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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D C 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, 1997 . 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. 33-47577
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 29621
(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, $.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]
The aggregate market value of the voting stock (which consist solely of shares
of Common Stock) held by non-affiliates of the Registrant as of March 17, 1998,
computed by reference to the closing sale's price of the Registrant's Common
Stock as reported by the NASDAQ National Market System, was approximately
$24,900,000. Shares of Common Stock held, directly or indirectly, by each
director and executive officer and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 17, 1998, the Registrant had outstanding 4,143,343 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement, relative to its
1998 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
1997 ANNUAL REPORT
Table of Content
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 the Registrant's Common Equity and
Related Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
Part III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 15
Item 13. Certain Relationships and Related Transactions 15
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 16
Signature Page 19
Consolidated Financial Statements F-1
Financial Statement Schedules F-22
Quarterly Financial and Stock Data F-28
2
"Cautionary Disclosure Regarding Forward-Looking Statements"
When used in this document in general and in the Outlook Section of Management's
Discussion and Analysis in particular, the words "expects", "anticipates" and
similar expressions are intended to identify forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, in this report, as well as the Company's other filings
under the Securities Exchange Act of 1934.
PART I
------
ITEM 1 - BUSINESS
GENERAL
- -------
Hampshire Group, Limited ("Hampshire Group" or the "Company") operates three
business segments - sweaters, hosiery and investments. Hampshire Designers, Inc.
is the largest manufacturer of sweaters in North America and is a manufacturer
of hosiery and other legwear. Hampshire Investments, Limited was organized in
March 1997, for the purpose of making long-term, diversified investments.
Information with respect to sales, operating income and identifiable assets
attributable to the business segments appears in Management's Discussion and
Analysis of Financial Condition commencing on Page 10 hereof.
Hampshire Group, through a predecessor firm, has been engaged in the manufacture
of hosiery since 1917 and of sweaters since 1956. On June 24, 1992, the Company
had an initial public offering of one million shares of its common stock.
STRENGTHS AND STRATEGY
- ----------------------
The Company's primary strength is its ability to design, develop, manufacture
and deliver quality products within a given price range, while providing
superior levels of customer service.
The Company's products are designed and developed in several ways depending on
the type of product. In the branded business, the products first are designed
through 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 then further refined in collaboration with the manufacturing
sector, resulting in a high-quality product that can be manufactured to meet
certain price points. In the private-label side of the business, the products
are designed in a collaborative process with the customers to ensure that the
needs of the customers are being satisfied.
The quality of these garments is ensured in a variety of ways. For those goods
produced in the Company's own facilities, each garment is manufactured using
only superior quality yarns and must undergo a rigorous quality assurance
program. For goods that are sourced outside the Company, several techniques are
utilized. In some instances, multi-staged inspection processes, including direct
field audits, are employed by the Company's employees to ensure the quality
demands of our customers are being met. In others, the Company utilizes both
sourcing agents and inspection agencies to obtain the assurances that those
goods manufactured outside meet the same standards applied to the goods produced
"in-house".
The Company provides superior customer service from its domestic distribution
facilities through the Company's Quick Response program and an Electronic Data
Interchange ("EDI") system that links the Company's computers electronically to
those of many of its major customers. By helping retailers reduce inventory
carrying costs through the centralized location of its distribution facilities
in the United States and through sophisticated order fulfillment techniques, the
Company provides an important service to its customers.
3
The Company is a leading supplier in the women's sweater moderate-price
category. The Company has expanded into higher-priced segments of both the
women's and men's sweater market. The Company, in addition to being the largest
sweater manufacturer in North America, has developed world-wide sweater sourcing
capabilities.
The acquisition of San Francisco Knitworks, Inc. ("SFK") and Segue, Limited
("Segue") expanded the Company's business into women's better sweater market.
Segue also provides worldwide sourcing of manufacturing for sweaters. The
acquisition of Winona Knitting Mills expanded the sweater business by providing
a strong customer base in the men's sweater market. The Company's men's sweater
business will be further expanded beginning in 1998 by the acquisition of
licenses to produce sweaters under brands covering the entire range of men's
sweaters sold by department stores.
The hosiery segment strategy consists of producing a limited number of high
volume customized styles and increasing its share of the specialty market
including tights and cotton tights for children.
SWEATER OPERATIONS
- ------------------
The Company is the largest manufacturer of sweaters in North America. This
business consists of Designers Originals branded sweaters and private-label
women's sweaters, novelty imported women's sweaters, designer-branded women's
sweaters and men's private-label and branded sweaters.
With the expansion of the import program of Segue and the addition of the
licenses for the designer branded men's sweaters, management believes that 1998
sales will consist of approximately 50% women's and 50% men's sweaters; and
approximately 50% self manufactured and 50% outsourced. This mix allows the
Company to supply the needs of its customers at a number of price levels.
Designers Originals
- -------------------
Designers Originals sweaters, which generally sell in the $30-$40 range, are
full-fashion (knit-to-body shape) and dyed slowly in an open vat process. Most
are made of the Company's branded, cashmere-like acrylic yarn called Luxelon and
are styled mainly in classic designs which have changed little since first
introduced.
Designers Originals sweaters are sold in the moderate- price women's market, but
possess manufacturing details usually found only on more expensive sweaters.
Sales are strong because of the demand for classic-styled sweaters. The Company
has historical relationships with many of its 1,600 customers which include
department stores such as J C Penney, Dillard's Department Stores, May Company,
Federated Department Stores and specialty stores. The sweaters are sold by two
employees and twelve independent sales representatives in the United States with
senior management participating in the presentations to the larger accounts. The
Company also meets with customers during the ten market weeks conducted in the
apparel industry each year.
The Company manufactures the Designers Originals sweaters. This affords the
Company flexibility in the production planning process. The Company maintains
rigorous quality control in order to satisfy the strict standards required by
its customers. Quality control consists of light inspection by photospectrometer
of each dye lot for shade consistency and lamp examination of all sweaters after
assembly for knitting defects. In addition, there are three full inspections of
all sweaters - after dying, after finishing, and during folding and packaging.
The Company utilizes Quick Response automatic reordering through EDI for many of
its customers. Because of the consistent demand for its products, the Company is
able to maintain a sizable finished goods inventory which, when combined with
the fast turnaround time for manufacturing, allows the Company to fill most
reorders in 72 hours.
Private-Label
- -------------
The Company's private-label sweaters are designed in collaboration
with customers and are produced to desired specifications for sale under labels
of a number of retailers and apparel companies. These sweaters consist primarily
of full-fashion cotton sweaters manufactured domestically in the Company's
facilities in Virginia, California and Puerto Rico, utilizing the same processes
employed for manufacture of the branded Designers Originals sweaters. The
Company maintains the high quality standards required by its private-label
customers including Lands' End, Lord & Taylor and Sears.
Novelty Import Line
- -------------------
The Company, through Segue's international sourcing capability, designs and
imports patterned and novelty sweaters for sale primarily in the women's
moderate-price market. These products are sold under several brand names
including Designers Originals Studio, Designers Originals Sport, and Moving
Bleu.
4
Designer-Branded Women's Line
- -----------------------------
The Company has the exclusive right to market products designed by Mary Jane
Marcasiano which bears the Marcasiano label. Ms. Marcasiano designs fashionable
classic sweaters of exceptional quality which sell to the designer, bridge and
better markets. She works closely with her customers, including prestigious
boutiques, department stores and catalogs to develop specific products for
their customers. Major customers include Saks Fifth Avenue, Neiman Marcus,
Bergdorf Goodman and Nordstroms.
The sweaters are manufactured by the Company, by domestic contractors and by
contractors in Southeast Asia obtained by the Company's import business.
Men's Branded and Private-Label Line
- ------------------------------------
In October 1995, the Company acquired Winona Knitting Mills, which has
manufactured branded and private-label men's sweaters since 1943.
Approximately 60% of the men's sweaters are manufactured in the Company's
facilities in Winona, Minnesota and the remaining sweaters are produced by
contractors.
The sweaters, made from natural fibers including wool and cotton, are sold
primarily under private-labels for retailers and apparel companies including
Eddie Bauer, Lands' End, L.L. Bean and Woolrich. The branded men's line,
including American Portrait, Berwick, The Lake Harmony Rowing Club and
Landscape, are sold to retailers including Dillard's Department Stores,
Federated Department Stores and J C Penney.
Men's Designer Branded Lines
- ----------------------------
The Company has acquired the following licenses, effective January 1, 1998, to
produce and market men's sweaters: Jantzen, which the Company believes to be the
number one men's sweater brand in the country, Geoffrey Beene, Ron Chereskin and
Robert Stock. 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. The majority of
the sweaters will be produced by contractors.
The sweaters will be sold to large department stores and specialty stores in the
United States. Major customers will include Federated Department Stores, May
Company, J C Penney, Mercantile Stores, Belks and Sears. The sweaters will be
sold by two employees and five independent representatives.
Competition
- -----------
The sweater industry competition is based on price, quality and service. While
the Company faces competition from a large number of sweater manufacturers
located in the United States, its primary competition comes from manufacturers
located in Southeast Asia.
The foreign competitors benefit from production cost advantages which are offset
in part by United States import quota and tariff protection. The Company
competes with the Southeast Asian suppliers by providing superior service based
on domestic manufacturing. The Company sources sweaters both in Southeast Asia
and in Mexico.
HOSIERY OPERATIONS
- ------------------
The hosiery industry is highly competitive and is dominated by two major
competitors. Hampshire Hosiery provides customized private-label hosiery and
tights programs for chains and mass merchandisers and selected department store
customers. Hampshire Hosiery sells a limited number of high-volume styles
utilizing its manufacturing facilities in North Carolina and foreign
contractors.
The hosiery business provides a high level of quality and service through the
use of state-of-the-art machinery including electronically controlled knitting
machines, automated assembly machines, computerized color assurance machines and
automated packaging machines. In addition, the use of electronic data processing
utilizing EDI reduces the inventory required to be carried by its customers.
Hampshire Hosiery sells its hosiery and tights to customers in the United States
including Kids "R" Us, Nordstroms, Loehmann's Department Stores and Casual
Corner. The hosiery is sold by eight employees located in the Company's
showrooms in New York and other sales locations throughout the United States.
The Company also sells niche products including cotton tights, Diahann Carrol
and Charles Jourdan branded hosiery products and athletic socks.
5
INVESTMENT OPERATIONS
- ---------------------
Hampshire Investments, Limited ("Hampshire Investments") was created by the
Company for the purpose of implementing its strategy to use a portion of its
financial resources to invest in diversified businesses which are not
necessarily owned solely by the Company. The investment objective of Hampshire
Investments is to make a substantial contribution to the earnings of the Company
in the long term.
In 1997, Hampshire Investments invested approximately $8 million in such
businesses and expects to invest an additional $10 million in 1998. The
investments were made in publicly traded apparel and textile businesses, in
entertainment, industrial and service businesses, some of which are not publicly
traded, and in real property, for development and rental income. Some of the
real property is owned solely by Hampshire Investments.
It is the intention of Hampshire Investments to concentrate future investments
in businesses in which either substantial influence or control may be exercised.
Ludwig Kuttner, Chairman and Chief Executive Officer of the Company, who has
privately invested both in diversified operating businesses and in real property
developments over the past 25 years, actively participates in the investment
decisions of Hampshire Investments.
SEASONALITY
- -----------
Sweaters: Although the Company sells sweaters throughout the year, the sweater
business is highly seasonal, with approximately 75% of sales occurring during
the fall and winter months.
Hosiery: The hosiery business is not seasonal; although, hosiery sales increase
slightly in the fall and winter months.
BACKLOG
- -------
Sweaters: The sales order backlog for the sweater segment was approximately
$42.8 million as of March 2, 1998, compared with approximately $38.5 as of March
7, 1997. The timing of the placement of seasonal orders by customers affects the
backlog; accordingly, a comparison of backlog from year to year is not
indicative of a trend in sales for the year.
Hosiery: Hampshire Hosiery receives orders throughout the year. Approximately
90% of the hosiery orders are received by EDI with about one-half being shipped
in two to five days and the remaining one-half being shipped the next week after
receipt of order. As a result, Hampshire Hosiery has no significant sales order
backlog.
TRADEMARKS
- ----------
All significant trademarks of the Company are registered and the Company
considers its trademarks to have value in the marketing of its products.
ELECTRONIC INFORMATION SYSTEMS
- ------------------------------
In order to schedule manufacturing, fill customer orders, transmit shipment data
to the customers' distribution centers and invoice electronically, the Company
has developed a number of EDI applications. Approximately 60% of all orders
are received electronically. These orders are automatically generated by the
customers' computer systems based on their inventory levels. The Company's
advance ship notices and invoices are sent to customers electronically, which
results in the updating of the inventory systems of the customers.
CUSTOMER CONCENTRATION
- ----------------------
One customer accounted for approximately 19% and 14% of consolidated sales for
1997 and 1996, respectively. The Company's five largest sweater customers and
five largest hosiery customers accounted for approximately 41% and 7%,
respectively, of the Company's total consolidated sales in 1997, compared with
39% and 12% in 1996.
CREDIT AND COLLECTIONS
- ----------------------
The Company manages its credit and collection functions on a consolidated basis
by evaluating, approving and monitoring the credit lines of its customers.
Credit limits are determined by past payment history and financial information
obtained from credit agencies and other sources. The Company believes that its
credit and collection management has been a significant factor in maximizing
sales opportunities while minimizing bad debt losses.
EMPLOYEES
- ---------
As of March 2, 1998, the Company had approximately 2,500 full-time employees and
45 part-time employees. The Company and its employees are not parties to any
collective bargaining agreements except for the hourly employees of San
Francisco Knitworks, Inc. The UNITE Labor Union represents approximately 110
such employees under an agreement expiring in May 1998.
6
GOVERNMENTAL REGULATION
- -----------------------
The Company's business is subject to regulation by federal, state and local
governmental agencies dealing with the protection of the environment. Certain of
these regulations, which include provisions regulating air quality, water
quality, disposal of waste products and employee safety, are technical in nature
and require extensive controls to assure compliance with their provisions. The
Company believes that it has operated, and intends to continue to operate, in
full compliance with these regulations.
As a result of various bilateral agreements between the United States and
certain foreign countries negotiated under the framework established by the
Arrangement Regarding International Trade in Textiles, Hampshire Designers
benefits from import quota and tariff protection in certain categories of its
sweater business, which quotas and tariffs are expected to continue in some form
for the foreseeable future. The bilateral agreements impose quotas on the amount
and type of competing goods which may be shipped into the United States.
The General Agreement on Trade and Tariffs ("GATT") was approved in 1994 by the
United States and 140 foreign countries. This Agreement, over time, gradually
reduces tariffs and expands quotas between member countries. The profitability
of the sweater business could be adversely affected if the quotas and tariffs
were substantially reduced or eliminated.
The North American Free Trade Agreement ("NAFTA"), approved in 1993 by the
United States, Canada and Mexico, will, over time, eliminate quota and tariffs
among these three countries. Management is positioning the Company to benefit
from NAFTA.
ITEM 2 - PROPERTIES
The Company leases its Anderson, South Carolina corporate offices and its New
York sales offices. Hampshire Designers, San Francisco Knitworks and Winona
Knitting Mills lease all of their sweater manufacturing and distribution
facilities. Hampshire Hosiery owns its manufacturing and distribution facilities
and Hampshire Brands owns its distribution facility.
The Company believes that all of its properties are well maintained, in good
condition and are generally suitable for their intended use. The Company's
principally owned and leased properties are described in the table below.
Square Lease
Property Footage Expiration(1)
- -------------------------------------------------- ------- ------------
Corporate Offices-Anderson, South Carolina 10,500 04/30/06
Sales Office-New York, New York 24,000 08/31/11
Hampshire Designers:
Distribution Facility-Anderson, South Carolina 57,000 04/30/01
Knitting and Finishing Plant-Chilhowie, Virginia 92,500 08/30/08
Knitting Plant-Quebradillas, Puerto Rico 193,200 06/30/02
Finishing Plant-Quebradillas, Puerto Rico 23,050 06/30/06
Hampshire Brands:
Distribution Facility-Winona, Minnesota 36,000 Owned
Hampshire Hosiery:
Knitting and Sewing Plant-Spruce Pine, North Carolina 37,000 Owned
Finishing Plan and Distribution Facility-
Spruce Pine, North Carolina 132,700 Owned
San Francisco Knitworks:
Manufacturing Plant-San Francisco, California 27,500 08/01/06
Winona Knitting Mills:
Knitting and Finishing Plant-Winona, Minnesota 110,000 06/01/07
Sewing Plant-La Crescent, Minnesota 15,600 10/31/09
(1) Assuming the exercise of all 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. The Company's management believes that no currently
pending litigation to which it is a party will have a material adverse effect on
its consolidated financial condition or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the NASDAQ National
Market System ("NASDAQ") under the symbol "HAMP". The quarterly high and low bid
quotations on NASDAQ for 1997 and 1996 are presented on Page F-28 of this Annual
Report on Form 10-K. These quotations reflect the inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
The approximate number of stockholders of record on March 17, 1998 was 990.
The Company has not declared any dividends with respect to its Common Stock,
subsequent to the effective date of its initial public offering, June 24, 1992.
Any determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors may deem relevant. The Senior Note Agreement, which is expected to be
closed in April 1998, will contain covenants placing limitations on "restricted
payments" which includes payment of cash dividends See Note 17 to the
consolidated financial statements.
8
ITEM 6 - SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
(in thousands, except per share data)
YEAR ENDED DECEMBER 31, 1997 1996 1995(1) 1994 1993
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Net sales $164,428 $148,305 $112,450 $83,595 $93,843
Cost of goods 127,631 114,475 85,553 63,925 74,884
---------------------------------------------
Gross profit 36,797 33,830 26,897 19,670 18,959
Commission revenue - 942 1,357 - -
---------------------------------------------
36,797 34,772 28,254 19,670 18,959
Selling, general & admin expenses 24,170 23,691 20,464 12,486 15,158
---------------------------------------------
12,627 11,081 7,790 7,184 3,801
Hosiery restructuring
gain (provision) - - - 818 (7,500)
---------------------------------------------
Income (loss) from operations 12,627 11,081 7,790 8,002 (3,699)
Other income (expense):
Interest income 320 216 310 39 -
Interest expense (1,343) (1,319) (944) (797) (1,089)
Other (98) (82) 312 254 (324)
---------------------------------------------
Income (loss) before income taxes 11,506 9,896 7,468 7,498 (5,112)
Income tax (provision) benefit:
Current (2,700) (1,900) (1,028) (1,109) (500)
Deferred 200 3,900 278 109 -
---------------------------------------------
Net income (loss) $ 9,006 $11,896 $ 6,718 $ 6,498 ($5,612)
---------------------------------------------
Net income (loss) applicable
to common stock $ 8,839 $11,712 $ 6,577 $ 6,375 ($4,435)
=============================================
Net income (loss) per share-basic $2.29 $3.10 $1.85 $1.81 ($1.33)
---------------------------------------------
Net income (loss) per share-diluted $2.02 $2.72 $1.68 $1.73 ($1.33)
---------------------------------------------
- --------------------------------------------------------------------------------
DECEMBER 31, 1997 1996 1995(1) 1994 1993
- --------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash and cash equivalents $12,003 $20,385 $10,034 $10,712 $ 2,433
Working capital 36,303 37,220 29,675 22,349 15,344
Total assets 80,585 71,930 66,438 42,966 41,132
---------------------------------------------
Long-term debt (less current portion)
and redeemable preferred stock 7,166 10,869 13,817 7,270 6,223
Total debt (2) 10,577 14,364 18,569 8,860 8,782
Common stockholders'equity (3) 57,710 47,275 34,755 25,863 18,489
---------------------------------------------
Book value per share $13.96 $12.17 $9.21 $7.47 $5.57
---------------------------------------------
(1) Includes the results of operations of Winona Knitting Mills from October
11, 1995
(2) Includes long-term debt, current portion thereof, borrowings under lines of
credit, related party debt and redeemable preferred stock
(3) There were no cash dividends declared on common stock during any of the
periods presented above
9
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth information with respect to the segments of the
Company's business - Sweaters, Hosiery and Investments.
RESULTS OF OPERATIONS OF COMPANY SEGMENTS
Year ended December 31, (in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Net sales Sweaters $140,807 $117,575 $84,924
Hosiery 23,621 30,730 27,526
--------------------------------
164,428 148,305 112,450
- --------------------------------------------------------------------------------
Gross profit Sweaters 33,081 29,180 22,763
Hosiery 3,716 4,650 4,134
--------------------------------
36,797 33,830 26,897
- --------------------------------------------------------------------------------
Commission revenue Sweaters - 942 1,357
- --------------------------------------------------------------------------------
Selling, general and Sweaters 18,350 17,040 14,727
administrative expenses Hosiery 3,114 3,530 3,603
Corporate 2,706 2,454 2,134
--------------------------------
24,170 23,024 20,464
- --------------------------------------------------------------------------------
Operating profit Sweaters 14,731 12,415 9,393
Hosiery 602 1,120 531
Corporate (2,706) (2,454) (2,134)
--------------------------------
Income from operations 12,627 11,081 7,790
Interest income 320 216 310
Interest expense (1,343) (1,319) (944)
Other income (expense) (98) (82) 312
Income before income taxes $11,506 $ 9,896 $ 7,468
- --------------------------------------------------------------------------------
Depreciation and amortization Sweater $3,459 $3,445 $2,556
Hosiery 459 408 451
Investments 21 - -
Corporate 28 26 25
-------------------------------
$3,967 $3,879 $3,032
- --------------------------------------------------------------------------------
Capital expenditures Sweaters $4,346 $2,829 $2,824
Hosiery 816 837 108
Corporate 54 18 3
-------------------------------
$5,216 $3,684 $2,935
- --------------------------------------------------------------------------------
Identifiable assets Sweaters $49,778 $41,277 $48,270
Hosiery 7,131 8,455 9,341
Investments 8,290 - -
Corporate 15,386 22,198 8,827
-------------------------------
$80,585 $71,930 $66,438
- --------------------------------------------------------------------------------
10
The following table sets forth selected operating data as a percentage of net
sales for the periods indicated.
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Net sales Sweaters 85.6% 79.3% 75.5%
Hosiery 14.4 20.7 24.5
-----------------------------
Consolidated 100.0 100.0 100.0
- -------------------------------------------------------------------------------
Gross profit Sweaters 23.5 24.8 26.8
Hosiery 15.7 15.1 15.0
-----------------------------
Consolidated 22.4 22.8 23.9
- -------------------------------------------------------------------------------
Commission revenue Sweaters - 0.8 1.6
- -------------------------------------------------------------------------------
Selling, general & administrative Consolidated 14.7 16.0 18.2
- -------------------------------------------------------------------------------
Operating profit Consolidated 7.7% 7.5% 6.9%
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
1997 Compared To 1996
- ---------------------
The consolidated net income of the Company was $9,006,000 or $2.02 per share on
a diluted basis. This represents an increase of $1,010,000 or 12.6% when
compared with the $7,996,000 or $1.83 per share earned in the prior year,
excluding the $3,900,000 deferred tax benefit or $0.89 per share recorded in
1996.
Consolidated net sales of the Company increased 10.9% to $164,428,000 from
$148,305,000 in 1996. The increase in sales was attributable to the sweater
segment.
Net sales of the sweater segment increased 19.8% to $140,807,000, as compared to
$117,575,000 in 1996. The increased sales consists primarily of the imported
products sold under the Designers Original Studio and Designers Originals Sport
labels and men's sweaters. Of the 19.8% overall increase, growth in unit volume
accounted for 19.3% while the changes in product mix to higher priced goods
accounted for 0.5%.
Net sales of the hosiery segment declined to $23,621,000 due to the loss of a
major customer. The customer loss was partially offset by the addition of two
new customers who accounted for over 10% of the sales and increased sales to
other customers. Unit volume for the year decreased 13% while a shift in mix to
lower priced goods resulted in a decrease in the average selling price of 10.1%.
Consolidated gross profit of the Company increased $2,967,000 or 8.8%, but as a
percentage of net sales, the gross margin decreased by 0.4% to 22.4%. The
decrease resulted from lower gross profit percentage of the sweater segment.
The sweater segment gross profit as a percentage of sales decreased by 1.4%,
resulting from several factors. First, a decrease in sales of Designers Original
sweaters resulted in lower favorable volume variances versus the prior year.
Second, greater than expected close-out volume in the imported, novelty sweater
line resulted in lower margins, as a percentage of sales, than in prior years.
This overall decrease was partially offset by higher gross profits, as a
percentage of net sales, in men's sweaters resulting from having the
efficiencies of the consolidated manufacturing facilities.
Gross profit in the hosiery segment increased, as a percentage of net sales, by
0.6% from the prior year. The increase, which was accomplished in spite of a
23.1% decrease in sales, resulted from blending domestic production with lower
cost imported products.
In prior years, a subsidiary of the Company acted as agent for certain of its
customers in arranging for the sourcing and importation of sweaters and received
commissions. Commencing in 1997, management decided to source and import the
products as a principal.
Selling, general and administrative expenses ("SG&A") as a percentage of net
sales decreased by 0.8% for 1997 compared to 1996, excluding the write-off of
impaired goodwill of $667,000 with respect to San Francisco Knitworks, which
occurred in 1996. The sweater segment was the leading contributor to the
decrease with a 1.5% decrease from 14.5% in 1996 to 13.0% in 1997, principally
due to the increase in volume spreading the fixed cost over a larger base of
sales.
11
Income from operations increased 14% to $12,627,000. The increase in the sweater
segment was 18.7%.
The provision for income taxes net increased to $2,500,000 in 1997 compared with
$1,900,000 in 1996, excluding the $3.9 million adjustment to the Company's
deferred asset account. The 2.5% increase in effective tax rate from 19.2% in
1996 to 21.7% for 1997 is primarily the result of a larger percentage of taxable
income being generated in the United States.
Certain net operating loss carryforwards ("NOL") are available to the Company to
offset future taxable income. Subject to certain restrictions resulting from the
sale of the Company's stock during its initial public offering, approximately
$1.7 million of the NOL carryforwards are available for use in any single tax
year plus any credit unused from a previous year.
The Company, through its Puerto Rican subsidiary, has made an election under
Section 936 of the Internal Revenue Code pursuant to which the subsidiary's
earnings are exempt from federal regular income taxes. This election has had the
effect of generating deferred tax assets in the form of alternative minimum tax
credit ("AMT") carryforwards for the Company for which an offsetting valuation
allowance was recorded. Due to the repeal of Section 936 and phase-out of its
provision by the year 2005, management has determined that it is "more likely
than not" that the Company will realize the full amount of the deferred tax
assets relating to the AMT credit carryforwards and therefore no valuation
allowance is required for such carryforwards.
Substantially all of the income of the Company's Puerto Rican operations are
effectively exempt from Puerto Rican income taxes which reduces the Company's
effective income tax rate as more fully described in Note 11 to the consolidated
financial statements.
1996 Compared To 1995
- ---------------------
In 1996, the consolidated net income of the Company, excluding the net tax
benefit of $3.9 million, was $7,996,000 or $1.83 per share on a diluted basis.
This represented an increase of $1,278,000 or 19% when compared with the
$6,718,000 or $1.68 per share earned in 1995. Including the deferred tax
benefit, the net income of the Company was $11,896,000 or $2.72 per share. The
consolidated net sales of the Company increased 31.9% to $148,305,000 in 1996 as
a result of increased sales in both segments of the business.
In 1996, net sales for the sweater segment increased 38.4% to $117,575,000.
Approximately 60% of this increase is attributable to sales in the men's
division, which was acquired in October 1995. Sales of the pre-acquisition
sweater business increased by 16.8%.
Net sales of the hosiery segment increased by $3,204,000 or 11.6% in 1996 as
higher sales volume was offset by a shift in mix to lower priced items. Sales
volume increased by 16.8% with higher volume in the tights business accounting
for approximately 40% of the increase. A shift in product mix to lower priced
goods resulted in a decrease in average selling price of 3.2%.
Consolidated gross profit of the Company for 1996 increased 25.8% to $33,830,000
compared to $26,897,000 the previous year. As a percentage of net sales,
however, gross profit decreased to 22.8% verses 23.9% for 1995. This overall
decrease as a percentage of sales is attributable to the decrease in the sweater
segment's gross profit percentage.
Sweater segment gross profit increased $6,417,000 for 1996, and was 24.8% of net
sales compared to 26.8% for the prior year. The men's sweater business had an
adverse impact on overall segment gross profit, resulting primarily to the
expense of consolidating the manufacturing facilities and costs attributable to
introducing the branded men's sweater business.
Hosiery segment gross profit increased by $516,000 but, as a percentage of net
sales, increased only 0.1% compared to 1995. This limited increase reflects the
intense price competition within the industry.
A subsidiary of the Company received commission revenue as agent for certain of
its customers in arranging for the sourcing and importation of sweaters through
independent manufacturers in the Far East. The commission revenue totaled
$942,000 and $1,357,000 in 1996 and 1995, respectively.
Selling, general and administrative (SG&A) expenses as a percentage of net sales
decreased by 2.2% for 1996. Included in the 1996 amount is a $667,000 charge
against income for the recognition of the impairment of goodwill of San
Francisco Knitworks in accordance with SFAS 121 as more fully explained in Note
8 to the consolidated financial statements.
Income from operations increased $3,291,000 in 1996 to $11,081,000. As a
percentage of net sales, income from operations increased to 7.5% from 6.9% in
1995. The sweater segment accounted for the majority of the increase.
12
A provision for current income taxes of $1,900,000 was recorded in 1996 compared
with $1,028,000 in 1995. The provision included U.S. federal alternative minimum
taxes (AMT), state income taxes where applicable and income taxes on the taxable
earnings of the Puerto Rican subsidiary. This provision, however, was offset by
a credit of $3,900,000, or $0.89 per share, relating to an adjustment of the
Company's deferred tax asset.
At December 31, 1996, the Company recorded deferred tax assets of $5,271,000,
net of a valuation allowance of $1,869,000. At December 31, 1995, the deferred
tax assets totaled $1,371,000, net of a valuation allowance of $6,487,000. The
benefit associated with the decrease in the valuation allowance is a result of
both the utilization of deferred tax assets for which a valuation allowance was
previously provided and management's determination of the amount of deferred tax
benefits of net operating loss (NOL) carryforwards and AMT credit carryforwards
which are "more likely than not" to be realized.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The primary liquidity and capital requirements of the Company relate to funding
working capital for current operations (primarily funding the buildup in
inventories and accounts receivable which reach their maximum seasonal
requirements in the third quarter), servicing long-term debt, funding capital
expenditures for the improvement and replacement of machinery and equipment and
other investments made from time to time by Hampshire Investments. The primary
resources to meet the liquidity and capital requirements include funds generated
by operations, long-term equipment financing, revolving credit lines and other
long-term financing.
The Company ended 1997 with cash and cash equivalents totaling $12,003,000, down
$8,382,000 from December 31, 1996. Net cash was impacted by a $3,855,000
increase in inventory and a $3,161,000 increase in accounts receivable from
1996. Inventory levels were higher in part due to the carrying requirements
associated with projected first quarter 1998 sales and in part due to the low
levels of inventory carried at the end of 1996. Accounts receivable increases
are attributable to the customers requesting shipments of goods later in the
year in order to minimize their carrying costs. This has the effect of pushing
shipments to later in the year, which in turn moves the due date into the
subsequent period.
Net cash used to fund capital expenditures and Hampshire Investments totaled
$13,443,000. It is the Company's policy to generally reinvest an amount
approximating current year depreciation charges in improving and replacing
machinery and equipment and operating facilities. In addition, in 1997 the
company incurred approximately $1,800,000 in capital expenditures associated
with the start-up of the new Hampshire Brands division ("Brands"). Hampshire
Investments invested $8 million in 1997. The investments were in publicly traded
apparel and textile businesses, in entertainment, industrial and service
businesses, some of which are not publicly traded, and in real property, for
development and rental income. Some of the real property is owned solely by
Hampshire Investments.
The Board of Directors of the Company has authorized management to purchase from
time-to-time in the open market up to 140,000 shares of its common stock. The
Company intends to use approximately 50% of such shares for employee benefit
programs.
The Company has a principal credit facility which expires May 31, 1998. The
credit facility consists of $20 million line of credit and an $8 million letter
of credit facility, not to exceed $25 million in the aggregate. Advances under
the line of credit are limited to the lesser of: (1) the amount available set
forth above; or (2) the sum of (i) 85% of the eligible accounts receivable and
(ii) a seasonal adjustment of $6 million during the period from March 1 to
October 31.
Loans under the facility bear interest at the bank's prime rate or, at the
option of the company, a fixed rate for a fixed term. The loans are secured by
the trade accounts receivable of Hampshire Designers and are guaranteed by
Hampshire Group, Limited. Letters of credit issued under the facility are
secured by the inventory shipped pursuant to the letters of credit.
The Company has received a commitment from several banks for a revolving credit
facility to accommodate its short-term financing needs. Advances under the new
facility will be limited to 85% of eligible accounts receivable, plus a seasonal
over-advance from March through October, not to exceed $42 million at any time.
The line will be secured by the receivables and common stock of all subsidiaries
of the Companies except Hampshire Investments.
The Company also has other credit facilities which in the aggregate allow the
Company to borrow an additional $8 million of which $3.5 million is limited to
use for international letters of credit. The maximum amount outstanding under
all lines of credit during 1997 was $23,920,000 and the average amount
outstanding was approximately $7,078,000.
13
The Company has also received a commitment from two insurance companies for a
term loan ("Senior Note") of $15 million at 7.05% with repayment terms of seven
equal annual installments commencing January 2002. Interest shall be payable
semi-annually and the loan shall be secured pari passu with the Company's bank
revolving credit facility. The Senior Note is expected to be delivered in April
1998.
Management believes that cash flow from operations, available borrowings under
the credit facilities and available borrowing under the Senior Note will provide
adequate resources to meet the Company's capital requirements and operational
needs for the foreseeable future.
YEAR 2000 COMPLIANCE
- --------------------
In March 1996, the Company began converting its computer systems to be year 2000
compliant (e.g., to recognize the difference between '99 and '00 as one year
instead of negative 99 years). At December 31, 1997, approximately 75 percent of
the Company's systems were compliant, with all systems expected to be compliant
by mid-year 1999.
The Company was in process of replacing the systems at two of its operating
divisions; therefore, the new software did not require modification. Secondly,
some of the operating software is under maintenance agreements and updated
versions of such operating systems have been received.
The total cost of the project is estimated to be $500,000 and is being funded
through operating cash flows. The Company is expensing all costs associated with
these system changes as incurred. As of December 31, 1997, the project is
approximately 50% completed.
OUTLOOK
- -------
The Company has experienced substantial growth in net sales over the past few
years, and anticipates a similar increase in 1998. The growth in sales is
attributable to the acquisition and business development strategy of the sweater
segment. The Company does not expect a similar increase in net income. The sale
of sweaters under the Jantzen, Geoffrey Beene, Robert Stock and Ron Chereskin
brands is expected to add in excess of $20 million in 1998. The Company expects
the costs associated with the integration of the branded sweaters will reduce
the contribution of such sales to the sweater segment income in 1998.
The Company continues to believe that a primary reason for its success in recent
years has been its ability to offer new products and the highest level of
quality and services through its domestic manufacturing and its ability to be an
in-stock resource for its customers. Management is committed to continuing to
offer such quality and services to its customers. Management is also very
cognizant of the pricing pressures within the market which could adversely
effect earnings of the Company.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be presented in this Item 8 is presented commencing
on Page F-1 of this Annual Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure in 1997.
14
PART III
Certain information required to be presented in this Part III of this Annual
Report on Form 10-K is omitted in that 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 and 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 this Item 10 is incorporated herein by reference to
the Company's 1998 Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The information concerning executive compensation required to be presented in
this Item 11 is incorporated herein by reference to the Company's 1998 Proxy
Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and
management required to be presented in this Item 12 is incorporated herein by
reference to the Company's 1998 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
required to be presented in this Item 13 is incorporated herein by reference to
the Company's 1998 Proxy Statement.
15
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K.
(1) Financial Statements
(2) Financial Statement Schedules
The financial statements and financial statement schedules are listed
on the Index to the Consolidated Financial Statements on Page F-1 of
this Annual Report on Form 10-K. All other schedules have been omitted
because the required information is shown in the consolidated financial
statements or notes thereto, or they are not applicable.
(3) Exhibits:
Exhibit No. Description Footnote
----------- ----------------------------------------------- --------
EXHIBITS INCORPORATED BY REFERENCES:
(10)(H)(10) Fourth Amended and Restated loan Agreement between
Hampshire Designers, Inc. and NatWest Bank N.A.
dated as of March 31, 1996 1
(10)(H)(11) Amendment Number Two to Fourth Amended and Restated
Loan Agreement between Hampshire Designers, Inc.,
The Chase Manhattan Bank and Fleet Bank dated
June 1, 1997 2
(10)(H)(12) Amendment Number Three to Fourth Amended and Restated
Loan Agreement between Hampshire Designers, Inc.,
The Chase Manhattan Bank and Fleet Bank, N.A. dated
June 30, 1997 3
(10)(L)(1) Industrial Tax Exemption between Glamourette Fashion
Mills, Inc. and the Commonwealth of Puerto Rico,
Office of Industrial Tax Exemption, dated
September 17, 1996 1
(10)(P)(1) Revolving Line of Credit Agreement between Banco Popular
and Glamourette Fashion Mills, Inc. dated May 23, 1996. 1
(10)(P)(2) First Amendment to Financing Agreement between Banco
Popular and Glamourette Fashion Mills, Inc. dated
September 16, 1996. 1
(10)(S) Revolving Line of Credit Agreement between Merchants
National Bank and Hampshire Group, Limited
dated April 1, 1996. 1
(10)(T) Amendment to Credit Agreement between MTB Bank and
Segue (America) Limited dated June 19, 1996. 1
- -------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's 1996 Annual Report on Form 10-K.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
June 28, 1997.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for September 27, 1997.
16
EXHIBITS FILED HEREWITH:
(3)(A) Restated Certificate of Incorporation of Hampshire
Group, Limited
(3)(A)(1) Certificate of Amendment to the Certificate of
Incorporation of Hampshire Group, Limited
(3)(A)(2) Amended and Restated By-Laws of Hampshire Group, Limited
(3)(B)(2) Agreement of Merger between Hampshire Hosiery, Inc. and
Hampshire Designers, Inc. dated June 26, 1995
(3)(B)(3) Agreement of Merger between Segue (America) Limited
and H.G. Knitwear, Inc. dated December 26, 1995
(3)(B)(4) Agreement and Plan of Merger among Hampshire Group,
Limited, The Winona Knitting Mills, Inc. and Pete and
Joyce Woodworth dated June 5, 1995
(3)(B)(5) Asset Purchase Agreement among Segue (America) Limited,
Segue, Ltd. and Neil Friedman dated February 15, 1995
(10)(A)(1) Employment Agreement between Hampshire Group, Limited
and Ludwig Kuttner dated May 6, 1992
(10)(A)(2) Employment Agreement between Hampshire Designers, Inc.
and Pete Woodworth dated October 10, 1995
(10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option Plan
Amended and Restated effective June 7, 1995
(10)(C)(1) Form of Hampshire Group, Limited and Affiliates Common
Stock Purchase Plan for Directors and Executives
Amended and Restated effective June 7, 1995
(10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries
401(k) Retirement Savings Plan
(10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred
Compensation Plan for Directors and Executives Amended and
Restated December 30, 1997
(10)(J)(1) Lease Agreements between Hampshire Designers, Inc. and
Commerce Center Associates for the Company's Anderson,
South Carolina corporate offices dated May 1, 1994
(10)(J)(2) Lease Agreements between Hampshire Designers, Inc. and
Commerce Center Associates for the Company's Anderson,
South Carolina distribution center dated May 1, 1994
(10)(J)(3) Lease Agreement between Hampshire Designers, Inc.
and Leslie R. Woodworth, et al for the Winona, Minnesota
manufacturing plant dated October 10, 1995
17
(10)(J)(4) Lease Agreement between the Hampshire Designers, Inc.
and Pete Woodworth and Joyce Woodworth for the La Crescent,
Minnesota manufacturing plant dated October 10, 1995
(10)(K) Loan and Security Agreement between Hampshire Hosiery, Inc.
and MetLife Capital Corporation, dated July 30, 1993
(10)(K)(1) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated May 13, 1994
(10)(K)(2) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated October 12, 1994
(10)(K)(3) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated September 22, 1995
(10)(M) Agreement between Glamourette Fashion Mills, Inc. and
The Commonwealth of Puerto Rico on Repatriation of Earnings
(the "Closing Agreement"), dated June 30, 1993
(10)(N) Loan and Security Agreement between Hampshire Designers, Inc.
and SouthTrust Bank of Alabama, N.A. dated May 1, 1994
(10)(O) Loan and Security Agreement between Hampshire Designers, Inc.
and Central Fidelity National Bank dated February 8, 1995
(10)(Q) Loan Agreement between Hampshire Designers, Inc. and
NationsBank of South Carolina, N.A. dated June 27, 1995
(11) Statement Re Computation of Income per Share
(21) Subsidiaries of the Company
(23) Consent of Price Waterhouse LLP
(27) Financial Data Schedule
(b) There were no reports on Form 8-K filed in the fourth quarter of 1997.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Anderson
and the State of South Carolina on this 20th day of March 1997.
HAMPSHIRE GROUP, LIMITED
By: /s/ LUDWIG KUTTNER
-----------------------------
Ludwig Kuttner
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ LUDWIG KUTTNER Chairman of the Board of Directors March 20, 1998
Ludwig Kuttner President and Chief Executive Officer
(Principal Executive Officer)
/s/ CHARLES W. CLAYTON Vice President, Secretary, Treasurer March 20, 1998
Charles W. Clayton and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ HERBERT ELISH Director March 20, 1998
Herbert Elish
/s/ HARVEY L. SPERRY Director March 20, 1998
Harvey L. Sperry
/s/ EUGENE WARSAW Director March 20, 1998
Eugene Warsaw
/s/ PETER W. WOODWORTH Director March 20, 1998
Peter W. Woodworth
19
HAMPSHIRE GROUP, LIMITED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheet F-3
Consolidated Statement of Income F-4
Consolidated Statement of Cash Flows F-5
Consolidated Statement of Changes in Common Stockholders' Equity F-6
Notes to Consolidated Financial Statements F-7 - F-21
Financial Statement Schedules
I. Condensed Financial Information of Registrant F-22 - F-24
II. Valuation and Qualifying Accounts F-25
III. Real Estate and Accumulated Depreciation F-26 - F-27
Quarterly and Financial Stock Data F-28
F-1
Report of Independent Accountants
To the Board of Directors and Stockholders
of Hampshire Group, Limited
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Hampshire Group, Limited and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- ---------------------------
Price Waterhouse LLP
Atlanta, Georgia
February 27, 1998
F-2
HAMPSHIRE GROUP, LIMITED CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
ASSETS
December 31, 1997 1996
- -------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $12,003 $20,385
Available-for-sale securities 914 203
Accounts receivable trade - net 16,227 13,101
Inventories 18,728 14,873
Deferred tax asset 3,198 1,631
Other current assets 942 813
---------------------------
Total current assets 52,012 51,006
Property, plant and equipment - net 15,093 13,596
Real property investments - net 4,127 -
Long-term investments 3,051 300
Available-for-sale securities 547 -
Deferred tax asset 2,326 3,640
Intangible assets - net 3,385 3,161
Other assets 44 227
---------------------------
$80,585 $71,930
- -------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 2,911 $ 2,618
Current portion of notes payable to
related parties 500 877
Accounts payable 4,068 3,722
Accrued liabilities and other liabilities 8,230 6,569
---------------------------
Total current liabilities 15,709 13,786
Long-term debt 6,084 6,643
Notes payable to related parties 125 625
Deferred compensation 957 307
Commitments and contingencies - -
PREFERRED STOCK
Redeemable, convertible preferred stock,
at redemption value: - 3,294
---------------------------
COMMON STOCKHOLDERS EQUITY
Common stock, $.10 par value; 4,191,721 and
3,891,503 shares issued and 4,135,125 and
3,885,503 outstanding 419 389
Additional paid-in capital 27,322 23,853
Retained earnings 31,038 23,111
Unrealized loss on available-for-sale
securities - net (89) -
Treasury stock, 59,210 and 6,000 shares at cost (980) (78)
---------------------------
Total stockholders' equity 57,710 47,275
---------------------------
$80,585 $71,930
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
HAMPSHIRE GROUP, LIMITED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
Year ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Net sales $164,428 $148,305 $112,450
Cost of goods sold 127,631 114,475 85,553
-------------------------------
Gross profit 36,797 33,830 26,897
Commission revenue - 942 1,357
36,797 34,772 28,254
Selling, general and administrative expenses 24,170 23,691 20,464
-------------------------------
Income from operations 12,627 11,081 7,790
Other income (expenses):
Interest income 320 216 310
Interest expense (1,343) (1,319) (944)
Other (98) (82) 312
-------------------------------
Income before provision for income taxes 11,506 9,896 7,468
Benefit (provision) for income taxes:
Current (2,700) (1,900) (1,028)
Deferred 200 3,900 278
-------------------------------
Net income 9,006 11,896 6,718
Preferred stock dividend requirements (167) (184) (141)
-------------------------------
Net income applicable to common stock $ 8,839 $11,712 $ 6,577
- --------------------------------------------------------------------------------
Net income per share: Basic $2.29 $3.10 $1.85
-------------------------------
Diluted $2.02 $2.72 $1.68
-------------------------------
Weighted average number
of shares outstanding: Basic 3,856 3,778 3,560
-------------------------------
Diluted 4,465 4,379 3,992
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HAMPSHIRE GROUP, LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 9,006 $11,896 $ 6,718
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,967 3,879 3,032
Loss on impairment of asset - 667 -
Loss (gain) on sale of assets (3) 50 (37)
Deferred income taxes (200) (3,900) (278)
Tax benefit relating to common stock plans 100 122 -
Net change in operating assets and liabilities,
net of effects of acquired companies:
Receivables (3,126) 3,784 (300)
Inventories (3,855) 4,507 (1,144)
Accounts payable 346 (992) 701
Other liabilities 2,385 (1,518) 1,681
Other (16) (57) (337)
-------------------------------
Net cash provided by operating activities 8,604 18,438 10,036
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,216) (3,684) (2,935)
Proceeds from sales of property and equipment 73 110 852
Purchase of available-for-sale securities - net (1,400) - -
Real property and other investments (6,900) (503) -
Cash used for business acquisitions - - (5,691)
-------------------------------
Net cash used in investing activities (13,443) (4,077) (7,774)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,421 711 4,640
Repayment of debt (3,562) (4,915) (7,448)
Proceeds from issuance of common stock 90 764 9
Repurchase of common stock warrants (1,000) - -
Redemption of preferred stock - (308) -
Cash dividends on preferred stock (167) (184) (141)
Purchase of treasury stock - net (1,325) (78) -
------------------------------
Net cash used in financing activities (3,543) (4,010) (2,940)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (8,382) 10,351 (678)
Cash and cash equivalents - beginning of year 20,385 10,034 10,712
------------------------------
Cash and cash equivalents - end of year $12,003 $20,385 $10,034
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HAMPSHIRE GROUP, LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 and 1997
(in thousands, except share data)
Unrealized
Loss on
Additional Available Trea-
Common Stock Paid-In Retained for-sale sury
Shares Amount Capital Earnings Securities Stock Total
- --------------------------------------------------------------------------------
Balance-Beginning
of period 3,460,583 $346 $20,695 $4,822 - - $25,863
Net income - - - 6,718 - - 6,718
Issuance of common
stock for business
acquisition 240,000 24 1,761 - - - 1,785
Shares issued under
the common stock
plans 71,041 7 523 - - - 530
Deferred compensation
payable in Company
shares 205,961 - - 1,348 - - 1,348
Shares held in trust
for deferred compen-
sation liability (205,961) - - (1,348) - - (1,348)
Dividends on
preferred stock - - - (141) - - (141)
- --------------------------------------------------------------------------------
Balance-
December 31, 1995 3,771,624 377 22,979 11,399 - - 34,755
Net income - - - 11,896 - - 11,896
Purchase of treasury
stock (62,500) - - - - ($746) (746)
Shares issued under
the common stock
plans 176,379 12 752 - - 668 1,432
Tax benefit relating to
common stock plans - - 122 - - - 122
Deferred compensation
payable in Company
shares 245,763 - - 1,835 - - 1,835
Shares held in trust
for deferred compen-
sation liability (245,763) - - (1,835) - - (1,835)
Dividends on preferred
stock - - - (184) - - (184)
- --------------------------------------------------------------------------------
Balance-December
31, 1996 3,885,503 389 23,853 23,111 - (78) 47,275
Net income - - - 9,006 - - 9,006
Additional shares issued
for business
acquisition 14,223 1 264 - - - 265
Preferred stock
conversion 276,995 27 3,267 - - - 3,294
Purchase of treasury
stock (91,615) - - - - (1,443)(1,443)
Shares issued under the
common stock plans 50,019 2 88 (92) - 541 539
Repurchase of stock
warrant - - (98) (902) - - (1,000)
Repurchase of subsidiary
stock - - - (70) - - (70)
Tax benefit relating to
common stock plans - - 100 - - - 100
Deferred compensation
payable in Company
shares 276,616 - - 2,456 - - 2,456
Shares held in trust
for deferred compen-
sation liability (276,616) - - (2,456) - - (2,456)
Unrealized loss on
available-for-sale
securities - net - - - - ($89) - (89)
Dividends on preferred
stock - - - (167) - - (167)
- --------------------------------------------------------------------------------
Balance December
31, 1997 4,135,125 $419 $27,490 $30,870 ($89) ($980)$57,710
- --------------------------------------------------------------------------------
F-6
The accompanying notes are an integral part of these consolidated financial
statements.
HAMPSHIRE GROUP, LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Hampshire Group, Limited (the "Company"), through its subsidiaries, is engaged
in the manufacture and sale of knitted sweaters and legwear and investing in and
holding of real estate. The significant accounting policies used in the
preparation of the accompanying consolidated financial statements are as
follows:
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its subsidiaries, Hampshire Designers, Inc. and its subsidiaries (collectively,
"Hampshire Designers") and Hampshire Investments, Limited and its subsidiaries
(collectively, "Hampshire Investments"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Cash Equivalents
- ----------------
Cash equivalents consist of highly liquid investments with initial maturities of
ninety days or less.
Fair Value of Financial Instruments
- -----------------------------------
Management believes that the fair value of financial instruments does not
materially differ from their carrying values.
Available-For-Sale Securities
- -----------------------------
The Company owns certain equity securities which it has classified as
available-for-sale. These securities are stated at fair value, with unrealized
gains and losses, net of tax, reported as a separate component of stockholders'
equity. Realized gains and losses on the disposal of available-for-sale
securities are determined using the specific-identification method and are
included in the results of operations for the period of the transaction.
Management determines the appropriate classification of securities at the time
of purchase.
Inventories
- -----------
Inventories are stated at the lower of cost or market. Cost is determined using
the last-in, first-out ("LIFO") method for domestic inventories of Hampshire
Designers and Hampshire Hosiery and using the first-in, first-out ("FIFO")
method for all other domestic inventory and inventory located in Puerto Rico.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives of
the assets. Additions and major replacements or improvements are capitalized,
while maintenance costs and minor replacements 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.
Intangibles
- -----------
Intangible assets consist primarily of goodwill which is being amortized over 10
years on a straight-line basis. The Company continually monitors conditions that
may affect the carrying value of its intangible assets. When conditions indicate
potential impairment of such assets, the Company will undertake the necessary
studies and evaluate projected future earnings associated with the asset. When
projected future cash flows, not discounted for the time value of money, are
less than the carrying value of the asset, the impaired asset is written down to
its estimated fair value.
Revenue Recognition
- -------------------
The Company recognizes revenue upon shipment of goods to customers or upon
confirmation of a security trade. Rental income is recognized on a straight-line
basis.
F-7
Income Taxes
- ------------
Income taxes are recognized during the year in which transactions enter into the
determination of income for financial reporting purposes, with deferred taxes
being provided for temporary differences between the basis of assets and
liabilities for financial reporting purposes and the basis for income tax
reporting purposes.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Presentation of Prior Year Data
- -------------------------------
Certain reclassifications have been made to prior-year data to conform with the
current-year presentation.
Earnings Per Common Share
- -------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 supersedes APB Opinion No. 15, "Earnings Per Share." SFAS 128
requires dual presentation of basic and diluted earnings per share on the face
of the income statement for entities with complex capital structures. SFAS 128
is effective for annual and interim periods ending after December 15, 1997.
Earnings per share for prior years have been restated to provide comparable
information to 1997.
Basic earnings per common share is computed by dividing net income by the
weighted-average number of shares outstanding for the year. Diluted earnings per
common share is computed similarly; however, it is adjusted for the effects of
the assumed exercise of the Company's outstanding options and warrants and
conversion of the preferred stock.
Recent Accounting Standards
- ---------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company currently has
one item, unrecognized gain or loss on available-for-sale securities, that would
be considered a component of comprehensive income. SFAS 130 is effective for the
Company in 1998.
Also in June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 ("SFAS 131") "Disclosures About Segments of an Enterprise and Related
Information." SFAS 131, which is also effective in 1998, requires that public
business enterprises report financial and descriptive information about its
reportable operating segments using the "management approach." This approach
focuses on financial information that an enterprise's management uses to make
decisions about operating matters. Management has not yet determined the impact
SFAS 131 will have on the reporting of the Company.
Note 2 - Acquisition
In October 1995, The Winona Knitting Mills, Inc. (Winona), principally a
private-label manufacturer of better men's sweaters, was merged into the Company
in exchange for approximately $500,000 in cash, $2,287,000 in short-term
obligations, $1,250,000 in long-term debt, 124,000 shares of convertible
preferred stock valued at $1,550,000 and 240,000 restricted shares of the
Company's common stock valued at $1,785,000. Additionally, payments of up to
$1,333,000 are contingent upon the future financial performance of the acquired
business for the years 1996 through 1998, of which such payments will be made
one-half in cash and one-half in restricted common stock of the Company. No
additional amount was earned in 1996 and $530,000 was earned in 1997. In
connection with the acquisition, the Company recorded goodwill in the amount of
$2,288,000 and as a result of the additional payments to be made, the Company
has recorded an additional $530,000 in goodwill. The Company estimates that an
additional contingent payment of $470,000 will be required in 1998; hence an
additional $470,000 of goodwill will be recorded then.
The above transaction was accounted for using the purchase method. The operating
results of Winona are included in the consolidated financial statements of the
Company from the date of acquisition.
F-8
Had the acquisition of Winona been consummated as of January 1, 1995, the
Company's consolidated pro forma results of operations for the year ended
December 31, 1995 would have been as set forth in the table below:
Pro Forma
(in thousands, except per share data) (unaudited)
- ------------------------------------------------------------
Net sales $130,545
- ------------------------------------------------------------
Net income applicable to common stock $4,624
- ------------------------------------------------------------
Net income per share: Basic $1.23
Diluted $1.18
- ------------------------------------------------------------
Note 3 - Available-for-Sale Securities
A summary of available-for-sale securities at December 31, 1997 and 1996 is set
forth in the table below.
(in thousands)
Unrealized Holdings
------------------- Fair
1997 Cost Gain Losses Value
- ---------------------------------------------------------------------
Current:
Equity securities $1,056 $2 ($144) $914
Long-term:
Mutual funds (1) 547 - - 547
- ---------------------------------------------------------------------
$1,603 $2 ($144) $1,461
- ---------------------------------------------------------------------
Unrealized Holdings
------------------- Fair
1996 Cost Gain Losses Value
- ---------------------------------------------------------------------
Current:
Equity securities $203 - - $203
- ---------------------------------------------------------------------
(1) The investment in mutual funds has been made to fund the liability of a
deferred compensation plan. (See Note 14.)
Note 4 - Accounts Receivable and Major Customers
The Company performs ongoing evaluations of its customers' credit worthiness and
maintains allowances for potential credit losses. The Company generally does not
require collateral to secure its trade receivables. The accounts receivable are
stated net of allowances for doubtful accounts and returns and allowances of
$3,295,000 and $2,847,000 at December 31, 1997 and 1996, respectively. At
December 31, 1997, and 1996, 55% and 53%, respectively, of the trade receivables
were due from five customers.
The Company sells principally to department stores, mail-order catalog
businesses, chain stores, mass merchandisers and other retailers located in the
United States. The Company had sales to one major customer (defined as sales in
excess of 10% of total sales) which as a percentage of total sales accounted
for approximately 17%, 14% and 13% for 1997, 1996 and 1995, respectively.
Note 5 - Inventories
The components of inventories at December 31, 1997 and 1996 are set forth in the
table below.
(in thousands) 1997 1996
- -----------------------------------------------------
Finished goods $11,512 $ 8,767
Work-in-progress 6,938 6,063
Raw materials and supplies 4,393 4,176
- -----------------------------------------------------
22,843 19,006
Less - Excess of current cost
over LIFO carrying value (4,115) (4,133)
- -----------------------------------------------------
$18,728 $14,873
- -----------------------------------------------------
Approximately 58% and 49% of total inventories were valued using the LIFO method
at December 31, 1997 and 1996, respectively.
F-9
Note 6 - Property, Plant and Equipment
The components of property, plant and equipment for December 31, 1997 and 1996
are set forth in the table below.
Estimated
(in thousands) Useful Lives 1997 1996
- -----------------------------------------------------------------
Land $ 225 $ 83
Buildings and improvements 15-45 years 3,301 1,310
Leasehold improvements 5-10 years 4,980 4,683
Machinery and equipment 3-7 years 28,126 25,767
Furniture and fixtures 3-7 years 1,179 907
Transportation equipment 3-5 years 233 219
Construction in progress 76 673
- -----------------------------------------------------------------
38,120 33,642
Less-Accumulated depreciation (23,027) (20,046)
- -----------------------------------------------------------------
$15,093 $13,596
- -----------------------------------------------------------------
Depreciation expense was $3,661,000, $3,387,000, and $2,519,000, respectively,
for the years ended December 31, 1997, 1996 and 1995.
Note 7 - Real Property Investments
The Company, through its investments subsidiary, has made direct investments in
real property for the purposes of generating rental revenue. These properties
consist of commercial facilities in the United States and abroad and are carried
at capitalized cost with depreciation being provided for over the estimated
useful lives of the property, 15 years.
(in thousands) 1997 1996
- ---------------------------------------------------------
Commercial property: - -
United States $1,687 -
Foreign 2,461 -
- ---------------------------------------------------------
4,148
Less:Accumulated depreciation (21) -
- ---------------------------------------------------------
Total - $4,127 -
- ---------------------------------------------------------
Note 8 - Intangible Assets
In connection with the merger of Winona Knitting Mills, the Company recorded an
additional $530,000 in goodwill as a result of certain payments to be made in
accordance with the contingent purchase price agreement. In the fourth quarter
of 1996, management made an evaluation of the goodwill recorded on the books of
the Company and concluded that the carrying value of the goodwill recorded in
the acquisition of the assets of San Francisco Knitworks had become impaired.
The carrying value was written down $667,000 to its estimated fair value.
Activity in intangible assets for the years ended December 31, 1997 and 1996 is
summarized in the table below.
(in thousands) 1997 1996
- -----------------------------------------------------------------
Balance - beginning of year $3,161 $4,320
Amortization during year (306) (492)
Addition from contingent purchase price
of Winona Knitting Mills 530 -
Impairment write-down of goodwill of
San Francisco Knitworks - (667)
- -----------------------------------------------------------------
Balance - end of year $3,385 $3,161
- -----------------------------------------------------------------
F-10
Note 9 - Accrued Liabilities
Accrued liabilities at December 31, 1997 and 1996 are summarized in the
table below.
(in thousands) 1997 1996
- ---------------------------------------------------------------
Accrued compensation $2,799 $2,210
Income taxes 1,678 1,434
Accrued medical claims 836 764
Other accrued liabilities 2,917 2,161
- ---------------------------------------------------------------
$8,230 $6,569
- ---------------------------------------------------------------
Note 10 - Borrowings
Revolving Credit Facility
- -------------------------
The Company has renewed its principal credit facility through May 31, 1998. The
credit facility consists of $20 million line of credit and an $8 million letter
of credit facility, not to exceed $25 million in the aggregate. Advances under
the line of credit are limited to the lesser of: (1) the amount available set
forth above; or (2) the sum of (i) 85% of the eligible accounts receivable and
(ii) a seasonal adjustment of $6 million during the period from March 1 to
October 31.
Loans under the facility bear interest at the bank's prime rate or, at the
option of the company, a fixed rate for a fixed term. The loans are secured by
the trade accounts receivable of Hampshire Designers and are guaranteed by
Hampshire Group, Limited. Letters of credit issued under the facility are
secured by the inventory shipped pursuant to the letters of credit.
The Company maintains a $3.5 million facility with a bank for Segue, Limited, a
subsidiary of Hampshire Designers, which is used primarily to fund international
letters of credit. Advances on the facility bear interest at the bank's prime
rate and are secured by the inventory purchased pursuant thereto and are
guaranteed by Hampshire Group, Limited. Outstanding letters of credit totaled
approximately $1.1 million at December 31, 1997.
At December 31, 1997, Glamourette Fashion Mills, Inc., a subsidiary of Hampshire
Designers, had available an unsecured $2 million credit facility from a
commercial bank which is guaranteed by Hampshire Designers. The facility is
available for short-term borrowing not to exceed 180 days and to fund letters of
credit. Advances on the facility bear interest at the lower of the bank's prime
rate or the one-month LIBOR rate plus 1.75%. No advances were outstanding under
the line at December 31, 1997 or 1996.
The Company maintains an unsecured $2.5 million credit facility for the Winona
Division for peak period financing. The line is available for short-term
borrowing not to exceed one year and to fund letters of credit. Advances on the
facility bear interest, at the option of the Company, at the bank's prime rate
or the one-month LIBOR rate plus 1.87%. No advances were outstanding under the
line at December 31, 1997 or 1996.
Factoring Agreement
- -------------------
The Winona Division has a factoring agreement pursuant to which it sells
approximately 40% of its accounts receivables to a factor, without recourse. The
accounts are factored on a 45-day maturity basis, but the Company may request
advances up to 80% of the uncollected balance of the receivables, with such
advances bearing interest at prime rate plus 1%. The agreement requires a
commission rate of 1% of the factored accounts receivable.
F-11
Long -Term Debt
- ---------------
Long-term debt at December 31, 1997 and 1996 is comprised of:
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Notes payable to insurance company in monthly installments
of $96,000, including interest at rates from 7.55% to
9.03%, through 2000. $3,568 $4,882
Note payable to bank in monthly installments of approximately
$31,800, including interest at 7.70% through 1999. 511 840
Note payable to bank, in monthly installments of approximately
$20,500, plus interest at LIBOR rate plus 1.75%, adjusted
quarterly through 2000. 641 887
Note payable to bank in monthly installments of $9,650, plus
interest at LIBOR plus 1.75%, adjusted quarterly through 2001. 435 551
Note payable to bank in monthly installments of approximately
$31,100, including interest at 7.97% through 1999. 386 723
Note payable to bank in monthly installments of $15,800,
including interest at 8.25% through 2002. 733 -
Note payable to bank in monthly installments of approximately
$12,350, including interest at 8.4% through 2007, secured
by certain real estate. 989 -
Note payable to bank in monthly installments of approximately
$8,300, including interest at 10% through 2008, secured by
certain real estate. The interest rate is adjustable every
five years with the next adjustment coming April 1, 1998. 637 -
Notes payable to mortgage company in monthly installments of
approximately $1,750, including interest at 7.25% through
2000, secured by certain real estate. 251 254
Note payable to Economic Development Division of the State of
Minnesota in monthly installments of approximately $4,400,
including interest at 4.0% through 2007, unsecured. 414 450
Other notes payable in monthly installments of approximately
$28,000, including interest ranging from 5.88% to 10.4%,
through 2001. 430 674
- --------------------------------------------------------------------------------
8,995 9,261
Less - Amount payable within one year (2,911) (2,618)
- --------------------------------------------------------------------------------
Amount payable after one year $6,084 $6,643
- --------------------------------------------------------------------------------
Unless otherwise disclosed, the notes are secured by certain machinery and
equipment of the respective companies.
Maturities of long-term debt as of December 31, 1997 are summarized in the
table below.
Year (in thousands)
- ------------------------------------
1998 $2,911
1999 2,379
2000 1,520
2001 474
2002 579
Thereafter 1,132
- ------------------------------------
$8,995
- ------------------------------------
F-12
Notes Payable to Related Parties
- --------------------------------
Notes payable to related parties at December 31, 1997 and 1996 (all of which
were part of the acquisition purchase price) are set forth below:
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
Unsecured note payable to a director of the Company
and his spouse, in ten equal quarterly installments
of principal plus accrued interest at 9.8% per annum,
commencing October 1996 $625 $1,125
Unsecured note payable to the Company's Chairman and
Chief Executive Officer, interest payable quarterly
at 9.5% per annum (balance paid in full in February 1997) - 377
- --------------------------------------------------------------------------------
625 1,502
Less - Amount payable within one year (500) (877)
- --------------------------------------------------------------------------------
Amount payable after one year $125 $ 625
- --------------------------------------------------------------------------------
Note 11 - Income Taxes
The components of income tax expense for the years ended December 31, 1997, 1996
and 1995 are set forth in the table below.
(in thousands) 1997 1996 1995
- -----------------------------------------------------------
Current:
Federal $2,246 $1,430 $ 504
State 317 290 300
Puerto Rico 137 180 224
- -----------------------------------------------------------
2,700 1,900 1,028
Deferred:
Federal (200) (3,900) (278)
- ------------------------------------------------------------
Total $2,500 ($2,000) $ 750
- ------------------------------------------------------------
The domestic and Puerto Rico components of income before income taxes are set
forth in the table below.
(in thousands) 1997 1996 1995
- ------------------------------------------------------------
Domestic $ 6,368 $4,161 $1,187
Puerto Rico 5,138 5,735 6,281
- ------------------------------------------------------------
Income before income taxes $11,506 $9,896 $7,468
- ------------------------------------------------------------
A reconciliation of the provision (benefit) for income taxes computed by
applying the statutory federal income tax rate to income before income taxes and
the Company's actual provision for income taxes is set forth in the table below.
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Tax provision at federal statutory rate $3,912 $3,365 $2,539
Increase (decrease) in tax arising from:
Effect of exemption of Puerto Rico
earnings from United States tax (1,747) (1,950) (2,136)
Puerto Rico taxes on income,
including withholding taxes 137 180 224
State taxes, less federal income
tax benefit 178 191 199
Change in valuation allowance - (4,618) (596)
Other 20 832 520
- ----------------------------------------------------------------------
$2,500 ($2,000) $ 750
- ----------------------------------------------------------------------
F-13
A summary of the temporary differences carryforwards giving rise to deferred
income tax assets and liabilities as of December 31, 1997 and 1996 is set forth
in the table below.
(in thousands) 1997 1996
- ------------------------------------------------------------------------------
Deferred income tax assets:
Inventories $ 249 -
Allowances for receivables 1,055 $ 996
Accrued liabilities and other temporary
differences 1,840 1,221
Unrealized losses on available-for-sale securities 53 -
Net operating loss carryforwards 3,633 4,227
AMT credit carryforwards 1,034 1,116
- ------------------------------------------------------------------------------
Gross deferred income tax assets 7,864 7,560
- ------------------------------------------------------------------------------
Deferred income tax liabilities:
Inventories - (8)
Property, plant and equipment (471) (412)
- ------------------------------------------------------------------------------
Gross deferred income tax liabilities (471) (420)
- ------------------------------------------------------------------------------
Valuation allowance for deferred income tax assets (1,869) (1,869)
- ------------------------------------------------------------------------------
$5,524 $5,271
- ------------------------------------------------------------------------------
The net operating loss carryforwards for income tax purposes expire as set forth
in the table below.
(in thousands) Year Regular Tax
--------------------
1998 $ 1,095
1999 648
2000 164
2001 1,344
2002 1,384
2003-2009 6,051
--------------------
$10,686
--------------------
As a result of the sale of the Company's common stock pursuant to the Offering,
the Company generally is not permitted to utilize more than $1.7 million of the
net operating loss carryovers existing as of the completion of the Offering in
any single tax year, provided that to the extent such net operating loss
carryforward limitation is not utilized in any tax year, it may be carried
forward to subsequent tax years and consequently will increase the subsequent
years' limitation. Substantially all of the income of Glamourette Fashion Mills,
Inc. ("Glamourette") was effectively exempt from Puerto Rico income tax by an
extended tax grant under the Puerto Rico Tax Incentives Act of 1987 (the "Act").
The grant allows partial exemption from income, property and municipal taxes.
Under this extension of the grant, the Company enjoys 90% exemption from Puerto
Rico income taxes, and 75% exemption from property taxes and municipal taxes
through the year 2010 and will be subject to tollgate taxes on dividends ranging
from 0 to 5%. Absent this exemption, Glamourette's earnings would be subject to
Puerto Rican income tax at rates of up to 39%.
Glamourette has made an election under Section 936 of the Internal Revenue code
pursuant to which Glamourette's earnings are exempt from US taxes. However,
dividends received from Glamourette, together with certain other items, enter
into the computation of the US alternative minimum tax ("AMT"). Due to the
Section 936 exemption and the relative portion of Glamourette's earnings to
other US taxable income in prior years, management estimated that the Company
would more likely than not be a perpetual AMT taxpayer. Accordingly, since NOL
deductions are limited in calculating AMT, the Company had, prior to 1996,
determined that a valuation allowance was required with respect to NOL
carryforwards and AMT credit carryforwards. During 1996, Section 936 was
repealed and is being phased out over a 10-year period. As a result, the Company
believes that during this phase-out period it will incur regular US tax
F-14
liabilities and therefore receive the benefit of a significant portion of the
NOL and AMT credit carryforwards. The Company reduced the valuation allowance in
the fourth quarter of 1996 to adjust deferred tax assets to an amount management
believes more likely than not will be realized.
The Company has approximately $9.0 million of Glamourette's undistributed
earnings which it considers permanently invested and for which it has not
provided any deferred taxes. The Company received dividends from Glamourette of
approximately $5.0 million, $5.0 million and $5.5 million in 1997, 1996 and
1995, respectively.
Note 12 - Commitments and Contingencies
The Company leases premises and equipment under operating leases having terms
from monthly to 12 years. At December 31, 1997, future minimum lease payments
under leases having an initial or remaining non-cancelable term in excess of one
year were as set forth in the table below:
Year (in thousands)
- ---------------------------------
1998 $1,362
1999 1,288
2000 1,190
2001 877
2002 294
Thereafter 1,162
- ---------------------------------
Total $6,173
- ---------------------------------
Rent expense on operating leases was $1,596,000, $1,636,000 and $1,475,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
During November 1997, the Company's subsidiary, Glamourette Fashion Mills, Inc.,
received notice from the Internal Revenue Service of a pending examination of
the year 1995. The examination has not been completed. However, the Company
believes any assessment would be without merit, and that any adjustment which
might result would not have a material effect on the consolidated financial
position of the Company.
The Company is, from time to time, involved in litigation incidental to the
conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
consolidated financial condition or results of operations.
Note 13 - Capitalization
The Company's authorized capital stock consists of 10,000,000 shares of common
stock and 1,000,000 shares of serial preferred stock (the "Preferred Stock"),
each having a par value of $0.10 per share. The Board of Directors is authorized
to provide for the issuance of Preferred Stock in such series and having such
designations, voting powers, preferences and other rights and restrictions as
the Board of Directors shall determine.
In connection with the acquisition of stock of The Winona Knitting Mills
described in Note 2, the Company issued 124,000 shares of 5% cumulative
nonvoting Series A Convertible, Preferred Stock ("Series A" stock) having a
liquidation preference and stated value of $12.50 per share. The Series A stock
was convertible, at the option of the holder into common stock at the conversion
rate of one share of common stock for one share of the Series A stock. The
Series A stock was also subject to mandatory redemption by the Company at its
stated value plus a premium and any accrued but unpaid dividends in 20 equal
quarterly installments beginning on January 1, 2001.
In 1992, the Company issued 41,039 shares (including 36,039 shares held by the
Company's Chairman) of 6% cumulative nonvoting Series D Convertible, Preferred
Stock ("Series D" stock) having a liquidation preference and stated value of $50
per share. The Series D stock was convertible at the option of the holder, in
whole or in part, into common stock at a price of $11.40 per common share. The
Series D stock was also subject to mandatory redemption at its stated value plus
a premium and any accrued but unpaid dividends in 20 quarterly installments
beginning April 1, 1996. During 1996, the Company redeemed 6,156 shares of
Series D stock at its stated value. During 1997, subject to the mandatory
quarterly redemptions, the holders elected to convert 8,208 shares of Series D
stock into 36,000 shares of Hampshire Group, Limited common stock.
In the fourth quarter of 1997, the Company gave notice to the holders of record
of its intent to redeem all of the outstanding shares of both Series A and
Series D stock at the required redemption price. The Company was notified by the
holders of all of the Series A and Series D stock of their intent to convert the
F-15
shares into common stock of the Company. Effective December 30, 1997, all shares
of Series A and Series D stock were converted into 240,995 shares of Hampshire
Group, Limited common stock in the aggregate.
A summary of the activity in redeemable Preferred Stock for the three years
ended December 31, 1997 is set forth in the table below.
Preferred Stock
(in thousands) Series A Series D
- -------------------------------------------------------
Balance - Beginning of period - $2,052
Issuance of preferred stock $1,550 -
Preferred dividends accrued 18 123
Preferred dividends paid (18) (123)
- -------------------------------------------------------
Balance December 31, 1995 1,550 2,052
Preferred dividends accrued 78 106
Preferred dividends paid (78) (106)
Redemption of preferred stock - (308)
- -------------------------------------------------------
Balance December 31, 1996 1,550 1,744
Preferred dividends accrued 78 89
Preferred dividends paid (78) (89)
Conversion of preferred stock (1,550) (1,744)
- -------------------------------------------------------
Balance December 31, 1997 - -
- -------------------------------------------------------
Note 14 - Stock Options, Warrants and Compensation Plans
In November 1994, the Company registered 750,000 shares of its common stock
under the Securities Act of 1933, as amended. This action was in regards to the
Hampshire Group, Limited 1992 Stock Option Plan and the Hampshire Group, Limited
Common Stock Purchase Plan for Directors and Executives. Of these shares,
292,000 have been issued under these plans.
Beginning in 1996, the Board of Directors of the Company authorized the
repurchase of shares of the Company's common stock, some of which would be used
to offset the dilution caused by the issuance of shares under the Stock Option
Plan and Stock Purchase Plan. The Company's repurchase of shares of common stock
are recorded as "Treasury Stock" and result in a reduction of "Stockholders'
Equity". When treasury shares are reissued, the Company uses a specific
identification method and the excess of repurchase cost over reissuance price is
treated as a reduction of "Retained Earnings".
Stock Options
- -------------
Options to purchase Hampshire Group, Limited Common Stock are granted at the
direction 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 fair market value per share of common stock at the date of
grant. All options have a maximum term of 10 years and become fully exercisable
after a maximum of 5 years from the date of grant.
F-16
Stock option activity is set forth in the table below.
Number of Weighted Average
Options Exercise Price
- ---------------------------------------------------------------------
Outstanding - Beginning of period 445,159 $ 7.12
Granted 108,067 7.71
Exercised (1,500) 5.98
Canceled or expired (15,000) 7.50
- ---------------------------------------------------------------------
Outstanding December 31, 1995 536,726 7.42
Granted 63,466 11.28
Exercised (119,879) 6.37
Canceled or expired (24,500) 8.86
- ----------------------------------------------------------------------
Outstanding December 31, 1996 455,813 7.87
Granted 50,000 14.50
Exercised (29,556) 6.98
Canceled or expired (45,625) 14.16
- ----------------------------------------------------------------------
Outstanding December 31, 1997 430,632 $ 8.33
- ----------------------------------------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), was issued by the Financial Accounting Standards
Board during 1995 and was effective for the Company in 1996. SFAS 123 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 25. Since
the Company has elected to continue applying APB 25 in accounting for its plans,
no compensation expense has been recognized in 1997, 1996 or 1995. Additionally,
in accordance with SFAS 123, the Company is required to disclose fair value
information about its stock-based employee compensation plans for periods
beginning after January 1, 1995. Had compensation expense for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS 123,
the Company's net income and earnings per share would have been reduced .
In order to estimate compensation cost, the Black-Scholes model was employed
using the assumptions set forth in the table below.
1997 1996 1995
- ------------------------------------------------------------
Dividend yield 0.00% 0.00% 0.00%
Expected life (years) 4.37 5.11 4.16
Expected volatility 18.60% 21.40% 25.90%
Risk-free interest rate 6.54% 5.37% 7.56%
Weighted-average fair values
of options granted $5.07 $3.38 $2.40
- -------------------------------------------------------------
The table below sets forth the effect on net income and diluted earnings per
share had compensation cost been determined under SFAS 123.
(in thousands) 1997 1996 1995
- -----------------------------------------------------------------
Net income: As reported $9,006 $11,896 $6,718
Proforma $8,930 $11,813 $6,459
- -----------------------------------------------------------------
Diluted earnings As reported $2.02 $2.72 $1.68
per share: Proforma $2.00 $2.70 $1.62
- -----------------------------------------------------------------
F-17
The table below is a summary of the status of options outstanding at
December 31,1997:
Options Outstanding Options Exercisable
- ----------------------------------------------- ---------------------------
Weighted Weighted
Range of Number Average Average Number Weighted
Exercise Outstanding Remaining Exercise Exercisable Average
Prices 12/31/97 Life Price 12/31/97 Exercise Price
- ----------------------------------------------- ---------------------------
$ 5.750-$5.750 4,274 1.00 $ 5.750 4,274 $ 5.750
5.812- 5.813 77,092 2.00 5.813 77,092 5.813
6.000- 6.190 47,273 3.34 6.150 42,273 6.168
7.500- 7.500 50,653 3.22 7.500 50,653 7.500
7.870- 7.870 65,909 1.53 7.870 52,728 7.870
8.250- 8.250 15,000 2.00 8.250 15,000 8.250
9.900- 9.900 109,091 2.00 9.900 109,091 9.900
10.625-11.750 44,565 5.40 11.173 24,724 11.129
12.100-12.500 8,000 4.56 12.125 4,250 12.147
14.500-14.500 8,775 6.50 14.500 2,194 14,500
------- ---------- ---------------------------
430,632 $ 8.332 382,279 $ 8.085
------- ---------- ---------------------------
Warrants to Purchase Common Stock
- ---------------------------------
In December 1990, the Company issued warrants to purchase 338,182 shares of the
Company's common stock at an exercise price of $6.19 per share through December
31, 2000. The aggregate consideration for such warrants was $250,000. As of July
1, 1997, the Company repurchased from a former director, for $1 million ($7.534
per share), 132,728 of these warrants leaving a balance of 205,454 outstanding
at December 31, 1997.
Common Stock Purchase Plan
- --------------------------
In 1992, the Company adopted the Hampshire Group, Limited Common Stock Purchase
Plan for Directors and Executives ("SPP"). Pursuant to the plan, which was
amended June 7, 1995, non-employee directors may elect to use their fees as
directors to purchase common stock of the Company. Key executives may elect to
use from 4% to 10% of their annual salaries and 10% to 40% of their annual
bonuses to purchase common stock of the Company.
The number of shares of common stock to be delivered is determined, with respect
to non-employee directors, by dividing the amount of director fees elected to be
used to purchase common stock in each quarter by 95% of the fair market value of
the Company's common stock at the end of the calendar quarter. The number of
shares of common stock to be delivered with respect to annual bonuses of key
executives is determined by dividing the amount so elected to be used for the
purchase of common stock by 90% of the lower of: (1) the average of the fair
market value of the Company's common stock at the end of each calendar quarter,
or (2) the fair market value of the Company's common stock as of the end of the
plan year. The number of shares of common stock to be delivered with respect to
annual salaries of key executives is determined by dividing the amount so
elected to be used for the purchase of common stock by 90% of the Company's
common stock at the end of the calendar quarter.
The participating directors and executives, in the aggregate, elected to use
approximately $735,000, $560,000 and $534,000 of their compensation for 1997,
1996 and 1995, respectively, to purchase common stock of the Company under the
SPP. The Company has established a trust to which it delivers the shares of the
Company's common stock to satisfy such elections following the end of each plan
year. Alternatively, the Company may contribute cash to the trust in an amount
sufficient to enable the trustee to purchase in the open market, the number of
shares of common stock which the Company would be required to deliver.
Voluntary Deferred Compensation Plan
- ------------------------------------
In 1997, the Company adopted the Hampshire Group, Limited Deferred Voluntary
Compensation Plan for Directors and Executives (the "Top Hat Plan"). Pursuant to
the plan, key executives may elect to defer up to 20% of the total compensation
in each year with said deferrals being invested in mutual funds external to the
Company. In 1997, the participants deferred $547,000 with the
F-18
resulting liability being included in deferred compensation. To assist in
funding the deferred compensation liability, the Company has invested in certain
mutual funds. The market value of these mutual funds was $547,000 and are
presented as assets of the Company in the accompanying balance sheets.
Note 15 - Retirement Savings Plan
In 1988, the Company adopted the Hampshire Group, Limited and Subsidiaries
401(k) Retirement Savings Plan under which all employees may participate after
having completed at least one year of service and having reached the age of
twenty years. The Company's matching contribution is determined annually at the
discretion of the Board of Directors and was $346,000, $313,000 and $225,000 in
1997, 1996 and 1995, respectively. Such matching contributions vest fully over
seven years of employment.
Note 16 - Related Party Transactions
The Company leases certain buildings from an affiliated company. Rent expense
under such leases was $200,000, $192,000 and $184,000 in 1997, 1996 and 1995,
respectively. The Company also leases certain buildings from a director of the
Company and certain of his relatives. Rent expense under such leases was
$162,000, $135,000 and $28,500 for 1997, 1996 and 1995. The terms of these
leases were approved by the Board of Directors of the Company based on
independent confirmation that the leases are fair and reasonable and are at
market terms.
The Company has notes receivable from certain key executives of a subsidiary
amounting to $1,425 and $109,000 at December 31, 1997 and 1996, respectively.
The notes are secured by subsidiary preferred stock owned by the executives.
In 1996 the Company granted an option to a key executives of the Hosiery
Division of Hampshire Designers, Inc. to purchase 20% of the equity interest of
the division for $1,200,000. In the opinion of management, the option price
currently meets or exceeds the fair market value. The option terminates the
earlier of: a) December 31, 1999, or b) upon termination of the executive for
any reason.
Note 17 - Subsequent Event
Subsequent to December 31, 1997, the Company received a commitment from two
insurance companies for a term loan of $15 million (the "Senior Notes") with
repayment terms of seven equal annual installments commencing January 2002. The
outstanding balance shall bear interest at 7.05% per annum, payable
semi-annually, and shall be secured parri passu with the Company's revolving
credit facility by a pledge of the accounts receivable and common stock of the
subsidiaries of the Company other than Hampshire Investments which shall be
defined as an Unrestricted Subsidiary of the Company.
The note agreement shall contain certain covenants which, among other things,
limit the amount of additional funded indebtedness which may be incurred by the
Company and restricts unsecured indebtedness of the Restricted Subsidiaries of
the Company. The agreement shall also contain provisions which shall limit
restricted payments including cash dividend payments and advances to and
investments in Hampshire Investments; and shall require the Company to maintain
certain minimum financial ratios and tangible net worth for the Company and
Restricted Subsidiaries.
Management expects the agreement to be closed and the loan to be funded in April
1998.
F-19
Note 18 - Earnings Per Share
Set forth in the tables below is a reconciliation by year of the numerator
and the denominator of the basic and diluted earnings per share ("EPS")
computation.
Income Shares Per-Share
For the Year Ended 1997 (in thousands) (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Net income $9,006
Less: Preferred stock dividends (167)
- -----------------------------------------------------
Basic EPS:
Income available to common stockholders 8,839 3,856 $2.29
Effect of dilutive securities:
Convertible preferred stock 167 254 -
Options/warrants - 355 -
- --------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $9,006 4,465 $2.02
- --------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended 1996 (in thousands) (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Net income $11,896
Less: Preferred stock dividends (184)
- -----------------------------------------------------
Basic EPS:
Income available to common stockholders 11,712 3,778 $3.10
Effect of dilutive securities:
Convertible preferred stock 184 321 -
Options/warrants - 280 -
- --------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $11,896 4,379 $2.72
- --------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended 1995 (in thousands) (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
Net income $6,718
Less: Preferred stock dividends (141)
- -----------------------------------------------------
Basic EPS:
Income available to common stockholders 6,577 3,560 $1.85
Effect of dilutive securities:
Convertible preferred stock 141 207 -
Options/warrants - 225 -
- --------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $6,718 3,992 $1.68
- --------------------------------------------------------------------------------
F-20
Note 19 - Supplementary Disclosure of Cash Flow Information
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------
Cash paid during the year for:
Interest $1,329 $1,304 $974
Income taxes 2,152 1,952 551
- ---------------------------------------------------------------------
Schedule of non-cash investing and
financial activities:
Issuance of stock under the
Common Stock Purchase Plan for
Directors and Executives - - $521
- ---------------------------------------------------------------------
The Company purchased all of the capital stock of The Winona Knitting Mills,
Inc. in October 1995. In conjunction with the acquisition, liabilities were
assumed as set forth in the table below.
(in thousands)
- ------------------------------------------------
Fair value of assets acquired $17,346
Cash paid (500)
Notes and other obligations (3,537)
Preferred stock exchanged (1,550)
Common stock exchanged (1,785)
- ------------------------------------------------
Liabilities assumed $ 9,974
- ------------------------------------------------
The Company purchased the assets of Segue Limited and Babette & Partners, Ltd.
in January 1995. In conjunction with these acquisitions, liabilities were
assumed as set forth in the table below.
(in thousands)
- ------------------------------------------------
Fair value of assets acquired $3,350
Cash paid for the net assets (2,131)
- ------------------------------------------------
Liabilities assumed $1,219
- ------------------------------------------------
Note 20 - Financial Information About Industry Segments
Business segment information appears on Pages 10 and 11 of this Annual Report on
Form 10-K.
F-21
SCHEDULE I
1 of 3
HAMPSHIRE GROUP, LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
(in thousands)
December 31,
-----------------------
1997 1996
---- ----
ASSETS
- ------
Current assets:
Cash $ 9,494 $16,211
Due from subsidiaries 26,525 20,612
Deferred tax asset 3,145 1,631
Other current assets 55 412
------------------------
Total current assets 39,219 38,866
Notes receivable from and investments in subsidiaries 20,631 12,101
Deferred tax asset 2,326 3,640
Other assets 617 304
------------------------
$62,793 $54,911
========================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable - related parties $ 500 $ 877
Accounts payable and accrued expenses 3,501 2,533
------------------------
Total current liabilities 4,001 3,410
Note payable - related parties 125 625
Deferred compensation 957 307
Redeemable preferred stock - 3,294
Common stock and other stockholders' equity:
Common stock, $0.10 par value 419 389
Additional paid-in capital 27,322 23,853
Retained earnings 30,949 23,111
Treasury stock (980) (78)
-------------------------
Total stockholders' equity 57,710 47,275
-------------------------
$62,793 $54,911
=========================
F-22
SCHEDULE I
2 of 3
HAMPSHIRE GROUP, LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF INCOME
(in thousands)
Year ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
Revenue
Management fees charged to subsidiaries $2,466 $ 2,241 $1,707
Interest charged to subsidiaries 2,388 2,717 1,589
-------------------------------
4,854 4,958 3,296
General and administrative expenses 2,706 2,454 2,134
-------------------------------
Income from operations 2,148 2,504 1,162
Other income (expense)
Equity in earnings of subsidiaries 7,440 5,980 5,586
Interest income 272 141 152
Interest expense (111) (149) -
Other income (expense) 7 - 3
------------------------------
Income before income taxes 9,756 8,476 6,903
Income taxes (provision) benefit (750) 3,420 (185)
------------------------------
Net income 9,006 11,896 6,718
Preferred dividend requirements (167) (184) (141)
------------------------------
Net income applicable to common stock $8,839 $11,712 $6,577
==============================
F-23
SCHEDULE I
3 of 3
HAMPSHIRE GROUP, LIMITED
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(in thousands)
Year ended December 31,
-------------------------------
1997 1996 1995
------ ------ ------
Cash flows from operating activities:
Net income $ 9,006 $11,896 $6,718
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Equity in earnings of consolidated
subsidiaries (7,440) (5,980) (5,586)
Dividends received from subsidiaries 6,500 8,629 9,492
Depreciation and amortization 28 26 25
Tax benefits from employee stock plans 100 122 -
Deferred income taxes (200) (3,900) (278)
Net change in operating assets and liabilities:
Receivables from subsidiaries (13,360) 129 (534)
Receivables 36 (76) (133)
Other assets (2) 21 (345)
Accounts payable and accrued expenses 1,946 126 1,608
-------------------------------
Net cash provided (used) by operating activities (3,386) 10,993 10,967
-------------------------------
Cash flows from investing activities:
Capital expenditures (52) (18) (3)
Pre-acquisition advances to Winona - - (3,060)
Cash paid in business acquisition - - (500)
-------------------------------
Net cash used in investing activities (52) (18) (3,563)
-------------------------------
Cash flows from financing activities
Repayment of long-term debt (877) (2,248) -
Purchase of stock warrants (1,000) - -
Proceeds from issuance of common stock 90 764 9
Redemption of preferred stock - (308) -
Purchase of treasury stock - net (1,325) (78) -
Cash dividends on preferred stock (167) (184) (141)
-------------------------------
Net cash used in financing activities (3,279) (2,054) (132)
-------------------------------
Net increase (decrease) in cash (6,717) 8,921 7,272
Cash at beginning of period 16,211 7,290 18
-------------------------------
Cash at end of period $ 9,494 $16,211 $7,290
===============================
F-24
SCHEDULE II
HAMPSHIRE GROUP, LIMITED
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance Charged Charged
at to sales to Balance
beginning and other Deduc- end of
of year expenses accounts tions year
------------------------------------------------
Year Ended December 31, 1995
- ----------------------------
Allowance for doubtful
accounts $414 $ 375 $50 ($135) $ 704
Allowance for returns and
adjustments 828 1,081 83 (665) 1,327
Year Ended December 31, 1996
- ----------------------------
Allowance for doubtful
accounts $ 704 $ 269 - ($ 176) $ 797
Allowance for returns and
adjustments 1,327 2,564 - (1,841) 2,050
Year Ended December 31, 1997
- ----------------------------
Allowance for doubtful
accounts $ 797 $ 223 - ($ 204) $ 816
Allowance for returns and
adjustments 2,050 3,925 - (3,496) 2,479
F-25
SCHEDULE III
1 of 2
HAMPSHIRE GROUP, LIMITED
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Initial Cost
--------------------------------
Land
Encum- and
brances Land Buildings Buildings
-------------------------------------------
Charlottesville-Commercial Bldg.
Charlottesville, Virginia $285 $ 397 $ 682
Amity Mall-Shopping Center
Amityville, New York $637 187 664 851
Project #1-Apartment Units
St. Petersburg, Russia - - 152 152
Project #2-Apartment Units
St. Petersburg, Russia - - 330 330
Project #5-Apartment Units
St. Petersburg, Russia - - 255 255
Project #6-Apartment Units
St. Petersburg, Russia - - 182 182
Project #7-Apartment Units
St. Petersburg, Russia - - 210 210
Project #8-Apartment Units
St. Petersburg, Russia - - 155 155
Project #9-Apartment Units
St. Petersburg, Russia - - 182 182
Project #10-Apartment Units
St. Petersburg, Russia - - 110 110
Deposits and Other - - 254 254
------------------------------------------
$637 $472 $2,891 $3,363
==========================================
F-26
SCHEDULE III Page 1 of 2 (continued)
---------
HAMPSHIRE GROUP, LIMITED
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Cost Capitalized Subsequent
to Acquisition
-------------------------------------------
Land and
Land Building Building
Improvements Improvements Improvements
-------------------------------------------
Charlottesville-Commercial Bldg.
Charlottesville, Virginia - $ 1 $ 1
Amity Mall-Shopping Center
Amityville, New York - 3 3
Project #1-Apartment Units
St. Petersburg, Russia - 184 184
Project #2-Apartment Units
St. Petersburg, Russia - 142 142
Project #5-Apartment Units
St. Petersburg, Russia - 182 182
Project #6-Apartment Units
St. Petersburg, Russia - 120 120
Project #7-Apartment Units
St. Petersburg, Russia - 10 10
Project #8-Apartment Units
St. Petersburg, Russia - 114 114
Project #9-Apartment Units
St. Petersburg, Russia - 29 29
Project #10-Apartment Units
St. Petersburg, Russia - - -
Deposits and Other - - -
------------------------------------------
- $785 $785
==========================================
F-26
SCHEDULE III Page 1 of 2 (continued)
---------
HAMPSHIRE GROUP, LIMITED
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Gross Amount at Which Carried
at End of Period
------------------------------
Building
and Accumulated
Land Improvements Total Depreciation
------------------------------ ------------
Charlottesville-Commercial Bldg.
Charlottesville, Virginia $285 $ 398 $ 683 ($13)
Amity Mall-Shopping Center
Amityville, New York 187 667 854 (8)
Project #1-Apartment Units
St. Petersburg, Russia - 336 336 -
Project #2-Apartment Units
St. Petersburg, Russia - 472 472 -
Project #5-Apartment Units
St. Petersburg, Russia - 437 437 -
Project #6-Apartment Units
St. Petersburg, Russia - 302 302 -
Project #7-Apartment Units
St. Petersburg, Russia - 220 220 -
Project #8-Apartment Units
St. Petersburg, Russia - 269 269 -
Project #9-Apartment Units
St. Petersburg, Russia - 211 211 -
Project #10-Apartment Units
St. Petersburg, Russia - 110 110 -
Deposits and Other - 254 254 -
------------------------------------------
$472 $3,676 $4,148 ($21)
==========================================
F-26
SCHEDULE III
2 of 2
HAMPSHIRE GROUP, LIMITED
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Depreciation and amortization of the Company's investment in buildings and
improvements reflected in the statements of operations are calculated over the
estimated useful lives of the assets as follows:
Base Building 15 years
Improvements Over remaining useful lives of the building
The aggregate cost for federal income tax purposes was approximately $4.15
million at December 31, 1997.
The changes in total real estate assets and accumulated depreciation for the
period ending December 31, 1997 are as follows:
Total Real Estate Assets Accumulated Depreciation
- ------------------------ ------------------------
Balance, beginning of period - Balance, beginning of period -
Acquisitions $3,363 Depreciation ($21)
Additions and improvements 785 Disposals -
- --------------------------------------- ----------------------------------
Balance, end of period $4,148 Balance, end of period ($21)
======================================= ==================================
F-27
Quarterly Financial and Stock Data (unaudited)
(in thousands, except per share data and stock prices)
In 1997 Quarter Ended Mar.29 Jun.28 Sept.27 Dec.31
------ ------ ------- -------
Net sales $23,580 $21,466 $61,008 $58,374
Gross profit 4,691 4,374 13,769 13,963
- -------------------------------------------------------------------------------
Income (loss) from operations (92) (255) 6,811 6,163
Income (loss) applicable to common stock (304) (277) 5,069 4,351
- -------------------------------------------------------------------------------
Income (loss) per common and
common equivalent share - basic ($0.08) ($0.07) $1.31 $1.13
Income (loss) per common share - diluted ($0.08) ($0.07) $1.16 $0.99
- -------------------------------------------------------------------------------
Common stock price: High $15.75 $15.75 $17.50 $20.00
Low $12.75 $14.00 $14.75 $17.50
- -------------------------------------------------------------------------------
In 1996 Quarter Ended Mar.30 Jun.29 Sept.28 Dec.31
------ ------ ------- -------
Net sales $26,430 $21,243 $49,593 $51,039
Gross profit 4,878 3,748 12,059 13,145
Commission revenue 41 284 579 38
- -------------------------------------------------------------------------------
Income (loss) from operations (262) (373) 5,916 5,800
Income (loss) applicable to common stock (574) (642) 4,819 8,109(1)
- -------------------------------------------------------------------------------
Income (loss) per common and
common equivalent share - basic ($0.15) ($0.17) $1.27 $1.99(1)
Income (loss) per common share -diluted ($0.15) ($0.17) $1.11 $1.83(1)
- -------------------------------------------------------------------------------
Common stock price: High $12.00 $13.00 $12.75 $13.50
Low $10.38 $10.75 $11.50 $12.25
- --------------------------------------------------------------------------------
In 1995 Quarter Ended Apr.1 Jul.1 Sept.30 Dec.31
------ ------ ------- -------
Net sales $14,111 $13,580 $39,278 $45,481
Gross profit 3,032 3,251 10,548 10,066
Commission revenue 73 222 884 178
- -------------------------------------------------------------------------------
Income (loss) from operations (210) (236) 4,941 3,295
Income (loss) applicable to common stock (299) (93) 4,264 2,705
- -------------------------------------------------------------------------------
Income (loss) per common and
common equivalent share - basic ($0.08) ($0.03) $1.21 $0.73
Income (loss) per common share - diluted ($0.08) ($0.03) $1.08 $0.63
- -------------------------------------------------------------------------------
Common stock price: High $9.25 $9.25 $11.00 $13.00
Low $7.00 $8.25 $8.50 $10.00
- -------------------------------------------------------------------------------
(1) Income applicable to common stock for the fourth quarter of 1996 includes
$3.9 million adjustment to the Company's deferred tax account; and basic and
diluted earnings per share for the period includes $0.89 per share relating to
the adjustment.
F-28
HAMPSHIRE GROUP, LIMITED
1997 EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------------------------------------------------------------
(3)(A) Restated Certificate of Incorporation of Hampshire Group, Limited
(3)(A)(1) Certificate of Amendment to the Certificate of Incorporation of
Hampshire Group, Limited
(3)(A)(2) Amended and Restated By-Laws of Hampshire Group, Limited
(3)(B)(2) Agreement of Merger between Hampshire Hosiery, Inc. and
Hampshire Designers, Inc. dated June 26, 1995
(3)(B)(3) Agreement of Merger between Segue (America) Limited
and H.G. Knitwear, Inc. dated December 26, 1995
(3)(B)(4) Agreement and Plan of Merger among Hampshire Group,
Limited, The Winona Knitting Mills, Inc. and Pete and
Joyce Woodworth dated June 5, 1995
(3)(B)(5) Asset Purchase Agreement among Segue (America) Limited,
Segue, Ltd. and Neil Friedman dated February 15, 1995
(10)(A)(1) Employment Agreement between Hampshire Group, Limited
and Ludwig Kuttner dated May 6, 1992
(10)(A)(2) Employment Agreement between Hampshire Designers, Inc.
and Pete Woodworth dated October 10, 1995
(10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option Plan
Amended and Restated effective June 7, 1995
(10)(C)(1) Form of Hampshire Group, Limited and Affiliates Common
Stock Purchase Plan for Directors and Executives
Amended and Restated effective June 7, 1995
(10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries
401(k) Retirement Savings Plan
(10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred Compensation
Plan for Directors and Executives Amended and Restated
December 30, 1997
(10)(J)(1) Lease Agreements between Hampshire Designers, Inc. and
Commerce Center Associates for the Company's Anderson,
South Carolina corporate offices dated May 1, 1994
(10)(J)(2) Lease Agreements between Hampshire Designers, Inc. and
Commerce Center Associates for the Company's Anderson,
South Carolina distribution center dated May 1, 1994
(Exhibits continued on next page)
(Exhibits continued from previous page)
(10)(J)(3) Lease Agreement between Hampshire Designers, Inc.
and Leslie R. Woodworth, et al for the Winona, Minnesota
manufacturing plant dated October 10, 1995
(10)(J)(4) Lease Agreement between the Hampshire Designers, Inc.
and Pete Woodworth and Joyce Woodworth for the La Crescent,
Minnesota manufacturing plant dated October 10, 1995
(10)(K) Loan and Security Agreement between Hampshire Hosiery, Inc.
and MetLife Capital Corporation, dated July 30, 1993
(10)(K)(1) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated May 13, 1994
(10)(K)(2) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated October 12, 1994
(10)(K)(3) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated September 22, 1995
(10)(M) Agreement between Glamourette Fashion Mills, Inc. and
The Commonwealth of Puerto Rico on Repatriation of Earnings
(the "Closing Agreement"), dated June 30, 1993
(10)(N) Loan and Security Agreement between Hampshire Designers, Inc.
and SouthTrust Bank of Alabama, N.A. dated May 1, 1994
(10)(O) Loan and Security Agreement between Hampshire Designers, Inc.
and Central Fidelity National Bank dated February 8, 1995
(10)(Q) Loan Agreement between Hampshire Designers, Inc. and
NationsBank of South Carolina, N.A. dated June 27, 1995
(11) Statement Re Computation of Income per Share
(21) Subsidiaries of the Company
(23) Consent of Price Waterhouse LLP
(27) Financial Data Schedule