ITEM 1 - BUSINESS - ----------------- GENERAL - ------- Hampshire Group, Limited ("Hampshire Group" or the "Company") operates two business segments - Apparel and Investments. The Apparel segment is composed of Hampshire Designers, Inc. ("Hampshire Designers") and Item-Eyes, Inc. ("Item-Eyes"). Hampshire Designers is the largest designer and marketer of sweaters in North America and Item-Eyes is a leading designer and marketer of related separates. Both Hampshire Designers and Item-Eyes source the manufacture of their products through a network of quality manufacturers. The Investment segment consists of Hampshire Investments, Limited and its subsidiaries ("Hampshire Investments") which invest primarily in domestic and international real property.
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 design, manufacture (until the sale of all manufacturing facilities in 2000), and marketing of sweaters since 1956 and Item-Eyes has been engaged in the apparel business since 1978. In 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, source and deliver quality products within a given price range, while providing superior levels of customer service. The Company has developed worldwide sourcing abilities to broaden its product lines and to deliver quality merchandise at a competitive price.
The process for the design and development of the Company's products depends on whether the product is branded or private-label. In the branded business, the products first are designed by the Company's experienced design team, incorporating aspects of the latest fashion trends together with the consistent appeal of the brand name. These products are further refined in collaboration with manufacturers, resulting in a high-quality product to meet certain price levels. For private-label business, the products are designed by the Company for approval by the retailers.
- --------------------------------------------------------------------------- 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. - ----------------------------------------------------------------------------
The quality of the garments is ensured in a variety of ways. Each garment is manufactured using the finest quality yarns and each must undergo a rigorous quality assurance program. In some instances, multi-staged inspection processes, including direct field audits, are performed by Company personnel, and from time to time by customer quality control personnel. In international sourcing, the Company, in addition to its own personnel, utilizes factory personnel, sourcing agents, and inspection agencies to assure that the products meet our high quality standards and the standards required by our customers.
A high level of customer service is provided by the Company's domestic distribution facilities using the Company's Quick Response program and an Electronic Data Interchange ("EDI") system which links the Company's computers electronically to most of its customers. All distribution is coordinated through the domestic distribution facilities; but goods sourced from the Far East are distributed through public warehouses strategically located in California, improving delivery time. By providing just-in-time delivery of merchandise through the strategically located distribution facilities in the United States and through sophisticated order fulfillment techniques, the Company provides an essential service to its customers.
The acquisition of the Item-Eyes business in August 2000 accomplished several of the Company's long-term strategies. With a broad line of coordinated sportswear, the Item-Eyes acquisition expanded the Company's product lines; moved the Company into new market areas with its customers; and increased the Company's global sourcing capabilities through inclusion of a Central America sourcing network.
To diversify the asset base, the Company established Hampshire Investments to make long-term investments primarily in domestic and international real properties.
APPAREL OPERATIONS - ------------------ The Company is an apparel company whose principal products are women's and men's branded and private-label sweaters and women's related sportswear. The Company is a major supplier to the moderate-price sector of department stores and sells to mass merchandisers, specialty stores and mail-order distributors.
Product Lines - ------------- The Company has greatly expanded its product lines. A decade ago, the Company's product line was primarily focused on women's full-fashion, Luxelon(R) sweaters marketed under the Designers Originals(R) label. Although Designers Originals sweaters remain an important product line, the expanded product line permits the Company to supply many more departments of the Company's customers. Through the 1995 acquisition of Segue Limited, the Company added a business-casual line for women and through the 2000 acquisition of Item-Eyes, a broad line of related sportswear, including classic-woven apparel.
A line of men's sweaters has also been developed over the past six years through strategic acquisitions. Hampshire Brands is licensed to manufacture and market men's sweaters under the Geoffrey Beene(R), Dockers(R), Jantzen(R), Levi's(R), Wrangler Hero(R) and Timbercreek by Wrangler(R) labels. 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 for our customers.
The Company was licensed in 2001, to manufacture and market women's sweaters under the Docker's(R) and RIDERS(R) labels.
The product lines are sold by both the Company's sales force and independent sales representatives with senior management participating in the presentations to the larger accounts.
Products - -------- Designers Originals(R) sweaters include the Company's traditional product for women - classically designed, full-fashioned, fine-gauge, Luxelon(R) (acrylic) sweaters with a cashmere feel and look - and a variety of novelty and other sweaters. The Company recently introduced a fine-gauge, full-fashion, cotton sweater, which has been well received.
Under the Designers Originals Studio(R) and Moving Bleu(R) labels, the Company sells a business-casual line for women which incorporates woven fabrics in related separates, such as blouses, pants, skirts and sweaters, in the moderate-price category. The Company also sells solid and jacquard chenille sweaters and seasonal theme sweaters.
Related sportswear, including blazers, pants, shirts and sweaters, and "soft dressing", are sold by Item-Eyes under its Requirements(R) and Nouveaux(R) labels and the private-labels of some of the Company's customers. With its established worldwide sourcing network, the Company has the ability to respond to market demands.
Customers - --------- The Company's customer base has decreased due to the consolidation of the retail industry. However, management believes that the number of stores serviced by the Company has not decreased. The Company has historical relationships with many of its approximately 500 customers, which include most major department stores and mass merchandisers, specialty stores and mail-order distributors.
Competition - ----------- The apparel market remains highly competitive. Competition is primarily based on product design, price, quality and service. While the Company faces competition from manufacturers located in the United States, its primary competition comes from manufacturers located in Southeast Asia.
The ability of the Company to compete is substantially enhanced by its financial strength.
The foreign competitors benefit from production cost advantages, which are offset in part by United States import quota and tariff protection. The Company is continuing to develop international sourcing relationships in areas which have lower manufacturing costs.
INVESTMENT OPERATIONS - --------------------- Hampshire Investments was established by the Company in 1997 to diversify the asset base of the Company. At the end of 2001, the carrying value of its investments was approximately $33 million, of which approximately 88% was in real properties. The investment decisions of Hampshire Investments are primarily made by the Investment Committee of the Board of Directors.
Seasonality - ----------- Although the Company sells apparel throughout the year, the business is highly seasonal, with approximately 76% of sales occurring during the third and fourth quarters.
Backlog - ------- The sales order backlog for the Apparel segment was approximately $123 million as of March 2, 2002, compared with approximately $133 million as of March 2, 2001. 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 AND LICENSES - ----------------------- The Company considers its trademarks to have value in the marketing of its products. The Company has entered into licensing agreements to manufacture and market sweaters under certain trademarks for which it pays a royalty fee based on sales. The licensing agreements are normally for a three-year initial term with an option to renew providing that the Company achieves a specified sales level during the term.
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 integrated electronic information systems applications. More than 70% of all orders are received electronically. These orders are generated by the customers' computer systems based on their sales and inventory levels. The Company electronically sends advance ship notices and invoices to customers, which results in the timely updating of the customer's inventory system.
CREDIT AND COLLECTION - --------------------- The Company manages its credit and collection functions by approving and monitoring the credit lines of its customers. Credit limits are determined by past payment history and financial information obtained from credit agencies and other sources. The Company believes that its credit and collection staff has been a significant factor in maximizing sales opportunities while minimizing bad debt losses.
CUSTOMER CONCENTRATION - ---------------------- The Company had sales to three major customers (defined as sales in excess of 10% of total sales) during 2001, which represented 10%, 11% and 14% of total sales; two major customers during 2000, which represented 14% and 15% of total sales; and three major customers in 1999, which represented 10%, 11% and 15% of total sales. The Company's five largest customers accounted for approximately 49% of the Company's consolidated sales in 2001, compared with 50% in 2000 and 51% in 1999.
EMPLOYEES - --------- As of March 2, 2002, the Company had approximately 214 full-time employees and 4 part-time employees. The Company and its employees are not parties to any collective bargaining agreements except for 13 hourly employees of Item-Eyes, Inc., who are represented by UNITE Labor Union under an agreement expiring in August 2004. The Company considers its relationship with its employees to be good.
GOVERNMENTAL REGULATION - ----------------------- The Company's business is subject to regulation by federal, state and local governmental agencies dealing with environmental protection. The Company believes it has operated, and intends to continue to operate, in compliance in all material respects with these regulations.
The World Trade Organization was established in 1995 as the governing body for international trade between the United States and 140 foreign countries. As a result of various multilateral and bilateral agreements between the United States and certain foreign countries negotiated under the framework established by the World Trade Organization agreements, the Apparel segment benefits from limited import quota and tariff protection in certain categories of its business. These quotas and tariffs are expected to continue in some form through
2004. The agreements impose quotas on the amount and type of competing goods which may be shipped into the United States from some countries. If these quotas or tariffs were to become more restrictive or punitive, the profitability of the Apparel segment could be adversely affected.
The North American Free Trade Agreement ("NAFTA"), approved in 1993 by the United States, Canada and Mexico, has in most part eliminated quotas and tariffs among these three countries.
ITEM 2
ITEM 2 - PROPERTIES - ------------------- The Company leases its corporate office and all of its sales offices/showrooms and distribution center. The Company believes that all of its properties are well maintained, in good condition and are generally suitable for their intended use. The Company's principal properties are described in the table below.
Square Lease Properties Footage Expiration(1) - ------------------------------------------------------------------------------- Corporate Office - Anderson, South Carolina 10,500 04/30/06
Hampshire Designers Sales Office and Showroom - New York, New York 24,000 08/31/11 Distribution Center - Anderson, South Carolina 57,000 04/30/06
Item-Eyes Sales Office and Showroom - New York, New York 6,000 04/30/04 Operations Center - New York, New York 16,000 06/30/05 Administrative Offices - Hauppauge, New York 6,000 05/31/05
(1) Assuming the exercise of all options to renew. - -------------------------------------------------------------------------------
The Company also utilizes public warehouses in New Jersey and California to receive and distribute imported merchandise.
ITEM 3
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
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted to a vote of Stockholders during the fourth quarter of fiscal year 2001.
PART II ------- ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - -------------------------------------------------------------------------- The Company's Common Stock is quoted on the Nasdaq Stock Market under the symbol "HAMP".
The following table sets forth the high and low sales prices of shares of Common Stock as reported by the Nasdaq Stock Market.
Common Stock ------------------- High Low Year Ended December 31, 2000: ------ ----- - ---------------------------- First Quarter $14.50 $8.75 Second Quarter 12.75 6.87 Third Quarter 10.00 7.25 Fourth Quarter 9.12 7.25
Year Ended December 31, 2001: - ---------------------------- First Quarter $ 9.62 $7.06 Second Quarter 10.50 8.40 Third Quarter 10.50 8.50 Fourth Quarter 13.30 8.00
As of March 23, 2002, the Company had approximately 475 stockholders of record.
The Company has not declared dividends with respect to its Common Stock. The determination to pay dividends will be made by the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors may deem relevant. The Senior Notes Agreement, as amended September 5, 2000 and the Hampshire Group, Limited Revolving Credit Agreement of the same date, contain covenants placing limitations on "restricted payments", which includes payment of cash dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in Item 7.
(Page 9 Continued)
RESULTS OF OPERATIONS - --------------------- Effective August 20, 2000, (the "Acquisition Date") Hampshire Group, Limited purchased substantially all of the assets and business of Item-Eyes, Inc., a privately held sportswear company; and accordingly, the results of Item-Eyes (the "Acquired Business") have been included in the results of the Company subsequent to that date. The results of the Company, excluding the results of the Acquired Business, are referred to herein as the existing business (the "Existing Business").
2001 Compared With 2000 - ----------------------- Income from continuing operations of the Company for the year ended December 31, 2001 was $11,080,000, or $2.37 per share on a diluted basis, as compared with $8,145,000, or $1.88 per share on a diluted basis, for the preceding year.
Net sales for the year ended December 31, 2001 were $263,485,000, which included $98,033,000 of Acquired Business net sales, compared to $196,882,000 for 2000, which included $43,995,000 of Acquired Business net sales for the period from the Acquisition Date through December 31, 2000. The Existing Business net sales increased $12,565,000. The 8.2 % increase in the Company's Existing Business net sales reflected a strong demand for sweaters. For the year of 2001, compared with 2000, aggregate unit volume of the Existing Business increased 16.9%. The increase is a result of strong sales of women's cotton products, complemented with greater demand for men's sweaters. A shift in product mix to lower priced units resulted in a 7.4% decrease in the average sales price for the Existing Business.
Gross profit for 2001 was $69,827,000 (26.5% of net sales), which included Acquired Business gross profit of $23,244,000, compared to $40,129,000 (20.4% of net sales) for 2000, which included $10,252,000 of Acquired Business gross profit for the period after the Acquisition Date. The gross profit for the Existing Business was 28.2% compared with 19.5% for the same period last year. The increase in gross profit from the Company's Existing Business is attributed to discontinuing less profitable product lines and the increase in unit volume of sweaters.
Revenues for the Investment segment in 2001 were $2,594,000, compared to $2,281,000 for 2000, an increase of $313,000. The increase in revenues resulted primarily from the increase in the number of domestic real property investments being renovated and leased.
Selling, general and administrative ("SG&A") expenses for the Company were $48,668,000 in 2001, which included Acquired Business SG&A expenses of $16,322,000, compared to $31,666,000 for 2000, which included $4,917,000 of Acquired Business SG&A expenses for the period after the Acquisition Date. The increase consisted of additional selling, shipping and related expenses caused by the increased sales volume and higher bonuses due to increased income in 2001.
SG&A expenses for the Investment segment were $2,174,000 for 2001, and $1,646,000 for 2000, an increase of $528,000. The increase resulted primarily from additional operating expenses for property renovated and leased, selling and operating expenses related to the sale of real property, and additional depreciation expense, which increased to $1,001,000 in 2001 from $822,000 in 2000.
In 2000, the Company sold its sweater manufacturing assets to Glamourette/OG, Inc. ("Glamourette"), a Puerto Rican corporation. The sale resulted in a gain of $632,000, after recognizing $2,169,000 of exit costs associated with closing the domestic manufacturing facilities and impairment charges of $849,000 for fixed assets and $819,000 for goodwill (see Note 15 of the Consolidated Financial Statements). During the fourth quarter of 2001, the Company notified Glamourette
that Glamourette was in default under the terms of its agreement. Subsequent to this notice Glamourette filed for bankruptcy. As a result of these events, the Company fully reserved the remaining balance of the promissory note due from Glamourette, as part of the purchase price, in the amount of $3,893,000, with $1,793,000 recognized in 2001 and $2,100,000 in 2000. Additionally, in the Apparel segment, the Company recognized impairment in 2001 of goodwill, in the amount of $825,000, due to the permanent decline in one of the divisional operations and its estimated deficiencies in future cash flows.
During 2000, the Company had revenues from leased hosiery equipment of $747,000 and recognized a gain of $523,000 from the sale of this equipment (see Note 16 of the Consolidated Financial Statements) and a gain of $406,000 on the sale of other apparel equipment and property.
In 2001, the Investments segment reported "net investment transactions and impairment charges" of $876,000 compared to $465,000 in 2000. The amount reported for 2001 includes an impairment charge of $1,272,000 on three European investments; an impairment charge against the real property holdings in Russia and Romania of $242,000; which were partially offset by the gain on the sale of real property of $652,000 and other gains and losses. The amount reported for 2000 primarily includes an impairment charge of $300,000 on two European investments; an impairment charge against two notes receivable of $147,000; a loss on the sale and permanent write-down of available-for-sale securities of $658,000; all of which were partially offset by the gain on the sale of real property of $735,000 and other gains and losses.
Operating income in 2001, for the Apparel segment, was $24,245,000, which included $6,922,000 Acquired Business income, compared to $13,739,000 for 2000, which included Acquired Business income of $5,335,000 for the period after the Acquisition Date. Income from operations of the Existing Business increased by $8,919,000. The improvement for the Existing Business was principally due to the increase in net sales and gross profit. The current year's Apparel operating income for the Existing Business includes charges for the goodwill impairment as discussed above and the write-off of the Glamourette promissory note. The prior year's operating income included gains from both the sale of the manufacturing facilities and from other property and equipment. The Investment segment had an operating loss of $456,000 for 2001, compared to operating income of $13,000, a decline of $469,000. This decline resulted from the net difference between impairment and investment activity.
Interest income was $561,000 for 2001, compared to $1,353,000 for 2000, a decline of $792,000. The reduction resulted primarily from the use of cash in the purchase of the Acquired Business in August 2000 and lower average cash balances for most of 2001.
The income tax provision was $6,200,000 for 2001, compared with $2,171,000 in 2000. The increase in the effective tax rate to 35.9% for 2001 from 21.0% for 2000 resulted from substantially all of the taxable income being generated in the United States in 2001 versus 2000, when a larger portion of the taxable income was generated in Puerto Rico, and such income being exempt from U.S. federal regular income taxes pursuant to an election under Section 936 of the Internal Revenue Code.
2000 Compared With 1999 - ----------------------- Income from continuing operations of the Company for the year ended December 31, 2000 was $8,145,000, or $1.88 per share on a diluted basis as compared with $5,196,000, or $1.22 per share on a diluted basis, for the preceding year.
Net sales of the Company for the year ended December 31, 2000 were $196,882,000 compared to $151,317,000 in 1999. The Acquired Business accounted for $43,995,000 in net sales, while the net sales of the Existing Business of the Company increased 1.0% in 2000. The increased sales in the Existing Business primarily resulted from the first year's sales of the Dockers(R) brand.
Gross profit of the Apparel segment in 2000 was $40,129,000, or 20.4% of net sales, compared to $29,700,000, or 19.6% of net sales in the prior year. The Acquired Business accounted for the additional increase in gross profit and the 0.8% difference.
Revenues of the Investment segment were $2,281,000 in 2000 compared with $2,005,000 in 1999. The increase resulted from additional property acquired and renovated real property units, which were leased in late 1999 and during 2000.
SG&A expenses of the Company were $31,666,000 in 2000 compared with $25,111,000 in 1999. The SG&A of the Acquired Business accounted for $4,918,000 or 75.0% of the increase for the year. The first year sales of the Dockers(R) sweater line also contributed to the increase in SG&A expenses.
SG&A expenses for the Investment segment were $1,646,000 in 2000 and $1,242,000 in 1999. The increase resulted primarily from additional operating expenses for acquired property and additional depreciation expense, which increased from $624,000 in 1999 to $822,000 in 2000.
During the second quarter of 2000, the Company sold its sweater manufacturing assets to Glamourette, a Puerto Rican corporation. The sale resulted in a gain of $632,000, after recognizing $2,169,000 of exit costs associated with closing the domestic manufacturing facilities and impairment charges of $849,000 for fixed assets and $819,000 for goodwill (see Note 15 of the Consolidated Financial Statements).
In the fourth quarter of 2000, the Company sold the leased hosiery equipment. The Company had revenues from leasing this equipment during 2000 of $747,000, in addition to the $523,000 gain on the sale of the equipment (see Note 16 of the Consolidated Financial Statements).
During 2000, the Company sold certain equipment located in Mexico and property located in Winona, Minnesota, which resulted in a gain of $406,000. In the fourth quarter of 1999, the Company recorded a $300,000 impairment charge for the closing of a distribution center in Winona, Minnesota. Sales of property and equipment during 1999 resulted in a $15,000 gain.
In 2000, the Investments segment reported "net investment transactions and impairment charges" of $465,000 compared to $394,000 in 1999. The amount reported for 2000 primarily includes an impairment charge of $300,000 on two European investments; an impairment charge against two notes receivable of $147,000; a loss on the sale and permanent write down of available-for-sale securities of $658,000; all of which were partially offset by the gain on the sale of real property of $735,000 and other gains and losses. In the $394,000 "net investment transactions and impairment charges" recorded in 1999, the Company recognized an impairment charge of $425,000, which was partially offset by other investment gains and losses.
Interest expense was $3,410,000 in 2000 and $1,967,000 in 1999. Approximately $209,000 of this increase resulted from the additional financing of real properties by the Investment segment. The balance of the increase in interest expense related primarily to the financing of the acquisition of the Acquired Business.
Interest income was $1,353,000 in 2000 compared to $729,000 in 1999. The additional interest income resulted primarily from the cash and equivalents of the Company during the first half of 2000 (prior to acquisition of the Acquired Business). Also reflected in interest income is approximately $218,000 of interest income related to the promissory note received in connection with the sale of the sweater manufacturing facilities (see Note 15 of the Consolidated Financial Statements) and $319,000 of interest income on the promissory note and other obligations from the purchaser of the Hosiery Division.
The income tax provision was $2,171,000 in 2000 compared with $900,000 in 1999. The increase in the effective tax rate to 21.0% for 2000 as compared to 14.8% for the prior year resulted principally from two factors. First, a larger percentage of the taxable income was generated in the United States in 2000 versus 1999 when a larger percentage was generated in Puerto Rico, and such income was exempt from U.S. federal regular income taxes pursuant to an election under Section 936 of the Internal Revenue Code. Second, the gain on the sale of the manufacturing facilities in Puerto Rico in 2000, resulted in an additional $600,000 provision for taxes in Puerto Rico. Because of the sale of the manufacturing facilities in Puerto Rico, the Company expects to benefit from a significant portion of the net operating loss carryforward. As a result, the valuation allowance of $1,869,000, which had been recorded prior to 1999 was reversed in 2000.
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 buildup in inventories and accounts receivable (which historically reach their maximum requirements in the third quarter), servicing long-term debt and funding capital expenditures and investments. The primary sources to meet the liquidity and capital requirements include funds generated from operations, revolving credit lines and long-term borrowing.
The Company has its principal credit facility with a consortium of six commercial banks with JPMorganChase, as agent. The Company's Revolving Credit Facility, which matures on September 5, 2003, provides a secured credit facility up to $97,937,500 in revolving line of credit borrowings and outstanding letters of credit. Advances under the line of credit are limited to the lesser of: (1) $97,937,500 less outstanding letters of credit; or (2) the sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject to seasonal limits) of the Restricted Subsidiaries (defined as Hampshire Designers and Item-Eyes), and 50% of outstanding eligible letters of credit issued through this credit facility, plus a seasonal supplemental, less borrowings outstanding under the Senior Notes (see below) and outstanding letters of credit.
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 2.25%, for a fixed term. The loan is collateralized, pari passu with the Senior Notes, principally by the trade accounts receivable and inventories of the Company's Restricted Subsidiaries and a pledge of the Common Stock of all subsidiaries. The Company has also pledged as collateral two insurance policies, a $5,000,000 policy on the life of its Chief Executive Officer and a $1,000,000 policy on the life of the Chief Executive Officer of Item-Eyes, Inc. At December 31, 2001 there were $9,340,000 outstanding letters of credit. No advances were outstanding under the line of credit at December 31, 2001 or 2000, which resulted in availability for borrowing of approximately $29,980,000 under the line of credit at December 31, 2001.
The Company also has available two other credit facilities, which provide for international letters of credit in the aggregate amount of $2,000,000. As of December 31, 2001, the letters of credit outstanding against these two letter of credit facilities totaled approximately $207,000. Additionally, Hampshire Investments, Limited, has a $1,000,000 line of credit available for its use. As of December 31, 2001, there were no outstanding balances.
The maximum advances outstanding during 2001, under all lines of credit, was $62,270,000. The average amount outstanding during 2001 was approximately $16,875,000. Outstanding letters of credit under all credit lines totaled approximately $9,547,000 at December 31, 2001.
During 1998, the Company issued $15,000,000 long-term notes to two insurance companies (the "Senior Notes"). The Senior Notes are collateralized pari passu with the Revolving Credit Facility. The Senior Notes bear interest at 8% with principal due in semi-annual installments of $937,500.
Both the Revolving Credit Facility and the Senior Notes Agreement (the "Agreements") contain covenants which require certain financial performance and restrict certain payments by the Company and the Restricted Subsidiaries, including advances to the Company's Non-Restricted Subsidiary (defined as Hampshire Investments, Limited and its subsidiaries).
The financial performance covenants require, among other things, that the Company maintain specified levels of consolidated net worth, not exceed a specified consolidated leverage ratio, achieve a specified fixed charge ratio and limit capital expenditures to a specified maximum amount. The Company was in compliance with the financial performance covenants at December 31, 2001.
The Agreements restrict the sale of assets, payments by the Company of cash dividends to stockholders, prepayment of Subordinated Notes, the repurchase of Company Common Stock and investments in and loans to the Non-Restricted Subsidiary. The Senior Notes Agreement also requires that during any twelve-month period there must be a period of 45 consecutive days where there is no outstanding short-term debt. The Company was in compliance with these provisions at December 31, 2001.
The Company's other debt includes $1,863,000 of Subordinated Notes from the acquisition of Item-Eyes and a $2,678,000 loan from Merchants National Bank. The Company, through its Non-Restricted Subsidiary, finances real property investments through mortgages and construction loans. The Company's Chief Executive Officer has guaranteed the Subordinated Notes and certain indebtedness of the Non-Restricted Subsidiary.
Future contractual obligations related to long-term debt and noncancellable operating leases at December 31, 2001 were as follows:
Year Ended December 31, 2001 (In thousands)
Total 2002 2003 2004 2005 2006 Thereafter ----- ---- ---- ---- ---- ---- ---------- Operating leases $ 4,412 $1,300 $1,310 $ 982 $ 558 $ 262 $ - Long term debt 29,459 7,721 3,371 5,468 2,913 2,195 7,791 ----------------------------------------------------------- Total $33,871 $9,021 $4,681 $6,450 $3,471 $2,457 $7,791 ===========================================================
At December 31, 2001 the Company had cash and cash equivalents totaling $28,686,000.
Net cash provided by operating activities was $23,865,000 for the year ended December 31, 2001, as compared to net cash provided by operating activities of $26,345,000 for last year. Net cash provided by operating activities in 2001 was provided primarily from adjusted net income of $17,891,000 (after adjusting for $2,619,000 in depreciation and amortization and $4,192,000 for asset impairment charges) and $7,344,000 from changes in the working capital accounts. Net cash provided by operating activities in 2000 was provided primarily from adjusted net income of $12,738,000 (after adjusting for $3,408,000 in depreciation and amortization and $787,000 for asset impairment charges) and $15,484,000 from changes in the working capital accounts.
Net cash used in investing activities was $5,431,000 for the year ended December 31, 2001, as compared to net cash used in investing activities of $44,657,000 for last year. The decrease in cash used in investment activities results primarily from $44,069,000 used in 2000 for the purchase of the Acquired Business and $6,415,000 of cash received in 2000 from the sale of property, plant and equipment. The Company, through the Investment segment, invests in assets unrelated to the Company's Apparel segment. During 2001, the Investment segment invested $8,502,000 compared to $9,039,000 during 2000.
Net cash used in financing activities was $265,000 for the year ended December 31 2001, as compared to net cash provided by financing activities of $4,998,000 for 2000. Proceeds from long-term debt in 2001 was $3,344,000, as compared to $6,980,000 for last year. The majority of the long-term debt, for both periods resulted from the Investment segment financing real property purchases and renovations. During 2001, the Company repaid $3,953,000 of long-term debt as compared to $2,174,000 for 2000. The Board of Directors of the Company has authorized management to purchase from time to time, in the market, shares of the Company's Common Stock. During 2001, the Company purchased 16,760 shares of its Common Stock for $138,000.
Management believes that cash flow from operations, available borrowings under the credit facilities and long-term borrowing will provide adequate resources to meet the Company's capital requirements and operational needs for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis management evaluates its estimates, including those related to the allowance for doubtful notes and accounts, allowances for customer returns and adjustments, inventory reserves and for impairment of real property investments, long-term investments and other long-lived assets. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.
The following critical accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:
Allowance For Doubtful Notes and Accounts and Customer Returns and Adjustments - ------------------------------------------------------------------------------ The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers or other parties failure to make payments on trade or notes receivable due to the Company. In addition, the Company maintains allowances for customer returns, trade discounts, customer chargebacks, and for sales and markdown allowances given to the customer, typically at the end of the selling seasons, enabling customers to markdown the retail sales prices of any remaining goods on hand. The estimates for these allowances and discounts are based on a number of factors, including: (1) historical experience, (2) aging of the trade accounts receivable, (3) specific information obtained by the Company on the financial condition and current credit worthiness of customers or other parties, and (4) specific agreements or negotiated amounts with customers.
If the financial condition of the Company's customers were to deteriorate and reduce the ability of the Company's customers to make payments on their accounts, the Company may be required to increase its allowances by recording additional bad debt expense. Further, while the Company believes that it has negotiated all substantial sales and markdown allowances with its customers, additional allowances may be requested by customers. Likewise, should the financial condition of the Company's customers or other parties improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse recorded allowances.
Inventory Reserves - ------------------ The Company analyzes out-of-season merchandise on an SKU by SKU basis to determine reserves, if any, that may be required. Factors considered in evaluating the reserves include product styling, color, current fashion trends and quantities on hand. Many of the Company's products are "classics" and remain saleable from one season to the next and therefore no reserves are generally required on these products. An estimate is made of the market value, less costs to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than estimated amounts, reserves may be reduced.
Impairment of Long-Lived Assets - ------------------------------- The Company's long-lived assets include real property investments, long-term investments, property and goodwill. The Company follows the provisions of Accounting Principles Board Opinion No. 17 ("APB 17"), "Intangible Assets," and Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting of the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance with APB 17 and SFAS 121, as applicable, management assesses impairment of real property investments, long-term investments, property and goodwill whenever changes or events indicate that the carrying value may not be recoverable. In accordance with APB 17, management assesses impairment of goodwill whenever operating trends have had other than a temporary adverse change. Management applies a discounted cash flow approach to measure impairment using the Company's estimated current cost of capital as the discount rate. In accordance with SFAS 121, management writes down other long-lived assets to fair value if, based on an analysis, the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets.
Additionally, economic conditions and other factors in foreign countries and elsewhere affect certain of the Company's real property investments and long-term investments. Where impairment indicators exist, management uses available information, including estimated future undiscounted cash flows to estimate impairment, if any. Factors could develop to cause the Company to recognize additional impairment of long-lived assets. If the impairment estimates are excessive, gains may be recognized upon disposal or sale of the assets. Likewise, if insufficient impairment charges have been recorded, losses may be recognized upon disposal or sale of the assets.
OUTLOOK - ------- The Company believes that the primary reason for its success in recent years has been its ability to offer classic and new products and the highest level of quality and services to its customers. Management is committed to continue to offer such quality and services to its customers. Management recognizes that price competition in the apparel market can adversely affect earnings of the Company.
The ability of the Company to compete is substantially enhanced by its financial strength.
Over the past five years, the retail industry has consolidated through acquisitions and mergers. Further, retailers have concentrated more volume with a fewer number of vendors. The Company has responded by expanding its product line in the sweater business and by acquiring Item-Eyes. By increasing its utilization of foreign sources, the Company can offer greater variety in yarns, styling and surface treatment at competitive prices.
Seasonality - ----------- The Company's apparel business is highly seasonal with the majority of sales occurring in the third and fourth quarters of the year.
Effects of Changing Prices - -------------------------- The Company is subject to the effects of changing prices. It has generally been able to pass along a majority of inflationary increases in its costs by increasing the prices for its products; however, competitive conditions sometimes preclude such increases.
New Accounting Standards - ------------------------ SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and was amended in June 2000 by SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities". SFAS 133 requires all derivative instruments to 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. The adoption of SFAS 133 on January 1, 2001 had no effect on the Company's financial position, results of operations or cash flows.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets." These statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. The adoption of SFAS 141 had no impact on the Company's financial statements.
SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Impairment would be examined more frequently if certain impairment indicators are encountered. Intangible assets with a determinable useful life will continue to be amortized over that period. This statement is effective for the Company on January 1, 2002. Within the first six months of 2002, the Company will complete its assessment of goodwill. Amortization expense related to goodwill for the years ended December 31, 2001, 2000, and 1999 was $847,000, $692,000 and $487,000, respectively.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions of APB 30 related to the disposal of a segment of a business. SFAS 144 is effective for the Company on January 1, 2002. The Company does not expect the adoption of the standard to have a significant impact on the Company's financial position, or results of operations.
The FASB's Emerging Issues Task Force ("EITF") issued EITF 00-25, "Vendor Income Statement Characterization Paid to a Reseller of the Vendor's Products", which addresses whether consideration from a vendor to a reseller of the vendor's product is (a) an adjustment to the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement, or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore should be included as a cost or an expense when recognized in the vendor's income statement. EITF 00-25 is effective for the Company on January 1, 2002. The Company is evaluating the impact of the adoption of EITF 00-25 and has not yet determined the effect, if any, that the adoption will have on the Company's classification of such costs in the consolidated statements of operations.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial and product market prices and rates. The Company is exposed to market risk in the areas of changing interest rates and fluctuations of currency exchange rates. The Company is also exposed to market risk due to increased costs for raw materials for the Company's products.
The long-term debt of the Company is at fixed interest rates, which were at market when the debt was issued, but are primarily above market on December 31, 2001. The impact of a 100 hypothetical basis point increase in interest rates on the Company's variable rate debt would be to increase interest expense for 2001 and 2000 by approximately $169,000 and $130,000, respectively. 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.
In purchasing apparel from foreign manufacturers, the Company uses letters of credit that require the payment of dollars upon receipt of bills of lading for the products. Prices are fixed in U.S. dollars at the time the letters of credit are issued.
With the exception of Hampshire Praha, the Company's 70% owned Czech Republic subsidiary, Hampshire Investments does not issue or own foreign indebtedness. Further, the foreign indebtedness of Hampshire Praha is insignificant to the Company's financial statements. Hampshire Investments either purchases foreign based assets with U.S. dollars or with foreign currency purchased with U.S. dollars, on or near the purchase date. Real property owned by Hampshire Investments and located outside the United States is leased for either U.S. dollars or other stable currency. The primary foreign currency risk for Hampshire Investments is the impact of fluctuations that such currencies have on the businesses of the lessees of real property owned by Hampshire Investments.
The Company does not currently engage in derivative financial instruments to mitigate these market risks.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The information required to be presented in Item 8 is presented commencing on Page of this Annual Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------ There were no disagreements with independent accountants on accounting or financial disclosure during the three fiscal years ended December 31, 2001, 2000 and 1999.
PART III -------- Certain information required to be presented in this Part III of this Annual Report on Form 10-K is omitted as the Registrant will file a Definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year, which is incorporated herein by reference thereto.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The information concerning the Company's directors and executive officers required to be presented in Item 10 is incorporated herein by reference to the Company's 2002 Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION - -------------------------------- The information concerning executive compensation required to be presented in Item 11 is incorporated herein by reference to the Company's 2002 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 Item 12 is incorporated herein by reference to the Company's 2002 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information concerning certain relationships and related transactions required to be presented in Item 13 is incorporated herein by reference to the Company's 2002 Proxy Statement.
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 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. 1 (3)(A)(1) Certificate of Amendment to the Certificate of Incorporation of Hampshire Group, Limited. 1 (3)(A)(2) Amended and Restated By-Laws of Hampshire Group, Limited. 1 (3)(B)(6) Merger Agreement between Hampshire Designers, Inc. and Segue (America) Limited dated December 30, 1999. 3 (10)(A)(3) Employment Agreement between Hampshire Group, Limited and Ludwig Kuttner dated as of January 1, 1998. 2 (10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option Plan Amended and Restated effective June 7, 1995. 1 (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. 1 (10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries 401(k) Retirement Savings Plan. 1 (10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred Compensation Plan for Directors and Executives Amended and Restated December 30, 1997. 1 (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. 2 (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. 2 - ------------------------------------------------------------------------------ (Exhibits continued on next page)
(Exhibits continued from previous page)
Exhibit No. Description Footnote ---------- ------------------------------------------------------ -------- (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. 2 (10)(J)(7) Lease Agreement between Hampshire Designers, Inc. and Peter Woodworth and Joyce Woodworth for the Winona, Minnesota Distribution Center dated June 15, 1999. 3 (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. 1 (10)(U) Agreement between Hampshire Designers, Inc. and Vision Legwear LLC, dated May 27, 1999 for the disposal of the hosiery business. 4 4.1 Amendment No. 1, dated September 5, 2000 to the Note Purchase Agreement, dated as of May 15, 1998, among the Company, the Guarantors named therein, Phoenix Home Life Mutual Insurance Company and the Ohio National Life Insurance Company. 5 10.1 Asset Purchase Agreement among Vintage III, Inc., Hampshire Group, Limited, Item-Eyes, Inc. and certain other parties, dated June 26, 2000. 5 10.2 Amended and Restated Credit Agreement and Guaranty among Hampshire Group, Limited, the Guarantors named therein, the Banks named therein and The Chase Manhattan Bank as agent for the Banks, dated September 5, 2000. 5 10.3 Term Loan Agreement between Merchants National Bank and Hampshire Group, Limited dated as of September 20, 2000. 6 - ------------------------------------------------------------------------------- (1) Incorporated by reference to the Company's 1997 Annual Report on Form 10-K. (2) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K. (3) Incorporated by reference to the Company's 1999 Annual Report on Form 10-K. (4) Incorporated by reference to the Company's June 15, 1999 Report on Form 8-K. (5) Incorporated by reference to the Company's September 15, 2000 Report on Form 8-K. (6) Incorporated by reference to the Company's November 9, 2000 Report on Form 8-K/A.
Exhibits filed herewith: -------------------------------------------------------------- 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K filed during the quarter.
No reports were filed on Form 8-K during the quarter ended December 31, 2001.
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 27th day of March 2002.
HAMPSHIRE GROUP, LIMITED
By: /s/ LUDWIG KUTTNER ----------------------- Ludwig Kuttner President and Chief Executive Officer (Principal Executive Officer)
- ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ LUDWIG KUTTNER Chairman of the Board of Directors, March 27, 2002 - ------------------------ President and Chief Executive Officer -------------- Ludwig Kuttner
/s/ JOEL GOLDBERG Director March 27, 2002 - ------------------------ -------------- Joel Goldberg
/s/ MICHAEL C. JACKSON Director March 27, 2002 - ------------------------ -------------- Michael C. Jackson
/s/ HARVEY L. SPERRY Director March 27, 2002 - ------------------------ -------------- Harvey L. Sperry
/s/ EUGENE WARSAW Director March 27, 2002 - ------------------------ -------------- Eugene Warsaw
/s/ PETER W. WOODWORTH Director March 27, 2002 - ------------------------ -------------- Peter W. Woodworth
/s/ WILLIAM W. HODGE Vice President and Chief Financial Officer - ------------------------ (Principal Financial Officer and March 27, 2002 William W. Hodge Principle Accounting Officer) --------------
HAMPSHIRE GROUP, LIMITED Index To Consolidated Financial Statements
Page ---- Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows -
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements -
Financial Statement Schedules II. Valuation and Qualifying Accounts and Reserves III. Real Estate and Accumulated Depreciation -
Quarterly Financial Data
Report of Independent Accountants
To the Board of Directors and Stockholders of Hampshire Group, Limited Anderson, South Carolina
We have audited the accompanying consolidated balance sheets of Hampshire Group, Limited and its Subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the index on. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP - ---------------------------
Deloitte & Touche LLP Greenville, South Carolina March 7, 2002
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
(Consolidated Statements of Cash Flows continued on next page.)
(Consolidated Statements of Cash Flow continued from previous page.)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 1 - Organization and Summary of Critical and Other Significant Accounting Policies - ------------------------------------------------------------------- Organization - ------------ Hampshire Group, Limited (the "Company"), through its subsidiaries, engages in the apparel business and invests in real property. The Company, with headquarters in Anderson, South Carolina, operates in two segments, Apparel and Investments. The Company's apparel products are sold primarily in the United States through various retail and catalog companies. The investment company, with subsidiaries located in the United Kingdom, the Cayman Islands and the Czech Republic, principally purchases real properties located primarily in the United States, Russia and Eastern Europe, for the purposes of long-term 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 all majority-owned subsidiaries, including Hampshire Designers, Inc. and its subsidiaries (collectively, "Hampshire Designers"); Item-Eyes, Inc. ("Item-Eyes"), since its acquisition on August 20, 2000; and Hampshire Investments, Limited and its subsidiaries and Hampshire Praha s.r.o. (70% owned) located in the Czech Republic (collectively, "Hampshire Investments"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Summary of Critical and Other Significant Accounting Policies - ------------------------------------------------------------- The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis management evaluates its estimates, including those related to the allowance for doubtful notes and accounts, allowances for customer returns and adjustments, inventory reserves and for impairment of real property investments, long-term investments and other long-lived assets. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.
The following critical accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:
Allowance For Doubtful Notes and Accounts and Customer Returns and Adjustments - ------------------------------------------------------------------------------ The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers or other parties failure to make payments on trade or notes receivable due to the Company. In addition, the Company maintains allowances for customer returns, trade discounts, customer chargebacks, and for sales and markdown allowances given to the customer, typically at the end of the selling seasons, enabling customers to markdown the retail sales prices of any remaining goods on hand. The estimates for these allowances and discounts are based on a number of factors, including: (1) historical experience, (2) aging of the trade accounts receivable, (3) specific information obtained by the Company
on the financial condition and current credit worthiness of customers or other parties, and (4) specific agreements or negotiated amounts with customers.
If the financial condition of the Company's customers were to deteriorate and reduce the ability of the Company's customers to make payments on their accounts, the Company may be required to increase its allowances by recording additional bad debt expense. Further, while the Company believes that it has negotiated all substantial sales and markdown allowances with its customers, additional allowances may be requested by customers. Likewise, should the financial condition of the Company's customers or other parties improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse recorded allowances.
Inventory Reserves - ------------------ The Company analyzes out-of-season merchandise on an SKU by SKU basis to determine reserves, if any, that may be required. Factors considered in evaluating the requirement for reserves include product styling, color, current fashion trends and quantities on hand. Many of the Company's products are "classics" and remain saleable from one season to the next and therefore no reserves are generally required on these products. An estimate is made of the market value, less costs to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than estimated amounts, reserves may be reduced.
Impairment of Long-Lived Assets - ------------------------------- The Company's long-lived assets include real property investments, long-term investments, property and goodwill. The Company follows the provisions of Accounting Principles Board Opinion No. 17 ("APB 17"), "Intangible Assets," and Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting of the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance with APB 17 and SFAS 121, as applicable, management assesses impairment of real property investments, long-term investments, property and goodwill and whenever changes or events indicate that the carrying value may not be recoverable. In accordance with APB 17, management assesses impairment of goodwill whenever operating trends have had other than a temporary adverse change. Management applies a discounted cash flow approach to measure impairment using the Company's estimated current cost of capital as the discount rate. In accordance with SFAS 121, management writes down other long-lived assets to fair value if, based on an analysis, the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets.
Additionally, economic conditions and other factors in foreign countries and elsewhere affect certain of the Company's real property investments and long-term investments. Where impairment indicators exist, management uses available information, including estimated future undiscounted cash flows to estimate impairment, if any. Factors could develop to cause the Company to recognize additional impairment of long-lived assets. If the impairment estimates are excessive, gains may be recognized upon disposal or sale of the assets. Likewise, if insufficient impairment charges have been recorded, losses may be recognized upon disposal or sale of the assets.
Also, the following accounting policies significantly affect the preparation of the consolidated financial statements:
Cash Equivalents - ---------------- Cash equivalents consist of highly liquid investments with initial maturities of ninety days or less. Interest bearing amounts were approximately $26.2 million and $8.8 million at December 31, 2001 and 2000, respectively.
Inventories - ----------- Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method ("FIFO") for all inventory except for approximately 14% and 8% of the inventory at December 31, 2001 and 2000, respectively, for which cost is determined using the last-in, first-out method ("LIFO").
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 minor replacements and maintenance costs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Real Property Investments - ------------------------- Real property investments are recorded at cost. The Company provides for depreciation using the straight-line method over 15 years, or 39 years for new construction, which is the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction. Such gains and losses on the sale of real property investments and impairment charges on such investments are classified as "net investment transactions and impairment charges" in the accompanying consolidated statements of income.
Long-Term Investments - --------------------- Long-term investments are recorded either at cost or by using the equity method of accounting depending on the Company's ownership percentage in the investments. Gains and losses from the sale of long-term investments and any impairment charges on such investments are classified as "net investment transactions and impairment charges" in the accompanying consolidated statements of income.
Goodwill - -------- Goodwill is being amortized over estimated useful lives of 10 to 15 years, on a straight-line basis. The Company continually monitors conditions that may affect the carrying value of its goodwill. As conditions may indicate potential impairment of goodwill, the Company evaluates projected future undiscounted cash flows to determine the extent of impairment, if any. See "New Accounting Standards".
Foreign Currency Transactions and Translation - --------------------------------------------- Foreign currency transactions are translated into U.S. dollars at prevailing exchange rates. The balance sheet of the Company's consolidated foreign subsidiaries, excluding equity, was translated into U.S. dollars at current exchange rates at year-end. The statement of operations for the Company's consolidated foreign subsidiaries was translated at the annual average exchange rates. Net transaction gains (losses) were not significant in 2001, 2000 or 1999.
Financial Instruments - --------------------- The Company's financial instruments primarily consist of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued liabilities, long-term debt and subordinated notes payable. The fair value of long-term debt and the subordinated notes payable is disclosed in Note 9. The carrying amounts of the other financial instruments are considered a reasonable estimate of fair value at December 31, 2001 and 2000, due to the short-term nature of the items.
Revenue Recognition - ------------------- The Company recognizes apparel sales revenue upon shipment of goods to customers (net of the Company's estimate of returns and allowances) and rental revenue is recognized on a straight-line basis over the terms of the related leases.
Advertising Costs - ----------------- The Company recognizes advertising costs, including the costs of co-op advertising arrangements, as incurred. Advertising costs were approximately $2,936,000, $1,643,000 and $1,145,000 in 2001, 2000 and 1999, respectively, and were recorded as a component of selling, general and administrative expenses in the accompanying consolidated statements of income. See "New Accounting Standards".
Shipping Costs - -------------- The costs to ship products to customers of approximately $713,000, $562,000 and $180,000 in 2001, 2000, and 1999, respectively, are included as a component of selling, general and administrative expenses in the accompanying consolidated statements of income.
Income Taxes - ------------ Income taxes are recognized for financial reporting purposes during the year in which transactions enter into the determination of income, with deferred taxes being provided for temporary differences between the basis for financial reporting purposes and the basis for income tax reporting purposes.
Earnings Per Common Share - ------------------------- Basic earnings per common share 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.
Comprehensive Income - -------------------- Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. At December 31, 2001 and 2000, the Company had one item, unrealized gain or loss on foreign currency translation, that remains a component of other comprehensive income.
Presentation of Prior Year Data - ------------------------------- Certain reclassifications have been made to prior year's data to conform with the current-year presentation.
New Accounting Standards - ------------------------ SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and was amended in June 2000 by SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities". SFAS 133 requires all derivative instruments to 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. The adoption of SFAS 133 on January 1, 2001 had no effect on the Company's financial position, results of operations or cash flows.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets." These Statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. The adoption of SFAS 141 had no impact on the Company's financial statements.
SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Impairment would be examined more frequently if certain impairment indicators are encountered. Intangible assets with a determinable useful life will continue to be amortized over that period. This statement is effective for the Company on January 1, 2002. Within the first six months of 2002, the Company will complete its assessment of goodwill. Amortization expense related to goodwill for the years ended December 31, 2001, 2000, and 1999 was $847,000, $692,000 and $487,000, respectively.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions of APB 30 related to the disposal of a segment of a business. SFAS 144 is effective for the Company on January 1, 2002. The Company does not expect the adoption of the standard to have a significant impact on the Company's financial position or results of operations.
The FASB's Emerging Issues Task Force ("EITF") issued EITF 00-25, "Vendor Income Statement Characterization Paid to a Reseller of the Vendor's Products", which addresses whether consideration from a vendor to a reseller of the vendor's product is (a) an adjustment to the selling prices of the vendor's products and, therefore should be deducted from revenue when recognized in the vendor's income statement, or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore should be included as a cost or an expense when recognized in the vendor's income statement. EITF 00-25 is effective for the Company on January 1, 2002. The Company is evaluating the impact of the adoption of EITF 00-25 and has not yet determined the effect, if any, that the adoption will have on the Company's classification of such costs in the consolidated statements of operations.
Note 2 - Acquisition of Assets - ------------------------------ Effective August 20, 2000, the Company acquired substantially all the assets and business of Item-Eyes, Inc. ("Item-Eyes"), a privately-held sportswear company.
The assets were acquired for a total of $57,288,000, which was paid as follows: Cash, including repayment of revolving credit line of $31,069,000 $44,069,000 Assumed liabilities - trade accounts payable, etc. 8,396,000 Issuance of Subordinated Notes payable 2,100,000 Issuance of Hampshire Group, Limited Common Stock 2,723,000 (1)
(1) Hampshire Group Limited issued 395,382 unregistered shares of its Common Stock.
The purchase price was allocated to the net assets acquired, including the liabilities assumed as of August 20, 2000, based upon their estimated fair values as of that date with the remainder of approximately $8,650,000 being recorded as goodwill.
The following unaudited pro forma financial information shows the results of operations of the Company as though the acquisition of Item-Eyes occurred as of January 1, 2000 or January 1, 1999, respectively. The unaudited pro forma financial information presented below does not purport to be indicative of the results of the continuing operations had the acquisition of Item-Eyes been consummated as of January 1, 2000 or January 1, 1999 or of the future results of operations of the combined businesses.
Pro Forma Pro Forma Year Ended December 31, 2000 1999 (in thousands, except per share data) (unaudited) (unaudited) - ---------------------------------------------------------------------- Net sales $250,819 $253,789 ------------------------- Net income $7,028 $6,824 ------------------------- Net income per share Basic $1.56 $1.52 ------------------------- Diluted $1.53 $1.47 -------------------------
Note 3 - Accounts Receivable and Major Customers - ------------------------------------------------ The Company performs ongoing evaluations of the credit worthiness of its customers 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 approximately $6,830,000 and $7,042,000 at December 31, 2001 and 2000, respectively.
The Company sells principally to department stores, mail order distributors, specialty stores, mass merchandisers and other retailers located in the United States. The Company had sales to three major customers (defined as sales in excess of 10% of total sales) during 2001 which represented 14%, 11% and 10% of total sales; two major customers during 2000 which represented 15% and 14% of total sales, and three major customers in 1999 which represented 15%, 11% and 10% of total sales. At December 31, 2001 and 2000, 38% and 32%, respectively, of the total trade receivables were due from these customers.
Note 6 - Real Property and Long-Term Investments - ------------------------------------------------
The Company has made direct investments in real property for the purpose of generating rental revenue and asset appreciation. These properties consist of commercial and residential facilities in the United States and Europe and are carried at historical cost, net of impairment charges totaling $2,092,000, including $242,000 recognized in 2001.
Depreciation is provided over the estimated useful lives of the property, which is 15 years, or 39 years for new construction. Depreciation expense was $1,016,000, $822,000 and $624,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Real Property Investments (in thousands) 2001 2000 - ------------------------------------------------------------------------ Commercial and residential property: United States $21,784 $17,766 Russia 3,273 3,535 Europe 7,973 5,024 - ------------------------------------------------------------------------ 33,030 26,325 Less: Accumulated depreciation (3,650) (3,532) - ------------------------------------------------------------------------ Total $29,380 $22,793 ========================================================================
Long-term investments consist principally of common stock of non-publicly traded companies and investments in real estate partnerships. Management intends that these investments will be held on a long-term basis. The carrying values set forth in the table below are shown net of asset impairment charges totaling $2,647,000, including $1,272,000 recognized in 2001, $300,000 recognized in 2000 and $425,000 recognized in 1999 for certain foreign assets deemed to be permanently impaired.
Long-Term Investments (in thousands) 2001 2000 - ------------------------------------------------------------------------ United States $3,109 $3,381 Russia 131 131 Europe 566 1,838 - ------------------------------------------------------------------------ Total $3,806 $5,350 ========================================================================
Costs associated with the Company's rental activities are included in selling, general and administrative expense and amounted to $2,034,000, $1,646,000 and $1,242,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
Net investment transactions and impairment charges, reported net in the accompanying consolidated statements of operations for the years ended December 31, 2001, 2000 and 1999 are summarized in the table below.
(in thousands) 2001 2000 1999 - ------------------------------------------------------------------------ Impairment of foreign investments $1,272 $300 $425 Impairment of foreign real property 242 - - (Gain) on sale of domestic real property (652) (735) - Impairment of notes receivable 60 147 54 (Gain) loss on available for sale securities - 658 (133) Other investments (gains) and losses, net (46) 95 48 - ------------------------------------------------------------------------ Total $876 $465 $394 ========================================================================
Note 7 - Goodwill - ----------------- Accumulated amortization of goodwill was $1,142,000, $2,703,000 and $3,037,000 at December 31, 2001, 2000 and 1999, respectively.
The Company recognized impairment of goodwill in 2001, due to the permanent decline in one of the divisional operations and its estimated deficiencies in future cash flows
Activity in goodwill for the years ended December 31, 2001, 2000 and 1999 is summarized in the table below.
(in thousands) 2001 2000 1999 - ------------------------------------------------------------------- Balance - beginning of year $9,692 $2,553 $3,390 Amortization for the year (847) (692) (487) Addition from acquisition of Item-Eyes, Inc. (See Note 2) - 8,650 - Purchase price adjustments resulting from settlement of acquisition contingencies - - (350) Impairment of goodwill (825) - - Write-off upon sale of manufacturing facilities - (819) - - ------------------------------------------------------------------- Balance - end of year $8,020 $9,692 $2,553 ===================================================================
Note 8 - Accrued Expenses and Other Liabilities - -----------------------------------------------
Accrued expenses and other (in thousands) 2001 2000 liabilities at December 31, ------------------------------------ 2001 and 2000 are summarized Compensation $5,341 $1,675 on the adjacent table. Income taxes 4,686 2,245 Co-op advertising 1,450 1,021 Royalties 1,303 871 Other 3,934 4,231 ------------------------------------ Total $16,714 $10,043 ====================================
Note 9 - Borrowings - -------------------
Revolving Credit Facilities - --------------------------- The Company's Revolving Credit Facility, which matures on September 5, 2003, provides a secured credit facility up to $97.9 million in revolving line of credit and letters of credit. Advances under the line of credit are limited to the lesser of: (1) $97.9 million less outstanding letters of credit; or (2) the sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject to seasonal limits) of the Company's Restricted Subsidiaries (defined as Hampshire Designers and Item-Eyes), and 50% of outstanding eligible letters of credit issued through this credit facility, plus a seasonal supplemental.
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 2.25%, for a fixed term. The loan is collateralized, pari passu with the Senior Notes, principally by the trade accounts receivable and inventories of the Company's Restricted Subsidiaries and a pledge of the Common Stock of all subsidiaries. The Company has also pledged as collateral two insurance policies, a $5 million policy on the life of its Chairman and a $1 million policy on the life of the Chief Executive Officer of Item-Eyes, Inc. At December 31, 2001 there were $9.3 million outstanding letters of credit. No advances were outstanding under the line of credit at December 31, 2001 or 2000, which resulted in availability for borrowing of approximately $30 million under the line of credit at December 31, 2001.
The Company also has available two other credit facilities, which provide for international letters of credit in the aggregate amount of $2.0 million. As of December 31, 2001, the letters of credit outstanding against these two letter of credit facilities totaled approximately $207,000.
Additionally, the Company, through its Investment subsidiary, Hampshire Investments, Limited, has a $1.0 million unsecured line of credit, for use by this subsidiary. As of December 31, 2001, there were no outstanding balances.
The subordinated debt and certain of the real property debt has been guaranteed by the Company's Chief Executive Officer.
Financial Covenants - ------------------- Both the Revolving Credit Facility and the Senior Notes Agreement (the "Agreements") contain covenants which require certain financial performance and restrict certain payments by the Company and the Restricted Subsidiaries, including advances to the Company's Non-Restricted Subsidiary (defined as Hampshire Investments, Limited and its subsidiaries).
The financial performance covenants require, among other things, that the Company maintain specified levels of consolidated net worth, not exceed a specified consolidated leverage ratio, achieve a specified fixed charge ratio and limit capital expenditures to a specified maximum amount. The Company was in compliance with the financial performance covenants at December 31, 2001.
The Agreements restrict the sale of assets, payments by the Company of cash dividends to stockholders, prepayment of Subordinated Notes, the repurchase of Company common stock and investments in and loans to the Non-Restricted Subsidiary. The Senior Notes Agreement also requires that during any 12-month period there must be a period of 45 consecutive days where there is no outstanding short-term debt. The Company was in compliance with these provisions at December 31, 2001. (in thousands) --------------------------- Maturities of long-term debt as of Year December 31, 2001 are summarized in --------------------------- the adjacent table. 2002 $ 7,721 2003 3,371 2004 5,468 2005 2,913 2006 2,195 Thereafter 7,791 ---------------------------- Total $29,459 ============================
The net book value of the assets collateralizing the debt on real property at December 31, 2001 was approximately $25.5 million. The fair value of the long-term debt at December 31, 2001 and 2000, based on current market interest rates discounted to present value, is approximately $29.8 million and $28.9 million, respectively.
Note 10 - Income Taxes - ---------------------- The domestic, Puerto Rico and (in thousands) 2001 2000 1999 foreign components of income --------------------------------------------- (loss) from continuing opera- Domestic $18,820 $ 7,091 $2,268 tions before income taxes are Puerto Rico (469) 3,993 4,654 set forth in the adjacent table. Foreign (1,071) (768) (826) --------------------------------------------- Income before income taxes $17,280 $10,316 $6,096 =============================================
The components of income tax (in thousands) 2001 2000 1999 provision (benefit) for the --------------------------------------------- years ended December 31, 2001, Current: 2000 and 1999 are set forth Federal $6,565 $ 988 $ 98 in the adjacent table. State 1,138 459 380 Puerto Rico (200) 710 85 --------------------------------------------- 7,503 2,157 563 --------------------------------------------- Deferred: Federal (1,099) (123) 469 State (204) 137 (132) --------------------------------------------- (1,303) 14 337 --------------------------------------------- Total $6,200 $2,171 $900 =============================================
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 table below.
(in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------ Tax provision at federal statutory rate $6,048 $3,507 $2,073 Increase (decrease) in tax arising from: Effect of exemption of Puerto Rico (earnings) losses from United States tax 164 (1,358) (1,582) Change in valuation allowance 1,310 (1,869) - Puerto Rico taxes on income, including withholding taxes and capital gains - 710 85 State taxes, less federal income tax benefit 607 393 119 Foreign operating losses 375 261 281 Tax benefit of capital losses (1,652) - - Tax benefit of tax rate changes (164) - - Adjustment to NOL carryforward (258) - - Tax benefit of Puerto Rico amendment (200) - - Nondeductible items 72 454 - Other (102) 73 (76) - ------------------------------------------------------------------------------ $6,200 $2,171 $ 900 ==============================================================================
A summary of the temporary differences and carryforwards giving rise to deferred income tax assets as of December 31, 2001 and 2000 is set forth in the table below.
(in thousands) 2001 2000 - ------------------------------------------------------------------------------ Deferred income tax assets: Allowances for receivables $1,085 $1,265 Inventories 1,097 252 Property, plant and equipment 511 359 Write-down of assets not currently deductible 363 59 Accrued liabilities and other temporary differences 2,658 2,138 Net operating loss carry forwards 1,551 1,850 Capital loss carryforward 1,310 - Tax credit carry forwards - 39 - ------------------------------------------------------------------------------ Gross deferred income tax assets 8,575 5,962 - ------------------------------------------------------------------------------ Valuation allowance for deferred income tax assets arising from capital loss carryforward (1,310) - - ------------------------------------------------------------------------------ Net deferred income tax assets $7,265 $5,962 ==============================================================================
The deferred tax assets are (in thousands) 2001 2000 recognized as follows in the -------------------------------------- accompanying consolidated balance Deferred tax asset- sheets. current $5,216 $3,714 Deferred tax asset- noncurrent 2,049 2,248 -------------------------------------- Total $7,265 $5,962 ======================================
(in thousands) -------------------------------------- The net operating loss carryforwards Year Regular Tax for federal income tax purposes -------------------------------------- expire as set forth in the adjacent 2003 $ 225 table. 2004 411 2005 2,429 2009 1,366 -------------------------------------- Total $4,431 ======================================
The Company generally is not permitted to utilize more than $1.7 million of the net operating loss carryforwards in any single tax year. 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 increases the subsequent years' limitation.
Under the Puerto Rico Tax Incentives Act of 1987 (the "Act"), the Company was granted 90% exemption from Puerto Rico income taxes of Glamourette Fashion Mills, Inc. ("GFM"), a subsidiary of the Company, 75% exemption from property
and municipal taxes and was subject to tollgate taxes ranging from 0% to 5% on dividends. These exemptions ceased with the sale of the Puerto Rico manufacturing facilities in April 2000.
GFM had an election under Section 936 of the Internal Revenue Code pursuant to which GFM's earnings were exempt from US taxes. However, dividends received from GFM, 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 GFM'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 net operating losses ("NOL") deductions are limited in calculating AMT, the Company had, prior to 1996, determined that a valuation allowance was required with respect to NOL carryforwards and AMT credit carryforwards. Since the assets of GFM were sold in 2000, the Company believes that it will incur regular US tax liabilities and therefore will receive the benefit of a significant portion of the NOL. Accordingly, the valuation allowance on the NOL and AMT carryforwards was reversed in 2000.
The undistributed earnings of the Company's foreign subsidiaries are expected to be permanently reinvested overseas and accordingly, deferred income taxes have not been provided thereon.
During 2001, the Company recognized tax benefits related to capital losses totaling $1,652,000. A valuation allowance has been established for $1,310,000, the future tax benefit of the capital loss carryforwards, because it is uncertain whether the Company will be able to generate capital gains to utilize the capital loss carryforwards. The capital loss carryforward expires in 2006.
During 1999, the Internal Revenue Service made an examination of the Company's consolidated tax return for the year ended December 31, 1996. The examination resulted in an insignificant adjustment of the Company's income tax liability.
Note 11 - Commitments and Contingencies - --------------------------------------- The Company leases premises and equipment under (in thousands) operating leases having terms from month-to-month ------------------------- to 7 years. At December 31, 2001, future minimum Year Lessee Lessor lease payments under leases ("Lessee") having an ------------------------- initial or remaining non-cancelable term in excess 2002 $1,300 $2,167 of one year were as set forth in the adjacent table. 2003 1,310 1,645 2004 982 1,098 The Company also leases certain owned real estate 2005 558 761 properties of its Investment segment. Future 2006 262 409 minimum lease receipts by the Company for leases Thereafter - 1,037 ("Lessor") having an initial or remaining non- ------------------------- cacelable term in excess of one year were as set Total $4,412 $7,117 forth in the adjacent table. =========================
Rent expense for operating leases was $1,494,000, $1,766,000 and $1,501,000 in 2001, 2000 and 1999, respectively.
Rental revenue was $2,594,000, $2,281,000 and $2,005,000 in 2001, 2000 and 1999, respectively.
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, results of operations, or cash flow.
Note 12 - Capitalization and Warrants - ------------------------------------- The Company's authorized capital stock consists of 10,000,000 shares of Common Stock and 1,000,000 shares of serial preferred stock each having a par value of $0.10 per share. No preferred stock has been issued by the Company.
In December 1990, the Company issued warrants to purchase 338,182 shares of the Company's Common Stock through December 31, 2000, at an exercise price of $6.19 per share. The aggregate consideration for such warrants was $250,000. During 1997, the Company had repurchased 132,728 of these warrants and on December 12, 2000, the Company repurchased an additional 132,727 of these warrants at $1 per share. The excess of the purchase price over the pro rata consideration paid upon issue was charged against retained earnings. The 72,727 remaining warrants were exercised on December 26, 2000.
Note 13 - Stock Options, Compensation Plans and Retirement Savings Plan - ----------------------------------------------------------------------- In 1994, the Company registered 750,000 shares of its Common Stock under the Securities Act of 1933, as amended, and on January 16, 2001, the Company registered an additional 750,000 shares, as previously approved by the Stockholders. These actions were in regards to the Hampshire Group, Limited 1992 Stock Option Plan, as amended, and the Hampshire Group, Limited Common Stock Purchase Plan for Directors and Executives. Of these shares, 854,000 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. During 2001, the Company repurchased 16,760 shares of its Common Stock for $138,000.
The Company's repurchase of shares of Common Stock are recorded at cost as "Treasury Stock" and result in a reduction of "Stockholders' Equity". When treasury shares are reissued, the Company uses a weighted average cost method and the excess of outstanding repurchased costs over reissue price is treated as a reduction of "Retained Earnings".
Stock Options - ------------- Options to purchase Hampshire Group, Limited Common Stock are granted at the discretion of the Company's Board of Directors to executives and key employees of the Company and its subsidiaries. No option may be granted with an exercise price less than the fair market value per share of Common Stock at the date of grant. All options have a maximum term of 10 years and become fully exercisable after a maximum of 5 years from the date of grant.
Number of Weighted Average Options Exercise Price --------------------------------------------------------- Stock option activity Outstanding-January 1, 1999 412,016 $ 9.23 is set forth in the Granted 76,650 8.72 adjacent table. Exercised (143,718) 6.94 Canceled or expired (54,235) 10.95 --------------------------------------------------------- Outstanding-December 31, 1999 290,713 10.18 Granted 197,000 13.35 Exercised (53,864) 7.45 Canceled or expired (52,483) 9.72 --------------------------------------------------------- Outstanding-December 31, 2000 381,366 12.27 Granted 61,500 9.37 Exercised (34,360) 6.85 Canceled or expired (18,365) 11.60 --------------------------------------------------------- Outstanding-December 31, 2001 390,141 $12.32 =========================================================
SFAS 123, "Accounting for Stock-Based Compensation", allows companies to adopt the fair value based method of accounting or to continue using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Under APB 25, which the Company has elected not to use, 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 was recognized in 2001, 2000, or 1999. 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. If compensation expense for the Company's stock-based compensation plans had been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced as per the "pro forma" amounts in the accompanying table.
2001 2000 1999 In order to estimate ------------------------------------------------------ compensation cost Expected life (years) 5.9 6.5 6.2 under SFAS 123, the Expected volatility 24.3% 15.9% 22.5% Black-Scholes model Dividend yield 0.0% 0.0% 0.0% was employed using Risk-free interest rate 4.8% 5.5% 5.0% the assumptions set ------------------------------------------------------ forth in the Weighted-average fair value adjacent table. of options granted $3.02 $1.38 $2.71 ======================================================
The adjacent table (in thousands) 2001 2000 1999 sets forth the ------------------------------------------------------ effect on net income Net income: As reported $11,080 $8,543 $5,196 and diluted earnings ======================== per share had compen- Pro forma $10,937 $8,390 $5,022 sation cost been ======================== determined in Diluted earnings per share: accordance with As reported $2.37 $1.97 $1.22 SFAS 123. ======================== Pro forma $2.34 $1.93 $1.18 ========================
The number of options exercisable was 97,141, 137,116 and 195,863 at December 31, 2001, 2000 and 1999, respectively.
Common Stock Purchase Plan - -------------------------- Pursuant to the Hampshire Group, Limited 1992 Common Stock Purchase Plan for Directors and Executives ("Stock Purchase Plan"), key executives 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. Non-employee Directors may elect to defer their fees to purchase Common Stock of the Company. Contributions of annual salaries, annual bonuses and non-employee director fees earned subsequent to December 31, 2002 are not permitted.
The price at which Common Stock can be purchased under the Stock Purchase Plan, with respect to the deferrals on the annual salaries of key executives is 90% and for non-employee directors is 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 to the Stock Purchase Plan with respect to deferrals on the annual bonuses, is 90% of the lower of: (a) the average of the fair market value of the Company's Common Stock at the end of each calendar quarter for the Plan year, or (b) the fair market value of the Company's Common Stock as of the end of the plan year.
Shares of the Company's Common Stock purchased pursuant to the Stock Purchase Plan are distributed to the participants in accordance with their election made prior to the deferral.
During the years 2001, 2000 and 1999, approximately $128,000, $434,000 and $345,000, respectively, of participants' compensation, was used by the Stock Purchase Plan to purchase Common Stock of the Company. The Company has established a trust to which it delivers the shares of the Company's Common Stock following the end of each plan year to satisfy such elections. The deferred compensation liability and the Company's shares are presented as offsetting amounts in the stockholders' equity section.
Voluntary Deferred Compensation Plan - ------------------------------------ The Company has established the Hampshire Group, Limited Voluntary Deferred Compensation Plan for Executives (the "Top Hat Plan"). Pursuant to the plan, key executives could elect to defer up to 20% of the total compensation in each year with such deferrals being invested in mutual funds external to the Company. The Board of Directors resolved to discontinue deferrals under the Top Hat Plan for compensation earned after December 31, 2000. During the years 2000 and 1999, participants deferred $99,000 and $270,000, respectively, with the resulting liability being included as deferred compensation in the accompanying consolidated balance sheets.
To fund the deferred compensation liability, the Company has invested the amounts deferred by the participants in certain mutual funds which are presented as "Trading securities held in retirement trust" in the accompanying consolidated balance sheets. The market value of these mutual funds at December 31, 2001 and 2000, was $1,142,000 and $1,349,000, respectively, which equal the liability of the Company at the respective date. Shares of mutual funds purchased pursuant to the Top Hat Plan are distributed to the participants in kind, or in cash equal to the liquidation value of the shares, in accordance with the participant's election made prior to the deferral.
Company Deferred Compensation Plans - ----------------------------------- As a condition of their employment agreements, the Company contributes $100,000 annually to a deferred compensation plan on behalf of the Chief Executive Officer and contributed $2,500 on behalf of the former Chief Financial Officer. At the option of the executive, the cumulative amount may be invested in the Company, accruing interest at 110% of the Applicable Federal Long-Term Interest Rate, or may be invested in the Top Hat Plan.
In accordance with an unfunded deferred compensation agreement with the President of Hampshire Designers, Inc., the Company accrued $471,000 during 2001 and $240,000 during 2000.
Retirement Savings Plan - ----------------------- The Company has a 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 $125,000, $210,000 and $297,000 in 2001, 2000 and 1999, respectively. Such matching contributions vest fully after six years of employment.
Note 14 - 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 $234,000, $232,000 and $216,000 in 2001, 2000 and 1999, respectively. The Company also leases certain buildings from a director of the Company, Peter Woodworth, his wife and certain of his relatives. Rent expense under such leases was $158,000, $164,000 and $201,000, respectively, for 2001, 2000 and 1999. 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. Mr. Kuttner received a fee for guaranteeing certain of the Company's debt of $59,000 in 2001 and $24,000 in 2000.
During 1999, Hampshire Investments made advances supported by two promissory notes in the aggregate principal amount of $775,000. The issuers defaulted under the notes and on March 30, 2000, the Chairman and Chief Executive Officer of the Company purchased the notes from Hampshire Investments for their aggregate principal amount.
Mr. Harvey L. Sperry, a director of the Company, is a retired partner in the law firm of Willkie Farr & Gallagher, provided consulting services to the Company and was paid $12,000 in fees during 2001.
Dr. Joel Goldberg, a director of the Company, is a principal in Career Consultants, Inc., which has provided human resource consulting services to the Company since 1997 and in such capacity was paid fees in the amount of $5,000, $25,000 and $7,000 during the years 2001, 2000 and 1999, respectively.
The son of Mr. Kuttner was the independent contractor managing certain renovations on the real property owned by the Company located in Charlottesville, Virginia. The Company paid the contractor $34,000, $20,000 and $10,000 during the years 2001, 2000 and 1999, respectively. The contractor will receive as future consideration, 30% of the net cash flow of the property after the Company has received a 10% return on its investment. Another son of the Chairman and Chief Executive Officer of the Company worked on this project as a subcontractor. His company was paid $70,000 in 2001 and $45,000 in 2000.
Note 15 - Sale of Assets - ------------------------ On April 28, 2000, the Company sold all sweater manufacturing assets, except finished goods inventory, to Glamourette/OG, Inc. ("Glamourette"), a Puerto Rican corporation, for a sales price of $10,468,000. The sales price included a 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 sale resulted in a gain of $632,000 which has been classified as "net loss (gain) on sale of property, plant and equipment and related charges" in the accompanying consolidated statement for 2000. The note is payable by a deduction of $0.67 per sweater purchased from Glamourette or is payable in cash, and is partially collateralized by machinery and equipment and by the pledge of the common stock of Glamourette. During the fourth quarter of 2001, the Company served notice to Glamourette of default on the loan agreement from the sale of the sweater manufacturing assets. Subsequent to this notice Glamourette filed for bankruptcy. As a result of these events the Company has fully reserved the unpaid balance of the promissory note due from Glamourette in the amount of $3,893,000. The Company had reserved $2,100,000 of the note balance in 2000 due to the deteriorating financial condition of Glamourette and the remaining $1,793,000 was provided during 2001 based on the continued deterioration of Glamourette's financial condition.
Note 16 - Discontinued Operations - --------------------------------- In 1998 the Company's Board of Directors approved a plan to discontinue and sell the assets of the Hosiery Division, which was engaged in the manufacture and sale of ladies and children's hosiery and socks. On June 1, 1999, the Company sold the assets of the Hosiery Division, consisting principally of inventory and certain machinery and equipment and agreed to lease other equipment to the purchaser. The difference between the book basis of the assets sold and the selling price was established as a valuation reserve against an 8.25% promissory note received as part of the consideration from the sale. No gain on the sale was recognized pending collection of the note.
On December 5, 2000, the purchaser entered into an agreement to sell substantially all of its assets, other than the accounts receivable, to a competing hosiery company, which included the sale of the leased equipment. The sales price of the leased equipment was $750,000 and was paid with a promissory note payable in 36 equal monthly installments commencing February 1, 2001, with interest at prime. The gain on sale of the leased equipment is included with the net gain on sale of property, plant and equipment and related charges and the $633,000 in proceeds received against the 8.25 % promissory note from the sale was reported as gain from disposal of discontinued operations, net of a $235,000 provision for income taxes, during the year ended December 31, 2000.
Note 18 - Industry Segments and 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. Some of the Company's major customers operate both retail and mail order businesses; therefore, it is not possible for the Company to determine sales to the individual markets. The Investments segment makes investments both domestically and internationally, principally in real property as set forth on pages and.
SCHEDULE III 2 of 2 (continued)
HAMPSHIRE GROUP, LIMITED REAL PROPERTY 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 and 39 years for new construction Improvement Over remaining useful lives of the building
The aggregate cost for income tax purposes was approximately $33,030 at December 31, 2001.
The changes in total real property assets and accumulated depreciation for the period ending December 31, 2001 are as follows:
Total Real Property Assets Accumulated Depreciation - -------------------------- ------------------------ Balance, beginning of period $26,325 Balance, beginning of period ($3,532) Acquisitions 201 Depreciation (1,016) Additions and improvements 8,039 Property sale 80 Property sale (450) Write-off with impairment 663 Property impairment (905) Property donation 155 ------- Property donation (180) Balance, end of period ($3,650) ------- ======= Balance, end of period $33,030 =======
HAMPSHIRE GROUP, LIMITED 2001 EXHIBIT INDEX
Exhibit No. Description - ------------------------------------------------------------------------------
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
Item 7.
(Page 9 Continued)
RESULTS OF OPERATIONS - --------------------- Effective August 20, 2000, (the "Acquisition Date") Hampshire Group, Limited purchased substantially all of the assets and business of Item-Eyes, Inc., a privately held sportswear company; and accordingly, the results of Item-Eyes (the "Acquired Business") have been included in the results of the Company subsequent to that date. The results of the Company, excluding the results of the Acquired Business, are referred to herein as the existing business (the "Existing Business").
2001 Compared With 2000 - ----------------------- Income from continuing operations of the Company for the year ended December 31, 2001 was $11,080,000, or $2.37 per share on a diluted basis, as compared with $8,145,000, or $1.88 per share on a diluted basis, for the preceding year.
Net sales for the year ended December 31, 2001 were $263,485,000, which included $98,033,000 of Acquired Business net sales, compared to $196,882,000 for 2000, which included $43,995,000 of Acquired Business net sales for the period from the Acquisition Date through December 31, 2000. The Existing Business net sales increased $12,565,000. The 8.2 % increase in the Company's Existing Business net sales reflected a strong demand for sweaters. For the year of 2001, compared with 2000, aggregate unit volume of the Existing Business increased 16.9%. The increase is a result of strong sales of women's cotton products, complemented with greater demand for men's sweaters. A shift in product mix to lower priced units resulted in a 7.4% decrease in the average sales price for the Existing Business.
Gross profit for 2001 was $69,827,000 (26.5% of net sales), which included Acquired Business gross profit of $23,244,000, compared to $40,129,000 (20.4% of net sales) for 2000, which included $10,252,000 of Acquired Business gross profit for the period after the Acquisition Date. The gross profit for the Existing Business was 28.2% compared with 19.5% for the same period last year. The increase in gross profit from the Company's Existing Business is attributed to discontinuing less profitable product lines and the increase in unit volume of sweaters.
Revenues for the Investment segment in 2001 were $2,594,000, compared to $2,281,000 for 2000, an increase of $313,000. The increase in revenues resulted primarily from the increase in the number of domestic real property investments being renovated and leased.
Selling, general and administrative ("SG&A") expenses for the Company were $48,668,000 in 2001, which included Acquired Business SG&A expenses of $16,322,000, compared to $31,666,000 for 2000, which included $4,917,000 of Acquired Business SG&A expenses for the period after the Acquisition Date. The increase consisted of additional selling, shipping and related expenses caused by the increased sales volume and higher bonuses due to increased income in 2001.
SG&A expenses for the Investment segment were $2,174,000 for 2001, and $1,646,000 for 2000, an increase of $528,000. The increase resulted primarily from additional operating expenses for property renovated and leased, selling and operating expenses related to the sale of real property, and additional depreciation expense, which increased to $1,001,000 in 2001 from $822,000 in 2000.
In 2000, the Company sold its sweater manufacturing assets to Glamourette/OG, Inc. ("Glamourette"), a Puerto Rican corporation. The sale resulted in a gain of $632,000, after recognizing $2,169,000 of exit costs associated with closing the domestic manufacturing facilities and impairment charges of $849,000 for fixed assets and $819,000 for goodwill (see Note 15 of the Consolidated Financial Statements). During the fourth quarter of 2001, the Company notified Glamourette
that Glamourette was in default under the terms of its agreement. Subsequent to this notice Glamourette filed for bankruptcy. As a result of these events, the Company fully reserved the remaining balance of the promissory note due from Glamourette, as part of the purchase price, in the amount of $3,893,000, with $1,793,000 recognized in 2001 and $2,100,000 in 2000. Additionally, in the Apparel segment, the Company recognized impairment in 2001 of goodwill, in the amount of $825,000, due to the permanent decline in one of the divisional operations and its estimated deficiencies in future cash flows.
During 2000, the Company had revenues from leased hosiery equipment of $747,000 and recognized a gain of $523,000 from the sale of this equipment (see Note 16 of the Consolidated Financial Statements) and a gain of $406,000 on the sale of other apparel equipment and property.
In 2001, the Investments segment reported "net investment transactions and impairment charges" of $876,000 compared to $465,000 in 2000. The amount reported for 2001 includes an impairment charge of $1,272,000 on three European investments; an impairment charge against the real property holdings in Russia and Romania of $242,000; which were partially offset by the gain on the sale of real property of $652,000 and other gains and losses. The amount reported for 2000 primarily includes an impairment charge of $300,000 on two European investments; an impairment charge against two notes receivable of $147,000; a loss on the sale and permanent write-down of available-for-sale securities of $658,000; all of which were partially offset by the gain on the sale of real property of $735,000 and other gains and losses.
Operating income in 2001, for the Apparel segment, was $24,245,000, which included $6,922,000 Acquired Business income, compared to $13,739,000 for 2000, which included Acquired Business income of $5,335,000 for the period after the Acquisition Date. Income from operations of the Existing Business increased by $8,919,000. The improvement for the Existing Business was principally due to the increase in net sales and gross profit. The current year's Apparel operating income for the Existing Business includes charges for the goodwill impairment as discussed above and the write-off of the Glamourette promissory note. The prior year's operating income included gains from both the sale of the manufacturing facilities and from other property and equipment. The Investment segment had an operating loss of $456,000 for 2001, compared to operating income of $13,000, a decline of $469,000. This decline resulted from the net difference between impairment and investment activity.
Interest income was $561,000 for 2001, compared to $1,353,000 for 2000, a decline of $792,000. The reduction resulted primarily from the use of cash in the purchase of the Acquired Business in August 2000 and lower average cash balances for most of 2001.
The income tax provision was $6,200,000 for 2001, compared with $2,171,000 in 2000. The increase in the effective tax rate to 35.9% for 2001 from 21.0% for 2000 resulted from substantially all of the taxable income being generated in the United States in 2001 versus 2000, when a larger portion of the taxable income was generated in Puerto Rico, and such income being exempt from U.S. federal regular income taxes pursuant to an election under Section 936 of the Internal Revenue Code.
2000 Compared With 1999 - ----------------------- Income from continuing operations of the Company for the year ended December 31, 2000 was $8,145,000, or $1.88 per share on a diluted basis as compared with $5,196,000, or $1.22 per share on a diluted basis, for the preceding year.
Net sales of the Company for the year ended December 31, 2000 were $196,882,000 compared to $151,317,000 in 1999. The Acquired Business accounted for $43,995,000 in net sales, while the net sales of the Existing Business of the Company increased 1.0% in 2000. The increased sales in the Existing Business primarily resulted from the first year's sales of the Dockers(R) brand.
Gross profit of the Apparel segment in 2000 was $40,129,000, or 20.4% of net sales, compared to $29,700,000, or 19.6% of net sales in the prior year. The Acquired Business accounted for the additional increase in gross profit and the 0.8% difference.
Revenues of the Investment segment were $2,281,000 in 2000 compared with $2,005,000 in 1999. The increase resulted from additional property acquired and renovated real property units, which were leased in late 1999 and during 2000.
SG&A expenses of the Company were $31,666,000 in 2000 compared with $25,111,000 in 1999. The SG&A of the Acquired Business accounted for $4,918,000 or 75.0% of the increase for the year. The first year sales of the Dockers(R) sweater line also contributed to the increase in SG&A expenses.
SG&A expenses for the Investment segment were $1,646,000 in 2000 and $1,242,000 in 1999. The increase resulted primarily from additional operating expenses for acquired property and additional depreciation expense, which increased from $624,000 in 1999 to $822,000 in 2000.
During the second quarter of 2000, the Company sold its sweater manufacturing assets to Glamourette, a Puerto Rican corporation. The sale resulted in a gain of $632,000, after recognizing $2,169,000 of exit costs associated with closing the domestic manufacturing facilities and impairment charges of $849,000 for fixed assets and $819,000 for goodwill (see Note 15 of the Consolidated Financial Statements).
In the fourth quarter of 2000, the Company sold the leased hosiery equipment. The Company had revenues from leasing this equipment during 2000 of $747,000, in addition to the $523,000 gain on the sale of the equipment (see Note 16 of the Consolidated Financial Statements).
During 2000, the Company sold certain equipment located in Mexico and property located in Winona, Minnesota, which resulted in a gain of $406,000. In the fourth quarter of 1999, the Company recorded a $300,000 impairment charge for the closing of a distribution center in Winona, Minnesota. Sales of property and equipment during 1999 resulted in a $15,000 gain.
In 2000, the Investments segment reported "net investment transactions and impairment charges" of $465,000 compared to $394,000 in 1999. The amount reported for 2000 primarily includes an impairment charge of $300,000 on two European investments; an impairment charge against two notes receivable of $147,000; a loss on the sale and permanent write down of available-for-sale securities of $658,000; all of which were partially offset by the gain on the sale of real property of $735,000 and other gains and losses. In the $394,000 "net investment transactions and impairment charges" recorded in 1999, the Company recognized an impairment charge of $425,000, which was partially offset by other investment gains and losses.
Interest expense was $3,410,000 in 2000 and $1,967,000 in 1999. Approximately $209,000 of this increase resulted from the additional financing of real properties by the Investment segment. The balance of the increase in interest expense related primarily to the financing of the acquisition of the Acquired Business.
Interest income was $1,353,000 in 2000 compared to $729,000 in 1999. The additional interest income resulted primarily from the cash and equivalents of the Company during the first half of 2000 (prior to acquisition of the Acquired Business). Also reflected in interest income is approximately $218,000 of interest income related to the promissory note received in connection with the sale of the sweater manufacturing facilities (see Note 15 of the Consolidated Financial Statements) and $319,000 of interest income on the promissory note and other obligations from the purchaser of the Hosiery Division.
The income tax provision was $2,171,000 in 2000 compared with $900,000 in 1999. The increase in the effective tax rate to 21.0% for 2000 as compared to 14.8% for the prior year resulted principally from two factors. First, a larger percentage of the taxable income was generated in the United States in 2000 versus 1999 when a larger percentage was generated in Puerto Rico, and such income was exempt from U.S. federal regular income taxes pursuant to an election under Section 936 of the Internal Revenue Code. Second, the gain on the sale of the manufacturing facilities in Puerto Rico in 2000, resulted in an additional $600,000 provision for taxes in Puerto Rico. Because of the sale of the manufacturing facilities in Puerto Rico, the Company expects to benefit from a significant portion of the net operating loss carryforward. As a result, the valuation allowance of $1,869,000, which had been recorded prior to 1999 was reversed in 2000.
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 buildup in inventories and accounts receivable (which historically reach their maximum requirements in the third quarter), servicing long-term debt and funding capital expenditures and investments. The primary sources to meet the liquidity and capital requirements include funds generated from operations, revolving credit lines and long-term borrowing.
The Company has its principal credit facility with a consortium of six commercial banks with JPMorganChase, as agent. The Company's Revolving Credit Facility, which matures on September 5, 2003, provides a secured credit facility up to $97,937,500 in revolving line of credit borrowings and outstanding letters of credit. Advances under the line of credit are limited to the lesser of: (1) $97,937,500 less outstanding letters of credit; or (2) the sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject to seasonal limits) of the Restricted Subsidiaries (defined as Hampshire Designers and Item-Eyes), and 50% of outstanding eligible letters of credit issued through this credit facility, plus a seasonal supplemental, less borrowings outstanding under the Senior Notes (see below) and outstanding letters of credit.
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 2.25%, for a fixed term. The loan is collateralized, pari passu with the Senior Notes, principally by the trade accounts receivable and inventories of the Company's Restricted Subsidiaries and a pledge of the Common Stock of all subsidiaries. The Company has also pledged as collateral two insurance policies, a $5,000,000 policy on the life of its Chief Executive Officer and a $1,000,000 policy on the life of the Chief Executive Officer of Item-Eyes, Inc. At December 31, 2001 there were $9,340,000 outstanding letters of credit. No advances were outstanding under the line of credit at December 31, 2001 or 2000, which resulted in availability for borrowing of approximately $29,980,000 under the line of credit at December 31, 2001.
The Company also has available two other credit facilities, which provide for international letters of credit in the aggregate amount of $2,000,000. As of December 31, 2001, the letters of credit outstanding against these two letter of credit facilities totaled approximately $207,000. Additionally, Hampshire Investments, Limited, has a $1,000,000 line of credit available for its use. As of December 31, 2001, there were no outstanding balances.
The maximum advances outstanding during 2001, under all lines of credit, was $62,270,000. The average amount outstanding during 2001 was approximately $16,875,000. Outstanding letters of credit under all credit lines totaled approximately $9,547,000 at December 31, 2001.
During 1998, the Company issued $15,000,000 long-term notes to two insurance companies (the "Senior Notes"). The Senior Notes are collateralized pari passu with the Revolving Credit Facility. The Senior Notes bear interest at 8% with principal due in semi-annual installments of $937,500.
Both the Revolving Credit Facility and the Senior Notes Agreement (the "Agreements") contain covenants which require certain financial performance and restrict certain payments by the Company and the Restricted Subsidiaries, including advances to the Company's Non-Restricted Subsidiary (defined as Hampshire Investments, Limited and its subsidiaries).
The financial performance covenants require, among other things, that the Company maintain specified levels of consolidated net worth, not exceed a specified consolidated leverage ratio, achieve a specified fixed charge ratio and limit capital expenditures to a specified maximum amount. The Company was in compliance with the financial performance covenants at December 31, 2001.
The Agreements restrict the sale of assets, payments by the Company of cash dividends to stockholders, prepayment of Subordinated Notes, the repurchase of Company Common Stock and investments in and loans to the Non-Restricted Subsidiary. The Senior Notes Agreement also requires that during any twelve-month period there must be a period of 45 consecutive days where there is no outstanding short-term debt. The Company was in compliance with these provisions at December 31, 2001.
The Company's other debt includes $1,863,000 of Subordinated Notes from the acquisition of Item-Eyes and a $2,678,000 loan from Merchants National Bank. The Company, through its Non-Restricted Subsidiary, finances real property investments through mortgages and construction loans. The Company's Chief Executive Officer has guaranteed the Subordinated Notes and certain indebtedness of the Non-Restricted Subsidiary.
Future contractual obligations related to long-term debt and noncancellable operating leases at December 31, 2001 were as follows:
Year Ended December 31, 2001 (In thousands)
Total 2002 2003 2004 2005 2006 Thereafter ----- ---- ---- ---- ---- ---- ---------- Operating leases $ 4,412 $1,300 $1,310 $ 982 $ 558 $ 262 $ - Long term debt 29,459 7,721 3,371 5,468 2,913 2,195 7,791 ----------------------------------------------------------- Total $33,871 $9,021 $4,681 $6,450 $3,471 $2,457 $7,791 ===========================================================
At December 31, 2001 the Company had cash and cash equivalents totaling $28,686,000.
Net cash provided by operating activities was $23,865,000 for the year ended December 31, 2001, as compared to net cash provided by operating activities of $26,345,000 for last year. Net cash provided by operating activities in 2001 was provided primarily from adjusted net income of $17,891,000 (after adjusting for $2,619,000 in depreciation and amortization and $4,192,000 for asset impairment charges) and $7,344,000 from changes in the working capital accounts. Net cash provided by operating activities in 2000 was provided primarily from adjusted net income of $12,738,000 (after adjusting for $3,408,000 in depreciation and amortization and $787,000 for asset impairment charges) and $15,484,000 from changes in the working capital accounts.
Net cash used in investing activities was $5,431,000 for the year ended December 31, 2001, as compared to net cash used in investing activities of $44,657,000 for last year. The decrease in cash used in investment activities results primarily from $44,069,000 used in 2000 for the purchase of the Acquired Business and $6,415,000 of cash received in 2000 from the sale of property, plant and equipment. The Company, through the Investment segment, invests in assets unrelated to the Company's Apparel segment. During 2001, the Investment segment invested $8,502,000 compared to $9,039,000 during 2000.
Net cash used in financing activities was $265,000 for the year ended December 31 2001, as compared to net cash provided by financing activities of $4,998,000 for 2000. Proceeds from long-term debt in 2001 was $3,344,000, as compared to $6,980,000 for last year. The majority of the long-term debt, for both periods resulted from the Investment segment financing real property purchases and renovations. During 2001, the Company repaid $3,953,000 of long-term debt as compared to $2,174,000 for 2000. The Board of Directors of the Company has authorized management to purchase from time to time, in the market, shares of the Company's Common Stock. During 2001, the Company purchased 16,760 shares of its Common Stock for $138,000.
Management believes that cash flow from operations, available borrowings under the credit facilities and long-term borrowing will provide adequate resources to meet the Company's capital requirements and operational needs for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------ The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis management evaluates its estimates, including those related to the allowance for doubtful notes and accounts, allowances for customer returns and adjustments, inventory reserves and for impairment of real property investments, long-term investments and other long-lived assets. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.
The following critical accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:
Allowance For Doubtful Notes and Accounts and Customer Returns and Adjustments - ------------------------------------------------------------------------------ The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers or other parties failure to make payments on trade or notes receivable due to the Company. In addition, the Company maintains allowances for customer returns, trade discounts, customer chargebacks, and for sales and markdown allowances given to the customer, typically at the end of the selling seasons, enabling customers to markdown the retail sales prices of any remaining goods on hand. The estimates for these allowances and discounts are based on a number of factors, including: (1) historical experience, (2) aging of the trade accounts receivable, (3) specific information obtained by the Company on the financial condition and current credit worthiness of customers or other parties, and (4) specific agreements or negotiated amounts with customers.
If the financial condition of the Company's customers were to deteriorate and reduce the ability of the Company's customers to make payments on their accounts, the Company may be required to increase its allowances by recording additional bad debt expense. Further, while the Company believes that it has negotiated all substantial sales and markdown allowances with its customers, additional allowances may be requested by customers. Likewise, should the financial condition of the Company's customers or other parties improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse recorded allowances.
Inventory Reserves - ------------------ The Company analyzes out-of-season merchandise on an SKU by SKU basis to determine reserves, if any, that may be required. Factors considered in evaluating the reserves include product styling, color, current fashion trends and quantities on hand. Many of the Company's products are "classics" and remain saleable from one season to the next and therefore no reserves are generally required on these products. An estimate is made of the market value, less costs to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than estimated amounts, reserves may be reduced.
Impairment of Long-Lived Assets - ------------------------------- The Company's long-lived assets include real property investments, long-term investments, property and goodwill. The Company follows the provisions of Accounting Principles Board Opinion No. 17 ("APB 17"), "Intangible Assets," and Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting of the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance with APB 17 and SFAS 121, as applicable, management assesses impairment of real property investments, long-term investments, property and goodwill whenever changes or events indicate that the carrying value may not be recoverable. In accordance with APB 17, management assesses impairment of goodwill whenever operating trends have had other than a temporary adverse change. Management applies a discounted cash flow approach to measure impairment using the Company's estimated current cost of capital as the discount rate. In accordance with SFAS 121, management writes down other long-lived assets to fair value if, based on an analysis, the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets.
Additionally, economic conditions and other factors in foreign countries and elsewhere affect certain of the Company's real property investments and long-term investments. Where impairment indicators exist, management uses available information, including estimated future undiscounted cash flows to estimate impairment, if any. Factors could develop to cause the Company to recognize additional impairment of long-lived assets. If the impairment estimates are excessive, gains may be recognized upon disposal or sale of the assets. Likewise, if insufficient impairment charges have been recorded, losses may be recognized upon disposal or sale of the assets.
OUTLOOK - ------- The Company believes that the primary reason for its success in recent years has been its ability to offer classic and new products and the highest level of quality and services to its customers. Management is committed to continue to offer such quality and services to its customers. Management recognizes that price competition in the apparel market can adversely affect earnings of the Company.
The ability of the Company to compete is substantially enhanced by its financial strength.
Over the past five years, the retail industry has consolidated through acquisitions and mergers. Further, retailers have concentrated more volume with a fewer number of vendors. The Company has responded by expanding its product line in the sweater business and by acquiring Item-Eyes. By increasing its utilization of foreign sources, the Company can offer greater variety in yarns, styling and surface treatment at competitive prices.
Seasonality - ----------- The Company's apparel business is highly seasonal with the majority of sales occurring in the third and fourth quarters of the year.
Effects of Changing Prices - -------------------------- The Company is subject to the effects of changing prices. It has generally been able to pass along a majority of inflationary increases in its costs by increasing the prices for its products; however, competitive conditions sometimes preclude such increases.
New Accounting Standards - ------------------------ SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and was amended in June 2000 by SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities". SFAS 133 requires all derivative instruments to 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. The adoption of SFAS 133 on January 1, 2001 had no effect on the Company's financial position, results of operations or cash flows.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets." These statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. The adoption of SFAS 141 had no impact on the Company's financial statements.
SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Impairment would be examined more frequently if certain impairment indicators are encountered. Intangible assets with a determinable useful life will continue to be amortized over that period. This statement is effective for the Company on January 1, 2002. Within the first six months of 2002, the Company will complete its assessment of goodwill. Amortization expense related to goodwill for the years ended December 31, 2001, 2000, and 1999 was $847,000, $692,000 and $487,000, respectively.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions of APB 30 related to the disposal of a segment of a business. SFAS 144 is effective for the Company on January 1, 2002. The Company does not expect the adoption of the standard to have a significant impact on the Company's financial position, or results of operations.
The FASB's Emerging Issues Task Force ("EITF") issued EITF 00-25, "Vendor Income Statement Characterization Paid to a Reseller of the Vendor's Products", which addresses whether consideration from a vendor to a reseller of the vendor's product is (a) an adjustment to the selling prices of the vendor's products and, therefore, should be deducted from revenue when recognized in the vendor's income statement, or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore should be included as a cost or an expense when recognized in the vendor's income statement. EITF 00-25 is effective for the Company on January 1, 2002. The Company is evaluating the impact of the adoption of EITF 00-25 and has not yet determined the effect, if any, that the adoption will have on the Company's classification of such costs in the consolidated statements of operations.
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial and product market prices and rates. The Company is exposed to market risk in the areas of changing interest rates and fluctuations of currency exchange rates. The Company is also exposed to market risk due to increased costs for raw materials for the Company's products.
The long-term debt of the Company is at fixed interest rates, which were at market when the debt was issued, but are primarily above market on December 31, 2001. The impact of a 100 hypothetical basis point increase in interest rates on the Company's variable rate debt would be to increase interest expense for 2001 and 2000 by approximately $169,000 and $130,000, respectively. 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.
In purchasing apparel from foreign manufacturers, the Company uses letters of credit that require the payment of dollars upon receipt of bills of lading for the products. Prices are fixed in U.S. dollars at the time the letters of credit are issued.
With the exception of Hampshire Praha, the Company's 70% owned Czech Republic subsidiary, Hampshire Investments does not issue or own foreign indebtedness. Further, the foreign indebtedness of Hampshire Praha is insignificant to the Company's financial statements. Hampshire Investments either purchases foreign based assets with U.S. dollars or with foreign currency purchased with U.S. dollars, on or near the purchase date. Real property owned by Hampshire Investments and located outside the United States is leased for either U.S. dollars or other stable currency. The primary foreign currency risk for Hampshire Investments is the impact of fluctuations that such currencies have on the businesses of the lessees of real property owned by Hampshire Investments.
The Company does not currently engage in derivative financial instruments to mitigate these market risks.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The information required to be presented in Item 8 is presented commencing on Page of this Annual Report on Form 10-K.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------ There were no disagreements with independent accountants on accounting or financial disclosure during the three fiscal years ended December 31, 2001, 2000 and 1999.
PART III -------- Certain information required to be presented in this Part III of this Annual Report on Form 10-K is omitted as the Registrant will file a Definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year, which is incorporated herein by reference thereto.
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ The information concerning the Company's directors and executive officers required to be presented in Item 10 is incorporated herein by reference to the Company's 2002 Proxy Statement.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION - -------------------------------- The information concerning executive compensation required to be presented in Item 11 is incorporated herein by reference to the Company's 2002 Proxy Statement.
ITEM 12
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 Item 12 is incorporated herein by reference to the Company's 2002 Proxy Statement.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information concerning certain relationships and related transactions required to be presented in Item 13 is incorporated herein by reference to the Company's 2002 Proxy Statement.
PART IV ------- ITEM 14
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 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. 1 (3)(A)(1) Certificate of Amendment to the Certificate of Incorporation of Hampshire Group, Limited. 1 (3)(A)(2) Amended and Restated By-Laws of Hampshire Group, Limited. 1 (3)(B)(6) Merger Agreement between Hampshire Designers, Inc. and Segue (America) Limited dated December 30, 1999. 3 (10)(A)(3) Employment Agreement between Hampshire Group, Limited and Ludwig Kuttner dated as of January 1, 1998. 2 (10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option Plan Amended and Restated effective June 7, 1995. 1 (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. 1 (10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries 401(k) Retirement Savings Plan. 1 (10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred Compensation Plan for Directors and Executives Amended and Restated December 30, 1997. 1 (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. 2 (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. 2 - ------------------------------------------------------------------------------ (Exhibits continued on next page)
(Exhibits continued from previous page)
Exhibit No. Description Footnote ---------- ------------------------------------------------------ -------- (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. 2 (10)(J)(7) Lease Agreement between Hampshire Designers, Inc. and Peter Woodworth and Joyce Woodworth for the Winona, Minnesota Distribution Center dated June 15, 1999. 3 (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. 1 (10)(U) Agreement between Hampshire Designers, Inc. and Vision Legwear LLC, dated May 27, 1999 for the disposal of the hosiery business. 4 4.1 Amendment No. 1, dated September 5, 2000 to the Note Purchase Agreement, dated as of May 15, 1998, among the Company, the Guarantors named therein, Phoenix Home Life Mutual Insurance Company and the Ohio National Life Insurance Company. 5 10.1 Asset Purchase Agreement among Vintage III, Inc., Hampshire Group, Limited, Item-Eyes, Inc. and certain other parties, dated June 26, 2000. 5 10.2 Amended and Restated Credit Agreement and Guaranty among Hampshire Group, Limited, the Guarantors named therein, the Banks named therein and The Chase Manhattan Bank as agent for the Banks, dated September 5, 2000. 5 10.3 Term Loan Agreement between Merchants National Bank and Hampshire Group, Limited dated as of September 20, 2000. 6 - ------------------------------------------------------------------------------- (1) Incorporated by reference to the Company's 1997 Annual Report on Form 10-K. (2) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K. (3) Incorporated by reference to the Company's 1999 Annual Report on Form 10-K. (4) Incorporated by reference to the Company's June 15, 1999 Report on Form 8-K. (5) Incorporated by reference to the Company's September 15, 2000 Report on Form 8-K. (6) Incorporated by reference to the Company's November 9, 2000 Report on Form 8-K/A.
Exhibits filed herewith: -------------------------------------------------------------- 21 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP.
(b) Reports on Form 8-K filed during the quarter.
No reports were filed on Form 8-K during the quarter ended December 31, 2001.
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 27th day of March 2002.
HAMPSHIRE GROUP, LIMITED
By: /s/ LUDWIG KUTTNER ----------------------- Ludwig Kuttner President and Chief Executive Officer (Principal Executive Officer)
- ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ LUDWIG KUTTNER Chairman of the Board of Directors, March 27, 2002 - ------------------------ President and Chief Executive Officer -------------- Ludwig Kuttner
/s/ JOEL GOLDBERG Director March 27, 2002 - ------------------------ -------------- Joel Goldberg
/s/ MICHAEL C. JACKSON Director March 27, 2002 - ------------------------ -------------- Michael C. Jackson
/s/ HARVEY L. SPERRY Director March 27, 2002 - ------------------------ -------------- Harvey L. Sperry
/s/ EUGENE WARSAW Director March 27, 2002 - ------------------------ -------------- Eugene Warsaw
/s/ PETER W. WOODWORTH Director March 27, 2002 - ------------------------ -------------- Peter W. Woodworth
/s/ WILLIAM W. HODGE Vice President and Chief Financial Officer - ------------------------ (Principal Financial Officer and March 27, 2002 William W. Hodge Principle Accounting Officer) --------------
HAMPSHIRE GROUP, LIMITED Index To Consolidated Financial Statements
Page ---- Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows -
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements -
Financial Statement Schedules II. Valuation and Qualifying Accounts and Reserves III. Real Estate and Accumulated Depreciation -
Quarterly Financial Data
Report of Independent Accountants
To the Board of Directors and Stockholders of Hampshire Group, Limited Anderson, South Carolina
We have audited the accompanying consolidated balance sheets of Hampshire Group, Limited and its Subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the index on. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP - ---------------------------
Deloitte & Touche LLP Greenville, South Carolina March 7, 2002
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
(Consolidated Statements of Cash Flows continued on next page.)
(Consolidated Statements of Cash Flow continued from previous page.)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Note 1 - Organization and Summary of Critical and Other Significant Accounting Policies - ------------------------------------------------------------------- Organization - ------------ Hampshire Group, Limited (the "Company"), through its subsidiaries, engages in the apparel business and invests in real property. The Company, with headquarters in Anderson, South Carolina, operates in two segments, Apparel and Investments. The Company's apparel products are sold primarily in the United States through various retail and catalog companies. The investment company, with subsidiaries located in the United Kingdom, the Cayman Islands and the Czech Republic, principally purchases real properties located primarily in the United States, Russia and Eastern Europe, for the purposes of long-term 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 all majority-owned subsidiaries, including Hampshire Designers, Inc. and its subsidiaries (collectively, "Hampshire Designers"); Item-Eyes, Inc. ("Item-Eyes"), since its acquisition on August 20, 2000; and Hampshire Investments, Limited and its subsidiaries and Hampshire Praha s.r.o. (70% owned) located in the Czech Republic (collectively, "Hampshire Investments"). All significant intercompany accounts and transactions have been eliminated in consolidation.
Summary of Critical and Other Significant Accounting Policies - ------------------------------------------------------------- The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis management evaluates its estimates, including those related to the allowance for doubtful notes and accounts, allowances for customer returns and adjustments, inventory reserves and for impairment of real property investments, long-term investments and other long-lived assets. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.
The following critical accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:
Allowance For Doubtful Notes and Accounts and Customer Returns and Adjustments - ------------------------------------------------------------------------------ The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers or other parties failure to make payments on trade or notes receivable due to the Company. In addition, the Company maintains allowances for customer returns, trade discounts, customer chargebacks, and for sales and markdown allowances given to the customer, typically at the end of the selling seasons, enabling customers to markdown the retail sales prices of any remaining goods on hand. The estimates for these allowances and discounts are based on a number of factors, including: (1) historical experience, (2) aging of the trade accounts receivable, (3) specific information obtained by the Company
on the financial condition and current credit worthiness of customers or other parties, and (4) specific agreements or negotiated amounts with customers.
If the financial condition of the Company's customers were to deteriorate and reduce the ability of the Company's customers to make payments on their accounts, the Company may be required to increase its allowances by recording additional bad debt expense. Further, while the Company believes that it has negotiated all substantial sales and markdown allowances with its customers, additional allowances may be requested by customers. Likewise, should the financial condition of the Company's customers or other parties improve and result in payments or settlements of previously reserved amounts, the Company may be required to record a reduction in bad debt expense to reverse recorded allowances.
Inventory Reserves - ------------------ The Company analyzes out-of-season merchandise on an SKU by SKU basis to determine reserves, if any, that may be required. Factors considered in evaluating the requirement for reserves include product styling, color, current fashion trends and quantities on hand. Many of the Company's products are "classics" and remain saleable from one season to the next and therefore no reserves are generally required on these products. An estimate is made of the market value, less costs to dispose, of products whose value is determined to be impaired. If these products are ultimately sold at less than estimated amounts, additional reserves may be required. Likewise, if these products are sold for more than estimated amounts, reserves may be reduced.
Impairment of Long-Lived Assets - ------------------------------- The Company's long-lived assets include real property investments, long-term investments, property and goodwill. The Company follows the provisions of Accounting Principles Board Opinion No. 17 ("APB 17"), "Intangible Assets," and Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting of the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance with APB 17 and SFAS 121, as applicable, management assesses impairment of real property investments, long-term investments, property and goodwill and whenever changes or events indicate that the carrying value may not be recoverable. In accordance with APB 17, management assesses impairment of goodwill whenever operating trends have had other than a temporary adverse change. Management applies a discounted cash flow approach to measure impairment using the Company's estimated current cost of capital as the discount rate. In accordance with SFAS 121, management writes down other long-lived assets to fair value if, based on an analysis, the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets.
Additionally, economic conditions and other factors in foreign countries and elsewhere affect certain of the Company's real property investments and long-term investments. Where impairment indicators exist, management uses available information, including estimated future undiscounted cash flows to estimate impairment, if any. Factors could develop to cause the Company to recognize additional impairment of long-lived assets. If the impairment estimates are excessive, gains may be recognized upon disposal or sale of the assets. Likewise, if insufficient impairment charges have been recorded, losses may be recognized upon disposal or sale of the assets.
Also, the following accounting policies significantly affect the preparation of the consolidated financial statements:
Cash Equivalents - ---------------- Cash equivalents consist of highly liquid investments with initial maturities of ninety days or less. Interest bearing amounts were approximately $26.2 million and $8.8 million at December 31, 2001 and 2000, respectively.
Inventories - ----------- Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method ("FIFO") for all inventory except for approximately 14% and 8% of the inventory at December 31, 2001 and 2000, respectively, for which cost is determined using the last-in, first-out method ("LIFO").
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 minor replacements and maintenance costs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Real Property Investments - ------------------------- Real property investments are recorded at cost. The Company provides for depreciation using the straight-line method over 15 years, or 39 years for new construction, which is the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while minor replacements and maintenance costs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction. Such gains and losses on the sale of real property investments and impairment charges on such investments are classified as "net investment transactions and impairment charges" in the accompanying consolidated statements of income.
Long-Term Investments - --------------------- Long-term investments are recorded either at cost or by using the equity method of accounting depending on the Company's ownership percentage in the investments. Gains and losses from the sale of long-term investments and any impairment charges on such investments are classified as "net investment transactions and impairment charges" in the accompanying consolidated statements of income.
Goodwill - -------- Goodwill is being amortized over estimated useful lives of 10 to 15 years, on a straight-line basis. The Company continually monitors conditions that may affect the carrying value of its goodwill. As conditions may indicate potential impairment of goodwill, the Company evaluates projected future undiscounted cash flows to determine the extent of impairment, if any. See "New Accounting Standards".
Foreign Currency Transactions and Translation - --------------------------------------------- Foreign currency transactions are translated into U.S. dollars at prevailing exchange rates. The balance sheet of the Company's consolidated foreign subsidiaries, excluding equity, was translated into U.S. dollars at current exchange rates at year-end. The statement of operations for the Company's consolidated foreign subsidiaries was translated at the annual average exchange rates. Net transaction gains (losses) were not significant in 2001, 2000 or 1999.
Financial Instruments - --------------------- The Company's financial instruments primarily consist of cash and cash equivalents, accounts and notes receivable, accounts payable, accrued liabilities, long-term debt and subordinated notes payable. The fair value of long-term debt and the subordinated notes payable is disclosed in Note 9. The carrying amounts of the other financial instruments are considered a reasonable estimate of fair value at December 31, 2001 and 2000, due to the short-term nature of the items.
Revenue Recognition - ------------------- The Company recognizes apparel sales revenue upon shipment of goods to customers (net of the Company's estimate of returns and allowances) and rental revenue is recognized on a straight-line basis over the terms of the related leases.
Advertising Costs - ----------------- The Company recognizes advertising costs, including the costs of co-op advertising arrangements, as incurred. Advertising costs were approximately $2,936,000, $1,643,000 and $1,145,000 in 2001, 2000 and 1999, respectively, and were recorded as a component of selling, general and administrative expenses in the accompanying consolidated statements of income. See "New Accounting Standards".
Shipping Costs - -------------- The costs to ship products to customers of approximately $713,000, $562,000 and $180,000 in 2001, 2000, and 1999, respectively, are included as a component of selling, general and administrative expenses in the accompanying consolidated statements of income.
Income Taxes - ------------ Income taxes are recognized for financial reporting purposes during the year in which transactions enter into the determination of income, with deferred taxes being provided for temporary differences between the basis for financial reporting purposes and the basis for income tax reporting purposes.
Earnings Per Common Share - ------------------------- Basic earnings per common share 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.
Comprehensive Income - -------------------- Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. At December 31, 2001 and 2000, the Company had one item, unrealized gain or loss on foreign currency translation, that remains a component of other comprehensive income.
Presentation of Prior Year Data - ------------------------------- Certain reclassifications have been made to prior year's data to conform with the current-year presentation.
New Accounting Standards - ------------------------ SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and was amended in June 2000 by SFAS 138, "Accounting for Certain Derivative Instruments and Hedging Activities". SFAS 133 requires all derivative instruments to 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. The adoption of SFAS 133 on January 1, 2001 had no effect on the Company's financial position, results of operations or cash flows.
In July 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets." These Statements make significant changes to the accounting for business combinations, goodwill, and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. The adoption of SFAS 141 had no impact on the Company's financial statements.
SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived intangible assets and initiates an annual review for impairment. Impairment would be examined more frequently if certain impairment indicators are encountered. Intangible assets with a determinable useful life will continue to be amortized over that period. This statement is effective for the Company on January 1, 2002. Within the first six months of 2002, the Company will complete its assessment of goodwill. Amortization expense related to goodwill for the years ended December 31, 2001, 2000, and 1999 was $847,000, $692,000 and $487,000, respectively.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions of APB 30 related to the disposal of a segment of a business. SFAS 144 is effective for the Company on January 1, 2002. The Company does not expect the adoption of the standard to have a significant impact on the Company's financial position or results of operations.
The FASB's Emerging Issues Task Force ("EITF") issued EITF 00-25, "Vendor Income Statement Characterization Paid to a Reseller of the Vendor's Products", which addresses whether consideration from a vendor to a reseller of the vendor's product is (a) an adjustment to the selling prices of the vendor's products and, therefore should be deducted from revenue when recognized in the vendor's income statement, or (b) a cost incurred by the vendor for assets or services received from the reseller and, therefore should be included as a cost or an expense when recognized in the vendor's income statement. EITF 00-25 is effective for the Company on January 1, 2002. The Company is evaluating the impact of the adoption of EITF 00-25 and has not yet determined the effect, if any, that the adoption will have on the Company's classification of such costs in the consolidated statements of operations.
Note 2 - Acquisition of Assets - ------------------------------ Effective August 20, 2000, the Company acquired substantially all the assets and business of Item-Eyes, Inc. ("Item-Eyes"), a privately-held sportswear company.
The assets were acquired for a total of $57,288,000, which was paid as follows: Cash, including repayment of revolving credit line of $31,069,000 $44,069,000 Assumed liabilities - trade accounts payable, etc. 8,396,000 Issuance of Subordinated Notes payable 2,100,000 Issuance of Hampshire Group, Limited Common Stock 2,723,000 (1)
(1) Hampshire Group Limited issued 395,382 unregistered shares of its Common Stock.
The purchase price was allocated to the net assets acquired, including the liabilities assumed as of August 20, 2000, based upon their estimated fair values as of that date with the remainder of approximately $8,650,000 being recorded as goodwill.
The following unaudited pro forma financial information shows the results of operations of the Company as though the acquisition of Item-Eyes occurred as of January 1, 2000 or January 1, 1999, respectively. The unaudited pro forma financial information presented below does not purport to be indicative of the results of the continuing operations had the acquisition of Item-Eyes been consummated as of January 1, 2000 or January 1, 1999 or of the future results of operations of the combined businesses.
Pro Forma Pro Forma Year Ended December 31, 2000 1999 (in thousands, except per share data) (unaudited) (unaudited) - ---------------------------------------------------------------------- Net sales $250,819 $253,789 ------------------------- Net income $7,028 $6,824 ------------------------- Net income per share Basic $1.56 $1.52 ------------------------- Diluted $1.53 $1.47 -------------------------
Note 3 - Accounts Receivable and Major Customers - ------------------------------------------------ The Company performs ongoing evaluations of the credit worthiness of its customers 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 approximately $6,830,000 and $7,042,000 at December 31, 2001 and 2000, respectively.
The Company sells principally to department stores, mail order distributors, specialty stores, mass merchandisers and other retailers located in the United States. The Company had sales to three major customers (defined as sales in excess of 10% of total sales) during 2001 which represented 14%, 11% and 10% of total sales; two major customers during 2000 which represented 15% and 14% of total sales, and three major customers in 1999 which represented 15%, 11% and 10% of total sales. At December 31, 2001 and 2000, 38% and 32%, respectively, of the total trade receivables were due from these customers.
Note 6 - Real Property and Long-Term Investments - ------------------------------------------------
The Company has made direct investments in real property for the purpose of generating rental revenue and asset appreciation. These properties consist of commercial and residential facilities in the United States and Europe and are carried at historical cost, net of impairment charges totaling $2,092,000, including $242,000 recognized in 2001.
Depreciation is provided over the estimated useful lives of the property, which is 15 years, or 39 years for new construction. Depreciation expense was $1,016,000, $822,000 and $624,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Real Property Investments (in thousands) 2001 2000 - ------------------------------------------------------------------------ Commercial and residential property: United States $21,784 $17,766 Russia 3,273 3,535 Europe 7,973 5,024 - ------------------------------------------------------------------------ 33,030 26,325 Less: Accumulated depreciation (3,650) (3,532) - ------------------------------------------------------------------------ Total $29,380 $22,793 ========================================================================
Long-term investments consist principally of common stock of non-publicly traded companies and investments in real estate partnerships. Management intends that these investments will be held on a long-term basis. The carrying values set forth in the table below are shown net of asset impairment charges totaling $2,647,000, including $1,272,000 recognized in 2001, $300,000 recognized in 2000 and $425,000 recognized in 1999 for certain foreign assets deemed to be permanently impaired.
Long-Term Investments (in thousands) 2001 2000 - ------------------------------------------------------------------------ United States $3,109 $3,381 Russia 131 131 Europe 566 1,838 - ------------------------------------------------------------------------ Total $3,806 $5,350 ========================================================================
Costs associated with the Company's rental activities are included in selling, general and administrative expense and amounted to $2,034,000, $1,646,000 and $1,242,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
Net investment transactions and impairment charges, reported net in the accompanying consolidated statements of operations for the years ended December 31, 2001, 2000 and 1999 are summarized in the table below.
(in thousands) 2001 2000 1999 - ------------------------------------------------------------------------ Impairment of foreign investments $1,272 $300 $425 Impairment of foreign real property 242 - - (Gain) on sale of domestic real property (652) (735) - Impairment of notes receivable 60 147 54 (Gain) loss on available for sale securities - 658 (133) Other investments (gains) and losses, net (46) 95 48 - ------------------------------------------------------------------------ Total $876 $465 $394 ========================================================================
Note 7 - Goodwill - ----------------- Accumulated amortization of goodwill was $1,142,000, $2,703,000 and $3,037,000 at December 31, 2001, 2000 and 1999, respectively.
The Company recognized impairment of goodwill in 2001, due to the permanent decline in one of the divisional operations and its estimated deficiencies in future cash flows
Activity in goodwill for the years ended December 31, 2001, 2000 and 1999 is summarized in the table below.
(in thousands) 2001 2000 1999 - ------------------------------------------------------------------- Balance - beginning of year $9,692 $2,553 $3,390 Amortization for the year (847) (692) (487) Addition from acquisition of Item-Eyes, Inc. (See Note 2) - 8,650 - Purchase price adjustments resulting from settlement of acquisition contingencies - - (350) Impairment of goodwill (825) - - Write-off upon sale of manufacturing facilities - (819) - - ------------------------------------------------------------------- Balance - end of year $8,020 $9,692 $2,553 ===================================================================
Note 8 - Accrued Expenses and Other Liabilities - -----------------------------------------------
Accrued expenses and other (in thousands) 2001 2000 liabilities at December 31, ------------------------------------ 2001 and 2000 are summarized Compensation $5,341 $1,675 on the adjacent table. Income taxes 4,686 2,245 Co-op advertising 1,450 1,021 Royalties 1,303 871 Other 3,934 4,231 ------------------------------------ Total $16,714 $10,043 ====================================
Note 9 - Borrowings - -------------------
Revolving Credit Facilities - --------------------------- The Company's Revolving Credit Facility, which matures on September 5, 2003, provides a secured credit facility up to $97.9 million in revolving line of credit and letters of credit. Advances under the line of credit are limited to the lesser of: (1) $97.9 million less outstanding letters of credit; or (2) the sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject to seasonal limits) of the Company's Restricted Subsidiaries (defined as Hampshire Designers and Item-Eyes), and 50% of outstanding eligible letters of credit issued through this credit facility, plus a seasonal supplemental.
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 2.25%, for a fixed term. The loan is collateralized, pari passu with the Senior Notes, principally by the trade accounts receivable and inventories of the Company's Restricted Subsidiaries and a pledge of the Common Stock of all subsidiaries. The Company has also pledged as collateral two insurance policies, a $5 million policy on the life of its Chairman and a $1 million policy on the life of the Chief Executive Officer of Item-Eyes, Inc. At December 31, 2001 there were $9.3 million outstanding letters of credit. No advances were outstanding under the line of credit at December 31, 2001 or 2000, which resulted in availability for borrowing of approximately $30 million under the line of credit at December 31, 2001.
The Company also has available two other credit facilities, which provide for international letters of credit in the aggregate amount of $2.0 million. As of December 31, 2001, the letters of credit outstanding against these two letter of credit facilities totaled approximately $207,000.
Additionally, the Company, through its Investment subsidiary, Hampshire Investments, Limited, has a $1.0 million unsecured line of credit, for use by this subsidiary. As of December 31, 2001, there were no outstanding balances.
The subordinated debt and certain of the real property debt has been guaranteed by the Company's Chief Executive Officer.
Financial Covenants - ------------------- Both the Revolving Credit Facility and the Senior Notes Agreement (the "Agreements") contain covenants which require certain financial performance and restrict certain payments by the Company and the Restricted Subsidiaries, including advances to the Company's Non-Restricted Subsidiary (defined as Hampshire Investments, Limited and its subsidiaries).
The financial performance covenants require, among other things, that the Company maintain specified levels of consolidated net worth, not exceed a specified consolidated leverage ratio, achieve a specified fixed charge ratio and limit capital expenditures to a specified maximum amount. The Company was in compliance with the financial performance covenants at December 31, 2001.
The Agreements restrict the sale of assets, payments by the Company of cash dividends to stockholders, prepayment of Subordinated Notes, the repurchase of Company common stock and investments in and loans to the Non-Restricted Subsidiary. The Senior Notes Agreement also requires that during any 12-month period there must be a period of 45 consecutive days where there is no outstanding short-term debt. The Company was in compliance with these provisions at December 31, 2001. (in thousands) --------------------------- Maturities of long-term debt as of Year December 31, 2001 are summarized in --------------------------- the adjacent table. 2002 $ 7,721 2003 3,371 2004 5,468 2005 2,913 2006 2,195 Thereafter 7,791 ---------------------------- Total $29,459 ============================
The net book value of the assets collateralizing the debt on real property at December 31, 2001 was approximately $25.5 million. The fair value of the long-term debt at December 31, 2001 and 2000, based on current market interest rates discounted to present value, is approximately $29.8 million and $28.9 million, respectively.
Note 10 - Income Taxes - ---------------------- The domestic, Puerto Rico and (in thousands) 2001 2000 1999 foreign components of income --------------------------------------------- (loss) from continuing opera- Domestic $18,820 $ 7,091 $2,268 tions before income taxes are Puerto Rico (469) 3,993 4,654 set forth in the adjacent table. Foreign (1,071) (768) (826) --------------------------------------------- Income before income taxes $17,280 $10,316 $6,096 =============================================
The components of income tax (in thousands) 2001 2000 1999 provision (benefit) for the --------------------------------------------- years ended December 31, 2001, Current: 2000 and 1999 are set forth Federal $6,565 $ 988 $ 98 in the adjacent table. State 1,138 459 380 Puerto Rico (200) 710 85 --------------------------------------------- 7,503 2,157 563 --------------------------------------------- Deferred: Federal (1,099) (123) 469 State (204) 137 (132) --------------------------------------------- (1,303) 14 337 --------------------------------------------- Total $6,200 $2,171 $900 =============================================
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 table below.
(in thousands) 2001 2000 1999 - ------------------------------------------------------------------------------ Tax provision at federal statutory rate $6,048 $3,507 $2,073 Increase (decrease) in tax arising from: Effect of exemption of Puerto Rico (earnings) losses from United States tax 164 (1,358) (1,582) Change in valuation allowance 1,310 (1,869) - Puerto Rico taxes on income, including withholding taxes and capital gains - 710 85 State taxes, less federal income tax benefit 607 393 119 Foreign operating losses 375 261 281 Tax benefit of capital losses (1,652) - - Tax benefit of tax rate changes (164) - - Adjustment to NOL carryforward (258) - - Tax benefit of Puerto Rico amendment (200) - - Nondeductible items 72 454 - Other (102) 73 (76) - ------------------------------------------------------------------------------ $6,200 $2,171 $ 900 ==============================================================================
A summary of the temporary differences and carryforwards giving rise to deferred income tax assets as of December 31, 2001 and 2000 is set forth in the table below.
(in thousands) 2001 2000 - ------------------------------------------------------------------------------ Deferred income tax assets: Allowances for receivables $1,085 $1,265 Inventories 1,097 252 Property, plant and equipment 511 359 Write-down of assets not currently deductible 363 59 Accrued liabilities and other temporary differences 2,658 2,138 Net operating loss carry forwards 1,551 1,850 Capital loss carryforward 1,310 - Tax credit carry forwards - 39 - ------------------------------------------------------------------------------ Gross deferred income tax assets 8,575 5,962 - ------------------------------------------------------------------------------ Valuation allowance for deferred income tax assets arising from capital loss carryforward (1,310) - - ------------------------------------------------------------------------------ Net deferred income tax assets $7,265 $5,962 ==============================================================================
The deferred tax assets are (in thousands) 2001 2000 recognized as follows in the -------------------------------------- accompanying consolidated balance Deferred tax asset- sheets. current $5,216 $3,714 Deferred tax asset- noncurrent 2,049 2,248 -------------------------------------- Total $7,265 $5,962 ======================================
(in thousands) -------------------------------------- The net operating loss carryforwards Year Regular Tax for federal income tax purposes -------------------------------------- expire as set forth in the adjacent 2003 $ 225 table. 2004 411 2005 2,429 2009 1,366 -------------------------------------- Total $4,431 ======================================
The Company generally is not permitted to utilize more than $1.7 million of the net operating loss carryforwards in any single tax year. 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 increases the subsequent years' limitation.
Under the Puerto Rico Tax Incentives Act of 1987 (the "Act"), the Company was granted 90% exemption from Puerto Rico income taxes of Glamourette Fashion Mills, Inc. ("GFM"), a subsidiary of the Company, 75% exemption from property
and municipal taxes and was subject to tollgate taxes ranging from 0% to 5% on dividends. These exemptions ceased with the sale of the Puerto Rico manufacturing facilities in April 2000.
GFM had an election under Section 936 of the Internal Revenue Code pursuant to which GFM's earnings were exempt from US taxes. However, dividends received from GFM, 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 GFM'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 net operating losses ("NOL") deductions are limited in calculating AMT, the Company had, prior to 1996, determined that a valuation allowance was required with respect to NOL carryforwards and AMT credit carryforwards. Since the assets of GFM were sold in 2000, the Company believes that it will incur regular US tax liabilities and therefore will receive the benefit of a significant portion of the NOL. Accordingly, the valuation allowance on the NOL and AMT carryforwards was reversed in 2000.
The undistributed earnings of the Company's foreign subsidiaries are expected to be permanently reinvested overseas and accordingly, deferred income taxes have not been provided thereon.
During 2001, the Company recognized tax benefits related to capital losses totaling $1,652,000. A valuation allowance has been established for $1,310,000, the future tax benefit of the capital loss carryforwards, because it is uncertain whether the Company will be able to generate capital gains to utilize the capital loss carryforwards. The capital loss carryforward expires in 2006.
During 1999, the Internal Revenue Service made an examination of the Company's consolidated tax return for the year ended December 31, 1996. The examination resulted in an insignificant adjustment of the Company's income tax liability.
Note 11 - Commitments and Contingencies - --------------------------------------- The Company leases premises and equipment under (in thousands) operating leases having terms from month-to-month ------------------------- to 7 years. At December 31, 2001, future minimum Year Lessee Lessor lease payments under leases ("Lessee") having an ------------------------- initial or remaining non-cancelable term in excess 2002 $1,300 $2,167 of one year were as set forth in the adjacent table. 2003 1,310 1,645 2004 982 1,098 The Company also leases certain owned real estate 2005 558 761 properties of its Investment segment. Future 2006 262 409 minimum lease receipts by the Company for leases Thereafter - 1,037 ("Lessor") having an initial or remaining non- ------------------------- cacelable term in excess of one year were as set Total $4,412 $7,117 forth in the adjacent table. =========================
Rent expense for operating leases was $1,494,000, $1,766,000 and $1,501,000 in 2001, 2000 and 1999, respectively.
Rental revenue was $2,594,000, $2,281,000 and $2,005,000 in 2001, 2000 and 1999, respectively.
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, results of operations, or cash flow.
Note 12 - Capitalization and Warrants - ------------------------------------- The Company's authorized capital stock consists of 10,000,000 shares of Common Stock and 1,000,000 shares of serial preferred stock each having a par value of $0.10 per share. No preferred stock has been issued by the Company.
In December 1990, the Company issued warrants to purchase 338,182 shares of the Company's Common Stock through December 31, 2000, at an exercise price of $6.19 per share. The aggregate consideration for such warrants was $250,000. During 1997, the Company had repurchased 132,728 of these warrants and on December 12, 2000, the Company repurchased an additional 132,727 of these warrants at $1 per share. The excess of the purchase price over the pro rata consideration paid upon issue was charged against retained earnings. The 72,727 remaining warrants were exercised on December 26, 2000.
Note 13 - Stock Options, Compensation Plans and Retirement Savings Plan - ----------------------------------------------------------------------- In 1994, the Company registered 750,000 shares of its Common Stock under the Securities Act of 1933, as amended, and on January 16, 2001, the Company registered an additional 750,000 shares, as previously approved by the Stockholders. These actions were in regards to the Hampshire Group, Limited 1992 Stock Option Plan, as amended, and the Hampshire Group, Limited Common Stock Purchase Plan for Directors and Executives. Of these shares, 854,000 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. During 2001, the Company repurchased 16,760 shares of its Common Stock for $138,000.
The Company's repurchase of shares of Common Stock are recorded at cost as "Treasury Stock" and result in a reduction of "Stockholders' Equity". When treasury shares are reissued, the Company uses a weighted average cost method and the excess of outstanding repurchased costs over reissue price is treated as a reduction of "Retained Earnings".
Stock Options - ------------- Options to purchase Hampshire Group, Limited Common Stock are granted at the discretion of the Company's Board of Directors to executives and key employees of the Company and its subsidiaries. No option may be granted with an exercise price less than the fair market value per share of Common Stock at the date of grant. All options have a maximum term of 10 years and become fully exercisable after a maximum of 5 years from the date of grant.
Number of Weighted Average Options Exercise Price --------------------------------------------------------- Stock option activity Outstanding-January 1, 1999 412,016 $ 9.23 is set forth in the Granted 76,650 8.72 adjacent table. Exercised (143,718) 6.94 Canceled or expired (54,235) 10.95 --------------------------------------------------------- Outstanding-December 31, 1999 290,713 10.18 Granted 197,000 13.35 Exercised (53,864) 7.45 Canceled or expired (52,483) 9.72 --------------------------------------------------------- Outstanding-December 31, 2000 381,366 12.27 Granted 61,500 9.37 Exercised (34,360) 6.85 Canceled or expired (18,365) 11.60 --------------------------------------------------------- Outstanding-December 31, 2001 390,141 $12.32 =========================================================
SFAS 123, "Accounting for Stock-Based Compensation", allows companies to adopt the fair value based method of accounting or to continue using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock options. Under APB 25, which the Company has elected not to use, 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 was recognized in 2001, 2000, or 1999. 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. If compensation expense for the Company's stock-based compensation plans had been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net income and earnings per share would have been reduced as per the "pro forma" amounts in the accompanying table.
2001 2000 1999 In order to estimate ------------------------------------------------------ compensation cost Expected life (years) 5.9 6.5 6.2 under SFAS 123, the Expected volatility 24.3% 15.9% 22.5% Black-Scholes model Dividend yield 0.0% 0.0% 0.0% was employed using Risk-free interest rate 4.8% 5.5% 5.0% the assumptions set ------------------------------------------------------ forth in the Weighted-average fair value adjacent table. of options granted $3.02 $1.38 $2.71 ======================================================
The adjacent table (in thousands) 2001 2000 1999 sets forth the ------------------------------------------------------ effect on net income Net income: As reported $11,080 $8,543 $5,196 and diluted earnings ======================== per share had compen- Pro forma $10,937 $8,390 $5,022 sation cost been ======================== determined in Diluted earnings per share: accordance with As reported $2.37 $1.97 $1.22 SFAS 123. ======================== Pro forma $2.34 $1.93 $1.18 ========================
The number of options exercisable was 97,141, 137,116 and 195,863 at December 31, 2001, 2000 and 1999, respectively.
Common Stock Purchase Plan - -------------------------- Pursuant to the Hampshire Group, Limited 1992 Common Stock Purchase Plan for Directors and Executives ("Stock Purchase Plan"), key executives 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. Non-employee Directors may elect to defer their fees to purchase Common Stock of the Company. Contributions of annual salaries, annual bonuses and non-employee director fees earned subsequent to December 31, 2002 are not permitted.
The price at which Common Stock can be purchased under the Stock Purchase Plan, with respect to the deferrals on the annual salaries of key executives is 90% and for non-employee directors is 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 to the Stock Purchase Plan with respect to deferrals on the annual bonuses, is 90% of the lower of: (a) the average of the fair market value of the Company's Common Stock at the end of each calendar quarter for the Plan year, or (b) the fair market value of the Company's Common Stock as of the end of the plan year.
Shares of the Company's Common Stock purchased pursuant to the Stock Purchase Plan are distributed to the participants in accordance with their election made prior to the deferral.
During the years 2001, 2000 and 1999, approximately $128,000, $434,000 and $345,000, respectively, of participants' compensation, was used by the Stock Purchase Plan to purchase Common Stock of the Company. The Company has established a trust to which it delivers the shares of the Company's Common Stock following the end of each plan year to satisfy such elections. The deferred compensation liability and the Company's shares are presented as offsetting amounts in the stockholders' equity section.
Voluntary Deferred Compensation Plan - ------------------------------------ The Company has established the Hampshire Group, Limited Voluntary Deferred Compensation Plan for Executives (the "Top Hat Plan"). Pursuant to the plan, key executives could elect to defer up to 20% of the total compensation in each year with such deferrals being invested in mutual funds external to the Company. The Board of Directors resolved to discontinue deferrals under the Top Hat Plan for compensation earned after December 31, 2000. During the years 2000 and 1999, participants deferred $99,000 and $270,000, respectively, with the resulting liability being included as deferred compensation in the accompanying consolidated balance sheets.
To fund the deferred compensation liability, the Company has invested the amounts deferred by the participants in certain mutual funds which are presented as "Trading securities held in retirement trust" in the accompanying consolidated balance sheets. The market value of these mutual funds at December 31, 2001 and 2000, was $1,142,000 and $1,349,000, respectively, which equal the liability of the Company at the respective date. Shares of mutual funds purchased pursuant to the Top Hat Plan are distributed to the participants in kind, or in cash equal to the liquidation value of the shares, in accordance with the participant's election made prior to the deferral.
Company Deferred Compensation Plans - ----------------------------------- As a condition of their employment agreements, the Company contributes $100,000 annually to a deferred compensation plan on behalf of the Chief Executive Officer and contributed $2,500 on behalf of the former Chief Financial Officer. At the option of the executive, the cumulative amount may be invested in the Company, accruing interest at 110% of the Applicable Federal Long-Term Interest Rate, or may be invested in the Top Hat Plan.
In accordance with an unfunded deferred compensation agreement with the President of Hampshire Designers, Inc., the Company accrued $471,000 during 2001 and $240,000 during 2000.
Retirement Savings Plan - ----------------------- The Company has a 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 $125,000, $210,000 and $297,000 in 2001, 2000 and 1999, respectively. Such matching contributions vest fully after six years of employment.
Note 14 - 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 $234,000, $232,000 and $216,000 in 2001, 2000 and 1999, respectively. The Company also leases certain buildings from a director of the Company, Peter Woodworth, his wife and certain of his relatives. Rent expense under such leases was $158,000, $164,000 and $201,000, respectively, for 2001, 2000 and 1999. 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. Mr. Kuttner received a fee for guaranteeing certain of the Company's debt of $59,000 in 2001 and $24,000 in 2000.
During 1999, Hampshire Investments made advances supported by two promissory notes in the aggregate principal amount of $775,000. The issuers defaulted under the notes and on March 30, 2000, the Chairman and Chief Executive Officer of the Company purchased the notes from Hampshire Investments for their aggregate principal amount.
Mr. Harvey L. Sperry, a director of the Company, is a retired partner in the law firm of Willkie Farr & Gallagher, provided consulting services to the Company and was paid $12,000 in fees during 2001.
Dr. Joel Goldberg, a director of the Company, is a principal in Career Consultants, Inc., which has provided human resource consulting services to the Company since 1997 and in such capacity was paid fees in the amount of $5,000, $25,000 and $7,000 during the years 2001, 2000 and 1999, respectively.
The son of Mr. Kuttner was the independent contractor managing certain renovations on the real property owned by the Company located in Charlottesville, Virginia. The Company paid the contractor $34,000, $20,000 and $10,000 during the years 2001, 2000 and 1999, respectively. The contractor will receive as future consideration, 30% of the net cash flow of the property after the Company has received a 10% return on its investment. Another son of the Chairman and Chief Executive Officer of the Company worked on this project as a subcontractor. His company was paid $70,000 in 2001 and $45,000 in 2000.
Note 15 - Sale of Assets - ------------------------ On April 28, 2000, the Company sold all sweater manufacturing assets, except finished goods inventory, to Glamourette/OG, Inc. ("Glamourette"), a Puerto Rican corporation, for a sales price of $10,468,000. The sales price included a 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 sale resulted in a gain of $632,000 which has been classified as "net loss (gain) on sale of property, plant and equipment and related charges" in the accompanying consolidated statement for 2000. The note is payable by a deduction of $0.67 per sweater purchased from Glamourette or is payable in cash, and is partially collateralized by machinery and equipment and by the pledge of the common stock of Glamourette. During the fourth quarter of 2001, the Company served notice to Glamourette of default on the loan agreement from the sale of the sweater manufacturing assets. Subsequent to this notice Glamourette filed for bankruptcy. As a result of these events the Company has fully reserved the unpaid balance of the promissory note due from Glamourette in the amount of $3,893,000. The Company had reserved $2,100,000 of the note balance in 2000 due to the deteriorating financial condition of Glamourette and the remaining $1,793,000 was provided during 2001 based on the continued deterioration of Glamourette's financial condition.
Note 16 - Discontinued Operations - --------------------------------- In 1998 the Company's Board of Directors approved a plan to discontinue and sell the assets of the Hosiery Division, which was engaged in the manufacture and sale of ladies and children's hosiery and socks. On June 1, 1999, the Company sold the assets of the Hosiery Division, consisting principally of inventory and certain machinery and equipment and agreed to lease other equipment to the purchaser. The difference between the book basis of the assets sold and the selling price was established as a valuation reserve against an 8.25% promissory note received as part of the consideration from the sale. No gain on the sale was recognized pending collection of the note.
On December 5, 2000, the purchaser entered into an agreement to sell substantially all of its assets, other than the accounts receivable, to a competing hosiery company, which included the sale of the leased equipment. The sales price of the leased equipment was $750,000 and was paid with a promissory note payable in 36 equal monthly installments commencing February 1, 2001, with interest at prime. The gain on sale of the leased equipment is included with the net gain on sale of property, plant and equipment and related charges and the $633,000 in proceeds received against the 8.25 % promissory note from the sale was reported as gain from disposal of discontinued operations, net of a $235,000 provision for income taxes, during the year ended December 31, 2000.
Note 18 - Industry Segments and 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. Some of the Company's major customers operate both retail and mail order businesses; therefore, it is not possible for the Company to determine sales to the individual markets. The Investments segment makes investments both domestically and internationally, principally in real property as set forth on pages and.
SCHEDULE III 2 of 2 (continued)
HAMPSHIRE GROUP, LIMITED REAL PROPERTY 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 and 39 years for new construction Improvement Over remaining useful lives of the building
The aggregate cost for income tax purposes was approximately $33,030 at December 31, 2001.
The changes in total real property assets and accumulated depreciation for the period ending December 31, 2001 are as follows:
Total Real Property Assets Accumulated Depreciation - -------------------------- ------------------------ Balance, beginning of period $26,325 Balance, beginning of period ($3,532) Acquisitions 201 Depreciation (1,016) Additions and improvements 8,039 Property sale 80 Property sale (450) Write-off with impairment 663 Property impairment (905) Property donation 155 ------- Property donation (180) Balance, end of period ($3,650) ------- ======= Balance, end of period $33,030 =======
HAMPSHIRE GROUP, LIMITED 2001 EXHIBIT INDEX
Exhibit No. Description - ------------------------------------------------------------------------------
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.