Item 1. Business 3 Item 2.
Item 2. Properties 8 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 security holders during the fourth quarter of fiscal year 1999.
PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter on the NASDAQ National Market System ("NASDAQ") under the symbol "HAMP". The quarterly high and low bid quotations on NASDAQ for 1998 and 1999 are presented on Page of this Annual Report on Form 10-K. These quotations reflect the inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
As of March 20, 2000, the Company had approximately 900 stockholders of record.
The Company has not declared any dividends with respect to its Common Stock, subsequent to the effective date of its 1992 initial public offering. Any determination to pay dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors may deem relevant. The Senior Note Agreement, which closed in June 1998, contains covenants placing limitations on "restricted payments", which includes payment of cash dividends. See Note 9 to the consolidated financial statements.
The available balance at December 31, 1999 to make restricted payments, including any cash dividends which may be approved, was approximately $2.1 million.
RESULTS OF OPERATIONS
1999 Compared With 1998 - -----------------------
Consolidated income from continuing operations of the Company for the year ended December 31, 1999 was $5,196,000, or $1.22 per share on a diluted basis as compared with $5,727,000, or $1.29 per share on a diluted basis, for the preceding year.
Consolidated net sales of the Company were $151,317,000 in 1999 compared with $168,688,000 in 1998. The 10.3% decrease in net sales is attributed primarily to the men's non-branded lines. A large customers of the Winona Knitting Mills Division ("Winona") eliminated from its catalog a product which had generated substantial sales units in previous years. Non-delivery and delivery of
substandard quality of products to Winona by contractors also resulted in loss of sales. These factors accounted for approximately 64.0% of the decrease in net sales of the Company.
Approximately 25.3% of the decrease in net sales resulting from a decrease in net sales of the orlon women's sweaters resulting from price competition. The balance of the decrease in net sales resulted primarily from a change in product mix and average price of units sold.
Revenues of Hampshire Investments were $2,005,000 in 1999 compared with $507,000 in 1998. The increase resulted from a large percentage of the real estate units being renovated and leased in 1999.
Gross margin of the Company's apparel segment in 1999 was 19.6% percent of net sales, a 1.1 percentage-point reduction compared with the prior year. The reduction is primarily attributed to reduced prices and to reduced unit volume in respect to men's non-branded sweaters.
Selling, general and administrative expenses ("SG&A") of the Company were $25,111,000 in 1999 compared with $24,971,000 in 1998. The increase was primarily due to the increased expenses in the Brands Division, including initial expenses of launching the Dockers brand in 2000. As a percent of net sales, SG&A was 16.6% of net sales in 1999, a 1.8 percentage point increase over 1998.
Income from operations was $5,869,000 in 1999, compared with $7,955,000, which included a $2,500,000 asset impairment charge in the Investments segment, in 1998. The income from operations for 1999 includes $725,000 of impairment charges which were recognized for the estimated losses on distribution center assets in the Brands Division and the reduction in the value of certain foreign investments. For the year 2000, products of the Brands Division will be distributed through third-party warehouses. The balance of the decrease resulted principally from the reduction in net sales and gross margin as explained above.
Other income consists primarily of $744,000 gain on market value of securities held in the Company's Deferred Compensation Plan (and a like amount was charged against selling, general and administrative expenses as compensation of executives), $270,000 lease revenue from the hosiery equipment retained by the Company and $100,000 consulting fee collected from Vision Legwear, Inc.
The income tax provision was reduced to $900,000 in 1999 compared with $1,277,000 in 1998. The 3.4 percentage point decrease in the effective tax rate from 18.2% in 1998 to 14.8% for 1999 is primarily the result of a smaller percentage of taxable income being generated in the United States and an in- creased deferred state tax credit. The effective tax rate is lower than the statutory rate because substantially all of the income of the Company's Puerto Rican subsidiary is exempt from federal regular income taxes pursuant to an election under Section 936 of the Internal Revenue Code. Section 936 will be phased-out by the year 2005.
1998 Compared With 1997 - ----------------------- The consolidated income of the Company from continuing operations for the year ended December 31, 1998 was $5,727,000, or $1.29 per share on a diluted basis. Compared with income from continuing operations of $8,919,000, or $2.00 per share on a diluted basis, for the preceding year. The income from continuing operations for 1998 included a $2,500,000 charge for asset impairment principally to reflect the devaluation of the ruble on certain Russian investments, which amounted to a reduction of $0.56 per share on a diluted basis.
Consolidated net sales of the Company from continuing operations increased 19.8% to $168,688,000 in 1998 from $140,807,000 in 1997. The increase in net sales can be attributed primarily to the success achieved by Segue in developing strong sales and worldwide sourcing relationships and the sales of Hampshire Brands. Of the overall 19.8% increase, growth in unit volume accounted for 25.8% of the increase, offset by a 6.0% decrease resulting from change in product mix and average price of units sold. The decrease is principally the result of price reductions from intense competition in the sweater market.
Gross profit from the Company's apparel segment increased $1,838,000, or 5.6%; however, as a percent of net sales the gross margin decreased 2.8 percentage points to 20.7%. The decrease can be attributed primarily to intense competition which resulted in lower prices and lower margins.
Hampshire Investments had a net loss of $2,545,000 for the year ended December 31, 1998. The loss included the $2,500,000 write-down of foreign investments resulting principally from the devaluation of the Russian ruble.
Selling, general and administrative expenses ("SG&A") from continuing operations of the Company were $24,971,000 in 1998 compared with $21,156,000 in 1997. The increase occurred primarily because of increased commission and shipping costs directly associated with the sales generated by Hampshire Brands. As a percent of net sales, SG&A was 14.8%, a 0.2 percentage point reduction from the previous year.
Income from operations was $10,455,000 for the year 1998, excluding the $2,500,000 asset impairment charge of the Investments segment, compared with $11,968,000 for the previous year. The decrease resulted principally from the increase in SG&A costs from 1997.
The income tax provision decreased to $1,277,000 in 1998 compared with $2,449,000 in 1997. The 3.3 percentage point decrease in the effective tax rate from 21.5% in 1997 to 18.2% for 1998 is primarily the result of a smaller percentage of taxable income being generated in the United States and an increased deferred state tax credit.
During the fourth quarter of 1998, the Company decided to dispose of the hosiery business and reported results of the segment as discontinued operations. For the year ended December 31, 1998, the Hosiery segment generated net sales of $24,118,000 and an after-tax loss of $214,000. The Hosiery segment has been treated as a discontinued operation in the consolidated financial statements and an after-tax accrual of $500,000 was charged against 1998 income for estimated loss on disposal of the assets.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and capital requirements of the Company relate to funding working capital for current operations (principally funding the buildup in inventories
and accounts receivable which reach their maximum seasonal requirements in the third quarter), servicing long-term debt and funding the investments of Hampshire Investments. The primary resources to meet the liquidity and capital requirements include funds generated by operations, revolving credit lines and long-term notes.
The Company has increased its principal credit facility shared with three commercial banks. The credit facility consists of a $55 million line of credit and letter of credit facility. Advances are limited to the lesser of: (1) $55 million; or (2) the sum of 85% of the eligible accounts receivable and a seasonal adjustment of $12 million during the period from March 1 to October 31. The facility is subject to renegotiation on or before May 26, 2000. The Company expects to renew or replace the current facility prior to its expiration.
Advances under the facility bear interest at the bank's prime rate or, at the option of the Company, a fixed rate for a fixed term. The loans are collateralized pari passu with the Senior Notes by the trade accounts receivable of Hampshire Designers and the common stock of all the subsidiaries of the Company. Letters of credit issued under the facility are collateralized by the inventory shipped pursuant to the letters of credit.
The Company also has other credit facilities which in the aggregate allow the Company to borrow an additional $7 million, of which $4 million is limited to use for international letters of credit. The maximum advances outstanding during 1999 under all lines of credit was $21,350,000. The average amount outstanding during the period beginning July 1 through November 19, 1999 (the only period of the borrowings) was approximately $11,750,000. At December 31, 1999 there were no advances outstanding.
During 1998, the Company sold $15 million of 7.05% long-term notes to two insurance companies (the "Senior Notes") with repayment terms of seven equal annual installments commencing January 2002. Interest is payable semi-annually and the loan is collateralized pari passu with the Company's revolving credit facility.
The Company's credit facility and Senior Notes contain certain covenants which require certain financial performance, including minimum net worth and specified current ratio and fixed charge coverage ratios, and which restricts the sale of assets and restricts certain payments, including dividends and investments. The Company was in compliance with the loan covenants at December 31, 1999.
The Company ended 1999 with cash and cash equivalents totaling $23,831,000, an increase of $9,945,000 over the previous year. Net income of $5,196,000 for 1999, plus depreciation and amortization for $4,968,000 are the primary contributing factors. In addition, net cash of $3,560,000 was generated from the sale of the Hosiery Division, $4,627,000 from a decrease in accounts receivable and $3,389,000 from a decrease in inventory compared with 1998. The decrease in both accounts receivable and inventory resulted primarily from sales being shifted to earlier months of the fourth quarter and reduced sales in the fourth quarter of 1999.
Capital expenditures were reduced from $3,094,000 in 1998 to $915,000 in 1999 as the Company's business has become more dependent on outside sourcing, thus reducing manufacturing capital requirements. In addition, in 1999 the Company invested approximately $8 million in real property for Hampshire Investments.
The Board of Directors of the Company has authorized management to purchase from time-to-time in the open market shares of its common stock. During 1999, the Company purchased 151,172 shares of common stock for $1,345,000. Such purchases were made to provided shares to be issued by the Company's Common Stock Purchase Plan and Stock Option Plan.
Management believes that cash flow from operations, available borrowings under the credit facilities and other long-term borrowing will provide adequate resources to meet the Company's capital requirements and operational needs for the foreseeable future.
OUTLOOK
The Company believes that the primary reason for its success in recent years has been its ability to offer new products and the highest level of quality and services to its customers. Management is committed to continuing to offer such quality and services to its customers. Management knows that price competition in the sweater market can adversely affect earnings of the Company. Therefore, Management continues to shift the emphasis from its own domestic manufacturing to international sourcing from contractors.
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 increasing its utilization of foreign sources and by reducing its dependence upon domestic manufacturing.
Seasonality - ----------- The Company's apparel business, particularly the sale of sweaters to its customers, 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 inflationary increases in its costs by increasing the prices for its products, however, market conditions sometimes preclude this practice.
Accounting Standards Not Yet Adopted - ------------------------------------ In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 137 was issued by the FASB in June 1999, and it delayed implementation of the statement. As a result, SFAS No. 133 will not become effective for the Company until January 1, 2001. Management of the Company has not yet evaluated the effects of SFAS 133 on the Company's financial position, results of operations or cash flows.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The long-term debt of the Company is at fixed interest rates which were at market when the debt was issued, but are below market interest rates at December 31, 1999. The short-term debt of the Company has variable interest rates based on the prime rate of the financial institution purchasing the debt. The Company had no short-term debt outstanding at December 31, 1999.
In purchasing sweaters from foreign manufacturers, the Company uses letters of credit which require the payment of dollars upon receipt of bills of lading for the sweaters. Prices are fixed in dollars at the time letters of credit are issued.
With the exception of its 70% owned subsidiary, Hampshire Investments does not issue or own foreign indebtedness. Hampshire Investments either purchases foreign based assets with dollars or with foreign currency purchased with dollars. Real property which is owned by Hampshire Investments and which is located outside the United States is leased for either US dollars or other stable currency. The primary market risk which Hampshire Investments has with respect to foreign currencies is the impact that fluctuations in such currencies have on the businesses of the lessees of such real property.
Hampshire Investments limits its market risk in the common stock of publicly traded apparel companies primarily by limiting the amount of its investments so that aggregate investments do not exceed one-half of annual net income of the Company and by closely monitoring each of its investments.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be presented in this 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
As reported in the Form 8-K, PricewaterhouseCoopers LLP was terminated as independent accountants of the Company on October 14, 1999. The change in independent accountants from PricewaterhouseCoopers LLP to Deloitte & Touche LLP was recommended by the Audit Committee and approved by the Board of Directors of the Company.
The independent accountants' reports on the financial statements of the Company for the fiscal years ended December 31, 1999, 1998 and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified as to uncertainty, audit scope, or accounting principles.
There were no disagreements with accountants on accounting and financial disclosure during the three fiscal years ended December 31, 1999, 1998 and 1997.
PART III
Certain information required to be presented in this Part III of this Annual Report on Form 10-K is omitted in that the Registrant will file a Definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year 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 this Item 10 is incorporated herein by reference to the Company's 2000 Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The information concerning executive compensation required to be presented in this Item 11 is incorporated herein by reference to the Company's 2000 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners and management required to be presented in this Item 12 is incorporated herein by reference to the Company's 2000 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions required to be presented in this Item 13 is incorporated herein by reference to the Company's 2000 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 ----------- ---------------------------------------------- -------- (3)(A) Restated Certificate of Incorporation of Hampshire Group, Limited 2 (3)(A)(1) Certificate of Amendment to the Certificate of Incorporation of Hampshire Group, Limited 2 (3)(A)(2) Amended and Restated By-Laws of Hampshire Group, Limited 2 (10)(A)(3) Employment Agreement between Hampshire Group, Limited and Ludwig Kuttner dated as of January 1, 1998 3 (10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option Plan Amended and Restated effective June 7, 1995 2 (10)(C)(1) Form of Hampshire Group, Limited and Affiliates Common Stock Purchase Plan for Directors and Executives Amended and Restated effective June 7, 1995 2 (10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries 401(k) Retirement Savings Plan 2 (10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred Compensation Plan for Directors and Executives Amended and Restated December 30, 1997 2 (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 3 (10)(H)(2) Credit Agreement and Guaranty between Hampshire Group, Limited and The Chase Manhattan Bank, Republic National Bank of New York and NationsBank, N.A. Dated May 28, 1998 3
(1) Incorporated by reference to the Company's 1996 Annual Report on Form 10-K. (2) Incorporated by reference to the Company's 1997 Annual Report on Form 10-K. (3) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K. (4) Incorporated by reference to the Company's June 15, 1999 Report on Form 8-K
(Exhibits continued on next page)
(Exhibits continued from previous page)
Exhibit No. Description Footnote ----------- ---------------------------------------------- -------- (10)(J)(3) Lease Agreement between Hampshire Designers, Inc. and Leslie R. Woodworth, et al for the Winona, Minnesota manufacturing plant dated October 10, 1995 2 (10)(J)(4) Lease Agreement between the Hampshire Designers, Inc. and Pete Woodworth and Joyce Woodworth for the La Crescent, Minnesota manufacturing plant dated October 10, 1995 2 (10)(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 3 (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 3 (10)(K)(3) Loan and Security Agreement among San Francisco Knitworks, Inc., Hampshire Designers, Inc. and MetLife Capital Corporation dated September 22, 1995 2 (10(L)(1) Industrial Tax Exemption between Glamourette Fashion Mills, Inc. and the Commonwealth of Puerto Rico, Office of Industrial Tax Exemption, dated September 17, 1996 1 (10)(M) Agreement between Glamourette Fashion Mills, Inc. and The Commonwealth of Puerto Rico on Repatriation of Earnings (the "Closing Agreement"), dated June 30, 1993 2 (10)(O) Loan and Security Agreement between Hampshire Designers, Inc. and Central Fidelity National Bank dated February 8, 1995 1 (10)(R) Restated Term Note between MetLife Capital Corporation and Hampshire Designers, Inc., dated July 30, 1998 3 (10)(S) Revolving Line of Credit Agreement between Merchants National Bank and Hampshire Group, Limited dated April 1, 1996. 1 (10)(T) Amendment to Credit Agreement between MTB Bank and Segue (America) Limited dated June 19, 1996. 1 (10)(U) Agreement between Hampshire Designers, Inc. and Vision Legwear LLC, dated May 27, 1999 for the disposal of the hosiery business. 4
(Exhibits continued on next page)
(Exhibits continued from previous page)
Exhibits filed herewith: ----------------------- (3)(B)(6) Merger Agreement between Hampshire Designers, Inc. and Segue (America) Limited dated December 30, 1999 (10)(H)(3) Third Amendment to Credit Agreement and guarantee between Hampshire Group, Limited and The Chase Manhattan Bank, Republic National Bank of New York and NationsBank N.A.dated June 22, 1999 (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. (10)(T)(1) Amendment to Credit Agreement between MTB Bank and Segue (America) Limited dated July 14, 1999 (21) Subsidiaries of the Company (23) Consent of Deloitte & Touche LLP (27) Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter.
A report on Form 8-K was filed on October 14, 1999 and a related Form 8-K/A was filed on October 29, 1999 regarding the Change of Independent Accountants from PricewaterhouseCoopers LLP to Deloitte & Touche LLP.
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 28th day of March 2000.
HAMPSHIRE GROUP, LIMITED By: /s/ LUDWIG KUTTNER ------------------------- Ludwig Kuttner President and Chief Executive Officer - -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ LUDWIG KUTTNER Chairman of the Board of Directors March 28, 2000 Ludwig Kuttner President and Chief Executive Officer (Principal Executive Officer)
/s/ CHARLES W. CLAYTON Vice President, Secretary, Treasurer March 28, 2000 Charles W. Clayton and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ HERBERT ELISH Director March 28, 2000 Herbert Elish
/s/ HARVEY L. SPERRY Director March 28, 2000 Harvey L. Sperry
/s/ EUGENE WARSAW Director March 28, 2000 Eugene Warsaw
/s/ JOEL GOLDBERG Director March 28, 2000 Joel Goldberg
/s/ PETER W. WOODWORTH Director March 28, 2000 Peter W. Woodworth
HAMPSHIRE GROUP, LIMITED Index To Consolidated Financial Statements
Page ------ Reports 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 and Stock 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 sheet of Hampshire Group, Limited (the "Company") as of December 31, 1999, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedules for the year ended December 31, 1999 listed in the index at. 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 audit.
We conducted our audit 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 audit provides 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, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules for the year ended December 31, 1999, 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 8, 2000
Report of Independent Accountants
To the Board of Directors and Stockholders of Hampshire Group, Limited:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hampshire Group, Limited and its subsidiaries at December 31, 1998, and the results of their operations and their cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free to material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for the opinion express above.
/s/ PRICEWATERHOUSECOOPERS LLP - ----------------------------------- PricewaterhouseCoopers LLP Atlanta, Georgia March 11, 1999
HAMPSHIRE GROUP, LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies - --------------------------------------------------- Hampshire Group, Limited (the "Company"), through its subsidiaries, is engaged in the apparel business and investing in and holding of real estate and equity securities. The Company, with headquarters in Anderson, South Carolina, operates apparel manufacturing and distribution plants in South Carolina, California, Minnesota, Virginia and Puerto Rico. The Company's products are sold primarily in the United States through various retail and mail-order companies. The investment company, with subsidiaries located in the United Kingdom and the Czech Republic, acquires real properties and equity securities primarily in the United States, Russia and Eastern Europe, for the purpose 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 its subsidiaries, Hampshire Designers, Inc. and its subsidiaries (collectively, "Hampshire Designers") and Hampshire Investments, Limited and its subsidiaries, including 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.
Cash Equivalents - ---------------- Cash equivalents consist of highly liquid investments with initial maturities of ninety days or less. Interest bearing amounts were approximately $20.9 million and $13.0 million at December 31, 1999 and 1998, respectively.
Available-For-Sale Securities - ----------------------------- The Company owns certain equity securities which it has classified as available-for-sale. These securities are stated at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses on the disposal of available-for-sale securities are determined using the specific-identification method and are included in the results of operations for the period of the transaction. Management determines the appropriate classification of securities at the time of purchase.
Inventories - ----------- Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for domestic inventories of Hampshire Designers and using the first-in, first-out ("FIFO") method for all other domestic inventory and inventory located in Puerto Rico.
Property, Plant and Equipment - ----------------------------- Property, plant and equipment are recorded at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while maintenance costs and minor replacements are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Real Property Investments - ------------------------- Real property investments are recorded at cost. The Company provides for depreciation using the straight-line method over 15 years, which is the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while maintenance costs and minor replacements are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Long-Term Investments - --------------------- Long-term investments are recorded at cost. Investments in real estate partnerships are subsequently adjusted for equity increases or decreases reported by the entity and reduced for any asset impairment.
Intangible Assets - ----------------- Intangible assets consist primarily of goodwill which is being amortized over 10 years on a straight-line basis (see Note 7). The Company continually monitors conditions that may affect the carrying value of its intangible assets. Should conditions indicate potential impairment of such assets, the Company would undertake the necessary studies and evaluate projected future undiscounted cash flows to determine the extent of impairment, if any.
Foreign Currency Translation - ---------------------------- Foreign currency transactions are translated into U.S. dollars at prevailing exchange rates. The balance sheet of the Company's consolidated foreign entity, 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 entity was translated at average exchange rates. The adjustments resulting from the translation of these financial statements were not significant and therefore not included in comprehensive income. Also, net transaction gains (losses) were not significant in 1999, 1998 or 1997.
Financial Instruments - --------------------- The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. The fair value of long-term debt is disclosed at Note 9. The carrying amounts of the other financial instruments are considered a reasonable estimate of fair value at December 31, 1999 and 1998, due to the short-term nature of the items.
Revenue Recognition - ------------------- The Company recognizes revenue upon shipment of goods to customers. Rental revenue is recognized on a straight-line basis over the terms of the related leases.
Advertising Costs - ----------------- The Company recognized advertising costs, including the costs of co-op advertising arrangements, as incurred. Advertising costs were $1,145,000, $757,000 and $333,000 in 1999, 1998 and 1997, respectively.
Income Taxes - ------------ Income taxes are recognized during the year in which transactions enter into the determination of income for financial reporting purposes, with deferred taxes being provided for temporary differences between the basis of assets and liabilities for financial reporting purposes and the basis for income tax reporting purposes.
Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the accounting period. The Company's most significant financial statement estimates include the allowance for doubtful accounts and customer allowances, income tax valuation allowance (see Note 10) and the reserve for self-insured health liabilities. Management determines the estimate of the allowance for doubtful accounts and customer allowances considering a number of factors, including historical experience, aging of the accounts, provisions for allowances based on specific agreements with customers and the current credit worthiness of its customers. The Company self-insures, with various insured stop-loss limitations, its health claims. Management determines the estimate of the reserve for self-insurance considering a number of factors, including historical experience, third-party claims administration and actuarial assessment of the liabilities for reported claims and claims incurred but not reported. Management believes that its estimates provided in the financial statements, including those for the previously described items, are reasonable. However, actual results could differ from these estimates.
Earnings Per Common Share - ------------------------- Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), requires dual presentation of basic and diluted earnings per share on the face of the income statement for entities with complex capital structures. 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 - -------------------- SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company currently has one item, unrecognized gain or loss on available-for-sale securities, that is presented in other comprehensive income.
Accounting Standards Not Yet Adopted - ------------------------------------ In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued. SFAS 133 requires all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 137 delayed implementation of the statement and as a result, it will not become effective for the Company until January 1, 2001. Management of the Company has not yet evaluated the effects of SFAS 133 on the Company's financial position, results of operations or cash flows.
Presentation of Prior Year Data - ------------------------------- Certain reclassifications have been made to data of prior years to conform with the current-year presentation.
Note 2 - Available-for-Sale Securities - -------------------------------------- A summary of available-for-sale securities at December 31, 1998 and 1997 is set forth in the table below.
Gains or losses on the sale of securities (not significant in any year) have been reported in the Consolidated Statements of Income under Other Income. Unrealized gains or losses have been reported in the Consolidated Statements of Comprehensive Income.
(in thousands) 1999 1998 - ------------------------------------------------- Original cost $ 736 $ 847 Unrealized gains - 15 Unrealized losses (529) (313) - ------------------------------------------------- Fair market value $ 207 $ 549 =================================================
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 $5,074,000 and $3,672,000 at December 31, 1999 and 1998, respectively.
The Company sells principally to department stores, mail-order catalog businesses, chain stores, mass merchandisers and other retailers located in the United States. The Company had sales to three major customers (defined as sales in excess of 10% of total sales ) which as a percentage of total sales accounted for approximately 36%, 33% and 35% for 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, 55% and 41%, respectively, of the trade receivables were due from these three customers.
Note 4 - Inventories - -------------------- The components of inventories at December 31, 1999 and 1998 are set forth in the table below.
Approximately 42% and 39% of total inventories were valued using the LIFO method at December 31, 1999 and 1998, respectively.
(in thousands) 1999 1998 - ------------------------------------------------ Finished goods $14,072 $14,904 Work-in-progress 2,503 3,460 Raw materials and supplies 2,626 4,126 - ------------------------------------------------ 19,201 22,490 Less - Excess of current cost over LIFO carrying value (1,801) (1,701) - ------------------------------------------------ Total $17,400 $20,789 ================================================
Note 5 - Property, Plant and Equipment - -------------------------------------- The components of property, plant and equipment at December 31, 1999 and 1998 are set forth in the table below.
Depreciation expense was $3,874,000, $3,797,000 and $3,202,000, respectively, for the years ended December 31, 1999, 1998 and 1997.
In 1999, a $300,000 impairment charge was recognized for certain equipment deemed to be impaired. Estimated (in thousands) Useful Lives 1999 1998 - ------------------------------------------------------------------------------ Land $ 242 $ 324 Buildings and improvements 15-45 years 2,541 3,879 Leasehold improvements 5-10 years 4,653 4,515 Machinery and equipment 3-7 years 26,358 25,298 Furniture and fixtures 3-7 years 1,416 1,227 Transportation equipment 3-5 years 105 122 - ------------------------------------------------------------------------------ Total cost 35,315 35,365 Less - Accumulated depreciation (25,166) (21,688) - ------------------------------------------------------------------------------ Total $10,149 $13,677 ==============================================================================
Note 6 - Real Property and Long-Term Investments - ------------------------------------------------ The Company, through its investments subsidiary, has made direct investments in real property for the purposes of generating rental revenue. These properties consist of commercial facilities in the United States and abroad and are carried at historical cost, net of a $1,850,000 asset impairment charge recorded in 1998. (In 1999, commercial property in the United States, includes $2,272,000 representing the cost of the hosiery plants transferred to this classification, and accumulated depreciation includes $2,054,000 for the same property.) Depreciation is provided over the estimated useful lives of the property, which is 15 years. Depreciation expense was $607,000 and $180,000 for the years ended December 31, 1999 and 1998, respectively.
Real Property Investments - ------------------------------------------------------ (in thousands) 1999 1998 - ------------------------------------------------------ Commercial property: United States $13,428 $5,933 Russia 2,889 2,141 Europe 3,083 806 - ------------------------------------------------------ 19,400 8,880 Less: Accumulated depreciation (2,862) (201) - ------------------------------------------------------ Total $16,538 $8,679 ======================================================
Long-term investments consist principally of common stock of non-publicly traded companies. Management intends that these investments will be held on a long-term basis. The carrying values set forth in the adjacent table are shown net of asset impairment charges of $425,000 recorded in 1999 and $650,000 recorded in 1998 for certain assets deemed to be permanently impaired.
Long-Term Investments - ------------------------------------------------------ (in thousands) 1999 1998 - ------------------------------------------------------ United States $2,268 $1,909 Russia 131 131 Europe 2,138 3,198 - ------------------------------------------------------ Total $4,537 $5,238 ======================================================
Note 7 - Intangible Assets - -------------------------- In connection with the acquisition of San Francisco Knitworks, the Company recorded a $350,000 reduction of goodwill in 1999 as a result of the favorable settlement of a purchase price contingency. In connection with the acquisition of Winona Knitting Mills, the Company recorded an additional $413,000 and $530,000 in goodwill in 1998 and 1997, respectively, as a result of certain payments made in accordance with the contingent purchase price agreement.
Activity in intangible assets for the years ended December 31, 1999, 1998 and 1997 is summarized in the table below.
(in thousands) 1999 1998 1997 - ---------------------------------------------------------------- Balance - beginning of year $3,390 $3,385 $3,161 Purchase price adjustments (350) 413 530 Amortization during year (487) (420) (306) Other - 12 - - ---------------------------------------------------------------- Balance - end of year $2,553 $3,390 $3,385 ================================================================
Note 8 - Accrued Expenses and Other Liabilities - ----------------------------------------------- Accrued expenses and other liabilities at December 31, 1999 and 1998 are summarized in the table below.
(in thousands) 1999 1998 - ------------------------------------------------------ Compensation $1,055 $1,870 Medical and health care 334 956 Workers' compensation 100 629 Co-op advertising 658 563 Interest 47 821 Income taxes 299 709 Other 1,531 1,838 - ------------------------------------------------------ Total $4,024 $7,386 ======================================================
Note 9 - Borrowings - ------------------- Revolving Credit Agreement - --------------------------
The Company's principal credit facility is with three participating commercial banks ("Revolving Credit Agreement"). The credit facility consists of a $55 million combined line of credit and letter of credit facility. Advances under the facility are limited to the lesser of $55 million, or the sum of 85% of the eligible accounts receivable, plus a seasonal adjustment of up to $12 million during the period March 1 to October 31. The next annual renewal of the facility is May 24, 2000.
Advances under the facility bear interest at either the bank's prime rate or, at the option of the Company, a fixed rate of LIBOR plus 1.5%, for a fixed term. The loan is collateralized, pari passu with the Senior Notes, by the trade accounts receivable of Hampshire Designers, other than certain factored trade accounts receivable. In addition, letters of credit issued under the facility are collateralized by the inventory shipped pursuant to the letters of credit. The Company has also pledged as collateral a $5 million insurance policy on the life of its Chairman and the common stock of its subsidiaries, and such subsidiaries guarantee the performance of the Company. No advances were outstanding under the credit line at December 31, 1999 or 1998, and therefore, approximately $19 million was available for borrowing under the line of credit at December 31, 1999.
The Company maintains an unsecured $3 million credit facility for Hampshire Designers for peak period financing. The line is available for short-term borrowings not to exceed one year and to fund letters of credit. Advances on the facility bear interest, at the Company's option, at the bank's prime rate or the one-month LIBOR rate plus 1.87%. No advances were outstanding under the line at December 31, 1999 or 1998. For a subsidiary of Hampshire Designers, the Company maintains with a bank a $4 million facility which is used primarily to fund
international letters of credit. Advances on the facility bear interest at the bank's prime rate and are collateralized by the inventory purchased pursuant thereto and are guaranteed by Hampshire Group, Limited. Outstanding letters of credit of all lines totaled approximately $8 million at December 31, 1999.
Factoring Agreement - ------------------- The Winona Division has a factoring agreement pursuant to which it sells approximately 40% of its accounts receivable to a factor, without recourse. The accounts are factored on a 45-day maturity basis, but the Company may request advances up to 80% of the uncollected balance of the receivables, with such advances bearing interest at the prime rate plus 1%. The agreement requires a commission rate of 1% of the factored accounts receivable.
Senior Notes Agreement - ---------------------- The Senior Notes are collateralized pari passu with the Company's Revolving Credit Agreement by the trade accounts receivable of Hampshire Designers, other than certain factored trade accounts receivable. The Company has also pledged as collateral a $5 million insurance policy on the life of its Chairman and the common stock of its subsidiaries, and such subsidiaries guarantee the performance of the Company under the Agreements, hereafter defined.
Financial Covenants - ------------------- Both the Revolving Credit Agreement and the Senior Note Agreement (the "Agreements") contain covenants which require certain financial performance and restrict certain payments by the Company and the Restricted Subsidiaries (defined as Hampshire Designers, Inc. and its subsidiaries), including advances to the Company's non-restricted subsidiary, defined as Hampshire Investments, Limited and it subsidiaries. The covenants require maintenance of a consolidated tangible net worth not less than $43 million plus 50% of the net income for the year 1998 and each succeeding year; an average current ratio of not less than 1.75 to 1.00; a fixed charge ratio of consolidated income for fixed charges for the period of four consecutive fiscal quarters most recently ended of at least 2.50 times consolidated fixed charges for such period and restricts funded debt to capitalization ratio not to exceed 0.45 to 1.00. The Agreements also require a short-term debt cleanup of 45 days during any 12-month period, restrict the sale of assets and restrict payments by the Company of cash dividends to stockholders and investments in and loans or advances to the non-restricted subsidiary. At December 31, 1999 approximately $2.1 million was available for restricted payment, including the payment of cash dividends if any had been declared. (There was no short-term debt outstanding for the first six months of the year.) The Company was in compliance with the loan covenants at December 31, 1999.
Maturities of long-term debt as of December 31, 1999 are summarized in the table below.
Year (in thousands) - --------------------------------- 2000 $ 1,418 2001 772 2002 2,744 2003 3,176 2004 4,902 Thereafter 12,576 - --------------------------------- Total $25,588 =================================
Senior Notes are collateralized pari passu with the Revolving Credit Facility by the accounts receivable of the Restricted Subsidiary of the Company and the common stock of all subsidiaries. The net book value of the assets collateralizing the debt on real property at December 31, 1999 was approximately $11.7 million. The net book value of the assets collateralizing the debt on machinery and equipment at December 31, 1999 was approximately $2.5 million.
The fair value of the debt at December 31, 1999, based on current market interest rates for the Company discounted to present value, is approximately $24.6 million.
Note 10 - Income Taxes - ---------------------- The components of income tax expense for the years ended December 31, 1999, 1998 and 1997 are set forth in the table below.
(in thousands) 1999 1998 1997 - -------------------------------------------------- Current: Federal $ 98 $1,068 $2,201 State 380 271 311 Puerto Rico 85 132 137 - -------------------------------------------------- 563 1,471 2,649 - -------------------------------------------------- Deferred: Federal 469 28 (200) State (132) (222) - - -------------------------------------------------- 337 (194) (200) - -------------------------------------------------- Total $900 $1,277 $2,449 ==================================================
The domestic, Puerto Rico and foreign components of income (loss) before income taxes are set forth in the table below.
(in thousands) 1999 1998 1997 - --------------------------------------------------- Domestic $2,268 $5,244 $ 6,230 Puerto Rico 4,654 4,183 5,138 Foreign (826) (2,423) - - --------------------------------------------------- Income before income taxes $6,096 $7,004 $11,368 ===================================================
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) 1999 1998 1997 - ---------------------------------------------------------------- Tax provision at federal statutory rate $2,073 $2,381 $3,865 Increase (decrease) in tax arising from: Effect of exemption of Puerto Rico earnings from United States tax (1,582) (1,422) (1,747) Puerto Rico taxes on income, including withholding taxes 85 132 137 State taxes, less federal income tax benefit 119 85 174 Foreign operating losses 281 85 - Other (76) 16 20 - ----------------------------------------------------------------- $ 900 $1,277 $2,449 =================================================================
A summary of the temporary differences and carryforwards giving rise to deferred income tax assets and liabilities as of December 31, 1999 and 1998 is set forth in the table below.
(in thousands) 1999 1998 - ----------------------------------------------------------------- Deferred income tax assets: Allowances for receivables $ 659 $ 936 Inventories - 199 Write-down of assets not currently deductible 219 925 Accrued liabilities and other temporary differences 3,303 2,359 Unrealized losses on available-for-sale securities 196 110 Provision for discontinued operations - 294 Net operating loss carryforwards 2,565 3,039 Tax credit carryforwards 1,283 697 - ----------------------------------------------------------------- Gross deferred income tax assets 8,225 8,559 Deferred income tax liabilities: Inventories (173) - Property, plant and equipment (12) (268) - ----------------------------------------------------------------- Gross deferred income tax liabilities (185) (268) - ----------------------------------------------------------------- Valuation allowance for deferred income tax assets (1,869) (1,869) - ----------------------------------------------------------------- Net deferred income tax assets $6,171 $6,422 =================================================================
Recognized as follows in the accompanying consolidated balance sheets.
(in thousands) 1999 1998 - ------------------------------------------------- Deferred tax asset - current $4,202 $4,006 Deferred tax asset - noncurrent 1,969 2,416 - ------------------------------------------------- Total $6,171 $6,422 =================================================
The net operating loss carryforwards for federal income tax purposes expire as set forth in the table below.
(in thousands) Year Regular Tax - ------------------------------------------ 2002 $1,139 2003 1,845 2004 411 2005 2,429 2009 1,366 - ------------------------------------------ Total $7,190 ==========================================
As a result of the sale of the Company's common stock pursuant to the Offering, the Company generally is not permitted to utilize more than $1.7 million of the net operating loss carryovers existing as of the completion of the Offering in any single tax year. To the extent such net operating loss carryforward limitation is not utilized in any tax year, it may be carried forward to subsequent tax years and consequently will increase the subsequent years' limitation.
Substantially all of the income of Glamourette Fashion Mills, Inc. ("Glamourette") was effectively exempt from Puerto Rico income tax by an extended tax grant under the Puerto Rico Tax Incentives Act of 1987 (the "Act"). The grant allows partial exemption from income, property and municipal taxes. Under the extension of the grant, the Company has been granted 90% exemption from Puerto Rico income taxes, and 75% exemption from property taxes and municipal taxes through the year 2010 and will be subject to tollgate taxes
ranging from 0% to 5% on dividends. Absent this exemption, Glamourette's earnings would be subject to Puerto Rican income tax at rates of up to 39%.
Glamourette has made an election under Section 936 of the Internal Revenue code pursuant to which Glamourette's earnings are exempt from US taxes. However, dividends received from Glamourette, together with certain other items, enter into the computation of the US alternative minimum tax ("AMT"). Due to the Section 936 exemption and the relative portion of Glamourette's earnings to other US taxable income in prior years, management estimated that the Company would, more likely than not, be a perpetual AMT taxpayer. Accordingly, since NOL deductions are limited in calculating AMT, the Company had, prior to 1996, determined that a valuation allowance was required with respect to NOL carryforwards and AMT credit carryforwards. During 1996, Section 936 was repealed and is being phased out over a 10-year period. As a result, the Company believes that during this phase-out period it will incur regular US tax liabilities and therefore will receive the benefit of a significant portion of the NOL and AMT credit carryforwards.
The Company received dividends from Glamourette of approximately $6 million, $2 million and $5 million in 1999, 1998 and 1997, respectively. The Company has approximately $9 million of Glamourette's undistributed earnings which it considers permanently invested. Additionally, any undistributed earnings of other foreign subsidiaries are expected to be indefinitely reinvested overseas. For this reason, deferred income taxes have not been provided thereon.
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 adjustment letter in the amount of $65,000 deficiency being issued which was accepted by the Company.
Note 11 - Commitments and Contingencies - ---------------------------------------
The Company leases premises and equipment under operating leases having terms from monthly to 7 years. At December 31, 1999, future minimum lease payments under leases ("lessee") having an initial or remaining non-cancelable term in excess of one year were as set forth in the table below.
The Company also leases certain owned real estate properties of its Investment segment. Future minimum lease receipts by the Company for leases ("lessor") having an initial or remaining non-cancelable item in excess of one year were as set forth in the adjacent table.
Rent expenses for operating leases were $1,501,000, $1,532,000 and $1,596,000 in 1999, 1998 and 1997, respectively.
Rental revenue was $2,005,000, $507,000 and $43,000 in 1999, 1998 and 1997, respectively.
Year Lessee Lessor - ------------------------------------- (in thousands) - ------------------------------------- 2000 $1,500 $1,573 2001 1,238 1,358 2002 1,012 1,185 2003 885 1,011 2004 569 476 Thereafter 708 1,225 - ------------------------------------ Total $5,912 $6,828 ====================================
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 - ------------------------ 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. The Board of Directors is authorized to provide for the issuance of preferred stock in such series and having such designations, voting powers, preferences and other rights and restrictions as the Board of Directors shall determine.
Effective December 30, 1997 all outstanding shares of preferred stock were converted into shares of Hampshire Group, Limited common stock.
Note 13 - Stock Options, Warrants and Compensation Plans - -------------------------------------------------------- In 1994, the Company registered 750,000 shares of its common stock under the Securities Act of 1933, as amended. This action was in regards to the Hampshire Group, Limited 1992 Stock Option Plan and the Hampshire Group, Limited Common Stock Purchase Plan for Directors and Executives. Of these shares, 350,000 have been issued under these plans.
Beginning in 1996, the Board of Directors of the Company authorized the repurchase of shares of the Company's common stock, some of which would be used to offset the dilution caused by the issuance of shares under the Stock Option Plan and Stock Purchase Plan. The Company's repurchase of shares of common stock are recorded as "Treasury Stock" and result in a reduction of "Stockholders' Equity". When treasury shares are reissued, the Company uses a weighted average cost method and the excess of repurchase cost over reissuance price is treated as a reduction of "Retained Earnings".
Stock Options - ------------- Options to purchase Hampshire Group, Limited Common Stock are granted at the discretion of the Company's Board of Directors to executives and key employees of the Company and its subsidiaries. No option may be granted with an exercise price less than fair market value per share of common stock at the date of grant. All options have a maximum term of 10 years and become fully exercisable after a maximum of 5 years from the date of grant.
Stock option activity is set forth in the table below.
Number of Weighted Average Options Exercise Price - ------------------------------------------------------------------------- Outstanding - December 31, 1996 455,813 $ 7.87 Granted 50,000 14.50 Exercised (29,556) 6.98 Canceled or expired (45,625) 14.16 - ------------------------------------------------------------------------- Outstanding - December 31, 1997 430,632 8.33 Granted 52,945 16.31 Exercised (65,767) 8.15 Canceled or expired (5,794) 10.77 - ------------------------------------------------------------------------- Outstanding - December 31, 1998 412,016 9.23 Granted 76,650 8.72 Exercised (143,718) 6.94 Canceled or expired (54,235) 10.95 - ------------------------------------------------------------------------- Outstanding - December 31, 1999 290,713 $10.18 - -------------------------------------------------------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), allows companies to adopt the fair value based method of accounting or to continue using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized in 1999, 1998 or 1997. 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.
In order to estimate compensation cost, the Black-Scholes model was employed using the assumptions set forth in the adjacent table. 1999 1998 1,997
1999 1998 1997 - ------------------------------------------------------- Expected life (years) 6.16 5.24 4.37 Expected volatility 22.46% 22.73% 18.60% Dividend yield 0.00% 0.00% 0.00% Risk-free interest rate 4.95% 5.14% 6.54% Weighted-average fair values of options granted $2.71 $5.33 $5.07 - -------------------------------------------------------
The adjacent table sets forth the effect on net income and diluted earnings per share had compensation cost been determined under SFAS 123.
(in thousands) 1999 1998 1997 - --------------------------------------------------------- Net income: As reported $5,196 $5,013 $9,006 ---------------------------- Pro forma $5,022 $4,927 $8,930 ---------------------------- Diluted earnings As reported $1.22 $1.13 $2.02 ---------------------------- per share: Pro forma $1.18 $1.11 $2.00 - ---------------------------------------------------------
A summary of the status of options outstanding at December 31, 1999 is set forth in the table below.
Options Outstanding Options Exercisable - ----------------------------------------------------- ------------------------ Number Range of Weighted Weighted Number Weighted Outstanding Exercise Average Average Exercisable Average 12/31/99 Prices Exercise Price Remaining Life 12/31/99 Exercise Price - ----------------------------------------------------- ------------------------ 31,818 $6.00-$ 6.19 $ 6.13 2.13 31,818 $ 6.13 42,882 7.50- 7.87 7.52 1.32 42,882 7.52 126,363 8.25- 9.90 9.19 3.49 58,863 9.32 48,250 11.00-12.13 11.60 3.84 46,500 11.58 9,900 12.50-14.50 14.40 4.42 7,550 14.37 30,000 18.13 18.13 6.50 7,500 18.13 1,500 22.69 22.69 5.50 750 22.69 - ------------------------------------------------------------------------------- 290,713 $ 6.00-$22.69 $10.18 3.44 195,863 $ 9.13 ===============================================================================
Warrants to Purchase Common Stock - --------------------------------- In December 1990, the Company issued warrants to purchase 338,182 shares of the Company's common stock at an exercise price of $6.19 per share through December 31, 2000. The aggregate consideration for such warrants was $250,000. During 1997, the Company repurchased for $1 million ($7.534 per share), 132,728 of these warrants leaving a balance of 205,454 outstanding.
Common Stock Purchase Plan - -------------------------- Pursuant to the Hampshire Group, Limited 1992 Common Stock Purchase Plan for Directors and Executives ("Stock Purchase Plan"), non-employee directors may elect to use their fees as directors to purchase common stock of the Company. Under the same provision, key executives may elect to use up to 10% of their annual salaries and up to 40% of their annual bonuses to purchase common stock of the Company under the Plan.
The number of shares of common stock to be delivered is determined, with respect to non-employee directors, by dividing the amount of director fees elected to be used to purchase common stock in each quarter by 95% of the fair market value of the Company's common stock at the end of the calendar quarter. The number of shares of common stock to be delivered with respect to annual salaries of key executives is determined by dividing the amount so elected to be used for the purchase of common stock by 90% of the Company's common stock at the end of the calendar quarter. The number of shares of common stock to be delivered with respect to annual bonuses of key executives is determined by dividing the amount elected to be used for the purchase of common stock by 90% of the lower of: (1)
the average of the fair market value of the Company's common stock at the end of each calendar quarter, or (2) the fair market value of the Company's common stock as of the end of the plan year.
The participating directors and executives, in the aggregate, elected to use approximately $345,000, $487,000 and $735,000 of their compensation for 1999, 1998 and 1997, respectively, to purchase common stock of the Company under the Stock Purchase Plan. The Company has established a trust to which it delivers the shares of the Company's common stock to satisfy such elections following the end of each plan year. Alternatively, the Company may contribute cash to the trust in an amount sufficient to enable the trustee to purchase in the open market, the number of shares of common stock which the Company would be required to deliver. The deferred compensation liability and the Company's shares are presented as offsetting amounts in the stockholders' equity section.
Voluntary Deferred Compensation Plan - ------------------------------------ The Company has a Hampshire Group, Limited Deferred Voluntary Compensation Plan for Directors and Executives (the "Top Hat Plan"). Pursuant to the plan, key executives may elect to defer up to 20% of the total compensation in each year with said deferrals being invested in mutual funds external to the Company. In 1999, 1998 and 1997 the participants deferred $270,000, $430,000 and $547,000, 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 executives 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, 1999 and 1998, was $2,101,000 and $1,087,000, respectively, which equal the liability of the Company at the respective date. Since both the deferred liability and the related mutual funds are marked to market, there is no effect on net income.
Company Deferred Compensation Plan - ---------------------------------- 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 $10,000 annually on behalf of the 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 other funds.
Note 14 - 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 $297,000, $345,000 and $346,000 in 1999, 1998 and 1997, respectively. Such matching contributions vest fully over seven years of employment.
Note 15 - Related Party Transactions - ------------------------------------ The Company leases certain buildings from an affiliated company. Ludwig Kuttner, Chief Executive Officer of the Company, and his wife together own approximately 18% of the voting stock of the affiliate. Rent expense under such leases was $216,000, $208,000 and $200,000 in 1999, 1998 and 1997, 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 $201,000, $179,000 and $162,000, respectively, for 1999, 1998 and 1997. 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. Harvey L. Sperry, a director of the Company, is a partner in the law firm of Willkie Farr & Gallagher. The firm has served as legal counsel to the Company since 1977 and in such capacity was paid fees in the amount of $57,000, $128,000 and $38,000 during the years 1999, 1998 and 1997, respectively. Dr. Joel Goldberg, a director of the Company, is a principle 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 $7,000, $18,000 and $5,000 during the years 1999, 1998 and 1997, respectively.
Oliver Kuttner, the son of the Chairman and Chief Executive Officer of the Company is managing certain renovations on the real estate owned by Hampshire Investments located in Charlottesville, Virginia. During 1999 and 1998, the Company paid Mr. Kuttner $20,000 and $10,000, respectively, and he will receive as additional, 30% of the net cash flow of the real property after Hampshire Investments has received a 10% return on its investment.
Note 16 - Discontinued Operations - --------------------------------- In 1998, the Board of Directors of the Company approved a formal plan to discontinue the operations and sell the assets of the Hosiery Division, which was engaged in the manufacture and sale of ladies' and children's hosiery and socks. Accordingly, the operating results of the Hosiery Division have been reflected as discontinued operations in the accompanying 1998 and 1997 consolidated statements of income.
On June 1, 1999, the Company sold the assets of its Hosiery Division, consisting principally of inventory and certain machinery and equipment, to a company controlled by the president and six other management employees of the Hosiery Division at the time of sale (the "Purchaser"). The $4,600,000 purchase price consisted of $500,000 cash; a $1,883,000 note bearing interest at 8.25% per annum, due January 2006 and secured by the machinery and equipment which was transferred ("8.25% Note"); a non-voting unit of the Purchaser in the amount of $275,000; the assumption by the Purchaser of current liabilities of the Company in the amount of $850,000 and a note of the Company in the amount of $1,092,000 and due July 1, 2002, for which the Company remains primarily liable. The Company also retains contingent liability with respect to note obligations of the Company in the amount of $1,092,000 which were assumed by the Purchaser as part of the purchase price.
The Company leased to the Purchaser two manufacturing plants for a period of three years on a triple net basis with annual rent of $126,000. At the end of the lease, the Purchaser has an option to purchase the plants for $840,000 or to extend the lease for three additional years at an increased annual rent. The Company also leased machinery and equipment located at the two plants for a period of four years at an annual rent of $324,000. The Purchaser has an option at the end of the lease to either renew the lease at fair market rental value or purchase the machinery and equipment at fair market value. Further, the Company has agreed to provide consulting services to the Purchaser for an annual fee of $100,000 for a three year period.
The Company has agreed with a financial institution which is providing working capital financing to the Purchaser, to subordinate its rights under the two leases and the 8.25% Note for a period of 120 days after notice of any default under the leases or the 8.25% Note which would otherwise permit the Company to terminate the leases or enforce the obligation of the Purchaser to pay the unpaid principal of the 8.25% Note. Through December 31, 1999, no event of default has occurred.
The difference between the book basis of the assets sold and the selling price has been established as a reserve against the 8.25% Note. No gain on the sale will be recognized until such time as the Note is collected and the Company has been relieved of its primary responsibilities under the $1,092,000 note assumed by the Purchaser.
Net sales for the Hosiery Division for the years ended December 31, 1998 and 1997 were $24,118,000 and $23,621,000, respectively. Operating results for 1998,
restated on a discontinued operations basis was an operating loss of $214,000, which combined with the after-tax accrual of $500,000 for estimated loss on disposal of the Hosiery assets, amounts to $0.16 per share on a diluted basis. For the year 1997, the Hosiery Division produced a profit of $87,000, or $0.02 per share on a diluted basis.
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 impossible for the Company to determine sales to the individual markets. The Investments segment makes investments both domestically and internationally, principally in real property.
Note 19 - Subsequent Event (unaudited) - -------------------------------------
During 1999, Hampshire Investments purchased two promissory notes in the aggregate principal amount of $775,000. The issuers have defaulted under the notes; and on March 30, 2000, the Chairman and Chief Executive Officer of the Company entered into an agreement to purchase the notes from Hampshire Investments for their aggregate principal amount.
HAMPSHIRE GROUP, LIMITED REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
Depreciation and amortization of the Company's investment in buildings and improvements reflected in the statements of operations are calculated over the estimated useful lives of the assets as follows:
Base Building 15 years Improvements Over remaining useful lives of the building
The aggregate cost for income tax purposes was approximately $21,250 at December 31, 1999.
The changes in total real estate assets and accumulated depreciation for the period ending December 31, 1999 are as follows:
Total Real Estate Assets - ------------------------- Balance, beginning of period $8,880 Acquisitions 6,419 Additions and improvements 1,829 Hosiery real estate reclassification (1,850) - ----------------------------------------------- Balance, end of period $19,400 ===============================================
Accumulated Depreciation - ------------------------ Balance, beginning of period ($ 201) Depreciation (607) Hosiery real estate reclassification (2,054) - ----------------------------------------------- Balance, end of period ($2,862) ===============================================
HAMPSHIRE GROUP, LIMITED 1999 EXHIBIT INDEX
Exhibit No. Description - ----------- ---------------------------------------------------------- (3)(B)(6) Merger Agreement between Hampshire Designers, Inc. and Segue (America) Limited dated December 30, 1999 (10)(H)(3) Third Amendment to Credit Agreement and Guarantee between Hampshire Group, Limited and The Chase Manhattan Bank, Republic National Bank of New York and NationsBank N.A. dated June 22, 1999 (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. (10)(T)(1) Amendment to Credit Agreement between MTB Bank and Segue (America) Limited dated July 14, 1999 (21) Subsidiaries of the Company (23) Consent of Deloitte & Touche LLP (27) Financial Data Schedule
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The long-term debt of the Company is at fixed interest rates which were at market when the debt was issued, but are below market interest rates at December 31, 1999. The short-term debt of the Company has variable interest rates based on the prime rate of the financial institution purchasing the debt. The Company had no short-term debt outstanding at December 31, 1999.
In purchasing sweaters from foreign manufacturers, the Company uses letters of credit which require the payment of dollars upon receipt of bills of lading for the sweaters. Prices are fixed in dollars at the time letters of credit are issued.
With the exception of its 70% owned subsidiary, Hampshire Investments does not issue or own foreign indebtedness. Hampshire Investments either purchases foreign based assets with dollars or with foreign currency purchased with dollars. Real property which is owned by Hampshire Investments and which is located outside the United States is leased for either US dollars or other stable currency. The primary market risk which Hampshire Investments has with respect to foreign currencies is the impact that fluctuations in such currencies have on the businesses of the lessees of such real property.
Hampshire Investments limits its market risk in the common stock of publicly traded apparel companies primarily by limiting the amount of its investments so that aggregate investments do not exceed one-half of annual net income of the Company and by closely monitoring each of its investments.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be presented in this 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
As reported in the Form 8-K, PricewaterhouseCoopers LLP was terminated as independent accountants of the Company on October 14, 1999. The change in independent accountants from PricewaterhouseCoopers LLP to Deloitte & Touche LLP was recommended by the Audit Committee and approved by the Board of Directors of the Company.
The independent accountants' reports on the financial statements of the Company for the fiscal years ended December 31, 1999, 1998 and 1997 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified as to uncertainty, audit scope, or accounting principles.
There were no disagreements with accountants on accounting and financial disclosure during the three fiscal years ended December 31, 1999, 1998 and 1997.
PART III
Certain information required to be presented in this Part III of this Annual Report on Form 10-K is omitted in that the Registrant will file a Definitive Proxy Statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year 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 this Item 10 is incorporated herein by reference to the Company's 2000 Proxy Statement.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information concerning executive compensation required to be presented in this Item 11 is incorporated herein by reference to the Company's 2000 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 this Item 12 is incorporated herein by reference to the Company's 2000 Proxy Statement.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions required to be presented in this Item 13 is incorporated herein by reference to the Company's 2000 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 ----------- ---------------------------------------------- -------- (3)(A) Restated Certificate of Incorporation of Hampshire Group, Limited 2 (3)(A)(1) Certificate of Amendment to the Certificate of Incorporation of Hampshire Group, Limited 2 (3)(A)(2) Amended and Restated By-Laws of Hampshire Group, Limited 2 (10)(A)(3) Employment Agreement between Hampshire Group, Limited and Ludwig Kuttner dated as of January 1, 1998 3 (10)(B)(1) Form of Hampshire Group, Limited 1992 Stock Option Plan Amended and Restated effective June 7, 1995 2 (10)(C)(1) Form of Hampshire Group, Limited and Affiliates Common Stock Purchase Plan for Directors and Executives Amended and Restated effective June 7, 1995 2 (10)(D)(1) Form of Hampshire Group, Limited and Subsidiaries 401(k) Retirement Savings Plan 2 (10)(D)(2) Form of Hampshire Group, Limited Voluntary Deferred Compensation Plan for Directors and Executives Amended and Restated December 30, 1997 2 (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 3 (10)(H)(2) Credit Agreement and Guaranty between Hampshire Group, Limited and The Chase Manhattan Bank, Republic National Bank of New York and NationsBank, N.A. Dated May 28, 1998 3
(1) Incorporated by reference to the Company's 1996 Annual Report on Form 10-K. (2) Incorporated by reference to the Company's 1997 Annual Report on Form 10-K. (3) Incorporated by reference to the Company's 1998 Annual Report on Form 10-K. (4) Incorporated by reference to the Company's June 15, 1999 Report on Form 8-K
(Exhibits continued on next page)
(Exhibits continued from previous page)
Exhibit No. Description Footnote ----------- ---------------------------------------------- -------- (10)(J)(3) Lease Agreement between Hampshire Designers, Inc. and Leslie R. Woodworth, et al for the Winona, Minnesota manufacturing plant dated October 10, 1995 2 (10)(J)(4) Lease Agreement between the Hampshire Designers, Inc. and Pete Woodworth and Joyce Woodworth for the La Crescent, Minnesota manufacturing plant dated October 10, 1995 2 (10)(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 3 (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 3 (10)(K)(3) Loan and Security Agreement among San Francisco Knitworks, Inc., Hampshire Designers, Inc. and MetLife Capital Corporation dated September 22, 1995 2 (10(L)(1) Industrial Tax Exemption between Glamourette Fashion Mills, Inc. and the Commonwealth of Puerto Rico, Office of Industrial Tax Exemption, dated September 17, 1996 1 (10)(M) Agreement between Glamourette Fashion Mills, Inc. and The Commonwealth of Puerto Rico on Repatriation of Earnings (the "Closing Agreement"), dated June 30, 1993 2 (10)(O) Loan and Security Agreement between Hampshire Designers, Inc. and Central Fidelity National Bank dated February 8, 1995 1 (10)(R) Restated Term Note between MetLife Capital Corporation and Hampshire Designers, Inc., dated July 30, 1998 3 (10)(S) Revolving Line of Credit Agreement between Merchants National Bank and Hampshire Group, Limited dated April 1, 1996. 1 (10)(T) Amendment to Credit Agreement between MTB Bank and Segue (America) Limited dated June 19, 1996. 1 (10)(U) Agreement between Hampshire Designers, Inc. and Vision Legwear LLC, dated May 27, 1999 for the disposal of the hosiery business. 4
(Exhibits continued on next page)
(Exhibits continued from previous page)
Exhibits filed herewith: ----------------------- (3)(B)(6) Merger Agreement between Hampshire Designers, Inc. and Segue (America) Limited dated December 30, 1999 (10)(H)(3) Third Amendment to Credit Agreement and guarantee between Hampshire Group, Limited and The Chase Manhattan Bank, Republic National Bank of New York and NationsBank N.A.dated June 22, 1999 (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. (10)(T)(1) Amendment to Credit Agreement between MTB Bank and Segue (America) Limited dated July 14, 1999 (21) Subsidiaries of the Company (23) Consent of Deloitte & Touche LLP (27) Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter.
A report on Form 8-K was filed on October 14, 1999 and a related Form 8-K/A was filed on October 29, 1999 regarding the Change of Independent Accountants from PricewaterhouseCoopers LLP to Deloitte & Touche LLP.
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 28th day of March 2000.
HAMPSHIRE GROUP, LIMITED By: /s/ LUDWIG KUTTNER ------------------------- Ludwig Kuttner President and Chief Executive Officer - -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ LUDWIG KUTTNER Chairman of the Board of Directors March 28, 2000 Ludwig Kuttner President and Chief Executive Officer (Principal Executive Officer)
/s/ CHARLES W. CLAYTON Vice President, Secretary, Treasurer March 28, 2000 Charles W. Clayton and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ HERBERT ELISH Director March 28, 2000 Herbert Elish
/s/ HARVEY L. SPERRY Director March 28, 2000 Harvey L. Sperry
/s/ EUGENE WARSAW Director March 28, 2000 Eugene Warsaw
/s/ JOEL GOLDBERG Director March 28, 2000 Joel Goldberg
/s/ PETER W. WOODWORTH Director March 28, 2000 Peter W. Woodworth
HAMPSHIRE GROUP, LIMITED Index To Consolidated Financial Statements
Page ------ Reports 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 and Stock 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 sheet of Hampshire Group, Limited (the "Company") as of December 31, 1999, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedules for the year ended December 31, 1999 listed in the index at. 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 audit.
We conducted our audit 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 audit provides 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, 1999, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules for the year ended December 31, 1999, 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 8, 2000
Report of Independent Accountants
To the Board of Directors and Stockholders of Hampshire Group, Limited:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Hampshire Group, Limited and its subsidiaries at December 31, 1998, and the results of their operations and their cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. 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 of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free to material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for the opinion express above.
/s/ PRICEWATERHOUSECOOPERS LLP - ----------------------------------- PricewaterhouseCoopers LLP Atlanta, Georgia March 11, 1999
HAMPSHIRE GROUP, LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies - --------------------------------------------------- Hampshire Group, Limited (the "Company"), through its subsidiaries, is engaged in the apparel business and investing in and holding of real estate and equity securities. The Company, with headquarters in Anderson, South Carolina, operates apparel manufacturing and distribution plants in South Carolina, California, Minnesota, Virginia and Puerto Rico. The Company's products are sold primarily in the United States through various retail and mail-order companies. The investment company, with subsidiaries located in the United Kingdom and the Czech Republic, acquires real properties and equity securities primarily in the United States, Russia and Eastern Europe, for the purpose 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 its subsidiaries, Hampshire Designers, Inc. and its subsidiaries (collectively, "Hampshire Designers") and Hampshire Investments, Limited and its subsidiaries, including 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.
Cash Equivalents - ---------------- Cash equivalents consist of highly liquid investments with initial maturities of ninety days or less. Interest bearing amounts were approximately $20.9 million and $13.0 million at December 31, 1999 and 1998, respectively.
Available-For-Sale Securities - ----------------------------- The Company owns certain equity securities which it has classified as available-for-sale. These securities are stated at fair value, with unrealized gains and losses, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses on the disposal of available-for-sale securities are determined using the specific-identification method and are included in the results of operations for the period of the transaction. Management determines the appropriate classification of securities at the time of purchase.
Inventories - ----------- Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for domestic inventories of Hampshire Designers and using the first-in, first-out ("FIFO") method for all other domestic inventory and inventory located in Puerto Rico.
Property, Plant and Equipment - ----------------------------- Property, plant and equipment are recorded at cost. The Company provides for depreciation using the straight-line method over the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while maintenance costs and minor replacements are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Real Property Investments - ------------------------- Real property investments are recorded at cost. The Company provides for depreciation using the straight-line method over 15 years, which is the estimated useful lives of the assets. Additions and major replacements or improvements are capitalized, while maintenance costs and minor replacements are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the accounts and any gain or loss is included in the results of operations for the period of the transaction.
Long-Term Investments - --------------------- Long-term investments are recorded at cost. Investments in real estate partnerships are subsequently adjusted for equity increases or decreases reported by the entity and reduced for any asset impairment.
Intangible Assets - ----------------- Intangible assets consist primarily of goodwill which is being amortized over 10 years on a straight-line basis (see Note 7). The Company continually monitors conditions that may affect the carrying value of its intangible assets. Should conditions indicate potential impairment of such assets, the Company would undertake the necessary studies and evaluate projected future undiscounted cash flows to determine the extent of impairment, if any.
Foreign Currency Translation - ---------------------------- Foreign currency transactions are translated into U.S. dollars at prevailing exchange rates. The balance sheet of the Company's consolidated foreign entity, 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 entity was translated at average exchange rates. The adjustments resulting from the translation of these financial statements were not significant and therefore not included in comprehensive income. Also, net transaction gains (losses) were not significant in 1999, 1998 or 1997.
Financial Instruments - --------------------- The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and long-term debt. The fair value of long-term debt is disclosed at Note 9. The carrying amounts of the other financial instruments are considered a reasonable estimate of fair value at December 31, 1999 and 1998, due to the short-term nature of the items.
Revenue Recognition - ------------------- The Company recognizes revenue upon shipment of goods to customers. Rental revenue is recognized on a straight-line basis over the terms of the related leases.
Advertising Costs - ----------------- The Company recognized advertising costs, including the costs of co-op advertising arrangements, as incurred. Advertising costs were $1,145,000, $757,000 and $333,000 in 1999, 1998 and 1997, respectively.
Income Taxes - ------------ Income taxes are recognized during the year in which transactions enter into the determination of income for financial reporting purposes, with deferred taxes being provided for temporary differences between the basis of assets and liabilities for financial reporting purposes and the basis for income tax reporting purposes.
Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the accounting period. The Company's most significant financial statement estimates include the allowance for doubtful accounts and customer allowances, income tax valuation allowance (see Note 10) and the reserve for self-insured health liabilities. Management determines the estimate of the allowance for doubtful accounts and customer allowances considering a number of factors, including historical experience, aging of the accounts, provisions for allowances based on specific agreements with customers and the current credit worthiness of its customers. The Company self-insures, with various insured stop-loss limitations, its health claims. Management determines the estimate of the reserve for self-insurance considering a number of factors, including historical experience, third-party claims administration and actuarial assessment of the liabilities for reported claims and claims incurred but not reported. Management believes that its estimates provided in the financial statements, including those for the previously described items, are reasonable. However, actual results could differ from these estimates.
Earnings Per Common Share - ------------------------- Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), requires dual presentation of basic and diluted earnings per share on the face of the income statement for entities with complex capital structures. 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 - -------------------- SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company currently has one item, unrecognized gain or loss on available-for-sale securities, that is presented in other comprehensive income.
Accounting Standards Not Yet Adopted - ------------------------------------ In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued. SFAS 133 requires all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 137 delayed implementation of the statement and as a result, it will not become effective for the Company until January 1, 2001. Management of the Company has not yet evaluated the effects of SFAS 133 on the Company's financial position, results of operations or cash flows.
Presentation of Prior Year Data - ------------------------------- Certain reclassifications have been made to data of prior years to conform with the current-year presentation.
Note 2 - Available-for-Sale Securities - -------------------------------------- A summary of available-for-sale securities at December 31, 1998 and 1997 is set forth in the table below.
Gains or losses on the sale of securities (not significant in any year) have been reported in the Consolidated Statements of Income under Other Income. Unrealized gains or losses have been reported in the Consolidated Statements of Comprehensive Income.
(in thousands) 1999 1998 - ------------------------------------------------- Original cost $ 736 $ 847 Unrealized gains - 15 Unrealized losses (529) (313) - ------------------------------------------------- Fair market value $ 207 $ 549 =================================================
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 $5,074,000 and $3,672,000 at December 31, 1999 and 1998, respectively.
The Company sells principally to department stores, mail-order catalog businesses, chain stores, mass merchandisers and other retailers located in the United States. The Company had sales to three major customers (defined as sales in excess of 10% of total sales ) which as a percentage of total sales accounted for approximately 36%, 33% and 35% for 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, 55% and 41%, respectively, of the trade receivables were due from these three customers.
Note 4 - Inventories - -------------------- The components of inventories at December 31, 1999 and 1998 are set forth in the table below.
Approximately 42% and 39% of total inventories were valued using the LIFO method at December 31, 1999 and 1998, respectively.
(in thousands) 1999 1998 - ------------------------------------------------ Finished goods $14,072 $14,904 Work-in-progress 2,503 3,460 Raw materials and supplies 2,626 4,126 - ------------------------------------------------ 19,201 22,490 Less - Excess of current cost over LIFO carrying value (1,801) (1,701) - ------------------------------------------------ Total $17,400 $20,789 ================================================
Note 5 - Property, Plant and Equipment - -------------------------------------- The components of property, plant and equipment at December 31, 1999 and 1998 are set forth in the table below.
Depreciation expense was $3,874,000, $3,797,000 and $3,202,000, respectively, for the years ended December 31, 1999, 1998 and 1997.
In 1999, a $300,000 impairment charge was recognized for certain equipment deemed to be impaired. Estimated (in thousands) Useful Lives 1999 1998 - ------------------------------------------------------------------------------ Land $ 242 $ 324 Buildings and improvements 15-45 years 2,541 3,879 Leasehold improvements 5-10 years 4,653 4,515 Machinery and equipment 3-7 years 26,358 25,298 Furniture and fixtures 3-7 years 1,416 1,227 Transportation equipment 3-5 years 105 122 - ------------------------------------------------------------------------------ Total cost 35,315 35,365 Less - Accumulated depreciation (25,166) (21,688) - ------------------------------------------------------------------------------ Total $10,149 $13,677 ==============================================================================
Note 6 - Real Property and Long-Term Investments - ------------------------------------------------ The Company, through its investments subsidiary, has made direct investments in real property for the purposes of generating rental revenue. These properties consist of commercial facilities in the United States and abroad and are carried at historical cost, net of a $1,850,000 asset impairment charge recorded in 1998. (In 1999, commercial property in the United States, includes $2,272,000 representing the cost of the hosiery plants transferred to this classification, and accumulated depreciation includes $2,054,000 for the same property.) Depreciation is provided over the estimated useful lives of the property, which is 15 years. Depreciation expense was $607,000 and $180,000 for the years ended December 31, 1999 and 1998, respectively.
Real Property Investments - ------------------------------------------------------ (in thousands) 1999 1998 - ------------------------------------------------------ Commercial property: United States $13,428 $5,933 Russia 2,889 2,141 Europe 3,083 806 - ------------------------------------------------------ 19,400 8,880 Less: Accumulated depreciation (2,862) (201) - ------------------------------------------------------ Total $16,538 $8,679 ======================================================
Long-term investments consist principally of common stock of non-publicly traded companies. Management intends that these investments will be held on a long-term basis. The carrying values set forth in the adjacent table are shown net of asset impairment charges of $425,000 recorded in 1999 and $650,000 recorded in 1998 for certain assets deemed to be permanently impaired.
Long-Term Investments - ------------------------------------------------------ (in thousands) 1999 1998 - ------------------------------------------------------ United States $2,268 $1,909 Russia 131 131 Europe 2,138 3,198 - ------------------------------------------------------ Total $4,537 $5,238 ======================================================
Note 7 - Intangible Assets - -------------------------- In connection with the acquisition of San Francisco Knitworks, the Company recorded a $350,000 reduction of goodwill in 1999 as a result of the favorable settlement of a purchase price contingency. In connection with the acquisition of Winona Knitting Mills, the Company recorded an additional $413,000 and $530,000 in goodwill in 1998 and 1997, respectively, as a result of certain payments made in accordance with the contingent purchase price agreement.
Activity in intangible assets for the years ended December 31, 1999, 1998 and 1997 is summarized in the table below.
(in thousands) 1999 1998 1997 - ---------------------------------------------------------------- Balance - beginning of year $3,390 $3,385 $3,161 Purchase price adjustments (350) 413 530 Amortization during year (487) (420) (306) Other - 12 - - ---------------------------------------------------------------- Balance - end of year $2,553 $3,390 $3,385 ================================================================
Note 8 - Accrued Expenses and Other Liabilities - ----------------------------------------------- Accrued expenses and other liabilities at December 31, 1999 and 1998 are summarized in the table below.
(in thousands) 1999 1998 - ------------------------------------------------------ Compensation $1,055 $1,870 Medical and health care 334 956 Workers' compensation 100 629 Co-op advertising 658 563 Interest 47 821 Income taxes 299 709 Other 1,531 1,838 - ------------------------------------------------------ Total $4,024 $7,386 ======================================================
Note 9 - Borrowings - ------------------- Revolving Credit Agreement - --------------------------
The Company's principal credit facility is with three participating commercial banks ("Revolving Credit Agreement"). The credit facility consists of a $55 million combined line of credit and letter of credit facility. Advances under the facility are limited to the lesser of $55 million, or the sum of 85% of the eligible accounts receivable, plus a seasonal adjustment of up to $12 million during the period March 1 to October 31. The next annual renewal of the facility is May 24, 2000.
Advances under the facility bear interest at either the bank's prime rate or, at the option of the Company, a fixed rate of LIBOR plus 1.5%, for a fixed term. The loan is collateralized, pari passu with the Senior Notes, by the trade accounts receivable of Hampshire Designers, other than certain factored trade accounts receivable. In addition, letters of credit issued under the facility are collateralized by the inventory shipped pursuant to the letters of credit. The Company has also pledged as collateral a $5 million insurance policy on the life of its Chairman and the common stock of its subsidiaries, and such subsidiaries guarantee the performance of the Company. No advances were outstanding under the credit line at December 31, 1999 or 1998, and therefore, approximately $19 million was available for borrowing under the line of credit at December 31, 1999.
The Company maintains an unsecured $3 million credit facility for Hampshire Designers for peak period financing. The line is available for short-term borrowings not to exceed one year and to fund letters of credit. Advances on the facility bear interest, at the Company's option, at the bank's prime rate or the one-month LIBOR rate plus 1.87%. No advances were outstanding under the line at December 31, 1999 or 1998. For a subsidiary of Hampshire Designers, the Company maintains with a bank a $4 million facility which is used primarily to fund
international letters of credit. Advances on the facility bear interest at the bank's prime rate and are collateralized by the inventory purchased pursuant thereto and are guaranteed by Hampshire Group, Limited. Outstanding letters of credit of all lines totaled approximately $8 million at December 31, 1999.
Factoring Agreement - ------------------- The Winona Division has a factoring agreement pursuant to which it sells approximately 40% of its accounts receivable to a factor, without recourse. The accounts are factored on a 45-day maturity basis, but the Company may request advances up to 80% of the uncollected balance of the receivables, with such advances bearing interest at the prime rate plus 1%. The agreement requires a commission rate of 1% of the factored accounts receivable.
Senior Notes Agreement - ---------------------- The Senior Notes are collateralized pari passu with the Company's Revolving Credit Agreement by the trade accounts receivable of Hampshire Designers, other than certain factored trade accounts receivable. The Company has also pledged as collateral a $5 million insurance policy on the life of its Chairman and the common stock of its subsidiaries, and such subsidiaries guarantee the performance of the Company under the Agreements, hereafter defined.
Financial Covenants - ------------------- Both the Revolving Credit Agreement and the Senior Note Agreement (the "Agreements") contain covenants which require certain financial performance and restrict certain payments by the Company and the Restricted Subsidiaries (defined as Hampshire Designers, Inc. and its subsidiaries), including advances to the Company's non-restricted subsidiary, defined as Hampshire Investments, Limited and it subsidiaries. The covenants require maintenance of a consolidated tangible net worth not less than $43 million plus 50% of the net income for the year 1998 and each succeeding year; an average current ratio of not less than 1.75 to 1.00; a fixed charge ratio of consolidated income for fixed charges for the period of four consecutive fiscal quarters most recently ended of at least 2.50 times consolidated fixed charges for such period and restricts funded debt to capitalization ratio not to exceed 0.45 to 1.00. The Agreements also require a short-term debt cleanup of 45 days during any 12-month period, restrict the sale of assets and restrict payments by the Company of cash dividends to stockholders and investments in and loans or advances to the non-restricted subsidiary. At December 31, 1999 approximately $2.1 million was available for restricted payment, including the payment of cash dividends if any had been declared. (There was no short-term debt outstanding for the first six months of the year.) The Company was in compliance with the loan covenants at December 31, 1999.
Maturities of long-term debt as of December 31, 1999 are summarized in the table below.
Year (in thousands) - --------------------------------- 2000 $ 1,418 2001 772 2002 2,744 2003 3,176 2004 4,902 Thereafter 12,576 - --------------------------------- Total $25,588 =================================
Senior Notes are collateralized pari passu with the Revolving Credit Facility by the accounts receivable of the Restricted Subsidiary of the Company and the common stock of all subsidiaries. The net book value of the assets collateralizing the debt on real property at December 31, 1999 was approximately $11.7 million. The net book value of the assets collateralizing the debt on machinery and equipment at December 31, 1999 was approximately $2.5 million.
The fair value of the debt at December 31, 1999, based on current market interest rates for the Company discounted to present value, is approximately $24.6 million.
Note 10 - Income Taxes - ---------------------- The components of income tax expense for the years ended December 31, 1999, 1998 and 1997 are set forth in the table below.
(in thousands) 1999 1998 1997 - -------------------------------------------------- Current: Federal $ 98 $1,068 $2,201 State 380 271 311 Puerto Rico 85 132 137 - -------------------------------------------------- 563 1,471 2,649 - -------------------------------------------------- Deferred: Federal 469 28 (200) State (132) (222) - - -------------------------------------------------- 337 (194) (200) - -------------------------------------------------- Total $900 $1,277 $2,449 ==================================================
The domestic, Puerto Rico and foreign components of income (loss) before income taxes are set forth in the table below.
(in thousands) 1999 1998 1997 - --------------------------------------------------- Domestic $2,268 $5,244 $ 6,230 Puerto Rico 4,654 4,183 5,138 Foreign (826) (2,423) - - --------------------------------------------------- Income before income taxes $6,096 $7,004 $11,368 ===================================================
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) 1999 1998 1997 - ---------------------------------------------------------------- Tax provision at federal statutory rate $2,073 $2,381 $3,865 Increase (decrease) in tax arising from: Effect of exemption of Puerto Rico earnings from United States tax (1,582) (1,422) (1,747) Puerto Rico taxes on income, including withholding taxes 85 132 137 State taxes, less federal income tax benefit 119 85 174 Foreign operating losses 281 85 - Other (76) 16 20 - ----------------------------------------------------------------- $ 900 $1,277 $2,449 =================================================================
A summary of the temporary differences and carryforwards giving rise to deferred income tax assets and liabilities as of December 31, 1999 and 1998 is set forth in the table below.
(in thousands) 1999 1998 - ----------------------------------------------------------------- Deferred income tax assets: Allowances for receivables $ 659 $ 936 Inventories - 199 Write-down of assets not currently deductible 219 925 Accrued liabilities and other temporary differences 3,303 2,359 Unrealized losses on available-for-sale securities 196 110 Provision for discontinued operations - 294 Net operating loss carryforwards 2,565 3,039 Tax credit carryforwards 1,283 697 - ----------------------------------------------------------------- Gross deferred income tax assets 8,225 8,559 Deferred income tax liabilities: Inventories (173) - Property, plant and equipment (12) (268) - ----------------------------------------------------------------- Gross deferred income tax liabilities (185) (268) - ----------------------------------------------------------------- Valuation allowance for deferred income tax assets (1,869) (1,869) - ----------------------------------------------------------------- Net deferred income tax assets $6,171 $6,422 =================================================================
Recognized as follows in the accompanying consolidated balance sheets.
(in thousands) 1999 1998 - ------------------------------------------------- Deferred tax asset - current $4,202 $4,006 Deferred tax asset - noncurrent 1,969 2,416 - ------------------------------------------------- Total $6,171 $6,422 =================================================
The net operating loss carryforwards for federal income tax purposes expire as set forth in the table below.
(in thousands) Year Regular Tax - ------------------------------------------ 2002 $1,139 2003 1,845 2004 411 2005 2,429 2009 1,366 - ------------------------------------------ Total $7,190 ==========================================
As a result of the sale of the Company's common stock pursuant to the Offering, the Company generally is not permitted to utilize more than $1.7 million of the net operating loss carryovers existing as of the completion of the Offering in any single tax year. To the extent such net operating loss carryforward limitation is not utilized in any tax year, it may be carried forward to subsequent tax years and consequently will increase the subsequent years' limitation.
Substantially all of the income of Glamourette Fashion Mills, Inc. ("Glamourette") was effectively exempt from Puerto Rico income tax by an extended tax grant under the Puerto Rico Tax Incentives Act of 1987 (the "Act"). The grant allows partial exemption from income, property and municipal taxes. Under the extension of the grant, the Company has been granted 90% exemption from Puerto Rico income taxes, and 75% exemption from property taxes and municipal taxes through the year 2010 and will be subject to tollgate taxes
ranging from 0% to 5% on dividends. Absent this exemption, Glamourette's earnings would be subject to Puerto Rican income tax at rates of up to 39%.
Glamourette has made an election under Section 936 of the Internal Revenue code pursuant to which Glamourette's earnings are exempt from US taxes. However, dividends received from Glamourette, together with certain other items, enter into the computation of the US alternative minimum tax ("AMT"). Due to the Section 936 exemption and the relative portion of Glamourette's earnings to other US taxable income in prior years, management estimated that the Company would, more likely than not, be a perpetual AMT taxpayer. Accordingly, since NOL deductions are limited in calculating AMT, the Company had, prior to 1996, determined that a valuation allowance was required with respect to NOL carryforwards and AMT credit carryforwards. During 1996, Section 936 was repealed and is being phased out over a 10-year period. As a result, the Company believes that during this phase-out period it will incur regular US tax liabilities and therefore will receive the benefit of a significant portion of the NOL and AMT credit carryforwards.
The Company received dividends from Glamourette of approximately $6 million, $2 million and $5 million in 1999, 1998 and 1997, respectively. The Company has approximately $9 million of Glamourette's undistributed earnings which it considers permanently invested. Additionally, any undistributed earnings of other foreign subsidiaries are expected to be indefinitely reinvested overseas. For this reason, deferred income taxes have not been provided thereon.
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 adjustment letter in the amount of $65,000 deficiency being issued which was accepted by the Company.
Note 11 - Commitments and Contingencies - ---------------------------------------
The Company leases premises and equipment under operating leases having terms from monthly to 7 years. At December 31, 1999, future minimum lease payments under leases ("lessee") having an initial or remaining non-cancelable term in excess of one year were as set forth in the table below.
The Company also leases certain owned real estate properties of its Investment segment. Future minimum lease receipts by the Company for leases ("lessor") having an initial or remaining non-cancelable item in excess of one year were as set forth in the adjacent table.
Rent expenses for operating leases were $1,501,000, $1,532,000 and $1,596,000 in 1999, 1998 and 1997, respectively.
Rental revenue was $2,005,000, $507,000 and $43,000 in 1999, 1998 and 1997, respectively.
Year Lessee Lessor - ------------------------------------- (in thousands) - ------------------------------------- 2000 $1,500 $1,573 2001 1,238 1,358 2002 1,012 1,185 2003 885 1,011 2004 569 476 Thereafter 708 1,225 - ------------------------------------ Total $5,912 $6,828 ====================================
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 - ------------------------ 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. The Board of Directors is authorized to provide for the issuance of preferred stock in such series and having such designations, voting powers, preferences and other rights and restrictions as the Board of Directors shall determine.
Effective December 30, 1997 all outstanding shares of preferred stock were converted into shares of Hampshire Group, Limited common stock.
Note 13 - Stock Options, Warrants and Compensation Plans - -------------------------------------------------------- In 1994, the Company registered 750,000 shares of its common stock under the Securities Act of 1933, as amended. This action was in regards to the Hampshire Group, Limited 1992 Stock Option Plan and the Hampshire Group, Limited Common Stock Purchase Plan for Directors and Executives. Of these shares, 350,000 have been issued under these plans.
Beginning in 1996, the Board of Directors of the Company authorized the repurchase of shares of the Company's common stock, some of which would be used to offset the dilution caused by the issuance of shares under the Stock Option Plan and Stock Purchase Plan. The Company's repurchase of shares of common stock are recorded as "Treasury Stock" and result in a reduction of "Stockholders' Equity". When treasury shares are reissued, the Company uses a weighted average cost method and the excess of repurchase cost over reissuance price is treated as a reduction of "Retained Earnings".
Stock Options - ------------- Options to purchase Hampshire Group, Limited Common Stock are granted at the discretion of the Company's Board of Directors to executives and key employees of the Company and its subsidiaries. No option may be granted with an exercise price less than fair market value per share of common stock at the date of grant. All options have a maximum term of 10 years and become fully exercisable after a maximum of 5 years from the date of grant.
Stock option activity is set forth in the table below.
Number of Weighted Average Options Exercise Price - ------------------------------------------------------------------------- Outstanding - December 31, 1996 455,813 $ 7.87 Granted 50,000 14.50 Exercised (29,556) 6.98 Canceled or expired (45,625) 14.16 - ------------------------------------------------------------------------- Outstanding - December 31, 1997 430,632 8.33 Granted 52,945 16.31 Exercised (65,767) 8.15 Canceled or expired (5,794) 10.77 - ------------------------------------------------------------------------- Outstanding - December 31, 1998 412,016 9.23 Granted 76,650 8.72 Exercised (143,718) 6.94 Canceled or expired (54,235) 10.95 - ------------------------------------------------------------------------- Outstanding - December 31, 1999 290,713 $10.18 - -------------------------------------------------------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), allows companies to adopt the fair value based method of accounting or to continue using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense was recognized in 1999, 1998 or 1997. 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.
In order to estimate compensation cost, the Black-Scholes model was employed using the assumptions set forth in the adjacent table. 1999 1998 1,997
1999 1998 1997 - ------------------------------------------------------- Expected life (years) 6.16 5.24 4.37 Expected volatility 22.46% 22.73% 18.60% Dividend yield 0.00% 0.00% 0.00% Risk-free interest rate 4.95% 5.14% 6.54% Weighted-average fair values of options granted $2.71 $5.33 $5.07 - -------------------------------------------------------
The adjacent table sets forth the effect on net income and diluted earnings per share had compensation cost been determined under SFAS 123.
(in thousands) 1999 1998 1997 - --------------------------------------------------------- Net income: As reported $5,196 $5,013 $9,006 ---------------------------- Pro forma $5,022 $4,927 $8,930 ---------------------------- Diluted earnings As reported $1.22 $1.13 $2.02 ---------------------------- per share: Pro forma $1.18 $1.11 $2.00 - ---------------------------------------------------------
A summary of the status of options outstanding at December 31, 1999 is set forth in the table below.
Options Outstanding Options Exercisable - ----------------------------------------------------- ------------------------ Number Range of Weighted Weighted Number Weighted Outstanding Exercise Average Average Exercisable Average 12/31/99 Prices Exercise Price Remaining Life 12/31/99 Exercise Price - ----------------------------------------------------- ------------------------ 31,818 $6.00-$ 6.19 $ 6.13 2.13 31,818 $ 6.13 42,882 7.50- 7.87 7.52 1.32 42,882 7.52 126,363 8.25- 9.90 9.19 3.49 58,863 9.32 48,250 11.00-12.13 11.60 3.84 46,500 11.58 9,900 12.50-14.50 14.40 4.42 7,550 14.37 30,000 18.13 18.13 6.50 7,500 18.13 1,500 22.69 22.69 5.50 750 22.69 - ------------------------------------------------------------------------------- 290,713 $ 6.00-$22.69 $10.18 3.44 195,863 $ 9.13 ===============================================================================
Warrants to Purchase Common Stock - --------------------------------- In December 1990, the Company issued warrants to purchase 338,182 shares of the Company's common stock at an exercise price of $6.19 per share through December 31, 2000. The aggregate consideration for such warrants was $250,000. During 1997, the Company repurchased for $1 million ($7.534 per share), 132,728 of these warrants leaving a balance of 205,454 outstanding.
Common Stock Purchase Plan - -------------------------- Pursuant to the Hampshire Group, Limited 1992 Common Stock Purchase Plan for Directors and Executives ("Stock Purchase Plan"), non-employee directors may elect to use their fees as directors to purchase common stock of the Company. Under the same provision, key executives may elect to use up to 10% of their annual salaries and up to 40% of their annual bonuses to purchase common stock of the Company under the Plan.
The number of shares of common stock to be delivered is determined, with respect to non-employee directors, by dividing the amount of director fees elected to be used to purchase common stock in each quarter by 95% of the fair market value of the Company's common stock at the end of the calendar quarter. The number of shares of common stock to be delivered with respect to annual salaries of key executives is determined by dividing the amount so elected to be used for the purchase of common stock by 90% of the Company's common stock at the end of the calendar quarter. The number of shares of common stock to be delivered with respect to annual bonuses of key executives is determined by dividing the amount elected to be used for the purchase of common stock by 90% of the lower of: (1)
the average of the fair market value of the Company's common stock at the end of each calendar quarter, or (2) the fair market value of the Company's common stock as of the end of the plan year.
The participating directors and executives, in the aggregate, elected to use approximately $345,000, $487,000 and $735,000 of their compensation for 1999, 1998 and 1997, respectively, to purchase common stock of the Company under the Stock Purchase Plan. The Company has established a trust to which it delivers the shares of the Company's common stock to satisfy such elections following the end of each plan year. Alternatively, the Company may contribute cash to the trust in an amount sufficient to enable the trustee to purchase in the open market, the number of shares of common stock which the Company would be required to deliver. The deferred compensation liability and the Company's shares are presented as offsetting amounts in the stockholders' equity section.
Voluntary Deferred Compensation Plan - ------------------------------------ The Company has a Hampshire Group, Limited Deferred Voluntary Compensation Plan for Directors and Executives (the "Top Hat Plan"). Pursuant to the plan, key executives may elect to defer up to 20% of the total compensation in each year with said deferrals being invested in mutual funds external to the Company. In 1999, 1998 and 1997 the participants deferred $270,000, $430,000 and $547,000, 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 executives 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, 1999 and 1998, was $2,101,000 and $1,087,000, respectively, which equal the liability of the Company at the respective date. Since both the deferred liability and the related mutual funds are marked to market, there is no effect on net income.
Company Deferred Compensation Plan - ---------------------------------- 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 $10,000 annually on behalf of the 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 other funds.
Note 14 - 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 $297,000, $345,000 and $346,000 in 1999, 1998 and 1997, respectively. Such matching contributions vest fully over seven years of employment.
Note 15 - Related Party Transactions - ------------------------------------ The Company leases certain buildings from an affiliated company. Ludwig Kuttner, Chief Executive Officer of the Company, and his wife together own approximately 18% of the voting stock of the affiliate. Rent expense under such leases was $216,000, $208,000 and $200,000 in 1999, 1998 and 1997, 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 $201,000, $179,000 and $162,000, respectively, for 1999, 1998 and 1997. 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. Harvey L. Sperry, a director of the Company, is a partner in the law firm of Willkie Farr & Gallagher. The firm has served as legal counsel to the Company since 1977 and in such capacity was paid fees in the amount of $57,000, $128,000 and $38,000 during the years 1999, 1998 and 1997, respectively. Dr. Joel Goldberg, a director of the Company, is a principle 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 $7,000, $18,000 and $5,000 during the years 1999, 1998 and 1997, respectively.
Oliver Kuttner, the son of the Chairman and Chief Executive Officer of the Company is managing certain renovations on the real estate owned by Hampshire Investments located in Charlottesville, Virginia. During 1999 and 1998, the Company paid Mr. Kuttner $20,000 and $10,000, respectively, and he will receive as additional, 30% of the net cash flow of the real property after Hampshire Investments has received a 10% return on its investment.
Note 16 - Discontinued Operations - --------------------------------- In 1998, the Board of Directors of the Company approved a formal plan to discontinue the operations and sell the assets of the Hosiery Division, which was engaged in the manufacture and sale of ladies' and children's hosiery and socks. Accordingly, the operating results of the Hosiery Division have been reflected as discontinued operations in the accompanying 1998 and 1997 consolidated statements of income.
On June 1, 1999, the Company sold the assets of its Hosiery Division, consisting principally of inventory and certain machinery and equipment, to a company controlled by the president and six other management employees of the Hosiery Division at the time of sale (the "Purchaser"). The $4,600,000 purchase price consisted of $500,000 cash; a $1,883,000 note bearing interest at 8.25% per annum, due January 2006 and secured by the machinery and equipment which was transferred ("8.25% Note"); a non-voting unit of the Purchaser in the amount of $275,000; the assumption by the Purchaser of current liabilities of the Company in the amount of $850,000 and a note of the Company in the amount of $1,092,000 and due July 1, 2002, for which the Company remains primarily liable. The Company also retains contingent liability with respect to note obligations of the Company in the amount of $1,092,000 which were assumed by the Purchaser as part of the purchase price.
The Company leased to the Purchaser two manufacturing plants for a period of three years on a triple net basis with annual rent of $126,000. At the end of the lease, the Purchaser has an option to purchase the plants for $840,000 or to extend the lease for three additional years at an increased annual rent. The Company also leased machinery and equipment located at the two plants for a period of four years at an annual rent of $324,000. The Purchaser has an option at the end of the lease to either renew the lease at fair market rental value or purchase the machinery and equipment at fair market value. Further, the Company has agreed to provide consulting services to the Purchaser for an annual fee of $100,000 for a three year period.
The Company has agreed with a financial institution which is providing working capital financing to the Purchaser, to subordinate its rights under the two leases and the 8.25% Note for a period of 120 days after notice of any default under the leases or the 8.25% Note which would otherwise permit the Company to terminate the leases or enforce the obligation of the Purchaser to pay the unpaid principal of the 8.25% Note. Through December 31, 1999, no event of default has occurred.
The difference between the book basis of the assets sold and the selling price has been established as a reserve against the 8.25% Note. No gain on the sale will be recognized until such time as the Note is collected and the Company has been relieved of its primary responsibilities under the $1,092,000 note assumed by the Purchaser.
Net sales for the Hosiery Division for the years ended December 31, 1998 and 1997 were $24,118,000 and $23,621,000, respectively. Operating results for 1998,
restated on a discontinued operations basis was an operating loss of $214,000, which combined with the after-tax accrual of $500,000 for estimated loss on disposal of the Hosiery assets, amounts to $0.16 per share on a diluted basis. For the year 1997, the Hosiery Division produced a profit of $87,000, or $0.02 per share on a diluted basis.
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 impossible for the Company to determine sales to the individual markets. The Investments segment makes investments both domestically and internationally, principally in real property.
Note 19 - Subsequent Event (unaudited) - -------------------------------------
During 1999, Hampshire Investments purchased two promissory notes in the aggregate principal amount of $775,000. The issuers have defaulted under the notes; and on March 30, 2000, the Chairman and Chief Executive Officer of the Company entered into an agreement to purchase the notes from Hampshire Investments for their aggregate principal amount.
HAMPSHIRE GROUP, LIMITED REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands)
Depreciation and amortization of the Company's investment in buildings and improvements reflected in the statements of operations are calculated over the estimated useful lives of the assets as follows:
Base Building 15 years Improvements Over remaining useful lives of the building
The aggregate cost for income tax purposes was approximately $21,250 at December 31, 1999.
The changes in total real estate assets and accumulated depreciation for the period ending December 31, 1999 are as follows:
Total Real Estate Assets - ------------------------- Balance, beginning of period $8,880 Acquisitions 6,419 Additions and improvements 1,829 Hosiery real estate reclassification (1,850) - ----------------------------------------------- Balance, end of period $19,400 ===============================================
Accumulated Depreciation - ------------------------ Balance, beginning of period ($ 201) Depreciation (607) Hosiery real estate reclassification (2,054) - ----------------------------------------------- Balance, end of period ($2,862) ===============================================
HAMPSHIRE GROUP, LIMITED 1999 EXHIBIT INDEX
Exhibit No. Description - ----------- ---------------------------------------------------------- (3)(B)(6) Merger Agreement between Hampshire Designers, Inc. and Segue (America) Limited dated December 30, 1999 (10)(H)(3) Third Amendment to Credit Agreement and Guarantee between Hampshire Group, Limited and The Chase Manhattan Bank, Republic National Bank of New York and NationsBank N.A. dated June 22, 1999 (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. (10)(T)(1) Amendment to Credit Agreement between MTB Bank and Segue (America) Limited dated July 14, 1999 (21) Subsidiaries of the Company (23) Consent of Deloitte & Touche LLP (27) Financial Data Schedule