UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended July 1, 2000.
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ______ to ______.
Commission File No. 000-20201
HAMPSHIRE GROUP, LIMITED
------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-0967107
---------------------- ----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
215 COMMERCE BOULEVARD
ANDERSON, SOUTH CAROLINA 29625
-------------------------------------------------------------------------
(Address, Including Zip Code, of Registrant's Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (864) 225-6232
-------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Number of Shares Outstanding
Of Securities As of August 7, 2000
----------------------------- ----------------------------
Common Stock, $0.10 Par Value 4,121,037
1
<PAGE>
HAMPSHIRE GROUP, LIMITED
INDEX TO FORM 10-Q
July 1, 2000
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements
Unaudited Consolidated Balance Sheets as of July 1, 2000,
July 3, 1999 and December 31, 1999 3
Unaudited Consolidated Statements of Operations for the Six Month
and Three Month Periods Ended July 1, 2000 and July 3, 1999 5
Unaudited Consolidated Statements of Comprehensive Loss for the
Six Month and Three Month Periods Ended July 1, 2000 and
July 3, 1999 6
Unaudited Consolidated Statements of Cash Flows for the Six Month
Periods Ended July 1, 2000 and July 3, 1999 7
Notes to Unaudited Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signature Page 20
2
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<CAPTION>
July 1, July 3, Dec. 31,
2000 1999 1999*
--------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................ $ 9,671 $ 1,125 $ 23,831
Available-for-sale securities ............ 143 525 207
Accounts receivable trade - net .......... 7,730 15,636 16,732
Other accounts receivable ................ 1,104 302 1,028
Notes receivable - current portion ....... 2,925 1,693 1,266
Inventories .............................. 31,424 35,651 17,400
Deferred tax asset ....................... 4,225 3,992 4,202
Other current assets ..................... 542 1,368 704
------------------------------
Total current assets ................... 57,764 60,292 65,370
Property, plant and equipment - net ........ 2,535 12,239 10,149
Notes receivable - long term - net ......... 4,065 95 267
Real property investments - net ............ 17,748 10,842 16,538
Long-term investments - net ................ 5,396 5,482 4,537
Trading securities held in retirement trust 2,193 1,394 2,101
Deferred tax asset ......................... 1,969 2,416 1,969
Intangible assets - net .................... 1,497 2,813 2,553
Deposit on business acquisition ............ 5,000 -- --
Other assets ............................... 177 30 110
------------------------------
Total assets ........................... $98,344 $ 95,603 $103,594
==============================
<FN>
* Derived from the December 31, 1999 audited consolidated balance sheet.
(The accompanying notes are an integral part of these unaudited financial
statements.)
</FN>
</TABLE>
3
<PAGE>
<TABLE>
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
July 1, July 3, Dec. 31,
2000 1999 1999*
--------------------------------
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt ....... $ 482 $ 1,470 $ 1,418
Borrowings under lines of credit ........ -- 890 --
Accounts payable ........................ 2,633 4,416 3,787
Accrued expenses and other liabilities .. 4,273 5,725 4,024
-------------------------------
Total current liabilities ............. 7,388 12,501 9,229
Long-term debt ............................ 24,168 21,349 24,170
Deferred compensation ..................... 2,312 2,096 2,869
-------------------------------
Total liabilities ..................... 33,868 35,946 36,268
-------------------------------
Commitments and Contingencies
Stockholders' equity:
Common stock ............................ 418 418 418
Additional paid-in capital .............. 27,762 27,713 27,762
Retained earnings ....................... 37,386 33,028 40,182
Accumulated other comprehensive loss .... (452) (163) (334)
Treasury stock .......................... (638) (1,339) (702)
--------------------------------
Total stockholders' equity ............ 64,476 59,657 67,326
--------------------------------
Total liabilities and stockholders'
equity............................... $98,344 $95,603 $103,594
===============================
<FN>
* Derived from the December 31, 1999 audited consolidated balance sheet.
(The accompanying notes are an integral part of these unaudited financial
statements.)
</FN>
</TABLE>
4
<PAGE>
<TABLE>
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<CAPTION>
Six Month Three Month
Periods Ended Periods Ended
------------------ ------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales .......................... $27,412 $39,576 $12,832 $19,184
Cost of goods sold ................. 23,443 32,271 11,224 15,972
------------------ ------------------
Gross profit ..................... 3,969 7,305 1,608 3,212
Rental revenue ..................... 1,168 398 594 230
Gain on sale of real estate
investments 730 -- 730 --
------------------ ------------------
5,867 7,703 2,932 3,442
Selling, general and
administrative expenses .......... (10,417) (10,198) (4,647) (4,855)
Gain on sale of manufacturing
facilities, net of impairment and
exit costs........................ 1,326 -- 1,326 --
Gain on other sales of property and
equipment......................... 385 14 385 15
------------------ ------------------
Loss from operations ............... (2,839) (2,481) (4) (1,398)
Other income (expense):
Interest expense ................. (904) (687) (426) (382)
Interest income .................. 763 259 386 106
Other ............................ 347 241 (128) 121
------------------ ------------------
Loss before income taxes ........... (2,633) (2,668) (172) (1,553)
Provision for income taxes ......... 150 (355) 650 (180)
------------------ ------------------
Net loss ......................... ($ 2,783) ($ 2,313) ($ 822) ($ 1,373)
================== ==================
-------------------------------------------------------------------------------
Net loss per share
basic and diluted................. ($0.68) ($0.56) ($0.20) ($0.34)
================== ==================
Weighted average number
of shares outstanding............. 4,116 4,150 4,117 4,078
================== ==================
<FN>
(The accompanying notes are an integral part of these unaudited financial
statements.)
</FN>
</TABLE>
5
<PAGE>
<TABLE>
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
<CAPTION>
Six Month Periods Ended
-----------------------
July 1, 2000 July 3, 1999
-------------- --------------
<S> <C> <C> <C> <C>
Net loss .................................... ($2,783) ($2,313)
Other comprehensive income (loss):
Foreign currency translation adjustment .. (79) --
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on
securities arising during periods..... ($64) $85
Reclassification adjustment for amounts
included in net - income.............. -- (45)
----- ----
Other comprehensive gain (loss) on
securities............................ (64) 40
Income tax benefit (expense) on securities 25 (15)
----- ----
Unrealized gains (losses) on securities -
net of tax................................ (39) 25
------ ------
Comprehensive loss ......................... ($2,901) ($2,288)
====== ======
Three Month Periods Ended
-------------------------
July 1, 2000 July 3, 1999
-------------- --------------
Net loss .................................... ($822) ($1,373)
Other comprehensive income (loss):
Foreign currency translation adjustment .. 12 --
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on
securities arising during periods..... ($111) $237
Reclassification adjustment for amounts
included in net - income.............. -- (36)
----- ----
Other comprehensive gain (loss) on
securities............................ (111) 201
Income tax benefit (expense) on securities 42 (75)
----- ----
Unrealized gains (losses) on securities -
net of tax................................ (69) 126
----- ------
Comprehensive loss ......................... ($879) ($1,247)
===== ======
<FN>
(The accompanying notes are an integral part of these unaudited financial
statements.)
</FN>
</TABLE>
6
<PAGE>
<TABLE>
HAMPSHIRE GROUP, LIMITED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Six Month Periods Ended
-------------------------
July 1, 2000 July 3, 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss for periods............................ ($ 2,783) ($ 2,313)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................ 1,959 2,244
Gain on sale of real estate investment ....... (730) --
Net gain on sale of manufacturing operations . (1,326) --
Gain on sales of property and equipment ...... (385) (14)
Gain on sales of available-for-sale securities -- (45)
Deferred compensation costs for executive
officers ................................... 68 69
Net change in operating assets and liabilities,
net of effects of disposed companies:
Receivables .................................. 8,926 6,399
Inventories .................................. (15,997) (14,863)
Other assets ................................. 89 (768)
Accounts payable ............................. (1,154) (1,356)
Accrued expenses and other liabilities ....... (1,620) (1,661)
----------------------------
Net cash used in continuing operations ....... (12,953) (12,308)
Net cash provided by discontinued operations . -- 3,673
----------------------------
Net cash used in operating activities ........ (12,953) (8,635)
----------------------------
Cash flows from investing activities:
Capital expenditures............................ (146) (672)
Deposit on business acquisition ................ (5,000) --
Proceeds from the sale of real estate investment 990 --
Proceeds from sales of manufacturing facilities. 5,220 --
Proceeds from sales of property and equipment . 1,151 22
Purchases of available-for-sale securities ..... -- (307)
Proceeds from sales of available-for-sale
securities ................................... -- 411
Purchase of real property and other investments. (3,298) (2,542)
Loans and advances to investees ................ (1,765) (1,149)
Repayments of loans and advances by investees .. 402 --
Business Purchase price adjustment ............. -- (375)
----------------------------
Net cash used in investing activities ........ 2,446 (4,612)
----------------------------
Cash flows from financing activities:
Net borrowings under line of credit ............ -- 890
Proceeds from issuance of long-term debt ....... 2,146 1,279
Repayment of long-term debt .................... (954) (947)
Payments of deferred compensation to executive
officers ..................................... (4) (4)
Proceeds from issuance of treasury stock ....... 51 89
Purchases of treasury stock .................... -- (821)
----------------------------
Net cash provided by financing activities .... 1,239 486
----------------------------
Net decrease in cash and cash equivalents ........ (14,160) (12,761)
Cash and cash equivalents - beginning of period... 23,831 13,886
----------------------------
Cash and cash equivalents - end of period $ 9,671 $ 1,125
============================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Six Month Periods Ended
-------------------------
July 1, 2000 July 3, 1999
------------ -------------
<S> <C> <C>
Supplementary disclosure of cash flow
information:
Cash paid (refunded) during the period for:
Interest..................................... $ 894 $1,372
Income taxes................................. 239 (523)
Sale of investments to related party, settled
by forgiveness of certain liabilities owed to
related party by the Company.................. 775 --
Non-cash investing activity - Settlement of
San Francisco Knitworks purchase price dispute-
return of Company stock held in escrow........ -- 725
Long-term debt payment - sale of real property 1,376 --
Long term debt payment - sale of manufacturing
assets Glamourette/OG......................... 754 --
Note receivable from Glamourette/OG -
sale of manufacturing operations - net........ 4,828 --
<FN>
(The accompanying notes are an integral part of these unaudited financial
statements.)
</FN>
</TABLE>
8
<PAGE>
HAMPSHIRE GROUP, LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
July 1, 2000
NOTE 1. BASIS OF PRESENTATION
------------------------------
The unaudited consolidated financial statements include the accounts of
Hampshire Group, Limited and its subsidiaries, substantially all of which are
wholly-owned (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by such generally accepted accounting
principles for complete financial statements.
In the opinion of the management of the Company, the unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair statement of the results
of operations for the interim periods presented. The results of operations for
interim periods are not indicative of the results that may be expected for a
full year due to the seasonality of the business. These interim unaudited
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended December
31, 1999, included in the Company's Annual Report on Form 10-K.
Certain reclassifications have been made to data from the previous year to
conform with the presentation of the current year.
NOTE 2. SALE OF MANUFACTURING OPERATIONS
-----------------------------------------
On April 28, 2000, Hampshire Group, Limited concluded a transaction whereby it
sold all of its sweater manufacturing assets to Glamourette/OG, Inc., a Puerto
Rican corporation ("Glamourette/OG"), with its principal executive offices at
Guaynabo, Puerto Rico. Glamourette/OG is a subsidiary of Olympic Mills
Corporation, a Delaware corporation ("Olympic Mills"), both of which are
unrelated to the Company.
The assets sold include the sweater manufacturing facilities of the Company's
subsidiary Glamourette Fashion Mills, Inc., located in Quebradillas, Puerto Rico
and the machinery and equipment of San Francisco Knitworks, Inc., located in San
Francisco, California, Natalie Knitting Mills, located in Chilhowie, Virginia
and Winona Knitting Mills, located in Winona, Minnesota, and certain of the
machinery and equipment on consignment to a contract manufacturer in Mexico. In
addition to the machinery and equipment, assets sold include the inventories,
other than finished goods, and certain other assets of the respective
operations.
The sales price for the machinery and equipment, having a net book value of
approximately $3,956,000, was $10,468,000 consisting of $4,000,000 cash and a
non-interest bearing promissory note in the amount of $8,000,000 discounted to
$6,468,000 at 8.75% per annum and due April 28, 2005 ("the 8.75% Note"). The
8.75% Note is payable over a five-year period by a deduction of $0.67 per
sweater purchased from Glamourette/OG or is payable in cash. The 8.75% Note is
partially collateralized by the machinery and equipment which was sold pursuant
thereto and by the pledge of the common stock of Glamourete/OG, Inc. Of the
proceeds received approximately $754,000 was used to pay off loans outstanding
against the machinery and equipment sold. Due to the term of this note and
related factors, the Company has established a reserve for $1,600,000 of the
8.75% Note.
9
<PAGE>
In order to avoid interruption of supply, Glamourette/OG took possession of only
the Puerto Rico facility on the Closing Date. The Asset Purchase Agreement
provides that the Company will continue to operate the three domestic
manufacturing facilities for varying periods of up to ten months. During the
transition period, the Company will continue to pay all related operating
expenses and as compensation for the use of the machinery and equipment, will
credit the 8.75% Note for $0.67 per sweater manufactured in the domestic
facilities.
The inventories in Puerto Rico on the Closing Date, including work in process,
raw materials and supplies totaling $2,321,000, were sold to Glamourette/OG at
cost, paid 50% in cash, with the balance paid by deduction of 50% of purchase
price of sweaters shipped to the Company in May and June 2000, after deduction
of the $0.67 to be applied as a reduction of the 8.75% Note.
Concurrently, the Company purchased a 1% equity interest in Glamourette/OG, Inc.
for $40,000, which purchase price was paid in full by reduction from the 8.75%
Note. The Company has an option to put its 1% interest at anytime to Olympic
Mills at cost and Olympic Mills has a right to purchase the Company's 1%
interest at cost at any time after the 8.75% Note is paid in full.
Collection of the 8.75% Note is largely conditional on a long term "supply
agreement" whereby the Company can purchase manufactured sweaters from
Glamourette/OG at a defined price for up to five years and/or 1,000,000 dozen
sweaters. Due to the competitive market in the sweater industry and potential
changes to international trade policies, the Company has established a $1.6
million allowance against final year of the 8.75% Note.
From the sale of the manufacturing equipment, the Company has recognized a net
gain of $1,326,000. The reported gain is after establishing the previously
referenced reserve on the 8.75% Note and reserves for costs and expenses that
will be incurred as the Company exits its domestic manufacturing facilities.
Included in the exit costs and expense reserve, totaling $1,912,000, are
estimated severance and benefit costs, future lease obligation and other
commitments, net of estimated subleases, and other projected costs related to
the shut-down of these operations. Additionally, netted against the gain, is an
asset impairment charge in the amount of $1,674,000 for the impairment of
certain fixed assets and goodwill at the locations to be exited.
NOTE 3. PROPOSED ACQUISITION OF ASSETS AND BUSINESS OF ITEM-EYES, INC.
----------------------------------------------------------------------
On June 26, 2000, the Company entered into an Asset Purchase Agreement
with the stockholders of Item-Eyes to purchase ("Purchase") substantially all of
the assets and business of Item-Eyes, Inc. ("Item-Eyes"), a privately held
sportswear company with sales in excess of $100 million in 1999. Item-Eyes
maintains an operation center and sales office/showroom in New York City, a
corporate office in Hauppauge, New York and uses shipping facilities in Passaic,
New Jersey.
The purchase price consists of $13.0 million payable in cash, approximately $2.3
million payable in subordinated notes of the Company, and 377,056 shares of
common stock of the Company. The Company will be assuming certain liabilities of
Item-Eyes, as described in the Asset Purchase Agreement, dated June 26, 2000, a
copy of which was filed with the Securities and Exchange Commission on July 10,
2000 on the Company's report Form 8-K. The Company has received notice of early
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. On June 26, 2000, simultaneous with the execution of
the Asset Purchase Agreement, the Company made a good faith deposit of $5.0
million ("Deposit"). Pursuant to the terms of the Asset Purchase Agreement, if
the Company is unable to obtain financing for the Purchase, Item-Eyes will be
entitled to retain $1 million of the Deposit. In addition, if the Purchase does
not occur as a result of the Company's failure to close (other than as a result
of certain circumstances described in the Asset Purchase Agreement pursuant to
which the Company shall be entitled to a full refund of the Deposit plus
interest), Item-Eyes will be entitled to retain at least $1 million, and as much
as $5 million, of the Deposit. The Purchase is subject to certain conditions and
due diligence by the purchaser and is expected to close in August 2000.
10
<PAGE>
NOTE 4. INVENTORIES
--------------------
A summary of inventories by component is as follows:
(in thousands)
July 1, 2000 July 3, 1999 Dec. 31, 1999
------------ ------------ -------------
Finished goods....................... $28,075 $28,710 $14,072
Work-in-progress..................... 2,268 4,514 2,503
Raw materials and supplies........... 2,771 4,366 2,626
-----------------------------------------
33,114 37,590 19,201
Less - LIFO reserve ............... (1,690) (1,939) (1,801)
-----------------------------------------
Net inventories ................... $31,424 $35,651 $17,400
=========================================
NOTE 5. TRADING SECURITIES HELD IN RETIREMENT TRUST
----------------------------------------------------
Under a plan adopted by the Company in 1997, senior executives of the Company
are permitted to defer annually a portion of their compensation. These deferrals
are invested in certain mutual funds which have been classified as non-current
trading securities to correspond with the related long-term deferred
compensation liability.
NOTE 6. INTANGIBLE ASSETS
--------------------------
Intangible assets consist primarily of goodwill which is being amortized over
ten years on a straight-line basis.
Activity in intangible assets for the six-month periods ended July 1, 2000 and
July 3, 1999 is summarized in the table below.
(in thousands)
July 1, July 3,
2000 1999
-------- --------
Balance - beginning of periods...................... $2,553 $3,390
Purchase price adjustment........................... -- (350)
Amortization during periods......................... (237) (227)
Write-off of goodwill related to disposal
of manufacturing operations....................... (819) --
-----------------------
Balance - end of periods $1,497 $2,813
=======================
NOTE 7. CREDIT FACILITIES
--------------------------
The Company has a revolving credit facility (the "Revolving Credit Agreement")
with three participating commercial banks. The credit facility consists of a $55
million combined line of credit and letter of credit facility through May 23,
2001. Advances under the facility are limited to the lesser of: (1) $55 million,
less outstanding letters of credit, or (2) the sum of (a) 85% of the eligible
accounts receivable, plus 50% of the eligible inventory, plus 50% of the
outstanding letters of credit through this credit facility, and (b) a seasonal
adjustment of $1 million to $14 million from January 1 to September 25.
11
<PAGE>
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 loan is collateralized
by the trade accounts receivable of Hampshire Designers, Inc. and its
subsidiaries. In addition, letters of credit issued under the facility are
collateralized by 50% of the shipment value shipped pursuant to the letters of
credit. The Company has pledged as collateral the common stock of its
subsidiaries and such subsidiaries guarantee the performance of the Company. The
Revolving Credit Agreement contains 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
Company was in compliance with the loan covenants at July 1, 2000. At July 1,
2000, the Company had approximately $13.3 million available under this facility,
no amounts were outstanding under this facility as of this date.
The Company has other credit facilities, which in the aggregate allow the
Company to borrow up to $4.5 million. Additionally, the Company has available
credit facilities restricted in use for international letters of credit in the
amount of $8.5 million. At July 1, 2000 the Company had no outstanding balance
against the credit line, but outstanding letters of credit against these lines
were $4.0 million.
NOTE 8. SENIOR NOTES
---------------------
In June 1998, the Company sold senior notes (the "Senior Notes") in the
principal amount of $15 million to two insurance companies. The Senior Notes,
which bear interest at a rate of 7.05% per annum, are payable in equal annual
installments of approximately $2,143,000 during the period January 2, 2002
through January 2, 2008. The Senior Notes are collateralized pari passu with the
Company's revolving credit facilities. The Senior Notes agreement contains
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 Company was in compliance with these
covenants at July 1, 2000.
NOTE 9. RECENT ACCOUNTING STANDARDS
------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, ("SFAS 133") "Accounting for
Derivative Instruments and Hedging Activities". 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 designated as part
of a hedge transaction and, if it is, the type of hedge transaction. SFAS No.
137 delayed implementation of the statement and as a result, it will not become
effective for the Company until January 1, 2001. Management of the Company has
not yet evaluated the effects of SFAS 133 on the Company's financial position,
results of operations or cash flows.
12
<PAGE>
<TABLE>
NOTE 10. INDUSTRY SEGMENTS AND DATA BY GEOGRAPHICAL AREAS
----------------------------------------------------------
The Company operates in two industry segments - Apparel and Investments. The
Apparel 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. Although the Company sells sweaters throughout the year, the
sweater business is highly seasonal, with more than 80% of sales occurring in
the third and fourth quarters. The Investments segment makes investments both
domestically and internationally, principally in real property.
<CAPTION>
Industry Segment Data Six Month Three Month
Periods Ended Periods Ended
------------------ ------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------------------ ------------------
<S> <C> <C> <C> <C>
Net sales Apparel $27,412 $39,576 $12,832 $19,184
Rental revenue and gain
on real estate
investment Investments 1,898 398 1,324 230
----------------------------------------
$29,310 $39,974 $14,156 $19,414
-------------------------------------------------------------------------------
Revenue by geographic area
United States $28,823 $39,936 $13,922 $19,397
Russia 207 38 121 17
Europe 280 -- 113 --
----------------------------------------
$29,310 $39,974 $14,156 $19,414
-------------------------------------------------------------------------------
Income (loss) from operations
Apparel ($2,944) ($1,613) ($633) ($1,015)
Investments 1,152 116 990 44
Corporate (1,047) (984) (361) (427)
----------------------------------------
($2,839) ($2,481) ($ 4) ($1,398)
-------------------------------------------------------------------------------
Capital expenditures Apparel $139 $667 $72 $303
Investments 1 -- 1 --
Corporate 6 5 3 1
----------------------------------------
$146 $672 $76 $304
-------------------------------------------------------------------------------
Depreciation and Apparel $1,498 $2,097 $579 $1,074
amortization Investments 364 135 181 72
Corporate 97 12 48 6
----------------------------------------
$1,959 $2,244 $808 $1,152
-------------------------------------------------------------------------------
<S> <C> <C> <C>
July 1, July 3, December 31,
2000 1999 1999
------- ------- -----------
Long-lived assets United States $14,046 $19,946 $20,970
Russia 2,955 2,329 2,766
Europe 3,282 806 2,951
--------------------------------------
$20,283 $23,081 $26,687
------------------------------------------------------------------------------
Long-term investments - United States $3,127 $2,849 $2,268
net Russia 131 131 131
Europe 2,138 2,502 2,138
--------------------------------------
$5,396 $5,482 $4,537
------------------------------------------------------------------------------
Total identifiable Apparel $49,544 $67,773 $52,212
assets Investments 25,567 19,210 24,015
Corporate 23,233 8,620 27,367
--------------------------------------
$98,344 $95,603 $103,594
------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This quarterly report on Form 10-Q contains forward-looking information and
statements that involve risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding the results of operations.
The Company's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements which are made only as of the date hereof.
RESULTS OF OPERATIONS
Six Month Periods Ended July 1, 2000 and July 3, 1999
-----------------------------------------------------
Consolidated net sales for the Company for the six month period ended July 1,
2000, were $27,412,000, compared with $39,576,000 for the same period in 1999.
Of the 30.7% decline, 19.1% resulted from reduced volume and 11.6% from lower
prices. Influencing the decrease in volume in all lines of our sweater business,
is the continuing shift of shipments of product to our customers in the third
and fourth quarters. This concentration of shipments in the second half of the
year is due to the retailers' efforts to have all of their suppliers in the
"Quick Response" mode to maximize sales with a quick inventory turn.
Industry wide, the Spring sweater season was very soft due to the unusually warm
winter experienced throughout the country and current style trends. The sweater
industry has experienced a styling trend away from the heavier gauged sweaters,
where the Company has had manufacturing success, to finer gauge sweaters that
cannot be produced in the Company's manufacturing facilities. The flat market
and low demand for the Spring sweater season has been experienced equally across
the Company in both the men's and women's lines. An additional factor
contributing to the decline in net sales during the first quarter of 2000 was
the decision by the Company not to pursue the branded knit shirt business for
the completed Spring season. This decision was based on the limited success
achieved by the Company in the preceding year. Favorably impacting sales volume
was the growth experienced in the "Moving Bleu" related separates line; net
sales for this line were up approximately 20% to $4.7 million.
Revenues of Hampshire Investments, Limited were $1,168,000 for the six month
period ended July 1, 2000, an increase of $770,000 from the $398,000 in revenues
reported for the same period in 1999. The increase resulted primarily from the
larger percentage of the real property units being renovated and leased in late
1999 and during 2000. Additionally the Investment segment, during the second
quarter of 2000, reported a gain of approximately $730,000 from the sale of its
first domestic real property investment.
Gross margin for the Company's Apparel segment for the first quarter of 2000 was
14.5% percent of net sales, off 4.0 percentage points from the gross margin
achieved in the prior year for the same time period. The low demand for Spring
sweater products led to even more price pressure in an already very competitive
market, significantly reducing gross margin. The decline in the Company's Spring
sweater business resulted in a higher percentage of the net sales, for the first
two quarters, being in other apparel that has a lower margin, thus reducing the
Company's overall gross margin percentage. Finally, the lower volume
resulted in manufacturing inefficiencies.
Selling, general and administrative expenses ("SG&A") for the Apparel segment of
the Company were $8,624,000 for the first six month period in 2000, compared
with $8,932,000 for the same period in 1999. Variable selling and shipping
expenses were down due to the reduced sales volume. The lower sales volume
resulted in fixed general and administrative expenses being higher as a percent
of net sales. Expenses in the Brands Division were higher, primarily due to the
launching of the Dockers(R) line and a significant commitment made to the
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Jantzen(R) line for the Fall season. These factors accounted for the 8.9
percentage points increase as a percentage of net sales to 31.5% for the six
month period of 2000, compared to 22.6% for the same period the previous year.
During the second quarter of 2000, the Company consummated the transaction to
sell all of its sweater manufacturing assets to Glamourette/OG, Inc., a Puerto
Rican corporation, with its principal executive offices at Guaynabo, Puerto
Rico. The accounting for this sale resulted in a net gain of $1,326,000, which
was after recognizing $1,912,000 of estimated exit costs associated with
shutting down the domestic manufacturing facilities and recording a $1,674,000
impairment charge for fixed assets and goodwill. This transaction is explained
in more detail in Note 2 of the financial statements.
Additionally, in the Apparel segment, gains were recognized in the second
quarter of 2000, from the sale of certain equipment located in Mexico and the
Brands distribution center in Winona, Minnesota, totaling approximately $384,000
of the $385,000 gain reported for the period. Gain on sale of equipment the
previous year, for the same period was $14,000.
SG&A expenses in the Investment segment were $717,000 and $282,000 for the first
two quarters of 2000 and 1999, respectively. The increase resulted primarily
from additional operating expenses for acquired property and additional
depreciation expense. Depreciation for the six month period of 2000 was
$347,000, compared to $135,000 for the same period in 1999.
Interest expense for the Company during the first six months of 2000 was
$904,000, compared to $687,000 for the same period in 1999. This increase
resulted primarily from the additional financing on properties acquired
subsequent to the second quarter of 1999 in the Investment segment of the
business. Interest expense of the Apparel segment was down in the first six
month period of 2000, resulting from the payment of debt related to the assets
sold during the period.
Interest income for the Company was $763,000 for the first two quarters of 2000,
compared to $259,000 for the same period in 1999. The additional interest income
principally resulted from the improved cash position the Company experienced
over the first six months of 2000, when compared to 1999. Also reflected in the
interest income is approximately $95,000 of interest on payments made
against the Note in connection with the sale of the manufacturing equipment
explained in more detail in Note 2 of the financial statements.
For the six month period of 2000, the Company has reported a net loss of
$2,783,000, compared with a net loss of $2,313,000 for the six month period of
1999. The loss was ($0.68) per share for the six month period in 2000 and
($0.56) for the same period in 1999.
Three Month Periods Ended July 1, 2000 and July 3, 1999
-------------------------------------------------------
Primarily due to reduced demand on certain heavy guage sweater products
manufactured by the Company, net sales for the Company for the quarter ended
July 1, 2000 were $12,832,000, compared with $19,184,000 for the same period in
1999. Of the 33% decline, approximately 17% is attributed to reduced volume and
approximately 16% is related to decrease in pricing, primarily due to soft
market conditions in the sweater industry.
Revenues from Hampshire Investments, Limited for the second quarter of 2000 were
$594,000 compared to $230,000 for the second quarter of 1999, an increase of
approximately 158%. The increase resulted primarily from the larger percentage
of the real property units being leased in 2000 and from additional real
property acquisitions made after the end of the second quarter in 1999.
Additionally the Investment segment, during the second quarter of 2000, reported
a gain of approximately $730,000 from the sale of its first domestic real
property.
Gross profit, as a function of net sales, for the second quarter of 2000 was
12.5% compared with 16.7% for the prior year, primarily as a result of reduced
volume and reduced selling prices.
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SG&A expenses for the Apparel segment for the quarter ended July 1, 2000, were
$3,952,000, compared with $4,242,000 for the same period of 1999, a decrease of
6.8%. The net decrease results primarily from to the variable expenses related
to volume.
During the second quarter of 2000, the Company consummated the transaction to
sell all of its sweater manufacturing assets to Glamourette/OG, Inc., a Puerto
Rican corporation, with its principal executive offices at Guaynabo, Puerto
Rico. The accounting for this sale resulted in a net gain of $1,326,000, which
was after recognizing $1,912,000 of estimated exit costs associated with
shutting down the domestic manufacturing facilities and recording a $1,674,000
impairment charge for fixed assets and goodwill. This transaction is explained
in more detail in Note 2 of the financial statements.
Additionally, in the Apparel segment, gains were recognized in the second
quarter of 2000, from the sale of equipment located in Mexico, real estate in
Winona and the Brands distribution center totaling approximately $384,000 of the
$385,000 gain reported for the period. Gain on sale of equipment the previous
year, for the same period was $15,000.
The Company reported other expenses or losses for the quarter July 1, 2000 in
the amount $128,000, compared to other income for the same period in 1999 of
$121,000. This difference primarily resulted from a $161,000 unrealized market
loss on the securities held in the Company's Deferred Compensation Plan reported
in the second quarter of 2000 compared to a $62,000 unrealized market gain for
the same period in 1999.
The Company, for the quarter ended July 1, 2000, has reported a net loss of
$822,000, compared with a $1,373,000 net loss for the same quarter in 1999. The
loss was ($0.20) per share for the second quarter of 2000 and ($0.34) for the
second quarter of 1999.
SEASONALITY
-----------
The Company believes that more than eighty percent of the Company's sweater
sales will occur in the second half of the year.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The primary liquidity and capital requirements of the Company are to fund
working capital for current operations consisting of funding the build-up in
inventories and accounts receivable (which reach their maximum requirements in
the third quarter), servicing long-term debt, funding capital expenditures and
making investments, through its investment subsidiary, in assets not used in the
apparel business of the Company. The primary sources to meet the liquidity and
capital requirements include funds generated from operations, revolving credit
lines and long-term borrowing.
Net cash used in operations for the six month period ended July 1, 2000 totaled
$12,953,000, which was used primarily for the build-up of inventory for
shipments later in the year.
Cash flow from investing activities include $5,220,000 received from the
previously discussed sale of the manufacturing equipment (see also Note 2). The
Company had proceeds from the sale of other assets of $2,141,000, including the
proceeds from the sale of real property in the investment segment of the
business. Capital expenditures for the six month period were $146,000 against an
annual budget of $650,000 for 2000.
Additionally, on June 26, 2000 the Company made a good faith Deposit of $5
million on the Purchase of Item-Eyes. The refund of this Deposit is contingent
on, among other terms, securing adequate financing for the combined operations
(see also Note 3).
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During the first half of 2000, Hampshire Investments made real property and
long-term investments in the amount of $3,298,000. Separate financing was
arranged during the second quarter for some of the investment projects, which
resulted in proceeds from long-term debt in the amount of $2,146,000.
The Company's principal credit facility is with three participating commercial
banks. The credit facility consists of a $55 million combined line of credit and
letter of credit facility. Advances under the line of credit are limited to the
lesser of: (1) $55 million less outstanding letters of credit; or (2) the sum of
85% of eligible account receivables, 50% of eligible inventory, 50% of
outstanding letters of credit issued through this credit facility plus a
seasonal over-advance of up to $14 million from January 1 through September 25.
Advances under the facility bear interest at 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 and its subsidiaries, excluding certain
factored trade accounts receivable. The Company has pledged as additional
collateral, the common stock of its subsidiaries and such subsidiaries guarantee
the performance of the Company. Letters of credit issued under the facility are
collateralized by the inventory shipped pursuant to the letters of credit. At
the end of the second quarter, the Company had no outstanding balance against
the credit line, outstanding letters of credit were $27.7 million and the
Company had approximately $13.3 million available under the facility. The
Company was in compliance with all loan covenants at July 1, 2000.
The Company has other credit facilities, which in the aggregate allow the
Company to borrow up to $4.5 million. Additionally, the Company has available
credit facilities restricted in use for international letters of credit in the
amount of $8.5 million. At July 1, 2000 the Company had no outstanding balance
against the credit line, but outstanding letters of credit against these lines
were $4.0 million. The Company was in compliance with all loan covenants at July
1, 2000
PROPOSED ACQUISITION OF BUSINESS
--------------------------------
On June 26, 2000, the Company entered into an Asset Purchase Agreement
to acquire substantially all of the assets of Item-Eyes, Inc., a privately held
sportswear company. Item-Eyes maintains an operation center and sales
office/showroom in New York City, a corporate office in Hauppauge, New York and
uses shipping facilities in Passaic, New Jersey.
The purchase price consists of $13.0 million payable in cash, approximately $2.3
million payable in subordinated notes of the Company, and 377,056 shares of
common stock of the Company. The Company made a good faith Deposit of $5 million
on the Purchase of Item-Eyes. The refund of this Deposit is contingent on, among
other terms, securing adequate financing for the combined operations (see also
Note 3).
The Company will be assuming certain liabilities of Item-Eyes, as described in
the Asset Purchase Agreement, dated June 26, 2000, a copy of which was filed
with the Securities and Exchange Commission on July 10, 2000 on Form 8-K. The
transaction is subject to certain closing conditions. The Company has received
notice of early termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the transaction is expected to close in
August 2000.
COMPANY STRATEGY
----------------
The Company believes it has made major progress in positioning itself for the
future from both the completed sale of the manufacturing facilities and the
anticipated acquisition of Item-Eyes.
With the sale of the manufacturing facilities and finalizing the exit from these
operations, the Company believes it has enhanced its flexibility in the product
lines that can be offered to its customers. With the established international
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sourcing network and negotiated supply agreement with the purchaser of the
manufacturing facilities, the Company believes it will be able to provide its
customers with a better service and diversified, cost competitive product line.
The acquisition of Item-Eyes complements the Company's long-term strategy in
diversification of apparel product line, while broadening the Company's
international sourcing network.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The long term debt of the Company is at fixed interest rates which were at
market when the debt was issued, but are primarily below market at July 1, 2000.
The short-term debt of the Company has variable rates based on the prime
interest rate of the lending institution, or at the option of the Company, a
fixed rate based on LIBOR for a fixed term. As of July 1, 2000 there was no
short-term indebtedness under the Company's credit facility.
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. Prices are fixed in US dollars at the time the letters of credit
are issued.
With the exception of its 70% owned subsidiary, Hampshire Praha in the Czech
Republic, the Company does not issue or own foreign indebtedness. Hampshire
Investments either purchases foreign-based assets with US dollars, or with
foreign currency purchased with US dollars. All Real properties owned by
Hampshire Investments and located outside the United States, with the exception
of properties owned by Hampshire Praha in the Czech Republic which are leased
in German DM, are leased for US dollars and not in a foreign currency. Hampshire
Praha lease proceeds are received in German DM. 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 securities.
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 such that investments may not exceed 50% of annual net
income of the Company on a cumulative basis.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company believes that no currently pending
litigation, to which it is a party, will have a material adverse effect on its
consolidated financial condition, results of operations, or cash flows.
Item 2 and 3 are not applicable and have been omitted.
Item 4 - Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Stockholder held on May 16, 2000, pursuant to the
Notice of Annual Meeting of Stockholders and Proxy Statement dated April 12,
2000.
(1) Each of the six nominees standing for reelection (Ludwig Kuttner,
Herbert Elish, Joel Goldberg, Harvey L. Sperry, Eugene Warsaw and Peter W.
Woodworth) were elected as Directors of the Company by a majority of the votes
cast in the election; and
(2) A proposal to amend the Company's Stock Option Plan by increasing the
number of shares available for grant by 500,000 shares was ratified by a
majority of the votes cast; and
(3) Ratification of the appointment of Deloitte & Touche LLP as the
Company's independent accountants for the fiscal year ending December 31, 2000
was adopted by a majority of votes cast.
Item 5 is not applicable and has been omitted.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit No. Description
---------- ---------------------------------------------------
(27) Financial Data Schedule (electronic filing only)
b) Reports on Form 8-K filed during the quarter
A report was filed on May 11, 2000 regarding the "Disposition of Assets" of
Glamourette Fashion Mills to Glamourette/OG, Inc. (A report on Form 8-K/A,
amending the above report, was filed on July 10, 2000.)
A report was filed on July 10, 2000 announcing the signing of a Definitive Asset
Purchase Agreement to acquire substantially all the assets of Item-Eyes, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAMPSHIRE GROUP, LIMITED
(Registrant)
Date: August 10, 2000 /s/ Ludwig Kuttner
--------------------- -----------------------------
Ludwig Kuttner
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2000 /s/ Charles W. Clayton
--------------------- ------------------------------
Charles W. Clayton
Vice President, Secretary, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
