,019 6,573
Year Ended December 31, 2001
- ----------------------------
Allowance for doubtful accounts $ 469 ( $ 53) ($ 156) - $ 260
Allowance for returns and adjustments 6,573 11,140 (11,143) - 6,570
- -------------------------------------------------------------------------------------------------
(1) Adjustment of reserve resulting from change in estimate for the Hosiery
division, which was discontinued.
(2) Balance resulting from acquisition of Item-Eyes, Inc.
F-28
SCHEDULE III
1 of 2a
HAMPSHIRE GROUP, LIMITED
REAL PROPERTY AND ACCUMULATED DEPRECIATION
(in thousands)
December 31, 2001
- ------------------------------------------------------------------------------------------------------------
Cost Capitalized
Subsequent
Initial Cost to Acquisition
------- --------------------------- -----------------
Encum- Land and Land/Building
Properties brances Land Buildings Buildings Improvements
- ------------------------------------------------------------------------------------------------------------
UNITED STATES
- --------------------------------------------------
Residential/Commercial Blg - Charlottesville, VA
(parking lot) $3,159 $ 432 $ 397 $ 829 $10,187
Hidden Creek Development - Blanco, Texas 407 999 - 999 586
Merrick Properties - Huntington, New York 1,775 620 1,500 2,120 616
PA Properties - Washington, D.C. 2,110 764 1,687 2,451 190
Teall Properties - Syracuse, New York 1,139 585 1,076 1,661 53
Manufacturing Plant - Spruce Pine, North Carolina - 64 2,028 2,092 -
- -------------------------------------------------------------------------------------------------------------
Total United States Real Property 8,590 3,464 6,688 10,152 11,632
- -------------------------------------------------------------------------------------------------------------
ST. PETERSBURG, RUSSIA
- --------------------------------------------------
Bolshaya Knonushennaya No. 15, Unit No. 2 - - 152 152 195
Nevsky 64, Unit No. 43 - - 330 330 246
Nevsky 43, Unit No. 1 - - 255 255 275
Nevsky 11, Unit No. 6 - - 182 182 150
Millionnaya 29, Unit No. 3 - - 210 210 183
Nevsky 23, Unit No. 4 - - 155 155 152
Nevsky 11, Unit No. 7 - - 182 182 150
Nevsky 23, Unit No. 20 - - 203 203 228
Nevsky 64, Unit No. 39 - - 130 130 100
Nevsky 11, Unit No. 8 - - 160 160 145
Nevsky 13, Unit No. 4 - - 101 101 98
Millonaya 11, Embankment, Unit No. 65 - - 175 175 119
Millonaya 29, Unit No. 5 - - 200 200 170
Nevsky 64, Unit No. 42 - - 60 60 74
Millionnaya 29, Penthouse - - 60 60 335
Millionnaya 29, Unit No. 7 - - 200 200 184
Millionnaya 29, Unit No. 6 - - 153 153 7
Millionnaya 11, Embankment, Unit No. 62 - - 63 63 -
Kutuzova Embankment, Bldg. 30, Unit 41 - - 108 108 -
- ------------------------------------------------------------------------------------------------------------
Total Russian Real Property - - 3,079 3,079 2,811
Real Property Write-Down - - - - -
- ------------------------------------------------------------------------------------------------------------
Net Russian Real Property - - 3,079 3,079 2,811
- ------------------------------------------------------------------------------------------------------------
F-29
SCHEDULE III
2 of 2b
- ------------------------------------------------------------------------------------------------------------
Real Property and Accumulated Depreciation (Continued)
- ------------------------------------------------------------------------------------------------------------
Cost Capitalized
Subsequent
Initial Cost to Acquisition
------- --------------------------- -----------------
Encum- Land and Land/Building
Properties brances Land Buildings Buildings Improvements
- ------------------------------------------------------------------------------------------------------------
BUCHAREST, ROMANIA
- -----------------------------------------------
Jean Texier Street, No. 7, Unit No. 1 - - 174 174 -
Nicolae Balcescu Blvd. No. 5, Unit No. 32 - - 47 47 -
Nicolae Balcescu Blvd. No. 5, Unit No. 35 - - 88 88 -
Television Blvd. Unit No. 1 - - 73 73 23
Urban District 1, Str. Naum Rimniceanu nr.
2-4, B1.5 Apt No. 7 - - 32 32 9
Urban District 1
Calea Dorobantitor nr. 134-138, sc. A Unit No. 4 - - 26 26 16
- ------------------------------------------------------------------------------------------------------------
Impairment Reserve - - - - -
- ------------------------------------------------------------------------------------------------------------
Total Romanian Real Property - - 440 440 48
- ------------------------------------------------------------------------------------------------------------
PRAGUE, CZECH REPUBLIC
- ------------------------------------------------
Office Building, Slikova 55 Praha 757 - 314 314 586
Office Building, Belgicka 14 Praha 649 - 782 782 592
Office Building, Belgicka 16 Praha 1,138 - 590 590 1,328
Office Building, Business Parc Vraz 398 - 466 466 485
Office Building, Husinecka, Praha 679 - 1,387 1,387 59
Office Building, Belgicka 20 Praha 527 - 997 997 37
- ------------------------------------------------------------------------------------------------------------
Total Czech Republic Real Property 4,148 - 4,536 4,536 3,087
- ------------------------------------------------------------------------------------------------------------
$12,738 $3,464 $14,743 $18,207 $17,578
- ------------------------------------------------------------------------------------------------------------
F-30
SCHEDULE III
1 of 2a
HAMPSHIRE GROUP, LIMITED
REAL PROPERTY AND ACCUMULATED DEPRECIATION
(in thousands)
December 31, 2001
- -------------------------------------------------------------------------------------------------------
Gross Amount at Which Carried
at the End of Period
------------------------------
Building and Accumulated
Properties Land Improvements Total Depreciation
- ------------------------------------------------------------------------------------ ----------------
UNITED STATES
- --------------------------------------------------
Residential/Commercial Blg - Charlottesville, VA
(parking lot) $ 507 $10,509 $11,016 ($ 203)
Hidden Creek Development - Blanco, Texas 1,585 - 1,585 -
Merrick Properties - Huntington, New York 620 2,116 2,736 (288)
PA Properties - Washington, D.C. 764 1,877 2,641 (404)
Teall Properties - Syracuse, New York 585 1,129 1,714 (197)
Manufacturing Plant - Spruce Pine, North Carolina 64 2,028 2,092 (1,985)
- ---------------------------------------------------------------------------------------------------------
Total United States Real Property 4,125 17,659 21,784 (3,077)
- ---------------------------------------------------------------------------------------------------------
ST PETERSBURG, RUSSIA
- --------------------------------------------------
Bolshaya Knonushennaya No. 15, Unit No. 2 - 347 347 (1)
Nevsky 64, Unit No. 43 - 576 576 (1)
Nevsky 43, Unit No. 1 - 530 530 (1)
Nevsky 11, Unit No. 6 - 332 332 (1)
Millionnaya 29, Unit No. 3 - 393 393 (1)
Nevsky 23, Unit No. 4 - 307 307 (1)
Nevsky 11, Unit No. 7 - 332 332 (1)
Nevsky 23, Unit No. 20 - 431 431 (1)
Nevsky 64, Unit No. 39 - 230 230 (1)
Nevsky 11, Unit No. 8 - 305 305 (1)
Nevsky 13, Unit No. 4 - 199 199 -
Millonaya 11, Embankment, Unit No. 65 - 294 294 (1)
Millonaya 29, Unit No. 5 - 370 370 (1)
Nevsky 64, Unit No. 42 - 134 134 -
Millionnaya 29, Penthouse - 395 395 (2)
Millionnaya 29, Unit No. 7 - 384 384 (2)
Millionnaya 29, Unit No. 6 - 160 160 (1)
Millionnaya 11, Embankment, Unit No. 62 - 63 63 -
Kutuzova Embankment, Bldg. 30, Unit 41 - 108 108 -
- ---------------------------------------------------------------------------------------------------------
Total Russian Real Property - 5,890 5,890 (17)
Real Property Write-Down - (2,617) (2,617) -
- ---------------------------------------------------------------------------------------------------------
Net Russian Real Property - 3,273 3,273 (17)
- ---------------------------------------------------------------------------------------------------------
F-29
SCHEDULE III
2 of 2b
- --------------------------------------------------------------------------------------------------------
Real Property and Accumulated Depreciation (Continued)
- --------------------------------------------------------------------------------------------------------
Gross Amount at Which Carried
at the End of Period
------------------------------
Building and Accumulated
Properties Land Improvements Total Depreciation
- ------------------------------------------------------------------------------------ ----------------
BUCHAREST, ROMANIA
- -----------------------------------------------
Jean Texier Street, No. 7, Unit No. 1 - 174 174 (1)
Nicolae Balcescu Blvd. No. 5, Unit No. 32 - 47 47 -
Nicolae Balcescu Blvd. No. 5, Unit No. 35 - 88 88 -
Television Blvd. Unit No. 1 - 96 96 (1)
Urban District 1, Str. Naum Rimniceanu nr.
2-4, B1.5 Apt No. 7 - 41 41 -
Urban District 1
Calea Dorobantitor nr. 134-138, sc. A Unit No. 4 - 42 42 -
- ---------------------------------------------------------------------------------------------------------
Impairment Reserve - (138) (138) -
- ---------------------------------------------------------------------------------------------------------
Total Romanian Real Property - 350 350 (2)
- ---------------------------------------------------------------------------------------------------------
PRAGUE, CZECH REPUBLIC
- ------------------------------------------------
Office Building, Slikova 55 Praha - 900 900 -
Office Building, Belgicka 14 Praha - 1,374 1,374 (45)
Office Building, Belgicka 16 Praha - 1,918 1,918 -
Office Building, Business Parc Vraz - 951 951 (72)
Office Building, Husinecka, Praha - 1,446 1,446 (280)
Office Building, Belgicka 20 Praha - 1,034 1,034 (157)
- ---------------------------------------------------------------------------------------------------------
Total Czech Republic Real Property - 7,623 7,623 (554)
- ---------------------------------------------------------------------------------------------------------
$4,125 $28,905 $33,030 ($3,650)
- ---------------------------------------------------------------------------------------------------------
F-30
SCHEDULE III
2 of 2
(continued)
HAMPSHIRE GROUP, LIMITED
REAL PROPERTY AND ACCUMULATED DEPRECIATION
(in thousands)
- --------------------------------------------------------------------------------
Depreciation and amortization of the Company's investment in buildings and
improvements reflected in the statements of operations are calculated over the
estimated useful lives of the assets as follows:
Base Building 15 years and 39 years for new construction
Improvement Over remaining useful lives of the building
The aggregate cost for income tax purposes was approximately $33,030 at December
31, 2001.
The changes in total real property assets and accumulated depreciation for the
period ending December 31, 2001 are as follows:
Total Real Property Assets Accumulated Depreciation
- -------------------------- ------------------------
Balance, beginning of period $26,325 Balance, beginning of period ($3,532)
Acquisitions 201 Depreciation (1,016)
Additions and improvements 8,039 Property sale 80
Property sale (450) Write-off with impairment 663
Property impairment (905) Property donation 155
-------
Property donation (180) Balance, end of period ($3,650)
------- =======
Balance, end of period $33,030
=======
F-30
Quarterly Financial Data (unaudited)
(in thousands, except per share data)
Annual
In 2000 Quarter Ended Apr. 1 Jul. 1 Sept. 30 Dec. 31 Total
- -------------------------------------------------------------------------------------------------------
Net sales $14,580 $12,832 $81,839 $87,631 $196,882
Gross profit 2,361 1,608 15,522 20,638 40,129
Operating income (loss) (2,843) 16 6,966 8,448 12,587
--------------------------------------------------
Income (loss) from continuing operations ($1,961) ($822) $5,072 $5,856 $8,145
==================================================
Net income (loss) ($1,961) ($822) $5,072 $6,254 $8,543
==================================================
Income (loss) from continuing operations - Basic ($0.48) ($0.20) $1.18 $1.29 $1.91
==================================================
- Diluted ($0.48) ($0.20) $1.16 $1.28 $1.88
==================================================
Net income (loss) per common share - Basic ($0.48) ($0.20) $1.18 $1.38 $2.00
==================================================
- Diluted ($0.48) ($0.20) $1.16 $1.36 $1.97
==================================================
- -------------------------------------------------------------------------------------------------------
Annual
In 2001 Quarter Ended Mar. 31 Jun. 30 Sept. 29 Dec. 31 Total
- -------------------------------------------------------------------------------------------------------
Net sales $37,434 $26,008 $101,617 $98,426 $263,485
Gross profit 7,262 4,907 25,371 32,287 69,827
Operating income (loss) (1,266) (2,876) 11,865 12,536 20,259
==================================================
Income (loss) from continuing operations ($1,163) ($2,114) $ 6,505 $ 7,852 $11,080
==================================================
Net income (loss) ($1,163) ($2,114) $ 6,505 $ 7,852 $11,080
==================================================
Net income (loss) per common share - Basic ($0.25) ($0.45) $1.39 $1.68 $2.38
==================================================
- Diltued ($0.25) ($0.45) $1.39 $1.67 $2.37
==================================================
F-31
HAMPSHIRE GROUP, LIMITED
2001 EXHIBIT INDEX
Exhibit No. Description
- ------------------------------------------------------------------------------
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.