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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. For the fiscal year ended December 31, 1998.
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 29625
(Address, Including Zip Code, of Registrant's Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (864) 225-6232
Securities registered pursuant to Section 12(b) of the Act: (Title of class)
None.
Securities registered pursuant to Section 12(g) of the Act: (Title of class)
Common Stock, $.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 19, 1999,
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
$13,315,000. 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 19, 1999, the Registrant had outstanding 4,208,246 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's Definitive Proxy Statement, relative to its
1999 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
1998 ANNUAL REPORT
Table of Contents
Page
Part I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for 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 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Transactions 14
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 15
Signature Page 18
Consolidated Financial Statements F-1
Financial Statement Schedules F-23
Quarterly Financial and Stock Data F-26
2
PART I
ITEM 1 - BUSINESS
GENERAL
- -------
Hampshire Group, Limited ("Hampshire Group" or the "Company") operates two
business segments - Sweaters and Investments. Hampshire Designers, Inc. is the
largest manufacturer of sweaters in North America. 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 of this report.
Hampshire Group, through a predecessor firm, has been engaged in the manufacture
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. Secondly, the Company has developed
superior international sourcing abilities.
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 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 collaboration with the customers to ensure that the consumer
appeal desired by 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 the
finest quality yarns and each 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 applied by the Company's employees, and occasionally by the
customers' quality control personnel, to ensure that the quality demands of the
customers are being met. In international sourcing, the Company utilizes both
sourcing agents and inspection agencies to obtain the assurances that those
goods manufactured outside meet the same high quality standards applied to the
goods produced in the Company's manufacturing facilities.
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 providing just-in-time delivery of
merchandise 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.
- -------------------------------------------------------------------------------
"Cautionary Disclosure Regarding Forward-Looking Statements"
When used in this document in general and in the Outlook Section of Management's
Discussion and Analysis in particular, the words "expects", "anticipates" and
similar expressions are intended to identify forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrences of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, in this report, as well as the Company's other filings
under the Securities Exchange Act of 1934.
3
The Company is a leading supplier in the women's sweater moderate-price category
and 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 world-wide sweater sourcing capabilities.
The acquisition of San Francisco Knitworks, Inc. ("SFK") and Segue, Limited
("Segue") expanded the Company's business into the women's better sweater
market. Segue also has worldwide sourcing capabilities. The acquisition in 1995
of Winona Knitting Mills ("Winona") expanded the sweater business by providing a
strong customer base in the men's sweater market. The Company's men's sweater
business was extended further in 1998 by obtaining licenses to produce sweaters
under nationally known brands covering the entire range of men's sweaters sold
by department stores.
To diversify the asset base, the Company has established Hampshire Investments,
Limited to invest primarily in real properties and common stock of apparel
companies.
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, 1998 sales consisted of
approximately 50% women's and 50% men's sweaters; and approximately 50% self
manufactured and 50% outsourced. Further, the 1998 sales consisted of
approximately 50% branded and 50% private-label merchandise. This mix better
enables the Company to be the complete source for the sweater requirements of
its customers.
Designers Originals
- -------------------
Designers Originals sweaters are sold in the moderate-price women's market,
but possess manufacturing details usually found only on more expensive sweaters.
The 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
primarily in classic designs for which there is continuing customer demands.
The Company has historical relationships with many of its approximately 1,600
customers which include department stores such as JC Penney, Dillard's
Department Stores, May Company, Federated Department Stores and specialty
stores. The sweaters are sold by Company employees with senior management
participating in the presentations to the larger accounts.
The Company manufactures the majority of 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. Quality evaluation includes
three full inspections of all sweaters - after dying, after finishing, and
during folding and packaging. Our manufacturing facilities have been evaluated
and highly rated to the high quality standards of our customers, including JC
Penney, and Lands' End.
The Company utilizes Quick Response automatic reordering through EDI for many of
its customers. Because of the consistent demand for the 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 the
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 sales primarily in the women's
moderate-price market. These products, which are marketed under the brand names
Designers Originals Sport, Designers Originals Studio, and Moving Bleu, were
among the Company's fastest-growing lines in 1998. A variety of new patterns and
designs have been incorporated into the line for 1999.
4
Men's Branded and Private-Label Line
- ------------------------------------
In 1995, the Company acquired Winona Knitting Mills, which has manufactured
branded and private-label men's sweaters since 1943. Approximately 55% of the
men's sweaters sold during 1998 were manufactured in the Company's facilities in
Winona, Minnesota and the remaining sweaters were produced by contractors
located primarily in the United States and Mexico.
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, Lake Harmony Rowing Club and
Landscape, are sold to retailers including Dillard's Department Stores,
Federated Department Stores and JC Penney.
Men's Designer Branded Lines
- ----------------------------
Effective January 1, 1998, the Company acquired the following licenses to
produce and market men's sweaters: Jantzen, 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 Company
believes that Jantzen is one of the most important men's sweater brand in the
United States. The branded sweaters are designed by the Company and produced
internationally by contractors to the specifications of the Company.
The sweaters are sold to large department and specialty stores across the United
States. Major customers include Federated Department Stores, May Company, JC
Penney, Mercantile Stores, Belks and Sears. The sweaters are sold by two
employees and five independent representatives.
Competition
- -----------
Competition in the sweater industry primarily is based on product design, 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 and
quicker turn around time, providing a better quality product to meet customers'
requirements. The Company is developing manufacturing capabilities in areas
where costs are competitive, including Southeast Asia and in Mexico.
INVESTMENT OPERATIONS
- ---------------------
Hampshire Investments, Limited ("Hampshire Investments") was established by the
Company in 1997 to diversify the asset base of the Company and to increase
stockholder value in the long term. In 1997 Hampshire Investments invested
approximately $5 million in real property and in a mutual fund holding common
stock of natural resource companies in Russia. In 1998 the subsidiary recorded a
reserve of $2.5 million charge for assets impairment primarily due to the effect
of the devaluation of the Russian ruble.
The balance of the investments were made primarily in real property and publicly
traded apparel and textile stocks. Investments' holdings include real property
for development and rental income. At the end of 1998, the value of investments
was approximately $15.5 million, of which approximately 60% was real estate and
40% was common stock.
The Company intends to utilize not in excess of one-half of its annual net
income for Hampshire Investments. The investment emphasis will be on undervalued
assets.
Ludwig Kuttner, 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, primarily makes the investment decisions of
Hampshire Investments.
Seasonality
- -----------
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.
Backlog
- -------
The sales order backlog for the sweater segment was approximately $34.7 million
as of March 5, 1999, compared with approximately $38.5 as of March 6, 1998. The
timing of the placement of seasonal orders by customers affects the backlog;
accordingly, a comparison of backlog from year to year is not indicative of a
trend in sales for the year.
Trademarks
- ----------
The Company considers its trademarks to have value in the marketing of its
products; therefore, all significant trademarks of the Company are registered.
5
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 15% and 19% of consolidated sales for
1998 and 1997, respectively. The Company's five largest customers accounted for
approximately 48% of the Company's consolidated sales in 1998, compared with 41%
in 1997.
Credit and Collection
- ---------------------
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 5, 1999, the Company had approximately 2,125 full-time employees and
25 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 92
employees under an agreement expiring in May 2001.
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 World Trade Organization was established in 1995 as the governing body for
international trade between the United States and 140 foreign countries. This
Agreement, over a ten year period, 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.
6
ITEM 2 - PROPERTIES
The Company leases its Anderson, South Carolina corporate office and its New
York sales office and showroom. All of the operating subsidiaries of the Company
lease manufacturing plants and distribution centers, except Hampshire Brands
which owns its distribution center.
- ------------------------------------------------------------------------------
Square Lease
Properties Footage Expiration(1)
- --------------------------------------------------- ------- ------------
Corporate Offices - Anderson, South Carolina 10,500 04/30/06
Sales Office and Showroom - New York, New York 24,000 08/31/11
Hampshire Designers:
Distribution Center - Anderson, South Carolina 57,000 04/30/06
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 Center - Winona, Minnesota 36,000 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 - LaCrescent, Minnesota 15,600 10/31/09
Hampshire Hosiery (discontinued operations):
Knitting and Sewing Plant - Spruce Pine,
North Carolina 37,000 Owned
Finishing Plant and Distribution Facility -
Spruce Pine, North Carolina 132,700 Owned
- -------------------------------------------------------------------------------
(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, results of operations or cash flows.
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 1998.
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 1996, 1997 and 1998 are presented on Page F-25 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 19, 1999 was 1,300.
The Company has not declared any dividends with respect to its Common Stock,
subsequent to the effective date of its 1992 initial public offering. 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 closed in June
1998, contains covenants placing limitations on "restricted payments", which
includes payment of cash dividends. See Note 9 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, 1998 1997 1996 1995(3) 1994
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA (1)
Net sales $168,688 $140,807 $117,575 $84,924 $55,984
Cost of goods sold 133,769 107,726 88,395 62,161 39,063
-----------------------------------------------
Gross profit 34,919 33,081 29,180 22,763 16,921
Other revenue 507 43 942 1,357 -
-----------------------------------------------
35,426 33,124 30,122 24,120 16,921
Selling, general and admin.
expenses 24,971 21,156 19,494 16,861 9,394
Asset impairment charge 2,500 - 667 - -
-----------------------------------------------
Income from continuing operations 7,955 11,968 9,961 7,259 7,527
Other income (expense):
Interest expense (1,696) (824) (716) (488) (188)
Interest income 243 363 195 297 31
Other 502 (139) (90) 262 254
-----------------------------------------------
Income before income taxes 7,004 11,368 9,350 7,330 7,624
Income tax (provision) benefit:
Current (1,471) (2,649) (1,780) (998) (1,137)
Deferred 194 200 3,900(2) 278 109
-----------------------------------------------
Net income from continuing
operations $5,727 $8,919 $11,470 $6,610 $6,596
===============================================
Net income per share from
continuing operations: Basic $1.39 $2.27 $2.99 $1.82 $1.84
-----------------------------------------------
Diluted $1.29 $2.00 $2.62 $1.66 $1.76
-----------------------------------------------
- -------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
BALANCE SHEET DATA
Cash and cash equivalents $ 13,886 $12,003 $20,385 $10,034 $10,712
Working capital 51,283 36,303 37,220 29,675 22,349
Total assets 100,848 80,585 71,930 66,438 42,966
- -------------------------------------------------------------------------------
Long-term debt (less current portion)
and redeemable preferred stock 22,505 7,166 10,869 13,817 7,270
Total debt (4) 24,287 10,577 14,364 18,569 8,860
Common stockholders' equity (5) 63,403 57,710 47,275 34,755 25,863
- -------------------------------------------------------------------------------
Book value per share $15.03 $13.96 $12.17 $9.21 $7.47
- -------------------------------------------------------------------------------
(1) The Statement of Operations has been restated to eliminate the revenues and
expenses of discontinued operations.
(2) Net income for 1996 includes a $3.9 million adjustment to the Company's
deferred tax account, and earnings per share include $0.89 relative to the
adjustment.
(3) Includes the results of operations of Winona Knitting Mills
from October 11, 1995.
(4) Includes long-term debt, current portion thereof, borrowings under lines
of credit, related party debt and redeemable preferred stock.
(5) 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
RESULTS OF OPERATIONS OF COMPANY SEGMENTS
The following table sets forth information with respect to the segments of the
Company's business.
Year Ended December 31, (in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Net sales Sweaters $168,688 $140,807 $117,575
- ------------------------------------------------------------------------------
Gross profit Sweaters 34,919 33,081 29,180
20.7% 23.5% 24.8%
- -------------------------------------------------------------------------------
Other revenue Sweaters - - 942
Investments 507 43 -
- -------------------------------------------------------------------------------
Selling, general and Sweaters 21,966 18,350 17,040
administrative expenses Corporate 2,523 2,706 2,454
Investments 482 100 -
------------------------------------
24,971 21,156 19,494
14.8% 15.0% 16.6%
Asset impairment charge Investments 2,500 - 667
------------------------------------
27,471 21,156 20,161
- -------------------------------------------------------------------------------
Operating profit Sweaters 12,953 14,731 12,415
Corporate (2,523) (2,706) (2,454)
Investments (2,475) (57) -
------------------------------------
Income from operations 7,955 11,968 9,961
4.7% 8.5% 8.5%
Interest expense (1,696) (824) (716)
Interest income 243 363 195
Other income (expense) 502 (139) (90)
------------------------------------
Income before income taxes $ 7,004 $11,368 $ 9,350
- -------------------------------------------------------------------------------
Revenue by United States $169,086 $140,850 $118,517
geographic area Russia 99 - -
Europe 10 - -
-----------------------------------
$169,195 $140,850 $118,517
- -------------------------------------------------------------------------------
Additional segment data is provided in Note 18 of the consolidated financial
statements included in this Annual Report.
10
RESULTS OF OPERATIONS
1998 Compared With 1997
- -----------------------
The consolidated net income of the Company from continuing operations for the
year ended December 31, 1998 was $5,727,000, or $1.29 per share on a diluted
basis. This represents a decrease of $3,192,000 when compared with net income
from continuing operations of $8,919,000, or $2.00 per share on a diluted basis,
for the preceding year. The income from continuing operations for 1998 included
$2,500,000 for asset impairment principally to reflect the devaluation of the
ruble on certain Russian investments, which amounted to a reduction of $0.56 per
share on a diluted basis.
Consolidated nets sales of the Company of continuing operations increased 19.8%
to $168,688,000 for the year 1998 from $140,807,000 in the prior year. The
increase in sales can be attributed primarily to the success achieved by Segue
in developing strong sales and worldwide sourcing relationships and the
establishment of the branded men's lines. Of the overall 19.8% increase, growth
in unit volume accounted for 25.8% increase, offset by a 6.0% decrease resulting
from change in product mix and average price of units sold. This decrease is
principally the result of price reductions from intense competition in the
sweater market.
Gross profit from the Company's continuing operations increased $1,838,000, or
5.6%; however, as a percent of net sales the gross margin decreased 2.8% to
20.7%. The decrease can be attributed primarily to intense competition which
resulted in lower prices and lower margins. A second factor that had a
significant impact on the cost of goods produced was the introduction of a new
fiber component in the manufacturing process of one of the sweater manufacturing
plants of the Company. In introducing the new fiber, inefficiencies occurred
consisting of higher than average irregulars and lower than usual production. A
third factor adversely affecting the margin was the unseasonably warm weather
experienced during the peak retail season for sweaters. This resulted in higher
than normal mark-down allowances for customers. These factors were partially
offset by the success achieved by our branded men's lines and reduced costs
resulting from international sourcing.
Hampshire Investments, Limited, the investment segment of the Company
established in 1997, had net loss of $2,545,000 for the year. The loss included
the $2,500,000 write-down resulting principally from the devaluation of the
Russian ruble.
Selling, general and administrative expenses ("SG&A") for the continuing
operations of the Company was $24,971,000 for the year 1998 compared with
$21,156,000 for the preceding year. The increase occurred primarily because of
increased commission and shipping costs directly associated with the higher
sales generated by Hampshire Brands. As a percent of sales, SG&A was 14.8% of
net sales, a 0.2% reduction from the previous year.
Income from continuing operations was $10,455,000 for the year 1998, excluding
the $2,500,000 asset impairment of the Investments segment, compared with
$11,968,000 for the previous year. The decrease resulted principally from the
reduction in gross margin.
The net income tax provision decreased to $1,277,000 in 1998 compared with
$2,449,000 in 1997. The 3.3% decrease in the effective tax rate from 21.5% in
1997 to 18.2% for 1998 is primarily the result of a smaller percentage of
taxable income being generated in the United States and increased deferred state
tax credit.
The effective tax rate is lower than the statutory rate due to (i) the
utilization of certain net operating loss carry-forwards available to the
Company to offset taxable income and (ii) substantially all of the income of the
Company's Puerto Rican subsidiary is exempt from federal regular income taxes
pursuant to an election under Section 936 of the Internal Revenue Code. Section
936 has been repealed and its provisions will be phased-out by the year 2005.
During the fourth quarter of 1998, the Company decided to dispose of the hosiery
business and reported results of the segment as discontinued operations. For the
year ended December 31, 1998, the Hosiery segment generated net sales of
$24,118,000 and an after-tax loss of $214,000. The Hosiery segment has been
treated as a discontinued operation in the consolidated financial statements and
an after-tax accrual of $500,000 has been charged against the 1998 income for
estimated loss on disposal of the assets.
1997 Compared With 1996
- -----------------------
The consolidated net income from continuing operation of the Company was
$8,919,000 or $2.00 per share on a diluted basis. This represents an increase of
$1,349,000 or 17.8% when compared with the $7,570,000 or $1.73 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 sweater segment increased 19.8% to $140,807,000,
as compared with $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%.
11
Consolidated gross profit of the Company increased $3,901,000 or 13.4%, but as a
percentage of net sales, the gross margin decreased by 1.3% to 23.5%. The
decrease resulted from lower gross profit percentage of the imported products.
The Sweater segment gross profit as a percentage of sales decreased by 1.3%,
resulting from several factors. First, a decrease in sales of Designers Original
sweaters resulted in smaller 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.
Selling, general and administrative expenses ("SG&A") as a percentage of net
sales decreased by 1.6% for 1997 compared with 1996, excluding the write-off in
1996 of impaired goodwill of $667,000 with respect to San Francisco Knitworks.
The Sweater segment was the leading contributor to the decrease with a 1.5%
decrease in 1997, principally due to the increase in volume spreading the fixed
cost over a larger base of sales.
Income from continuing operations increased $2,007,000 to $11,968,000. The 20.1%
increase resulted primarily from the increased volume with the operating profit
percentage remaining constant at 8.5%.
The net income tax provision increased to $2,449,000 in 1997 compared with
$1,780,000 in 1996, excluding the $3,900,000 adjustment to the Company's
deferred tax asset account. The 2.5% increase in effective tax rate from 19.0%
in 1996 to 21.5% for 1997 is primarily the result of a larger percentage of
taxable income being generated in the United States. The Company's tax structure
and effective income tax rate are more fully described in Note 10 to the
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The liquidity and capital requirements of the Company relate to funding working
capital for current operations (principally 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 long-term notes.
The Company has a principal credit facility which is subject to renegotiation on
or before May 26, 1999. The credit facility consists of $42 million combined
line of credit and letter of credit facility 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 $12 million during the period from March 1 to
October 31.
Advances 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
collateralized pari passu with the Senior Notes by the trade accounts receivable
of Hampshire Designers and the common stock of all the subsidiaries of the
Company. Letters of credit issued under the facility are collateralized by the
inventory shipped pursuant to the letters of credit.
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 advances outstanding under
all lines of credit during 1998 was $36,595,000 and the average amount
outstanding during the borrowing period was approximately $15,980,000. At
December 31, 1998 there were no advances outstanding.
During 1998, the Company sold $15 million of 7.05% long-term notes to two
insurance companies (the "Senior Notes") with repayment terms of seven equal
annual installments commencing January 2002. Interest is payable semi-annually
and the loan is collateralized pari passu with the Company's bank revolving
credit facility as more fully explained in Note 9 to the consolidated financial
statements.
The Company ended 1998 with cash and cash equivalents totaling $13,886,000, an
increase of $1,883,000 over the previous year. Net cash was impacted by a
$6,383,000 increase in inventory and a $7,960,000 increase in accounts
receivable from continuing operations as compared with 1997. Both elements
resulted primarily from the startup of Hampshire Brands.
Net cash used to fund capital expenditures was $3,094,000. 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 1998 the Company increased the investments of
Hampshire Investments by $9,126,000. The investments primarily consist of
publicly traded apparel common stocks and real property for development and
rental income. The Company intends to invest not in excess of one-half of the
annual income in the Investment segment.
12
The Board of Directors of the Company had authorized management to purchase
from time-to-time in the open market up to 140,000 shares of its common stock.
During 1998, the Company purchased 44,200 shares of common stock for $745,545.
Such purchases approximated the number of shares required for funding the
Company's Common Stock Purchase Plan.
Management believes that cash flow from operations, available borrowings under
the credit facilities and other long-term borrowing will provide adequate
resources to meet the Company's capital requirements and operational needs for
the foreseeable future.
YEAR 2000 READINESS
- -------------------
The Company has developed and is implementing a strategic plan to address Year
2000 issues. The Year 2000 issue involves the risk that various problems may
result from the improper processing of dates and date-sensitive calculations by
computers and other equipment as the year 2000 approaches. The Company and its
subsidiaries conduct on-going employee education on the issue and have attempted
to identify all information technology (computers, software, etc.) and
non-information technology (machinery, alarms, etc.) that may be affected by the
Year 2000 date change.
The Company began in 1996 implementing its plan to ensure that all mission
critical software of its systems will function properly in the year 2000 and
thereafter. The majority of the software used by the corporate office and all
operations other than Hampshire Brands and Winona Knitting Mills has been
developed in-house; therefore, the emphasis has been primarily on modifying
these systems. The systems used by Hampshire Brands and Winona Knitting Mills
have been modified, tested and certified by the third party vendors who supplied
the software.
The Company believes that the conversion of substantially all critical operating
systems will be completed by June 1999 and that its customers are aware of and
are addressing their Year 2000 issues. However, in the Company's most reasonably
likely worse case scenario, some portion of a critical system may not function
properly. If a critical system temporarily fail to perform properly, the Company
will invoke its contingency plan to correct the problem, The Company will incur
extra costs for salaries and for independent expert assistance. These costs are
not expected to be material.
The Company intends to make a complete test of its hardware as well as software
during the 4th of July shut-down week. Management estimated that on December 31,
1998 the project was 90% complete. The Company has developed contingency plans
to mitigate the potential effects of a disruption in normal operations resulting
from Year 2000 problems. The plans include, among other alternatives, operating
on substitute hardware.
The Company's Directors & Officers liability insurance policy was rewritten upon
renewal in August 1998 and coverage of Year 2000 issues was added.
The direct cost of the projects solely intended to correct Year 2000 problems
are currently estimated at less than $1 million of which approximately $800,000
has been expended or committed to as of December 31, 1998. With the exception of
approximately $100,000 for outside software enhancements, all other costs have
been expensed as incurred. The Company does not expect any cost increases above
its current estimates to have a material effect on its financial results. The
Company has been in contact with its significant suppliers and customers with
which its systems interface regarding Year 2000 compliance and does not
anticipate any problems relating to the exchange of data.
The preceding discussion of the Year 2000 issue includes forward-looking
statements reflecting management's current assessments and estimates and which
involve risks and uncertainties. Various factors could cause actual results to
differ materially from those expected by such assessments and forward-looking
statements. Factors that might affect the timely and satisfactory completion of
the Year 2000 project include, but are not limited to, vendor representations
and timely corrections of hardware or software problems, the readiness of key
utilities, suppliers and customers, and similar uncertainties. The Company's
management of the project is an ongoing process involving continual evaluation.
Unanticipated problems could emerge and alternative solutions may be devised
that may be more costly than anticipated or more difficult to solve.
OUTLOOK
- -------
The Company has experienced substantial growth in net sales over the past few
years. The growth in sales is attributable to the acquisition and business
development strategy of the sweater segment. Sales of the men's branded products
under the Jantzen, Geoffrey Beene, Ron Chereskin and Robert Stock licenses,
contributed in excess of $25 million in 1998.
The Company continues to believe that the 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 very cognizant
of the pricing pressures within the market which could adversely affect earnings
of the Company.
13
ITEM 7A - MARKET RISK
The long term debt of the Company is at fixed interest rates which were at
market when the debt was issued and which approximates market interest rates at
December 31, 1998. The short-term debt of the Company has variable interest
rates based on the prime rate of the financial institution purchasing the debt.
The Company had no short-term debt at December 31, 1998.
In purchasing sweaters from foreign manufacturers, the Company uses letters
of credit which require the payment of dollars upon receipt of bills of lading
for the sweaters.
Hampshire Investments does not issue or own foreign indetedness. Hampshire
Investments either purchases foreign based assets with dollars or with foreign
currency purchased with dollars. Real property which is owned by Hampshire
Investments and which is located outside the United States is leased for dollars
and not foreign currency. The primary market risk which Hampshire Investments
has with respect to foreign currencies is the impact that fluctuations in such
currencies have on the businesses of the lessees of such real property and on
the foreign based businesses and the foreign based funds in which Hampshire
Investments owns equity.
Hampshire Investments limits its market risk in the common stock of publicly
traded apparel companies primarily by limiting the amount of its investments. In
addition to following all of its investments closely, Hampshire Investments
limits the market risk, of its investments by limiting the amount of the
aggregate investments to not in excess of 50% of annual net income of the
Company on a cumulative basis.
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 1998.
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 1999 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 1999 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 1999 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 1999 Proxy Statement.
14
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-2 of this
Annual Report on Form 10-K. All other schedules have been omitted
because the required information is shown in the consolidated financial
statements or notes thereto, or they are not applicable.
(3)Exhibits:
Exhibit No. Description Footnote
------------ ---------------------------------------------- --------
Exhibits Incorporated by References:
-----------------------------------
(3)(A) Restated Certificate of incorporation of Hampshire
Group, Limited 2
(3)(A)(1) Certificate of Amendment to the Certificate of
Incorporation of Hampshire Group, Limited 2
(3)(A)(2) Amended and Restated By-Laws of Hampshire Group,
Limited 2
(3)(B)(2) Agreement of Merger between Hampshire Hosiery, Inc.
and Hampshire Designers, Inc. dated June 26, 1995 2
(3)(B)(3) Agreement of Merger between Segue (America) Limited
and H.G. Knitwear, Inc. dated December 26, 1995 2
(3)(B)(4) Agreement and Plan of Merger among Hampshire Group,
Limited, The Winona Knitting Mills, Inc. and
Peter and Joyce Woodworth dated June 5, 1995 2
(3)(B)(5) Asset Purchase Agreement among Segue (America)
Limited, Segue, Ltd. and Neil Friedman dated
February 15, 1995 2
(10)(A)(2) Employment Agreement between Hampshire Designers,
Inc. and Peter Woodworth dated October 10, 1995 2
(10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option
Plan Amended and Restated effective June 7, 1995 2
(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 2
(10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries 401(k)
Retirement Savings Plan 2
- -------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's 1996 Annual Report on Form 10-K.
(2) Incorporated by reference to the Company's 1997 Annual Report on Form 10-K.
(Exhibits continued on next page)
15
(Exhibits continued from previous page)
Exhibit No. Description Footnote
- ------------ --------------------------------------------------- --------
(10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred
Compensation Plan for Directors and Executives Amended
and Restated December 30, 1997 2
(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 2
(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 2
(10)(K)(1) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated May 13, 1994 2
(10)(K)(2) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated October 12, 1994 2
(10)(K)(3) Loan and Security Agreement among San Francisco
Knitworks, Inc., Hampshire Designers, Inc. and
MetLife Capital Corporation dated September 22, 1995 2
(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)(M) Agreement between Glamourette Fashion Mills, Inc. and
The Commonwealth of Puerto Rico on Repatriation of
Earnings (the "Closing Agreement"), dated June 30, 1993 2
(10)(N) Loan and Security Agreement between Hampshire Designers,
Inc. and SouthTrust Bank of Alabama, N.A. dated
May 1, 1994 2
(10)(O) Loan and Security Agreement between Hampshire Designers,
Inc. and Central Fidelity National Bank dated
February 8, 1995 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)(Q) Loan Agreement between Hampshire Designers, Inc. and
NationsBank of South Carolina, N.A. dated June 27, 1995 2
(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
(Exhibits continued on next page)
16
(Exhibits continued from previous page)
Exhibits filed herewith:
-----------------------
(10)(A)(3) Employment Agreement between Hampshire Group, Limited and
Ludwig Kuttner dated as of January 1, 1998
(10)(H)(1) Note Purchase Agreement between Hampshire Group, Limited
Phoenix Home Life Mutual Insurance Company and
The Ohio National Life Insurance Company dated May 15, 1998
(10)(H)(2) Credit Agreement and Guaranty between Hampshire Group,
Limited and The Chase Manhattan Bank, Republic National
Bank of New York and NationsBank, N.A. Dated May 28, 1998
(10)(J)(5) Renewed Lease Agreement between Hampshire Designers, Inc.
and Commerce Center Associates, Inc. for the Company's
Anderson, South Carolina corporate offices dated August 1, 1998
(10)(J)(6) Renewed Lease Agreement between Hampshire Designers, Inc. and
Commerce Center Associates, Inc. for the Company's Anderson,
South Carolina distribution center dated August 1, 1998
(10)(R) Restated Term Note between MetLife Capital Corporation and
Hampshire Designers, Inc., dated July 30, 1998
(21) Subsidiaries of the Company
(23) Consent of PricewaterhouseCoopers LLP
(27) Financial Data Schedule
(b) There were no reports on Form 8-K filed in the fourth quarter of 1998.
17
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 19th day of March 1999.
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 19, 1999
Ludwig Kuttner President and Chief Executive Officer
(Principal Executive Officer)
/s/ CHARLES W. CLAYTON Vice President, Secretary, Treasurer March 19, 1999
Charles W. Clayton and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ HERBERT ELISH Director March 19, 1999
Herbert Elish
/s/ HARVEY L. SPERRY Director March 19, 1999
Harvey L. Sperry
/s/ EUGENE WARSAW Director March 19, 1999
Eugene Warsaw
/s/ JOEL GOLDBERG Director March 19, 1999
Joel Goldberg
/s/ PETER W. WOODWORTH Director March 19, 1999
Peter W. Woodworth
18
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, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, 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/ PricewaterhouseCoopers LLP
- ---------------------------------
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 11, 1999
F-1
HAMPSHIRE GROUP, LIMITED
Index To Consolidated Financial Statements
Page
----
Report of Independent Accountants F-1
Consolidated Balance Sheet F-3
Consolidated Statement of Income F-4
Consolidated Statement of Comprehensive Income F-5
Consolidated Statement of Cash Flows F-6
Consolidated Statement of Changes
in Stockholders' Equity F-7
Notes to Consolidated Financial Statements F-8 - F-21
Financial Statement Schedules
I. Valuation and Qualifying Accounts F-23
II. Real Estate and Accumulated Depreciation F-24 - F-25
Quarterly and Financial Stock Data F-26
F-2
HAMPSHIRE GROUP, LIMITED
Consolidated Balance Sheet
(in thousands, except share data)
December 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $13,886 $12,003
Available-for-sale securities 549 914
Accounts receivable trade - net 24,194 16,227
Other accounts receivable 1,428 434
Inventories 20,789 18,728
Deferred tax asset 4,006 3,198
Hosiery assets held for sale - net 774 -
Other current assets 597 508
-------------------------
Total current assets 66,223 52,012
Property, plant and equipment - net 13,677 15,093
Real property investments - net 8,679 4,127
Long-term investments 5,238 3,051
Trading securities held in retirement trust 1,087 547
Deferred tax asset 2,416 2,326
Intangible assets - net 3,390 3,385
Other assets 138 44
-------------------------
$100,848 $80,585
=========================
- --------------------------------------------------------------------------------
LIABILITIES
- -----------
Current liabilities:
Current portion of long-term debt $ 1,782 $ 3,411
Accounts payable 5,772 4,068
Accrued expenses and other liabilities 7,386 8,230
-------------------------
Total current liabilities 14,940 15,709
Long-term debt 20,777 6,209
Deferred compensation 1,728 957
Commitments and contingencies - -
-------------------------
Total liabilities 37,445 22,875
-------------------------
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
- --------------------
Common stock, $.10 par value; 4,253,492 and
4,191,721 shares issued and 4,218,246 and
4,135,125 outstanding 425 419
Additional paid-in capital 28,276 27,474
Retained earnings 35,459 30,886
Accumulated other comprehensive loss (188) (89)
Treasury stock, 35,246 and 59,210 shares at cost (569) (980)
-------------------------
Total stockholders' equity 63,403 57,710
-------------------------
$100,848 $80,585
=========================
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, 1998 1997 1996
- -------------------------------------------------------------------------------
Net sales $168,688 $140,807 $117,575
Cost of goods sold 133,769 107,726 88,395
---------------------------------
Gross profit 34,919 33,081 29,180
Other revenue 507 43 942
---------------------------------
35,426 33,124 30,122
Selling, general and administrative expenses 24,971 21,156 19,494
Asset impairment charge 2,500 - 667
---------------------------------
Income from operations 7,955 11,968 9,961
Other income (expense):
Interest expense (1,696) (824) (716)
Interest income 243 363 195
Other 502 (139) (90)
---------------------------------
Income before provision for income taxes 7,004 11,368 9,350
Income tax (provision) benefit:
Current (1,471) (2,649) (1,780)
Deferred 194 200 3,900
---------------------------------
Net income from continuing operations 5,727 8,919 11,470
Income (loss) from discontinued operations-net (214) 87 426
Loss from disposal of discontinued
operations-net (500) - -
---------------------------------
Net income 5,013 9,006 11,896
Preferred stock dividend requirements - (167) (184)
---------------------------------
Net income applicable to common stock $ 5,013 $ 8,839 $11,712
=================================
- -------------------------------------------------------------------------------
Net income per share from Basic $1.39 $2.27 $2.99
continuing operations: ---------------------------------
Diluted $1.29 $2.00 $2.62
---------------------------------
Net income per share: Basic $1.21 $2.29 $3.10
---------------------------------
Diluted $1.13 $2.02 $2.72
---------------------------------
Weighted average number Basic 4,128 3,856 3,778
of shares outstanding: ---------------------------------
Diluted 4,443 4,465 4,379
---------------------------------
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
HAMPSHIRE GROUP, LIMITED
Consolidated Statement of Comprehensive Income
(in thousands)
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
Net income $5,013 $9,006 $11,896
Other comprehensive income, net of tax:
Unrealized holding losses on securities
arising during periods 49 (89) -
Plus reclassification adjustment for
gains included in net income (148) - -
----------------------------------
Other comprehensive loss (99) (89) -
----------------------------------
Comprehensive income $4,914 $8,917 $11,896
==================================
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
HAMPSHIRE GROUP, LIMITED
Consolidated Statement of Cash Flows
(in thousands)
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 5,013 $ 9,006 $11,896
Loss (income) from discontinued operations 214 (87) (426)
Loss from disposal of discontinued operation 500 - -
----------------------------------
Income from continuing operations 5,727 8,919 11,470
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,397 3,508 3,471
Write-down of foreign investments 2,500 - -
Loss on impairment of asset - - 667
Loss on sale of assets 1 4 59
Deferred income taxes (781) (200) (3,900)
Tax benefit relating to common stock plans 227 100 122
Net change in operating assets and
liabilities, net of effects of acquired
or disposed companies:
Receivables (7,960) (4,132) 3,458
Inventories (6,383) (4,312) 3,506
Accounts payable 2,000 340 (247)
Accrued expenses and other liabilities 401 2,927 (1,733)
Other assets (42) (93) (153)
---------------------------------
Net cash provided by (used in)
continuing operations 87 7,061 16,720
Net cash provided by (used in)
discontinued operations (820) 957 211
---------------------------------
Net cash provided by (used in) operating
activities (733) 8,018 16,931
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (3,094) (4,400) (2,847)
Proceeds from sales of property and
equipment 580 4 110
Purchase of available-for-sale securities-net (622) (1,400) -
Purchase of real property and other
investments (9,126) (6,900) (503)
Additional purchase price of business
acquisition (265) - -
---------------------------------
Net cash used in investing activities (12,527) (12,696) (3,240)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 17,523 1,645 711
Debt issuance costs (112) - -
Repayment of long-term debt (2,939) (2,947) (4,245)
Proceeds from issuance of common stock 375 90 764
Repurchase of common stock warrants - (1,000) -
Redemption of preferred stock - - (308)
Cash dividends on preferred stock - (167) (184)
Reduction (purchase) of treasury stock - net 296 (1,325) (78)
---------------------------------
Net cash provided by (used in) financing
activities 15,143 (3,704) (3,340)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 1,883 (8,382) 10,351
Cash and cash equivalents - beginning of year 12,003 20,385 10,034
---------------------------------
Cash and cash equivalents - end of year $13,886 $12,003 $20,385
=================================
Supplementary disclosure of cash flow information
- -------------------------------------------------------------------------------
Cash paid during the year for:
Interest $1,434 $1,329 $1,304
Income taxes 1,387 2,152 1,952
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
HAMPSHIRE GROUP, LIMITED
Consolidated Statement of Changes in Stockholders' Equity
(in thousands, except share data)
Years Ended December 31, 1996, 1997 and 1998
Additional
Common Stock Paid-In Retained
Shares Amount Capital Earnings
- ------------------------------------------------------------------------------
Balance - Beginning of year 3,771,624 $377 $22,979 $11,399
Net income for the year - - - 11,896
Purchase of treasury stock (62,500) - - -
Shares issued under the
common stock plans 176,379 12 752 -
Tax benefit relating to
common stock plans - - 122 -
Deferred compensation payable
in Company shares 245,763 - - -
Shares held in trust for deferred
compensation liability (245,763) - - -
Dividends on preferred stock - - - (184)
- -------------------------------------------------------------------------------
Balance - December 31, 1996 3,885,503 389 23,853 23,111
Net income for the year - - - 9,006
Additional shares issued
for business acquisition 14,223 1 264 -
Preferred stock conversion 276,995 27 3,267 -
Purchase of treasury stock (91,615) - - -
Shares issued under the
common stock plans 50,019 2 88 (92)
Repurchase of stock warrant - - (98) (902)
Repurchase of subsidiary stock - - - (70)
Tax benefit relating to
common stock plans - - 100 -
Deferred compensation payable
in Company shares 276,616 - - -
Shares held in trust for deferred
compensation liability (276,616) - - -
Unrealized loss on available-
for-sale securities - net - - - -
Dividends on preferred stock - - - (167)
- -------------------------------------------------------------------------------
Balance - December 31, 1997 4,135,125 419 27,474 30,886
Net income for the year - - - 5,013
Additional shares issued -
for business acquisition 17,952 2 204 -
Purchase of treasury stock (44,200) - - -
Shares issued under the
common stock plans 109,369 4 371 (440)
Tax benefit relating to
common stock plans - - 227 -
Deferred compensation payable
in Company shares 314,050 - - -
Shares held in trust for deferred
compensation liability (314,050) - - -
Unrealized loss on available-
for-sale securities - net - - - -
- -------------------------------------------------------------------------------
Balance - December 31, 1998 4,218,246 $425 $28,276 $35,459
================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Consolidated Statement of changes in Stockholders' Equity
(Continued)
Accumulated
Other
Comprehensive Treasury Total
Loss
- -------------------------------------------------------------------------------
Balance - Beginning of year - - $34,755
Net income for the year - - 11,896
Purchase of treasury stock - ($746) (746)
Shares issued under the
common stock plans - 668 1,432
Tax benefit relating to
common stock plans - - 122
Deferred compensation payable
in Company shares - 1,835 1,835
Shares held in trust for deferred
compensation liability - (1,835) (1,835)
Dividends on preferred stock - - (184)
- -------------------------------------------------------------------------------
Balance - December 31, 1996 - (78) 47,275
Net income for the year - - 9,006
Additional shares issued
for business acquisition - - 265
Preferred stock conversion - - 3,294
Purchase of treasury stock - (1,443) (1,443)
Shares issued under the
common stock plans - 541 539
Repurchase of stock warrant - - (1,000)
Repurchase of subsidiary stock - - (70)
Tax benefit relating to
common stock plans - - 100
Deferred compensation payable
in Company shares - 2,356 2,456
Shares held in trust for deferred
compensation liability - (2,456) (2,456)
Unrealized loss on available-
for-sale securities - net ($89) - (89)
Dividends on preferred stock - - (167)
- -------------------------------------------------------------------------------
Balance - December 31, 1997 (89) (980) 57,710
Net income for the year - - 5,013
Additional shares issued
for business acquisition - - 206
Purchase of treasury stock - (748) (748)
Shares issued under the
common stock plans - 1,159 1,094
Tax benefit relating to
common stock plans - - 227
Deferred compensation payable
in Company shares - 2,903 2,903
Shares held in trust for deferred
compensation liability - (2,903) (2,903)
Unrealized loss on available-
for-sale securities - net (99) - (99)
- -------------------------------------------------------------------------------
Balance - December 31, 1998 ($188) ($569) $63,403
================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
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 investing in and holding of
real estate and equity securities. The Company, with headquarters in Anderson,
South Carolina, operates sweater manufacturing and distribution plants in South
Carolina, Virginia, Minnesota, California and Puerto Rico. The Company's knitted
products are sold primarily in the United States through various retail and
mail-order companies. The investment company, with a subsidiary located in the
United Kingdom, acquires real properties and equity securities primarily in the
United States, Russia and Eastern Europe, for the purpose of investments.
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
- -----------------------------------
The fair value of long-term debt approximates its carrying value due to the fact
the rates do not differ materially from market rates of interest for similar
instruments.
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 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.
Intangible Assets
- -----------------
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
F-8
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. Rental
income is recognized on a straight-line basis.
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 accounting period. Actual results could differ from these estimates.
Presentation of Prior Year Data
- -------------------------------
Certain reclassifications have been made to data of prior years to conform with
the current-year presentation.
Earnings Per Common Share
- -------------------------
In 1997 the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128") which
superseded 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. Earnings per share for
prior years have been restated to provide comparable information.
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
- ---------------------------
On January 1, 1998, the Company adopted 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 is presented in other comprehensive income.
The Company also adopted on January 1, 1998 Statement of Financial Accounting
Standards No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS131"). SFAS 131 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 feels that determination of financial data for
disclosure by product is impractical; therefore, adoption of SFAS 131 had no
effect on the Company's segment reporting.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether the derivative is
F-9
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Due to the present limited use of derivative instruments,
management anticipates the adoption of SFAS 133 will not have a significant
impact on the Company's results of operations or its financial position.
Note 2 - Available-for-Sale Securities
- --------------------------------------
A summary of available-for-sale securities at December 31, 1998 and 1997 is set
forth in the adjacent table.
Gain or loss on the sale of securities has been reported in the Consolidated
Statement of Income under Other Income.
(in thousands) 1998 1997
- ------------------------------------
Original cost $847 $1,056
Unrealized gains 15 2
Unrealized losses (313) (144)
- ------------------------------------
Fair market value $549 $ 914
====================================
Note 3 - 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 for its trade receivables. The accounts receivable are stated
net of allowances for doubtful accounts and returns and allowances of $3,817,000
and $3,295,000 at December 31, 1998 and 1997, respectively. At December 31,
1998, and 1997, 60% and 55%, 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 two major customers (defined as sales in
excess of 10% of total sales ) which as a percentage of total sales accounted
for approximately 25%, 20% and 17% for 1998, 1997 and 1996, respectively.
Note 4 - Inventories
- --------------------
The components of inventories at December 31, 1998 and 1997 are set forth in the
adjacent table.
Approximately 39% and 58% of total inventories were valued using the LIFO method
at December 31, 1998 and 1997, respectively.
(in thousands) 1998 1997
- ------------------------------------------------
Finished goods $14,904 $11,512
Work-in-progress 3,460 6,938
Raw materials and supplies 4,126 4,393
- ------------------------------------------------
22,490 22,843
Less - Excess of current cost
over LIFO carrying value (1,701) (4,115)
- ------------------------------------------------
Total $20,789 $18,728
================================================
Note 5 - Property, Plant and Equipment
- --------------------------------------
The components of property, plant and equipment for December 31, 1998 and 1997
are set forth in the adjacent table. Depreciation expense was $3,797,000,
$3,202,000, and $2,979,000, respectively, for the years ended December 31, 1998,
1997 and 1996.
Estimated
(in thousands) Useful Lives 1998 1997
- ---------------------------------------------------------------------
Land $ 324 $ 225
Buildings and improvements 15-45 years 3,879 3,301
Leasehold improvements 5-10 years 4,515 4,980
Machinery and equipment 3-7 years 25,171 28,126
Furniture and fixtures 3-7 years 1,227 1,179
Transportation equipment 3-5 years 122 233
Construction in progress 127 76
- ---------------------------------------------------------------------
Total cost 35,365 38,120
Less - Accumulated depreciation (21,688) (23,027)
- ---------------------------------------------------------------------
Total $13,677 $15,093
=====================================================================
F-10
Note 6 - Real Property and Long-Term 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 historical cost, net of $1,850,000 asset impairment charge recorded in 1998.
Depreciation is provided over the estimated useful lives of the property, which
is 15 years.
Real Property Investments
- -------------------------------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------
Commercial property:
United States $5,933 $1,687
Russia 2,141 2,461
Europe 806 -
- -------------------------------------------------------
8,880 4,148
Less: Accumulated depreciation (201) (21)
- -------------------------------------------------------
Total $8,679 $4,127
=======================================================
Long-term investments consist principally of common stock of non-publicly traded
companies. The carrying values set forth in the adjacent table are shown net of
asset impairment charge of $650,000 recorded in 1998. To recognize the effect of
the devaluation of the Russian ruble, and other permanent impairment.
Long-Term Investments
- -------------------------------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------
United States $1,909 $ 827
Russia 131 -
Europe 3,198 2,224
- -------------------------------------------------------
Total $5,238 $3,051
=======================================================
Note 7 - Intangible Assets
- --------------------------
In connection with the merger of Winona Knitting Mills (the "Winona Division"),
the Company recorded an additional $413,000 and $530,000 in 1998 and 1997,
respectively, in goodwill as a result of certain payments to be made in
accordance with the contingent purchase price agreement.
Activity in intangible assets for the years ended December 31, 1998 and 1997 is
summarized in the adjacent table.
(in thousands) 1998 1997
- ------------------------------------------------------
Balance - beginning of year $3,385 $3,161
Addition from contingent purchase
price of Winona Knitting Mills 413 530
Other additions 12 -
Amortization during year (420) (306)
- ------------------------------------------------------
Balance - end of year $3,390 $3,385
======================================================
Note 8 - Accrued Expenses and Other Liabilities
- -----------------------------------------------
Accrued expenses and other liabilities at December 31, 1998 and 1997 are
summarized in the adjacent table.
(in thousands) 1998 1997
- ----------------------------------------
Compensation $1,870 $2,799
Interest 821 304
Income taxes 709 1,678
Medical and health care 956 836
Workers' compensation 629 501
Other 2,401 2,112
- ----------------------------------------
$7,386 $8,230
========================================
F-11
Note 9 - Borrowings
- -------------------
Revolving Credit Agreement
- --------------------------
The Company has renewed its principal credit facility through May 26, 1999 with
three participating commercial banks. The credit facility consists of a $42
million combined line of credit and letter of credit facility. Advances under
the facility 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; plus (ii)
a seasonal adjustment of up to $12 million during the period March 1 to October
31.
Advances under the facility bear interest at either the bank's prime rate or, at
the option of the Company, a fixed rate of LIBOR plus 1.5% for a fixed term. The
loan is collateralized, pari passu with the Senior Notes, by the trade accounts
receivable of Hampshire Designers, Inc. and its subsidiaries, other than certain
factored trade accounts receivable. In addition, letters of credit issued under
the facility are collateralized by the inventory shipped pursuant to the letters
of credit. The Company has pledged as collateral a $5 million insurance policy
on the life of its Chairman and the common stock of its subsidiaries; and, such
subsidiaries guarantee the performance of the Company.
The Company maintains an unsecured $2.5 million credit facility for Hampshire
Designers 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 Company's option, 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, 1998 or 1997. For a subsidiary of Hampshire Designers, the Company
maintains with a bank a $4 million facility which is used primarily to fund
international letters of credit. Advances on the facility bear interest at the
bank's prime rate and are collateralized by the inventory purchased pursuant
thereto and are guaranteed by Hampshire Group, Limited. Outstanding letters of
credit of all lines totaled approximately $6.4 million at December 31, 1998.
At December 31, 1998, a subsidiary of Hampshire Designers had available from a
commercial bank an unsecured $2 million credit facility 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, 1998 or 1997.
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 the prime rate plus 1%. The agreement requires a
commission rate of 1% of the factored accounts receivable.
Senior Notes Agreement
- ----------------------
The Senior Notes are collateralized pari passu by the trade accounts receivable
of Hampshire Designers, Inc. and its subsidiaries, other than certain factored
trade accounts receivable. The Company has also pledged as collateral a $5
million insurance policy on the life of its Chairman and the common stock of its
subsidiaries; and such subsidiaries guarantee the performance of the Company
under the Agreements, hereafter defined. Both the Revolving Credit Agreement and
the Senior Note Agreement (the "Agreements") contain covenants which require
certain financial performance and restrict certain payments by the Company and
the Restricted Subsidiaries (defined as Hampshire Designers, Inc. and its
Subsidiaries).
The covenants require maintenance of a consolidated tangible net worth not less
than $43 million plus 50% of the net income for the year 1998 and each
succeeding year; an average current ratio of not less than 1.75 to 1.00; a fixed
charge ratio of consolidated income for fixed charges for the period of four
consecutive fiscal quarters most recently ended of at least 2.50 times
consolidated fixed charges for such period and restricts funded debt to
F-12
capitalization ratio not to exceed 0.45 to 1.00. The Agreements also require a
short-term debt cleanup of 45 days during any 12-month period, restricts the
sale of assets and restricts payments of cash dividends and investments in the
non-restricted subsidiary.
Long-Term Debt
- ---------------
Long-term debt at December 31, 1998 and 1997 is composed of:
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Senior Notes payable to two insurance companies in seven
annual installments of $2,142,857 commencing January 2002,
interest at 7.05% per annum, payable semi-annually,
collateralized pari passu with the Revolving Credit Facility $15,000 -
Debt collateralized by real property
Note payable to a mortgage company in monthly installments
of $12,326, including interest at 7.36% through 2008 1,684 -
Note payable to a bank in monthly installments of $12,350,
including interest at 8.4% through 2007 922 $ 989
Note payable to a bank in monthly installments of $8,300,
including interest at 8.06% through 2008 (guaranteed by the
Company) 597 637
Other notes payable collateralized by real estate payable
in monthly installments of $9,400, including interest at
various rates from 7.25% to 8.00% 1,075 251
Debt collateralized by machinery and equipment
Notes payable to an insurance company in monthly installments
of $80,406 including interest at various rates from 7.55%
to 9.03% through 2000 1,152 3,568
Note payable to a bank in monthly installments of $30,150,
plus interest, at LIBOR plus 1.75%, adjusted quarterly,
through 2001 713 1,076
Note payable to a bank in monthly installments of $15,800,
including interest at 8.25% through 2002. 599 733
Other notes payable in monthly installments of approximately
$18,000, including interest at various rates from 5.88% to
10.3% through 2007 439 1,327
Unsecured debt
Note payable to Minnesota Economic Development Division in
monthly installments of $4,400, including interest at 4.0%
through 2007 378 414
Note payable to a related party plus interest at 9.08%, paid
December 1998 - 625
- -------------------------------------------------------------------------------
Total debt 22,559 9,620
Less - Amount payable within one year (1,782) (3,411)
- -------------------------------------------------------------------------------
Amount payable after one year $20,777 $6,209
===============================================================================
Maturities of long-term debt as of December 31, 1998 are summarized in the
adjacent table.
Year (in thousands)
- ------------------------------
1999 $1,782
2000 1,254
2001 566
2002 2,586
2003 2,681
Thereafter 13,690
- ------------------------------
$22,559
==============================
F-13
Note 10 - Income Taxes
- ----------------------
The components of income tax expense for the years ended December 31, 1998, 1997
and 1996 are set forth in the adjacent table.
(in thousands) 1998 1997 1996
- ----------------------------------------------
Current:
Federal $1,068 $2,201 $1,320
State 271 311 280
Puerto Rico 132 137 180
- ----------------------------------------------
1,471 2,649 1,780
- ----------------------------------------------
Deferred:
Federal 28 (200) (3,900)
State (222) - -
- ----------------------------------------------
(194) (200) (3,900)
- ----------------------------------------------
Total $1,277 $2,449 ($2,120)
==============================================
The domestic, Puerto Rico and foreign components of income (loss) before income
taxes are set forth in the adjacent table.
(in thousands) 1998 1997 1996
- ------------------------------------------------------
Domestic $5,244 $ 6,230 $3,615
Puerto Rico 4,183 5,138 5,735
Foreign (2,423) - -
- ------------------------------------------------------
Income before income taxes $7,004 $11,368 $9,350
======================================================
A reconciliation of the provision (benefit) for income taxes computed by
applying the statutory federal income tax rate to income from continuing
operations before income taxes and the Company's actual provision for income
taxes is set forth in the adjacent table.
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Tax provision at federal statutory rate $2,381 $3,865 $3,179
Increase (decrease) in tax arising from:
Effect of exemption of Puerto Rico
earnings from United States tax (1,422) (1,747) (1,950)
Puerto Rico taxes on income, including
withholding taxes 132 137 180
State taxes, less federal income tax benefit 85 174 159
Foreign operating losses 85 - -
Change in valuation allowance - - (4,618)
Other 16 20 930
- ---------------------------------------------------------------------------
$1,277 $2,449 ($2,120)
===========================================================================
F-14
A summary of the temporary differences and carryforwards giving rise to deferred
income tax assets and liabilities as of December 31, 1998 and 1997 is set forth
in the adjacent table.
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Deferred income tax assets:
Inventories $ 199 $ 249
Allowances for receivables 936 1,055
Write-down of assets not currently deductible 925 -
Accrued liabilities and other temporary differences 2,359 1,840
Unrealized losses on available-for-sale securities 110 53
Provision for discontinued operations 294 -
Net operating loss carryforwards 3,039 3,633
Tax credit carryforwards 697 1,034
- --------------------------------------------------------------------------------
Gross deferred income tax assets 8,559 7,864
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment (268) (471)
- --------------------------------------------------------------------------------
Gross deferred income tax liabilities (268) (471)
- --------------------------------------------------------------------------------
Valuation allowance for deferred income tax assets (1,869) (1,869)
- --------------------------------------------------------------------------------
Total $6,422 $5,524
================================================================================
The net operating loss carryforwards for federal income tax purposes expire as
set forth in the adjacent table.
(in thousands)
Year Regular Tax
- --------------------
2000 $ 159
2001 1,344
2002 1,384
2003 1,334
2004-2009 4,717
- --------------------
Total $8,938
====================
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 the extension of the grant, the Company has been granted 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
ranging from 0% to 5% on dividends. 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.
F-15
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
liabilities and therefore will 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 received dividends from Glamourette of approximately $2.0 million,
$5.0 million and $5.0 million in 1998, 1997 and 1996, respectively. The Company
has approximately $9.0 million of Glamourette's undistributed earnings which it
considers permanently invested. Additionally, any undistributed earnings of
other foreign subsidiaries are expected to be indefinitely reinvested overseas.
For this reason, deferred income taxes have not been provided thereon.
In January 1999, the Company received notice from the Internal Revenue Service
of an examination of the Company's consolidated tax return for the year ended
December 31, 1996. The examination has been completed and an adjustment letter
in the amount of $65,000 deficiency (after giving effect to the amended return
filed in 1997) has been issued and has been accepted by the Company.
In February 1998, the Internal Revenue Service commenced an examination of the
1995 tax return of the Company's Puerto Rican subsidiaries, Glamourette Fashion
Mills, Inc.; however, the examination has not been completed. 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.
Note 11 - Commitments and Contingencies
- ---------------------------------------
The Company leases premises and equipment under operating leases having terms
from monthly to 8 years. At December 31, 1998, 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 to the right:
Rent expenses on operating leases were $1,532,000, $1,596,000 and $1,636,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Year (in thousands)
- ----------------------
1999 $1,579
2000 1,627
2001 1,359
2002 1,005
2003 885
Thereafter 1,276
- ----------------------
Total $7,731
======================
The Company is, from time to time, involved in litigation incidental to the
conduct of its business. Management believes that no currently pending
litigation to which it is a party will have a material adverse effect on the
Company's consolidated financial condition or results of operations.
Note 12 - 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 in
October 1995, 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.
F-16
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
shares into common stock of the Company. Effective December 30, 1997, all shares
of Series A stock in the amount of $1,550,000 and Series D stock in the amount
of $1,744,000 were converted into 240,995 shares of Hampshire Group, Limited
common stock.
Note 13 - Stock Options, Warrants and Compensation Plans
- --------------------------------------------------------
In 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, 330,000 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
discretion of the Company's Board of Directors to executives and key employees
of the Company and its subsidiaries. No option may be granted with an exercise
price less than fair market value per share of common stock at the date of
grant. All options have a maximum term of 10 years and become fully exercisable
after a maximum of 5 years from the date of grant.
Stock option activity is set forth in the adjacent table.
Number of Weighted Average
Options Exercise Price
- -------------------------------------------------------------------
Outstanding - January 1, 1996 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
Granted 52,945 16.31
Exercised (65,767) 8.15
Canceled or expired (5,794) 10.77
- -------------------------------------------------------------------
Outstanding - December 31, 1998 412,016 $ 9.23
- -------------------------------------------------------------------
F-17
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 1998, 1997 or 1996. Additionally,
in accordance with SFAS 123, the Company is required to disclose fair value
information about its stock-based employee compensation plans for all periods
presented. 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 adjacent table.
1998 1997 1996
- --------------------------------------------------------
Expected life (years) 5.24 4.37 5.11
Expected volatility 22.73% 18.60% 21.40%
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 5.14% 6.54% 5.37%
Weighted-average fair values
of options granted $5.33 $5.07 $3.38
- ---------------------------------------------------------
The adjacent table sets forth the effect on net income and diluted earnings per
share had compensation cost been determined under SFAS 123.
(in thousands) 1998 1997 1996
- ---------------------------------------------------------------------
Net income: As reported $5,013 $9,006 $11,896
---------------------------
Pro forma $4,927 $8,930 $11,813
- ---------------------------------------------------------------------
Diluted earnings per share: As reported $1.13 $2.02 $2.72
---------------------------
Pro forma $1.11 $2.00 $2.70
- ---------------------------------------------------------------------
A summary of the current status of options outstanding at December 31, 1998, is
set forth in the table below.
Options Outstanding Options Exercisable
- ---------------------------------------------------- ------------------------
Weighted Weighted Weighted
Number Range of Average Average Number Average
Outstanding Exercise Exercise Remaining Exercisable Exercise
12/31/98 Prices Price Life 12/31/98 Price
- --------------------------------------------------- ------------------------
68,455 $5.81-$6.00 $ 5.84 1.51 68,455 $ 5.84
32,727 6.19 6.19 2.00 32,727 6.19
48,889 7.50 7.50 2.22 48,889 7.50
65,909 7.87 7.87 0.53 65,909 7.87
15,000 8.25 8.25 2.00 15,000 8.25
72,727 9.90 9.90 0.75 72,727 9.90
63,159 11.00-12.13 11.58 4.77 36,252 11.39
11,775 12.50-14.50 14.42 5.44 6,138 14.34
30,000 18.13 18.13 7.50 - -
3,375 22.69 22.69 6.50 844 22.69
- -------------------------------------------------- -------------------------
412,016 $9.23 346,941 $ 8.24
================================================== =========================
F-18
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 for $1 million ($7.534 per share), 132,728 of
these warrants leaving a balance of 205,454 outstanding.
Common Stock Purchase Plan
- --------------------------
Pursuant to the Hampshire Group, Limited 1992 Common Stock Purchase Plan for
Directors and Executives ("Stock Purchase Plan"), non-employee directors may
elect to use their fees as directors to purchase common stock of the Company.
Under the same provision, key executives may elect to use up to 10% of their
annual salaries and up to 40% of their annual bonuses to purchase common stock
of the Company under the Plan.
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 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 $487,000, $735,000 and $560,000 of their compensation for 1998,
1997 and 1996, respectively, to purchase common stock of the Company under the
Stock Purchase Plan. 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. The deferred compensation liability and the Company's shares are
presented as offsetting amounts in the stockholders' equity section on Page F-7
hereof.
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 1998 and 1997 the participants deferred $430,000 and $547,000,
respectively, with the resulting liability being included as deferred
compensation. To fund the deferred compensation liability, the Company has
invested the amounts deferred by the executives in certain mutual funds which
are presented as "Trading securities in retirement trust". The market value of
these mutual funds at December 31, 1998 and 1997, was $1,087,000 and $547,000,
respectively, which equal the liability of the Company at the respective date.
Since both the deferred liability and the related mutual funds are marked to
market, there is no effect on net income.
Note 14 - 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 $345,000, $346,000 and $313,000 in
1998, 1997 and 1996, respectively. Such matching contributions vest fully over
seven years of employment.
F-19
Note 15 - Related Party Transactions
- ------------------------------------
The Company leases certain buildings from an affiliated company. Ludwig Kuttner,
Chief Executive Officer of the Company, and his wife together own approximately
18% of the voting stock of the affiliate. Rent expense under such leases was
$208,000, $200,000 and $192,000 in 1998, 1997 and 1996, respectively. The
Company also leases certain buildings from a director of the Company and
President and Chief Executive Officer of the Winona Division, Peter Woodworth,
his wife and certain of his relatives. Rent expense under such leases was
$179,000, $162,000 and $135,000, respectively, for 1998, 1997 and 1996. 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.
A company owned by the adult son of Ludwig Kuttner is the general contractor
performing certain renovations on the real estate owned by the Company located
in Charlottesville, Virginia.
Note 16 - Discontinued Operations
- ---------------------------------
The Board of Directors of the Company approved a formal plan to discontinue the
operations and sell the assets of the Hampshire Hosiery Division, which is
engaged in the manufacture and sale of ladies' and children's hosiery and socks.
Accordingly, the operating results of the Hosiery segment have been reflected as
discontinued operations in the accompanying consolidated statement of income.
The management of the Hosiery division (the "Purchaser") has delivered to the
Company a letter of intent for the purchase of substantially all of the assets
and business of the Hosiery division. Details of a purchase agreement, which is
expected to close in April 1999, are currently being negotiated.
As a condition of the sale, the Company will retain the two manufacturing plants
located in Spruce Pine, North Carolina. The facilities will be leased to the
Purchaser for three years at $126,000 annually with a purchase option of
$840,000. The lease also provided for an option to renew for three additional
years at escalated rent. The Company also will retain certain machinery and
equipment, with a fair market value of approximately $1,700,000, which will be
leased to the Purchaser at fair market rates. The machinery and equipment
collateralize a purchase note payable by the Company of $695,000 and a note
payable of $1,091,000 which is being assumed by the Purchase but for which the
Company remains contingently liable.
Net sales for the Hosiery division for the years ended December 31, 1998 and
1997 was $24,118,000 and $23,621,000, respectively. Operating results for 1998,
restated on a discontinued operations basis was an operating loss of $214,000,
which combined with the after-tax accrual of $500,000 for estimated loss on
disposal of the Hosiery assets, amounts to $0.16 per share on a diluted basis.
For the year 1997, the Hosiery division produced a profit of $87,000, $0.02 per
share.
F-20
Note 17 - 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")
computations.
For the Year 1996 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares 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
================================================================================
For the Year 1997 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares 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
================================================================================
For the Year 1998 Numerator Denominator Per-Share
(in thousands, except per share data) Income Shares Amount
- --------------------------------------------------------------------------------
Basic EPS:
Income available to common stockholders $5,013 4,128 $1.21
Effect of dilutive securities:
Options/warrants - 315 -
- --------------------------------------------------------------------------------
Diluted EPS:
Income available to common stockholders
plus assumed conversions $5,013 4,443 $1.13
================================================================================
Note 18 - Industry Segments and Geographical Areas
- ---------------------------------------------------
The Company operates in two industry segments - Sweaters and Investments. The
Sweater segment includes sales of apparel, primarily women's and men's tops,
both knitted and woven. The products are sold to customers throughout the United
States of America including major department stores, specialty retail stores and
catalog companies. Some of the Company's major customers operate both retail and
mail-order businesses; therefore, it is impossible for the Company to determine
sales to the individual markets. The Investment segment makes investments both
domestically and internationally, principally in real property and common stock
of apparel companies.
(See segment data in the table on the following page.)
F-21
Industrial Segment Data
- -----------------------
Year Ended December 31, (in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Net sales Sweaters $168,688 $140,807 $117,575
Other revenue Sweaters - - 942
Investments 507 43 -
---------------------------------
$169,195 $140,850 $118,517
- -------------------------------------------------------------------------------
Gross profit Sweaters 34,919 33,081 29,180
20.7% 23.5% 24.8%
- -------------------------------------------------------------------------------
Revenue by United States $169,086 $140,850 $118,517
geographic area Russia 99 - -
Europe 10 - -
---------------------------------
$169,195 $140,850 $118,517
- -------------------------------------------------------------------------------
Interest income Sweaters $108 $ 28 $ 54
Corporate 112 272 141
Investments 23 63 -
---------------------------------
$243 $363 $195
- -------------------------------------------------------------------------------
Interest expense * Sweaters $1,262 $713 $594
Corporate 335 111 122
Investments 99 - -
---------------------------------
$1,696 $824 $716
*Net of intercompany interest eliminated in consolidation.
- -------------------------------------------------------------------------------
Income before income tax Sweaters $6,183 $9,655 $7,315
from continuing operations Corporate 3,336 1,712 2,035
Investments (2,515) 1 -
---------------------------------
$7,004 $11,368 $9,350
- -------------------------------------------------------------------------------
Income tax provision Sweaters $850 $1,750 $1,300
Corporate 591 899 480
Investments 30 - -
---------------------------------
$1,471 $2,649 $1,780
- -------------------------------------------------------------------------------
Identifiable assets Sweaters $60,080 $49,778 $41,277
Corporate 20,708 15,386 22,198
Investments 15,505 8,290 -
---------------------------------
96,293 73,454 63,475
Discontinued business 4,555 7,131 8,455
---------------------------------
$100,848 $80,585 $71,930
- -------------------------------------------------------------------------------
Capital expenditures Sweaters $3,084 $4,346 $2,829
Corporate 5 54 18
Investments 5 - -
---------------------------------
$3,094 $4,400 $2,847
- -------------------------------------------------------------------------------
Depreciation and Sweaters $4,195 $3,459 $3,445
amortization Corporate 22 28 26
Investments 180 21 -
---------------------------------
$4,397 $3,508 $3,471
- -------------------------------------------------------------------------------
Long-lived assets United States $19,464 $16,759 $13,596
Russia 2,086 2,461 -
Europe 806 - -
---------------------------------
$22,356 $19,220 $13,596
- -------------------------------------------------------------------------------
F-22
SCHUEDULE I
HAMPSHIRE GROUP, LIMITED
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance Charged to Charged Balance at
beginning sales and to Deduc- end of
of year expenses other tions year
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful
accounts $ 816 ($ 206) (1) - ($ 12) $ 598
Allowance for returns
and adjustments 2,479 4,296 - (3,556) 3,219
- --------------------------------------------------------------------------------
(1) Negative provision for doubtful accounts resulted from the elimination of
excess provisions in prior years for Hampshire Hosiery and Mary Jane
Marcasiano Divisions.
F-23
SCHEDULE II
1 of 2
HAMPSHIRE GROUP, LIMITED
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
December 31, 1998
Cost Capitalized
Subsequent
Initial Cost to Acquisition
---------------------------- ---------------
Encum- Land and Building
Properties brances Land Buildings Buildings Improvements
- --------------------------------------------------------------------------------
UNITED STATES
- -------------
Charlottesville-
Commercial Building -
Charlottesville, Virginia - $ 285 $ 397 $ 682 $ 417
Amity Mall-Shopping Center
Amityville, New York $ 597 187 664 851 63
2620 North Australian Ave
West Palm Beach, Florida 251 135 301 436 -
Fairfax Village-Shopping
Center - Washington, D.C. 2,258 764 1,687 2,451 34
Hidden Creek Ranch
Blanco, Texas - 999 - 999 -
- --------------------------------------------------------------------------------
Total United States
Real Property 3,106 2,370 3,049 5,419 514
- -------------------------------------------------------------------------------
ST PETERSBURG, RUSSIA
- ---------------------
Bolshaya Knonushennaya
No. 15, Apt. No. 2 - - 152 152 188
Nevsky 64 - - 330 330 206
Nevsky 11, Apt. No. 17 - - 34 34 -
Nevsky 43 - - 255 255 256
Nevsky 11, Apt. No. 6,
2nd Floor - - 182 182 199
Millionnaya 29; 2nd Floor - - 210 210 175
Nevsky 23, Apt. No. 4 - - 155 155 134
Nevsky 11, Apt. No. 6,
3rd Floor - - 182 182 111
Nevsky 23, Apt. No. 20
Hotel - - 203 203 219
Nevsky 64, Apt. No. 39 - - 130 130 82
Nevsky 11, Apt. No. 8,
2nd Floor - - 104 104 26
Nevsky 13, Apt. No. 9 - - 92 92 85
Millonaya 11, Embankment - - 175 175 24
Millonaya 29, Flat No. 5,
3rd Floor - - 80 80 2
- --------------------------------------------------------------------------------
Total Russian Real Property - - 2,284 2,284 1,707
Real Property Write-Down - - - - -
- --------------------------------------------------------------------------------
Net Russian Real Property - - 434 434 1,707
- --------------------------------------------------------------------------------
F-24
HAMPSHIRE GROUP, LIMITED REAL ESTATE AND ACCUMULATED DEPRECIATION (continued)
(in thousands)
December 31, 1998
Gross Amount at Which
Carried at End of Period
-------------------------------
Building
and Accumulated
Properties Land Improvements Total Depreciation
- --------------------------------------------------------------------------------
UNITED STATES
- -------------
Charlottesville-
Commercial Building -
Charlottesville, Virginia $ 285 $814 $1,099 ($40)
Amity Mall-Shopping Center
Amityville, New York 187 727 914 (51)
2620 North Australian Ave
West Palm Beach, Florida 135 301 436 (17)
Fairfax Village-Shopping
Center - Washington, D.C. 764 1,721 2,485 (38)
Hidden Creek Ranch
Blanco, Texas 999 - 999 -
- --------------------------------------------------------------------------------
Total United States
Real Property 2,370 3,563 5,933 (146)
- -------------------------------------------------------------------------------
ST PETERSBURG, RUSSIA
- ---------------------
Bolshaya Knonushennaya
No. 15, Apt. No. 2 - 340 340 (6)
Nevsky 64 - 536 536 (8)
Nevsky 11, Apt. No. 17 - 34 34 -
Nevsky 43 - 511 511 (9)
Nevsky 11, Apt. No. 6,
2nd Floor - 381 381 (6)
Millionnaya 29; 2nd Floor - 385 385 (6)
Nevsky 23, Apt. No. 4 - 289 289 (5)
Nevsky 11, Apt. No. 6,
3rd Floor - 293 293 (5)
Nevsky 23, Apt. No. 20
Hotel - 422 422 (7)
Nevsky 64, Apt. No. 39 - 212 212 -
Nevsky 11, Apt. No. 8,
2nd Floor - 130 130 -
Nevsky 13, Apt. No. 9 - 177 177 (3)
Millonaya 11, Embankment - 199 199 -
Millonaya 29, Flat No. 5,
3rd Floor - 82 82 -
- --------------------------------------------------------------------------------
Total Russian Real Property - 3,991 3,991 (55)
Real Property Write-Down - (1,850) (1,850) -
- --------------------------------------------------------------------------------
Net Russian Real Property - 2,141 2,141 (55)
- --------------------------------------------------------------------------------
F-24
SCHEDULE II
2 of 2
(continuted)
HAMPSHIRE GROUP, LIMITED
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
December 31, 1998
Cost Capitalized
Subsequent
Initial Cost to Acquisition
---------------------------- ---------------
Encum Land and Building
Properties brances Land Buildings Buildings Improvements
- --------------------------------------------------------------------------------
BUCHAREST, ROMANIA
- ------------------
Jean Texier Street,
No. 7, Apt. No. 1 - - 160 160 -
Nicolae Balcescu Blvd.
No. 5, Apt. No. 32 - - 60 60 -
Nicolae Balcescu Blvd.
No. 5, Apt. No. 35 - - 118 118 -
Television Blvd.
Apt. No. 1 - - 80 80 30
- -------------------------------------------------------------------------------
Total Romanian Real Property - - 418 418 30
- -------------------------------------------------------------------------------
PRAGUE, CZECH REPUBLIC
- ---------------------
Office Building, No. 1 - - 136 136 -
Office Building, No. 2 - - 222 222 -
- --------------------------------------------------------------------------------
Total Czech Republic
Real Property - - 358 358 -
- --------------------------------------------------------------------------------
$3,106 $2,370 $6,109 $8,479 $2,251
- --------------------------------------------------------------------------------
Gross Amount at Which
Carried at End of Period
-------------------------------
Building
and Accumulated
Properties Land Improvements Total Depreciation
- --------------------------------------------------------------------------------
BUCHAREST, ROMANIA
- ------------------
Jean Texier Street,
No. 7, Apt. No. 1 - 160 160 -
Nicolae Balcescu Blvd.
No. 5, Apt. No. 32 - 60 60 -
Nicolae Balcescu Blvd.
No. 5, Apt. No. 35 - 118 118 -
Television Blvd.
Apt. No. 1 - 110 110 -
- -------------------------------------------------------------------------------
Total Romanian Real Property - 448 448 -
- -------------------------------------------------------------------------------
PRAGUE, CZECH REPUBLIC
- ---------------------
Office Building, No. 1 - 136 136 -
Office Building, No. 2 - 222 222 -
- --------------------------------------------------------------------------------
Total Czech Republic
Real Property - 358 358 -
- --------------------------------------------------------------------------------
$2,370 $6,540 $8,880 ($201)
- --------------------------------------------------------------------------------
F-25
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 income tax purposes was approximately $10,730 at December
31, 1998.
The changes in total real estate assets and accumulated depreciation for the
period ending December 31, 1998 are as follows:
Total Real Estate Assets
- -------------------------
Balance, beginning of period $4,148
Acquisitions 5,116
Additions and improvements 1,466
Write-downs (1,850)
- --------------------------------------
Balance, end of period $8,880
======================================
Accumulated Depreciation
- ------------------------
Balance, beginning of period ($21)
Depreciation (180)
Disposals -
- --------------------------------------
Balance, end of period ($201)
======================================
F-25
Quarterly Financial and Stock Data (unaudited)
(in thousands, except per share data and stock prices)
Annual
In 1997 Quarter Ended Mar. 29 Jun. 28 Sept. 27 Dec. 31 Total
- -------------------------------------------------------------------------------
Net sales previously reported $23,580 $21,466 $61,008 $58,374 $164,428
Less sales of discontinued
operations (4,730) (5,411) (7,253) (6,227) (23,621)
-----------------------------------------------
Net sales of continuing
operations 18,850 16,055 53,755 52,147 140,807
- -------------------------------------------------------------------------------
Gross profit previously reported 4,691 4,374 13,769 13,963 36,797
Less gross profit of discontinued
operations (447) (846) (1,195) (1,228) (3,716)
----------------------------------------------
Gross profit of continuing
operations 4,244 3,528 12,574 12,735 33,081
- -------------------------------------------------------------------------------
Operating income (loss)
previously reported (92) (255) 6,796 6,121 12,570
Income (loss) of discontinued
operations 330 (34) (361) (594) (659)
----------------------------------------------
Operating income (loss) of
continuing operations 238 (289) 6,450 5,569 11,968
- -------------------------------------------------------------------------------
Income of continuing operations $ 3 ($ 57) $4,938 $4,035 $8,919
Income (loss) applicable to
common stock (304) (277) 5,069 4,351 8,839
- -------------------------------------------------------------------------------
Income of continuing operations
Basic - ($0.01) $1.28 $1.05 $2.27
---------------------------------------------
Diluted - (0.01) 1.12 0.91 2.00
- -------------------------------------------------------------------------------
Income (loss) per common share
Basic ($0.08) ($0.07) $1.31 $1.13 $2.29
---------------------------------------------
Diluted (0.08) (0.07) 1.16 0.99 2.00
- -------------------------------------------------------------------------------
Common stock price: High $15.75 $15.75 $17.50 $20.00 $20.00
---------------------------------------------
Low 12.75 14.00 14.75 17.50 12.75
===============================================================================
===============================================================================
Annual
In 1998 Quarter Ended Mar. 28 Jun. 27 Sept. 26(1) Dec. 3 Total
- -------------------------------------------------------------------------------
Net sales previously reported $26,180 $28,599 $60,215 $77,812 $192,806
Less sales of discontinued
operations (4,487) (5,358) (6,286) (7,985) (24,118)
-------------------------------------------------
Net sales of continuing
operations 21,693 23,241 53,927 69,827 168,688
- -------------------------------------------------------------------------------
Gross profit previously reported 4,423 5,067 12,136 16,607 38,233
Less gross profit of discontinued
operations (404) (678) (874) (1,358) (3,314)
-------------------------------------------------
Gross profit of continuing
operations 4,019 4,389 11,262 15,249 34,919
- -------------------------------------------------------------------------------
Operating income (loss)
previously reported (1,465) (848) 2,270 8,166 8,123
Income (loss) of discontinued
operations 350 87 (90) (515) (168)
-------------------------------------------------
Operating income (loss) of
continuing operations (1,115) (761) 2,180 7,651 7,955
- -------------------------------------------------------------------------------
Income (loss) of continuing
operations ($878) ($668) $704 $6,569 $5,727
Income (loss) applicable to
common stock (1,158) (800) 663 6,308 5,013
- -------------------------------------------------------------------------------
Income (loss) of Basic ($0.21) ($0.16) $0.18 $1.59 $1.39
continuing operations -------------------------------------------------
Diluted (0.21) (0.16) 0.16 1.50 1.29
- -------------------------------------------------------------------------------
Income (loss) per Basic ($0.28) ($0.19) $0.16 $1.52 $1.21
common share -------------------------------------------------
Diluted (0.28) (0.19) 0.15 1.44 1.13
- -------------------------------------------------------------------------------
Common stock price: High $19.00 $20.38 $18.25 $13.25 $20.38
Low 18.50 20.38 18.12 10.00 10.00
- -------------------------------------------------------------------------------
(1) Net income for the third quarter of 1998 includes $2.5 million asset
impairment charge resulting principally from the affect of the devaluation
of the Russian ruble on certain investments, and as a result earnings per
share were reduced by $0.56.
F-26
HAMPSHIRE GROUP, LIMITED
1998 EXHIBIT INDEX
Exhibit No. Description
- ----------- ----------------------------------------------------------
(10)(A)(3) Employment Agreement between Hampshire Group, Limited and
Ludwig Kuttner dated as of January 1, 1998
(10)(H)(1) Note Purchase Agreement between Hampshire Group, Limited
Phoenix Home Life Mutual Insurance Company and The Ohio
National Life Insurance Company dated May 15, 1998
(10)(H)(2) Credit Agreement and Guaranty between Hampshire Group,
Limited and The Chase Manhattan Bank, Republic National
Bank of New York and NationsBank, N.A. Dated May 28, 1998
(10)(J)(5) Renewed Lease Agreement between Hampshire Designers, Inc.
and Commerce Center Associates, Inc. for the Company's
Anderson, South Carolina corporate offices dated
August 1, 1998
(10)(J)(6) Renewed Lease Agreement between Hampshire Designers, Inc.
and Commerce Center Associates, Inc. for the Company's
Anderson, South Carolina distribution center dated
August 1, 1998
(10)(R) Restated Term Note between MetLife Capital Corporation and
Hampshire Designers, Inc., dated July 30, 1998
(21) Subsidiaries of the Company
(23) Consent of PricewaterhouseCoopers LLP
(27) Financial Data Schedule