UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. For the fiscal year ended December 31, 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 29625-1303
------------------------------------------------------------------------
(Address, Including Zip Code, of Registrant's Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (864) 225-6232
Securities registered pursuant to Section 12(b) of the Act: (Title of class)
None.
Securities registered pursuant to Section 12(g) of the Act: (Title of class)
Common Stock, $0.10 Par Value.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates on July 3, 2004, the last business day of the second fiscal
quarter, based on the NASDAQ closing price of $28.95 was approximately
$67,580,000. Shares of Common Stock held, directly or indirectly, by each
director and executive officer of the Company have been excluded in that such
persons are deemed to be affiliates.
As of March 18, 2005, the Registrant had outstanding 4,109,629 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement, relative to its
2005 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year, are
incorporated by reference into Part III of this Annual Report on Form 10-K.
HAMPSHIRE GROUP, LIMITED
2004 ANNUAL REPORT
Table of Contents
Page
Part I ----
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 20
Item 9A. Controls and Procedures 20
Item 9B. Other Information 21
Part III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management 22
Item 13. Certain Relationships and Related Transactions 22
Item 14. Principal Accountant Fees and Services 22
Part IV
Item 15. Exhibits, Financial Statement Schedules 23
Signature Page 25
Certifications 26
Independent Auditors' Report F-2
Consolidated Financial Statements F-3
Notes to Consolidated Financial Statements F-7
Quarterly Financial Data F-21
Financial Statement Schedule F-22
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PART I
ITEM 1 - BUSINESS
General
- -------
Hampshire Group, Limited ("Hampshire Group" or the "Company"), a Delaware
corporation, is a holding company that markets apparel through two wholly-owned
subsidiaries, Hampshire Designers, Inc. ("Hampshire Designers") and Item-Eyes,
Inc. ("Item-Eyes").
The Company believes that Hampshire Designers is the largest designer and
marketer of sweaters in North America. Through a predecessor firm, Hampshire
Designers has been engaged in the design and marketing of sweaters since 1956.
Item-Eyes is a leading designer and marketer of related separates and has been
engaged in the apparel business since 1979. The products of Hampshire Designers
and Item-Eyes, both branded and private label, are marketed across multiple
channels of distribution including national and regional department stores, mass
market and specialty store chains throughout the United States.
Both Hampshire Designers and Item-Eyes source the manufacture of their products
through quality manufacturers internationally. Keynote Services, Limited, a Hong
Kong based subsidiary, assists with the sourcing and quality control needs of
Hampshire Designers and Item-Eyes.
In 2003, the Company disposed of its investment subsidiary, Hampshire
Investments, Limited ("HIL"). The transaction was conducted, on behalf of the
Company, by a special committee of the Board, consisting solely of independent
directors, because Ludwig Kuttner, Chairman and Chief Executive Officer, and
other members of management of the Company participated as purchasers of HIL.
(See Item 7 for "Disposal of Investment Company".)
Strengths and Strategy
- ----------------------
The Company's primary strength is its ability to design, develop, source and
deliver quality products within a given price range, while providing superior
levels of customer service. The Company has developed international sourcing
abilities to broaden its product lines and to deliver quality merchandise at a
competitive price to its markets primarily in the United States.
The process for the design and development of the Company's products depends on
whether the product is branded or private-label. For branded business, the
products are designed by the Company's experienced design team, incorporating
aspects of the latest fashion trends together with the consistent appeal of the
brand name. These products are further refined in collaboration with
manufacturers, resulting in a high-quality product to meet specified price
points. For private-label business, the Company's design team collaborates with
the retailers, under whose brands the products will be marketed, in the designs
of the products.
- -------------------------------------------------------------------------------
Cautionary Disclosure Regarding Forward-Looking Statements
When used in this document in general and in the Outlook Section of Management's
Discussion and Analysis in particular, the words "expects", "anticipates" and
similar expressions are intended to identify forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish or
revise forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrences of unanticipated events. Readers are
also urged to carefully review and consider the various disclosures made by the
Company, which attempt to advise interested parties of the factors that affect
the Company's business in this report, as well as the other filings of the
Company under the Securities Exchange Act of 1934.
-3-
The quality of the Company's garments is assured in a variety of ways. Each
garment is manufactured using the finest quality yarns and each must undergo a
rigorous quality assurance program. In some instances, multi-staged inspection
processes, including direct field audits, are performed by Company personnel,
and from time to time by customers' quality control personnel. In international
sourcing, the Company utilizes its own personnel, as well as factory personnel,
independent inspection agencies and independent test labs to assure that the
products meet the high quality standards required by our customers.
The Company's domestic distribution facilities, using the Company's Quick
Response program and an Electronic Data Interchange ("EDI") system, are linked
electronically to the majority of the Company's customers. All distribution is
coordinated through domestic facilities, primarily through public warehouses
strategically located in California. By providing just-in-time delivery of
merchandise through its distribution facilities in the United States and through
sophisticated order fulfillment techniques, the Company provides an important
service to its customers.
The Company's long-term strategy of building a more diversified apparel company
was initiated with the acquisition of Item-Eyes. With a broad line of women's
woven and knit related separates, Item-Eyes expanded the Company's product
lines, moved the Company into new market areas with its customers, and increased
the Company's global sourcing capabilities through inclusion of manufacturing
sources in Central America. One of the challenges of the Company today is to
expand its product lines to move into markets above and below its principal
moderate-price sector.
Organization
- ------------
The Company is an apparel company whose principal products are women's and men's
branded and private-label sweaters and women's woven and knit related separates.
The Company sells its products into the moderate-price sector of most major
department stores and mass merchants in the United States and sells to many
specialty retail store chains and catalog companies.
Product Lines
- -------------
The Company has significantly expanded its product lines. A decade ago, the
Company's product line primarily consisted of women's full-fashion, Luxelon(R)
(acrylic yarn) sweaters marketed under the Designers Originals(R) label.
Although Designers Originals sweaters remain an important product line, the
expanded product line permits the Company to supply many more departments of its
customers. Through the acquisition of Segue Limited, the Company added a
business-casual line for women under the Designers Originals Studio(R) line and
through the acquisition of Item-Eyes, added a broad line of woven and knit
related separates, including classic-woven apparel.
Hampshire Brands, a division of Hampshire Designers, markets branded sportswear
to major department stores and national chains across America. Such prestigious
brand names as Geoffrey Beene(R) and Dockers(R) are licensed for men's sweaters.
The Levi Brand(R) is licensed for both men's and women's sweaters. Nick
Danger(R) and Spring + Mercer(R), brands owned by the Company, feature multi-
product sportswear offerings, sold to the department store segment of retail.
The emphasis with each of the brands is on compelling products that feature high
quality and great value. These brands cover the entire range of men's department
store offerings, from middle-of-the-road, "main floor" styles to fashion-
forward, designer sweaters for the "better" departments of our customers.
Both the Company's sales force and independent sales representatives sell the
Company's product lines. Senior management participates in the presentations to
the larger accounts.
Products
- --------
Products under the Designers Originals label include traditional, classically
designed sweaters for women. The full-fashioned sweaters are produced from fine-
-4-
gauge, Luxelon (acrylic yarn) which has a cashmere feel and look. The Designers
Originals label also includes a line of full-fashion, fine-gauge cotton sweaters
and a variety of novelty sweaters.
Under the Designers Originals Studio label, the Company sells a dressy casual
and casual sweater line. This line complements the Designers Originals career
line and offers today's woman a relaxed dressing alternative to fit casual
lifestyle needs. The Company also sells seasonal theme sweaters and knits under
this label.
The Hampshire Brands division, through licensed and internally developed brands,
addresses the entire range of lifestyle and market tier customers in the men's
and young men's area. Sweater licenses include Geoffrey Beene and Dockers in the
men's area and Levi's for young men and juniors. The Company brands, Nick
Danger, Spring + Mercer and Mercer Street Studio, have been developed as the
foundation for in-house brands. Broader ranges of products are offered under
these brands including sweaters, knits, wovens and accessories.
Related sportswear, including jackets, pants, skirts, sweaters and "soft
dressing", is sold by Item-Eyes under its Requirements(R), R.Q.T by
Requirements(R) and Nouveaux(R) labels and under the private labels of
customers.
With its established international sourcing relationships, the Company has the
ability to respond expediently to market demands for changing fashion trends.
Customers
- ---------
The Company has long-term relationships with many of its approximately 250
customers. The Company sells its products principally into the moderate-price
sector of most major department stores and mass merchants in the United States
and also to many specialty retail store chains and catalog companies. Over the
past few years, the number of customers of the Company has decreased due to the
consolidation of the retail industry; however, management does not believe that
the number of retail stores selling the Company's products has decreased. The
Company continues to seek new international markets for its products.
Competition
- -----------
The moderate-priced apparel market remains highly competitive. Competition is
primarily based on product design, price, quality and service. While the Company
faces competition from manufacturers and distributors located in the United
States, its primary competition comes from manufacturers located in Southeast
Asia. The Company also competes for private label programs with the internal
sourcing departments of many of its customers.
The ability of the Company to compete is enhanced by its in-house design
abilities and its broad international sourcing relationships. The Company's
strong financial position, including significant liquid assets and low debt,
further enhances its ability to compete.
Seasonality
- -----------
Although the Company sells apparel throughout the year, its business is highly
seasonal with more than 70% of annual sales for fiscal 2004 occurring during the
third and fourth quarters.
Effects of Changing Prices
- --------------------------
The Company is subject to the effects of changing prices but has generally been
able to maintain its gross margin by passing along a portion of its cost
increases to its customers in the prices for its products.
Backlog
- -------
The sales order backlog for the Company as of March 2, 2005 was approximately
$179 million, compared to approximately $113 million as of March 1, 2004. The
-5-
timing of the placement of seasonal orders by customers affects the backlog;
accordingly, a comparison of backlog from year to year is not necessarily
indicative of a trend in sales for the year.
Trademarks and Licenses
- -----------------------
The Company considers its own trademarks to have significant value in the
marketing of its products. In addition, the Company has entered into licensing
agreements to manufacture and market sweaters under certain trademarks for which
it pays royalties based on the volume of sales. The licensing agreements are
normally for a three-year term, generally with an option for the Company to
renew for an additional three-year term.
Electronic Information Systems
- ------------------------------
In order to schedule production, fill customer orders, transmit shipment data to
the customers' distribution centers and invoice electronically, the Company has
developed a number of integrated electronic information systems applications.
Approximately 87% of all orders of the Company for 2004 were received
electronically. The customers' computer systems based on sales and managed
inventory levels generates these orders. The Company electronically sends
advance shipment notices and invoices to customers, which results in the timely
updating of the customers' inventory systems.
Credit and Collection
- ---------------------
The Company manages its credit and collection functions by approving and
monitoring the credit lines of its customers. Credit limits are determined by
past payment history and financial information obtained from credit agencies and
other sources. The majority of high-risk accounts are factored with financial
institutions or the Company purchases credit insurance for these accounts. The
Company believes that its review procedures and its credit and collection staff
has been a significant factor in minimizing bad debt losses.
Customers
- ---------
For each of the last three years, more than 96% of the Company's sales were to
customers located in the United States. Sales outside of the United States were
to customers in Mexico and Canada. The Company had sales to three major
customers during 2004, which represented 18%, 9% and 9% of total annual sales.
These same three customers represented 15%, 14%, and 10% of total sales during
2003; and 14%, 11% and 11% of total sales during 2002. The Company's five
largest customers accounted for approximately 50% of consolidated sales in 2004,
compared with 52% and 49% in 2003 and 2002, respectively.
Employees
- ---------
As of March 4, 2005, the Company had approximately 266 employees. The Company
and its employees are not parties to any collective bargaining agreements except
for 19 hourly employees of Item-Eyes, Inc., who are represented by UNITE Labor
Union under an agreement expiring in September 2007. The Company believes its
relationship with its employees is good.
Governmental Regulation and Trade Agreements
- --------------------------------------------
The apparel industry and the Company's business are subject to a wide variety of
international trade agreements as well as federal, state and local regulations.
The Company believes it operates in compliance in all material respects with
these agreements and regulations.
International trade agreements in particular can have a significant impact on
the apparel industry and the Company. These agreements generally provide for
-6-
tariffs, which impose a duty charge on the product being imported, and quotas,
which limit the amount of the product that may be imported from specific
countries, both of which increase the cost of importing a product.
Primary among the many multilateral and bilateral trade agreements existing
between the United States and certain foreign countries is the World Trade
Organization (WTO), which was established in 1995 as the governing body for
international trade between the 140 originating member countries, including the
United States. As part of that agreement, international textile and apparel
quotas which were then in existence were phased out over ten years. Effective
January 1, 2005, all such quota restrictions involving trade with WTO member
countries were terminated. However, as part of the WTO agreements, and part of
China's entry into the WTO, the United States government has reserved the right
to limit the quantities of individual categories of products imported if it
determined that increased imports of such products were causing or threatening
injury to products produced in the United States.
A coalition of United States textile industry trade groups has petitioned the
United States government to establish quotas on certain products, including
products that the Company purchases from manufacturers in foreign markets. That
petition is now being litigated. The Company does not believe that such quotas
would cause a shortage of those products because of the large number of foreign
suppliers in many different countries who would be unaffected by such action,
although the cost of the goods could be increased.
In addition to the WTO, apparel imports into the United States are affected by
other trade agreements and legislation. Most important are the North American
Free Trade Agreement (NAFTA) signed in 1993, which has eliminated all apparel
tariffs and quotas between Canada, Mexico and the United States, and legislation
granting similar trade benefits to 23 Caribbean countries. Further, the African
Growth and Opportunity Act (AGOA) of 2000, gave 38 countries in sub-Saharan
Africa similar trade privileges on apparel and certain other products imported
into the United States. The Company imports products from manufacturers in
Vietnam, which are subject to quotas since Vietnam is not a member of the WTO.
ITEM 2 - PROPERTIES
The Company leases all of its administrative offices, operations center and its
sales offices and showrooms. The Company believes that all of its properties are
well maintained and are generally suitable for their intended use. The Company's
principal properties are described in the table below.
Square Lease
Properties Footage Expiration(1)
- -------------------------------------------------------------------------------
Hampshire Designers
Sales Office and Showroom - Designers Originals and
Hampshire Brands - New York, NY 24,000 08/31/11
Sales Offices and Showroom - Nick Danger - New York, NY 6,500 04/30/10
Administrative Offices - Anderson, SC 10,500 06/30/06
Sourcing Office - Kowloon, Hong Kong 2,000 12/14/06
Sourcing & Quality Control Office - Dong Guan, China 1,400 11/30/06
Item-Eyes
Sales Office and Showroom - New York, NY 6,000 06/30/07
Operations Center - New York, NY 22,000 06/30/08
Administrative Offices - Hauppauge, NY 6,000 05/31/05
(1) Assuming the exercise of all Company options to renew.
- -------------------------------------------------------------------------------
-7-
ITEM 3 - LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its business. Management believes that no currently pending
litigation to which the Company is a party will have a material adverse effect
on its consolidated financial condition or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Stockholders during the fourth quarter of
fiscal 2004.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCK-
HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is listed on the NASDAQ Stock Market and trades under
the symbol "HAMP". As of March 4, 2005, the Company had 34 Stockholders of
Record, but the Company believes there are in excess of 1,000 beneficial owners
of its Common Stock.
The following table sets forth the low and high sales prices of shares of Common
Stock of the Company for each of the quarters of 2003 and 2004 as reported by
the NASDAQ Stock Market.
Fiscal 2003 Fiscal 2004
-------------- --------------
Low High Low High
--- ---- --- ----
First Quarter $19.58 $23.00 $29.21 $32.50
Second Quarter 20.67 31.09 27.85 32.00
Third Quarter 28.02 33.80 27.77 31.09
Fourth Quarter 29.52 35.50 30.00 32.89
The Company has not declared or paid any dividends with respect to its Common
Stock. The determination to pay dividends will be made by the Board of Directors
and will be dependent upon the Company's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors may deem relevant. The Company's Senior Notes and Revolving Credit
Facility contain restrictive covenants placing limitations on "restricted
payments", which includes payment of cash dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7 hereof.
-8-
The following table sets forth the registrant's purchases of equity securities
during the fourth quarter of 2004.
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE
-------------------------------------
Total Number of
Shares Purchased Maximum Number of
Total Number Average as Part of Shares that may
Period of Shares Price Paid Publicly be Purchased
Purchased per Share Announced Plans Under such Plans
- ----------------------- -------------- ------------ ----------------- -------------------
Month 10
Oct. 3 - Oct. 30, 2004 - - - -
- ----------------------- -------------- ------------ ----------------- -------------------
Month 11
Oct. 31 - Nov. 27, 2004 2,625 $30.00 2,625 -
- ----------------------- -------------- ------------ ----------------- -------------------
Month 12
Nov. 28 - Dec. 31, 2004 1,100 30.00 1,100 20,275
- ----------------------- -------------- ------------ ----------------- -------------------
Total 3,725 $30.00 3,725 20,275
- ----------------------- -------------- ------------ ----------------- -------------------
Footnote - On February 4, 1998, the Board of Directors approved the repurchase
of 100,000 shares of the Company's Common Stock in the open market, of which
20,275 shares remain to be purchased as of December 31, 2004. Such plan was
announced on March 4, 1998 and does not have a termination date.
The following table provides information as of December 31, 2004, with respect
to shares of the Company's Common Stock that may be issued under equity
compensation plans.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
Number of securities
Number of securities Weighted-average remaining available for
to be issued upon exercise price of future issuance under
exercise of outstanding equity compensation
Plan Category outstanding options, options, warrants plans (excluding
warrants and rights and rights securities in column a))
- ---------------------------------------------------------------------------------------------
(a) (b) (c)
- ---------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 56,656 $12.13 460,975
- ---------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders None N/A None
- ---------------------------------------------------------------------------------------------
Total 56,656 $12.13 460,975
- ---------------------------------------------------------------------------------------------
ITEM 6 - SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements, including the related
notes incorporated in this Annual Report on Form 10-K. The selected consolidated
financial data under the captions "Income Statement Data" and "Balance Sheet
Data" for, and as of the end of, each of the years in the five-year period ended
December 31, 2004, are derived from our audited consolidated financial
statements. The financial information previously presented for the years 2000
through 2003 has been restated to present Hampshire Investments, Limited as a
discontinued operation. Our historical results are not necessarily indicative of
results to be expected in any future period.
-9-
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31, 2004 2003 2002 2001 2000(2)
----------------------------------------------------------------------------------------
INCOME Net sales $301,999 $292,651 $293,268 $261,361 $195,372
STATEMENT Cost of goods sold 221,453 218,454 210,336 192,546 155,721
DATA (1) -------------------------------------------------
Gross profit 80,546 74,197 82,932 68,815 39,651
Selling, general and administrative
expenses 57,405 54,903 51,816 45,482 29,542
Loss (gain) on sale of plant
and equipment (3) - - - 2,618 (2,308)
--------------------------------------------------
Income from operations 23,141 19,294 31,116 20,715 12,417
Other income (expense):
Interest expense (645) (909) (1,359) (2,563) (2,687)
Interest income 726 683 420 514 1,201
Other 3 155 (271) (133) (205)
--------------------------------------------------
Income from continuing operations
before provision for income taxes 23,225 19,223 29,906 18,533 10,726
Income tax provision - net 9,500 7,800 11,861 6,930 2,127
--------------------------------------------------
Income from continuing operations (4) $ 13,725 $ 11,423 $ 18,045 $ 11,603 $ 8,599
==================================================
Income per share from Basic $3.37 $2.50 $3.83 $2.49 $2.02
continuing operations: ==================================================
Diluted $3.33 $2.43 $3.73 $2.48 $1.98
==================================================
Weighted average number Basic 4,074 4,573 4,711 4,661 4,265
of shares outstanding: ==================================================
Diluted 4,126 4,696 4,834 4,674 4,341
==================================================
----------------------------------------------------------------------------------------
December 31, 2004 2003 2002 2001 2000
----------------------------------------------------------------------------------------
BALANCE Cash and short term investments $ 80,654 $ 63,292 $ 66,893 $ 28,151 $ 9,902
SHEET Working capital 100,774 85,827 82,626 70,713 60,456
DATA (1) Total assets $141,975 $133,106 $130,051 $109,128 $102,465
==================================================
Long-term liabilities $ 6,690 $ 8,307 $ 10,158 $ 13,797 $ 18,763
Total debt and deferred
compensation (5) 8,591 10,239 12,088 18,167 21,236
Stockholders' equity 104,892 90,422 108,455 91,153 79,715
--------------------------------------------------
Book value per share $25.58 $22.23 $22.97 $19.42 $17.16
==================================================
(1) The financial information previously presented for the years 2000 through 2002 has been
restated to present Hampshire Investments, Limited as a discontinued operation in all
periods. Accordingly, the Income Statement Data represents only continuing operations and
assets and liabilities of the discontinued operations and have been excluded for the years
2000 through 2002 in the Balance Sheet Data.
(2) Includes the results of operations of Item-Eyes, Inc. from August 20, 2000, the date of acquisi-
tion.
(3) Gains and losses on sale of plant and equipment included herein are related to the sale of the
Company's manufacturing operations. Gains and losses on sales of plant and equipment in the
normal course of business are included in selling, general and administrative expenses.
(4) Fiscal years 2001 and 2000 include goodwill amortization, net of income taxes, of $543,000
and $546,000. Effective January 1, 2002, the Company is no longer permitted to amortize
goodwill as result of adoption of SFAS No.142. (See Note 1 to the Consolidated Financial State-
ments.)
(5) Includes long-term debt, current portion thereof, borrowing under the credit facility and
deferred compensation.
-10-
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
- ------------------
The Company is engaged exclusively in the apparel business which is conducted
through two wholly owned subsidiaries - Hampshire Designers, which primarily
designs and sells women's and men's sweaters, and Item-Eyes, which designs and
sells a broad line of women's woven and knit related separates. The Company
sells to approximately 250 retail customers, primarily in the United States. The
Company is a major supplier to the moderate-price sector of most major
department stores and mass merchants. The Company also sells many specialty
retail store chains and catalog companies. Five major customers, Belk's
Department Stores, Federated Department Stores, JC Penney Company, Kohl's
Department Stores and May Department Stores, accounted for approximately 50% of
the Company's sales for the year ended December 31, 2004.
Women's sweaters are marketed under the Company's labels, Designers Originals(R)
and Designers Originals Studio(R) and private labels of its customers. The
Company historically produced and marketed a classic-styled sweater; however,
demand has shifted over the past several years with the majority of growth
occurring in fashion design and embellished sweaters and tops that can only be
sourced internationally due to the extensive hand labor required to manufacture
such garments. Sales of women's sweaters, including sweaters marketed by
Item-Eyes, accounted for approximately 54% of the Company's net sales in 2004.
Men's sweaters accounted for approximately 20% of net sales of the Company in
2004. During 2004, market demand for men's sweaters was relatively flat;
however, the Company's bookings experienced a significant shift in volume from
private label to its branded offerings, resulting in an increase in market share
of all of its brands. Management believes the introduction of multiple men's
products in the owned branded offerings will provide an opportunity for
increased market share in 2005.
Item-Eyes produces women's products. In 2003, the trend in product mix for
Item-Eyes shifted with a decrease in the demand for jackets, which was offset by
an approximately equal increase in the sale of sweaters. Sales of jackets by
Item-Eyes during 2003 decreased to less than 6% of annual sales while sweaters
increased to approximately 26% of annual sales. During 2004, the demand for
jackets accelerated and sales of jackets approximated 31% of annual net sales
while the sweater category also increased to 31%.
The Company outsources the manufacture of its products, principally due to lower
labor costs. The products sold by the Company are purchased from manufacturers
throughout the world through its established international sourcing network,
with the majority of manufacturers being located in Southeast Asia. With the
Company's dependence on international sources, the 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
including 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 resulting in customers either
canceling the orders or demanding reduced prices for late delivery.
The Company believes its greatest risk is the uncertainty arising from the
elimination on January 1, 2005 of quotas on imported products established by the
World Trade Organization (see discussion under "Governmental Regulation and
Trade Agreements" above) and the impact that this change will have on
international trade, particularly the apparel industry. The uncertainty includes
any action that may be taken by the United States government in the event that
the increased quantity of imported apparel is determined to be a market
disruption in the United States. The Company placed orders with delivery dates
early in the year 2005 to minimize any disruption in supply of its products.
The results in 2004 were affected by the highly competitive conditions in the
retail apparel market. In the women's sweater business, sales decreased, while
margins were flat, compared to the prior year. The Company expects pressure on
margins to continue throughout 2005. Sales of men's products were relatively
flat, but margins increased due to stronger sell-through in the retail market
which resulted in reduced markdown allowances.
-11-
DISPOSAL OF INVESTMENT COMPANY
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 the 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. HIL made investments both domestically and internationally,
principally in real property.
Certain assets of HIL, including a commercial building in Charlottesville,
Virginia, were sold by HIL to K Holdings, LLC, controlled by Mr. Kuttner, for a
purchase price consisting of 250,000 shares of the Company's common stock. The
250,000 shares of the Company's common stock received by HIL in the exchange of
the assets set forth above were exchanged on October 8, 2003 for $4.8 million
cash and a real estate investment valued at $650,000, respectively, with the
remaining approximately $3.1 million being used to reduce the debt of HIL to the
Company. This transaction was a condition of the purchase agreement to fund the
obligations of approximately $4.8 million committed to by HIL as of the purchase
date. The Company then exchanged all of the outstanding shares of capital stock
of HIL with an investor group including Mr. Kuttner, Peter Woodworth, a Director
of the Company, and Charles Clayton, Chief Financial Officer of the Company, for
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 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 is
attributable to the disposition of the capital stock of Hampshire Investments,
Limited, the Company's investment subsidiary. 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 income tax benefit has been provided for this loss in the
consolidated financial statements.
The financial statements of the Company for prior reporting periods have been
restated to account for HIL as a discontinued operation.
RESULTS OF CONTINUING OPERATIONS
2004 Compared To 2003
- ---------------------
Net Sales
- ---------
Net sales for the year ended December 31, 2004 were $301,999,000, compared to
$292,651,000 for 2003, an increase of $9,348,000 or 3.2%. The increase was
primarily due to an increase in sales by the women's related separates business,
offset in part by a decline in the sales of women's sweaters. Units shipped for
the year ended December 31, 2004 exceeded units shipped during the same period
the prior year by approximately 53,000 dozen or 2.1%. The average sales price
per unit increased 1.0% primarily due to favorable sell-through of most product
lines in the retail market.
Gross Profit
- ------------
Gross profit for the year ended December 31, 2004 was $80,546,000, compared to
$74,197,000 for 2003, an increase of $6,349,000, or 8.6%. As a percentage of net
sales, gross profit margin was 26.7% for 2004, compared to 25.4% for 2003. The
increase in gross profit is primarily attributable to an increase in unit volume
of products sold, reduced costs associated with sourcing, and favorable
sell-through of most product lines in the retail market which resulted in
reduced markdown allowances.
-12-
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the Company for the
year ended December 31, 2004, were $57,405,000 compared to $54,903,000 for 2003,
an increase of $2,502,000, or 4.6%. As a percentage of net sales, SG&A expenses
were 19.0% for 2004, compared to 18.8% for 2003. The higher SG&A expenses
resulted primarily from expenses related to the increased sales volume. Both
years included approximately $1,100,000 of non-recurring costs associated with
employment agreement settlements. During 2003, the Company successfully defended
a lawsuit brought by a former supplier and recorded a reduction of $450,000 in a
reserve for the claim resulting in a corresponding reduction of SG&A expenses.
Interest Expense
- ----------------
Interest expense for the year ended December 31, 2004 was $645,000, compared to
$909,000 for 2003, a decrease of $264,000 or 29.0%. The decrease was primarily
attributable to lower average borrowings during the year ended December 31,
2004. Average borrowings during the year ended December 31, 2004, including
long-term debt, were $7,073,000, compared to $13,038,000 for 2003.
Interest Income
- ---------------
Interest income for the year ended December 31, 2004 was $726,000, compared to
$683,000 for the 2003, an increase of $43,000. The increase resulted from higher
average invested cash and short-term investment balances during the year 2004.
Income Tax on Continuing Operations
- -----------------------------------
The income tax provision associated with continuing operations for the year
ended December 31, 2004 was $9,500,000, compared to $7,800,000 for 2003, an
increase of $1,700,000. The effective income tax rate was 40.9% for the year
ended December 31, 2004, compared to 40.6% for 2003.
Income from Continuing Operations
- ---------------------------------
As a result of the foregoing, net income from continuing operations for the year
ended December 31, 2004 was $13,725,000, or $3.33 per share on a diluted basis,
as compared to $11,423,000, or $2.43 per diluted share for 2003.
Income (Loss) from Discontinued Operations
- ------------------------------------------
Income from discontinued operations for the year ended December 31, 2003 was
$637,000, net of a provision for income tax of $408,000. The net loss from the
disposal of $6,433,000, net of income taxes of $192,000, resulted from the
charge to reduce the assets of the investment segment to their fair market
value, plus disposal expenses of approximately $950,000. Loss from discontinued
operations for the year ended December 31, 2003, including the loss on disposal,
was $1.23 per diluted share.
Net Income
- ----------
Net income of the Company for the year ended December 31, 2004 was $13,725,000,
or $3.33 per share on a diluted basis, as compared to $5,627,000, or $1.20 per
diluted share for 2003.
2003 Compared To 2002
- ---------------------
Net Sales
- ---------
Net sales for the year ended December 31, 2003 were $292,651,000, compared to
$293,268,000 for 2002, a decrease of $617,000. Units shipped for the year ended
December 31, 2003 exceeded units shipped during the same period of the prior
year by approximately 101,000 dozen, or 4.2%. The increase was due to an
increase in sales of women's sweaters, offset in part by a reduction in sales of
men's sweaters. The average sales price per unit declined 4.2% primarily due to
a shift in product mix and higher allowances granted to customers.
-13-
Gross Profit
- ------------
Gross profit for the year ended December 31, 2003 was $74,197,000, compared to
$82,932,000 for 2002, a decrease of $8,735,000. As a percentage of net sales,
gross profit margin was 25.4% for 2003, compared to 28.3% for 2002. The decrease
in gross profit margins primarily resulted from increased markdown allowances
granted to customers in a highly competitive retail market.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses for the Company for the
year ended December 31, 2003, were $54,903,000 compared to $51,816,000 for 2002,
an increase of $3,087,000. As a percentage of net sales, SG&A expenses were
18.8% for 2003, compared to 17.7% for 2002. The increase primarily resulted from
additional expenses caused by the increased unit volume for the year ended
December 31, 2003, costs related to the development of two new product lines
launched in the fall of 2003, and non-recurring cost of approximately $700,000
associated with resolving a vendor royalty audit and approximately $1,100,000
associated with an employment agreement settlement. During 2002 and 2003, the
Company successfully defended a lawsuit brought by a former supplier and
recorded $450,000 in 2003 and $550,000 in 2002 as both a reduction of the
reserve for the claim and a reduction of SG&A expenses in each year.
Interest Expense
- ----------------
Interest expense for the year ended December 31, 2003 was $909,000, compared to
$1,359,000 for 2002, a decrease of $450,000 or 33.1%. The decrease primarily
resulted from lower average borrowings and lower interest rates on borrowings
under the credit facility during the year ended December 31, 2003. Average
borrowings during the year ended December 31, 2003 were $13,038,000, compared to
$19,011,000 for 2002.
Interest Income
- ---------------
Interest income for the year ended December 31, 2003 was $683,000, compared to
$420,000 for the 2002, an increase of $263,000. The increase primarily resulted
from higher average invested cash and short-term investment balances during the
year ended December 31, 2003.
Income Tax on Continuing Operations
- -----------------------------------
The income tax provision for the year ended December 31, 2003 was $7,800,000,
compared to $11,861,000 for 2002, a decrease of $4,061,000. The effective income
tax rate was 40.6% for the year ended December 31, 2003, compared to 39.7% for
2002. In 2002, the Company benefited from a charitable contribution.
Income from Continuing Operations
- ---------------------------------
As a result of the foregoing, net income from continuing operations for the year
2003 was $11,423,000, or $2.43 per share on a diluted basis, as compared to
$18,045,000, or $3.73 per share for 2002.
Income (Loss) from Discontinued Operations
- ------------------------------------------
Income from discontinued operations for the year ended December 31, 2003 was
$637,000, net of a provision for income tax of $408,000, compared to a loss of
$997,000, net of a benefit for income tax of $1,761,000, for the preceding year.
The 2002 results of the Company's investment subsidiary included an impairment
charge on real property in the amount of $3,140,000 less an income tax benefit
of $1,761,000.
The net loss from the disposal of $6,433,000, net of income taxes of $192,000,
resulted from the charge to reduce the assets of the investment segment to their
fair market value, plus disposal expenses of approximately $950,000. The
disposal of the investment segment was consummated on October 8, 2003. Loss from
discontinued operations for the year ended December 31, 2003, including the loss
on disposal, was $1.23 per share on a diluted basis, as compared with a loss of
$0.20 per share for 2002.
Net Income
- ----------
Net income of the Company for the year ended December 31, 2003 was $5,627,000,
or $1.20 per share on a diluted basis, as compared to $17,048,000, or $3.53 per
share for 2002.
-14-
INFLATION
The Company believes that inflation has not had a material effect on its costs
or net revenues during the past three years.
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 seasonal
buildup in inventories and accounts receivable, funding markdown allowances and
servicing long-term debt. 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 and borrowings
under the revolving credit facility and long-term debt.
The Company maintains a Revolving Credit Facility (the "Revolving Credit
Facility") with six participating commercial banks. The Revolving Credit
Facility, which matures on April 30, 2007, provides for up to $100,000,000 in
revolving line of credit borrowings and issuance of letters of credit. Advances
under the line of credit are limited to the lesser of: (a) $100,000,000 less
outstanding letters of credit; or (b) the sum of 85% of eligible accounts
receivable, 50% of eligible inventory of the Company's operating subsidiaries
(defined as Hampshire Designers and Item-Eyes), and 50% of outstanding eligible
letters of credit issued through the Revolving Credit Facility, plus seasonal
over advances in the periods of highest borrowing.
Advances under the Revolving Credit Facility bear interest at either the bank's
prime rate minus 0.25%, or at the option of the Company, a fixed rate of LIBOR
plus 1.80%, for a fixed term not to exceed 180 days. The Company is charged a
fee of 0.125% on the unused balance of the credit facility.
The loan is collateralized, pari passu with the Company's outstanding Senior
Notes, principally by the trade accounts receivable and inventories of the
Company's subsidiaries and a pledge of the common stock of such subsidiaries. At
December 31, 2004, availability for borrowing was approximately $18,500,000
under the Revolving Credit Facility.
Both the Revolving Credit Facility and the Senior Notes contain covenants that
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 and achieve a specified fixed charge
ratio. The Company was in compliance with the financial performance covenants
and restrictions at December 31, 2004.
The Company's trade account receivables and inventories are pledged as
collateral, pari passu, under the Revolving Credit Facility and the Senior
Notes. The Revolving Credit Facility and the Senior Notes restrict payments by
the Company of cash dividends to stockholders and the repurchase of Company
Common Stock. The Senior Notes also require that during any 12-month period
there must be a period of 45 consecutive days where there is no outstanding
short-term debt. The Company was in compliance with these provisions at December
31, 2004.
As of December 31, 2004 and 2003, the Company had no outstanding borrowings
under its revolving credit facility. The maximum amount of advances outstanding
during 2004 under the revolving credit facility was $4,795,000 and the average
balance outstanding during the year was approximately $85,000. Outstanding
letters of credit under the credit facility totaled approximately $33,000,000 at
December 31, 2004. The highest balance of letters of credit outstanding under
the credit facility during the year ended December 31, 2004 was approximately
$72,000,000 with an average balance outstanding for the year of $42,600,000.
-15-
The Company, in the normal course of business, issues binding purchase orders to
secure product for future sales to its customers. At December 31, 2004, these
open purchase orders amounted to approximately $50,000,000 of which
approximately $30,600,000 were covered by open letters of credit. The majority
of the purchases made pursuant to open letters of credit are scheduled to be
received during the first six months of 2005, at which time these commitments
will be fulfilled.
The Company had Senior Notes outstanding with a balance at December 31, 2004 of
$5,625,000 with two insurance companies. The Senior Notes are payable in
semi-annual installments of $975,000, plus interest at 8% per annum and are
collateralized, pari passu with the Company's Revolving Credit Facility, by the
accounts receivable and inventory of the Company.
Future contractual obligations related to long-term debt and non-cancelable
operating leases at December 31, 2004 were as follows:
Total 2005 2006 2007 2008 2009 Thereafter
--------------------------------------------------------
Long term debt $ 5,651 $1,901 $1,875 $1,875 - - -
Operating leases 5,761 1,424 1,256 996 $703 $533 $849
--------------------------------------------------------
Total $11,412 $3,325 $3,131 $2,871 $703 $533 $849
========================================================
The Company has deferred compensation agreements with certain key executives as
more fully discussed in Note 10 of the Consolidated Financial Statements
enclosed herewith. A liability of $2,940,000 is recorded on the December 31,
2004, consolidated balance sheet as long-term since payments do not commence
until 2007 and are scheduled to be paid in incremental amounts over a number of
years.
At December 31, 2004, the Company had cash and cash equivalents totaling
$31,214,000. Additionally, at December 31, 2004, the Company had $49,440,000
investment in AAA rated auction bonds, which normally have 35-day liquidity. The
classification of the short-term investments is "available for sale".
Net cash provided by operating activities of continuing operations was
$20,011,000 for the year ended December 31, 2004, as compared to net cash
provided by operating activities of $5,420,000 in the same period of the prior
year. Net cash provided by operating activities of continuing operations during
the year ended December 31, 2004 resulted primarily from income from continuing
operations of $13,725,000 and a decrease in inventory of $11,656,000, offset by
an increase in accounts receivables of $4,188,000. Net cash provided by
operating activities of continuing operations during the year ended December 31,
2003 resulted primarily from income from continuing operations of $11,423,000,
offset by an increase in inventory of $7,317,000.
Net cash used in investing activities of continuing operations was $44,887,000
for the year ended December 31, 2004, as compared to net cash used in investing
activities of continuing operations of $5,570,000 for 2003. In funding
short-term investments, the Company used $44,430,000 and 5,010,000,
respectively, for the years ended December 31, 2004 and 2003. During the years
ended December 31, 2004 and 2003, the Company used $478,000 and $840,000,
respectively, for capital expenditures.
Net cash used in financing activities of continuing operations was $2,192,000
for the year ended December 31, 2004 as compared to $2,742,000 for 2003. During
the years 2004 and 2003, the Company used $1,932,000 and $1,930,000,
respectively, for the repayment of long-term debt. During the year ended
December 31, 2004, the Company purchased 39,725 shares of its Common Stock for
$1,157,000 and for the year ended December 31, 2003, the Company purchased
50,519 shares of its Common Stock for $1,194,000.
Net cash used in discontinued operations for the year ended December 31, 2003
was $5,719,000. Hampshire Investments, Limited, the discontinued operation, made
-16-
investments, both domestically and internationally, primarily in real property.
The cash used in the discontinued operations during the year ended December 31,
2003 (through October 8, 2003, the date of disposition) primarily was the
funding of investments and repayment of long-term debt, offset by cash received
from sale of assets and long-term financing.
Management believes that cash flow from operations, available borrowings under
the revolving credit facility and long-term borrowings will provide adequate
resources to meet the Company's capital requirements and operational needs for
the foreseeable future.
OUTLOOK
The Company believes the primary reason for its success in recent years has been
its ability to offer new and classics products with a high level of quality and
services to its customers at competitive prices. Management is committed to
continuing to offer such quality and services to its customers.
The Company recognizes that price competition in the apparel market can
adversely affect its earnings. The ability of the Company to compete is enhanced
by its established international sourcing relationships and its strong financial
position with significant liquid assets and relatively low debt to equity ratio.
The elimination of the quota system as of January 1, 2005, as discussed in
"Governmental Regulation and Trade Agreements" under Item I above, may increase
cost of products purchased by the Company.
Over the past five years, the retail industry has consolidated through
acquisitions and mergers. Further, retailers have concentrated more volume with
a fewer number of vendors. The Company has responded by expanding its product
line in the sweater business and adding related separates through the
acquisition of Item-Eyes. By increasing its utilization of international
sourcing, the Company can offer greater variety in yarns, styling and surface
treatment at competitive prices.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any arrangements that are not recorded on the balance
sheet of the Company other than liability for delivery of shares of the
Company's Common Stock under the Hampshire Group, Limited Common Stock Purchase
Plan, which is fully funded, as described in Note 10 to the Consolidated
Financial Statements included in this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis management evaluates its estimates, including those related to
allowances for markdowns, customer returns and adjustments, doubtful accounts,
inventory reserves and income taxes payable. Management bases its estimates on
historical experience and on various other assumptions that management believes
to be reasonable under the circumstances, the results of which form a basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, management
believes that its estimates, including those for the above-described items, are
reasonable and that the actual results will not vary significantly from the
estimated amounts.
The following critical accounting policies relate to the more significant
judgments and estimates used in the preparation of the consolidated financial
statements:
Allowances for Customer Returns and Adjustments
- -----------------------------------------------
The Company reserves allowances for customer returns, trade discounts, customer
chargebacks, and for sales and markdown allowances given to the customer at the
-17-
end of the selling seasons, which enable customers to markdown the retail sales
prices. The estimates for these allowances and discounts are based on a number
of factors, including: (a) historical experience, (b) industry trends, and (c)
specific agreements or negotiated amounts with customers.
Further, while the Company believes that it has negotiated all substantial sales
and markdown allowances with its customers for the season recently completed,
additional allowances for the spring season are anticipated and have been
provided for and others may be requested by customers for the concluded seasons.
Likewise, should the financial condition of the Company's customers or other
parties improve and result in payments or favorable settlements of previously
reserved amounts, the Company may reduce its recorded allowances.
Reserves for Doubtful Accounts of Customers
- -------------------------------------------
The Company maintains reserves for doubtful accounts of customers. The estimates
for these reserves are based on aging of the trade accounts receivable and
specific information obtained by the Company on the financial condition and
current credit worthiness of customers. Certain high-risk customer accounts are
factored with financial institutions or the Company purchases credit insurance
for a portion of such accounts. If the financial condition of the Company's
customers were to deteriorate and impair the ability of the customers to make
payments on their accounts, the Company may be required to increase its
allowances by recording additional reserve for doubtful accounts.
Inventory Reserves
- ------------------
The Company analyzes out-of-season merchandise on an individual SKU basis to
determine reserves, if any, that may be required to reduce the carrying value to
net realizable value. Additionally, the Company provides reserves for current
season merchandise whose carrying value is expected, based on historical
experience, to exceed its net realizable value. Factors considered in evaluating
the requirement for reserves include product styling, color, current fashion
trends and quantities on hand. Some of the Company's products are "classics" and
remain saleable from one season to the next and therefore no reserves are
generally required on these products. An estimate is made of the market value,
less expense to dispose and a normal profit margin, of products whose value is
determined to be impaired. If these products are ultimately sold at less than
estimated amounts, additional reserves may be required. Likewise, if these
products are sold for more than estimated amounts, reserves may be reduced.
Recent Accounting Standards
- ---------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amended the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation", to require disclosure
in both interim and annual financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.
SFAS No. 123, as amended by SFAS No. 148, allows companies to adopt the fair
value based method of accounting or to continue using the intrinsic value based
method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options. Under APB No. 25 (the "intrinsic method"), which the Company has
elected to continue to use, the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
Therefore, no compensation expense was recognized in 2004, 2003, or 2002.
Additionally, in accordance with SFAS No. 123 as amended, the Company is
required to disclose fair value information about its stock-based employee
compensation plans for all periods presented. If compensation expense for the
Company's stock-based compensation plans had been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of SFAS No. 123, the Company's income from continuing operations and basic and
diluted earnings per share from continuing operations would have been reduced as
per the "pro forma" amounts in Footnote l of the Consolidated Financial
Statements.
-18-
The compensation costs and effect on income from continuing operations and basic
and diluted earnings per share from continuing operations had compensation cost
been determined in accordance with SFAS No. 123 are set forth in the table in
Footnote 1 of the Consolidated Financial Statements included as part of this
Annual Report on Form 10-K.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Interpretation No. 45 requires an entity
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial recognition
and measurement provision are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 had no effect on the Company's financial position and results of operations.
Interpretation No. 45 also provides guidance on the disclosure to be made by the
guarantor about its obligation under certain guarantees that it has issued. The
disclosure requirements are effective for the financial statements of periods
ending after December 15, 2002. At December 31, 2004 and 2003, the Company and
various consolidated subsidiaries of the Company are borrowers under the
Revolving Credit Facility and Senior Notes (the "Facilities") (see Note 6). The
Facilities are guaranteed by either the Company and/or various consolidated
subsidiaries of the Company in the event that the borrower(s) default under the
provisions of the Facilities. The guarantees are in effect for the period of the
related Facilities.
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46, among other things, provides guidance on identifying variable interest
entities ("VIE") and determining when assets, liabilities, non-controlling
interests, and operating results of a VIE should be included in a company's
consolidated financial statements, and also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. In
December 2003, the FASB issued a revision to FIN 46 to clarify some of the
provisions of the original interpretation and to exempt certain entities from
its requirements. The additional guidance explains how to identify a VIE and how
an enterprise should assess its interest in an entity to decide whether to
consolidate that entity. Application of revised FIN 46 is required for public
companies with interest in "special purpose entities" for periods ending after
December 15, 2003. Application for public entities for all other types of
entities is required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 had no effect on the Company's financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how companies classify and measure, in their statement
of financial position, certain financial instruments with characteristics of
both liabilities and equities. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 had no effect on the Company's financial position, results of operations
or cash flows.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. The
Company is in the process of reviewing the effect, if any, that the adoption of
SFAS N. 123(R) will have on its financial position and results of operations.
-19-
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk represents the risk of loss that may affect 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 area of changing interest rates. The Company is also exposed to
market risk due to increased costs of its products.
The long-term debt of the Company is at fixed interest rates, which were
primarily at market when the debt was issued, but were primarily above market on
December 31, 2004. The short-term debt of the Company has variable rates based
on the prime interest rate of the lending institution, or at the option of the
Company, a fixed rate based on LIBOR for a fixed term. The impact of a
hypothetical 100 basis point increase in interest rates on the Company's
variable rate debt (borrowings under the credit facility) would have been to
increase interest expense by approximately $2,000 for 2004 and by approximately
$45,000 for 2003.
In purchasing apparel in international markets, the Company uses letters of
credit that require the payment of dollars upon receipt of bills of lading for
the products. Prices are fixed in U.S. dollars at the time the letters of credit
are issued. The Company does not currently engage in derivative financial
instruments to mitigate these market risks.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be presented in Item 8 is presented commencing on
Page F-1 of this Annual Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
There were no changes in, or disagreements with the independent accountants on
accounting or financial disclosure issues.
ITEM 9A - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures.
- ---------------------------------------
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, as of December 31, 2004 (the "Evaluation Date"). 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.
(b) Changes in Internal Control Over Financial Reporting.
- ---------------------------------------------------------
In reviewing its system of internal control over financial reporting for
Sarbanes-Oxley readiness, management noted deficiencies in the documentation of
certain procedures in the informational technology area. With the assistance of
an independent consulting firm, documentation of the procedures in this area was
completed prior to December 31, 2004. There were no instances noted that caused
-20-
management to have concerns that a breakdown had occurred in internal controls
which would result in a misstatement in financial reporting. There have not been
any changes in the Company's internal controls over financial reporting during
the fiscal year ended December 31, 2004 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
(c) Implementation of Requirements of the Sarbanes-Oxley Act.
- -------------------------------------------------------------
During the second quarter of 2004, the Audit Committee of the Board of Directors
engaged a Compliance Officer to assist the Company in evaluating and documenting
the Company's internal controls over financial reporting. Testing procedures
under the requirements of Sarbanes-Oxley are being developed in coordination
with the Company's independent auditors based upon a comprehensive risk
assessment performed by management. Management plans to have all internal
control documentation and initial testing completed by June 30, 2005.
ITEM 9B - OTHER INFORMATION
None.
-21-
PART III
Certain information required to be presented in Part III of this Annual Report
on Form 10-K is omitted as the Registrant will file a Definitive Proxy Statement
pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after
the end of the fiscal year, which is incorporated herein by reference thereto.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and executive officers
required to be presented in Item 10 is incorporated herein by reference to the
Company's 2005 Proxy Statement.
Code of Ethics
- --------------
The Company has adopted a `Code of Ethics and Business Conduct' for its
directors and officers (including its principal executive officer, principal
financial officer, principal accounting officer and controllers) and established
procedures whereby employees and/or shareholders may report matters that may be
a violation of the Company's Code of Ethics and Business Conduct to the proper
authority. The Code of Ethics has been filed as an exhibit to this Annual Report
on Form 10-K. It is also available on the Company's website at www.hamp.com; or
a copy may be received free of charge by submitting a written request to:
Hampshire Group, Limited, Attn: Corporate Secretary, 215 Commerce Boulevard,
Anderson, SC 29625.
ITEM 11 - EXECUTIVE COMPENSATION
The information concerning executive compensation required to be presented in
Item 11 is incorporated herein by reference to the Company's 2005 Proxy
Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information concerning security ownership of certain beneficial owners and
management and related stockholder matters required to be presented in Item 12
is incorporated herein by reference to the Company's 2005 Proxy Statement except
for the information required by Item 201(d) of Regulation S-K, which is set
forth under Item 5 of this Annual Report on Form 10-K.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
required to be presented in Item 13 is incorporated herein by reference to the
Company's 2005 Proxy Statement.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information regarding accounting fees and services of the principal auditors
to be presented in Item 14 is hereby incorporated by reference to the Company's
2005 Proxy Statement.
-22-
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form
10-K.
(1) Financial Statements
Financial Statements filed herewith are listed on the Index to the
Consolidated Financial Statements on Page F-1 of this Annual Report on
Form 10-K.
(2) Financial Statement Schedules
The Financial Statement Schedules filed herewith are listed on the Index
to the Consolidated Financial Statements on Page F-1 of this Annual
Report on Form 10-K. All other schedules have been omitted because the
required information is shown in consolidated financial statements or
notes thereto, or they are not applicable.
(3) Exhibits
Exhibit No. Description
- ----------- -------------------------------------------------------------------
3.0 Restated Certificate of Incorporation of Hampshire Group, Limited
3.1 Certificate of Amendment and Restatement of the Certificate of
Incorporation of Hampshire Group, Limited
3.2 Amended and Restated By-Laws of Hampshire Group, Limited
10.1* Form of Hampshire Group, Limited and Subsidiaries
401(k) Retirement Savings Plan
10.2* Form of Hampshire Group, Limited Stock Option Plan
Amended and Restated effective June 7, 1995
10.3* Form of Hampshire Group, Limited and Affiliates Common Stock
Purchase Plan for Directors and Executives Amended June 7, 1995
10.4* Employment Agreement between Hampshire Group, Limited and
Ludwig Kuttner dated as of January 1, 2005
10.10 Note Purchase Agreement between Hampshire Group, Limited
Phoenix Home Life Mutual Insurance Company and The Ohio National
Life Insurance Company dated May 15, 1998
10.11 Amendment No. 3, to the Note Purchase Agreement, among the Company,
the Guarantors named therein, Phoenix Life Insurance Company and
Ohio National Life Insurance Company dated August 19, 2003
10.12 Credit Agreement among HSBC Bank USA as agent, the Banks named
therein and Hampshire Group, Limited, dated August 15, 2003
10.13 Amendment No. 1 to Credit Agreement among HSBC Bank USA as agent,
the Banks named therein and Hampshire Group, Limited, dated
December 29, 2004
* Company compensatory plan or management contract.
(Exhibits continued on next page)
-23-
Exhibit No. Description
- ----------- -------------------------------------------------------------------
10.14 Asset Purchase Agreement dated October 8, 2003 by and between
Hampshire Investments, Limited and K Holdings, LLC
10.15 Stock Purchase Agreement dated October 8, 2003 by and between
Hampshire Group, Limited and Ludwig Kuttner, et al
14.1 Code of Ethics and Business Conduct
14.2 Complaint Procedures for Accounting and Audit Matters
21.1 Subsidiaries of the Company
23.1 Consent of Deloitte & Touche LLP
31.1 Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulations 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 Regulations S-K as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized.
HAMPSHIRE GROUP, LIMITED
By: /s/ LUDWIG KUTTNER President and March 24, 2005
------------------- Chief Executive Officer
Ludwig Kuttner (Principal Executive Officer)
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
-------------------------- ------------------------------- ---------------
/s/ LUDWIG KUTTNER Chairman of the March 24, 2005
----------------------- Board of Directors
Ludwig Kuttner
/s/ JOEL GOLDBERG Director March 24, 2005
-----------------------
Joel Goldberg
/s/ MICHAEL C. JACKSON Director March 24, 2005
-----------------------
Michael C. Jackson
/s/ HARVEY L. SPERRY Director March 24, 2005
-----------------------
Harvey L. Sperry
/s/ IRWIN W. WINTER Director March 24, 2005
-----------------------
Irwin W. Winter
/s/ CHARLES W. CLAYTON Chief Financial Officer March 24, 2005
------------------------ (Principal Financial Officer)
Charles W. Clayton
/s/ ROGER B. CLARK Vice President Finance March 24, 2005
------------------------ (Principal Accounting Officer)
Roger B. Clark
-25-
HAMPSHIRE GROUP, LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7
Quarterly Financial Data F-22
Financial Statement Schedule
II. Valuation and Qualifying Accounts and Reserves F-23
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Hampshire Group, Limited
Anderson, South Carolina
We have audited the accompanying consolidated balance sheets of Hampshire Group,
Limited and subsidiaries (the "Company") as of December 31, 2004 and 2003, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the index on
F-1. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hampshire Group, Limited and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for the each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Charlotte, North Carolina
March 24, 2005
F-2
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, 2004 2003
- -------------------------------------------------------------------------------------
ASSETS Current assets:
Cash and cash equivalents $ 31,214 $ 58,282
Short-term investments 49,440 5,010
Accounts receivable trade - net 32,971 29,450
Other receivables 1,292 646
Inventories - net 10,393 22,049
Deferred tax assets 3,974 4,274
Other current assets 1,883 493
-------------------
Total current assets 131,167 120,204
Fixed assets - net 1,318 1,667
Deferred tax assets 1,181 2,007
Goodwill 8,020 8,020
Other assets 289 1,208
-------------------
$141,975 $133,106
===================
- -------------------------------------------------------------------------------------
LIABILITIES Current liabilities:
Current portion of long-term debt $ 1,901 $ 1,932
Accounts payable 8,156 12,898
Accrued expenses and other liabilities 20,336 19,547
-------------------
Total current liabilities 30,393 34,377
Long-term debt, less current portion 3,750 5,651
Deferred compensation 2,940 2,656
-------------------
Total liabilities 37,083 42,684
-------------------
Commitments and contingencies
- -------------------------------------------------------------------------------------
STOCKHOLDERS' Common Stock, $0.10 par value; 4,761,911 shares
EQUITY issued and 4,100,570 (2004) and 4,067,721 (2003)
shares outstanding 476 476
Additional paid-in capital 33,682 32,685
Retained earnings 93,114 80,964
Treasury stock, 661,341 (2004) and 694,190 (2003)
shares at cost (22,380) (23,703)
-------------------
Total stockholders' equity 104,892 90,422
-------------------
$141,975 $133,106
===================
- -------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Years Ended December 31, 2004 2003 2002
- -----------------------------------------------------------------------------------
Net sales $301,999 $292,651 $293,268
Cost of goods sold 221,453 218,454 210,336
-------------------------------
Gross profit 80,546 74,197 82,932
Selling, general and administrative expenses 57,405 54,903 51,816
-------------------------------
Income from operations 23,141 19,294 31,116
Other income (expense):
Interest expense (645) (909) (1,359)
Interest income 726 683 420
Other - net 3 155 (271)
-------------------------------
Income from continuing operations
before income taxes 23,225 19,223 29,906
Income tax (provision) benefit:
Current (8,374) (6,821) (12,525)
Deferred (1,126) (979) 664
-------------------------------
Income from continuing operations 13,725 11,423 18,045
Loss from discontinued operations,
net of income taxes of $600 in 2003
and ($1,761) in 2002 - (5,796) (997)
-------------------------------
Net Income $ 13,725 $ 5,627 $ 17,048
===============================
- ----------------------------------------------------------------------------------
Income per share from continuing operations:
Basic $3.37 $2.50 $3.83
================================
Diluted $3.33 $2.43 $3.73
===============================
Loss per share from discontinued operations:
Basic - ($1.27) ($0.21)
===============================
Diluted - ($1.23) ($0.20)
===============================
Net income per share: Basic $3.37 $1.23 $3.62
===============================
Diluted $3.33 $1.20 $3.53
===============================
Weighted average number of shares outstanding:
Basic 4,074 4,573 4,711
===============================
Diluted 4,126 4,696 4,834
===============================
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (in thousands) 2004 2003 2002
- ----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $13,725 $ 5,627 $17,048
Loss from discontinued operations - 5,796 997
-----------------------------
Income from continuing operations 13,725 11,423 18,045
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation 810 823 704
Loss (gain) on sale of fixed assets 17 (1) 109
Deferred income tax provision (benefit) 1,126 979 (664)
Deferred compensation costs for executive officers 799 415 775
Tax benefit relating to Common Stock Plans 997 726 73
Net change in operating assets and liabilities:
Receivables (4,188) (982) 6,290
Inventories 11,656 (7,317) 12,007
Other assets (978) 399 (284)
Current liabilities (3,953) (1,045) 12,776
-----------------------------
Net cash provided by operating activities 20,011 5,420 49,831
- ----------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments (49,440) (5,010) -
Sale of short-term investments 5,010 - -
Capital expenditures (478) (840) (916)
Proceeds from sales of fixed assets - 30 8
Repayments of loans and advances 21 250 250
-----------------------------
Net cash used in investing activities (44,887) (5,570) (658)
- ----------------------------------------------------------------------------------------
Cash flows from financing activities:
Debt issuance costs - (323) -
Repayment of long-term debt (1,932) (1,930) (6,537)
Payments of deferred compensation (8) (8) (8)
Proceeds from issuance of Common Stock
under the Company Stock Plans - 479 183
Proceeds from issuance of Treasury Stock
under the Company Stock Plans 905 234 263
Purchases of Treasury Stock (1,157) (1,194) (265)
-----------------------------
Net cash used in financing activities (2,192) (2,742) (6,364)
- ----------------------------------------------------------------------------------------
Discontinued operations:
Net cash used in discontinued operations - (5,719) (4,067)
- ----------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (27,068) (8,611) 38,742
Cash and cash equivalents - beginning of year 58,282 66,893 28,151
-----------------------------
Cash and cash equivalents - end of year $31,214 $58,282 $66,893
=============================
Supplementary disclosure of cash flow information:
- ----------------------------------------------------------------------------------------
Cash paid during the year for: Income taxes $6,202 $6,253 $12,541
Interest 595 884 1,393
Non-cash investing and financing activities:
Treasury stock acquired from options exercised
under the Company Stock Plans 181 731 73
Treasury stock received from the disposal of
discontinued operations - 23,905 -
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Common Stock Additional
Years Ended December 31, ---------------- Paid-In Retained Treasury
2002, 2003 and 2004 Shares Amount Capital Earnings Stock Total
- --------------------------------------------------------------------------------------------------
Beginning balance 4,693,142 $471 $31,229 $59,581 ($ 128) $ 91,153
Net income for the year - - - 17,048 - 17,048
Purchase of treasury stock (13,136) - - - (265) (265)
Shares issued under the
Common Stock plans 40,585 1 182 (103) 366 446
Tax benefit relating to
Common Stock plans - - 73 - - 73
Deferred compensation payable
in Company shares 376,765 - - - 3,394 3,394
Shares held in trust for deferred
compensation liability (376,765) - - - (3,394) (3,394)
- --------------------------------------------------------------------------------------------------
Balance - December 31, 2002 4,720,591 472 31,484 76,526 (27) 108,455
------------------------------------------------------------
Net income for the year - - - 5,627 - 5,627
Treasury stock received in disposal
of discontinued operations (700,000) - - - (23,905) (23,905)
Purchase of treasury stock (50,519) - - - (1,194) (1,194)
Shares issued under the
Common Stock plans 97,649 4 475 (1,189) 1,423 713
Tax benefit relating to
Common Stock plans - - 726 - - 726
Deferred compensation payable
in Company shares 278,014 - - - 2,502 2,502
Shares held in trust for deferred
compensation liability (278,014) - - - (2,502) (2,502)
- --------------------------------------------------------------------------------------------------
Balance - December 31, 2003 4,067,721 476 32,685 80,964 (23,703) 90,422
-------------------------------------------------------------
Net income for the year - - - 13,725 - 13,725
Purchase of treasury stock (39,725) - - - (1,157) (1,157)
Shares issued under the
Common Stock plans 72,574 - - (1,575) 2,480 905
Tax benefit relating to
Common Stock plans - - 997 - - 997
Deferred compensation payable
in Company shares 190,266 - - - 1,712 1,712
Shares held in trust for deferred
compensation liability (190,266) - - - (1,712) (1,712)
- --------------------------------------------------------------------------------------------------
Balance - December 31, 2004 4,100,570 $476 $33,682 $93,114 ($22,380) $104,892
==================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
HAMPSHIRE GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Summary of Accounting Policies
Organization
- ------------
Hampshire Group, Limited ("Hampshire Group" or the "Company"), through its
wholly owned subsidiaries Hampshire Designers, Inc. ("Hampshire Designers"),
Item-Eyes, Inc. ("Item-Eyes") and Keynote Services, Limited ("Keynote
Services"), engages in the apparel business. The Company's corporate offices are
in Anderson, South Carolina and its sales offices and showrooms are in the
apparel district of New York City. Both Hampshire Designers and Item-Eyes source
the manufacture of their products worldwide from quality manufacturers and their
products are sold primarily in the United States to various retail and catalog
companies. Keynote Services, a Hong Kong based subsidiary, assists with the
sourcing and quality control needs of Hampshire Designers and Item-Eyes.
Summary of Critical and Other Significant Accounting Policies
- -------------------------------------------------------------
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses and related disclosure of contingent assets and liabilities. On an
ongoing basis management evaluates its estimates, including those related to
allowances for markdowns, customer returns and adjustments, doubtful accounts,
inventory reserves and income taxes payable. Management bases its estimates on
historical experience and on various other assumptions that management believes
to be reasonable under the circumstances, the results of which form a basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions; however, management
believes that its estimates, including those for the above described items, are
reasonable and that the actual results will not vary significantly from the
estimated amounts.
The following critical accounting policies relate to the more significant
judgments and estimates used in the preparation of the consolidated financial
statements:
Allowances for Customer Returns and Adjustments
- -----------------------------------------------
The Company reserves allowances for customer returns, trade discounts, customer
chargebacks, and for sales and markdown allowances given to the customer
normally at the end of the selling seasons, which enable customers to markdown
the retail sales prices. The estimates for these allowances and discounts are
based on a number of factors, including: (a) historical experience, (b) industry
trends, and (c) specific agreements or negotiated amounts with customers.
Further, while the Company believes that it has negotiated all substantial sales
and markdown allowances with its customers for the season recently completed,
additional allowances for the spring season are anticipated and have been
provided for and others may be requested by customers for the concluded seasons.
Likewise, should the financial condition of the Company's customers or other
parties improve and result in payments or favorable settlements of previously
reserved amounts, the Company may reduce its recorded allowances.
Reserves for Doubtful Accounts of Customers
- -------------------------------------------
The Company maintains reserves for doubtful accounts of its customers. The
estimates for these reserves are based on aging of the trade accounts receivable
and specific information obtained by the Company on the financial condition and
current credit worthiness of customers. The Company does not normally require
collateral for its trade receivables. Certain high-risk customer accounts are
F-7
factored with financial institutions or the Company purchases credit insurance
for a portion of such accounts. If the financial condition of the Company's
customers were to deteriorate and impair the ability of the customers to make
payments on their accounts, the Company may be required to increase its
allowances by recording addition reserves for doubtful accounts.
Inventory Reserves
- ------------------
The Company analyzes out-of-season merchandise on an individual SKU basis to
determine reserves, if any, that may be required to reduce the carrying value to
net realizable value. Additionally, the Company provides reserves for current
season merchandise whose carrying value is expected, based on historical
experience, to exceed its net realizable value. Factors considered in evaluating
the requirement for reserves include product styling, color, current fashion
trends and quantities on hand. Some of the Company's products are "classics" and
remain saleable from one season to the next and therefore no reserves are
generally required on these products. An estimate is made of the market value,
less expense to dispose and a normal profit margin, of products whose value is
determined to be impaired. If these products are ultimately sold at less than
estimated amounts, additional reserves may be required. Likewise, if these
products are sold for more than estimated amounts, reserves may be reduced.
Also, the following accounting policies significantly affect the preparation of
the consolidated financial statements:
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, including Hampshire Designers, Item-Eyes and Keynote Services.
Hampshire Investments, Limited ("Hampshire Investments") has been reported as
discontinued operations for the periods 2002 and 2003 due to the disposal of the
investment segment on October 8, 2003. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash Equivalents
- ----------------
Cash equivalents consist of highly liquid investments with initial maturities of
ninety days or less. At December 31, 2004 and 2003, interest bearing amounts
were approximately $31.2 million and $58.3 million, respectively. A significant
amount of the Company's cash and cash equivalents are on deposit in financial
institutions and exceed the maximum insurable deposit limits.
Short-Term Investments
- ----------------------
Short-term investments consist primarily of AAA rated auction bonds which
normally have a 35 day liquidity. At December 31, 2004 and 2003 these
investments were $49.4 million and $5.0 million, respectively. These investments
are classified as "available for sale". The $5.0 million at December 31, 2003,
which had previously been reported as cash equivalents, has been reclassified to
conform with the current year presentation.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in, first-out method ("FIFO") for all inventory except for
approximately 5% of the inventory at December 31, 2003, for which cost was
determined using the last-in, first-out method ("LIFO").
Fixed Assets
- ------------
Fixed assets are recorded at cost. The Company provides for depreciation using
the straight-line method over the estimated useful lives of the assets.
Additions and major replacements or improvements are capitalized, while minor
replacements and maintenance costs are charged to expense as incurred. The cost
and accumulated depreciation of assets sold or retired are removed from the
accounts and any gain or loss is included in the results of operations for the
period of the transaction.
F-8
Impairment of Long-Lived Assets
- -------------------------------
The Company evaluates the carrying value of its long-lived assets based on
criteria set forth in Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and
records impairment losses on such assets when indicators of impairment are
present and the undiscounted cash flow estimates to be generated by those assets
are less than the assets' carrying amount. Management has evaluated the carrying
value of its long-lived assets and has determined that no impairment existed as
of December 31, 2004.
Goodwill
- --------
Goodwill represents the excess of cost over net assets acquired in connection
with the acquisition of certain businesses. Beginning January 1, 2002, in
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill
amortization ceased. In addition, goodwill is reviewed for impairment during the
fourth quarter of each year or more often should impairment indicators exist.
There has been no goodwill impairment recorded since adoption of SFAS No. 142.
Financial Instruments
- ---------------------
The Company's financial instruments primarily consist of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
long-term debt. The fair value of long-term debt is disclosed in Note 6. The
carrying amounts of the other financial instruments are considered a reasonable
estimate of their fair value at December 31, 2004, due to the short-term nature
of the items.
Revenue Recognition
- -------------------
The Company recognizes sales revenue upon shipment of goods to customers, net of
the Company's estimate of returns and allowances and co-op advertising.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses. Total advertising costs for the years ended
December 31, 2004, 2003 and 2002 totaled approximately $990,000, $1,425,000 and
$459,000, respectively.
Shipping Costs
- --------------
Costs to ship products to customers are expensed as incurred and are included in
selling, general and administrative expenses. Total shipping costs for the years
ended December 31, 2004, 2003 and 2002 totaled approximately $1,608,000,
$1,066,000 and $1,011,000, respectively.
Income Taxes
- ------------
Income taxes are recognized for financial reporting purposes during the year in
which transactions enter into the determination of income, with deferred taxes
being provided for temporary differences between the basis for financial
reporting purposes and the basis for income tax reporting purposes.
Earnings Per Common Share
- -------------------------
Basic earnings per common share are computed by dividing net income by the
weighted-average number of shares outstanding for the year. Diluted earnings per
common share are computed similarly; however, it is adjusted for the effects of
the assumed exercise of the Company's outstanding stock options.
Presentation of Prior Years Data
- --------------------------------
Certain reclassifications have been made to data of prior years to conform to
the current-year presentation.
Recent Accounting Standards
- ---------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a voluntary
F-9
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amended the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation", to require disclosure
in both interim and annual financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.
SFAS No. 123, as amended by SFAS No. 148, allows companies to adopt the fair
value based method of accounting or to continue using the intrinsic value based
method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its employee stock
options. Under APB No. 25 (the "intrinsic method"), which the Company has
elected to continue to use, the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant.
Therefore, no compensation expense was recognized in 2004, 2003, or 2002.
Additionally, in accordance with SFAS No. 123 as amended, the Company is
required to disclose fair value information about its stock-based employee
compensation plans for all periods presented. If compensation expense for the
Company's stock-based compensation plans had been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
of SFAS No. 123, the Company's income from continuing operations and basic and
diluted earnings per share from continuing operations would have been reduced as
per the "pro forma" amounts in the following table.
The compensation costs and effect on income from continuing operations and basic
and diluted earnings per share from continuing operations had compensation cost
been determined in accordance with SFAS No. 123 are set forth below:
(in thousands, except for per share data) 2004 2003 2002
- -----------------------------------------------------------------------------
Income from continuing operations As reported $13,725 $11,423 $18,045
Compensation cost - net of tax (11) (4) (78)
----------------------------
Pro forma $13,714 $11,419 $17,967
=============================================================================
Basic income per share from As reported $3.37 $2.50 $3.83
continuing operations: ----------------------------
Pro forma $3.37 $2.50 $3.81
=============================================================================
Diluted income per share from As reported $3.33 $2.43 $3.73
continuing operations: ----------------------------
Pro forma $3.33 $2.43 $3.72
=============================================================================
In order to estimate compensation cost under SFAS No. 123, the Black-Scholes
model was employed using the assumptions set forth below:
2004(1) 2003 2002(1)
- -----------------------------------------------------------------------------
Expected life (years) - 4.2 -
Expected volatility - 39.7% -
Dividend yield - 0.0% -
Risk-free interest rate - 4.1% -
- -----------------------------------------------------------------------------
Weighted-average fair value of options granted - $7.02 -
=============================================================================
(1) There were no options granted during the years ended December 31, 2004 or
2002.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". Interpretation No. 45 requires an entity
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. The initial recognition
and measurement provision are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption of Interpretation No.
45 had no effect on the Company's financial position and results of operations.
Interpretation No. 45 also provides guidance on the disclosure to be made by the
guarantor about its obligation under certain guarantees that it has issued. The
F-10
disclosure requirements are effective for the financial statements of periods
ending after December 15, 2002. At December 31, 2004 and 2003, the Company and
various consolidated subsidiaries of the Company are borrowers under the
Revolving Credit Facility and Senior Notes (the "Facilities") (see Note 6). The
Facilities are guaranteed by either the Company and/or various consolidated
subsidiaries of the Company in the event that the borrower(s) default under the
provisions of the Facilities. The guarantees are in effect for the period of the
related Facilities.
In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46, among other things, provides guidance on identifying variable interest
entities ("VIE") and determining when assets, liabilities, non-controlling
interests, and operating results of a VIE should be included in a company's
consolidated financial statements, and also requires additional disclosures by
primary beneficiaries and other significant variable interest holders. In
December 2003, the FASB issued a revision to FIN 46 to clarify some of the
provisions of the original interpretation and to exempt certain entities from
its requirements. The additional guidance explains how to identify a VIE and how
an enterprise should assess its interest in an entity to decide whether to
consolidate that entity. Application of revised FIN 46 is required for public
companies with interest in "special purpose entities" for periods ending after
December 15, 2003. Application for public entities for all other types of
entities is required in financial statements for periods ending after March 15,
2004. The adoption of FIN 46 had no effect on the Company's financial position
or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how companies classify and measure, in their statement
of financial position, certain financial instruments with characteristics of
both liabilities and equities. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003. The adoption of SFAS
No. 150 had no effect on the Company's financial position, results of operations
or cash flows.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment", which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. This
eliminates the exception to account for such awards using the intrinsic method
previously allowable under APB Opinion No. 25. SFAS No. 123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. The
Company is in the process of reviewing the effect, if any, that the adoption of
SFAS N. 123(R) will have on its financial position and results of operations.
Note 2 - Accounts Receivable and Major Customers
The Company performs ongoing evaluations of the credit worthiness of its
customers and maintains allowances for potential doubtful accounts. The accounts
receivable at December 31, 2004 and 2003 are stated net of allowances for
doubtful accounts, customer returns, customer charge backs, and for sales and
markdown allowances of approximately $14,652,000 and $15,494,000, respectively
(see Note 1).
The Company sells principally to department stores, catalog companies, specialty
stores, mass merchants and other retailers located in the United States. The
Company's sales to three major customers for the year ended December 31, 2004
represented 18%, 9% and 9% of total sales. For the year ended December 31, 2003,
the three major customers represented 15%, 14% and 10% of total sales, and for
the year ended December 31, 2002, the three major customers represented 14%, 11%
and 11% of total sales. At December 31, 2004 and 2003, 53% and 48%,
respectively, of the total trade receivables were due from these major
customers.
F-11
Note 3 - Inventories
Inventories at December 31, 2004 and 2003 consist of the following:
(in thousands) 2004 2003
- ------------------------------------------------------------
Finished goods $10,212 $20,823
Work-in-progress 43 465
Raw materials and supplies 138 879
- ------------------------------------------------------------
10,393 22,167
Less - Excess of current cost
over LIFO carrying value - (118)
- ------------------------------------------------------------
Total $10,393 $22,049
============================================================
At December 31, 2003 approximately 5% of total inventories were valued using the
LIFO method.
Note 4 - Fixed Assets
Fixed assets at December 31, 2004 and 2003 consist of the following:
Estimated
(in thousands) Useful Lives 2004 2003
- -----------------------------------------------------------------------
Leasehold improvements 5-10 years $1,050 $1,095
Machinery and equipment 3-7 years 3,181 3,335
Furniture and fixtures 3-7 years 942 910
Vehicles 3 years 172 141
- -----------------------------------------------------------------------
Total cost 5,345 5,481
Less - Accumulated depreciation (4,027) (3,814)
- -----------------------------------------------------------------------
Total $1,318 $1,667
=======================================================================
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
approximately $810,000, $823,000 and $704,000, respectively.
Note 5 - Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities at December 31, 2004 and 2003 consist of
the following:
(in thousands) 2004 2003
- ------------------------------------------------------------
Compensation $3,961 $4,156
Reserve for supplier disputes 7,540 7,297
Income taxes 3,828 2,991
Co-op advertising 1,357 1,450
Royalties 665 489
Other 2,985 3,164
- ------------------------------------------------------------
Total $20,336 $19,547
============================================================
During the fourth quarter of 2002, the Company was advised that certain of its
suppliers would not be able to deliver finished product as agreed. As a result
of the failure to meet these obligations to the Company, the Company has
established a reserve in the amount of $7,540,000 and $7,297,000 at December 31,
2004 and 2003, respectively, for costs of inventory purchases and estimated
losses for matters arising from these events. At December 31, 2004, these
matters remain unresolved.
F-12
Note 6 - Borrowings
Revolving Credit Facility
- -------------------------
The Company maintains a Revolving Credit Facility ("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 up to
$100 million in revolving line of credit borrowings and issuance of letters of
credit. Advances under the line of credit are limited to the lesser of: (a) $100
million less outstanding letters of credit; or (b) the sum of 85% of eligible
accounts receivable, 50% of eligible inventory (subject to seasonal limits) of
Hampshire Designers and Item-Eyes, and 50% of outstanding eligible letters of
credit issued through the 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 not to exceed 180 days. The Company is charged a
fee of 0.125% on the unused balance of the Revolving Credit Facility.
The loan is collateralized, pari passu with the Company's outstanding Senior
Notes, principally by the trade accounts receivable and inventories of the
Company's subsidiaries and a pledge of the common stock of such subsidiaries. At
December 31, 2004 there was approximately $33.0 million outstanding under
letters of credit. No advances were outstanding under the Revolving Credit
Facility at December 31, 2004, which resulted in availability for borrowing of
approximately $18.5 million under the Revolving Credit Facility.
Long-Term Debt
- --------------
Long-term debt at December 31, 2004 and 2003 consists of the following:
2004 2003
- -------------------------------------------------------------------------------
(in thousands)
Senior Notes payable to two insurance companies due in
semi-annual installments of $937,500 through 2008, plus
interest at 8% per annum, collateralized pari passu with
the Revolving Credit Facility $5,625 $7,500
Note payable in monthly installments of approximately $5,030,
including interest at 4.875% collateralized by equipment 26 83
- -------------------------------------------------------------------------------
Total long-term debt 5,651 7,583
Less - Amount payable within one year (1,901) (1,932)
- -------------------------------------------------------------------------------
Amount payable after one year $3,750 $5,651
===============================================================================
Financial Covenants
- -------------------
Both the Revolving Credit Facility and the Senior Notes contain covenants that
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 and achieve a specified fixed charge
ratio. The Company was in compliance with the financial performance covenants
and restrictions at December 31, 2004.
The Company's trade account receivables and inventories are pledged as
collateral, pari passu, under the Revolving Credit Facility and the Senior
Notes. The Revolving Credit Facility and the Senior Notes restrict payments by
the Company of cash dividends to stockholders and the repurchase of Company
common stock. The Senior Notes also require that during any twelve-month period
there must be a period of 45 consecutive days where there is no outstanding
short-term debt. The Company was in compliance with these provisions for the
year ended December 31, 2004.
F-13
Other
- -----
Maturities of long-term debt as of December 31, 2004 are as follows:
Year (in thousands)
- -----------------------------------------------------------------------
2005 $1,901
2006 1,875
2007 1,875
- -----------------------------------------------------------------------
Total $5,651
=======================================================================
The fair value of the long-term debt at December 31, 2004 and 2003, based on
current market interest rates discounted to present value, was approximately
$5.7 million and $8.0 million, respectively.
Note 7 - Income Taxes
The components of income tax provision (benefit) consist of the following:
(in thousands) 2004 2003 2002
- -----------------------------------------------------------------------
Current:
Federal $7,073 $5,349 $10,481
State 1,301 1,472 2,044
- -----------------------------------------------------------------------
8,374 6,821 12,525
- -----------------------------------------------------------------------
Deferred:
Federal 1,033 995 (455)
State 93 (16) (209)
- -----------------------------------------------------------------------
1,126 979 (664)
- -----------------------------------------------------------------------
Total $9,500 $7,800 $11,861
=======================================================================
A reconciliation of the provision for income taxes computed by applying the
statutory federal income tax rate to income from continuing operations before
income taxes and the Company's actual provision for income taxes is as follows:
(in thousands) 2004 2003 2002
- -----------------------------------------------------------------------
Tax provision at federal statutory rate $8,129 $6,728 $10,467
Increase in tax arising from:
State taxes, less federal income tax
benefit 906 946 1,193
Other 465 126 201
- -----------------------------------------------------------------------
Total $9,500 $7,800 $11,861
=======================================================================
F-14
A summary of the temporary differences and carryforwards giving rise to deferred
income tax assets as of December 31, 2004 and 2003 is as follows:
(in thousands) 2004 2003
- -------------------------------------------------------------------------------
Deferred income tax assets:
Allowances for receivables $2,429 $2,363
Inventories 605 1,487
Accrued liabilities and other temporary differences 941 423
Deferred compensation plans 1,703 2,075
Other 125 372
- -------------------------------------------------------------------------------
Gross deferred income tax assets 5,803 6,720
- -------------------------------------------------------------------------------
Deferred income tax liabilities:
Fixed assets - (33)
Intangible assets (648) (406)
- -------------------------------------------------------------------------------
Gross deferred income tax liabilities (648) (439)
- -------------------------------------------------------------------------------
Net deferred income tax assets $5,155 $6,281
===============================================================================
The deferred tax assets and liabilities are recognized in the consolidated
balance sheets as follows:
(in thousands) 2004 2003
- -------------------------------------------------------------------------------
Deferred tax asset - current $3,974 $4,274
Deferred tax asset - noncurrent 1,181 2,007
- -------------------------------------------------------------------------------
Total $5,155 $6,281
===============================================================================
All federal net operating loss carryforwards have been utilized. State net
operating loss carryforwards totaling approximately $700,000 begin to expire in
2010.
As discussed in Note 12, the Company incurred a loss in 2003 from the disposal
of certain discontinued operations of approximately $6,433,000. Of the reported
loss, approximately $5,560,000 is attributable to the disposition of the capital
stock of Hampshire Investments, Limited, the Company's former investment
subsidiary. 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 has been
provided for this loss in the consolidated financial statements.
For the year ended December 31, 2002, the Company reported an income tax benefit
of approximately $1,761,000. This benefit resulted primarily from the impairment
charge recorded on a domestic real property investment in the amount of
$3,140,000 and the benefit from the utilization of a capital loss carryforward.
The Company's 2003 consolidated federal income tax return is presently under
examination by the Internal Revenue Service. Management has been informed that
the examination is expected to be complete by June 30, 2005. Additionally, the
Company's income tax returns for the years 2002 and 2001 are presently under
examination by New York City Tax Authority. Management believes the Company has
adequately provided for income tax contingencies associated with these
examinations.
Note 8 - Commitments and Contingencies
The Company leases premises and equipment under operating leases having terms
from month-to-month to three years. At December 31, 2004, including those leases
which have been renewed subsequent to year-end, future minimum lease payments
under leases having an initial or remaining non-cancelable term in excess of one
year were as set forth below:
F-15
Year (in thousands)
- -----------------------------------------------------------------------
2005 $1,424
2006 1,256
2007 996
2008 703
2009 533
Thereafter 849
- -----------------------------------------------------------------------
Total $5,761
=======================================================================
For the years ended December 31, 2004, 2003 and 2002, rent expense for operating
leases was approximately $1,159,000, $1,206,000 and $1,274,000, respectively.
The Company, in the normal course of business, issues binding purchase orders to
secure product for future sales to its customers. At December 31, 2004 these
open purchase orders commitments amounted to approximately $50.0 million, of
which approximately $30.6 million were covered by open letters of credit. The
majority of the product is scheduled to be received during the first six months
of 2005, at which time these commitments will be fulfilled.
The products sold by the Company are purchased from manufacturers throughout the
world through its established international sourcing network, with the majority
of manufacturers being located in Southeast Asia. With the Company's dependence
on international sources, the 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 including 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 resulting in customers either canceling the orders or demanding
reduced prices for late delivery.
The Company is, from time to time, involved in litigation incidental to the
conduct of its business. Management believes that no currently pending
litigation to which it is a party will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
Note 9 - Capitalization
The Company's authorized capital stock consists of 10.0 million shares of Common
Stock and 1.0 million shares of preferred stock each having a par value of $0.10
per share. No preferred stock has been issued by the Company. As discussed in
Note 12, the Company received in the disposal of its discontinued operations on
October 8, 2003, 700,000 shares of its Common Stock, recorded as Treasury Stock
in the Company's financial statements.
The Board of Directors of the Company has from time-to-time authorized the
repurchase of shares of the Company's Common Stock, some of which would be used
to offset the dilution caused by the issuance of shares under the Hampshire
Group, Limited 1992 Stock Option Plan and the Hampshire Group, Limited Common
Stock Purchase Plan for Directors and Executives. During 2004, the Company
repurchased 39,725 shares of its Common Stock for $1,157,000.
The Company's purchases of shares of Common Stock are recorded at cost as
"Treasury Stock" and result in a reduction of "Stockholders' Equity". When
treasury shares are reissued, the Company uses a weighted average cost method
and the excess of outstanding repurchased costs over reissue price is treated as
a reduction of "Retained Earnings".
Note 10 - Stock Options, Compensation Plans and Retirement Savings Plan
The Company registered 1.5 million shares of its Common Stock under the
Securities Act of 1933, as amended, to be issued with regards to the Hampshire
Group, Limited 1992 Stock Option Plan, as amended, and the Hampshire Group,
Limited Common Stock Purchase Plan for Directors and Executives. Of these
shares, 460,975 are available for future issue under these plans.
F-16
Stock Options
- -------------
Options to purchase Hampshire Group, Limited Common Stock are granted at the
discretion of the Company's Board of Directors to executives and key employees
of the Company and its subsidiaries. No option may be granted with an exercise
price less than the fair market value per share of Common Stock at the date of
grant. The vesting of options varies from immediate vesting to vesting five
years from date of grant and have a maximum term of ten years. Stock option
activity is as follows:
Number of Weighted Average
Options Exercise Price
- -------------------------------------------------------------------------------
Beginning balance outstanding 392,641 $12.32
Granted - -
Exercised (28,156) 9.78
Canceled or expired (35,790) 10.15
- -------------------------------------------------------------------------------
Outstanding - December 31, 2002 328,695 12.71
Granted 1,000 21.15
Exercised (116,070) 11.42
Canceled or expired (77,850) 13.93
- -------------------------------------------------------------------------------
Outstanding - December 31, 2003 135,775 13.18
Granted - -
Exercised (78,369) 13.87
Canceled or expired (750) 21.15
- -------------------------------------------------------------------------------
Outstanding - December 31, 2004 56,656 $12.13
===============================================================================
A summary of the status of options outstanding at December 31, 2004 is set forth
in the table below.
Options Outstanding Options Exercisable
- ----------------------------------------------------------- --------------------------
Number Weighted Weighted Number Weighted
Range of Outstanding Average Average Exercisable Average
Exercise Prices 12/31/04 Remaining Life Exercise Price 12/31/04 Exercise Price
- ----------------------------------------------------------- --------------------------
$ 8.00 - $ 8.63 27,356 2.35 $ 8.62 20,400 $ 8.61
12.00 - 12.00 3,500 4.00 12.00 3,500 12.00
12.13 - 12.13 6,675 4.30 12.13 4,475 12.13
14.50 - 16.00 9,375 3.88 15.94 9,375 15.94
18.00 - 18.00 9,000 5.00 18.00 9,000 18.00
22.69 - 22.69 750 1.50 22.69 750 22.69
- ----------------------------------------------------------- -------------------------
$ 8.00 - $22.69 56,656 3.34 $12.13 47,500 $12.64
=========================================================== =========================
At December 31, 2004, 2003 and 2002, the number of stock options exercisable was
47,500, 105,925 and 94,995, respectively.
Common Stock Purchase Plan
- --------------------------
Pursuant to the Hampshire Group, Limited 1992 Common Stock Purchase Plan for
Directors and Executives ("Stock Purchase Plan"), key executives were permitted
to use a portion of their annual compensation to purchase Common Stock of the
Company. Non-employee Directors were permitted to defer their fees to purchase
Common Stock of the Company. The right to purchase shares under the Stock
Purchase Plan was terminated on December 31, 2002.
For the year ended December 31, 2002, approximately $193,000 of participants'
compensation was used by the Stock Purchase Plan to purchase Common Stock of the
Company. The Company has established a trust to which it delivers the shares of
the Company's Common Stock following the end of each plan year to satisfy such
elections. The deferred compensation liability and the Company's shares are
presented as offsetting amounts in the stockholders' equity section.
F-17
Distributions from the plan commenced on January 15, 2003 with the distribution
of 104,755 shares valued at approximately $2,095,000. On January 15, 2004,
87,747 shares valued at approximately $2,687,000 were distributed and on January
15, 2005, 36,336 shares valued at approximately $1,166,000 were distributed. The
remaining 153,930 shares will be distributed to the participants in accordance
with their elections.
Voluntary Deferred Compensation Plan
- ------------------------------------
In 1997, the Company adopted the Hampshire Group, Limited Voluntary Deferred
Compensation Plan for Executives (the "Top Hat Plan"). The Top Hat Plan was
established to permit key executives to defer up to 20% of the total
compensation in each year for retirement with such deferrals being invested in
mutual funds. The Top Hat Plan had a "sunset provision" for deferral of December
31, 2000. Distributions from the plan of approximately $440,000 on January 15,
2003 and approximately $525,000 on January 15, 2004 were made which constituted
all of the assets of the Top Hat Plan.
Company Deferred Compensation Plans
- -----------------------------------
As part of his employment agreement, the Company has agreed to make
contributions to a deferred compensation plan on behalf of Ludwig Kuttner. For
the year ended December 31, 2004, the Compensation Committee of the Board of
Directors increased the contribution to $300,000. For the years ended December
31, 2003 and 2002, the amount contributed to the plan was $200,000. The
cumulative amount may be left in the Company, which accrues interest at 110% of
the Applicable Federal Long-Term Interest Rate, or in common stock of publicly
traded companies or mutual funds. Such amounts will be distributed in six
approximately equal annual installments commencing in 2008.
As part of his employment agreement, the Company has agreed that Charles W.
Clayton, Chief Financial Officer of the Company, may defer up to 60% of his
incentive compensation plus any increase in base salary, not to exceed 45% of
total compensation, which may be left in the Company, accruing interest at 110%
of the Applicable Federal Long-Term Interest Rate or in common stock of publicly
traded companies or mutual funds. Such amounts will be distributed at a rate of
$30,000 per quarter commencing in 2008.
In accordance with an unfunded deferred compensation agreement with Eugene
Warsaw, the former President of Hampshire Designers, Inc., the Company accrued
for the years ended December 31, 2003 and 2002, approximately $89,000, and
$561,000, respectively. The aggregate vested balance of $1,450,000 accrues
interest at the Company's effective investment rate during periods when the
Company has cash invested and at the Company's borrowing rate with its lead bank
during periods when the Company is borrowing cash. Such amounts will be
distributed in three approximately equal annual installments commencing in 2007.
Retirement Savings Plan
- -----------------------
The Company has a "Hampshire Group, Limited and Subsidiaries 401(k) Retirement
Savings Plan" under which employees may participate after having completed at
least one year of service and having reached the age of twenty years. The
Company's matching contribution is determined annually at the discretion of the
Board of Directors. Matching contributions for the years ended December 31,
2004, 2003 and 2002 were approximately $157,000, $168,000 and $142,000,
respectively. All matching contributions vest fully after six years of
employment.
F-18
Note 11 - Related Party Transactions
The Company leases two buildings from a company in which Ludwig Kuttner,
Chairman and Chief Executive Officer of the Company, has a 96% beneficial
ownership and Charles W. Clayton, Chief Financial Officer of the Company, has a
4% beneficial ownership. Rent expense under such leases for the years ended
December 31, 2004, 2003 and 2002 was approximately $153,000, $251,000 and
$243,000, respectively. The Company's lease for a distribution center in
Anderson, South Carolina, expired April 30, 2004, and was not renewed except for
6,000 square feet of office space. During 2004, the distribution center was sold
to an unrelated third party with whom the Company continues to lease the 6,000
square foot space at the same rate previously paid.
Mr. Kuttner received a fee for guaranteeing certain of the Company's debt for
the years ended December 31, 2003 and 2002; these fees were approximately
$31,000 and $49,000, respectively. With the disposal of the investment
operations, there are no other guarantees by Mr. Kuttner of debt for the
Company. Mr. Kuttner and Roger B. Clark, Vice President and Principal Accounting
Officer, participate in the management of the real estate investment company
formally owned by the Company. Such participation does not, in the judgment of
the Company, interfere with the performance by Messrs. Kuttner and Clark of
their duties for the Company.
The Company also leased certain buildings from Peter Woodworth, a director of
the Company, through June 2003. Rent expense under these leases for the years
ended December 31, 2003 and 2002 was approximately $59,000 and $96,000,
respectively. The terms of the leases with Mr. Woodworth as well as those with
Mr. Kuttner were approved by the Board of Directors of the Company based on
independent confirmation that the leases are fair and reasonable and are at
market terms.
Mr. Harvey L. Sperry, a director of the Company, is a retired partner in the law
firm of Willkie Farr & Gallagher LLP. The firm has served as legal counsel to
the Company since 1977 and in such capacity, for the years ended December 31,
2004, 2003 and 2002, the firm was paid approximately $57,000, $262,000 and
$96,000, respectively.
Mr. Michael Jackson, a director of the Company, is a principal of Ironwood
Partners LLC, which has provided financial consulting services to the Company.
In such capacity this firm was paid a fee, for the years ended December 31, 2003
and 2002; of approximately $150,000 and $75,000, respectively.
The Company entered into a service agreement with an affiliated company, owned
by certain officers of Item-Eyes, Inc., to warehouse and distribute
approximately 30% of its women's related separates products. The service
agreement provides that a fee be paid on a per unit shipped basis. The service
agreement expires August 31, 2005; however it may be terminated by the Company
at any time upon 30 days written notice. Fees paid for the years ended December
31, 2004, 2003, and 2002 were $2,288,000, $2,496,000 and $2,765,000,
respectively, and are included in selling, general and administrative expenses
in the consolidated statements of income.
Note 12 - 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 the
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 of HIL.
Certain assets of HIL, including a commercial building in Charlottesville,
Virginia, were sold by HIL to K Holdings, LLC, a company controlled by Mr.
Kuttner, for a purchase price of 250,000 shares of the Company's common stock.
The 250,000 shares of the Company's common stock received by HIL in the exchange
F-19
of the assets set forth above were exchanged on October 8, 2003 for $4.8 million
cash and a real property investment valued at $650,000, respectively, with the
remaining approximately $3.1 million being used to reduce the debt of HIL to the
Company. This transaction was a condition of the purchase agreement to fund the
obligations of approximately $4.8 million committed to by HIL as of the purchase
date. The Company then exchanged all of the outstanding shares of capital stock
of HIL with an investor group including Mr. Kuttner, Peter Woodworth, a Director
of the Company, and Charles Clayton, Chief Financial Officer of the Company, for
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 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 operations for the year ended December 31, 2003. Of
the reported loss from the disposal of the discontinued operations,
approximately $5,560,000 is attributable to the disposal of the capital stock of
HIL. Under the Internal Revenue Code Section 355, the transaction is
characterized as a tax-free spin-off and 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 has been 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 major classes of discontinued assets and liabilities as of October 8, 2003,
disposition date, and December 31, 2002 are summarized as follows:
Oct. 8, Dec. 31,
(in thousands) 2003 2002
- --------------------------------------------------------------------
Current assets $ 6,498 $ 3,067
Real property investments - net 30,918 27,668
Long-term investments - net 3,877 4,315
Other assets 709 844
Impairment on disposal (5,291) -
- --------------------------------------------------------------------
Total assets $36,711 $35,894
====================================================================
Current liabilities $ 2,687 $ 2,193
Long-term liabilities 10,918 9,719
- --------------------------------------------------------------------
Total liabilities $13,605 $11,912
====================================================================
At October 8, 2003 current liabilities include amounts incurred but unpaid for
the disposition of the discontinued operations. The rental revenue and pretax
income for HIL, which are included in the income (loss) from discontinued
operations in the consolidated statements of operations through October 8, 2003,
the date of disposition of HIL, are summarized as follows:
Oct. 8, Dec. 31,
(in thousands) 2003 2002
- --------------------------------------------------------------------
Rental Revenue $2,614 $3,194
Pre-tax income (loss) 1,045 (2,758)
====================================================================
F-20
Note 13 - Earnings Per Share
Set forth in the table below is reconciliation by year of the numerator (income)
and the denominator (shares) for the computation of basic and diluted earnings
per share ("EPS").
For the Year 2004 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- -------------------------------------------------------------------------------
Basic EPS:
Net income $13,725 4,074 $3.37
Effect of dilutive securities-options - 52 (0.04)
- -------------------------------------------------------------------------------
Diluted EPS:
Net income $13,725 4,126 $3.33
===============================================================================
For the Year 2003 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- -------------------------------------------------------------------------------
Basic EPS:
Income from continuing operations $11,423 - $2.50
Loss from discontinued operations, net (5,796) - (1.27)
- -------------------------------------------------------------------------------
Net income 5,627 4,573 1.23
Effect of dilutive securities-options - 123 (0.03)
- -------------------------------------------------------------------------------
Diluted EPS:
Net income $ 5,627 4,696 $1.20
===============================================================================
For the Year 2002 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- -------------------------------------------------------------------------------
Basic EPS:
Income from continuing operations $18,045 - $3.83
Loss from discontinued operations, net (997) - (0.21)
- -------------------------------------------------------------------------------
Net income 17,048 4,711 3.62
Effect of dilutive securities-options - 123 (0.09)
- -------------------------------------------------------------------------------
Diluted EPS:
Net income $17,048 4,834 $3.53
===============================================================================
F-21
HAMPSHIRE GROUP, LIMITED
QUARTERLY FINANCIAL DATA
(Unaudited)
In 2004, Quarter Annual
(in thousands, except per share data) Apr. 3 Jul. 3 Oct. 2 Dec. 31 Total
- --------------------------------------------------------------------------------------------------------
Net sales $54,397 $26,252 $116,104 $105,246 $301,999
Gross profit 12,416 7,602 29,333 31,195 80,546
Operating income (loss) 119 (2,924) 11,715 14,231 23,141
Net income (loss) $ 147 ($ 1,694) $ 6,940 $ 8,332 $ 13,725
===================================================
Net income (loss) per common share - Basic $0.04 ($0.42) $1.71 $2.04 $3.37
===================================================
- Diluted $0.03 ($0.42) $1.69 $2.02 $3.33
===================================================
In 2003, Quarter Annual
(in thousands, except per share data) Mar. 29 Jun. 28 Sept. 27 Dec. 31 Total
- --------------------------------------------------------------------------------------------------------
Net sales $51,167 $31,961 $97,036 $112,487 $292,651
Gross profit 12,566 7,508 24,368 29,755 74,197
Operating income (loss) from continuing operations 1,124 (1,735) 7,991 11,914 19,294
---------------------------------------------------
Income (loss) from continuing operations 711 (948) 4,865 6,795 11,423
Income (loss) from discontinued operations 391 (4) (5,730) (453) (5,796)
Net income (loss) $1,102 ($ 952) ($ 865) $ 6,342 $ 5,627
===================================================
Income (loss) per common share from
continuing operations - Basic $0.15 ($0.20) $1.02 $1.64 $2.50
===================================================
- Diluted $0.15 ($0.20) $1.00 $1.60 $2.43
===================================================
Net income (loss) per common share - Basic $0.23 ($0.20) ($0.18) $1.53 $1.23
===================================================
- Diluted $0.23 ($0.20) ($0.18) $1.49 $1.20
===================================================
(1) Differences from amounts previously reported on the Company's filings on Form 10-Q are due to
reclassifications resulting from the disposal of the discontinued operations.
F-22
SCHEDULE II
HAMPSHIRE GROUP, LIMITED
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Charged to
beginning sales and Other Balance at
of year expenses Deductions adjustments end of year
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Allowance for returns and adjustments $ 6,570 $21,457 ($15,420) - $12,607
Allowance for doubtful accounts 260 354 (164) - 450
YEAR ENDED DECEMBER 31, 2003
Allowance for returns and adjustments $12,607 $25,858 ($23,308) - $15,157
Allowance for doubtful accounts 450 (57) (56) - 337
YEAR ENDED DECEMBER 31, 2004
Allowance for returns and adjustments $15,157 $21,368 ($22,148) - $14,377
Allowance for doubtful accounts 337 12 (74) - 275
- ----------------------------------------------------------------------------------------------------------
F-23