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HAMPSHIRE GROUP LTD 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 3, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 000-20201
HAMPSHIRE GROUP, LIMITED
(Exact name of registrant as specified in its charter)
     
Delaware   06-0967107
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
114 W. 41st Street, New York, New York   10036
(Address of principal executive offices)   (Zip Code)
(212) 840-5666
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( §233.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if smaller reporting company)    
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Number of shares of common stock outstanding as of July 30, 2010: 6,341,360
 
 

 

 


 

HAMPSHIRE GROUP, LIMITED
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended July 3, 2010
         
  ii  
 
       
    1  
 
       
    1  
 
       
    12  
 
       
    17  
 
       
    17  
 
       
    17  
 
       
    17  
 
       
    17  
 
       
    18  
 
       
    19  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make oral and written statements that may constitute “forward looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward looking statements made in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as those made in other filings with the SEC.
Forward looking statements can be identified by our use of forward looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “forecast,” “foresee,” or other similar words. Such forward looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties, and changes in plans that could cause actual results to differ materially from those described in the forward looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward looking statements include, but are not limited to, those described in Part I, Item 2 of this Form 10-Q and under Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions, or circumstances on which any forward looking statement is based.
As used herein, except as otherwise indicated by the context, the terms “Hampshire,” “Company,” “we,” and “us” are used to refer to Hampshire Group, Limited and its wholly-owned subsidiaries.

 

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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
                 
(In thousands, except par value and shares)   July 3, 2010     December 31, 2009  
Current assets:
               
Cash and cash equivalents
  $ 31,630     $ 33,365  
Accounts receivable, net
    5,030       21,708  
Other receivables
    7,476       7,663  
Inventories, net
    22,540       8,137  
Other current assets
    3,613       1,606  
Assets of discontinued operations
    29       152  
 
           
Total current assets
    70,318       72,631  
Fixed assets, net
    10,410       11,283  
Other assets
    1,945       3,015  
 
           
Total assets
  $ 82,673     $ 86,929  
 
           
 
               
Current liabilities:
               
Current portion of long-term debt
  $ 36     $ 39  
Accounts payable
    13,413       7,256  
Accrued expenses and other liabilities
    7,303       5,557  
Liabilities of discontinued operations
    482       572  
 
           
Total current liabilities
    21,234       13,424  
 
           
Long-term debt less current portion
    61       79  
Other long-term liabilities
    15,137       14,577  
 
           
Total liabilities
    36,432       28,080  
 
           
 
               
Commitments and contingencies (Note 5)
               
 
               
Stockholders’ equity:
               
Preferred stock, $0.10 par value, 1,000,000 shares authorized at July 3, 2010 and December 31, 2009, respectively; none issued
           
Series A junior participating preferred stock, $0.10 par value, 10,000 shares authorized at July 3, 2010 and December 31, 2009, respectively; none issued
           
Common stock, $0.10 par value, 10,000,000 shares authorized; 8,243,784 shares issued at July 3, 2010 and December 31, 2009
    824       824  
Additional paid-in capital
    30,013       29,948  
Retained earnings
    29,387       42,246  
Treasury stock, 1,902,424 and 1,927,119 shares at cost at July 3, 2010 and December 31, 2009, respectively
    (13,983 )     (14,169 )
 
           
Total stockholders’ equity
    46,241       58,849  
 
           
Total liabilities and stockholders’ equity
  $ 82,673     $ 86,929  
 
           
See accompanying notes to the financial statements.

 

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Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
                                 
    Three Months Ended     Six Months Ended  
(In thousands, except per share data)   July 3, 2010     June 27, 2009     July 3, 2010     June 27, 2009  
Net sales
  $ 14,752     $ 20,968     $ 35,202     $ 50,045  
Cost of goods sold
    11,123       15,929       27,335       38,834  
 
                       
Gross profit
    3,629       5,039       7,867       11,211  
Selling, general, and administrative expenses
    7,407       8,747       15,966       19,683  
Restructuring charges
          3,416             3,416  
Special costs
    3,874       1,072       4,415       3,005  
Tender offer related costs
          102             1,109  
 
                       
Loss from operations
    (7,652 )     (8,298 )     (12,514 )     (16,002 )
Other income (expense):
                               
Interest income
    26       37       44       146  
Interest expense
    (138 )     (35 )     (246 )     (83 )
Other, net
    (56 )     (25 )     (80 )     (26 )
 
                       
Loss from continuing operations before income taxes
    (7,820 )     (8,321 )     (12,796 )     (15,965 )
Income tax provision
    83       110       122       206  
 
                       
Loss from continuing operations
    (7,903 )     (8,431 )     (12,918 )     (16,171 )
Income (loss) from discontinued operations, net of taxes
    64       (22 )     59       (47 )
 
                       
Net loss
  $ (7,839 )   $ (8,453 )   $ (12,859 )   $ (16,218 )
 
                       
 
                               
Basic loss per share:
                               
Loss from continuing operations
  $ (1.42 )   $ (1.54 )   $ (2.33 )   $ (2.96 )
Income (loss) from discontinued operations, net of taxes
    0.01       (0.01 )     0.01       (0.01 )
 
                       
Net loss
  $ (1.41 )   $ (1.55 )   $ (2.32 )   $ (2.97 )
 
                       
 
                               
Diluted loss per share:
                               
Loss from continuing operations
  $ (1.42 )   $ (1.54 )   $ (2.33 )   $ (2.96 )
Income (loss) from discontinued operations, net of taxes
    0.01       (0.01 )     0.01       (0.01 )
 
                       
Net loss
  $ (1.41 )   $ (1.55 )   $ (2.32 )   $ (2.97 )
 
                       
 
                               
Weighted average number of shares outstanding:
                               
Basic weighted average number of common shares outstanding
    5,554       5,469       5,553       5,469  
 
                       
 
                               
Diluted weighted average number of common shares outstanding
    5,554       5,469       5,553       5,469  
 
                       
See accompanying notes to the financial statements.

 

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Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statement of Stockholders’ Equity
                                                         
                    Additional                             Total  
    Common Stock     Paid-In     Retained     Treasury Stock     Stockholders’  
(In thousands, except shares)   Shares     Amount     Capital     Earnings     Shares     Amount     Equity  
 
                                                       
Balance at December 31, 2009
    8,243,784     $ 824     $ 29,948     $ 42,246       1,927,119     $ (14,169 )   $ 58,849  
Net loss
                      (12,859 )                 (12,859 )
Restricted stock grants
                (478 )           (65,000 )     478        
Restricted stock forfeitures
                287             39,000       (287 )      
Stock based compensation
                256                         256  
Purchase of treasury shares
                            1,305       (5 )     (5 )
 
                                         
Balance at July 3, 2010
    8,243,784     $ 824     $ 30,013     $ 29,387       1,902,424     $ (13,983 )   $ 46,241  
 
                                         
See accompanying notes to the financial statements.

 

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Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
                 
    Six Months Ended  
(In thousands)   July 3, 2010     June 27, 2009  
Cash flows from operating activities:
               
Net loss
  $ (12,859 )   $ (16,218 )
Less: Income (loss) from discontinued operations, net of taxes
    59       (47 )
 
           
Loss from continuing operations
    (12,918 )     (16,171 )
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    1,239       1,098  
Loss on sale or disposal of fixed assets
    34       14  
Stock based compensation
    256        
Changes in operating assets and liabilities:
               
Receivables, net
    16,738       21,303  
Inventories, net
    (14,252 )     (7,695 )
Other assets
    176       (3,628 )
Liabilities
    8,250       5,436  
 
           
Net cash provided by (used in) continuing operating activities
    (477 )     357  
Net cash provided by (used in) discontinued operations
    76       (94 )
 
           
Net cash provided by (used in) operating activities
    (401 )     263  
Cash flows from investing activities:
               
Acquisition of a business
    (1,210 )      
Capital expenditures
    (98 )     (270 )
Cash restricted for the collateralization of letters of credit
          (13,523 )
Proceeds from the sale of fixed assets
          4  
 
           
Net cash provided by (used in) continuing investing activities
    (1,308 )     (13,789 )
Net cash provided by (used in) discontinued operations
           
 
           
Net cash provided by (used in) investing activities
    (1,308 )     (13,789 )
Cash flows from financing activities:
               
Purchase of treasury stock
    (5 )      
Repayment of long-term debt
    (21 )     (14 )
Capitalized credit facility costs
          (204 )
 
           
Net cash provided by (used in) financing activities
    (26 )     (218 )
 
           
Net increase (decrease) in cash and cash equivalents
    (1,735 )     (13,744 )
Cash and cash equivalents at beginning of period
    33,365       35,098  
 
           
Cash and cash equivalents at end of period
  $ 31,630     $ 21,354  
 
           
See accompanying notes to the financial statements.

 

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Note 1 — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Hampshire Group, Limited and its subsidiaries (the “Company” or “Hampshire”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and according to instructions from the United States Securities and Exchange Commission (“SEC”) for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2009.
The information included herein is not necessarily indicative of the annual results that may be expected for the year ending December 31, 2010, but does reflect all adjustments (which are of a normal and recurring nature) considered, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from these estimates and assumptions. In addition, the Company’s revenues are highly seasonal, causing significant fluctuations in financial results for interim periods. The Company sells apparel throughout the year but approximately 70% of its annual sales in recent years have occurred in the third and fourth quarters, primarily due to the large concentration of sweaters in the product mix and seasonality of the apparel industry in general.
The Company has evaluated subsequent events from the date of the unaudited condensed consolidated balance sheet through the date the financial statements were issued. During this period, no material recognizable subsequent events were identified, except as discussed below and in Note 5 — Commitments and Contingencies.
Special Costs
In 2006, the Audit Committee (the “Audit Committee”) of the Board of Directors (the “Board”) commenced an investigation related to, among other things, the misuse and misappropriation of assets for personal benefit, certain related party transactions, tax reporting, internal control deficiencies, financial reporting, and accounting for expense reimbursements, in each case involving certain members of the Company’s former management (the “Audit Committee Investigation”).
On December 3, 2007, the Company purchased an insurance policy that insures a person who was a director or an officer of the Company for purposes of the Company’s 2005/2006 directors’ and officers’ insurance policy against litigation brought either by any director or officer of the Company who was terminated during 2006 or by the Company directly (“Special D&O Insurance Policy”). The Special D&O Insurance Policy provides coverage of $7.5 million, has a term of six years, and cost $4.1 million including taxes and fees. This payment was treated as a prepaid expense as the policy covers a six year period and amortized at a rate of approximately $0.7 million per year. It is included in Other current assets and Other assets.
As discussed in Note 5 hereto, the Company entered into settlements in August 2010 with the two remaining former officers who were terminated during 2006, and therefore, the remaining value of the Special D&O Insurance Policy totaling $2.4 million was written off at July 3, 2010. Including this $2.4 million write off, the Company recognized expense related to the Special D&O Insurance Policy in the amount of $2.5 million in the three month period ended July 3, 2010, as compared with $0.2 million in the three month period ended June 27, 2009. The Company recognized expense related to the Special D&O Insurance Policy in the amount of $2.7 million in the year to date period ended July 3, 2010 as compared with $0.3 million in the year to date period ended June 27, 2009.
The Company reports certain costs as Special Costs including, but not limited to, the costs associated with the Audit Committee Investigation, the assessment and remediation of certain tax exposures, the restatement of the financial statements which resulted from the findings of the Audit Committee Investigation, investigations by the SEC and the U.S. Attorney’s Office, a stockholder derivative suit, Nasdaq Global Market listing related costs, the Special D&O Insurance expense, legal and other expenses related to the now settled arbitration and litigation with Ludwig Kuttner, the Company’s former Chief Executive Officer, Chairman and director, legal and other expenses related to the now settled litigation involving former employees Charles Clayton and Roger Clark, and other matters investigated by the Audit Committee. See Note 5 — Commitments and Contingencies.
Special Costs incurred since inception of the Audit Committee Investigation were approximately $23.4 million through July 3, 2010. All litigation related to the Audit Committee Investigation has now been resolved, and thus, the Company does not expect to incur significant expenses associated with the Audit Committee Investigation after the recognition of legal costs incurred in the third quarter of 2010.

 

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Accounting Standard Updates
The following accounting pronouncements have been issued and will be effective for the Company in or after fiscal year 2010:
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures,” which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The guidance is effective for annual and interim reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual and interim periods beginning after December 15, 2010. The Company adopted these amendments in the first quarter of 2010 and the adoption did not have a material impact on the disclosures of the Company’s unaudited condensed consolidated financial statements.
In February 2010, the FASB issued ASU 2010-09 “Subsequent Events — Amendments to Certain Recognition and Disclosure Requirements” (“ASU 2010-09”), which amends FASB ASC Topic 855, Subsequent Events, so that SEC filers no longer are required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. ASU No. 2010-09 was effective immediately and the Company adopted these new requirements in its first quarter of 2010. The adoption did not have a material impact on the disclosures of the Company’s unaudited condensed consolidated financial statements.
Note 2 — Credit Facility
On August 7, 2009, the Company and its lenders amended and restated its credit facility (the “Amended Facility”) with HSBC Bank USA, National Association (“HSBC”), other financial institutions named therein as bank parties (together with HSBC, the “Banks”), and HSBC, as letter of credit issuing bank and as agent for the Banks.
The Amended Facility with the Banks is a $48.0 million asset based revolving credit facility including trade letters of credit with a $10.0 million sub-limit for standby letters of credit. The Amended Facility is scheduled to expire on June 30, 2011 and is secured by substantially all assets of the Company. Aggregate borrowing availability under the Amended Facility is limited to the lesser of $48.0 million or a formula which considers cash, accounts receivable and inventory. Interest rates under the Amended Facility vary with the prime rate or the London Interbank Offered Rate (“LIBOR”). The Amended Facility includes certain covenants, which include minimum earnings before interest, taxes, depreciation and amortization (excluding certain charges), maximum capital expenditures, minimum availability, minimum liquidity, letters of credit tied to booked orders, and limitations on when direct debt is permitted. The Amended Facility has other customary provisions for periodic reporting, monitoring, and fees.
On May 7, 2010, the Company and the Banks entered into an amendment (“Amendment No. 1”) with respect to the Amended Facility. Amendment No. 1, among other things, (i) allows the Company to acquire, in one or more transactions or series of transactions, assets for an aggregate purchase price not to exceed $1.5 million; (ii) amended the Amended Facility’s original earnings before interest, taxes, depreciation and amortization covenant; and, (iii) allows the Company to make dividend payments or purchases of its capital stock in an aggregate amount not to exceed $3.5 million if certain conditions are met.
At July 3, 2010, there were no outstanding borrowings and approximately $15.4 million outstanding under letters of credit. Borrowing availability was approximately $32.5 million at July 3, 2010.
Note 3 — Inventories
Inventories at July 3, 2010 and December 31, 2009 consisted of the following:
                 
(In thousands)   July 3, 2010     December 31, 2009  
Finished goods
  $ 22,785     $ 8,340  
Raw materials and supplies
    62       37  
 
           
 
    22,847       8,377  
Less: reserves
    (307 )     (240 )
 
           
Inventories, net
  $ 22,540     $ 8,137  
 
           

 

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Note 4 — Loss Per Share
Set forth in the table below is the reconciliation of the numerator (loss from continuing operations) and the denominator (shares) for the computation of basic and diluted loss from continuing operations per share:
                         
    Numerator     Denominator     Per Share  
(In thousands, except per share data)   Income (Loss)     Shares     Amount  
Three months ended July 3, 2010:
                       
Basic loss from continuing operations
  $ (7,903 )     5,554     $ (1.42 )
Effect of dilutive securities:
                       
Preferred rights
                 
Restricted stock
                 
 
                 
Diluted loss from continuing operations
  $ (7,903 )     5,554     $ (1.42 )
 
                 
 
                       
Three months ended June 27, 2009:
                       
Basic loss from continuing operations
  $ (8,431 )     5,469     $ (1.54 )
Effect of dilutive securities:
                       
Preferred rights
                 
 
                 
Diluted loss from continuing operations
  $ (8,431 )     5,469     $ (1.54 )
 
                 
 
                       
Six months ended July 3, 2010:
                       
Basic loss from continuing operations
  $ (12,918 )     5,553     $ (2.33 )
Effect of dilutive securities:
                       
Preferred rights
                 
Restricted stock
                 
 
                 
Diluted loss from continuing operations
  $ (12,918 )     5,553     $ (2.33 )
 
                 
 
                       
Six months ended June 27, 2009:
                       
Basic loss from continuing operations
  $ (16,171 )     5,469     $ (2.96 )
Effect of dilutive securities:
                       
Preferred rights
                 
 
                 
Diluted loss from continuing operations
  $ (16,171 )     5,469     $ (2.96 )
 
                 
Potentially dilutive shares were excluded from the calculation of dilutive shares because their effect would have been anti-dilutive, which totaled 785,250 as of July 3, 2010. There were no potentially dilutive shares as of June 27, 2009.
Note 5 — Commitments and Contingencies
In 2006, the Audit Committee of the Board commenced the Audit Committee Investigation related to, among other things, the misuse and misappropriation of assets for personal benefit, certain related party transactions, tax reporting, internal control deficiencies, financial reporting, and accounting for expense reimbursements, in each case involving certain members of the Company’s former management.
On March 7, 2008, the Company filed a complaint in the Court of Chancery of the State of Delaware for the County of New Castle (the “Court”) against Messrs. Ludwig Kuttner, Charles Clayton, and Roger Clark, former members of management. On August 4, 2008, the Company entered into a Stock Purchase and Settlement Agreement and Mutual Releases with Mr. Kuttner, his wife, Beatrice Ost-Kuttner, his son, Fabian Kuttner, and a limited liability company controlled by him, K Holdings LLC (together, the “Kuttner Parties”). Under the Agreement, the Company and the Kuttner Parties exchanged releases of ongoing and potential claims, and the Kuttner Parties sold all of the stock of the Company that they owned to the Company for approximately $12.0 million and Mr. Kuttner made a $1.6 million payment to the Company.
On September 10, 2008 and September 19, 2008, Mr. Clayton and Mr. Clark, respectively, filed answers with respect to the claims that the Company filed against them on March 7, 2008, as well as counterclaims against the Company. Mr. Clayton and Mr. Clark denied the Company’s claims against them and asserted claims against the Company for, among other things, certain compensation and benefits, defamation and other damages.
On September 22, 2008, Mr. Clayton filed a third-party complaint against certain of the Company’s directors and officers. Mr. Clayton’s complaint asserted claims against those directors and officers for, among other things, contribution in the event that Mr. Clayton is found liable to the Company for damages in relation to the Company’s complaint against him, defamation and other damages allegedly stemming from the Company’s issuance of certain press releases related to the Audit Committee Investigation.

 

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On June 12, 2009, the Company and its directors and officers who are parties to the litigation filed a motion for summary judgment. On September 2, 2009, the Court granted the motion in part and dismissed Mr. Clayton’s claim for intentional infliction of emotional distress against the Company, as well as his defamation claim against the Company’s directors and officers. The Court denied the remainder of the Company’s motion and set the remainder of the parties’ claims for trial.
On December 21-24, 2009, the Court held a trial on the Company’s claims, Clayton’s and Clark’s counterclaims, and Clayton’s third-party claims. On July 12, 2010, the Court issued its Memorandum Opinion. Before entering a final judgment, the Court required supplemental briefing regarding the computation of the amount of damages to be paid. Prior to the Court entering a final judgment on the damages issues, the Company and Messrs. Clayton and Clark reached settlements as to the outstanding matters between them. The Company and Mr. Clark settled the outstanding matters, including potential claims for indemnification for reimbursement of certain legal costs incurred, for a payment to Mr. Clark of approximately $0.4 million. The Company and Mr. Clayton settled the outstanding matters, including potential claims for indemnification of certain legal costs incurred, for payment to Mr. Clayton of approximately $1.0 million, net of a disgorgement of $0.4 million of bonuses previously paid to Mr. Clayton.
Note 6 — Taxes
As of July 3, 2010, the Company’s unaudited condensed consolidated balance sheet reflects a liability for unrecognized tax benefits of approximately $7.0 million, including approximately $2.7 million of accrued interest and penalties. The Company anticipates that total unrecognized tax benefits will decrease by approximately $1.5 million, including interest and penalties of approximately $0.6 million, due to the settlement of certain state and local income tax liabilities or the expiration of statutes of limitation within the next twelve months. The Company currently has both U.S. net operating loss carrybacks and carryforwards. Upon examination, one or more of these net operating loss carrybacks or carryforwards may be limited or disallowed. The statute of limitations with respect to the Company’s federal income tax returns remains open for tax years 2006 and beyond. With limited exceptions, the statutes of limitations for state income tax returns remain open for tax years 2002 and beyond. During the second quarter, the Company was notified by one municipality that its 2006, 2007, and 2008 municipal income tax returns will be examined. The Company also files income tax returns in Hong Kong for which tax years 2006 and beyond remain open to examination by the Hong Kong Inland Revenue Department.
Note 7 — Dispositions and Discontinued Operations
The Company continually reviews its portfolio of labels, business lines, and divisions to evaluate whether they meet profitability and performance requirements and are in line with the Company’s business focus. As a part of this review, the Company has disposed and discontinued operations of certain divisions as outlined below.
In 2007, the Company sold certain assets of its Marisa Christina and David Brooks divisions and ceased their activities. During 2008, the Company sold certain assets of its Shane Hunter division and ceased its activities. In accordance with GAAP, these unaudited condensed consolidated financial statements reflect the results of operations and financial position of the Marisa Christina, David Brooks, and Shane Hunter divisions separately as discontinued operations. The assets and liabilities of the discontinued operations are presented in the unaudited condensed consolidated balance sheets under the captions Assets of discontinued operations and Liabilities of discontinued operations.
The underlying assets and liabilities of the discontinued operations at July 3, 2010 and December 31, 2009 were as follows:
                 
(In thousands)   July 3, 2010     December 31, 2009  
Other receivables
  $ 29     $ 152  
 
           
Assets of discontinued operations
  $ 29     $ 152  
 
           
 
               
Accrued expenses and other liabilities
  $ 482     $ 572  
 
           
Liabilities of discontinued operations
  $ 482     $ 572  
 
           

 

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The operating results for the discontinued operations for the three and six month periods ended July 3, 2010 and June 27, 2009 were as follows:
                                 
    Three Months Ended     Six Months Ended  
(In thousands)   July 3, 2010     June 27, 2009     July 3, 2010     June 27, 2009  
Net sales
  $     $     $     $  
 
                               
Gross profit
  $     $     $     $  
 
                               
Income (loss) on discontinued operations before income taxes
  $ 64     $ (22 )   $ 59     $ (47 )
Income tax provision
                       
 
                       
Income (loss) from discontinued operations, net of taxes
  $ 64     $ (22 )   $ 59     $ (47 )
 
                       
Note 8 — Restructuring Charges
The Company initiated and implemented restructuring and cost reduction programs in May 2008 and April 2009 that significantly reduced its fixed cost structure. The restructuring programs eliminated positions at every level of the Company and included the consolidation of divisions and back office functions as well as the reorganization of certain operating functions. In addition to personnel reductions, the cost reduction programs also eliminated certain non-payroll costs. Both the 2008 and 2009 restructuring programs were complete at the end of their respective fiscal years. There were no charges related to the restructuring programs recognized during the three and six month periods ended July 3, 2010. There was approximately $3.4 million of restructuring charges incurred during the three and six month periods ended June 27, 2009.
A reconciliation of the beginning and ending liability balances for restructuring costs included in the Accrued expenses and other liabilities and Other long-term liabilities sections of the unaudited condensed consolidated balance sheet is shown below:
                                                 
    Three Months Ended  
    July 3, 2010     June 27, 2009  
    Personnel     Other             Personnel     Other        
(In thousands)   Reductions     Costs     Total     Reductions     Costs     Total  
Beginning of period
  $     $ 1,103     $ 1,103     $     $     $  
Costs charged to expense
                      2,717       864       3,581  
Costs paid or settled
          (384 )     (384 )     (2,669 )     (14 )     (2,683 )
 
                                   
End of period
  $     $ 719     $ 719     $ 48     $ 850     $ 898  
 
                                   
                                                 
    Six Months Ended  
    July 3, 2010     June 27, 2009  
    Personnel     Other             Personnel     Other        
(In thousands)   Reductions     Costs     Total     Reductions     Costs     Total  
Beginning of period
  $ 32     $ 1,210     $ 1,242     $ 72     $     $ 72  
Costs charged to expense
                      2,717       864       3,581  
Costs paid or settled
    (32 )     (491 )     (523 )     (2,741 )     (14 )     (2,755 )
 
                                   
End of period
  $     $ 719     $ 719     $ 48     $ 850     $ 898  
 
                                   
Personnel reductions and other costs, which consist primarily of exit costs related to leased facilities and included the reversal of $0.2 million in deferred rent, were charged to Restructuring charges in the unaudited condensed consolidated statement of operations in the three and six month periods ended June 27, 2009.
Note 9 — Fair Value Measurements
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

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Level 2 — Fair values utilize inputs other than quoted prices that are observable for the asset or liability, and may include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents information about the Company’s assets measured at fair value on a recurring basis at July 3, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
                                 
    Fair Value Measurements at Reporting Date Using  
    Quoted Prices                    
    in Active     Significant              
    Markets for     Other     Significant        
    Identical     Observable     Unobservable        
(In thousands)   Assets     Inputs     Inputs        
Description   (Level 1)     (Level 2)     (Level 3)     July 3, 2010  
Cash equivalents
  $ 11,292     $     $     $ 11,292  
 
                       
Note 10 — Tender Offer
The Company announced on February 24, 2009 that it had reached a definitive agreement (the “Merger Agreement”) to be acquired by NAF Acquisition Corp., a direct wholly owned subsidiary of NAF Holdings II, LLC (together with NAF Acquisition Corp., “NAF”). On April 26, 2009, the Company received a letter from NAF stating that NAF was terminating the Merger Agreement effective immediately, as a result of one or more alleged breaches of covenants and agreements on the part of the Company.
On September 28, 2009, the Company entered into a settlement and mutual release agreement (“Settlement”) with NAF, pursuant to which the Company and NAF settled and discharged all claims related to and arising under the Merger Agreement and any ancillary agreements entered into in connection with the negotiation and execution of the Merger Agreement. Under the terms of the Settlement, the Company agreed to reimburse NAF for approximately $0.8 million of approximately $2.1 million in transaction related expenses incurred by NAF in connection with the Merger Agreement. The Company has not incurred significant expenses related to the tender offer since the Settlement and believes that it will not incur any significant expenses related thereto in the future.
The Company did not incur any expenses related to the Merger Agreement during the six month period ended July 3, 2010. During the three and six month periods ended June 27, 2009, the Company incurred approximately $0.1 million and $1.1 million, respectively, in costs related to the Merger Agreement, which were recorded in Tender offer related costs in the unaudited condensed consolidated statement of operations. From the commencement of these activities in 2008, the Company incurred approximately $2.4 million in such costs through December 31, 2009.
Note 11 — Acquisition
On May 20, 2010, the Company, through its wholly owned subsidiary Hampshire Acquisition Sub, LLC, a Delaware limited liability company, consummated the acquisition of certain assets of S. Kuhlman, LLC and S Kuhlman Wholesale LLC (collectively, “Scott James™”). Scott James™ is a men’s specialty retailer and wholesale provider of apparel. Scott James™ operates two stores and a wholesale business that sells primarily to upscale specialty stores. The Company acquired Scott James™ to broaden its customer base, diversify its sales channels and grow its gross margin.
The acquisition date fair value of the consideration transferred totaled approximately $1.4 million, which consisted of approximately $1.2 million in cash and approximately $0.2 million in contingent consideration. The contingent consideration is in the form of incentive compensation that may be earned by a former principal of Scott James™, a current Company employee, if Scott James™ achieves certain annual sales goals for 2010 through 2012. This fair value measurement is estimated using a probability-weighted discounted cash flow model and is classified within level 3 of the fair value hierarchy as defined by the FASB Codification.

 

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
         
(In thousands)   May 20, 2010  
Assets
       
Inventories
  $ 151  
Other current assets
    50  
Fixed assets
    60  
Goodwill
    1,182  
 
     
Total assets acquired
  $ 1,443  
 
     
 
       
Liabilities
       
Accrued expenses and other liabilities
  $ 6  
Other long term liabilities
    227  
 
     
Total liabilities assumed
  $ 233  
 
     
 
       
Purchase price (net assets acquired)
  $ 1,210  
 
     
The Company recognized approximately $1.2 million of goodwill in the acquisition based on the enhancement of the Company’s creative design and retail industry and sourcing relationships through the acquired employees. The Company expects a range of approximately $1.0 million to $1.2 million in goodwill to be deductible for tax purposes.
In connection with the acquisition, the Company assumed three lease agreements, pursuant to which the Company agreed to lease the facilities at which the Scott James™ operations are conducted. The facilities include two store locations and a wholesale location. The two stores include month to month lease terms with percentage rent based on sales. The wholesale business location has a lease term that expires on August 31, 2010.
The Company incurred approximately $0.1 million of acquisition related costs during the six month period ended July 3, 2010. These costs were recorded in Selling, general, and administrative expenses in the unaudited condensed consolidated statement of operations.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion contains statements that are forward looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed elsewhere in this report. This discussion should be read in conjunction with the discussion of forward-looking statements, the financial statements, and the related notes and the other statistical information included in this report.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
This report contains statements which may constitute ‘forward looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward looking statements. The words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue,” “forecast,” “foresee,” or other similar words are meant to identify such forward looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward looking statements include, but are not limited to, those described in our Annual Report for the fiscal year ended December 31, 2009 under Item 1A — Risk Factors and in Part II, Item 1A — Risk Factors in this Form 10-Q, and include the following risk factors:
    A prolonged period of depressed consumer spending;
 
    Lack of an established public trading market for our common stock;
 
    Decreases in business from or the loss of any one of our key customers;
 
    Financial instability experienced by our customers;
 
    Chargebacks and margin support payments;
 
    Loss of or inability to renew certain licenses;
 
    Change in consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers and consumers;
 
    Use of foreign suppliers for raw materials and manufacture of our products and the increase of related costs;
 
    Failure of our manufacturers to use acceptable ethical business practices;
 
    Failure to deliver quality products in a timely manner;
 
    Problems with our distribution system and our ability to deliver products;
 
    Labor disruptions at port, our suppliers, manufacturers, or distribution facilities;
 
    Failure, inadequacy, interruption, or security lapse of our information technology;
 
    Failure to compete successfully in a highly competitive and fragmented industry;
 
    Challenges integrating any business we have acquired or may acquire;
 
    Unanticipated expenses beyond the amount reserved on our balance sheet or unanticipated cash payments related to the ultimate resolution of income and other possible tax liabilities;
 
    Loss of certain key personnel which could negatively impact our ability to manage our business;
 
    Our stockholders’ rights plan potentially adversely affects existing stockholders; and
 
    Risks related to the global economic, political and social conditions.
We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions, or circumstances on which any forward looking statement is based.

 

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OVERVIEW
Our product mix, which has a high concentration of sweaters, skews our revenues to the third and fourth quarters, which accounted for approximately 70% of our net sales in 2009. Inventory begins to rise in the second quarter and typically peaks during the third quarter before descending to its cyclical low in the fourth quarter. Trade receivable balances rise commensurately with sales. Cash balances follow the cycle as inventory is purchased, product is sold, and trade receivables are collected. Funding inventory and pending trade receivable collections deplete cash balances, generally requiring draws from our revolving credit facility in the third or fourth quarters. Our income or loss from continuing operations has generally been correlated with revenue, as a large percentage of our profits have historically been generated in the third and fourth fiscal quarters.
We are a provider of women’s and men’s sweaters, wovens and knits, and a designer and marketer of branded apparel in the United States. As a holding company, we operate through our wholly-owned subsidiaries: Hampshire Designers, Inc. and Item-Eyes, Inc. which in turn hold our operating divisions — Women’s and Men’s. We were established in 1976 and are incorporated in the state of Delaware.
Our Women’s division is comprised of both our women’s knitwear business, known as Hampshire Designers, Inc. and our women’s related sportswear business, known as Item Eyes. Our Men’s division, known as Hampshire Brands, offers both sweaters and sportswear.
In May 2010, we acquired certain assets of S. Kuhlman, LLC and S Kuhlman Wholesale LLC (collectively,“Scott James™”). Scott James™ is a men’s specialty retailer and wholesale provider of apparel. Scott James™ operates two stores, located in Boston and New York, and a wholesale business that sells primarily to upscale specialty stores. We acquired Scott James™ to broaden our customer base, diversify our sales channels and grow our gross margin.
Our products, both branded and private label, are marketed in the moderate and better markets through multiple channels of distribution including national and regional department and chain stores. All of our divisions source their product with what we believe are quality manufacturers. Keynote Services, Limited, our subsidiary based in China, assists with our sourcing needs and provides quality control.
Our primary strength is our ability to design, develop, source, and deliver quality products within a given price range, while providing superior levels of customer service. We have developed international sourcing abilities that permit us to deliver quality merchandise at competitive prices to our customers.
Our divisions source the manufacture of their product with factories primarily located in Southeast Asia. Our products are subject to price increases, which we try to offset by achieving sourcing efficiencies, controlling costs in other parts of our operations and, when necessary, passing along a portion of our cost increases to our customers through higher selling prices. We purchase our products from international suppliers in U.S. dollars.
The apparel market is highly competitive. Competition is primarily based on product design, price, quality, and service. We face competition from apparel designers, manufacturers, importers, licensors, and our own customers’ private label programs, many of which are larger and have greater financial and marketing resources than we have available to us.

 

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RESULTS OF CONTINUING OPERATIONS
Quarterly Comparison — Three Months Ended July 3, 2010 and June 27, 2009
Net Sales
Net sales decreased by $6.2 million to $14.8 million for the three months ended July 3, 2010 compared with $21.0 million for the same period last year. The 29.6% decrease resulted from a decline in our women’s wear business and lower average selling prices due to larger customer allowances, partially offset by an increase in shipments from our men’s wear business. The increase in our men’s wear business reflects the addition of a spring season line with a major customer. The reconciliation of net sales is outlined in the table below:
                 
    Quarterly Rate/Volume  
            Percentage  
(Dollars in thousands)   Dollars     of 2009  
Net sales quarter ended June 27, 2009
  $ 20,968       100.0 %
Volume
    (4,485 )     (21.4 %)
Average net selling prices
    (1,731 )     (8.2 %)
 
           
Net sales quarter ended July 3, 2010
  $ 14,752       70.4 %
 
           
If the current retail environment, including a continuing reduction in customer orders and significant retailer discounts due to reduced consumer spending, continues through year end, our net sales and operating results will be adversely affected.
Gross Profit
Gross profit for the three months ended July 3, 2010 was $3.6 million compared with $5.0 million for the same period last year, which reflected a decrease in net sales, somewhat offset by a slight increase in gross profit percentage, which was 24.6% of net sales for the three months ended July 3, 2010 compared with 24.0% of net sales for the same period last year. The slight increase in the gross profit percentage was primarily due to a decrease in cost of goods sold, partially offset by an increase in customer allowances.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses declined by 15.3% to $7.4 million for the three months ended July 3, 2010 compared with $8.7 million for the same period last year. This $1.3 million decrease was primarily due to lower compensation and employee related expenses, largely due to the 2009 cost reduction program (See Note 8 — Restructuring Charges to the financial statements).
Restructuring Charges
There were no charges related to the restructuring programs recognized during the three months ended July 3, 2010. Restructuring charges for the three months ended June 27, 2009 were $3.4 million and consisted primarily of termination benefits and lease exit costs. The decrease in the current period was the result of the completion of the 2009 restructuring program at the end of last year. (See Note 8 — Restructuring Charges to the financial statements).
Special Costs
During the three months ended July 3, 2010, special costs were $3.9 million as compared to $1.1 million for the same period last year (See Note 1 — Basis of Presentation and Note 5 — Commitments and Contingencies to the financial statements). The increase is due principally to the entry into settlements with Messrs. Clayton and Clark totaling approximately $1.4 million and the $2.4 million write off of the remaining value of the special D&O insurance policy (as discussed in Note 1 — Basis of Presentation to the financial statements), somewhat offset by higher legal fees incurred in the prior period. All litigation related to the Audit Committee Investigation has now been resolved, and thus, we do not expect to incur significant expenses associated with the Audit Committee Investigation after the recognition of legal costs incurred in the third quarter of 2010.
Tender Offer Related Costs
We believe there will be no significant costs related to the NAF Acquisition Corp. tender offer in 2010 as the matter was settled in 2009. (See Note 10 — Tender Offer to the financial statements) There were $0.1 million of such costs in the three months ended June 27, 2009.
Income Taxes
Our provision for income taxes for the quarters ended July 3, 2010 and June 27, 2009 of approximately $0.1 million is comprised of interest and penalties on our income tax reserves.
Commencing with the fourth quarter of 2008, we determined, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), it was more likely than not, based on all of the relevant evidence, that all of our deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be realized. Excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $3.1 million or an effective tax rate of 39.4% due to the losses incurred in the quarter ended July 3, 2010. Excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $3.4 million or an effective tax rate of 40.5% due to the losses incurred in the quarter ended June 27, 2009. (See Note 6 — Taxes to the financial statements)

 

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Year to Date Comparison — Six Months Ended July 3, 2010 and June 27, 2009
Net Sales
Net sales decreased by $14.8 million to $35.2 million for the six months ended July 3, 2010 compared with $50.0 million for the same period last year. The 29.7% decrease resulted from a decline in our women’s wear business and lower average selling prices due to larger customer allowances, partially offset by an increase in shipments from our men’s wear business. The increase in our men’s wear business reflects the addition of a spring season line with a major customer. The reconciliation of net sales is outlined in the table below:
                 
    Year to Date Rate/Volume  
            Percentage  
(Dollars in thousands)   Dollars     of 2009  
Net sales six months ended June 27, 2009
  $ 50,045       100.0 %
Volume
    (11,232 )     (22.5 %)
Average net selling prices
    (3,611 )     (7.2 %)
 
           
Net sales six months ended July 3, 2010
  $ 35,202       70.3 %
 
           
As compared to the six months ended July 3, 2010, we expect a narrowing in the percentage decrease in our net sales during the second half of 2010. There can be no assurance of this narrowing as a continuing uncertain retail environment could further reduce customer orders and increase retailer discounts, which would adversely affect our net sales and operating results.
Gross Profit
Gross profit for the six months ended July 3, 2010 was $7.9 million compared with $11.2 million for the same period last year, which reflected a decrease in net sales as well as a slight decrease in gross profit percentage, which was 22.3% of net sales for the six months ended July 3, 2010 compared with 22.4% of net sales for the same period last year.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses declined by 18.8% to $16.0 million for the six months ended July 3, 2010 compared with $19.7 million for the same period last year. This $3.7 million decrease was primarily due to the combined effect of lower compensation and facility expenses, largely due to the 2009 cost reduction program (See Note 8 — Restructuring Charges to the financial statements), and a decline in shipping costs due to lower volumes in the current period.
Restructuring Charges
There were no charges related to the restructuring programs recognized during the six months ended July 3, 2010. Restructuring charges for the six months ended June 27, 2009 were $3.4 million and consisted primarily of termination benefits and lease exit costs. The decrease in the current period was the result of the completion of the 2009 restructuring program at the end of last year. (See Note 8 — Restructuring Charges to the financial statements)
Special Costs
During the six months ended July 3, 2010, special costs were $4.4 million as compared to $3.0 million for the same period last year. The increase is due principally to the entry into settlements with Messrs. Clayton and Clark totaling approximately $1.4 million and the $2.4 million write off of the remaining value of the special D&O insurance policy (as discussed in Note 1 — Basis of Presentation to the financial statements), somewhat offset by higher legal fees incurred in the prior period. All litigation related to the Audit Committee Investigation has now been resolved, and thus, we do not expect to incur significant expenses associated with the Audit Committee Investigation after the recognition of legal costs incurred in the third quarter of 2010.
Tender Offer Related Costs
We believe there will be no significant costs related to the NAF Acquisition Corp. tender offer in 2010 as the matter was settled in 2009. (See Note 10 — Tender Offer to the financial statements) There were $1.1 million of such costs in the six months ended June 27, 2009.
Income Taxes
Our provision for income taxes of approximately $0.1 million and $0.2 million for the six month periods ended July 3, 2010 and June 27, 2009, respectively, are comprised of interest and penalties on income tax reserves.

 

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Commencing with the fourth quarter of 2008, we determined, in accordance with GAAP, it was more likely than not, based on all of the relevant evidence that all of our deferred tax assets would not be utilized in future periods and that a tax benefit for losses incurred would not be realized. Excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $5.1 million or an effective tax rate of 39.8% due to the losses incurred in the six months ended July 3, 2010. Excluding the valuation allowances on our deferred tax assets, we would have recognized a tax benefit of approximately $6.2 million or an effective tax rate of 39.0% due to the losses incurred in the six months ended June 27, 2009. (See Note 6 — Taxes to the financial statements)
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity and capital requirements are to fund working capital for current operations, consisting of funding the seasonal buildup in inventories and accounts receivable and funding markdown allowances. Due to the seasonality of the business, we generally reach our maximum borrowing under our revolving credit facility during the third and fourth quarters of the year. Our primary sources of funds to meet our liquidity and capital requirements include funds generated from operations and borrowings under our revolving credit facility.
On August 7, 2009, we amended and restated our Credit Facility (the “Amended Facility”) with HSBC Bank USA, National Association (“HSBC”), other financial institutions named therein as bank parties (together with HSBC, the “Banks”), and HSBC, as letter of credit issuing bank and as agent for the Banks from a $125.0 million credit facility to a $48.0 million asset based revolving credit facility including trade letters of credit with a $10.0 million sub-limit for standby letters of credit. The reduction in size reflects our current business needs and the success we have had in convincing our vendors to accept open terms rather than requiring letters of credit. The financial covenants were adjusted to provide us with greater flexibility in the operation of our businesses. We believe fees and interest rates under the facility increased to then current market rates, although much of this increase will be offset by the reduction in the size of the facility.
The Amended Facility is scheduled to expire on June 30, 2011 and is secured by substantially all assets of the Company. Aggregate borrowing availability under the Amended Facility is limited to the lesser of $48.0 million or a formula which considers cash, accounts receivable and inventory. Interest rates under the Amended Facility vary with the prime rate or LIBOR. The Amended Facility includes certain covenants, which include minimum earnings before interest, taxes, depreciation and amortization (excluding certain charges), maximum capital expenditures, minimum availability, minimum liquidity, letters of credit tied to booked orders, and limitations on when direct debt is permitted. The Amended Facility has other customary provisions for periodic reporting, monitoring, and fees.
On May 7, 2010, we and the Banks entered into an amendment (“Amendment No. 1”) with respect to the Amended Facility. We believe that the terms of Amendment No. 1 will provide us with greater operating flexibility under the Amended Facility. Amendment No. 1, among other things, (i) allows the Company to acquire, in one or more transactions or series of transactions, assets for an aggregate purchase price not to exceed $1.5 million; (ii) amended the Amended Facility’s original earnings before interest, taxes, depreciation and amortization covenant; and, (iii) allows the Company to make dividend payments or purchases of its capital stock in an aggregate amount not to exceed $3.5 million if certain conditions are met.
At July 3, 2010, there were no outstanding borrowings from the Amended Facility with approximately $32.5 million of availability and approximately $15.4 million letters of credit outstanding.
We believe that the borrowings available to us under the Amended Facility along with cash flow from operations will provide adequate resources to meet our capital requirements and operational needs for the next twelve months.
INFLATION
We are subject to increased prices for the products we source due to both inflation and exchange rate fluctuations. We have historically managed to lessen the impact of inflation by achieving sourcing efficiencies, controlling costs in other parts of our operations and, when necessary, passing along a portion of our cost increases to our customers through higher selling prices.
OFF-BALANCE SHEET ARRANGEMENTS
We utilize letters of credit and are party to operating leases. It is currently not our general business practice to have material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2009. See Note 1 — Basis of Presentation to the financial statements regarding Accounting Standard Updates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk in the area of changing interest rates. During the first six months of fiscal year 2010, there were no significant changes in our exposure to market risks. See Item 7A in our Annual Report for the year ended December 31, 2009, which was filed with the SEC on March 22, 2010, for a discussion regarding our exposure to market risks. The impact of a hypothetical 100 basis point increase in interest rates on our variable rate debt (borrowings under the Amended Facility) would have had no material effect in the six months ended July 3, 2010 due to the fact that there were no short-term borrowings on our Amended Facility during the period.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified and pursuant to the regulations of the Securities and Exchange Commission. Disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act, include controls and procedures designed to ensure the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the Company’s system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act that were in place, as of July 3, 2010. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of July 3, 2010.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the six months ended July 3, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
For a description of litigation and certain related matters, please see Note 5 of Part I, Item 1, entitled Commitments and Contingencies.
In addition, the Company is from time to time involved in other litigation incidental to the conduct of its business, none of which is expected to be material to its business, financial condition, or operations.
Item 1A. Risk Factors.
A description of the risk factors associated with our business is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2009. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE
                                 
                            Maximum  
                    Total Number of     Number of Shares  
    Total     Average     Shares Purchased     that May Yet be  
    Number of     Price     as Part of Publicly     Purchased Under  
    Shares     Paid per     Announced Plans     the Plans or  
Period   Purchased     Share     or Programs     Programs  
April 4, 2010 – May 1, 2010
        $             846,195  
May 2, 2010 – May 29, 2010
                      846,195  
May 30, 2010 – July 3, 2010
                      872,195 *
 
                       
Total
        $             872,195  
 
                       
     
*   On June 2, 2010, the Company granted 65,000 shares to certain new directors and a new employee under The Hampshire Group, Limited 2009 Stock Incentive Plan, adopted on October 21, 2009 (the “Plan”). The Plan allows employees to satisfy their applicable withholding tax obligations by using shares of common stock that would otherwise be deliverable upon the vesting of the restricted stock. 39,000 shares were forfeited by former directors who participated in the Plan when their term ended on June 2, 2010. 872,195 shares that have been granted pursuant to the Plan are currently outstanding.

 

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Item 6. Exhibits.
(a) The following exhibits are filed as part of this Report:
         
  31.1    
Certification of Principal Executive Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
 
  31.2    
Certification of Principal Financial Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
 
  32.1    
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
  32.2    
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  Hampshire Group, Limited
 
 
Date: August 11, 2010  By:   /s/ Heath L. Golden    
    Heath L. Golden   
    President and Chief Executive Officer
(Principal Executive Officer) 
 
     
    /s/ Jonathan W. Norwood    
    Jonathan W. Norwood   
    Vice President, Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer) 
 

 

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INDEX TO EXHIBITS
         
EXHIBIT    
NUMBER   DESCRIPTION
       
 
  31.1    
Certification of Principal Executive Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
 
  31.2    
Certification of Principal Financial Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
 
  32.1    
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
  32.2    
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

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