UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 27, 2003.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ________ to _______.
Commission File No. 000-20201
HAMPSHIRE GROUP, LIMITED
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-0967107
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
215 COMMERCE BOULEVARD
ANDERSON, SOUTH CAROLINA 29625
(Address, Including Zip Code, of Registrant's Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (864) 225-6232
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Number of Shares Outstanding
of Securities as of November 4, 2003
----------------------------- ----------------------------
Common Stock, $0.10 Par Value 4,062,721
HAMPSHIRE GROUP, LIMITED
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
----
Item 1-Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
September 27, 2003, September 28, 2002 and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations
for the Nine-Month and Three-Month Periods Ended
September 27, 2003 and September 28, 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine-Month Periods Ended September 27, 2003 and
September 28, 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3-Quantitative and Qualitative Disclosures About Market Risk 15
Item 4-Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1-Legal Proceedings 16
Item 6-Exhibits and Reports on Form 8-K 16
Signatures 17
- 2 -
PART I - FINANCIAL INFORMATION
Item 1-Financial Statements
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
Sept. 27, Sept. 28, Dec. 31,
2003 2002 2002*
---------- -------- --------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,007 $ 357 $ 66,893
Accounts receivable trade-net 72,683 80,579 27,474
Notes and other accounts receivable-net 738 431 1,619
Inventories 54,809 54,343 14,732
Assets of discontinued operations-net 32,273 37,854 35,786
Other current assets 7,040 4,945 7,228
-------- -------- --------
Total current assets 169,550 178,509 153,732
Property, plant and equipment-net 1,785 1,586 1,679
Goodwill 8,020 8,020 8,020
Other assets 2,019 3,731 2,514
-------- -------- --------
Total assets $181,374 $191,846 $165,945
======== ======== ========
LIABILITIES
- -----------
Current liabilities:
Current portion of long-term debt $ 1,930 $ 2,547 $ 1,930
Borrowings under line of credit 22,679 34,431 -
Accounts payable 12,958 13,248 6,172
Accrued expenses and other liabilities 13,710 15,721 27,318
Liabilities of discontinued operations 13,946 12,462 11,912
-------- -------- --------
Total current liabilities 65,223 78,409 47,332
Long-term debt 6,605 10,224 7,583
Deferred compensation 2,352 2,209 2,575
-------- -------- --------
Total liabilities 74,180 90,842 57,490
-------- -------- --------
STOCKHOLDERS' EQUITY
- --------------------
Common stock 476 472 472
Additional paid-in capital 32,004 31,350 31,484
Retained earnings 74,768 69,183 76,526
Treasury stock (54) (1) (27)
-------- -------- --------
Total stockholders' equity 107,194 101,004 108,455
-------- -------- --------
Total liabilities and stockholders' equity $181,374 $191,846 $165,945
======== ======== ========
*Derived from the December 31, 2002 audited consolidated balance sheet.
(The accompanying notes are an integral part of these unaudited
financial statements.)
- 3 -
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Nine-Month Three-Month
Periods Ended Periods Ended
---------------------- ---------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $180,164 $183,529 $97,036 $109,134
Cost of goods sold 135,722 132,082 72,668 79,044
-------- -------- ------- --------
Gross profit 44,442 51,447 24,368 30,090
Selling, general and
administrative expenses 37,062 35,319 16,377 15,377
-------- -------- ------- --------
Income from operations 7,380 16,128 7,991 14,713
Other income (expense):
Interest expense (645) (970) (245) (386)
Interest income 623 344 85 34
Other 95 (296) 11 (154)
-------- -------- ------- --------
Income before taxes from
continuing operations 7,453 15,206 7,842 14,207
Provision for income taxes 2,825 5,753 2,977 5,384
-------- -------- ------- --------
Income from continuing operations 4,628 9,453 4,865 8,823
-------- -------- ------- --------
Discontinued operations:
Income from discontinued operations,
net of tax of $313, $47, $71 and $76 558 153 171 210
Loss from disposal of discontinued
operations, net of tax of $121 (5,901) - (5,901) -
-------- -------- ------- --------
(Loss) income from discontinued
operations (5,343) 153 (5,730) 210
-------- -------- ------- --------
Net income (loss) ($715) $9,606 ($865) $9,033
======== ======== ======= ========
Basic income per share -
Income from continuing operations $0.98 $2.01 $1.02 $1.87
(Loss) income from discontinued
operations (1.13) 0.03 (1.21) 0.04
----- ----- ----- -----
Net (loss) income ($0.15) $2.04 ($0.18) $1.92
===== ===== ===== =====
Diluted income per share -
Income from continuing operations $0.95 $1.96 $1.00 $1.82
(Loss) income from discontinued
operations (1.10) 0.03 (1.18) 0.04
----- ----- ----- -----
Net (loss) income ($0.15) $1.99 ($0.18) $1.86
===== ===== ===== =====
Weighted average number of
shares outstanding - Basic 4,724 4,709 4,751 4,716
===== ===== ===== =====
Diluted 4,851 4,833 4,863 4,855
===== ===== ===== =====
(The accompanying notes are an integral part of these unaudited
financial statements.)
- 4 -
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine-Month Periods Ended
------------------------
Sept. 27, Sept. 28,
2003 2002
-------- --------
Cash flows from operating activities:
Net income (loss) $ (715) $ 9,606
Loss (income) from discontinued operations 5,343 (153)
------- -------
Income from continuing operations 4,628 9,453
Adjustments to reconcile income from
continuing operations to net cash (used in)
provided by operating activities:
Depreciation and amortization 586 523
Provision for bad debts and uncollectible notes - 195
(Gain) loss on disposal of property (1) 108
Net deferred compensation costs 162 423
Net change in operating assets and liabilities:
Receivables (44,245) (45,822)
Inventories (40,077) (27,604)
Other assets 27 56
Accounts payable, accrued expenses and other
liabilities (6,822) 8,249
------- -------
Net cash (used in) continuing operating activities (85,742) (54,419)
------- -------
Cash flows from investing activities:
Capital expenditures (721) (633)
Proceeds from sale of property, plant and equipment 30 -
Proceeds from loans 188 188
------- -------
Net cash (used in) investing activities (503) (445)
------- -------
Cash flows from financing activities:
Net borrowings under line of credit 22,679 34,431
Proceeds from issuance of long-term debt - 168
Repayment of long-term debt (978) (3,447)
Proceeds from issuance of common stock 524 122
Proceeds from issuance of treasury stock 185 123
Purchases of treasury stock (1,255) -
------- -------
Net cash provided by financing activities 21,155 31,397
------- -------
Discontinued operations:
Net cash provided by (used in) discontinued
operations 204 (4,327)
------- -------
Net decrease in cash and cash equivalents (64,886) (27,794)
Cash and cash equivalents - beginning of period 66,893 28,151
------- -------
Cash and cash equivalents - end of period $ 2,007 $ 357
======= =======
- ---------------------------------------------------------------------------
Supplementary disclosure of cash flow information:
Cash paid during the period for: Interest $ 946 $1,216
Income taxes 5,721 7,311
Interest and income taxes paid include amounts related to discontinued
operations.
(The accompanying notes are an integral part of these
unaudited financial statements.)
- 5 -
HAMPSHIRE GROUP, LIMITED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements are unaudited and include the accounts of
Hampshire Group, Limited and its subsidiaries, substantially all of which are
wholly-owned (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by such generally accepted accounting
principles for complete financial statements.
In the opinion of the management of the Company, the unaudited condensed
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair statement of the
results of operations for the interim periods presented, with no material
retroactive adjustments. The results of operations for interim periods are not
indicative of the results that may be expected for a full year due to the
seasonality of the business. These interim unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 2002,
included in the Company's Annual Report on Form 10-K.
Certain reclassifications have been made to data from the previous year to
conform with the presentation of the current year. As discussed in Note 4,
"Discontinued Operations", in October 2003, the Company concluded to dispose of
its Investment segment and accordingly, the net assets and net liabilities
related to that segment are shown as held for sale in the accompanying balance
sheets, and the results of operations of the Investment segment have been
classified as discontinued operations for all periods presented.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are the same as those applied at
December 31, 2002 and disclosed in the Company's audited consolidated financial
statements and notes thereto for the year ended December 31, 2002, included in
the Company's Annual Report on Form 10-K.
Stock Based Compensation
- ------------------------
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 were effective for
fiscal years ending after December 15, 2002. The Company has elected to continue
to follow the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), to account for employee stock options. Under APB 25, no compensation
expense is recognized unless the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date
- 6 -
of grant. The Company has not recorded compensation expense in the periods
presented because stock options were granted at the fair market value of the
underlying stock on the date of grant.
The following information regarding net income and earnings per share prepared
in accordance with SFAS 123 has been determined as if the Company had accounted
for its employee stock options under the fair value method prescribed by SFAS
123. The resulting effect on net income and earnings per share pursuant to SFAS
123 is not likely to be representative of the effects on net income and earnings
per share pursuant to SFAS 123 in future periods, due to subsequent periods
including additional grants and periods of vesting. The fair value of options
was estimated at the date of grant using a Black-Scholes option valuation model
with the following weighted-average assumptions for the nine-month period ended
September 27, 2003: risk-free interest rates of 4.1%; dividend yield of 0%;
expected volatility of 39.7%; expected life of 4.2 years; and a weighted-average
fair value of options granted of $7.02. During the nine-month period ended
September 27, 2003, 1,000 options were granted and no options were granted
during the three-month period ended September 27, 2003. There were no options
granted during the nine-month and three-month periods ended September 28, 2002.
For purposes of disclosures pursuant to SFAS 123 as amended by SFAS 148, the
estimated fair value of options is amortized to expense over the options'
vesting period.
The following table illustrates the effect on reported net income (loss) and
earnings (loss) per share had the Company applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation (in thousands,
except per share amounts):
Nine-Month Three-Month
Periods Ended Periods Ended
------------------ ------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
-------- -------- -------- --------
Net income (loss) As reported ($715) $9,606 ($865) $9,033
Less - Compensation cost, net of tax 37 56 11 10
---------------------------------------
Pro forma ($752) $9,550 ($876) $9,023
- -----------------------------------------------------------------------------------
Basic earnings (loss)
per share: As reported ($0.15) $2.04 ($0.18) $1.92
---------------------------------------
Pro forma ($0.16) $2.03 ($0.18) $1.91
- -----------------------------------------------------------------------------------
Diluted earnings (loss)
per share: As reported ($0.15) $1.99 ($0.18) $1.86
---------------------------------------
Pro forma ($0.16) $1.98 ($0.18) $1.86
- -----------------------------------------------------------------------------------
NOTE 3. INVENTORIES
A summary of inventories by component is as follows:
(in thousands)
Sept. 27, Sept. 28, Dec. 31,
2003 2002 2002
-------- -------- --------
Finished goods $54,204 $52,710 $13,246
Work-in-progress 132 392 205
Raw materials and supplies 710 1,337 1,518
------- ------- -------
55,046 54,439 14,969
Less - Excess of current cost
over LIFO carrying value (237) (96) (237)
------- ------- -------
Total $54,809 $54,343 $14,732
======= ======= =======
- 7 -
NOTE 4. DISCONTINUED OPERATIONS
In August 2003, the Company announced that the Board of Directors had appointed
a special committee to consider the possible disposition of Hampshire
Investments, Limited ("HIL"), a subsidiary of the Company, which had previously
been reported as a separate operating segment. The special committee, consisting
of independent directors, was appointed because Ludwig Kuttner, Chairman and
Chief Executive Officer, had indicated to the Board that he and other members of
management of the Company, might participate as possible purchasers of HIL. HIL
made investments both domestically and internationally, principally in real
property, and earned rental revenues on many of these properties.
On October 8, 2003, the Company completed the disposition of HIL. Certain HIL
assets were sold to K Holdings, L.L.C., a company controlled by Ludwig Kuttner,
for a purchase price of 250,000 shares of the Company's common stock.
Immediately after this sale, the Company sold all of the outstanding shares of
HIL's capital stock to an investor group including Mr. Kuttner, Peter Woodworth,
a Director of the Company, and Charles Clayton, Treasurer of the Company, for a
purchase price of 450,000 shares of the Company's common stock.
The fair market value of the Company's common stock received in the two
transactions was $23,905,000 using a price of $34.15 per share, as reported by
NASDAQ at the market close on October 7, 2003, the trading day prior to the date
on which the transactions were consummated. The transactions resulted in a loss
from disposal of approximately $5,901,000, net of the related tax benefit. The
$5,901,000 impairment of HIL, including estimated costs to sell, was recognized
as a loss from disposal of discontinued operations in the consolidated statement
of operations for the three-month and nine-month periods ended September 27,
2003. Substantially the entire amount of the loss from the disposition of HIL is
classified as a capital loss and, since the benefit of the Company's future
utilization of the capital loss is deemed unlikely, minimal tax benefit from the
disposition has been recognized in the financial statements.
Due to the Company's announced intention in August 2003 to dispose of HIL, it
has been accounted for as a discontinued operation and, accordingly, the
financial information for all prior periods presented has been reclassified to
report HIL as a discontinued operation.
The major classes of discontinued assets and liabilities included in the
consolidated balance sheets are summarized as follows (in thousands):
Sept. 27, Sept. 28, Dec. 31,
2003 2002 2002
-------- -------- -------
Current assets $ 1,698 $ 1,879 $ 3,167
Real property investments - net 30,907 30,792 27,668
Long-term investments - net 3,788 4,537 4,315
Impairment on disposal of investments (4,830) - -
Other assets 710 646 636
------- ------- -------
Total assets $32,273 $37,854 $35,786
======= ======= =======
Current liabilities $ 2,971 $ 1,654 $ 2,193
Long-term liabilities 10,975 10,808 9,719
------- ------- -------
Total liabilities $13,946 $12,462 $11,912
======= ======= =======
- 8 -
The rental revenue and pretax income for HIL which are included in the income
from discontinued operation activities in the consolidated statements of
operations are summarized as follows (in thousands):
Nine-Month Periods Ended Three-Month Periods Ended
------------------------ -------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
-------- -------- -------- --------
Rental Revenue $2,596 $2,298 $885 $819
Pre-tax income 871 200 242 286
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires that if an entity has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of activities of
the variable interest entity should be included in the consolidated financial
statements of the entity. FIN 46 requires that its provisions are effective for
fiscal years beginning after December 15, 2003 for variable interest entities
acquired before February 1, 2003 and effective immediately for variable interest
entities created after January 31, 2003. The Company does not believe that the
adoption of FIN 46 will have any impact on the Company's operating results or
financial position, since the Company had not entered into such arrangements.
NOTE 6. REVOLVING CREDIT FACILITY
On August 15, 2003, the Company entered into a new Revolving Credit Facility
("facility") with six participating commercial banks, with HSBC Bank USA as
agent. The facility, which matures on April 30, 2007, provides a secured credit
facility up to $100,000,000 in revolving line of credit borrowings and letters
of credit. Advances under the line of credit are limited to the lesser of: (1)
$100,000,000 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 issued through
this credit facility, plus seasonal overadvances.
Advances under the facility bear interest at either the bank's prime rate minus
..25% or, at the option of the Company, a fixed rate of LIBOR plus 1.80%, for a
fixed term. The loan is collateralized, pari passu with the 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. At
September 27, 2003 there were $24,175,000 million outstanding letters of credit
and $22,679,000 outstanding borrowings under the line of credit, which resulted
in availability for borrowing of approximately $47,600,000 million under the
facility at September 27, 2003.
Both the Revolving Credit Facility and the Senior Notes contain covenants which
require certain financial performance and restrict certain payments by the
Company. The financial performance covenants require, among other things, that
the Company maintain specified levels of consolidated net worth, not 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
September 27, 2003.
- 9 -
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains forward-looking information and
statements that involve risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding the results of operations.
The Company's actual results, performance or achievements could differ
materially from the results expressed in, or implied by these forward-looking
statements, which are made only as of the date hereof.
Substantially all the Company's products are purchased from independent foreign
suppliers. The failure of these suppliers to ship products to the Company in a
timely manner or to meet required standards could cause the Company to miss
delivery date requirements from its customers. The failure to make timely
deliveries could expose the Company to liability from its customers or cause
customers to cancel orders, refuse to accept delivery of products or demand
reduced prices.
SEASONALITY
The Company's apparel business is highly seasonal with the majority of sales
occurring in the third and fourth quarters of the year.
DISCONTINUED OPERATIONS
In August 2003, the Company announced that the Board of Directors had appointed
a special committee to consider the possible disposition of Hampshire
Investments, Limited ("HIL"), a subsidiary of the Company, which had previously
been reported as a separate operating segment. The special committee, consisting
of independent directors, was appointed because Ludwig Kuttner, Chairman and
Chief Executive Officer, had indicated to the Board that he and other members of
management of the Company, might participate as possible purchasers of HIL. HIL
made investments both domestically and internationally, principally in real
property, and earned rental revenues on many of these properties.
On October 8, 2003, the Company completed the disposition of HIL. Certain HIL
assets were sold to K Holdings, L.L.C., a company controlled by Ludwig Kuttner,
for a purchase price of 250,000 shares of the Company's common stock.
Immediately after this sale, the Company sold all of the outstanding shares of
HIL's capital stock to an investor group including Mr. Kuttner, Peter Woodworth,
a Director of the Company, and Charles Clayton, Treasurer of the Company, for a
purchase price of 450,000 shares of the Company's common stock.
The fair market value of the Company's common stock received in the two
transactions was $23,905,000 using a price of $34.15 per share, as reported by
NASDAQ at the market close on October 7, 2003, the trading day prior to the date
on which the transactions were consummated. The transactions resulted in a loss
from disposal of approximately $5,901,000, net of the related tax benefit. The
$5,901,000 impairment of HIL, including estimated costs to sell, was recognized
as a loss from disposal of discontinued operations in the consolidated statement
of operations for the three-month and nine-month periods ended September 27,
2003. Substantially the entire amount of the loss from the disposition of HIL is
classified as a capital loss and, since the benefit of the Company's future
utilization of the capital loss is deemed unlikely, minimal tax benefit from the
disposition has been recognized in the financial statements.
- 10 -
Due to the Company's announced intention in August 2003 to dispose of HIL, it
has been accounted for as a discontinued operation and, accordingly, the
financial information for all prior periods presented has been reclassified to
report HIL as a discontinued operation.
Income (Loss) from Discontinued Operations
- ------------------------------------------
The operations of the Company's Investment Subsidiary, Hampshire Investments,
Limited, are classified as a discontinued operation as previously discussed.
Income from discontinued operations for the nine-month period ended September
27, 2003 was $558,000, net of a provision for income tax of $313,000, compared
to $153,000, net of a provision for income tax of $47,000, for the same period
last year, an increase of $405,000.
Income from discontinued operations for the three-month period ended September
27, 2003 was $171,000, net of a provision for income tax of $71,000, compared to
$210,000, net of a provision for income tax of $76,000, for the same period last
year, a decrease of $39,000.
The loss from disposal of $5,901,000 (net of tax), as previously discussed,
resulted from the charge to reduce the Investment segment (classified as held
for sale) to its fair market value, less costs to sell. The sale of the
Investment segment was consummated on October 8, 2003.
RESULTS OF CONTINUING OPERATIONS
Nine-month Periods Ended September 27, 2003 and September 28, 2002
- ------------------------------------------------------------------
Net Sales
- ---------
Net sales for the nine-month period ended September 27, 2003 were $180,164,000,
compared to $183,529,000 for the same period last year, a decrease of $3,365,000
or 1.8%. The decrease was primarily from reduced sales of men's sweaters and
women's related separates, offset by increases in sales of women's sweaters.
Units shipped in the nine-month period ended September 27, 2003 exceeded units
shipped during the same period last year by approximately 64,000 dozen, or 4.1%.
The average net sales price per unit declined 5.7% primarily due to higher
allowances granted to customers in a highly competitive retail market and a
shift in product mix.
Gross Profit
- ------------
Gross profit for the nine-month period ended September 27, 2003 was $44,442,000,
compared to $51,447,000 for the same period last year, a decrease of $7,005,000
or 13.6%. As a percentage of net sales, gross profit margins were 24.7% for the
nine-month period of 2003, compared with 28.0% for the same period last year.
The decrease in gross profit margins primarily resulted from higher allowances
granted to customers in a highly competitive retail market.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses were $37,062,000 for the
nine-month period ended September 27, 2003, compared to $35,319,000 for the same
period last year, an increase of $1,743,000 or 4.9%. As a percentage of net
sales, SG&A expenses were 20.6% for the nine-month period of 2003, compared with
19.2% for the same period last year. The increase primarily resulted from
additional marketing, designing, shipping and related expenses caused by the
increased unit volume in the nine-month period ended September 27, 2003, costs
related to the development of two new product lines launched in the fall of
2003, and approximately $1,300,000 of non-recurring costs associated with
settling a vendor royalty audit and a contractual obligation.
- 11 -
Interest Expense
- ----------------
Interest expense for the nine-month period ended September 27, 2003 was
$645,000, compared to $970,000 for the same period last year, a decrease of
$325,000 or 33.5%. The decrease primarily resulted from lower average borrowings
and lower interest rates on the credit facility borrowings during the period
ended September 27, 2003. Average borrowings during the nine-month period ended
September 27, 2003 were $12,629,000, compared to $18,324,000 for the same period
last year.
Interest Income
- ---------------
Interest income for the nine-month period ended September 27, 2003 was $623,000,
compared to $344,000 for the same period last year, an increase of $279,000 or
81.1%. The increase primarily resulted from higher cash balances during the
period ended September 27, 2003.
Income Taxes
- ------------
The Company's income tax provision for the nine-month period ended September 27,
2003 was $2,825,000, compared to $5,753,000 for the same period last year. The
effective income tax rate was 37.9% for the nine-month period ended September
27, 2003, compared to 37.8% for the same period last year.
Income from Continuing Operations
- ---------------------------------
For the reasons stated herein, net income from continuing operations for the
nine-month period ended September 27, 2003 was $4,628,000, or $0.95 per diluted
share, compared to $9,453,000, or $1.96 per diluted share, for the same period
last year, a decrease of $4,825,000.
Three-Month Periods Ended September 27, 2003 and September 28, 2002
- -------------------------------------------------------------------
Net Sales
- ---------
Net sales for the three-month period ended September 27, 2003 were $97,036,000,
compared to $109,134,000 for the same period last year, a decrease of
$12,098,000 or 11.1%. Units shipped in the three-month period ended September
27, 2003 decreased from units shipped during the same period last year by
approximately 57,000 dozen, or 6.4%. The decrease primarily resulted from a
highly competitive retail market causing a reduction in sales and the postponed
shipment of some orders to the fourth quarter. The average net sales price per
unit declined 5.0% primarily due to higher allowances granted to customers in a
highly competitive retail market and a shift in product mix.
Gross Profit
- ------------
Gross profit for the three-month period ended September 27, 2003 was
$24,368,000, compared to $30,090,000 for the same period last year, a decrease
of $5,722,000 or 19.0%. As a percentage of net sales, gross profit margins were
25.1% for the three-month period of 2003, compared with 27.6% for the same
period last year. The decrease in gross profit margins primarily resulted from
lower net sales and higher allowances granted to customers in a highly
competitive retail market.
Selling, General and Administrative Expenses
- --------------------------------------------
SG&A expenses were $16,377,000 for the three-month period ended September
27, 2003, compared to $15,377,000 for the same period last year, an
increase of $1,000,000 or 6.5%. As a percentage of net sales, SG&A
expenses were 16.9% for the three-month period of 2003, compared with
14.1% for the same period last year. The increase resulted primarily from
expenses related to the launching of new lines for the men's sweater
business and the women's related separate business during the three-month
period ended September 27, 2003, and approximately $1,300,000 of
non-recurring costs associated with settling a vendor royalty audit and a
contractual obligation.
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Interest Expense
- ----------------
Interest expense for the three-month period ended September 27, 2003 was
$245,000, compared to $386,000 for the same period last year, a decrease of
$141,000 or 36.5%. The decrease primarily resulted from lower average borrowings
and lower interest rates on the credit facility borrowings during the period
ended September 27, 2003. Average borrowings during the three-month period ended
September 27, 2003 were $17,320,000, compared to $23,435,000 for the same period
last year.
Interest Income
- ---------------
Interest income for the three-month period ended September 27, 2003 was $85,000,
compared to $34,000 for the same period last year, an increase of $51,000 or
150.0%. The increase primarily resulted from higher cash balances during the
three-month period ended September 27, 2003.
Income Taxes
- ------------
The Company's income tax provision for the three-month period ended September
27, 2003 was $2,977,000, compared to $5,384,000 for the same period last year.
The effective income tax rate was 38.0% for the three-month period ended
September 27, 2003, compared to 37.9% for the same period last year.
Income from Continuing Operations
- ---------------------------------
For the reasons stated herein, net income from continuing operations for the
three-month period ended September 27, 2003 was $4,865,000, or $1.00 per diluted
share, compared to $8,823,000, or $1.82 per diluted share, for the same period
last year, a decrease of $3,958,000.
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. The primary sources to meet the liquidity and capital requirements
include funds generated from operations, borrowings under revolving credit lines
and long-term debt.
Net cash used in operating activities was $85,742,000 for the nine-month period
ended September 27, 2003, as compared to net cash used in operating activities
of $54,419,000 in the same period last year. Net cash used in operating
activities during the nine-month period ended September 27, 2003 resulted
primarily from an increase in inventory of $44,245,000 and accounts receivable
of $40,077,000 and a reduction of accounts payable, accrued expenses and other
liabilities of $6,822,000, offset by the cash provided by income from continuing
operations of $4,628,000. The reduction of accounts payable, accrued expenses
and other liabilities included, among other things, the payment of the 2002
incentive bonus compensation and income taxes. These changes are fully
consistent with the seasonal nature of the Company's business. Net cash used in
operating activities during the nine-month period ended September 28, 2002
resulted primarily from an increase in inventory of $45,822,000 and accounts
receivable of $27,064,000, offset by an increase in accounts payable, accrued
expenses and other liabilities of $8,249,000 and income from continuing
operations of $9,453,000.
Net cash used in investing activities was $503,000 for the nine-month period
ended September 27, 2003, as compared to net cash used in investing activities
of $445,000 for the same period last year. During the nine-month periods ended
September 27, 2003 and September 28, 2002, the Company used $721,000 and
$633,000, respectively, for capital expenditures.
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Net cash provided by financing activities was $21,155,000 for the nine-month
period ended September 27, 2003, as compared to $31,397,000 for the same period
last year. At September 27, 2003 and September 28, 2002, the Company had net
borrowings under the credit facilities of $22,679,000 and $34,431,000,
respectively, primarily for working capital requirements. During the nine-month
periods ended September 27, 2003 and September 28, 2002, the Company used
$978,000 and $3,447,000, respectively, for the repayment of long-term debt.
Additionally during the nine-month period ended September 27, 2003, the Company
used $1,255,000 to purchase its common stock.
On August 15, 2003, the Company entered into a new Revolving Credit Facility
("facility") with six participating commercial banks, with HSBC Bank USA as
agent. The facility, which matures on April 30, 2007, provides a secured credit
facility up to $100,000,000 in revolving line of credit borrowings and letters
of credit. Advances under the line of credit are limited to the lesser of: (1)
$100,000,000 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 issued through
this credit facility, plus seasonal overadvances.
Advances under the facility bear interest at either the bank's prime rate minus
..25% or, at the option of the Company, a fixed rate of LIBOR plus 1.80%, for a
fixed term. The loan is collateralized, pari passu with the 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. At
September 27, 2003 there were $24,175,000 million outstanding letters of credit
and $22,679,000 outstanding borrowings under the line of credit, which resulted
in availability for borrowing of approximately $47,600,000 million under the
facility at September 27, 2003.
Both the Revolving Credit Facility and the Senior Notes contain covenants which
require certain financial performance and restrict certain payments by the
Company. The financial performance covenants require, among other things, that
the Company maintain specified levels of consolidated net worth, not 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
September 27, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The additional disclosure requirements of SFAS 148 were effective for
fiscal years ending after December 15, 2002. The Company has elected to continue
to follow the intrinsic value method of accounting as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), to account for employee stock options. Under APB 25, no compensation
expense is recognized unless the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date of
- 14 -
grant. The Company has not recorded compensation expense in the periods
presented because stock options were granted at the fair market value of the
underlying stock on the date of grant. See Note 2, "Significant Accounting
Policies", in the Notes to Unaudited Condensed Consolidated Financial Statements
in Part I, Item I of the Form 10-Q for the required disclosures under SFAS 148.
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires that if an entity has a controlling financial interest in a
variable interest entity, the assets, liabilities and results of activities of
the variable interest entity should be included in the consolidated financial
statements of the entity. FIN 46 requires that its provisions are effective for
fiscal years beginning after December 15, 2003 for variable interest entities
acquired before February 1, 2003 and effective immediately for variable interest
entities created after January 31, 2003. The Company does not believe that the
adoption of FIN 46 will have any impact on the Company's operating results or
financial position, since the Company had not entered into such arrangements.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
financial and product market prices and rates. The Company is exposed to market
risk in the areas of changing interest rates and fluctuations of currency
exchange rates. The Company is also exposed to market risk due to changes in
costs for raw materials for the Company's products.
Substantially all of the long-term debt of the Company is at fixed interest
rates, which were at market when the debt was issued, but are primarily above
market on September 27, 2003. The short-term debt of the Company has variable
rates based on the prime interest rate of the lending institutions, or at the
option of the Company, a fixed rate based on LIBOR for a fixed term on the
Revolving Credit Facility.
In purchasing apparel from foreign manufacturers, the Company uses letters
of credit that require the payment of U.S. 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.
Item 4 - 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
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Within the 90 days prior to the filing date of this quarterly report, 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 the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on this evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective.
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There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls and procedures
subsequent to the date the Company completed its evaluation. Therefore, no
corrective actions were required to be taken.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
consolidated financial condition, results of operations, or cash flow.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
----------- --------------------------------------------------------------
10.6 Credit Agreement among HSBC Bank USA as agent, the Banks named
therein and Hampshire Group, Limited, dated August 15, 2003.
10.7 Amendment No. 3, dated August 19, 2003, to the Note Purchase
Agreement, dated May 15, 1998, among the Company, the
Guarantors named therein, Phoenix Life Insurance Company and
the Ohio National Life Insurance Company.
31.1 Certification of the Chief Executive Officer of Hampshire Group,
Limited pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of the Chief Financial Officer of Hampshire Group,
Limited pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certification of the Chief Executive Officer and the Chief
Financial Officer of Hampshire Group, Limited pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K filed during the quarter
1. On August 14, 2003, the Company filed a current report on
Form 8-K reporting an Item 9 Regulation FD disclosure regarding
the release of the Company's financial results for the quarter
ended June 28, 2003.
2. On October 23, 2003, the Company filed a current report on
Form 8-K reporting an Item 2, Acquisition and Disposition of
Assets, regarding the October 8, 2003 sale of certain assets
and all of the outstanding shares of capital stock of Hampshire
Investments, Limited, a subsidiary of Hampshire Group, Limited.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAMPSHIRE GROUP, LIMITED
(Registrant)
Date November 6, 2003 /s/ Ludwig Kuttner
- ---------------------------- ---------------------------------
Ludwig Kuttner
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
Date November 6, 2003 /s/ William W. Hodge
- ---------------------------- ----------------------------------
William W. Hodge
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
- 17 -
EXHIBIT INDEX
Exhibit No. Description
- ----------- ---------------------------------------------------------------
10.6 Credit Agreement among HSBC Bank USA as agent, the Banks named
therein and Hampshire Group, Limited, dated August 15, 2003.
10.7 Amendment No. 3, dated August 19, 2003, to the Note Purchase
Agreement, dated May 15, 1998, among the Company, the Guarantors
named therein, Phoenix Life Insurance Company and the Ohio
National Life Insurance Company.
31.1 Certification of the Chief Executive Officer of Hampshire Group,
Limited pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of the Chief Financial Officer of Hampshire Group,
Limited pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certification of the Chief Executive Officer and the
Chief Financial Officer of Hampshire Group, Limited pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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