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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, 2002.
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
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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates based on the closing price of $22.98 on the last business day of
the second fiscal quarter (June 28, 2002), was $29,291,000. 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.
As of March 24, 2003, the Registrant had outstanding 4,696,201 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement, relative to its
2003 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
2002 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 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 20
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 20
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 and Related Stockholder Matters 20
Item 13. Certain Relationships and Related Transactions 20
Item 14. Controls and Procedures 20
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 21
Signature Page 24
Certifications 25
Report of Independent Accountants F-2
Consolidated Financial Statements F-3
Financial Statement Schedules F-28
Quarterly Financial Data F-31
2
PART I
ITEM 1 - BUSINESS
GENERAL
- -------
Hampshire Group, Limited ("Hampshire Group" or the "Company"), a Delaware
corporation, operates in two business segments - Apparel and Investments. The
Apparel segment is composed of Hampshire Designers, Inc. ("Hampshire Designers")
and Item-Eyes, Inc. ("Item-Eyes"), wholly owned subsidiaries of the Company.
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 Company's 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 net sales and operating income 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.
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 Company's 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, inspection agencies and independent test labs 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
domestic distribution facilities, however, goods sourced from the Far East are
distributed primarily through public warehouses strategically located in
California, which improves 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 its asset base, the Company established Hampshire Investments to
make long-term investments primarily in domestic and international real
property.
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 retail stores and catalog companies.
Product Lines
- -------------
The Company has significantly expanded its product lines. A decade ago, the
Company's product line was primarily focused on women's full-fashion, Luxelon(r)
(acrylic yarn) 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,
was added. Beginning in 2001, the Company was licensed to manufacture and market
women's sweaters under the RIDERS(R) labels.
A line of men's sweaters has also been developed over the past seven years
through strategic expansion of brand name licensing. Hampshire Brands is
licensed to manufacture and market men's sweaters under the Geoffrey Beene(R),
Dockers(R), Levi's(R), Wrangler Hero(R) and Timbercreek by Wrangler(R) labels.
During 2002 Hampshire Brands created and introduced two new brands, Spring +
Mercer(R) and Mercer Street Studio(R). 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's 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
yarn) sweaters with a cashmere feel and look. Designers Originals(R) sweaters
also include a line of fine-gauge, full-fashion, cotton sweaters and a variety
of other novelty sweaters.
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", is sold by Item-Eyes under its Requirements(R) and Nouveaux(R) labels
and the private-labels of some of the Company's customers. For Fall of 2003,
Item-Eyes plans to launch "RQT", a new updated casual lifestyle label.
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 retail stores serviced
by the Company has not decreased. The Company has historical relationships with
many of its approximately 250 customers, which include most major department
stores and mass merchandisers, specialty retail stores and catalog companies.
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 and distributors located in the United States, its primary
competition comes from manufacturers located in Southeast Asia. The Company also
competes for private label programs with the internal sourcing departments of
many of its own customers.
The Company's 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.
The ability of the Company to compete is enhanced by its financial strength.
INVESTMENT OPERATIONS
- ---------------------
Hampshire Investments was established by the Company in 1997 to diversify the
asset base of the Company. At the end of 2002, the carrying value of its
investments was approximately $33 million, of which approximately 87% was
invested in real properties. The investment decisions proposed by management of
Hampshire Investments are approved 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 75% of net sales occurring during the third and
fourth quarters.
5
BACKLOG
- -------
The sales order backlog for the Apparel segment was approximately $111 million
as of March 1, 2003, compared with approximately $123 million as of March 2,
2002. 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.
TRADEMARKS AND LICENSES
- -----------------------
The Company considers its own 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 provided the Company achieves a specified sales level
during the term.
ELECTRONIC INFORMATION SYSTEMS
- ------------------------------
In order to schedule production, 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 75% of all orders are received electronically. These orders are
generated by the customers' computer systems based on 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 2002, which represented 14%, 11% and 11% of total
sales; three major customers during 2001, which represented 14%, 11% and 10% of
total sales; and two major customers in 2000, which represented 15% and 14% of
total sales. The Company's five largest customers accounted for approximately
49% of the Company's consolidated sales in 2002, compared with 49% in 2001 and
50% in 2000.
EMPLOYEES
- ---------
As of March 1, 2003, the Company had approximately 242 full-time employees and 4
part-time employees. The Company and its employees are not parties to any
collective bargaining agreements except for 15 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 environmental protection agencies. The Company believes it has
operated, and intends to continue to operate, in compliance in all material
respects with these regulations.
6
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. Any material increase in tariffs, material decrease in quota levels or
material decrease in available quota allocations, could adversely affect the
Company's operation. These quotas and tariffs are expected to continue in some
form through 2004. The agreements impose quotas on the amount and type of
competing goods which may be shipped into the United States from some countries.
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 04/30/04
- ----------------
Hampshire Designers
- -------------------
Sales Office and Showroom - New York, New York 24,000 08/31/11
Distribution Center - Anderson, South Carolina 57,000 04/30/04
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. Management believes that no currently pending
litigation to which the Company 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
- ------------------------------------------------------------
A Special Meeting of Stockholders was held on November 21, 2002. At the Special
Meeting, action was taken to vote on a proposal to approve the Hampshire Group,
Limited Management Incentive Bonus Plan. The result of the vote was 4,111,603
for, 43,535 against, 0 withheld, 138,925 abstained and 0 brokers non-vote.
7
PART II
ITEM 5 - MARKET FOR 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, 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
Year Ended December 31, 2002:
- ----------------------------
First Quarter $19.45 $12.10
Second Quarter 22.98 16.75
Third Quarter 26.50 15.25
Fourth Quarter 22.48 16.00
As of March 27, 2003, the Company had approximately 450 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 Company's Senior Notes and Revolving Credit Facility 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
Selected Consolidated Financial Data
(in thousands, except per share data)
Year Ended December 31, 2002 2001 2000(2) 1999 1998
- -------------------------------------------------------------------------------
INCOME STATEMENT DATA (1)
Net sales $293,268 $261,361 $195,372 $150,394 $168,027
Cost of goods sold 210,336 192,546 155,721 120,748 132,850
-------------------------------------------------
Gross profit 82,932 68,815 39,651 29,646 35,177
Rental revenue 3,194 2,594 2,281 2,005 507
-------------------------------------------------
86,126 71,409 41,932 31,651 35,684
Selling, general and
administrative expenses 54,259 47,656 31,188 25,057 25,229
Net loss (gain) on sale of
property, plant and equipment
and related charges - 2,618 (2,308) 285 1
Net investment transactions and
impairment 3,277 876 465 394 2,267
-------------------------------------------------
Income from operations 28,590 20,259 12,587 5,915 8,187
Other income (expense):
Interest expense (2,016) (3,431) (3,410) (1,967) (1,696)
Interest income 476 561 1,353 729 243
Other 98 (109) (214) 1,419 270
-------------------------------------------------
Income from continuing
operations before provision
for income taxes and discon-
tinued operations 27,148 17,280 10,316 6,096 7,004
Income tax (provision) benefit:
Current (11,907) (7,503) (2,157) (563) (1,471)
Deferred 1,807 1,303 (14) (337) 194
-------------------------------------------------
Income from continuing
operations (3) $17,048 $11,080 $8,145 $5,196 $5,727
=================================================
Income per share from
continuing
operations: Basic $3.62 $2.38 $1.91 $1.27 $1.39
=================================================
Diluted $3.53 $2.37 $1.88 $1.22 $1.29
=================================================
Weighted average number of shares
outstanding: Basic 4,711 4,661 4,265 4,100 4,128
=================================================
Diluted 4,834 4,674 4,341 4,257 4,443
=================================================
- -------------------------------------------------------------------------------
Year Ended December 31, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash and cash equivalents $ 67,620 $ 28,686 $ 10,517 $ 23,831 $ 13,886
Working capital 83,500 67,315 58,184 56,141 51,283
Total assets 166,477 144,937 132,652 103,594 100,848
- -------------------------------------------------------------------------------
Long-term debt (less current
portion) and deferred
compensation 19,877 23,855 26,393 27,039 22,505
Total debt (4) 22,700 31,576 31,821 28,457 24,287
Stockholders' equity (5) 108,987 91,229 79,640 67,326 63,403
- -------------------------------------------------------------------------------
Book value per share $23.09 $19.44 $17.15 $16.36 $15.03
- ------------------------------=================================================
(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) Fiscal years 2001, 2000, 1999 and 1998 include goodwill amortization, net
of income taxes, of $543,000, $546,000, $415,000, and $343,000,
respectively. Effective January 1, 2002, the Company is no longer permitted
to amortize goodwill as result of adoption of SFAS No. 142 (see Note 1 to
the consolidated financial statements).
(4) Includes long-term debt, current portion thereof, borrowing under the
credit facility, related party debt, subordinated notes and deferred
compensation.
(5) 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 OF COMPANY SEGMENTS
The following table sets forth information with respect to the segments of the
Company's business (1):
Year Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------
Net sales Apparel $293,268 $261,361 $195,372
- ------------------------------------------------------------------------------
Gross profit Apparel 82,932 68,815 39,651
(as a percent of revenue) 28.3% 26.3% 20.3%
- ------------------------------------------------------------------------------
Rental revenue Investments 3,194 2,594 2,281
- ------------------------------------------------------------------------------
Total revenue 296,462 263,955 197,653
- ------------------------------------------------------------------------------
Selling, general and Apparel (4) 47,669 41,952 26,950
administrative expenses Investments (2) 2,443 2,174 1,646
Corporate (3) 4,147 3,530 2,592
------------------------------------
54,259 47,656 31,188
(as a percent of total revenue) 18.3% 18.1% 15.8%
Net loss (gain) on sale of
property, plant and equipment
and related charges Apparel - 2,618 (2,308)
Net investment transactions
and impairment charges Investments 3,277 876 465
------------------------------------
57,536 51,150 29,345
- ------------------------------------------------------------------------------
Income from operations Apparel 35,263 24,245 13,739
Investments (2,526) (456) 13
Corporate (4,147) (3,530) (1,165)
------------------------------------
Income from operations 28,590 20,259 12,587
(as a percent of total revenue) 9.6% 7.7% 6.4%
Interest expense (2,016) (3,431) (3,410)
Interest income 476 561 1,353
Other income (expense) (2) (3) 98 (109) (214)
- ------------------------------------------------------------------------------
Income from continuing
operations before income taxes $ 27,148 $ 17,280 $ 10,316
- ------------------------------------------====================================
(1) Additional segment data is provided in Note 17 of the consolidated
financial statements included in this Annual Report.
(2) Selling, general and administrative expenses of Hampshire Investments
include depreciation of $1,290,000, $1,001,000 and $822,000 for 2002, 2001
and 2000, respectively.
(3) Selling, general and administrative expenses for corporate include an
adjustment of ($285,000), ($158,000) and ($452,000) for 2002, 2001 and
2000, respectively, to compensation expense resulting from market losses in
the Company's mutual funds associated with the Deferred Compensation Plan,
and other expense includes a like amount of decrease in the market value of
the underlying securities.
(4) Fiscal years 2001 and 2000 includes goodwill amortization of $848,000 and
$685,000, respectively. Effective January 1, 2002, the Company is no longer
permitted to amortize goodwill as a result of adoption of SFAS No. 142 (see
Note 1 to the consolidated financial statements).
10
RESULTS OF OPERATIONS
2002 Compared With 2001
- -----------------------
Net Sales
- ---------
Net sales for the year ended December 31, 2002 were $293,268,000, compared to
$261,361,000 for 2001, an increase of $31,907,000 or 12.2%. Units shipped for
the year ended December 31, 2002 exceeded units shipped during the same period
last year by approximately 429,000 dozen or 21.6%. The increase was primarily
due to an increase in sales of women's sweaters. The average sales price per
unit declined 7.7% primarily due to a shift in product mix.
Gross Profit
- ------------
Gross profit for the year ended December 31, 2002 was $82,932,000, compared to
$68,815,000 for 2001, an increase of $14,117,000 or 20.5%. As a percentage of
net sales, gross profit margin was 28.3% for 2002, compared with 26.3% for 2001.
The increase in gross profit is attributed primarily to an increase in unit
volume of products sold, controlling cost associated with sourcing and changes
in customer programs (product mix).
Rental Revenues
- ---------------
Rental revenues from the Investments segment for the year ended December 31,
2002 were $3,194,000, compared to $2,594,000 for 2001, an increase of $600,000
or 23.1%. The increase in revenues resulted primarily from leasing recently
renovated domestic rental property.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the Company were
$54,259,000 for the year ended December 31, 2002, compared to $47,656,000 for
2001, an increase of $6,603,000 or 13.9%. As a percentage of net sales, SG&A
expenses were 18.5% for 2002, compared with 18.2% for 2001. The higher SG&A
expenses resulted primarily from additional marketing, designing, shipping and
related expenses caused by the increased sales volume and higher incentive
bonuses due to the increased income in 2002. With the adoption of SFAS No. 142
on January 1, 2002, the Company did not amortize goodwill for the year ended
December 31, 2002, while goodwill amortization was $847,000 in 2001. SG&A
expenses for the Investments segment were $2,443,000 for the year ended December
31, 2002, compared to $2,174,000 for 2001, an increase of $269,000 or 12.4%. The
increase resulted primarily from additional depreciation expense on the recently
renovated domestic rental property.
Net Gain or Loss on Sale of Property, Plant and Equipment and Related Charges
- -----------------------------------------------------------------------------
During the year ended December 31, 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 from Glamourette in the amount of
$8,000,000, discounted to $6,468,000, at 8.75% per annum and due April 28, 2005.
During the fourth quarter of 2001, the Company notified Glamourette that it was
in default under the loan agreement with respect to the sale of the sweater
manufacturing assets and that the Company would recoup approximately $1,100,000
due to the Company from Glamourette. Subsequent to this notice Glamourette filed
for bankruptcy and accordingly, the Company reserved the remaining $1,793,000
due on the note and the $1,100,000 recouped. During 2002, Glamourette
unsuccessfully challenged the recoupment and the Company reversed $553,000 of
the reserve (recognized as a reduction of SG&A). Additionally for the year ended
December 31, 2001, the Company recognized impairment 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.
11
Net Investment Transactions and Impairment Charges
- --------------------------------------------------
Net investment transactions and impairment charges for the year ended December
31, 2002 were $3,277,000, compared to $876,000 in 2001. In the fourth quarter of
2002, as a result of cost overruns from unforeseen design problems, an extended
construction period, and a reduction in the projected rental rates due to a
softening in the real estate market, an impairment charge on a recently
completed domestic real property project of $3,140,000 was recorded. For the
year ended December 31, 2001, the amount recorded included an impairment charge
of $1,272,000 on three European investments and an impairment charge against the
real property holdings in Russia and Romania of $242,000, which were partially
offset by, among other things, the gain on the sale of real property of
$652,000.
Interest Expense
- ----------------
Interest expense for the year ended December 31, 2002 was $2,016,000, compared
to $3,431,000 for 2001, a decrease of $1,415,000 or 41.2%. The decrease was
primarily due to lower average borrowings and lower interest rates during the
year ended December 31, 2002. Average borrowings during the year ended December
31, 2002 were $26,152,000, compared to $43,018,000 for 2001.
Interest Income
- ---------------
Interest income for the year ended December 31, 2002 was $476,000, compared to
$561,000 for the 2001, a decrease of $85,000 or 15.2%. The decrease resulted
from there being no interest income for the year ended December 31, 2002 on the
Glamourette promissory note, on which interest income of $229,000 had been
recognized during the year ended December 31, 2001.
Income Tax
- ----------
The income tax provision for the year ended December 31, 2002 was $10,100,000,
compared to $6,200,000 for 2001. The effective income tax rate increased to
37.2% for the year ended December 31, 2002, compared to 35.9% for 2001, due to
changes in composition of income among the Company's consolidated entities.
Net Income
- ----------
As a result of the foregoing, net income of the Company for the year ended
December 31, 2002 was $17,048,000, or $3.53 per share on a diluted basis, as
compared with $11,080,000, or $2.37 per share on a diluted basis, for the
preceding year.
2001 Compared With 2000
- -----------------------
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; 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").
Net Sales
- ---------
Net sales for the year ended December 31, 2001 were $261,361,000, which included
$98,033,000 of Acquired Business net sales, compared to $195,372,000 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 by $11,951,000, or 7.9%. The 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 7.8% decrease in the average sales price for
the Existing Business.
12
Gross Profit
- ------------
Gross profit for the year ended December 31, 2001 was $68,815,000, which
included Acquired Business gross profit of $23,244,000, compared to $39,651,000,
which included $10,252,000 of Acquired Business gross profit during 2000 for
the period after the Acquisition Date, an increase of $29,164,000. The gross
profit for the Existing Business was 27.9% of net sales in 2001, compared with
19.4% in 2000. 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.
Rental Revenues
- ---------------
Rental revenue from the Investments segment for the year ended December 31, 2001
was $2,594,000, compared to $2,281,000 for 2000, an increase of $313,000 or
13.7%. 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 Expenses
- --------------------------------------------
SG&A expenses for the Company for the year ended December 31, 2001 were
$47,656,000, which included Acquired Business SG&A expenses of $16,322,000,
compared to $31,188,000 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 incentive bonuses due to increased income in 2001. SG&A
expenses for the Investments segment for the year ended December 31, 2001 were
$2,174,000, compared to $1,646,000 for 2000, an increase of $528,000 or 32.1%.
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.
Net Gain or Loss on Sale of Property, Plant and Equipment and Related Charges
- -----------------------------------------------------------------------------
In 2000, the Company sold all sweater manufacturing assets, except finished
goods inventory, 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. Because of the deteriorating financial condition of Glamourette, the
Company reserved $2,100,000 of the note balance in 2000. During the fourth
quarter of 2001, the Company notified Glamourette that it was in default under
the terms of its agreement. Subsequent to this notice Glamourette filed for
bankruptcy and accordingly the Company reserved the remaining $1,793,000 due on
the note. Additionally, for the year ended December 31, 2001, the Company
recognized impairment 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.
Additionally, for the year ended December 31, 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 and a gain of $406,000 on the sale of other apparel
equipment and property.
Net Investment Transactions and Impairment Charges
- --------------------------------------------------
The Investments segment reported "net investment transactions and impairment
charges" for the year ended December 31, 2001, 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 and 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, and 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.
13
Interest Expense
- ----------------
Interest expense for the year ended December 31, 2001 was $3,431,000, compared
to $3,410,000 for 2000, an increase of $21,000.
Interest Income
- ---------------
Interest income for the year ended December 31, 2001 was $561,000, 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.
Income Tax
- ----------
The income tax provision for the year ended December 31, 2001 was $6,200,000,
compared to $2,171,000 for 2000. The effective tax rate increased to 35.9% for
the year ended December 31, 2001 compared to 21.0% for 2000 and such increase
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 was exempt from U.S. federal
regular income taxes pursuant to an election under Section 936 of the Internal
Revenue Code.
Net Income
- ----------
As a result of the foregoing, net 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 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 and borrowings
under the revolving credit facility and long-term debt.
The Company's Revolving Credit Facility, which matures on August 31, 2003,
provides a secured credit facility up to $97,938,000 in revolving credit
facility borrowings and letters of credit. Advances under the credit facility
are limited to the lesser of: (1) $97,938,000 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, less outstanding letters of credit and outstanding amounts
due on the Senior Notes, 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 $5,000,000 policy on
the life of its Chairman, Ludwig Kuttner, and a $1,000,000 million policy on the
life of the Chief Executive Officer of Item-Eyes, Inc. At December 31, 2002
there were $27,113,000 outstanding letters of credit. No advances were
outstanding under the credit facility at December 31, 2002 or 2001, which
resulted in availability for borrowing of approximately $12,532,000 under the
credit facility at December 31, 2002.
Both the Revolving Credit Facility and the Senior Notes contain covenants which
require certain financial performance and restrict certain payments by the
Company, including advances to Hampshire Investments, Limited and its
subsidiaries (the "Non-Restricted Subsidiary").
14
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 and restrictions at December
31, 2002.
The Company's trade account receivables and inventories are pledged as
collateral, pari passu, under the Revolving Credit Facility and the Senior
Notes. Certain real properties of the Non-Restricted Subsidiary's are pledged as
collateral for mortgages. The Revolving Credit Facility and the Senior Notes
restrict the sale of assets, payments by the Company of cash dividends to
stockholders, the repurchase of Company common stock and investments in and
loans to the Non-Restricted Subsidiary. The Senior Notes also require 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, 2002. The Company is charged 1/8% on the unused
balance of the credit facility.
The Company, through its Non-Restricted Subsidiary, finances real property
investments through mortgages and construction loans. The Company's Chief
Executive Officer has guaranteed certain indebtedness of the Non-Restricted
Subsidiary, for which he is paid a fee.
The maximum advanced outstanding during 2002 under the credit facility were
$39,901,000. The average amount outstanding during 2002 was approximately
$5,877,000. Outstanding letters of credit under the credit facility totaled
approximately $27,113,000 at December 31, 2002.
Future contractual obligations related to long-term debt and noncancellable
operating leases at December 31, 2002 were as follows:
(In thousands)
Total 2003 2004 2005 2006 2007 Thereafter
----------------------------------------------------------
Operating leases $ 3,168 $1,325 $ 999 $ 575 $ 269 $ - $ -
Long term debt 20,125 2,823 4,205 2,481 2,475 2,496 5,645
----------------------------------------------------------
Total $23,293 $4,148 $5,204 $3,056 $2,744 $2,496 $5,645
==========================================================
At December 31, 2002 the Company had cash and cash equivalents totaling
$67,620,000.
Net cash provided by operating activities was $51,699,000 for the year ended
December 31, 2002, as compared to $23,922,000 for 2001. Net cash provided by
operating activities during the year ended December 31, 2002 primarily resulted
from net income of $17,048,000, a reduction of both inventory of $12,007,000 and
receivables of $6,446,000, and an increase in accounts payable, accrued expenses
and other liabilities of $12,658,000. The decrease in inventory and accounts
receivable primarily resulted from the failure of a foreign supplier to provide
production under contract. The increase in accounts payable, accrued expenses
and other liabilities resulted primarily from the established reserves related
to events from the failure of this foreign supplier of $8,741,000, and higher
incentive bonus accruals of $2,984,000. Net cash provided by operating
activities for the year ended December 31, 2001 resulted primarily from net
income of $11,080,000 and a reduction of inventory of $6,483,000, which resulted
primarily from the decrease in manufacturing and purchasing more finished
product by letters of credit.
Net cash used in investing activities was $3,088,000 for the year ended December
31, 2002, as compared to net cash used in investing activities of $5,431,000 for
2001. During the years ended December 31, 2002 and 2001, the Company used
$3,191,000 and $8,502,000, respectively, to purchase or renovate real property
and make other investments. Additionally, during the year ended December 31,
2001, the Company received payments of $2,181,000 against certain notes
receivable, primarily the promissory note due from Glamourette, and received
$1,022,000 from the sale of certain Hampshire Investment assets. During the year
15
ended December 31, 2002 collections on notes receivable was $261,000 and the
proceeds from the sales of Hampshire Investment assets totaled $526,000.
Net cash used in financing activities was $9,709,000 for the year ended December
31, 2002, as compared to $326,000 for 2001. During the years ended December 31,
2002 and 2001, the Company used $10,590,000 and $3,957,000, respectively, for
the repayment of long-term debt. Additionally during the year ended December 31,
2001, the Company had proceeds from the issuance of long-term debt of
$3,287,000. As of December 31, 2002 and 2001, the Company had no borrowings
under the credit facility.
Management believes that cash flow from operations, available borrowings under
the credit facility and long-term borrowings will provide adequate resources to
meet the Company's capital requirements and operational needs for the
foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. By
their nature, these judgments are subject to an inherent degree of uncertainty.
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:
Allowances For Doubtful Notes and Accounts and Customer Returns and Adjustments
- -------------------------------------------------------------------------------
The Company maintains an allowance for doubtful notes and 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, which enable 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 favorable 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 a 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 and a normal profit margin, of products
whose value is determined to be impaired. If these products are ultimately sold
at less than estimated amounts, additional reserves may be required. Likewise,
if these products are sold for more than estimated amounts, reserves may be
reduced.
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 the
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", which addresses financial
reporting for the impairment or disposal of long-lived assets. In accordance
with SFAS No. 144, management assesses impairment of real property investments,
long-term investments, and property whenever changes or events indicate that the
carrying value may not be recoverable.
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 a high 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 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. Approximately 75% of net
sales occurred in the third and fourth quarters of fiscal 2002.
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.
17
Recent Accounting Standards
- ---------------------------
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", on
January 1, 2002. SFAS No. 142 discontinues the practice of amortizing goodwill
and intangible assets that have indefinite useful lives and initiates an annual
review for impairment. As of the date of adoption, the Company had unamortized
goodwill of $8,020,000. A reconciliation of the reported net income and income
per share for the years ended December 31, 2002, 2001 and 2000, to the amounts
adjusted for the reduction of amortization expense, net of the related income
tax effect, are as follows:
(in thousands except per share data) 2002 2001 2000
- -------------------------------------------------------------------------------
Net income as reported $17,048 $11,080 $8,543
Add back amortization of goodwill, net of tax
effect of $0, ($304) and ($146) - 543 546
- -------------------------------------------------------------------------------
Adjusted net income $17,048 $11,623 $9,089
- -------------------------------------------------------------------------------
Basic net income per share as reported $3.62 $2.38 $2.00
Adjustment for add back of amortization expense,
net of tax effect - 0.12 0.13
- -------------------------------------------------------------------------------
Adjusted basic net income per share $3.62 $2.50 $2.13
- -------------------------------------------------------------------------------
Diluted net income per share as reported $3.53 $2.37 $1.97
Adjustment for add back of amortization expense,
net of tax effect - 0.12 0.13
- -------------------------------------------------------------------------------
Adjusted diluted net income per share $3.53 $2.49 $2.10
- -------------------------------------------------------------------------------
In accordance with SFAS No. 142, goodwill is tested for impairment at least
annually and more frequently if circumstances indicate it may be impaired. The
Company performs its annual impairment test during the fourth quarter of each
year. During the fourth quarter of 2002, the Company completed its annual
assessment of goodwill for impairment in accordance with SFAS No. 142 and
determined that there was no impairment.
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", on January 1, 2002. SFAS No. 144 addresses financial
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121 and the accounting and reporting provisions of APB No.
30 related to the disposal of a segment of a business. The adoption of SFAS No.
144 had no material effect on the Company's financial position, results of
operations or cash flows.
The Company adopted Emerging Issues Task Force ("EITF") 01-9, "Accounting for
Consideration by a Vendor to a Customer or a Reseller of the Vendor's Products",
on January 1, 2002. EITF 01-9 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. The adoption of EITF 01-9 required reclassification of cooperative
advertising expenses from selling, general and administrative expenses as a
reduction of revenues. As a result of such retroactive reclassification of
cooperative advertising, net sales, gross profit and selling, general and
administrative expenses for the years ended December 31, 2002, 2001 and 2000
each decreased by $2,943,000, $2,123,000 and $1,510,000, respectively, with no
effect on net income.
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS
No. 146 requires that a liability for the cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS No. 146
also established that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is in the
process of reviewing the effect, if any, that the adoption of SFAS No. 146 will
have on its financial position, results of operations and cash flows.
18
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation", to require disclosure
in both interim and annual financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. Certain disclosures required by the statement are effective
for years beginning after December 15, 2002 and other disclosures are effective
for the first quarter beginning after December 15, 2002. The Company continues
to use the intrinsic value method. See Note 12 to the consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Interpretation No. 45 requires an entity
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial recognition
and measurement provision are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company is in the process of
reviewing the effect, if any, that the adoption of Interpretation No. 45 will
have on its financial position and results of operations.
Interpretation No. 45 also provides guidance on the disclosure to be made by the
guarantor about its obligation under certain guarantees that it has issued. The
disclosure requirements are effective for the financial statements of periods
ending after December 15, 2002. At December 31, 2002, the Company and various
consolidated subsidiaries of the Company are borrowers under the Revolving
Credit Facility and Senior Notes (the "Facilities") (see Note 8). The Facilities
are guaranteed by either the Company and/or various consolidated subsidiaries of
the Company in the event that the borrower(s) default under the provisions of
the Facilities. The guarantees are in effect for the period of the related
Facilities.
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 of raw materials for the Company's products.
The long-term debt of the Company is at fixed interest rates, which were
primarily at market when the debt was issued, but were primarily above market on
December 31, 2002. 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 2002 and 2001 by approximately $57,000 and $169,000, 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.
19
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 currencies. 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
None.
PART III
Certain information required to be presented in 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 2003 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 2003 Proxy
Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information concerning security ownership of certain beneficial owners and
management and related stockholder matters required to be presented in Item 12
is incorporated herein by reference to the Company's 2003 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 2003 Proxy Statement.
ITEM 14 - CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's reports filed
pursuant to the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules, regulations and related forms, and
that such information is accumulated and communicated to the Company's chief
20
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
Within the 90 days prior to the date of this report on Form 10-K, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's chief executive officer and
chief financial officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Company's chief executive officer and
chief financial officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date the Company carried out this evaluation. Accordingly, no
corrective actions have been required to be taken.
PART IV
ITEM 15 - 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
- -------------------------------------------------------------------------------
(Exhibits continued on next page)
21
(Exhibits continued from previous page)
Exhibit No. Description Footnote
- ---------- ------------------------------------------------------- --------
(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
(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 continued on next page)
22
(Exhibits continued from previous page)
Exhibits filed herewith:
- -----------------------
Exhibit No. Description Footnote
- ---------- ------------------------------------------------------- --------
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbones-Oxley
Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbones-Oxley
Act of 2002.
(b) Reports on Form 8-K filed during the quarter.
No reports were filed on Form 8-K during the quarter ended
December 31, 2002.
23
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 2003.
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, 2003
- ---------------------- President and Chief Executive Officer --------------
Ludwig Kuttner
/s/ JOEL GOLDBERG Director March 27, 2003
- ---------------------- --------------
Joel Goldberg
/s/ MICHAEL C. JACKSON Director March 27, 2003
- ---------------------- --------------
Michael C. Jackson
/s/ RICHARD V. ROMER Director March 27, 2003
- ---------------------- --------------
Richard V. Romer
/s/ HARVEY L. SPERRY Director March 27, 2003
- ---------------------- --------------
Harvey L. Sperry
/s/ EUGENE WARSAW Director March 27, 2003
- ---------------------- --------------
Eugene Warsaw
/s/ PETER W. WOODWORTH Director March 27, 2003
- ---------------------- --------------
Peter W. Woodworth
/s/ WILLIAM W. HODGE Vice President and Chief Financial March 27, 2003
- ---------------------- Officer (Principal Financial Officer --------------
William W. Hodge and Principal Accounting Officer)
24
CERTIFICATION
I, Ludwig Kuttner, certify that:
1. I have reviewed this annual report on Form 10-K of Hampshire Group,
Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Ludwig Kuttner
- ------------------
Ludwig Kuttner
President and Chief Executive Officer
25
CERTIFICATION
I, William W. Hodge, certify that:
1. I have reviewed this annual report on Form 10-K of Hampshire Group,
Limited;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ William W. Hodge
- --------------------
William W. Hodge
Chief Financial Officer
26
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-26
Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves F-28
III. Real Property 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, 2002 and 2001,
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, 2002. 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, 2002
and 2001, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002 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.
As discussed in Note 1 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill to conform to Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
/s/ Deloitte & Touche
- ----------------------
Deloitte & Touche
March 10, 2003
F-2
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31, 2002 2001
- -----------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 67,620 $ 28,686
Accounts receivable trade - net 27,474 34,691
Notes and other receivables - net 2,189 1,429
Inventories - net 14,732 26,739
Deferred tax assets 8,168 5,216
Other current assets 930 407
-------------------------
Total current assets 121,113 97,168
-------------------------
Property, plant and equipment - net 2,315 2,170
Real property investments - net 28,200 29,380
Long-term investments - net 4,315 3,806
Notes receivable 271 521
Trading securities held in retirement trust 833 1,142
Deferred tax assets 904 2,049
Goodwill 8,020 8,020
Other assets 506 681
-------------------------
$166,477 $144,937
=========================
- -----------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 2,823 $ 7,721
Accounts payable 6,408 5,418
Accrued expenses and other liabilities 28,382 16,714
------------------------
Total current liabilities 37,613 29,853
Long-term debt, less current portion 17,302 21,738
Deferred compensation 2,575 2,117
------------------------
Total liabilities 57,490 53,708
------------------------
Commitments and contingencies
- -----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $0.10 par value; 4,721,911 (2002) and
4,707,216 (2001) shares issued and 4,720,591 (2002)
and 4,693,142 (2001) shares outstanding 472 471
Additional paid-in capital 31,484 31,229
Retained earnings 76,526 59,581
Accumulated other comprehensive gain 532 76
Treasury stock, 1,320 (2002) and 14,074 (2001)
shares at cost (27) (128)
------------------------
Total stockholders' equity 108,987 91,229
------------------------
$166,477 $144,937
========================
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, 2002 2001 2000
- ------------------------------------------------------------------------------
Net sales $293,268 $261,361 $195,372
Cost of goods sold 210,336 192,546 155,721
-----------------------------
Gross profit 82,932 68,815 39,651
Rental revenue 3,194 2,594 2,281
-----------------------------
86,126 71,409 41,932
Selling, general and administrative expenses 54,259 47,656 31,188
Net loss (gain) on sale of property, plant and
equipment and related charges - 2,618 (2,308)
Net investment transactions and impairment
charges 3,277 876 465
-----------------------------
Income from operations 28,590 20,259 12,587
Other income (expense):
Interest expense (2,016) (3,431) (3,410)
Interest income 476 561 1,353
Other - net 98 (109) (214)
-----------------------------
Income from continuing operations before
provision for income taxes 27,148 17,280 10,316
Income tax (provision) benefit:
Current (11,907) (7,503) (2,157)
Deferred 1,807 1,303 (14)
-----------------------------
Income from continuing operations 17,048 11,080 8,145
Gain on disposal of discontinued operations
- net of income tax provision of $235 (2000) - - 398
-----------------------------
Net income $ 17,048 $ 11,080 $ 8,543
=============================
- ------------------------------------------------------------------------------
Income per share from Basic $3.62 $2.38 $1.91
continuing operations: =============================
Diluted $3.53 $2.37 $1.88
=============================
Net income per share: Basic $3.62 $2.38 $2.00
=============================
Diluted $3.53 $2.37 $1.97
=============================
Weighted average number Basic 4,711 4,661 4,265
of shares outstanding: =============================
Diluted 4,834 4,674 4,341
=============================
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, 2002 2001 2000
- ------------------------------------------------------------------------------
Net income $17,048 $11,080 $8,543
Other comprehensive income (loss):
Unrealized gains (losses) on securities:
Unrealized holding (losses) on securities - - (128)
Reclassification adjustment for
amount included in net income - - 658
------------------------------
Other comprehensive gain on securities - - 530
Income tax (provision) on securities - - (196)
------------------------------
Unrealized gains on securities - - 334
Foreign currency translation adjustment 456 151 (75)
------------------------------
Comprehensive income $17,504 $11,231 $8,802
==============================
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, 2002 2001 2000
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $17,048 $11,080 $8,543
Gain from disposal of discontinued operations - - (398)
------------------------------
Income from continuing operations 17,048 11,080 8,145
Adjustments to reconcile income from
continuing operations to net cash provided
by operating activities:
Depreciation and amortization 2,056 2,619 3,408
Asset impairment charges and provision
for uncollectible notes 3,140 4,192 787
Gain on sale of manufacturing facilities - - (632)
Loss (gain) on foreign currency valuation (348) 57 64
Gain on termination of equipment lease - - (296)
Gain on sale of real estate investment (110) (652) (735)
Loss (gain) on other sales of property
and equipment 109 - (929)
Loss on sale of available-for-sale
securities - - 318
Deferred income tax provision (benefit) (1,807) (1,303) 14
Deferred compensation costs for executive
officers 775 579 357
Tax benefit relating to Common Stock plans 73 6 26
Net change in operating assets and
liabilities, net of effects of acquired
company:
Receivables 6,446 (880) 127
Inventories 12,007 6,483 11,943
Accounts payable, accrued expenses and
other liabilities 12,658 941 3,022
Other assets (348) 800 392
------------------------------
Net cash provided by continuing operations 51,699 23,922 26,011
Net cash provided by discontinued
operations - - 398
------------------------------
Net cash provided by operating activities 51,699 23,922 26,409
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Cash used for business acquisition - - (44,069)
Capital expenditures (932) (294) (186)
Proceeds from sale of real estate investments 526 1,022 990
Proceeds from long-term investments 240 711 -
Purchase of real property and other investments (3,191) (8,502) (9,039)
Proceeds from sales of property, plant and
equipment 8 11 6,415
Proceeds from sale of available-for-sale
securities - - 35
Loans and advances - (560) (1,852)
Repayments of loans and advances 261 2,181 3,049
------------------------------
Net cash used in investing activities (3,088) (5,431) (44,657)
- -------------------------------------------------==============================
(Consolidated Statements of Cash Flows continued on next page.)
F-6
(Consolidated Statements of Cash Flow continued from previous page.)
Year Ended December 31, (in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 708 3,287 6,916
Debt issuance costs - - (563)
Repayment of long-term debt (10,590) (3,957) (2,174)
Proceeds from issuance of Common Stock 183 413 450
Repurchase of Common Stock warrants - - (133)
Payments of deferred compensation (8) (8) (8)
Proceeds from issuance of treasury stock 263 77 446
Purchases of treasury stock (265) (138) -
--------------------------------
Net cash (used in) provided by
financing activities (9,709) (326) 4,934
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash 32 4 -
Net increase (decrease) in cash and cash
equivalents 38,934 18,169 (13,314)
Cash and cash equivalents - beginning of year 28,686 10,517 23,831
--------------------------------
Cash and cash equivalents - end of year $67,620 $28,686 $10,517
- ------------------------------------------------================================
Supplementary disclosure of cash flow information
- --------------------------------------------------------------------------------
Cash paid during the year for: Interest $ 2,097 $ 3,877 $2,890
Income taxes 12,541 4,914 413
Non-cash investing and financing activities:
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
Other
Additional Comprehen-
Years Ended December 31, Common Stock Paid-In Retained sive Gain Treasury
2000, 2001 and 2002 Shares Amount Capital Earnings (Loss) Stock Total
- --------------------------------------------------------------------------------------------------------
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
Net income for the year - - - 17,048 - - 17,048
Purchase of treasury stock (13,136) - - - - (265) (265)
Shares issued under the
Common Stock plans 40,585 1 182 (103) - 366 446
Tax benefit relating to
Common Stock plans - - 73 - - - 73
Deferred compensation payable
in Company shares 376,765 - - - - 3,394 3,394
Shares held in trust for deferred
compensation liability (376,765) - - - - (3,394) (3,394)
Unrealized gain on currency
translation - - - - 456 - 456
- --------------------------------------------------------------------------------------------------------
Balance-December 31, 2002 4,720,591 $472 $31,484 $76,526 $532 ($ 27) $108,987
========================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
HAMPSHIRE GROUP, LIMITED
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 principally 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 Cayman Islands and the Czech Republic,
principally purchases real properties located primarily in the United States,
Russia and Eastern Europe, for the purpose of holding as long-term investments.
The critical and other significant accounting policies used in the preparation
of the accompanying consolidated financial statements are as follows:
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:
Allowances For Doubtful Notes and Accounts and Customer Returns and Adjustments
- -------------------------------------------------------------------------------
The Company maintains an allowance for doubtful notes and 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, which enable 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 favorable settlements of previously reserved amounts, the
Company may be required to record a reduction in bad debt expense to reverse
recorded allowances.
F-9
Inventory Reserves
- ------------------
The Company analyzes out-of-season merchandise on a 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 and a normal profit margin, of products
whose value is determined to be impaired. If these products are ultimately sold
at less than estimated amounts, additional reserves may be required. Likewise,
if these products are sold for more than estimated amounts, reserves may be
reduced.
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 the
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", which addresses financial
reporting for the impairment or disposal of long-lived assets. In accordance
with SFAS No. 144, management assesses impairment of real property investments,
long-term investments, and property whenever changes or events indicate that the
carrying value may not be recoverable.
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:
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries, including Hampshire Designers, Inc. ("Hampshire
Designers"); Item-Eyes, Inc. ("Item-Eyes"), since its acquisition on August 20,
2000; and Hampshire Investments, Limited and its subsidiaries, HIL, Inc.,
located in the Cayman Islands, 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.
Cash Equivalents
- ----------------
Cash equivalents consist of highly liquid investments with initial maturities of
ninety days or less. At December 31, 2002 and 2001, interest bearing amounts
were approximately $62.6 million and $26.2 million, respectively. A significant
amount of the Company's cash and cash equivalents are on deposit in financial
institutions and exceed the maximum insurable deposit limits.
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 5% and 14% of the inventory at December 31, 2002 and 2001,
respectively, for which cost is determined using the last-in, first-out method
("LIFO").
F-10
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. Gains and losses on the sale of real property investments and
impairment charges related to such investments are classified as "net investment
transactions and impairment charges" in the accompanying consolidated statements
of income.
Long-Term Investments
- ---------------------
Long-term investments, consisting primarily of common stock of non-publicly
traded companies and investments in domestic real estate partnerships, 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 related to such
investments are classified as "net investment transactions and impairment
charges" in the accompanying consolidated statements of income.
Goodwill
- --------
Goodwill represents the excess of cost over net assets acquired in connection
with the acquisition of certain businesses. Beginning January 1, 2002, in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill
amortization ceased. Prior to January 1, 2002, goodwill was amortized under the
straight-line method over the estimated useful life of 20 years. In addition,
goodwill is reviewed for impairment at least annually or more often if
impairment indicators exist. See "New Accounting Standards".
Foreign Currency Transactions and Translation
- ---------------------------------------------
Foreign currency transactions are translated into U.S. dollars at prevailing
exchange rates. The balance sheets of the Company's consolidated foreign
subsidiaries, excluding equity, are translated into U.S. dollars at current
exchange rates at year-end. The statement of operations for the Company's
consolidated foreign subsidiaries are translated at the annual average exchange
rates. Net transaction gains (losses) for the years ended December 31, 2002,
2001 and 2000 totaled approximately $348,000, ($57,000) and ($64,000),
respectively, and were recorded as other income or (expenses) in the
accompanying consolidated statements of income.
Financial Instruments
- ---------------------
The Company's financial instruments primarily consist of cash and cash
equivalents, accounts and notes receivable, accounts payable, accrued expenses
and other liabilities and long-term debt. The fair value of long-term debt is
disclosed in Note 8. The carrying amounts of the other financial instruments are
considered a reasonable estimate of their fair value at December 31, 2002 and
2001, 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
- -----------------
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses. Total advertising costs for the years ended
December 31, 2002, 2001 and 2000 totaled approximately $459,000, $812,000 and
$516,000, respectively. See "New Accounting Standards".
Shipping Costs
- --------------
Costs to ship products to customers are expensed as incurred and are included in
selling, general and administrative expenses. Total shipping costs for the years
ended December 31, 2002, 2001 and 2000 totaled approximately $1,011,000,
$713,000 and $562,000, respectively.
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.
Comprehensive Income
- --------------------
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, 2002 and 2001, the
Company had one item, unrealized gain 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.
Recent Accounting Standards
- ---------------------------
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", on
January 1, 2002. SFAS No. 142 discontinues the practice of amortizing goodwill
and intangible assets that have indefinite useful lives and initiates an annual
review for impairment. As of the date of adoption, the Company had unamortized
goodwill of $8,020,000. A reconciliation of the reported net income and income
per share for the years ended December 31, 2002, 2001 and 2000, to the amounts
adjusted for the reduction of amortization expense, net of the related income
tax effect, are as follows:
F-12
(in thousands, except per share data) 2002 2001 2000
- -----------------------------------------------------------------------------
Net income as reported $17,048 $11,080 $8,543
Add back amortization of goodwill,
net of tax effect of $0, ($304) and ($146) - 543 546
- -----------------------------------------------------------------------------
Adjusted net income $17,048 $11,623 $9,089
- -----------------------------------------------------------------------------
Basic net income per share as reported $3.62 $2.38 $2.00
Adjustment for add back of amortization
expense, net of tax effect - 0.12 0.13
- -----------------------------------------------------------------------------
Adjusted basic net income per share $3.62 $2.50 $2.13
- -----------------------------------------------------------------------------
Diluted net income per share as reported $3.53 $2.37 $1.97
Adjustment for add back of amortization expense,
net of tax effect - 0.12 0.13
- -----------------------------------------------------------------------------
Adjusted diluted net income per share $3.53 $2.49 $2.10
- -----------------------------------------------------------------------------
In accordance with SFAS No. 142, goodwill is tested for impairment at least
annually and more frequently if circumstances indicate it may be impaired. The
Company performs its annual impairment test during the fourth quarter of each
year. During the fourth quarter of 2002, the Company completed its annual
assessment of goodwill for impairment in accordance with SFAS No. 142 and
determined that there was no impairment.
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", on January 1, 2002. SFAS No. 144 addresses financial
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes SFAS No. 121 and the accounting and reporting provisions of
Accounting Principal Board Opinion ("APB") No. 30 related to the disposal of a
segment of a business. The adoption of the Accounting Principal Board Opinion
("APB") SFAS No. 144 had no material effect on the Company's financial position,
results of operations or cash flows.
The Company adopted Emerging Issues Task Force ("EITF") 01-9, "Accounting for
Consideration by a Vendor to a Customer or a Reseller of the Vendor's Products",
on January 1, 2002. EITF 01-9 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. The adoption of EITF 01-9 required reclassification of cooperative
advertising expenses from selling, general and administrative expenses as a
reduction from revenues. As a result of such retroactive reclassification of
cooperative advertising, net sales, gross profit and selling, general and
administrative expenses for the years ended December 31, 2002, 2001 and 2000
each decreased by $2,943,000, $2,123,000 and $1,510,000, respectively, with no
effect on net income.
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS
No. 146 requires that a liability for the cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS No. 146
also established that fair value is the objective for initial measurement of the
liability. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is in the
process of reviewing the effect, if any, that the adoption of SFAS No. 146 will
have on its financial position, results of operations and cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation", to require disclosure
in both interim and annual financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
F-13
reported results. Certain disclosures required by the statement are effective
for years ending after December 15, 2002 and other disclosures are effective for
the first quarter beginning after December 15, 2002. The Company continues to
use the intrinsic value method.
SFAS No. 123, as amended by SFAS No. 148, allows companies to adopt the fair
value based method of accounting or to continue using the intrinsic value based
method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options. Under APB No. 25 (the "intrinsic method"), which the Company has
elected 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 2002, 2001, or 2000. Additionally, in
accordance with SFAS No. 123 as amended, 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 No. 123,
the Company's net income and basic and diluted earnings per share would have
been reduced as per the "pro forma" amounts in the following table.
In order to estimate compensation cost under SFAS No. 123, the Black-Scholes
model was employed using the assumptions set forth below:
2002(1) 2001 2000
- --------------------------------------------------------------------------
Expected life (years) - 5.9 6.5
Expected volatility - 24.3% 15.9%
Dividend yield - 0.0% 0.0%
Risk-free interest rate - 4.8% 5.5%
- --------------------------------------------------------------------------
Weighted-average fair value
of options granted $ - $3.02 $1.38
==========================================================================
(1) There were no options granted during the year ended December 31, 2002.
The compensation costs and effect on net income and basic and diluted earnings
per share had compensation cost been determined in accordance with SFAS No.123
are set forth below:
(in thousands, except for per share data) 2002 2001 2000
- ---------------------------------------------------------------------------
Net income As reported $17,048 $11,080 $8,543
Compensation cost, net of tax 78 92 121
----------------------------
Pro forma $16,970 $10,988 $8,422
===========================================================================
Basic earnings per share: As reported $3.62 $2.38 $2.00
----------------------------
Pro forma $3.60 $2.36 $1.97
===========================================================================
Diluted earnings per share: As reported $3.53 $2.37 $1.97
----------------------------
Pro forma $3.51 $2.35 $1.94
===========================================================================
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Interpretation No. 45 requires an entity
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial recognition
and measurement provision are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company is in the process of
reviewing the effect, if any, that the adoption of Interpretation No. 45 will
have on its financial position and results of operations.
Interpretation No. 45 also provides guidance on the disclosure to be made by the
guarantor about its obligation under certain guarantees that it has issued. The
disclosure requirements are effective for the financial statements of periods
ending after December 15, 2002. At December 31, 2002, the Company and various
consolidated subsidiaries of the Company are borrowers under the Revolving
F-14
Credit Facility and Senior Notes (the "Facilities") (see Note 8). The Facilities
are guaranteed by either the Company and/or various consolidated subsidiaries of
the Company in the event that the borrower(s) default under the provisions of
the Facilities. The guarantees are in effect for the period of the related
Facilities.
Note 2 - 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. At December 31,
2002 and 2001, the accounts receivable are stated net of allowances for doubtful
accounts and returns and allowances of approximately $13,057,000 and $6,830,000,
respectively.
The Company sells principally to department stores, catalog companies,
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) for the year ended December 31, 2002 which
represented 14%, 11% and 11% of total sales; three major customers for the year
ended December 31, 2001 which represented 14%, 11% and 10% of total sales, and
two major customers for the year ended December 31, 2000 which represented 15%
and 14% of total sales. At December 31, 2002 and 2001, 55% and 38%,
respectively, of the total trade receivables were due from these major
customers.
Note 3 - Inventories
Inventories at December 31, 2002 and 2001 consist of the following:
(in thousands) 2002 2001
- -----------------------------------------------------------------------------
Finished goods $13,246 $21,922
Work-in-progress 205 1,697
Raw materials and supplies 1,518 3,774
- -----------------------------------------------------------------------------
14,969 27,393
Less - Excess of current cost
over LIFO carrying value (237) (654)
- -----------------------------------------------------------------------------
Total $14,732 $26,739
=============================================================================
At December 31, 2002 and 2001 approximately 5% and 14% of total inventories were
valued using the LIFO method, respectively.
Note 4 - Property, Plant and Equipment
Property, plant and equipment at December 31, 2002 and 2001 consist of the
following:
Estimated
Useful
(in thousands) Lives 2002 2001
- -----------------------------------------------------------------------------
Buildings and improvements 20 years $ 754 $ 754
Leasehold improvements 5-10 years 1,041 935
Machinery and equipment 3-7 years 2,881 2,932
Furniture and fixtures 3-7 years 977 949
Transportation equipment 3-5 years 141 100
Construction in process 9 -
- -----------------------------------------------------------------------------
Total cost 5,803 5,670
Less - Accumulated depreciation (3,488) (3,500)
- -----------------------------------------------------------------------------
Total $2,315 $2,170
=============================================================================
F-15
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
approximately $777,000, $756,000 and $1,912,000, respectively. See Note 14 for
further discussion regarding the sale of assets during 2000.
Note 5 - 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, Europe and Russia
and are carried at historical cost, net of impairment charges totaling
$5,232,000, including $3,140,000 recognized in 2002 and $242,000 recognized in
2001.
Real Property Investments
-------------------------
(in thousands) 2002 2001
- ------------------------------------------------------------------------------
Commercial and residential property:
United States $17,005 $21,784
Europe 10,166 7,973
Russia 4,161 3,273
- ------------------------------------------------------------------------------
31,332 33,030
Less - Accumulated depreciation (3,132) (3,650)
- ------------------------------------------------------------------------------
Total $28,200 $29,380
==============================================================================
Depreciation is provided over the estimated useful lives of the property, which
is 15 years, or 39 years for new construction. Depreciation expense for the
years ended December 31, 2002, 2001 and 2000 was approximately $1,279,000,
$1,016,000 and $822,000, respectively.
Long-term investments consist primarily of common stock of non-publicly traded
companies and investments in domestic real estate partnerships. Management
intends to hold these investments on a long-term basis. The carrying values set
forth below are shown net of asset impairment charges totaling $2,647,000,
including $1,272,000 recognized in 2001 and $300,000 recognized in 2000 for
certain foreign assets deemed to be permanently impaired.
Long-Term Investments
---------------------
(in thousands) 2002 2001
- ------------------------------------------------------------------------------
United States $3,618 $3,109
Europe 566 566
Russia 131 131
- ------------------------------------------------------------------------------
Total $4,315 $3,806
==============================================================================
Costs associated with the Company's rental activities are included in selling,
general and administrative expense for the years ended December 31, 2002, 2001
and 2000 and totaled approximately $2,403,000, $2,034,000 and $1,646,000,
respectively.
"Net investment transactions and impairment charges" reported in the
accompanying consolidated statements of income for the years ended December 31,
2002, 2001 and 2000 are as follows:
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Impairment of foreign long-term investments $1,272 $300
Impairment of real property $3,140 242 -
(Gain) on sale of real property (110) (652) (735)
Impairment of notes receivable - 60 147
Loss on available for sale securities - - 658
Other investments (gains) and losses - net 247 (46) 95
- ------------------------------------------------------------------------------
Total $3,277 $ 876 $465
==============================================================================
In the fourth quarter of 2002, as a result of cost overruns, an extended
construction period and a reduction in projected rental revenue due to a
softening in real estate market conditions, the Company recorded a $3,140,000
F-16
impairment charge for its recently completed real property project in
Charlottesville, Virginia. The fair value of the property was based on an
appraisal obtained by the Company which also approximated the discounted cash
flows.
Note 6 - Goodwill
Activity in goodwill for the years ended December 31, 2002, 2001 and 2000 are as
follows:
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------------
Balance - beginning of year $8,020 $9,692 $2,553
Amortization for the year - (847) (692)
Addition from acquisition of Item-Eyes, Inc. - - 8,650
Impairment of goodwill - (825) -
Write-off upon sale of manufacturing facilities - - (819)
- ------------------------------------------------------------------------------
Balance - end of year $8,020 $8,020 $9,692
==============================================================================
Accumulated amortization of goodwill at December 31, 2001 and 2000 was
approximately $1,142,000 and $2,703,000, respectively. The Company's Apparel
segment recognized impairment of goodwill in 2001, due to the permanent decline
in the business of one of the divisional operations and its estimated
deficiencies in future cash flows. The impairment charge was recorded in "net
loss on sale of property, plant and equipment and related charges" in the
accompanying consolidated statement of income.
Note 7 - Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at December 31, 2002 and 2001 consist of
the following:
(in thousands) 2002 2001
- ------------------------------------------------------------------------------
Compensation $ 8,182 $ 5,341
Reserve for dispute - foreign supplier 7,515 -
Income taxes 4,549 4,686
Co-op advertising 1,450 1,450
Royalties 1,306 1,303
Other 5,380 3,934
- ------------------------------------------------------------------------------
Total $28,382 $16,714
==============================================================================
During the fourth quarter of 2002, the Company was advised that one of its
primary foreign suppliers would not be able to deliver finished product as
agreed, due to difficulties the supplier had with the United States Customs
Department and its local government. As a result of this supplier's failure to
meet its obligations to the Company, the Company has established a reserve in
the amount of $7,515,000 for estimated costs of inventory purchases and losses
for matters arising from this event. Additionally, the Company has recorded a
reserve of $1,226,000, included under "other" above, for estimated lost margin
and additional costs for replacement product committed to be shipped to
customers during the first quarter of 2003.
Note 8 - Borrowings
Revolving Credit Facilities
- ---------------------------
The Company's Revolving Credit Facility, which matures on August 31, 2003,
provides a secured credit facility up to $97.9 million in revolving credit
facility borrowings and letters of credit. Advances under the credit facility
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, less outstanding letters of credit and outstanding amounts
due on the Senior Notes, plus a seasonal supplemental.
F-17
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, 2002 there were $27.1
million outstanding letters of credit. No advances were outstanding under the
credit facility at December 31, 2002 or 2001, which resulted in availability for
borrowing of approximately $12.5 million under the credit facility at December
31, 2002.
Long-Term Debt - Long-term debt at December 31, 2002 and 2001 consists of the
following:
(in thousands)
2002 2001
- --------------------------------------------------------------------------------
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 $ 9,375 $11,250
Debt collateralized by real property
- ------------------------------------
Note payable to a mortgage company in monthly
installments of $12,326, including interest at 7.36%
through 2008, and a final balloon payment of $1,370,000
on September 1, 2008 1,580 1,609
Note payable to a bank in monthly installments of $13,553,
including interest at 7.50% through 2004, and a final balloon
payment of $1,726.000 on October 1, 2004 1,745 1,775
Note payable to a bank in monthly installments of $8,992,
including interest at 6.25% through 2019 1,106 1,139
Notes payable to a foreign bank in Euros, quarterly
installments of approximately 43,800 US Dollars, including
interest at rates from 6.5% to 7.5% through 2004 1,109 1,206
Notes payable to foreign bank in Euros and Czech Koruna,
quarterly installments of approximately 108,600 US Dollars,
including interest at rates from 6.5% to 7.25% through 2015 3,725 2,937
Real estate note payable, interest at 8% due semi-annually,
principal due August 2003 313 408
Other notes payable due in monthly installments of $5,600,
including interest at various rates from 3.00% to 4.75%,
with maturities through 2010 456 899
Construction notes payable to two banks; repaid in 2002 - 3,000
Debt collateralized by machinery and equipment
- ----------------------------------------------
Note payable in monthly installments of approximately $5,030,
including interest at 4.875% through 2005 138 20
Subordinated debt (subordinated to the Revolving Credit
Facility and Senior Notes); repaid in 2002 - 1,863
Unsecured debt
Note payable to a bank; repaid in 2002 - 2,678
Other notes payable 578 675
- --------------------------------------------------------------------------------
Total long-term debt 20,125 29,459
Less - Amount payable within one year (2,823) (7,721)
- --------------------------------------------------------------------------------
Amount payable after one year $17,302 $21,738
================================================================================
Financial Covenants
- -------------------
Both the Revolving Credit Facility and the Senior Notes contain covenants which
require certain financial performance and restrict certain payments by the
Company, including advances to Hampshire Investments, Limited and its
subsidiaries (the "Non-Restricted Subsidiary").
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 and restrictions at December
31, 2002.
The Company's trade account receivables and inventories are pledged as
collateral, pari passu, under the Revolving Credit Facility and the Senior
Notes. Certain of the Non-Restricted Subsidiary 's real properties are pledged
F-18
as collateral for mortgages. The Revolving Credit Facility and the Senior Notes
restrict the sale of assets, payments by the Company of cash dividends to
stockholders, the repurchase of Company common stock and investments in and
loans to the Non-Restricted Subsidiary. The Senior Notes also require 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, 2002. The Company is charged 1/8% on the unused
balance of the credit facility.
Other
- -----
The Company, through its Non-Restricted Subsidiary, finances real property
investments through mortgages and construction loans. The Company's Chief
Executive Officer has guaranteed certain indebtedness of the Non-Restricted
Subsidiary, for which he is paid a fee.
Maturities of long-term debt as of December 31, 2002 are as follows:
Year (in thousands)
- -------------------------------------------------------------------------------
2003 $ 2,823
2004 4,205
2005 2,481
2006 2,475
2007 2,496
Thereafter 5,645
- -------------------------------------------------------------------------------
Total $20,125
===============================================================================
The net book value of the assets collateralizing the debt on real property at
December 31, 2002 was approximately $16.2 million. The fair value of the
long-term debt at December 31, 2002 and 2001, based on current market interest
rates discounted to present value, was approximately $21.0 million and $29.8
million, respectively.
Note 9 - Income Taxes
The domestic, Puerto Rico and foreign components of income (loss) from
continuing operations before income taxes are as follows:
(in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Domestic $26,827 $18,820 $ 7,091
Puerto Rico - (469) 3,993
Foreign 321 (1,071) (768)
- -------------------------------------------------------------------------------
Income before income taxes $27,148 $17,280 $10,316
===============================================================================
The components of income tax provision (benefit) for the years ended December
31, 2002, 2001 and 2000 consist of the following:
(in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Current:
Federal $9,816 $6,565 $ 988
State 2,091 1,138 459
Puerto Rico - (200) 710
- -------------------------------------------------------------------------------
11,907 7,503 2,157
- -------------------------------------------------------------------------------
Deferred:
Federal (1,439) (1,099) (123)
State (368) (204) 137
- -------------------------------------------------------------------------------
(1,807) (1,303) 14
- -------------------------------------------------------------------------------
Total $10,100 $6,200 $2,171
===============================================================================
F-19
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 as follows:
(in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Tax provision at federal statutory rate $9,502 $6,048 $3,507
Increase (decrease) in tax arising from:
Effect of exemption of Puerto Rico
(earnings) losses from United States tax - 164 (1,358)
Change in valuation allowance (534) 1,310 (1,869)
Puerto Rico taxes on income, including
withholding taxes and capital gains - - 710
State taxes, less federal income tax benefit 1,120 607 393
Foreign operating losses (112) 375 261
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) -
Tax benefit of charitable contribution (515) - -
Other 639 (30) 527
- -------------------------------------------------------------------------------
$10,100 $6,200 $2,171
===============================================================================
A summary of the temporary differences and carryforwards giving rise to deferred
income tax assets as of December 31, 2002 and 2001 is as follows:
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Deferred income tax assets:
Allowances for receivables $1,610 $1,085
Inventories 1,197 1,097
Property, plant and equipment 195 511
Write-down of assets not currently deductible 1,587 363
Accrued liabilities and other temporary differences 3,544 2,658
Net operating loss carryforwards 939 1,551
Capital loss carryforward 776 1,310
- -------------------------------------------------------------------------------
Gross deferred income tax assets 9,848 8,575
- -------------------------------------------------------------------------------
Valuation allowance for deferred income tax
assets arising from capital loss carryforward (776) (1,310)
- -------------------------------------------------------------------------------
Net deferred income tax assets $9,072 $7,265
===============================================================================
The deferred tax assets are recognized in the accompanying consolidated balance
sheets as follows:
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Deferred tax asset - current $8,168 $5,216
Deferred tax asset - noncurrent 904 2,049
- -------------------------------------------------------------------------------
Total $9,072 $7,265
===============================================================================
The net operating loss carryforwards for federal income tax purposes expire as
follows:
(in thousands)
- -------------------------------------------------------------------------------
Year Regular Tax
- -------------------------------------------------------------------------------
2005 $1,317
2009 1,366
- -------------------------------------------------------------------------------
Total $2,683
===============================================================================
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
F-20
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
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 was established for $1,310,000, the
future tax benefit of the unused capital loss carryforward, because it was
uncertain whether the Company would be able to generate capital gains to utilize
the capital loss carryforward. During 2002, unanticipated capital gains were
generated reducing the capital loss carryforward and corresponding valuation
allowance to $776,000. The capital loss carryforward expires in 2006.
Note 10 - Commitments and Contingencies
The Company leases premises and equipment under operating leases having terms
from month-to-month to 7 years. At December 31, 2002, future minimum lease
payments under leases ("Lessee") having an initial or remaining non-cancelable
term in excess of one year were as set forth below. The Company also leases
certain owned real estate properties of its Investment segment. Future minimum
lease receipts by the Company for leases ("Lessor") having an initial or
remaining non-cancelable term in excess of one year were as follows:
(in thousands)
- -------------------------------------------------------------------------------
Year Lessee Lessor
- -------------------------------------------------------------------------------
2003 $1,325 $2,171
2004 999 1,400
2005 575 1,027
2006 269 576
2007 - 443
Thereafter - 1,027
- -------------------------------------------------------------------------------
Total $3,168 $6,644
===============================================================================
For the years ended December 31, 2002, 2001 and 2000, rent expense for operating
leases was approximately $1,358,000, $1,494,000 and $1,766,000, respectively.
F-21
For the years ended December 31, 2002, 2001 and 2000, rental revenue was
approximately $3,194,000, $2,594,000 and $2,281,000 in 2002, 2001 and 2000,
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.
Note 11 - Capitalization
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.
Note 12 - Stock Options, Compensation Plans and Retirement Savings Plan
The Company registered 1,500,000 shares of its Common Stock under the Securities
Act of 1933, as amended, to be issued with 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,
864,000 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 2002, the Company repurchased 13,136 shares
of its Common Stock for $265,000.
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. Stock option activity is as
follows:
Number of Weighted Average
Options Exercise Price
- -------------------------------------------------------------------------------
Outstanding - December 31, 1999 293,213 10.19
Granted 197,000 13.35
Exercised (53,864) 7.45
Canceled or expired (52,483) 9.72
- -------------------------------------------------------------------------------
Outstanding - December 31, 2000 383,866 12.26
Granted 61,500 9.37
Exercised (34,360) 6.85
Canceled or expired (18,365) 11.60
- -------------------------------------------------------------------------------
Outstanding - December 31, 2001 392,641 12.32
Granted - -
Exercised (28,156) 9.78
Canceled or expired (35,790) 10.15
- -------------------------------------------------------------------------------
Outstanding - December 31, 2002 328,695 $12.76
===============================================================================
F-22
A summary of the status of options outstanding at December 31, 2002 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 12/31/02 Remaining Life Exercise Price 12/31/02 Exercise Price
- ----------------- ----------- -------------- -------------- ----------- --------------
$ 7.87 - $ 8.63 70,693 4.52 $ 8.27 36,975 $ 8.25
9.00 - 11.75 51,907 1.88 9.84 10,625 10.92
12.00 - 12.00 51,000 4.33 12.00 - -
12.10 - 14.00 48,845 4.37 13.43 9,145 12.12
14.50 - 18.00 74,750 5.64 16.77 6,750 14.50
18.13 - 22.69 31,500 3.45 18.34 31,500 18.34
- ------------------------------------------------------------- --------------------------
$ 7.87 - $22.69 328,695 4.20 $12.76 94,995 $12.71
============================================================= ==========================
At December 31, 2002, 2001 and 2000, the number of options exercisable was
94,995, 97,141 and 137,116, 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 were permitted
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 were permitted
to defer their fees to purchase Common Stock of the Company. The right to
purchase shares under the Stock Purchase Plan was terminated on January 1, 2003.
The price at which Common Stock was able to be purchased under the Stock
Purchase Plan, with respect to the deferrals on the annual salaries of key
executives was 90% and for non-employee directors was 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 delivered to the Stock Purchase Plan with
respect to deferrals on the annual bonuses, was 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.
For the years ended December 31, 2002, 2001 and 2000, approximately $193,000,
$128,000 and $434,000, 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 had 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. The Top Hat Plan was
terminated with respect to deferrals from compensation earned after December 31,
2000. For the year ended December 31, 2000 participants deferred $99,000, 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
F-23
as "Trading securities held in retirement trust" in the accompanying
consolidated balance sheets. The market value of these mutual funds at December
31, 2002 and 2001, was $833,000 and $1,142,000, 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.
Company Deferred Compensation Plans
- -----------------------------------
The Company contributes $200,000 annually to a deferred compensation plan on
behalf of Ludwig Kuttner. At the option of the Mr. Kuttner, the cumulative
amount may be invested in the Company, accruing interest at 110% of the
Applicable Federal Long-Term Interest Rate.
In accordance with an unfunded deferred compensation agreement with Eugene
Warsaw, the President of Hampshire Designers, Inc., the Company accrued for the
years ended December 31, 2002, 2001 and 2000, approximately $561,000, $471,000
and $240,000, respectively.
Retirement Savings Plan
- -----------------------
The Company has a "Hampshire Group, Limited and Subsidiaries 401(k) Retirement
Savings Plan" under which 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. Matching contributions for the years ended December 31,
2002, 2001 and 2000 were approximately $142,000, $125,000 and $210,000,
respectively. Such matching contributions vest fully after six years of
employment.
Note 13 - Related Party Transactions
The Company leases certain buildings from an affiliated company. Ludwig Kuttner
and his wife own approximately 18% of the voting stock of the affiliate. Rent
expense under such leases for the years ended December 31, 2002, 2001 and 2000
was approximately $243,000, $234,000 and $232,000, respectively. The Company
also leases certain buildings from Peter Woodworth, a director of the Company.
Rent expense under such leases for the years ended December 31, 2002, 2001 and
2000 was approximately $96,000, $158,000 and $164,000, respectively. 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, and for the years ended December 31, 2002, 2001 and 2000 these
fees were approximately $49,000, $59,000 and $24,000, respectively.
During 1999, Hampshire Investments purchased two promissory notes in the
aggregate principal amount of $775,000. The issuers defaulted under the notes
and on March 30, 2000, Ludwig Kuttner 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. The firm has served as legal counsel to the
Company since 1977 and in such capacity, for the years ended December 31, 2002,
2001 and 2000, the firm was paid approximately $96,000, $33,000 and $254,000,
respectively.
Dr. Joel Goldberg, a director of the Company, is a principal of Career
Consultants, Inc., which has provided human resource consulting services to the
Company since 1997. In such capacity this firm was paid fees, for the years
ended December 31, 2001 and 2000 approximately $5,000 and $25,000, respectively.
F-24
Mr. Michael Jackson, a director of the Company, is a principal of Ironwood
Partners LLC, which has provided financial consulting services to the Company.
In such capacity this firm was paid a fee, for the year ended December 31, 2002
of $75,000.
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 in 2001 and
$20,000 during the year 2000. Another son of Ludwig Kuttner worked on this
project as a subcontractor. His company was paid $70,000 in 2001 and $45,000 in
2000.
The Company entered into a service agreement with an affiliated company, owned
by certain officers of Item-Eyes, Inc., to warehouse and distribute its women's
related separates products. The service agreement provides that a fee be paid on
a per unit shipped basis. The service agreement expires August 31, 2005,
however; it may be terminated by the Company at any time upon 30 days written
notice. Fees paid for the years ended December 31, 2002, 2001, and 2000 were
$2,765,000, $2,800,000 and $890,000, respectively, and are included in selling,
general and administrative expenses in the accompanying consolidated statements
of income.
Note 14 - Sale of Assets
During the year ended December 31, 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. During the
fourth quarter of 2001, the Company notified Glamourette it was in default under
the loan agreement with respect to sale of the sweater manufacturing assets and
that the Company would recoup approximately $1,100,000 due to the Company from
Glamourette. Subsequent to this notice Glamourette filed for bankruptcy and
accordingly the Company reserved the remaining $1,793,000 due on the note and
the $1,100,000 recouped. During 2002, Glamourette unsuccessfully challenged the
recoupment and the Company reversed $553,000 of the reserve, which has been
included as a reduction of selling, general and administrative expenses in the
accompanying consolidated statement of income.
Note 15 - Discontinued Operations
In December 2000, the Company sold assets from its discontinued Hosiery
Division, which was engaged in the manufacture and sale of ladies and children's
hosiery and socks, resulting in a gain of $398,000, net of a $235,000 provision
for income taxes, during the year ended December 31, 2000.
F-25
Note 16 - 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 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 on disposal of discontinued operations 398 - 0.09
- -------------------------------------------------------------------------------
Net income 8,543 4,265 2.00
Effect of dilutive securities-options - 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 - 13 (0.01)
- -------------------------------------------------------------------------------
Diluted EPS:
Net income $11,080 4,674 $2.37
- -------------------------------------------------------------------------------
FOR THE YEAR 2002 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- -------------------------------------------------------------------------------
Basic EPS:
Net income $17,048 4,711 $3.62
Effect of dilutive securities-options - 123 (0.09)
- -------------------------------------------------------------------------------
Diluted EPS:
Net income $17,048 4,834 $3.53
- -------------------------------------------------------------------------------
Note 17 - 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, and earns rental revenue on many of these
properties.
F-26
Note 17 - Industry Segments and Geographical Areas (continued)
Year Ended December 31, (in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------
Net sales Apparel $293,268 $261,361 $195,372
Rental revenue Investments 3,194 2,594 2,281
-------------------------------
$296,462 $263,955 $197,653
-------------------------------
Revenue by geographic area United States $295,195 $262,894 $196,747
Russia 460 437 384
Europe 807 624 522
-------------------------------
$296,462 $263,955 $197,653
- ------------------------------------------------===============================
Gross profit Apparel $82,932 $68,815 $39,651
28.3% 26.3% 20.3%
- -------------------------------------------------------------------------------
Income (loss) from operations Apparel $35,263 $24,245 $13,739
Investments (2,526) (456) 13
Corporate (4,147) (3,530) (1,165)
-------------------------------
$28,590 $20,259 $12,587
- ------------------------------------------------===============================
Interest expense Apparel $ 83 $ 321 $ 495
Investments 657 868 723
Corporate 1,276 2,242 2,192
-------------------------------
$2,016 $3,431 $3,410
- ------------------------------------------------===============================
Interest income Apparel $ 14 $231 $ 255
Investments 56 47 152
Corporate 406 283 946
-------------------------------
$476 $561 $1,353
- ------------------------------------------------===============================
Income tax provision - net Apparel $10,490 $5,990 $2,200
Investments (1,265) (115) 44
Corporate 875 325 (73)
-------------------------------
$10,100 $6,200 $2,171
- ------------------------------------------------===============================
Identifiable assets Apparel $59,380 $74,903 $85,021
Investments 34,048 34,527 29,510
Corporate 73,049 35,507 18,121
-------------------------------
$166,477 $144,937 $132,652
- ------------------------------------------------===============================
Capital expenditures and
long-term asset expenditures Apparel $ 907 $ 204 $ 177
Investments 3,207 8,502 9,042
Corporate 9 90 6
-------------------------------
$4,123 $8,796 $9,225
- ------------------------------------------------===============================
Depreciation and amortization Apparel $ 729 $1,549 $2,390
Investments 1,290 1,001 822
Corporate 37 69 196
-------------------------------
$2,056 $2,619 $3,408
- ------------------------------------------------===============================
Long-lived assets excluding United States $17,489 $20,808 $17,518
long-term investments Russia 3,970 3,285 3,218
Europe 9,056 7,457 4,701
-------------------------------
$30,515 $31,550 $25,437
- ------------------------------------------------===============================
Long-term investments United States $3,618 $3,109 $3,381
Russia 131 131 131
Europe 566 566 1,838
-------------------------------
$4,315 $3,806 $5,350
- ------------------------------------------------===============================
F-27
SCHEDULE II
HAMPSHIRE GROUP, LIMITED
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Charged to
beginning sales and Deduc- Other Balance at
of year expenses tions adjustments end of year
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
- ----------------------------
Allowance for doubtful accounts $ 335 $ 25 ($ 95) $ 204 (1) $ 469
Allowance for returns and adjustments 4,739 8,129 (8,314) 2,019 (1) 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
YEAR ENDED DECEMBER 31, 2002
- ----------------------------
Allowance for doubtful accounts $ 260 $ 354 ($ 164) - $ 450
Allowance for returns and adjustments 6,570 21,457 (15,420) - 12,607
- ---------------------------------------------------------------------------------------------
(1) Balance resulting from acquisition of Item-Eyes, Inc.
F-28
SCHEDULE III
1 of 2
HAMPSHIRE GROUP, LIMITED
REAL PROPERTY AND ACCUMULATED DEPRECIATION
(in thousands)
December 31, 2002
- ------------------------------------------------------------------------------------------------------------
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 $ 432 $ 397 $ 829 $10,609
Hidden Creek Development - Blanco, Texas 313 999 - 999 485
Merrick Properties - Huntington, New York 1,745 620 1,500 2,120 742
PA Properties - Washington, D.C. 2,034 764 1,687 2,451 190
Teall Properties - Syracuse, New York 1,106 585 1,076 1,661 59
- ------------------------------------------------------------------------------------------------------------
Total United States Real Property 5,201 3,400 4,660 8,060 12,085
Real Property Write-Down - - - - -
- ------------------------------------------------------------------------------------------------------------
Net United States Real Property 5,201 3,400 4,660 8,060 12,085
- ------------------------------------------------------------------------------------------------------------
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
Millionnaya 11, Embankment, Unit No. 65 - - 175 175 119
Millionnaya 29, Unit No. 5 - - 200 200 170
Nevsky 64, Unit No. 42 - - 60 60 74
Millionnaya 29, Penthouse - - 60 60 579
Millionnaya 29, Unit No. 7 - - 200 200 184
Millionnaya 29, Unit No. 6 - - 170 170 304
Millionnaya 11, Embankment, Unit No. 62 - - 123 123 -
Kutuzova Embankment, Bldg. 30, Unit 41 - - 162 162 216
- ------------------------------------------------------------------------------------------------------------
Total Russian Real Property - - 3,210 3,210 3,568
Real Property Write-Down - - - - -
- ------------------------------------------------------------------------------------------------------------
Net Russian Real Property - - 3,210 3,210 3,568
- ------------------------------------------------------------------------------------------------------------
F-29a
SCHEDULE III
1 of 2
HAMPSHIRE GROUP, LIMITED
REAL PROPERTY AND ACCUMULATED DEPRECIATION
(in thousands)
December 31, 2002
- -------------------------------------------------------------------------------------------------------
Gross Amount at Which Carried
at End of Period
------------------------------
Building and Accumulated
Properties Land Improvements Total Depreciation
- ------------------------------------------------------------------------------------ ---------------
UNITED STATES
- --------------------------------------------------
Residential/Commercial Blg - Charlottesville, VA
(parking lot) $ 507 $10,931 $11,438 ($ 506)
Hidden Creek Development - Blanco, Texas 1,484 - 1,484 -
Merrick Properties - Huntington, New York 620 2,242 2,862 (449)
PA Properties - Washington, D.C. 764 1,877 2,641 (533)
Teall Properties - Syracuse, New York 585 1,135 1,720 (275)
- -------------------------------------------------------------------------------------------------------
Total United States Real Property 3,960 16,185 20,145 (1,763)
Real Property Write-Down - (3,140) (3,140) -
- -------------------------------------------------------------------------------------------------------
Net United States Real Property 3,960 13,045 17,005 (1,763)
- -------------------------------------------------------------------------------------------------------
ST PETERSBURG, RUSSIA
- --------------------------------------------------
Bolshaya Knonushennaya No. 15, Unit No. 2 - 347 347 (11)
Nevsky 64, Unit No. 43 - 576 576 (17)
Nevsky 43, Unit No. 1 - 530 530 (14)
Nevsky 11, Unit No. 6 - 332 332 (9)
Millionnaya 29, Unit No. 3 - 393 393 (11)
Nevsky 23, Unit No. 4 - 307 307 (9)
Nevsky 11, Unit No. 7 - 332 332 (9)
Nevsky 23, Unit No. 20 - 431 431 (13)
Nevsky 64, Unit No. 39 - 230 230 (7)
Nevsky 11, Unit No. 8 - 305 305 (14)
Nevsky 13, Unit No. 4 - 199 199 (7)
Millionnaya 11, Embankment, Unit No. 65 - 294 294 (11)
Millionnaya 29, Unit No. 5 - 370 370 (22)
Nevsky 64, Unit No. 42 - 134 134 (7)
Millionnaya 29, Penthouse - 639 639 (27)
Millionnaya 29, Unit No. 7 - 384 384 (25)
Millionnaya 29, Unit No. 6 - 474 474 (13)
Millionnaya 11, Embankment, Unit No. 62 - 123 123 -
Kutuzova Embankment, Bldg. 30, Unit 41 - 378 378 (6)
- -------------------------------------------------------------------------------------------------------
Total Russian Real Property - 6,778 6,778 (232)
Real Property Write-Down - (2,617) (2,617) -
- -------------------------------------------------------------------------------------------------------
Net Russian Real Property - 4,161 4,161 (232)
- -------------------------------------------------------------------------------------------------------
F-29b
SCHEDULE III
2 of 2
- ------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------
Total Romanian Real Property - - 382 382 23
Impairment Reserve - - - - -
- ------------------------------------------------------------------------------------------------------------
Total Romanian Real Property - - 382 382 23
- ------------------------------------------------------------------------------------------------------------
PRAGUE, CZECH REPUBLIC
- --------------------------------------------
Office Building, Slikova 55 Praha 1,198 - 314 314 1,381
Office Building, Belgicka 14 Praha 745 - 782 782 897
Office Building, Belgicka 16 Praha 1,341 - 590 590 1,722
Office Building, Business Parc Vraz 441 - 466 466 746
Office Building, Husinecka, Praha 591 - 1,387 1,387 361
Office Building, Belgicka 20 Praha 518 - 997 997 243
- ------------------------------------------------------------------------------------------------------------
Total Czech Republic Real Property 4,834 - 4,536 4,536 5,350
- ------------------------------------------------------------------------------------------------------------
$10,035 $3,400 $12,788 $16,188 $21,026
- ------------------------------------------------------------------------------------------------------------
F-30a
SCHEDULE III
2 of 2
- --------------------------------------------------------------------------------------------------------
Real Property and Accumulated Depreciation (Continued)
- --------------------------------------------------------------------------------------------------------
Gross Amount at Which Carried
at End of Period
------------------------------
Building and Accumulated
Properties Land Improvements Total Depreciation
- ------------------------------------------------------------------------------------ ----------------
BUCHAREST, ROMANIA
- -----------------------------------------------
Jean Texier Street, No. 7, Unit No. 1 - 174 174 (7)
Nicolae Balcescu Blvd. No. 5, Unit No. 32 - 47 47 (3)
Nicolae Balcescu Blvd. No. 5, Unit No. 35 - 88 88 (5)
Television Blvd. Unit No. 1 - 96 96 (5)
- --------------------------------------------------------------------------------------------------------
Total Romanian Real Property - 405 405 (20)
Impairment Reserve - (125) (125) -
- --------------------------------------------------------------------------------------------------------
Total Romanian Real Property - 280 280 (20)
- --------------------------------------------------------------------------------------------------------
PRAGUE, CZECH REPUBLIC
- ------------------------------------------------
Office Building, Slikova 55 Praha - 1,695 1,695 (49)
Office Building, Belgicka 14 Praha - 1,679 1,679 (112)
Office Building, Belgicka 16 Praha - 2,312 2,312 (153)
Office Building, Business Parc Vraz - 1,212 1,212 (116)
Office Building, Husinecka, Praha - 1,748 1,748 (428)
Office Building, Belgicka 20 Praha - 1,240 1,240 (259)
- --------------------------------------------------------------------------------------------------------
Total Czech Republic Real Property - 9,886 9,886 (1,117)
- --------------------------------------------------------------------------------------------------------
$3,960 $27,372 $31,332 ($3,132)
- --------------------------------------------------------------------------------------------------------
F-30b
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 $31,332 at December
31, 2002.
The changes in total real property assets and accumulated depreciation for the
period ending December 31, 2002 are as follows:
Total Real Property Assets Accumulated Depreciation
- -------------------------- ------------------------
Balance, beginning of period $33,030 Balance, beginning of period ($3,650)
Acquisitions 131 Depreciation (1,279)
Additions and improvements 2,143 Property sale 6
Foreign currency valuation Foreign currency valuation
adjustment 1,514 adjustment (194)
Property sale (254) Property donation 1,985
Property impairment (3,140) ------
Property donation (2,092)
-------
Balance, end of period $31,332 Balance, end of period ($3,132)
======= ======
F-30c
Quarterly Financial Data (unaudited)
(in thousands, except per share data)
Annual
In 2001 Quarter Ended (1) Mar. 31 Jun. 30 Sept. 29 Dec. 31 Total
- ------------------------------------------------------------------------------------------
Net sales $37,276 $25,847 $100,451 $97,787 $261,361
Gross profit 7,958 5,678 25,566 29,613 68,815
Operating income (loss) (1,266) (2,876) 11,865 12,536 20,259
----------------------------------------------
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
==============================================
- Diluted ($0.25) ($0.45) $1.39 $1.67 $2.37
==============================================
Annual
In 2002 Quarter Ended Mar. 30 Jun. 29 Sept. 28 Dec. 31 Total
- ------------------------------------------------------------------------------------------
Net sales $42,859 $31,536 $109,134 $109,739 $293,268
Gross profit 12,383 8,974 30,090 31,485 82,932
Operating income (loss) 2,203 (496) 15,091 11,792 28,590
----------------------------------------------
Net income (loss) $ 1,096 ($523) $ 9,033 $ 7,442 $ 17,048
==============================================
Net income (loss) per common share - Basic $0.23 ($0.11) $1.92 $1.58 $3.62
==============================================
- Diluted $0.23 ($0.11) $1.86 $1.54 $3.53
==============================================
(1) Differences from amounts previously reported on the Company's filings on Form 10-Q
are due to reclassifications.
F-31
HAMPSHIRE GROUP, LIMITED
2002 EXHIBIT INDEX
Exhibit No. Description
- -------------- ---------------------------------------------------------
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbones-Oxley
Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbones-Oxley
Act of 2002.