Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark the whether registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of July 1, 2006, the aggregate market value of the voting and non-voting Common Stock held
by non-affiliates of the registrant was $87,296,020. Such aggregate market value was computed by
reference to the closing sale price of the Common Stock as quoted on the Nasdaq Global Market on
such date. For purposes of making this calculation only, the Registrant has defined affiliates as
including all directors and executive officers, but excluding any institutional shareholders owning
more than ten percent of the Registrant’s Common Stock.
Number of shares of Common Stock outstanding as of August 31, 2007: 7,860,105
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EXPLANATORY NOTE
We were not able to file our Form 10-K for the year ended December 31, 2006 pending the
completion by the Audit Committee of the Board of Directors (“Audit Committee”) of an investigation
(“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 and financial reporting, and accounting for expense reimbursements, in each case
involving certain members of Hampshire Group, Limited’s management. The finding of the Audit
Committee Investigation resulted in, among other things, our terminating the employment of certain
former members of management. On May 25, 2007, the Audit Committee concluded its investigation. On
May 31, 2007, the Company filed Amendment No. 1 to its Form 10-K for the fiscal year ended December
31, 2005 (the “Form 10-K/A”) to, among other things, restate its consolidated financial statements
for the three years then ended. On August 9, 2007, the Company filed Amendment No. 2 to its Form
10-Q for the fiscal quarter ended April 1, 2006 and also filed Forms 10-Q for the fiscal quarters
ended July 1, 2006 and September 30, 2006. For additional information on the restatement and other
adjustments and reclassifications, see Part II, Item 7., Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Restatements and Related Matters and Note 16 to
the financial statements included in Part II, Item 8. in this Form 10-K.
HAMPSHIRE GROUP, LIMITED
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2006
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“SAFE HARBOR” STATEMENT
UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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 Annual Report on Form 10-K (the “Annual Report”), 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” 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 the forward looking
statements include, but are not limited to, those described under “Risk Factors” set forth in Item
1A of this Annual Report.
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” and
“Company” are used to refer to Hampshire Group, Limited and its wholly-owned subsidiaries.
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PART I.
Item 1. Business.
Company Overview
General
Hampshire Group, Limited is a holding company that designs and markets apparel through four
wholly-owned subsidiaries: Hampshire Designers, Inc.; Item-Eyes, Inc.; SB Corporation (doing
business as David Brooks); and Shane Hunter, Inc. The Company was established in 1977.
We believe that the Company, through its Hampshire Designers and other divisions, is one of the
largest designers and marketers of sweaters for women and men in North America. Item-Eyes is a
leading designer and marketer of related separates for women. David Brooks, which we acquired in
October 2005, designs and markets a range of women’s sportswear for the “better” market. Shane
Hunter, which we acquired in January 2006, designs and markets apparel in children, juniors, missy,
petite, and maternity sizes to mass merchant retailers.
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 stores, mass
market retailers and specialty stores. All of our divisions source the manufacture of their
products through quality manufacturers. Keynote Services, Limited, our Hong Kong based subsidiary,
assists with the sourcing and quality control needs of Hampshire Designers and Item-Eyes.
Strengths and Strategy
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 which permit us to deliver quality merchandise at a competitive
price to our markets, which are primarily located within the United States.
The process for the design and development of our products depends on whether the product is
branded or private label. Branded products are designed by our experienced design team,
incorporating aspects of the latest fashion trends together with the consistent appeal of the brand
name. These products are further refined in collaboration with manufacturers, resulting in a high
quality product to meet specified price points. Private label products are designed by our design
team in collaboration with the retailers, under whose labels the products will be marketed.
The quality of our garments is assured in a variety of ways. Each garment is manufactured using the
finest quality yarns and each must undergo rigorous quality assurance checks. In international
sourcing, we use our own personnel, as well as factory personnel, independent inspection agencies
and independent test labs to ensure that our products meet the high quality standards required by
our customers. In some instances, direct field audits are performed by our personnel, and from time
to time by customers’ quality control personnel.
Organization
We have a long history of providing women’s and men’s branded and private label sweaters and
women’s woven and knit related separates to the moderate price sector of most major department
stores and mass merchants in the United States as well as specialty retail store chains and catalog
companies. We use both our own sales force and independent sales representatives to sell our
products. With our established international sourcing relationships, we have the ability to respond
quickly to changing fashion trends.
Products
We have significantly expanded and diversified our product lines. In the 1990s, our product line
primarily consisted of women’s full-fashion, Luxelon® (acrylic yarn) sweaters marketed under the
Designers Originals® label. Although Designers Originals®, which celebrated its 50th anniversary in
2006, remains an important brand for us, our expanded product line permits us to supply many more
departments of our existing customers and helps us attract new customers.
Hampshire Designers - Hampshire Designers serves the entire market of sweaters from “better” down
through the mass merchant market. For women, in addition to the Designers Originals® line, we offer
sweaters under the brands Hampshire Studio®, Mercer Street Studio®, Spring + Mercer®, and Levi’s®,
as well as various private labels of our customers. Hampshire Studio® and Mercer Street Studio® are
labels used for specific customers on distinct lines of sweaters. Spring + Mercer® is a new line of
sweaters that we introduced during 2006 that features more contemporary styling.
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For men and young men, we offer sweaters under the licensed names of Geoffrey Beene®, Dockers® and
Levi’s®, as well as various private labels of our customers. In addition, we also utilize our own
brand, Spring + Mercer®, which is a more upscale line featuring cashmere and luxury blend sweaters,
as well as knit and woven tops. The emphasis with each of the brands is on compelling products that
feature high quality and great value. These brands cover the entire range of department store
offerings, from middle-of-the-road, “main floor” styles to fashion-forward, designer sweaters for
the “better” departments of our customers.
Item-Eyes - Item-Eyes offers related sportswear, including jackets, sweaters, pants, skirts and
“soft dressing”, targeted toward the moderate market under labels such as Requirements®, RQT by
Requirements®, R.E.Q. by Requirements®, Tara Ryan®, and Nouveaux®, as well as the private labels of
our customers.
David Brooks - David Brooks offers a complete line of classic American sportswear to the women’s
“better” market, including jackets, sweaters, knits, wovens and bottoms, under both the David
Brooks® label and the private labels of our customers.
Shane Hunter - Shane Hunter offers apparel in children, junior, missy, petite, and maternity sizes
to mass merchant retailers under the private labels of our customers as well as our own Aqua-Blues®
label.
Customers
We have long term relationships with many of our customers. We sell our products principally into
the moderate-price sector of most major department stores and mass merchants in the United States
and also to specialty retail stores and catalog companies. Over the past few years, we have seen a
decrease in the number of our significant customers due to the consolidation of the retail
industry. Sales to our four largest customers, Kohl’s Department Stores, Target Stores, JC Penney
Company and Federated Department Stores during 2006, represented 13%, 12%, 12% and 11%,
respectively, of total annual sales. These same four customers represented 26%, 0%, 7% and 6%,
respectively, of total sales during 2005; and 18%, 0%, 9% and 6%, respectively, of total sales
during 2004. For each of the last three years, more than 99% of our sales were to customers located
in the United States. Sales outside of the United States were principally to a customer in Canada.
Suppliers
We primarily use foreign suppliers for our raw materials and the manufacture of our products.
During fiscal 2006, the majority of our products were produced by independent manufacturers located
in the People’s Republic of China.
Competition
The apparel market remains highly competitive. Competition is primarily based on product design,
price, quality, and service. While we face competition from domestic manufacturers and
distributors, our primary competition comes from manufacturers located in Southeast Asia. We also
compete for private label programs with the internal sourcing departments of many of our customers.
Our ability to compete is enhanced by our in house design abilities and our international sourcing
relationships. Our strong financial position, including significant liquid assets and low debt,
further enhances our ability to compete. Our launch of Spring + Mercer® for women is the most
recent example of our ongoing efforts to deploy our financial resources in a manner that helps us
to enhance our competitiveness by broadening our apparel offering and product lines to reach
different markets.
Seasonality
Although we sell apparel throughout the year, our business is highly seasonal with more than 66% of
annual sales for fiscal 2006 occurring during the third and fourth quarters, primarily due to the
large concentration of sweaters in our product mix. Accordingly, our inventory typically increases
in the second and third quarter to accommodate such anticipated demand.
Effects of Changing Prices
We are subject to increased prices for the products we source, but have historically been able to
maintain our gross margin 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.
Backlog
Our sales order backlog as of March 3, 2007 was approximately $150 million compared to
approximately $146 million as of March 2, 2006. The timing of the placement of seasonal orders by
customers affects the backlog; accordingly, a comparison of backlog from year to year is not
necessarily indicative of a trend in sales for the year. The backlog as of March 3, 2007 is
expected to be filled during fiscal year 2007.
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Trademarks and Licenses
We consider our owned trademarks to have significant value in the marketing of our products. In
addition, we have entered into licensing agreements to manufacture and market sweaters under
certain labels for which we pay royalties based on the volume of sales. The licensing agreements
are generally for a three-year term, with an option to renew for an additional three-year period
provided we have met certain sales thresholds.
Electronic Information Systems
In order to schedule production, fill customer orders, transmit shipment data to our customers’
distribution centers, and invoice electronically, we have developed a number of integrated
electronic information systems applications. Approximately 86% of all our orders for 2006 were
received electronically. In some instances, our customers’ computer systems generate these orders
based on sales and inventory levels. We electronically send advance shipment notices and invoices
to our customers, which results in the timely updating of their inventory systems.
Credit and Collection
We manage our credit and collection functions by approving and monitoring our customers’ credit
lines. Credit limits are determined by past payment history and financial information obtained from
credit agencies and other sources. The majority of high risk accounts, if possible, are factored
with financial institutions to reduce high credit risk. We believe that our review procedures and
our credit and collection staff have contributed significantly toward minimizing our losses from
bad debt.
Employees
As of March 3, 2007, we had approximately 413 employees. The Company is not party to any collective
bargaining agreement, except for an agreement with UNITE Labor Union covering 7 hourly employees of
Item-Eyes through September 2007. We believe our relationship with our employees is good.
Governmental Regulation and Trade Agreements
The apparel industry and our business are subject to a wide variety of international trade
agreements as well as federal, state, and local regulations. We believe we are in compliance in all
material respects with these agreements and regulations.
International trade agreements in particular can have a significant impact on the apparel industry
and consequently on our business. These agreements generally provide for tariffs, which impose a
duty charge on the product being imported, and quotas, which limit the amount of a product that may
be imported from a specific country, both of which increase the cost of importing a product.
Primary among the many multilateral and bilateral trade agreements existing between the United
States and certain foreign countries is the World Trade Organization (“WTO”), which is the
governing body for international trade among the 151 originating member countries, including the
United States. As part of that agreement, international textile and apparel quotas then in
existence were phased out over ten years. Effective January 1, 2005, all such quota restrictions
involving trade with WTO member countries were terminated. The United States and China concluded a
new Memorandum of Understanding for exports from China covering the period between January 1, 2006
and December 31, 2008. This agreement was implemented with the intent of avoiding market disruption
as part of the safeguard actions allowed under China’s accession to the WTO in December 2001. The
Memorandum of Understanding established agreed levels of quotas to regulate exports in 34 different
product categories; but lightweight knit-to-shape cotton and synthetic sweaters, our largest single
product offering, are now no longer subject to quota and quantities exported to the United States
are no longer limited. During the first fiscal quarter of 2006, there was some delay in clearing
the lightweight sweaters through United States Customs due to confusion of its classification, but
there were no material customer cancellations as a result of the delays.
In addition to the WTO, apparel imports into the United States are affected by other trade
agreements and legislation, including the North American Free Trade Agreement, which has eliminated
all apparel tariffs and quotas between Canada, Mexico, and the United States, and legislation
granting similar trade benefits to 23 Caribbean countries. Further, the African Growth and
Opportunity Act of 2000 gave 38 countries in sub-Saharan Africa similar trade privileges on apparel
and certain other products imported into the United States.
Acquisitions
On October 3, 2005, the Company, through its wholly owned subsidiary SB Corporation, a Delaware
corporation, consummated the acquisition of certain assets of the David Brooks business. The assets
purchased, consisting primarily of inventory and trade name, were acquired for $2,460,000 in cash.
Under the terms of the purchase agreement, the Company will make additional payments to the seller
through 2008 based on a percentage of the net sales of products bearing the name David Brooks®. The
business is located in Brockton, Massachusetts with sales offices and showrooms in several major
U.S. cities.
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On January 5, 2006, the Company, through its wholly owned subsidiary SH Holding Company, a Delaware
corporation, purchased substantially all of the assets and business of Shane-Hunter, Inc. as of
January 1, 2006. The purchase price for the net assets and business was $1,982,000. SH Holding
Company changed its name to Shane Hunter, Inc. (“Shane Hunter”). Shane Hunter is based in San
Francisco, California and is primarily engaged in the sale of junior’s and children’s apparel to
mass merchant retailers. The principals of Shane-Hunter, Inc. have continued with the business as
its co-presidents.
On May 20, 2006, the Company, through a wholly owned subsidiary, acquired Marisa Christina,
Incorporated (“Marisa Christina”) as part of its women’s better market strategy of former
management, after which time it continued to operate as a wholly-owned subsidiary of Hampshire
Group. Upon completion of the acquisition, each outstanding share of Marisa Christina common stock
was converted into the right to receive $0.65 per share less a pro rata portion of the transaction
costs incurred by Marisa Christina, representing an aggregate purchase price of approximately
$4,834,000. The Company determined Marisa Christina had a net asset value of $6,634,000, which
assets included cash of $4,056,000. Therefore, pursuant to Financial
Accounting Standard (“FAS”)
No. 141, “Business Combinations” (“FAS No. 141”),
the Company recorded a $1,800,000 extraordinary gain for the amount by which the net assets
acquired exceeded the purchase price.
After incurring ongoing losses in the Marisa Christina division due to deteriorating sales, the
Company made the determination in May of 2007 to discontinue domestic operations of Marisa
Christina but plans to continue to license the Marisa Christina® label internationally.
Available Information
Our periodic and current reports, including amendments to such reports as filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are
available, free of charge, on our website, www.hamp.com, as soon as reasonably practicable after
such material is electronically filed with, or furnished to, the SEC. Information contained on our
website is not and should not be deemed a part of the Annual Report or a part of any other report
or filing with the SEC.
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Item 1A. Risk Factors.
In addition to the risks which are described below, there may be risks that we do not yet know of
or that we currently think are immaterial that may also impair our business. If any of the events
or circumstances described as risks below or elsewhere in this report actually occur, our business,
results of operations or financial condition could be materially and adversely affected. You should
carefully consider the following risks as well as other information contained herein, including our
consolidated financial statements and notes thereto, in evaluating our business.
We rely on our key customers, and a significant decrease in business from or the loss of any
one of these customers would substantially reduce our revenues and adversely affect our
business.
Four of our customers account for significant portions of our revenues. We do not have
long-term agreements with any of our customers and purchases generally occur on an order-by-order
basis. A decision by any of our major customers, whether motivated by marketing strategy,
competitive conditions, financial difficulties or otherwise, to decrease significantly the amount
of merchandise purchased from us or to change their manner of doing business with us, could
substantially reduce our revenues and materially adversely affect our profitability.
The retail industry has, in the past several years, experienced a great deal of consolidation and
other ownership changes and we expect such changes to be ongoing. In the future, retailers may
further consolidate, undergo restructurings or reorganizations, realign their affiliations or
re-position their stores’ target markets. Any of these types of actions could decrease the number
of stores that carry our products or increase the ownership concentration within the retail
industry. These changes could decrease our opportunities in the market, increase our reliance on a
smaller number of customers, and decrease our negotiating strength with them.
Our business could be adversely affected by financial instability experienced by our
customers.
During the past several years, various retailers have experienced significant financial
difficulties, which have resulted in bankruptcies, liquidations, and store closings. We sell our
products primarily to national and regional department and mass-market stores in the United States
on credit and evaluate each customer’s financial condition on a regular basis in order to determine
the credit risk we take in selling goods to them. The financial difficulties of a customer could
cause us to curtail business with that customer and we may be unable to shift sales to another
customer at comparable margins. We may also assume more credit risk relating to receivables of a
customer experiencing financial instability. Should these circumstances arise with respect to our
customers, our inability to shift sales or to collect on our trade accounts receivable from any one
of our customers could substantially reduce our revenues and have a material adverse affect on our
financial condition and results of operations.
We are dependent upon the revenues generated by our licensing alliances and the loss or
inability to renew certain licenses could reduce our revenue and consequently reduce our net
income.
We currently license from third parties the Geoffrey Beene®, Dockers®, and Levi’s® brands for
specific products. We will not continue with the Levi’s license beyond 2007. The term of both the
Geoffrey Beene® and Dockers® license is three years, and we currently have a renewal option on only
the Dockers® license, which is conditioned upon our meeting certain sales targets. We may not be
able to renew or extend these licenses on favorable terms, if at all. If we are unable to renew or
extend any one of these licenses, we could experience a decrease in net sales.
We may not be able to anticipate consumer preferences and fashion trends, which could
negatively affect acceptance of our products by retailers and consumers and result in a significant
decrease in net sales.
Our failure to anticipate, identify and respond effectively to changing consumer demands and
fashion trends could adversely affect acceptance of our products by retailers and consumers and may
result in a significant decrease in net sales or leave us with a substantial amount of unsold
inventory. Our products must appeal to a broad range of consumers whose preferences cannot be
predicted with certainty and are subject to rapid change. We may not be able to continue to develop
appealing styles or successfully meet constantly changing consumer demands in the future. In
addition, any new products or brands that we introduce may not be received successfully by
retailers and consumers. Due to the fact that we began marketing juniors’ apparel with the
acquisition of Shane Hunter, we may be more subject to additional changes in fashion as juniors’
fashion trends have historically changed more rapidly than men’s and women’s fashion trends. If our
products are not received successfully by retailers and consumers and we are left with a
substantial amount of unsold inventory, we may be forced to rely on markdowns or promotional sales
to dispose of excess inventory. If this occurs, our business, financial condition, and results of
operations could be adversely and materially affected.
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We primarily use foreign suppliers for our raw materials and the manufacture of our products,
which poses risks to our business operations.
During fiscal 2006, most of our products were produced by independent manufacturers located in the
People’s Republic of China. Although no single supplier is critical to our production needs, any of
the following could adversely affect the production and delivery of our products and, as a result,
have an adverse affect on our business, financial condition, and results of operations:
| • | political or labor instability in countries where contractors and suppliers are located; | ||
| • | political or military conflict involving the United States; | ||
| • | heightened terrorism security concerns, which could subject imported goods to additional, more frequent or more thorough inspections, leading to delays in deliveries or impoundment of goods for extended periods; | ||
| • | a continued tightening of the factory labor pool in China; | ||
| • | a significant decrease in availability or increase in cost of raw materials, particularly petroleum-based synthetic fabrics; | ||
| • | disease epidemics and health-related concerns, such as the SARS and the Avian flu out breaks in recent years, which could result in closed factories, reduced workforces and scrutiny or embargo of goods produced in infected areas; | ||
| • | imposition of regulations, quotas or duties relating to imports, which, among other things, could limit our ability to produce products in cost effective countries that have the labor force and expertise required; | ||
| • | any action that may change the fixed currency exchange rate of the yuan against the dollar or to permit the exchange rate to float; and | ||
| • | significant fluctuation of the value of the dollar against other foreign currencies. |
The occurrence of any or all of these events would result in an increase in our costs of goods,
which we may not be able to pass on to our customers. This reduction in our gross margin would
likely result in an adverse effect on our results of operations.
If our manufacturers fail to use acceptable ethical business practices, our business could be
adversely affected.
We require our manufacturers to operate in compliance with applicable laws, rules and regulations
regarding working conditions, employment practices, and environmental compliance. However, we do
not control our independent manufacturers or their labor and other business practices. If one of
our manufacturers violates labor or other laws or implements labor or other business practices that
are generally regarded as unethical in the United States, the shipment of products to us could be
interrupted and our reputation could be damaged. Any of these events could have a material adverse
effect on our results of operations.
Our business could be harmed if we do not deliver quality products in a timely manner.
Our sourcing, logistics, and technology functions operate within substantial production and
delivery requirements and subject us to the risks associated with unaffiliated manufacturers,
transportation, and other risks. If we do not comply with customer product requirements or meet
their delivery requirements, our customers could reduce the purchase prices, require significant
margin support, reduce the amount of business they do with us, or cease to do business with us, all
of which would adversely affect our business.
If we encounter problems with our distribution system, our ability to deliver our products to
the market would be adversely affected.
We rely on our third party distribution facilities to warehouse and to ship products to our
customers. Due to the fact that substantially all of our products are distributed from a
relatively small number of locations, our operations could be interrupted by earthquakes, floods,
fires, or other natural disasters near our distribution centers. We maintain business interruption
insurance, but it may not adequately protect us from the loss of customers. In addition, our
distribution capacity is dependent on the timely performance of services by third parties,
including transportation of product to and from distribution facilities. If we encounter problems
with our distribution system, our inability to meet customer expectations, manage inventory,
complete sales, and achieve objectives for operating efficiencies could materially adversely affect
our business.
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Labor disruptions at ports or our suppliers or manufacturers or distribution facilities may
adversely affect our business.
Our business depends on our ability to source and distribute products in a timely manner. As a
result, we rely on the free flow of goods on a consistent basis from our suppliers and
manufacturers. Labor disputes at various ports or at our suppliers, manufacturers, or our
distribution facilities create significant risks for our business, particularly if these disputes
result in work slowdowns, lockouts, strikes or other disruptions during our peak importing or
manufacturing seasons. An interruption in the flow of goods could have a material adverse affect on
our business, potentially resulting in cancelled orders by customers, unanticipated inventory
accumulation, or shortages and reduced net revenues and net income.
Chargebacks and margin support payments may have a material adverse affect on our business.
Consistent with industry practice we sometimes allow customers to deduct agreed upon amounts from
the purchase price for sales allowances, new store opening discounts, and other marketing
development funds, which in the opinion of management promotes brand awareness. In addition, margin
support payments may be required due to lower than anticipated sell through rates, which may be
caused by changing fashion trends and weather conditions, among other things. These deductions have
a dilutive effect on our business and results of operations since they reduce overall gross profit
margins on sales. Significant levels of chargebacks and margin support payments could reduce our
profitability resulting in a material adverse effect on our business.
We rely significantly on information technology and any failure, inadequacy, interruption, or
security lapse of that technology could adversely affect our ability to effectively operate our
business.
Our ability to effectively manage and maintain our inventory and internal reports and to ship
products to customers and invoice them on a timely basis depends significantly on our enterprise
resource planning system to which we make modifications on an on-going basis. The failure of this
system to operate effectively or to integrate with other systems, or a breach in security of this
system could cause delays in product fulfillment and reduced efficiency of our operations, and it
could require significant capital investments to remediate any such failure, problem or breach.
We operate in a highly competitive and fragmented industry and our failure to compete
successfully could result in a loss of one or more significant customers.
The apparel industry is highly competitive and fragmented. Our competitors include numerous apparel
designers, manufacturers, retailers, importers and licensors, many of which have greater financial
and marketing resources. We believe that the principal competitive factors in the apparel industry
are:
| • | brand name and brand identity, | ||
| • | timeliness, reliability, and quality of products and services provided, | ||
| • | market share and visibility, | ||
| • | price, and | ||
| • | the ability to anticipate customer and consumer demands. |
The level of competition and the nature of our competitors vary by product segment with low margin,
mass market manufacturers being our main competitors in the less expensive segment of the market
and domestic and foreign designers and licensors competing with us in the more upscale segment of
the market. Increasingly, we experience competition from our customers’ own in house
private label offerings. If we do not maintain our brand names and identities and continue to
provide high quality and reliable services on a timely basis at competitive prices, our ability to
compete in our industry will be adversely affected. If we are unable to compete successfully, we
could lose one or more of our significant customers, which would adversely affect our sales and
financial performance.
We may face challenges integrating the acquisitions of David Brooks and Shane Hunter or any
other businesses we may acquire, which may negatively impact our business.
As part of our strategy of making acquisitions, we acquire new brands and product categories.
Acquisitions have inherent risks, including the risk that the projected sales and net income from
the acquisition may not be generated, the risk that the integration of the acquired business is
more costly and takes longer than anticipated, risk of diversion of the attention and resources of
management, risks associated with additional customer concentration and related credit risk, risks
of retaining key personnel, and risks associated with unanticipated events and unknown legal
liabilities. Any of these risks could adversely affect our business.
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The Company’s dispute with its former Chief Executive Officer and Chairman could adversely
affect our business.
We currently have an ongoing dispute (See PART I, Item 3, Legal Proceedings) with Mr. Ludwig
Kuttner, former Chief Executive Officer, former Chairman, and current Director, regarding his
employment agreement that is in arbitration. The Company is currently evaluating claims it may have
against Mr. Kuttner and others, including claims for misappropriation, breach of duty of loyalty
and, pursuant to the Sarbanes-Oxley Act, disgorgement of bonuses and net gain on stock sales. Mr.
Kuttner and his affiliates own approximately 31.1% of our common
stock as of August 31, 2007, which
could, among other things, affect the stability of our business and thereby adversely affect our
business.
Mr. Kuttner and his affiliates own a significant portion of our common stock, which could
influence the outcome of key transactions presented to stockholders for their approval.
As of
August 31, 2007, Mr. Kuttner and his affiliates owned
approximately 31.1% of our common stock.
Accordingly, Mr. Kuttner and his affiliates have the ability to affect the outcome of, or exert
influence over, all matters requiring stockholder approval, including the election and removal of
directors and any change in control.
The ultimate resolution of income and other possible tax liabilities may require us to incur
expense beyond amounts reserved on our balance sheet or make cash payments beyond those that we
anticipated.
Former management took certain historic income and other tax positions that may be challenged by
the appropriate taxing authorities. Additionally, certain actions by the former management have
increased the possible tax liabilities of the Company. We believe that the Company has provided
adequate reserves for these tax positions for all periods open under the applicable statute of
limitations, but a challenge by a taxing authority could prove costly to defend as well as resolve.
If the actual liability for taxes exceeds our reserves, earnings could be adversely affected and
the Company may be required to make cash payments beyond what we anticipated.
Future defaults under our credit facility may adversely affect our business.
We have a $100.0 million revolving credit facility (the “Revolving Credit Facility”) with a group
of lenders, under which we had no amounts outstanding as of December 31, 2006. Our purchases of
inventory are mainly financed through letters of credit which are issued under the terms of our
Revolving Credit Facility. If the Company were to be in default of the covenants under the
Revolving Credit Facility, the ability to issue the letters of credit to our suppliers and
therefore obtain our inventory to meet our customer demands may be limited. In addition, due to the
seasonality of our business, it is at times necessary for the Company to borrow against the line of
credit under the Revolving Credit Facility. If the Company were to be in default of the covenants
under the Revolving Credit Facility, the Company may not be able to arrange financing for its
operations.
As a result of our delinquency in filing certain periodic reports during 2006 and 2007 with the
SEC, we are currently in breach of certain covenants contained in our Revolving Credit Facility.
While our lenders have unanimously granted us all necessary waivers to date with respect to such
breaches, there can be no assurance that they will grant any requests for additional waivers should
we require them. In addition, our Revolving Credit Facility expires on December 31, 2007. There can
be no assurance that we will be successful in our efforts to renew or replace our Revolving Credit
Facility prior to its expiration.
We are dependent on certain key personnel, the loss of whom could negatively impact our ability
to manage our business and thereby adversely affect our business.
Our future success depends to a significant extent on retaining the services of certain executive
officers and directors. The loss of the services of any one of these individuals, or any other key
member of management, could have a material adverse effect on our business.
We have identified material weaknesses in our internal control over financial reporting, which
could adversely affect the market for our common stock.
As discussed in Item 9A. Management’s Report on Internal Controls Over Financial
Reporting, our management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2006 and has identified two material weaknesses in internal controls
over financial reporting as of December 31, 2006. Due to these material weaknesses, management has
concluded that we did not maintain effective internal controls over financial reporting as of
December 31, 2006.
As outlined in Item 9A. (c) Changes in Internal Controls Over Financial Reporting, we have
engaged in, and continue to engage in, substantial efforts to address the material weaknesses in
our internal controls over financial reporting. We cannot be certain that remedial measures we have
taken or plan to take will ensure that we maintain adequate controls over our financial processes
and reporting in the future or will be sufficient to address and eliminate these material
weaknesses. Our inability to remedy these identified material weaknesses or any additional
deficiencies or material weaknesses that may be identified in the
future, could, among other
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things, cause us to fail to file our periodic reports
with the SEC in a timely manner, prevent us from providing reliable and accurate financial reports
or require us to incur additional costs or divert management resources. Our common stock has been
delisted from the Nasdaq Global Market as a result of our inability to file our periodic reports
with the SEC in a timely manner, and future delays to file may negatively affect the trading of our
common stock. In addition, these material weaknesses may lead to a restriction on our ability to
obtain equity financing.
Investigations by the SEC and the United States Attorney for the Southern District of New
York.
The SEC and the United States Attorney for the Southern District of New York (“U.S. Attorney’s
Office”) are currently investigating certain issues identified during the Audit Committee
Investigation. The Company is cooperating fully with the investigations. Our management and certain
committees of the Board of Directors have devoted a significant amount of time and Company
resources to these matters to date. There can be no assurance that the ongoing matters will not
consume a significant amount of management and the Board of Directors time and resources of the
Company. In addition, there can be no assurance that the SEC or U.S. Attorney’s Office will not
levy fines or penalties on the Company related to these matters or that civil litigation involving
private plaintiffs will not arise in the future related to these matters.
A risk exists that we may have to restate our prior financial statements.
While we believe that the information set forth in our Annual Report on Form 10-K for the year
ended December 31, 2006 complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that the information contained herein fairly presented, in all material respects,
the financial condition and results of operations of the Company, the SEC may disagree with the
manner in which we reported various matters or we may discover additional information that impacts
the information contained herein. Accordingly, we may be required to restate our financial
statements, amend prior filings with the SEC, or take other actions not currently contemplated.
Item 1B. Unresolved Staff Comments.
On December 15, 2006, the Company received written comments from the staff of the SEC (“Staff”)
regarding a Current Report on Form 8-K filed by the Company on December 14, 2006. The Company
responded to the Staff comments prior to December 31, 2006 and, as of the date of this filing, has
received no additional comments.
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Item 2. Properties.
We lease all of our administrative offices, operations center, sales offices, and showrooms. Our
sales offices and showrooms are in New York, New York and San Francisco and Los Angeles,
California. We have administrative offices in Anderson, South Carolina; Hauppauge, New York;
Brockton, Massachusetts; and San Francisco, California. Our operations center is in New York, New
York and we have sourcing offices in Kowloon, Hong Kong, and Dongyuan and Hangzhou, PRC. We believe
that all of our properties are well maintained and are generally suitable for their intended use.
We entered into a fifteen year, six month lease of approximately 77,000 square feet of office space
in New York, New York in July of 2007. The office space addresses present as well as future
operational needs and allows the consolidation of operations currently dispersed over a number of
locations in New York, which will provide certain divisions with the opportunity to capitalize on
synergies currently unavailable to them. We believe that over the term of the lease its costs will
be lower than had it elected to maintain the current leasing arrangements. (See Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — New
Facility Lease and Related Credit Facility Amendment,” as well as Note 16 — Subsequent Events to
the Financial Statements.)
Item 3. Legal Proceedings.
On July 18, 2006, a stockholder derivative suit was filed in the United States District Court for
the District of South Carolina naming as defendants Mr. Kuttner and Mr. Clark (former members of
management) and directors Joel Goldberg, Michael Jackson, Harvey Sperry, and Irwin Winter, as well
as naming the Company as a nominal defendant. The complaint alleged, among other things, that the
named individual defendants breached their fiduciary duties to the Company, abused control
relationships, engaged in gross mismanagement of the Company, wasted Company assets and were
unjustly enriched. The plaintiff’s complaint sought unspecified damages. On September 19, 2006, the
defendants filed motions to dismiss the complaint for failure to meet the pleading requirements for
derivative actions. The plaintiff filed an amended complaint on November 15, 2006, adding Mr.
Clayton as a defendant, and the defendants again moved to dismiss. Following oral argument, the
court provided the plaintiff an additional opportunity to amend the complaint. The plaintiff filed
a second amended complaint on January 10, 2007, and the defendants renewed their motions to
dismiss. On April 13, 2007, the court granted the defendants motions and dismissed the suit. No
appeal was taken. On May 27, 2007, the Plaintiff’s counsel made a formal “demand” that the Company
institute legal proceedings against certain of its current and/or former officers and directors
within 90 days. The Company subsequently responded rejecting the demand for artificial deadlines
and reaffirmed its commitment to take all necessary and appropriate actions in the best interests
of its shareholders.
On August 17, 2006, Mr. Kuttner filed a Demand for Arbitration with the American Arbitration
Association claiming that his suspension “effectively terminated” his employment with the Company
without cause and that therefore he is entitled, pursuant to his employment agreement with the
Company, to unpaid compensation, including salary, accrued bonus and unreimbursed expenses, a
termination benefit, and continued health, dental and life insurance coverage in the aggregate
amount of $7,500,000. The arbitration proceeding was stayed in February 2007 at Mr. Kuttner’s
request pending the outcome of discussions between Mr. Kuttner and the Company, but resumed in July
when Mr. Kuttner filed an amended statement of claim. The Company intends to contest vigorously Mr.
Kuttner’s claim. In addition, the Company is currently evaluating claims it may have against Mr.
Kuttner, including claims for misappropriation, breach of the duty of loyalty and, pursuant to the
Sarbanes-Oxley Act, disgorgement of bonuses and net gain on stock sales. In his amended claim, Mr.
Kuttner seeks a declaratory judgment that he is not liable to the Company for such claims.
The SEC and the U.S. Attorney’s Office are currently investigating certain issues identified during
the Audit Committee Investigation. The Company is cooperating fully with these investigations.
The Company has advanced the legal fees and related costs for a number of employees to encourage
them to cooperate with the Audit Committee and with the SEC and the U.S. Attorney’s Office. The
costs of these advances through July 1, 2007 were approximately $677,000. In addition, in
connection with the derivative action referenced above in Item 3, the Company advanced the legal
fees for all the individual defendants pursuant to an undertaking, which totaled approximately
$223,000 through July 1, 2007.
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As of December 31, 2006, the Company had incurred fees and expenses of approximately $6,159,000 in
connection with the Audit Committee Investigation, restatement of financial statements, the
investigations by the SEC and the U.S. Attorney’s Office, and related matters, which are included
within “Investigation, restatement, and related expenses” in the 2006 consolidated statement of
income. An additional $3,454,000 in such costs were incurred subsequent to December 31, 2006
through July 1, 2007. The Company expects to incur additional costs to make current its SEC filing
requirements and in
connection with the investigations by the SEC and the U.S. Attorney’s Office, and related matters.
The Company cannot predict the total cost but believes that future costs may be material.
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 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Our common stock, $0.10 par value per share, was traded on the Nasdaq Global Market under the
symbol HAMP through January 18, 2007. Effective with the opening of business on January 19, 2007,
our Common Stock was delisted from the Nasdaq Global Market. (See Item 7 “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Restatements and Related Matters,”
as well as Note 16 — Subsequent Events to the Financial Statements.) There is currently no
established public trading market for our Common Stock. Our Common Stock is currently quoted on the
Pink Sheets under the symbol “HAMP.PK”. The Pink Sheets is a centralized quotation service that
collects and publishes market maker quotes for over-the-counter securities in real time.
Over-the-counter market quotations, like those on the Pink Sheets, reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
As of July 2, 2007, the Company had 27 stockholders of record but we believe there are in excess of
1,000 beneficial owners of our common stock. The following table sets forth the low and high sales
prices of shares of our common stock for each of the quarters of 2006 and 2005 as reported by the
Nasdaq Global Market and reflects the two-for-one stock split effective June 28, 2005:
| 2006 | 2005 | |||||||||||||||
| Low | High | Low | High | |||||||||||||
First Quarter |
$ | 19.55 | $ | 24.80 | $ | 15.50 | $ | 20.73 | ||||||||
Second Quarter |
14.50 | 21.10 | 18.66 | 24.05 | ||||||||||||
Third Quarter |
11.91 | 18.09 | 18.35 | 25.80 | ||||||||||||
Fourth Quarter |
11.76 | 17.25 | 21.50 | 26.35 | ||||||||||||
The closing stock price on August 31, 2007 was $17.00.
The determination to pay dividends will be made by the Board of Directors and will be dependent
upon the Company’s financial condition, results of operations, capital requirements, and such other
factors as the Board of Directors may deem relevant. Our Revolving Credit Facility contains
restrictive covenants placing limitations on payment of cash dividends. We have not declared or
paid any dividends with respect to our common stock except a two-for-one stock split in the form of
a dividend. On March 17, 2005, our Board of Directors approved a two-for-one stock split of issued
common stock payable June 28, 2005 to stockholders of record at the close of business on May 31,
2005. As a result of the stock split, stockholders of record received one additional share of
common stock for each share of common stock held on the record date. The stock split resulted in
the distribution of 4,121,892 additional shares of common stock, which included 640,082 shares used
from the treasury stock account.
Our Board of Directors has from time-to-time authorized the repurchase of shares of our common
stock. Our Board of Directors approved the repurchase of up to 1,000,000 and 400,000 shares
(post-split) of our outstanding common stock on April 26, 2006 and March 17, 2005, respectively.
The repurchases were conducted through open market or privately negotiated transactions and have no
expiration date. The Company suspended the purchases upon the commencement of the Audit Committee
Investigation. (See Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Restatements and Related Matters and Note 11 — Capitalization.) The following table
sets forth our purchases of equity securities during the fourth quarter of 2006:
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE
COMMON STOCK, $0.10 PAR VALUE
| Maximum | ||||||||||||||||
| Total Number of | Number of Shares | |||||||||||||||
| Total | Shares Purchased | that May Yet be | ||||||||||||||
| Number of | Average | as Part of Publicly | Purchased Under | |||||||||||||
| Shares | Price Paid | Announced Plans | The Plans or | |||||||||||||
| Period | Purchased | per Share | or Programs | Programs | ||||||||||||
Oct. 2 — Oct. 28, 2006 |
— | $ | — | — | ||||||||||||
Oct. 29 — Dec. 2, 2006 |
— | — | — | |||||||||||||
Dec. 3 — Dec. 31, 2006 |
— | — | — | |||||||||||||
Total |
— | — | — | 1,036,490 | ||||||||||||
See Item 12 for the Equity Compensation Plan Information.
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Performance Graph
The following graph sets forth a comparison of the Company’s stock performance, the S&P 500
Composite Index and the S&P 500 Apparel, Accessories & Luxury Goods Index, in each case assuming an
investment of $100 on the last trading day of calendar year 2001 and the accumulation and the
reinvestment of dividends, where applicable, paid thereafter through the last trading day of
calendar year 2006. The Company chose the S&P 500 Composite Index as a measure of the broad equity
market and the S&P 500 Apparel, Accessories & Luxury Goods Index as a measure of its relative
industry performance. Prior to 2006, the Company compared the performance of its common stock with
the S&P Textiles & Apparel Index, which was discontinued in 2006 and is no longer available.
Comparative results with this index are presented for the periods for which the index was
available.
COMPARISON OF CUMULATIVE TOTAL RETURN
| 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||||||
Hampshire Group, Limited |
$ | 100 | $ | 172 | $ | 246 | $ | 253 | $ | 373 | $ | 260 | ||||||||||||
S&P 500 Composite Index |
100 | 78 | 100 | 111 | 117 | 135 | ||||||||||||||||||
S&P 500 Apparel, Accessories & Luxury Goods Index |
100 | 107 | 119 | 153 | 158 | 205 | ||||||||||||||||||
S&P Textile & Apparel Index |
100 | 92 | 121 | 155 | 156 | — | ||||||||||||||||||
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Item 6. Selected Financial Data.
The following selected consolidated financial data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements, including the related notes, included herein. The selected consolidated
financial data under the captions “Income Statement Data” and “Balance Sheet Data” as of and for
the end of, each of the years in the five-year period ended December 31, 2006, are derived from our
consolidated financial statements. The income statement data includes results from continuing
operations, which excludes an extraordinary gain on an acquisition made in 2006 as well as the
discontinued operations of Hampshire Investments, Limited in 2003 and 2002. Our historical results
are not necessarily indicative of results to be expected in any future period. The number of shares
and the per share data reflect the two-for-one stock split effective June 28, 2005.
| Year Ended December 31, | ||||||||||||||||||||
| (in thousands, except per share data) | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||
Income Statement Data: |
||||||||||||||||||||
Net sales |
$ | 347,919 | $ | 324,281 | $ | 301,999 | $ | 292,651 | $ | 293,455 | ||||||||||
Cost of goods sold |
259,772 | 246,224 | 221,333 | 218,325 | 210,336 | |||||||||||||||
Gross profit |
88,147 | 78,057 | 80,666 | 74,326 | 83,119 | |||||||||||||||
Selling, general, and administrative expenses |
77,494 | 63,673 | 58,447 | 55,534 | 51,315 | |||||||||||||||
Investigation, restatement, and related expenses |
6,159 | — | — | — | — | |||||||||||||||
Recovery of improper payments |
— | (6,013 | ) | — | — | — | ||||||||||||||
Income from operations |
4,494 | 20,397 | 22,219 | 18,792 | 31,804 | |||||||||||||||
Other income (expense): |
||||||||||||||||||||
Interest income |
1,462 | 1,334 | 726 | 683 | 420 | |||||||||||||||
Interest expense |
(152 | ) | (587 | ) | (645 | ) | (909 | ) | (1,382 | ) | ||||||||||
Miscellaneous |
345 | 257 | (51 | ) | 155 | (316 | ) | |||||||||||||
Income from continuing operations before
provision for income taxes |
6,149 | 21,401 | 22,249 | 18,721 | 30,526 | |||||||||||||||
Provision for income taxes |
3,647 | 9,987 | 10,965 | 9,202 | 13,457 | |||||||||||||||
Income from continuing operations |
$ | 2,502 | $ | 11,414 | $ | 11,284 | $ | 9,519 | $ | 17,069 | ||||||||||
Basic income per share from continuing
operations |
$ | 0.32 | $ | 1.40 | $ | 1.38 | $ | 1.04 | $ | 1.81 | ||||||||||
Diluted income per share from continuing
operations |
$ | 0.32 | $ | 1.40 | $ | 1.37 | $ | 1.01 | $ | 1.77 | ||||||||||
Basic weighted average common shares
outstanding (1) |
7,855 | 8,153 | 8,148 | 9,146 | 9,422 | |||||||||||||||
Diluted weighted aver | ||||||||||||||||||||