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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 July 3, 2004.
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 August 5, 2004
----------------------------- ----------------------------
Common Stock, $0.10 Par Value 4,059,615
HAMPSHIRE GROUP, LIMITED
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION Page
----
Item 1-Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
July 3, 2004 and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations
for the Six-Month and Three-Month Periods Ended
July 3, 2004 and June 28, 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six-Month Periods Ended July 3, 2004 and June 28, 2003 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2-Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
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 2-Change in Securities 16
Item 4-Submission of Matters to a Vote of Security Holders 16
Item 6-Exhibits and Reports on Form 8-K 17
Signatures 18
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act 20
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act 22
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PART I - FINANCIAL INFORMATION
Item 1-Financial Statements
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
July 3, Dec. 31,
2004 2003*
------ --------
ASSETS
Current assets:
Cash and cash equivalents $ 56,839 $ 63,292
Accounts receivable trade - net 11,895 29,450
Notes and other accounts receivable 842 646
Inventories 41,671 22,049
Other current assets 10,168 6,842
-------- --------
Total current assets 121,415 122,279
Fixed assets - net 1,545 1,667
Goodwill 8,020 8,020
Other assets 747 1,208
-------- --------
Total assets $131,727 $133,174
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 1,930 $ 1,932
Accounts payable 22,310 12,599
Accrued expenses and other liabilities 11,808 19,846
-------- ---------
Total current liabilities 36,048 34,377
Long-term debt; less current portion 4,687 5,651
Other long-term liabilities 2,625 2,724
-------- --------
Total liabilities 43,360 42,752
-------- --------
STOCKHOLDERS' EQUITY
Common Stock, $0.10 par value;
4,761,911 and 4,761,911 shares issued; and
4,059,615 and 4,067,721 shares outstanding 476 476
Additional paid-in capital 32,900 32,685
Retained earnings 78,787 80,964
Treasury stock (23,796) (23,703)
-------- --------
Total stockholders' equity 88,367 90,422
-------- --------
Total liabilities and stockholders' equity $131,727 $133,174
======== ========
*Derived from the December 31, 2003 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)
Six-Month Three-Month
Period Ended Period Ended
------------------- -----------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $80,649 $83,128 $26,252 $31,961
Cost of goods sold 60,631 63,054 18,650 24,453
------- ------- ------- -------
Gross profit 20,018 20,074 7,602 7,508
Selling, general and
administrative expenses 22,823 20,685 10,526 9,243
------- ------- ------- -------
Loss from operations (2,805) (611) (2,924) (1,735)
Other income (expense):
Interest income 515 538 243 320
Interest expense (327) (400) (164) (194)
Other 20 84 1 56
------- ------- ------- -------
Loss from continuing operations
before income taxes (2,597) (389) (2,844) (1,553)
Provision (benefit) for income taxes (1,050) (152) (1,150) (605)
------- ------- ------- -------
Loss from continuing operations (1,547) (237) (1,694) (948)
Income (loss) from discontinued
operations net of income taxes - 387 - (4)
------- ------- ------- -------
Net income (loss) ($1,547) $ 150 ($1,694) ($ 952)
======= ======= ======= =======
Basic income (loss) per share -
Loss from continuing operations ($0.38) ($0.05) ($0.42) ($0.20)
Income from discontinued operations - 0.08 - -
------- ------- ------- ------
Net income (loss) ($0.38) $0.03 ($0.42) ($0.20)
======= ======= ======= ======
Diluted income (loss) per share -
Loss from continuing operations ($0.38) ($0.05) ($0.42) ($0.20)
Income from discontinued operations - 0.08 - -
------- ------- ------- ------
Net income (loss) ($0.38) 0.03 ($0.42) (0.20)
======= ======= ======= ======
Weighted average number of shares
outstanding - Basic 4,077 4,709 4,077 4,730
------- ------- ------- ------
Diluted 4,077 4,840 4,077 4,730
------- ------- ------- ------
(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)
Six-Month Period Ended
-----------------------
July 3, June 28,
2004 2003
Cash flows from operating activities:
Net income (loss) ($1,547) $ 150
Income from discontinued operations - (387)
------ -------
Loss from continuing operations (1,547) (237)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Depreciation 393 418
Net deferred compensation expenses for executive
officers 408 107
Tax benefit relating to Common Stock Plans 215 -
Net change in operating assets and liabilities:
Receivables 17,338 11,611
Inventories (19,622) (14,774)
Other assets (3,372) (522)
Accounts payable, accrued expenses and other
liabilities 1,673 (16,754)
------- --------
Net cash used in continuing operating activities (4,514) (20,151)
------- --------
Cash flows from investing activities:
Capital expenditures (271) (409)
Net proceeds from sale of property, plant and equipment - 29
Proceeds from loans 21 125
------- --------
Net cash used in investing activities (250) (255)
------- --------
Cash flows from financing activities:
Repayment of long-term debt (966) (965)
Proceeds from issuance of common stock - 297
Proceeds from issuance of treasury stock 322 276
Purchase of treasury stock (1,045) (1,226)
------- -------
Net cash used in financing activities (1,689) (1,618)
------- -------
Discontinued operations:
Net cash used in discontinued operations - (978)
------- -------
Net decrease in cash and cash equivalents (6,453) (23,002)
Cash and cash equivalents - beginning of period 63,292 66,893
------- -------
Cash and cash equivalents - end of period $56,839 $43,891
======= =======
- ------------------------------------------------------------------------------
Supplementary disclosure of cash flow information:
Cash paid during the period for: Income taxes $2,973 $5,380*
Interest 301 72
*Income taxes paid for period ended June 28, 2003 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 wholly-owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation. These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the instructions of Regulation S-X.
Accordingly, 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, 2003, included in the Company's Annual
Report on Form 10-K.
Certain reclassifications have been made to data from the previous year to
conform to the presentation of the current year. As discussed in Note 4,
"Discontinued Operations", in October 2003, the Company concluded the disposal
of Hampshire Investments, Limited, its investment subsidiary. Accordingly, 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, 2003 as disclosed in the Company's audited consolidated financial
statements and notes thereto for the year ended December 31, 2003, included in
the Company's Annual Report on Form 10-K.
Stock Based Compensation
- ------------------------
The Company has elected to continue to follow the intrinsic value method of
accounting to account for employee stock options as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Under APB 25, no compensation expense is recognized unless the
exercise price of the employee stock options is less than the market price of
the underlying stock on the date of grant. The Company has not recorded
compensation expense in the periods presented because all stock options have
been 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 Statement of Financial Account Standards ("SFAS") 123 has
-6-
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.
There were no options granted during the six-month period ended July 3, 2004.
During the six-month period ended June 28, 2003, 1,000 options were granted. 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
six-month period ended June 28, 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.
For purposes of disclosures pursuant to SFAS 123 as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure", the
estimated fair value of options is amortized to expense over the options'
vesting period.
The following table illustrates the effect on reported loss and loss per share
from continuing operations had the Company applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation:
Six-Month Three-Month
(in thousands, except per share amounts) Period Ended Period Ended
------------------ ---------------
July 3, June 28, July 3, June 28,
2004 2003 2004 2003
------ ------- ------ ------
Loss from continuing operations, as reported ($1,547) ($237) ($1,694) ($948)
Less - Compensation cost, net of taxes (3) (25) (2) (12)
------ ----- ------ ------
Pro forma net income (loss) ($1,550) ($262) ($1,696) ($960)
- ---------------------------------------------- ====== ===== ====== ======
Basic earnings (loss) per share: As reported ($0.38) ($0.05) ($0.42) ($0.20)
Pro forma ($0.38) ($0.06) ($0.42) ($0.20)
- ---------------------------------------------- ------ ----- ------ ------
Diluted earnings (loss) per share: As reported ($0.38) ($0.05) ($0.42) ($0.20)
Pro forma ($0.38) ($0.06) ($0.42) ($0.20)
- ---------------------------------------------- ------ ----- ------ ------
NOTE 3. INVENTORIES
- --------------------
A summary of inventories by component is as follows:
July 3, Dec. 31,
(in thousands) 2004 2003
- ------------------------------------------------ ------ --------
Finished goods $29,456 $14,217
Finished goods in-transit 11,588 6,606
Work-in-progress 144 465
Raw materials and supplies 483 879
------- -------
41,671 22,167
Less-Excess of current cost over
LIFO carrying value - (118)
------- -------
Total $41,671 $22,049
======= =======
The Company has liquidated all inventories previously costed on the last-in,
first-out (LIFO) basis.
-7-
NOTE 4. DISCONTINUED OPERATIONS
- --------------------------------
On October 8, 2003, the Company completed the disposition of Hampshire
Investments, Limited ("HIL"), the investment subsidiary of the Company. A
special committee of the Board of Directors ("Board"), comprised of independent
directors, was responsible for the disposal because Ludwig Kuttner, Chairman and
Chief Executive Officer, and other members of management of the Company
participated as purchasers.
Certain HIL assets were sold to K Holdings, LLC, a company controlled by Ludwig
Kuttner, for a purchase price of 250,000 shares of the Company's Common Stock.
Subsequently, all of the outstanding shares of capital stock of HIL were
exchanged with an investor group consisting of Mr. Kuttner, Peter Woodworth, a
Director of the Company, and Charles Clayton, Secretary and Treasurer of the
Company, for 450,000 shares of the Company's Common Stock. Mr. Clayton
subsequently was appointed interim Chief Financial Officer of the Company.
The fair market value of the Company's Common Stock received in the two
transactions set forth above was $23,905,000 based on 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 $6,433,000,
including the related income tax expense of $192,000. This loss, including
disposal costs of $950,000, was recognized as a loss from disposal of
discontinued operations in the consolidated statement of income for the year
ended December 31, 2003. Approximately $5,560,000 of the reported loss from the
disposal of the discontinued operations was attributable to the disposal of the
capital stock of Hampshire Investments, Limited. Pursuant to Internal Revenue
Code Section 355, the transaction is characterized as a tax free spin-off.
Accordingly, the Company is not entitled to deduct this loss because it
represents a loss on the distribution of property by the Company in exchange for
its own Common Stock; therefore, no tax benefit was provided for this loss in
the consolidated financial statements.
In accordance with the guidance of SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", HIL has been accounted for as a discontinued
operation, and the financial information for all prior periods presented have
been reclassified to report HIL as a discontinued operation.
The rental revenue and income (loss) for HIL that are included in the income
from discontinued operation activities in the consolidated statement of
operations are summarized as follows:
Six-Month Three-Month
Period Ended Period Ended
(in thousands) June 28, 2003 June 28, 2003
- ----------------------------------- ---------------- -------------
Rental Revenue $1,711 $884
====== ====
Pre-tax income $629 $16
Provision for income taxes (242) (20)
------ ----
Net income (loss) $387 ($ 4)
====== ====
-8-
NOTE 5. REVOLVING CREDIT FACILITY
- ----------------------------------
The Company has a Revolving Credit Agreement ("Revolving Credit Facility") with
six participating commercial banks, with HSBC Bank USA as agent. The Revolving
Credit Facility, which matures on April 30, 2007, provides for secured
borrowings up to $100 million in revolving line of credit borrowings and letters
of credit. Advances under the line of credit are limited to the lesser of: (1)
$100 million less outstanding letters of credit; or (2) the sum of 85% of
eligible accounts receivable, cash on deposit in a pledged account, 50% of
eligible inventory of the Company's subsidiaries (subject to seasonal limits),
and 50% of outstanding eligible letters of credit issued through this Revolving
Credit Facility, plus seasonal overadvances in the periods of highest
requirements.
Advances under the Revolving Credit Facility bear interest at either the bank's
prime rate less 0.25% or, at the option of the Company, a fixed rate of LIBOR
plus 1.80%, for a fixed term. The loan is collateralized, pari passu with the
Company's Senior Notes ("Senior Notes"), principally by the trade accounts
receivable, cash on deposit in a pledged account, inventories of the Company's
subsidiaries and a pledge of the common stock of the subsidiaries. At July 3,
2004 there was $65.9 million outstanding under letters of credit, which includes
$11.6 million related to finished goods in-transit that have been included in
accounts payable in the accompanying balance sheet. At July 3, 2004, the balance
in the pledged account was $15.0 million. No advances were outstanding under the
Revolving Credit Facility at July 3, 2004 or December 31, 2003, which resulted
in availability for borrowing of approximately $18.3 million under the Revolving
Credit Facility at July 3, 2004.
Both the Revolving Credit Agreement and the Senior Notes contain financial
covenants and covenants that restrict certain payments by the Company. The
financial performance covenants require, among other things, that the Company
maintain specified levels of consolidated net worth, not 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 covenants and restrictions at July 3, 2004.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, that
reflect the Company's current views with respect to future events. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to 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 review and consider carefully the various disclosures made by the
Company in its Form 10-K and other Securities and Exchange Commission filings,
which advise interested parties of the factors that affect the Company's
business.
EXECUTIVE OVERVIEW
- ------------------
The Company derives its revenues exclusively from the apparel industry by
designing, sourcing and marketing women's and men's sweaters and women's woven
and knit separates. The Company sells to approximately 250 retail
-9-
customers, primarily in the United States, including mass merchants, specialty
retail stores, catalog companies and most major department stores. The Company's
business is highly seasonal with the majority of sales occurring in the third
and fourth quarters of the year.
The Company purchases its products from manufacturers throughout the world
through its established international sourcing network. The majority of the
products are purchased from manufactures in South East Asia. With the Company's
dependence on international sources, failure of any of these manufacturers to
ship products to the Company in a timely manner, failure of the manufacturers to
meet required quality standards or delays in the shipments clearing United
States Customs could cause the Company to miss delivery dates to its customers.
The failure to make timely deliveries could expose the Company to liability to
its customers or cause customers to cancel orders or demand reduced prices for
late delivery.
The Company is not able to forecast with any certainty its sales for the
remainder of the year because of the competitive retail environment, the
fluctuation of foreign currencies in relation to the dollar and the expiration
of quota agreements on December 31, 2004. With the expiration of the quota
agreements, it is anticipated that the quantity of previously restricted
products will greatly increase. A large increase in the volume may place undue
burdens on the international transportation systems, the United States ports
receiving the shipments and the United States Customs offices processing the
entries. The United States government reserves the right to limit the quantities
of individual categories of products imported if it is determined that there has
been a disruption in the United States markets resulting from the increased
volumes being received in the United States.
In the opinion of management of the Company, the elimination of the quota
agreements, may not reduce the Company's cost to purchase these products. A
portion of the price paid for the quota (the right to import the products) was
used by the foreign government to subsidize the manufacture of the products. The
elimination of the quota funding may result in the manufacturers demanding
higher sale prices. Further, each factor in the supply chain may be looking to
increase their pricing; i.e. the supplier of raw material, the transportation
companies, etc. Also, the Company's customers may seek reduced pricing. The
Company does not anticipate that it will have a gain from the elimination of the
quota agreements.
The Company will remain focused on its customers' needs both in terms of
quality, value and service and has attempted to minimize its exposure from
foreign manufacturers by placing its contracts for production as far in advance
as reasonably possible and by scheduling delivery of products for the first
quarter of 2005 well in advance of the dates on which they must be delivered to
its customers.
DISPOSAL OF INVESTMENT COMPANY IN 2003
- --------------------------------------
On October 8, 2003, the Company disposed of its investment subsidiary, Hampshire
Investments, Limited ("HIL") after the Board of Directors (the "Board")
determined that the Company should concentrate on the apparel business. A
special committee of the Board, consisting of independent directors, was
responsible for the disposal of HIL because Ludwig Kuttner, Chairman and Chief
Executive Officer and other members of management of the Company participated as
purchasers.
Certain assets of HIL were sold to K Holdings, LLC, a company controlled by Mr.
Kuttner, for a purchase price consisting of 250,000 shares of the Company's
-10-
common stock. The Company then exchanged all of the outstanding shares of
capital stock of HIL with an investor group consisting of Mr. Kuttner, Peter
Woodworth, a Director of the Company, and Charles Clayton, Secretary and
Treasurer of the Company, for 450,000 shares of the Company's common stock. Mr.
Clayton subsequently was appointed interim Chief Financial Officer of the
Company.
The fair market value of the Company's common stock received in the two
transactions was $23,905,000 based on a price of $34.15 per share, as reported
by NASDAQ as of the close of the market on October 7, 2003, the trading day
prior to the date on which the transactions were consummated. The transactions
resulted in a loss from the disposal of approximately $6,433,000, including the
related income tax expense of $192,000. This loss, including disposal costs, was
recognized as a loss from disposal of discontinued operations in the
consolidated statement of operations for the third quarter and the year ended
December 31, 2003. Of the reported loss, approximately $5,560,000 was
attributable to the disposition of the capital stock of Hampshire Investments,
Limited. Pursuant to Internal Revenue Code Section 355, the transaction is
characterized as a tax free spin-off and the Company is not entitled to deduct
this loss because it represents a loss on disposition of property by the Company
in exchange for its own Common Stock. Therefore, no tax benefit was provided for
this loss in the consolidated financial statements.
The disposal of HIL has been accounted for as a discontinued operation and,
accordingly, the financial information for all prior periods presented have been
reclassified to report HIL as a discontinued operation.
RESULTS OF CONTINUING OPERATIONS
- -------------------------------
Six-month Periods Ended July 3, 2004 and June 28, 2003
- ------------------------------------------------------
Net Sales
- ---------
Net sales for the six-month period ended July 3, 2004 were $80,649,000, compared
with $83,128,000 for the same period last year. The decrease was primarily due
to a reduction in sales of men's sweaters resulting from the Company's decision
to reduce its spring season business in men's products, offset in part by
increased sales of women's sweaters. The Company shipped approximately 15,000
dozen less units, or 1.9%, during the six-month period ended July 3, 2004 when
compared with the same period last year. The average net sales price per unit
declined 1.1% for the six-month period ended July 3, 2004, primarily due to
higher than usual shipments of off-priced products, the reduced sales of men's
products and the continued heavy demands from customers for allowances in a very
competitive retail market.
Gross Profit
- ------------
Gross profit for the six-month period ended July 3, 2004 was $20,018,000,
compared with $20,074,000 for the same period last year. As a percentage of net
sales, gross profit margin was 24.8% for the six-month period of 2004, compared
with 24.1% for the same period last year.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses were $22,823,000 for the
six-month period ended July 3, 2004, compared with $20,685,000 for the same
period last year. As a percentage of net sales, SG&A expenses were 28.3% for the
six-month period of 2004, compared with 24.9% for the same period last year. The
increase as a percentage of sales is partly attributable to a lower volume of
sales in the six-month period of 2004 as compared with the same period of the
previous year. The increase resulted primarily from the expense of additional
personnel in sales, design and international sourcing and fixed cost of
warehousing. The SG&A expenses for the same period of the prior year included a
reversal of a $450,000 reserve with respect to a litigation matter which was
satisfactorily resolved.
-11-
Interest Income
- ---------------
Interest income for the six-month period ended July 3, 2004 was $515,000,
compared with $538,000 for the same period last year. The decrease resulted from
a lower rate of return on investments during the period ended July 3, 2004, even
though the average investment was larger.
Interest Expense
- ----------------
Interest expense for the six-month period ended July 3, 2004 was $327,000,
compared with $400,000 for the same period last year. The decrease resulted from
lower average borrowings during the period ended July 3, 2004. Average
borrowings during the six-month period ended July 3, 2004 were $7,436,000,
compared with $9,366,000 for the same period last year.
Income Taxes
- ------------
The Company's provision for income tax for the six-month period ended July 3,
2004 was a benefit of $1,050,000 compared with a benefit of $152,000 for the
same period last year. The effective income tax rate was 40.4% for the six-month
period ended July 3, 2004, compared with 39.1% for the same period last year.
Loss from Continuing Operations
- -------------------------------
As a result of the foregoing, the Company had a loss from continuing operations
for the six-month period ended July 3, 2004 of $1,547,000, or $0.38 per diluted
share, compared with a loss of $237,000, or $0.05 per diluted share, for the
same period last year.
Income from Discontinued Operations
- -----------------------------------
Income from discontinued operations for the six-month period ended June 28, 2003
was $387,000, net of income taxes of $242,000.
Net Income/Loss
- ---------------
As a result of the foregoing, the Company had a net loss for the six-month
period ended July 3, 2004 of $1,547,000, or $0.38 per diluted share, compared
with net income of $150,000, or $0.03 per diluted share, for the same period
last year.
Three-Month Periods Ended July 3, 2004 and June 28, 2003
- --------------------------------------------------------
Net Sales
- ---------
Net sales for the three-month period ended July 3, 2004 were $26,252,000,
compared with $31,961,000 for the same period last year. The decrease resulted
from lower sales of women's specialty sweaters and women's related separates,
due to discontinuing certain license agreements and a soft market. The Company
shipped approximately 57,000 dozens less, or 18.1%, during the three-month
period ended July 3, 2004 when compared with the same period last year. The
average net sales price per unit increased 0.3% for the three-month period ended
July 3, 2004, compared with the same period the prior year.
Gross Profit
- ------------
Gross profit for the three-month period ended July 3, 2004 was $7,602,000,
compared with $7,508,000 for the same period last year. As a percentage of net
sales, gross profit margin was 29.0% for the three-month period of 2004,
compared with 23.5% for the same period last year. The gross profit for the
three-month period ended July 3, 2004 was positively affected by $785,000
-12-
reduction of a $1,200,000 reserve established during the first quarter of 2004
for customs costs related to importing merchandise.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses were $10,526,000 for the
three-month period ended July 3, 2004, compared with $9,243,000 for the same
period last year. As a percentage of net sales, SG&A expenses were 40.1% for the
three-month period of 2004, compared with 28.9% for the same period last year.
The increase primarily resulted from the expense of additional personnel in
sales, design and international sourcing and fixed cost of warehousing in a
period of low sales. The SG&A expenses for the same period of the prior year
included a reversal of a $450,000 reserve with respect to a litigation matter
which was satisfactorily resolved.
Interest Income
- ---------------
Interest income for the three-month period ended July 3, 2004 was $243,000,
compared with $320,000 for the same period last year. The decrease resulted from
a lower rate of return on investments during the period ended July 3, 2004, even
though the average investment was larger.
Interest Expense
- ----------------
Interest expense for the three-month period ended July 3, 2004 was $164,000,
compared with $194,000 for the same period last year. The decrease resulted from
lower average borrowings during the period ended July 3, 2004. Average
borrowings during the three-month period ended July 3, 2004 were $7,329,000,
compared with $9,259,000 for the same period last year.
Income Taxes
- ------------
The Company's income tax benefit for the three-month period ended July 3, 2004
was $1,150,000, compared with $605,000 for the same period last year. The
effective income tax rate was 40.4% for the three-month period ended July 3,
2004, compared with 39.0% for the same period last year.
Loss from Continuing Operations
- -------------------------------
As a result of the foregoing, the Company had a loss from continuing operations
for the three-month period ended July 3, 2004 of $1,694,000, or $0.42 per
diluted share, compared with a loss of $948,000, or $0.20 per diluted share, for
the same period last year.
Loss from Discontinued Operations
- ---------------------------------
Loss from discontinued operations for the three-month period ended June 28,
2003 was $4,000, net of income taxes.
Net Loss
- --------
As a result of the foregoing, the Company had a net loss for the three-month
period ended July 3, 2004 of $1,694,000, or $0.42 per diluted share, compared
with a net loss of $952,000, or $0.20 per diluted share, for the same period
last year.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary liquidity and capital requirements of the Company are to fund
working capital for current operations, which consists of funding the seasonal
buildup in inventories and accounts receivable, servicing long-term debt and
funding capital expenditures. Due to the seasonality of the business, the
Company generally reaches its maximum borrowing under its revolving credit
facility during the third quarter of the year. The primary sources to meet the
liquidity and capital requirements include funds generated from operations,
borrowings under revolving credit lines and long-term debt.
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On July 3, 2004, the Company had cash and cash equivalents totaling $56,839,000
of which $15,000,000 was pledged as collateral under the Revolving Credit
Facility.
Net cash used in operating activities was $4,514,000 for the six-month period
ended July 3, 2004, as compared with net cash used in operating activities for
continuing operations of $20,151,000 in the same period last year. Net cash used
in operating activities during the six-month period ended July 3, 2004 resulted
primarily from an increase in inventory of $19,622,000 and the net loss for the
period of $1,547,000, offset by a decrease in accounts receivable of
$17,338,000. The increase in inventory resulted from the seasonality of the
Company's business for higher shipments during the second half of the year
including $11,588,000 in-transit inventory shipped under letters of credit. The
liability has been recorded in accounts payable.
Net cash used in operating activities of continuing operations during the period
ended June 28, 2003 resulted primarily from the seasonal increase in inventory
of $14,774,000, a decrease in accounts payable, accrued expenses and other
liabilities of $16,754,000, which included the payment of 2002 income taxes and
incentive bonus compensation that were substantially higher than those paid in
the current period, offset by a decrease in accounts receivable of $11,611,000.
Net cash used in investing activities was $250,000 for the period ended July 3,
2004, as compared with net cash used in investing activities from continuing
operations of $255,000 for the same period last year. During the periods ended
July 3, 2004 and June 28, 2003, the Company used $271,000 and $409,000,
respectively, for capital expenditures.
Net cash used in financing activities of operations was $1,689,000 for the
period ended July 3, 2004, as compared with net cash used in financing
activities from continuing operations of $1,618,000 for the same period last
year. During the six-month periods ended July 3, 2004 and June 28, 2003, the
Company repaid long-term debt of $966,000 and $965,000, respectively, and
purchased 36,000 shares of its Common Stock for $1,045,000 and 53,519 shares of
its Common Stock for $1,226,000, respectively. As of July 3, 2004 and June 28,
2003, the Company had no borrowings under its credit facility and availability
for borrowing was approximately $18.3 million under the Revolving Credit
Facility at July 3, 2004.
Net cash used in the discontinued operations for the period ended June 28, 2003
was $978,000. Net cash used in the discontinued operations principally resulted
from the purchase of an investment offset in part by the sale of an investment
and the sale of real property.
The Company maintains a Revolving Credit Agreement ("Revolving Credit Facility")
with six participating commercial banks, with HSBC Bank USA as agent. The
Revolving Credit Facility, which matures on April 30, 2007, provides for secured
borrowings up to $100 million in revolving line of credit borrowings and letters
of credit. Advances under the line of credit are limited to the lesser of: (1)
$100 million less outstanding letters of credit; or (2) the sum of 85% of
eligible accounts receivable; cash deposited in a pledged account; 50% of
eligible inventory of the Company's subsidiaries (subject to seasonal limits);
50% of outstanding eligible letters of credit issued through this Revolving
Credit Facility, plus seasonal over advances in the periods of highest
requirements.
Advances under the Revolving Credit Facility bear interest at either the bank's
prime rate less 0.25% or, at the option of the Company, a fixed rate of LIBOR
plus 1.80%, for a fixed term. The loan is collateralized, pari passu with the
Company's Senior Notes ("Senior Notes"), principally by the trade accounts
receivable; cash deposited in a pledged account; inventories of the Company's
subsidiaries and a pledge of the common stock of the subsidiaries. At July 3,
-14-
2004 there was $65.9 million outstanding under letters of credit, which includes
approximately $11.6 million related to finished goods in-transit that have been
included in accounts payable in the accompanying balance sheet.
Both the Revolving Credit Facility and the Senior Notes contain financial
covenants and covenants that restrict certain payments by the Company. The
financial performance covenants require, among other things, that the Company
maintain specified levels of consolidated net worth, not 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 July 3,
2004.
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.
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 to changes in costs for raw
materials for the Company's products.
The long-term debt of the Company is at fixed interest rates, which were at
market when the debt was issued, but were primarily above market on July 3,
2004. The short-term debt of the Company is at variable rates based on the prime
interest rate of the lending institutions or, at the option of the Company, a
fixed rate based on LIBOR, for a fixed term.
In purchasing apparel from foreign manufacturers, the Company uses letters of
credit that require the payment in U.S. 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
Disclosure Controls and Procedures
- ----------------------------------
As of July 3, 2004 (the "Evaluation Date"), the Company, under the supervision
and with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, carried out an evaluation of the effectiveness of its
disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934.Based on the evaluation
performed, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures were effective in recording, processing, summarizing and
reporting in the periods specified in the SEC's rules and forms the information
required to be disclosed by the Company in its reports filed or furnished under
the Exchange Act.
Changes in Internal Control Over Financial Reporting
- ----------------------------------------------------
There have not been any changes in the Company's internal control over financial
reporting during the six-month period ended July 3, 2004 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
-15-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management of the Company believes that no currently
pending litigation to which it is a party will have a material adverse effect on
its consolidated financial condition, results of operations, or cash flow.
Item 2 - Changes in Securities / Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE
Total Number of Maximum Number of
Total Number of Shares Purchased as of Shares that May
Shares Average Price Part of Publicly yet be Purchased
Period Purchased Paid per Share Announced Plans (1) Under the Plans
- --------------------- --------------- -------------- ------------------- -------------------
Month No. 4
April 4 - May 1, 2004 10,000 $30.00 10,000 -
Month No. 5
May 2 - May 29, 2004 10,000 28.63 10,000 -
Month No. 6
May 30 - July 3, 2004 16,000 28.71 16,000 24,000
------ ------ ------ ------
Total 36,000 $29.05 36,000 24,000
====== ====== ====== ======
(1) The shares were purchased to provide treasury stock to be utilized to fund
the exercise of options.
Item 3 - Item 3 is not applicable and has been omitted.
Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 20, 2004, a proposal was
submitted to the vote of stockholders for the election of five directors to
serve until the 2005 Annual Meeting of Stockholders and until their successors
are elected and qualified. The results of the vote of stockholders were as
follows:
Election as Director For Against Withheld
- ------------------------ ----------- ---------- ----------
Ludwig Kuttner 3,909,046 2,250 170,675
Dr. Joel Goldberg 3,910,332 964 170,675
Michael Jackson 3,909,821 1,475 170,675
Harvey L. Sperry 3,910,332 964 170,675
Irwin W. Winter 3,910,332 964 170,675
-16-
Item 5 - Item 5 is not applicable and has been omitted.
Item 6 - Exhibit and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
- ----------- --------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-K as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-K as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer of Hampshire Group, Limited pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K filed during the quarter
On May 6, 2004, the Company filed a current report on Form 8-K
reporting an Item 7-Financial Statements and Exhibits disclosure
regarding the release of the Company's financial results for the
quarter ended April 3, 2004.
-17-
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: August 10, 2004 /s/ Ludwig Kuttner
--------------- ------------------------------------
Ludwig Kuttner
Chairman of the Board of Directors
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2004 /s/ Charles W. Clayton
--------------- -------------------------------------
Charles W. Clayton
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 10, 2004 /s/ Roger B. Clark
--------------- -------------------------------------
Roger B. Clark
Vice President Finance
(Principal Accounting Officer)
-18-
EXHIBIT INDEX
Exhibit No. Description
- ------------- ---------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-K as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-K as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer of Hampshire Group, Limited pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-19-