**Tableof Contents**

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**SECURITIES AND EXCHANGE COMMISSION**

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**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**x****   QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2009**

 

**o****   TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**Commission File No. 0-51715**

 

**SPORT-HALEY, INC.**

(Exact name ofsmall business issuer as specified in its charter)

 

| **COLORADO**                     | ** ** | **84-1111669**       |
|----------------------------------|------------|----------------------|
| (State of other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**4600 E. 48th Avenue, Denver, Colorado 80216**

(Address ofprincipal executive offices)

 

**(303)320-8800**

(Issuer’stelephone number including area code)

 

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes  x  No  o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).   Yes  o  No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer or a smaller reportingcompany. See the definition of “accelerated filer and non-accelerated filer” inRule 12b-2 of the Exchange Act.

 
| Large accelerated filer  o |   | Accelerated filer  o         |
|--------------------------------------|--------|----------------------------------------|
|                                 |   |                                   |
| Non-accelerated filer  o   |   | Smaller Reporting Company  x |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate thenumber of shares outstanding in each of the issuer’s classes of common stock,as of the latest practicable date.

 
| **Class**                      | ** ** | **Outstanding at May 8, 2009** | ** ** |
|--------------------------------|------------|-------------------------------------|------------|
| **Common Stock, no par value** | ** ** | **2,284,490**                       | ** ** |

 

 

 

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Table of Contents

 

**SPORT-HALEY, INC.**

**TABLE OF CONTENTS**

 
| ** **                                                                | **PAGE**                                                                                                                                                         |
|---------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **PART ****1****–********FINANCIAL INFORMATION****(UNAUDITED)** |                                                                                                                                                             |
|                                                                      |                                                                                                                                                             |   |
| ITEM 1                                                                    | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                      |   |
|                                                                      |                                                                                                                                                             |   |
|                                                                      | CONDENSED  CONSOLIDATED BALANCE SHEETS                                                                                                                           | **3** |
|                                                                      |                                                                                                                                                             |   |
|                                                                      | CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                                                 | **4** |
|                                                                      |                                                                                                                                                             |   |
|                                                                      | CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                                 | **5** |
|                                                                      |                                                                                                                                                             |   |
|                                                                      | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                                                                             | **6** |
|                                                                      |                                                                                                                                                             |   |
| ITEM 2                                                                    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                      | **19** |
|                                                                      |                                                                                                                                                             |   |
| ITEM 4                                                                    | CONTROLS AND  PROCEDURES                                                                                                                                         | **31** |
|                                                                      |                                                                                                                                                             |   |
| **PART II -  OTHER INFORMATION**                                     |                                                                                                                                                             |
|                                                                      |                                                                                                                                                             |   |
| ITEM 1                                                                    | LEGAL PROCEEDINGS                                                                                                                                                | **33** |
|                                                                      |                                                                                                                                                             |   |
| ITEM 1A                                                                   | RISK FACTORS                                                                                                                                                     | **33** |
|                                                                      |                                                                                                                                                             |   |
| ITEM 4                                                                    | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                                             | **33** |
|                                                                      |                                                                                                                                                             |   |
| ITEM 5                                                                    | OTHER INFORMATION                                                                                                                                                | **34** |
|                                                                      |                                                                                                                                                             |   |
| ITEM 6                                                                    | EXHIBITS                                                                                                                                                         | **35** |
|                                                                      |                                                                                                                                                             |   |
| **SIGNATURES**                                                            | **36**                                                                                                                                                           |
|                                                                      |                                                                                                                                                             |
| **EXHIBITS**                                                              |                                                                                                                                                             |
|                                                                      |                                                                                                                                                             |   |
| 10.4.4                                                                    | ADDENDUM TO LEASE AGREEMENT, DATED APRIL 28,  2009, BY AND BETWEEN THOMAS J. HILB, INDIVIDUALLY, AND AS TRUSTEE OF THE  CONNIE HILB TRUST, AND SPORT-HALEY, INC. |   |
|                                                                      |                                                                                                                                                             |   |
| 31.1                                                                      | CERTIFICATION OF DONALD W. JEWELL                                                                                                                                |   |
|                                                                      |                                                                                                                                                             |   |
| 31.2                                                                      | CERTIFICATION OF PATRICK W. HURLEY                                                                                                                               |   |
|                                                                      |                                                                                                                                                             |   |
| 32.1                                                                      | CERTIFICATIONS OF DONALD W. JEWELL AND PATRICK  W. HURLEY                                                                                                        |   |

 

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                         | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                         | ** ** | **2009**           | ** ** | **2008**          | ** ** |
| ** **                                                                                         | ** ** | **(Unaudited)**    | ** ** | **(***)**         | ** ** |
| **ASSETS**                                                                                         |       |
| **CURRENT ASSETS**                                                                                 |       |               |       |              |       |
| Cash and cash  equivalents                                                                         |       | $                  | 1,395,000  |              | $          | 2,830,000 |   |
| Marketable  securities                                                                             |       | —             |       | 200,000           |       |
| Accounts  receivable, net of allowances of $346,000 and $278,000, respectively                     |       | 1,903,000          |       | 2,791,000         |       |
| Inventories                                                                                        |       | 6,165,000          |       | 5,947,000         |       |
| Prepaid expenses  and other                                                                        |       | 146,000            |       | 264,000           |       |
| Total current  assets                                                                              |       | 9,609,000          |       | 12,032,000        |       |
|                                                                                               |       |               |       |              |       |
| **PROPERTY AND EQUIPMENT****, net**                                                                |       | 122,000            |       | 197,000           |       |
| Other assets                                                                                       |       | 3,000              |       | 3,000             |       |
|                                                                                               |       |               |       |              |       |
| **TOTAL ASSETS**                                                                                   |       | $                  | 9,734,000  |              | $          | 12,232,000 |   |
| ** **                                                                                         |       |               |       |              |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                      |       |
| **CURRENT LIABILITIES**                                                                            |       |               |       |              |       |
| Accounts payable                                                                                   |       | $                  | 482,000    |              | $          | 736,000 |   |
| Accrued  royalties payable                                                                         |       | 53,000             |       | 52,000            |       |
| Accrued  commissions payable                                                                       |       | 138,000            |       | 180,000           |       |
| Accrued payroll  payable                                                                           |       | 49,000             |       | 138,000           |       |
| Accrued customs  duties payable                                                                    |       | 828,000            |       | 685,000           |       |
| Accrued other  expenses payable                                                                    |       | 179,000            |       | 177,000           |       |
|                                                                                               |       | 1,729,000          |       | 1,968,000         |       |
|                                                                                               |       |               |       |              |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                  |       |               |       |              |       |
| Minimum  royalties payable (current)                                                               |       | —             |       | 80,000            |       |
|                                                                                               |       |               |       |              |       |
| **TOTAL LIABILITIES - CURRENT**                                                                    |       | 1,729,000          |       | 2,048,000         |       |
| ** **                                                                                         |       |               |       |              |       |
| **SHAREHOLDERS’ EQUITY**                                                                      |       |               |       |              |       |
| Preferred stock,  no par value; 1,500,000 shares authorized; none issued and outstanding           |       | —             |       | —            |       |
| Common stock, no  par value; 15,000,000 shares authorized; 2,284,490 shares issued and outstanding |       | 8,481,000          |       | 8,481,000         |       |
| Additional  paid-in capital                                                                        |       | 1,621,000          |       | 1,621,000         |       |
| Retained  earnings (deficit)                                                                       |       | (2,097,000         | )          | 82,000            |       |
| Total  shareholders’ equity                                                                   |       | 8,005,000          |       | 10,184,000        |       |
|                                                                                               |       |               |       |              |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                |       | $                  | 9,734,000  |              | $          | 12,232,000 |   |

 

----

***  Taken from the audited balance sheet at thatdate.

 

See accompanying notes to these condensed consolidated financialstatements.

 

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **March 31,**     | ** ** | **March 31,**    | ** ** |
| ** **                                             | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)**       | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                             | ** ** | ** **             | ** ** | **As Corrected**      | ** ** | ** ** | ** ** | **As Corrected** | ** ** |
| ** **                                             | ** ** | ** **             | ** ** | **(Note 2)**          | ** ** | ** ** | ** ** | **(Note 2)** | ** ** |
| ** **                                             | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET SALES**                                          |       | $                      | 2,852,000  |                  | $          | 4,751,000 |   | $ | 8,901,000 |   | $ | 12,690,000 |   |
| ** **                                             |       |                   |       |                  |       |   |   |   |   |
| **COST OF GOODS SOLD**                                 |       |                   |       |                  |       |   |   |   |   |
| Cost of goods  sold                                    |       | 2,125,000              |       | 2,970,000             |       | 6,039,000 |   | 7,861,000 |   |
| Impairments                                            |       | 254,000                |       | 5,000                 |       | 585,000 |   | 179,000 |   |
| Total cost of  goods sold                              |       | 2,379,000              |       | 2,975,000             |       | 6,624,000 |   | 8,040,000 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| **GROSS PROFIT**                                       |       | 473,000                |       | 1,776,000             |       | 2,277,000 |   | 4,650,000 |   |
| ** **                                             |       |                   |       |                  |       |   |   |   |   |
| **OTHER OPERATING COSTS**                              |       |                   |       |                  |       |   |   |   |   |
| Selling, general  and administrative expenses          |       | 1,416,000              |       | 1,901,000             |       | 4,288,000 |   | 5,272,000 |   |
| Royalty expense                                        |       | 53,000                 |       | 179,000               |       | 209,000 |   | 447,000 |   |
| Total other  operating costs                           |       | 1,469,000              |       | 2,080,000             |       | 4,497,000 |   | 5,719,000 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| **LOSS FROM OPERATIONS**                               |       | (996,000               | )          | (304,000              | )          | (2,220,000 | ) | (1,069,000 | ) |
| ** **                                             |       |                   |       |                  |       |   |   |   |   |
| Other income,  net                                     |       | (1,000                 | )          | 196,000               |       | 43,000 |   | 276,000 |   |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| Provision for  income taxes                            |       | —                 |       | (2,000                | )          | (2,000 | ) | (9,000 | ) |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| **NET LOSS**                                           |       | $                      | (997,000   | )                     | $          | (110,000 | ) | $ | (2,179,000 | ) | $ | (802,000 | ) |
| ** **                                             |       |                   |       |                  |       |   |   |   |   |
| **NET LOSS PER SHARE**                                 |       |                   |       |                  |       |   |   |   |   |
| Basic and  diluted loss per common share               |       | $                      | (0.43      | )                     | $          | (0.05 | ) | $ | (0.95 | ) | $ | (0.35 | ) |
|                                                   |       |                   |       |                  |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**                |       |                   |       |                  |       |   |   |   |   |
| Basic and  diluted weighted average shares outstanding |       | 2,284,000              |       | 2,284,000             |       | 2,284,000 |   | 2,284,000 |   |

 

See accompanying notes to these condensed consolidated financialstatements.

 

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **March 31,**    | ** ** |
| ** **                                                                   | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**       | ** ** | **(Unaudited)** | ** ** |
| ** **                                                                   | ** ** | ** **            | ** ** | **As Corrected** | ** ** |
| ** **                                                                   | ** ** | ** **            | ** ** | **(Note 2)** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                     |       |                  |       |   |   |
| Net loss                                                                     |       | $                     | (2,179,000 | ) | $ | (802,000 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                  |       |   |   |
| Depreciation and  amortization                                               |       | 117,000               |       | 157,000 |   |
| Impairments                                                                  |       | 585,000               |       | 179,000 |   |
| Allowance for  doubtful accounts                                             |       | 47,000                |       | 28,000 |   |
| Cash provided  (used) due to changes in assets and liabilities:              |       |                  |       |   |   |
| Accounts  receivable                                                         |       | 841,000               |       | 161,000 |   |
| Inventories                                                                  |       | (803,000              | )          | (1,163,000 | ) |
| Other assets                                                                 |       | 117,000               |       | 11,000 |   |
| Accounts payable                                                             |       | (254,000              | )          | (797,000 | ) |
| Accrued expenses  and other                                                  |       | (65,000               | )          | (205,000 | ) |
| Net cash used by  operating activities                                       |       | (1,594,000            | )          | (2,431,000 | ) |
|                                                                         |       |                  |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                     |       |                  |       |   |   |
| Proceeds from  maturity of marketable securities                             |       | 200,000               |       | — |   |
| Purchase of  fixed assets                                                    |       | (41,000               | )          | (7,000 | ) |
| Net cash  provided (used) by investing activities                            |       | 159,000               |       | (7,000 | ) |
|                                                                         |       |                  |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                     |       |                  |       |   |   |
| Borrowings under  line of credit                                             |       | —                |       | 1,850,000 |   |
| Repayments under  line of credit                                             |       | —                |       | (1,350,000 | ) |
| Net cash  provided by financing activities                                   |       | —                |       | 500,000 |   |
|                                                                         |       |                  |       |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                |       | (1,435,000            | )          | (1,938,000 | ) |
| ** **                                                                   |       |                  |       |   |   |
| **CASH AND CASH EQUIVALENTS****, beginning of period**                       |       | 2,830,000             |       | 4,464,000 |   |
| ** **                                                                   |       |                  |       |   |   |
| **CASH AND CASH EQUIVALENTS****, end of period**                             |       | $                     | 1,395,000  |   | $ | 2,526,000 |   |
| ** **                                                                   |       |                  |       |   |   |
| **SUPPLEMENTAL CASH FLOW INFORMATION**                                       |       |                  |       |   |   |
| Cash paid during  the period for:                                            |       |                  |       |   |   |
| Income taxes                                                                 |       | $                     | 2,000      |   | $ | 8,000 |   |

 

See accompanying notes to these condensed consolidated financialstatements.

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1****            ****SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Principlesof Consolidation*Our condensed consolidated financial statements include the accounts ofSport-Haley, Inc. (“Sport Haley”) and Reserve Apparel Group LLC (“ReserveApparel”). Sport Haley and Reserve Apparel may collectively be referred to as“the Company,” “we,” “us” or “our.” All significant inter-company transactionsbetween Sport Haley and Reserve Apparel have been eliminated.

 

*Nature ofOperations*Sport Haley, organized as a Colorado corporation in January 1991, designs,purchases or contracts for the manufacture of, markets and distributes women’sand men’s fashion golf apparel and outerwear under the SPORT HALEY® and BenHogan® labels. Our fashion golf apparel collections, known for their innovativedesigns, quality fabrics, generous fits and classic styles, are primarilymarketed in the premium and mid-priced markets through a network of independentsales representatives to golf professional shops, country clubs, resorts andexclusive department stores within the United States. Ben Hogan® fashion golfapparel is distributed per the terms of a license agreement with Callaway GolfCompany (“Callaway”).

 

Reserve Apparel,formed in November 2005, designed, purchased or contracted for themanufacture of, marketed and distributed branded golf apparel and outerwearunder the Top-Flite® label to mass retailers and other big-box, high salesvolume retail stores. Since September 2006 Reserve Apparel has been awholly-owned subsidiary of Sport Haley. Top-Flite® branded golf apparel wasdistributed per the terms of a license agreement with Callaway. We discontinuedmarketing Top-Flite® Branded apparel in November 2007, and in March 2008the license agreement was amended to remove the Top-Flite® brand, effective January 1,2008.

 

*CondensedConsolidated Financial Statements* Our condensed consolidated balance sheets and interimcondensed consolidated statements of operations and cash flows include alladjustments (consisting only of normal recurring items) necessary for theirfair representation. The preparation of consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses and thedisclosure of contingent assets and liabilities.

 

Certaininformation in footnote disclosures normally included in financial statementshas been condensed or omitted in accordance with the rules and regulationsof the Securities and Exchange Commission. The information included in this Form 10-Qshould be read in conjunction with financial statements and notes thereto andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for the year ended June 30, 2008, included in the Company’sfiling on Form 10-K.

 

*Reclassification* Certain priorperiod amounts have been reclassified to conform to the March 31, 2009,presentation. Such reclassifications had no affect on net income (loss) in anyof the periods presented.

 

*Marketable Securities* Marketablesecurities generally consisted of certificates of deposit that had an initialmaturity of greater than three months and were classified as held-to-maturity.Due to the short-term nature of the investments, there were no material 

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

unrealized gains or losseson these investments. As a result, the carrying values of marketable securitiesapproximated their fair value.

 

*Accounts Receivable* Accountsreceivable contain amounts due from our independent wholesale salesrepresentatives, primarily for sample garments. The total of amounts due fromsales representatives represents less than 5% of our total accounts receivable.

 

*Stock-Based Compensation*In January 2008, we adopted a newstock option plan, entitled the Sport-Haley 2008 Stock Option Plan (the “2008Plan”), which was approved by our shareholders in February 2008. Under the2008 Plan, the Compensation Committee of the Company’s Board of Directors isauthorized to grant up to 50,000 non-qualified stock options and up to 150,000incentive stock options. No options or other awards have been granted under the2008 Plan.

 

Our former Stock Option Plan(the “Former Plan”) expired by its terms in February 2003. Optionagreements that were issued in accordance with the Former Plan prior to itsexpiration generally remain in force until the earlier of their exercise, theexpiration of certain time periods after the termination of a grantee’semployment (or other relationship with the Company) or expiration by theirterms.

 

At March 31, 2009,there were outstanding options to purchase 577,000 shares of our common stockat exercise prices ranging from $2.71 to $3.60 per share and expiration datesbetween January 2010 and January 2013. All outstanding options arefully vested. No options were exercised during the three months or nine monthsended March 31, 2009. During the nine months ended March 31, 2009,9,000 options expired.

 

*RecentPronouncements*In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162(“SFAS 162”), *“The Hierarchy of Generally AcceptedAccounting Principles*(“GAAP”)*.”* The currentGAAP hierarchy, as set forth in the American Institute of Certified PublicAccountants (“AICPA”) Statement on Auditing Standards No. 69, *“The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles,”* has been criticized because: (i) it isdirected to the auditor rather than the entity; (ii) it is complex; and, (iii) itranks FASB Statements of Financial Accounting Concepts. The FASB believes thatthe GAAP hierarchy should be directed to entities, because it is the entity(not its auditors) that is responsible for selecting accounting principles forfinancial statements that are presented in conformity with GAAP. Accordingly,the FASB concluded that the GAAP hierarchy should reside in the accountingliterature established by the FASB and is issuing SFAS 162 to achieve thatresult. SFAS 162 is effective 60 days following the Securities and ExchangeCommission’s approval of the Public Company Accounting Oversight Boardamendments to AU Section 411, *“The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.”*Our adoption of SFAS 162 upon its effective date is not expected to have amaterial effect on our financial condition or the results of our operations.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards No. 161 (“SFAS161”), *“Disclosures about Derivative Instruments andHedging Activities — an amendment of FASB Statement No. 133.”*FASB Statement No. 133 (“SFAS 131”), *“Accounting for DerivativeInstruments and Hedging Activities,”* establishes, among otherthings, the disclosure requirements for derivative instruments and for hedgingactivities. 

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

SFAS 161 amends andexpands the disclosure requirements of SFAS 131 with the intent to provideusers of financial statements with an enhanced understanding of: (i) howand why an entity uses derivative instruments; (ii) how derivativeinstruments and related hedged items are accounted for under SFAS 133 and itsrelated interpretations; and, (iii) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance andcash flows. To meet those objectives, SFAS 161 requires qualitative disclosuresabout objectives and strategies for using derivatives, quantitative disclosuresabout fair value amounts of gains and losses on derivative instruments anddisclosures about credit-risk-related contingent features in derivativeagreements. SFAS 161 is effective for fiscal years, and interim periods withinthose fiscal years, beginning after November 15, 2008, with earlieradoption encouraged. SFAS 161 further encourages, but does not require,comparative disclosures for earlier periods at initial adoption. Our adoptionof SFAS 161 did not materially affect our financial condition or the results ofour operations.

 

We have reviewedall other recently issued, but not yet effective, accounting pronouncements anddo not believe the future adoption of any such pronouncements may be expectedto cause a material impact on our financial condition or the results of ouroperations.

 

**NOTE 2****            ****CORRECTION OF PREVIOUSLYISSUED FINANCIAL STATEMENTS**

 

As previouslyreported, in August 2008, we determined that we were underpaying customsduties with regard to imported fashion apparel for which fabric had beenpurchased separately from another foreign supplier. In order to correct theamount of duty payable to US Customs and Border Protection for such imports, wevoluntarily submitted a Prior Disclosure in November 2008. A PriorDisclosure is a specific procedure proscribed by US Customs and BorderProtection for the purpose of identifying and correcting amounts which werepreviously declared or omitted from declaration. Our Prior Disclosure correctedamounts with regard to our imports for the five-year period immediately priorto the date the Prior Disclosure was submitted to US Customs and BorderProtection, and we requested that the National Finance Center contact usregarding a payment plan for the balance due. At March 31, 2009, thebalance due with regard to the Prior Disclosure totaled $828,000, includingaccrued interest of $113,000. To date, we have not been contacted by either USCustoms and Border Protection or the National Finance Center with regard to ourPrior Disclosure or a payment arrangement therefor.

 

Our financial statements for the three-month and nine-month periodsended March 31, 2008, which are included in this report on Form 10-Q,have been corrected based upon our Prior Disclosure. Corrections of theCompany’s prior period financial statements resulted in a reduction of $404,000in total shareholders’ equity as of July 1, 2007, which added to the$119,000 correction for the nine months ended March 31, 2008, brought thereduction in shareholders’ equity to $523,000 as of March 31, 2008. Thefollowing comparison of condensed consolidated balance sheets as of March 31,2008, the comparisons of condensed consolidated statements of income for thethree months and nine months ended March 31, 2008, and the comparison ofcondensed consolidated statements of cash flows for the nine months ended March 31,2008, present the effects resulting from correcting the Company’s financialstatements for the aforementioned reason.

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**COMPARISON OF CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                           | ** ** | **MARCH 31, 2008** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | ** **              | ** ** | **Effect of** | ** ** | **As Previously** | ** ** |
| ** **                                           | ** ** | **As Corrected**        | ** ** | **Correction** | ** ** | **Reported** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**         | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                           | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **ASSETS**                                           |       |
| **CURRENT ASSETS**                                   |       |                    |       |   |   |   |   |
| Cash and cash  equivalents                           |       | $                       | 2,526,000  |   | $ | — |   | $ | 2,526,000 |   |
| Accounts  receivable, net of allowances              |       | 2,877,000               |       | — |   | 2,877,000 |   |
| Inventories                                          |       | 6,870,000               |       | 74,000 |   | 6,796,000 |   |
| Prepaid expenses  and other                          |       | 192,000                 |       | — |   | 192,000 |   |
| Total current  assets                                |       | 12,465,000              |       | 74,000 |   | 12,391,000 |   |
|                                                 |       |                    |       |   |   |   |   |
| **PROPERTY  AND EQUIPMENT, net**                     |       | 249,000                 |       | — |   | 249,000 |   |
| OTHER ASSETS                                         |       | 3,000                   |       | — |   | 3,000 |   |
|                                                 |       |                    |       |   |   |   |   |
| **TOTAL  ASSETS**                                    |       | $                       | 12,717,000 |   | $ | 74,000 |   | $ | 12,643,000 |   |
|                                                 |       |                    |       |   |   |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**       |       |
|                                                 |       |                    |       |   |   |   |   |
| **CURRENT  LIABILITIES**                             |       |                    |       |   |   |   |   |
| Notes payable                                        |       | $                       | 500,000    |   | $ | — |   | $ | 500,000 |   |
| Accounts payable                                     |       | 769,000                 |       | — |   | 769,000 |   |
| Accrued  royalties payable                           |       | 141,000                 |       | — |   | 141,000 |   |
| Accrued  commissions payable                         |       | 199,000                 |       | — |   | 199,000 |   |
| Accrued payroll                                      |       | 113,000                 |       | — |   | 113,000 |   |
| Accrued customs  duties payable                      |       | 597,000                 |       | 597,000 |   | — |   |
| Other                                                |       | 184,000                 |       | — |   | 184,000 |   |
|                                                 |       | 2,503,000               |       | 597,000 |   | 1,906,000 |   |
|                                                 |       |                    |       |   |   |   |   |
| **COMMITMENTS  AND CONTINGENCIES**                   |       |                    |       |   |   |   |   |
| Minimum  royalties payable (current)                 |       | 38,000                  |       | — |   | 38,000 |   |
|                                                 |       |                    |       |   |   |   |   |
| **TOTAL  LIABILITIES - CURRENT**                     |       | 2,541,000               |       | 597,000 |   | 1,944,000 |   |
|                                                 |       |                    |       |   |   |   |   |
| **SHAREHOLDERS’  EQUITY**                       |       |                    |       |   |   |   |   |
| Preferred stock,  no par value                       |       | —                  |       | — |   | — |   |
| Common stock, no  par value                          |       | 8,481,000               |       | — |   | 8,481,000 |   |
| Additional  paid-in capital                          |       | 1,621,000               |       | — |   | 1,621,000 |   |
| Retained  earnings                                   |       | 74,000                  |       | (523,000 | ) | 597,000 |   |
| Total  shareholders’ equity                     |       | 10,176,000              |       | (523,000 | ) | 10,699,000 |   |
|                                                 |       |                    |       |   |   |   |   |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY** |       | $                       | 12,717,000 |   | $ | 74,000 |   | $ | 12,643,000 |   |

 

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** **

**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

** **

**COMPARISON OF CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                    | ** ** | **THREE MONTHS ENDED MARCH 31, 2008** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                 | ** ** | **Effect of** | ** ** | **As Previously** | ** ** |
| ** **                                    | ** ** | **As Corrected**                           | ** ** | **Correction** | ** ** | **Reported** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                            | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                    | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET  SALES**                                |       | $                                          | 4,751,000  |   | $ | — |   | $ | 4,751,000 |   |
|                                          |       |                                       |       |   |   |   |   |
| **COST OF  GOODS SOLD**                       |       |                                       |       |   |   |   |   |
| Cost of goods  sold                           |       | 2,970,000                                  |       | 30,000 |   | 2,940,000 |   |
| Inventory impairments                         |       | 5,000                                      |       | — |   | 5,000 |   |
| Total cost of  goods sold                     |       | 2,975,000                                  |       | 30,000 |   | 2,945,000 |   |
|                                          |       |                                       |       |   |   |   |   |
| **GROSS  PROFIT**                             |       | 1,776,000                                  |       | (30,000 | ) | 1,806,000 |   |
|                                          |       |                                       |       |   |   |   |   |
| **OTHER  OPERATING COSTS**                    |       |                                       |       |   |   |   |   |
| Selling, general  and administrative expenses |       | 1,901,000                                  |       | — |   | 1,901,000 |   |
| Royalty expense                               |       | 179,000                                    |       | — |   | 179,000 |   |
| Total other  operating costs                  |       | 2,080,000                                  |       | — |   | 2,080,000 |   |
|                                          |       |                                       |       |   |   |   |   |
| **LOSS  FROM OPERATIONS**                     |       | (304,000                                   | )          | (30,000 | ) | (274,000 | ) |
|                                          |       |                                       |       |   |   |   |   |
| Other income,  net                            |       | 196,000                                    |       | — |   | 196,000 |   |
|                                          |       |                                       |       |   |   |   |   |
| Provision for  income taxes                   |       | (2,000                                     | )          | — |   | (2,000 | ) |
|                                          |       |                                       |       |   |   |   |   |
| **NET  INCOME (LOSS)**                        |       | $                                          | (110,000   | ) | $ | (30,000 | ) | $ | (80,000 | ) |
|                                          |       |                                       |       |   |   |   |   |
| **NET  INCOME (LOSS) PER SHARE**              |       |                                       |       |   |   |   |   |
| Basic                                         |       | $                                          | (0.05      | ) | $ | (0.01 | ) | $ | (0.04 | ) |
| Diluted                                       |       | $                                          | (0.05      | ) | $ | (0.01 | ) | $ | (0.04 | ) |
|                                          |       |                                       |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING**      |       |                                       |       |   |   |   |   |
| Basic                                         |       | 2,284,000                                  |       | — |   | 2,284,000 |   |
| Diluted                                       |       | 2,284,000                                  |       | — |   | 2,284,000 |   |

 

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** **

**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**COMPARISON OF CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                    | ** ** | **NINE MONTHS ENDED MARCH 31, 2008** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | ** **                                | ** ** | **Effect of** | ** ** | **As Previously** | ** ** |
| ** **                                    | ** ** | **As Corrected**                          | ** ** | **Correction** | ** ** | **Reported** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                           | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                    | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET  SALES**                                |       | $                                         | 12,690,000 |   | $ | — |   | $ | 12,690,000 |   |
|                                          |       |                                      |       |   |   |   |   |
| **COST OF  GOODS SOLD**                       |       |                                      |       |   |   |   |   |
| Cost of goods  sold                           |       | 7,861,000                                 |       | 119,000 |   | 7,742,000 |   |
| Inventory  impairments                        |       | 179,000                                   |       | — |   | 179,000 |   |
| Total cost of  goods sold                     |       | 8,040,000                                 |       | 119,000 |   | 7,921,000 |   |
|                                          |       |                                      |       |   |   |   |   |
| **GROSS  PROFIT**                             |       | 4,650,000                                 |       | (119,000 | ) | 4,769,000 |   |
|                                          |       |                                      |       |   |   |   |   |
| **OTHER  OPERATING COSTS**                    |       |                                      |       |   |   |   |   |
| Selling, general  and administrative expenses |       | 5,272,000                                 |       | — |   | 5,272,000 |   |
| Royalty expense                               |       | 447,000                                   |       | — |   | 447,000 |   |
| Total other  operating costs                  |       | 5,719,000                                 |       | — |   | 5,719,000 |   |
|                                          |       |                                      |       |   |   |   |   |
| **LOSS  FROM OPERATIONS**                     |       | (1,069,000                                | )          | (119,000 | ) | (950,000 | ) |
|                                          |       |                                      |       |   |   |   |   |
| Other income,  net                            |       | 276,000                                   |       | — |   | 276,000 |   |
|                                          |       |                                      |       |   |   |   |   |
| Provision for  income taxes                   |       | (9,000                                    | )          | — |   | (9,000 | ) |
|                                          |       |                                      |       |   |   |   |   |
| **NET  INCOME (LOSS)**                        |       | $                                         | (802,000   | ) | $ | (119,000 | ) | $ | (683,000 | ) |
|                                          |       |                                      |       |   |   |   |   |
| **NET  INCOME (LOSS) PER SHARE**              |       |                                      |       |   |   |   |   |
| Basic                                         |       | $                                         | (0.35      | ) | $ | (0.05 | ) | $ | (0.30 | ) |
| Diluted                                       |       | $                                         | (0.35      | ) | $ | (0.05 | ) | $ | (0.30 | ) |
|                                          |       |                                      |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING**      |       |                                      |       |   |   |   |   |
| Basic                                         |       | 2,284,000                                 |       | — |   | 2,284,000 |   |
| Diluted                                       |       | 2,284,000                                 |       | — |   | 2,284,000 |   |

 

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**SPORT-HALEY, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**COMPARISON OF CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **NINE MONTHS ENDED MARCH 31, 2008** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                   | ** ** | ** **                                | ** ** | **Effect of** | ** ** | **As Previously** | ** ** |
| ** **                                                                   | ** ** | **As Corrected**                          | ** ** | **Correction** | ** ** | **Reported** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**                           | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| ** **                                                                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                    |       |                                      |       |   |   |   |   |
| Net loss                                                                     |       | $                                         | (802,000   | ) | $ | (119,000 | ) | $ | (683,000 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation and  amortization                                               |       | 157,000                                   |       | — |   | 157,000 |   |
| Impairments                                                                  |       | 179,000                                   |       | — |   | 179,000 |   |
| Allowance for  doubtful accounts                                             |       | 28,000                                    |       | — |   | 28,000 |   |
| Cash provided  (used) due to changes in assets and liabilities:              |       |                                      |       |   |   |   |   |
| Accounts  receivable                                                         |       | 161,000                                   |       | — |   | 161,000 |   |
| Inventories                                                                  |       | (1,163,000                                | )          | (2,000 | ) | (1,161,000 | ) |
| Other assets                                                                 |       | 11,000                                    |       | — |   | 11,000 |   |
| Accounts payable                                                             |       | (797,000                                  | )          | — |   | (797,000 | ) |
| Accrued expenses  and other                                                  |       | (205,000                                  | )          | 121,000 |   | (326,000 | ) |
| Net cash used by  operating activities                                       |       | (2,431,000                                | )          | — |   | (2,431,000 | ) |
|                                                                         |       |                                      |       |   |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                    |       |                                      |       |   |   |   |   |
| Purchase of  fixed assets                                                    |       | (7,000                                    | )          | — |   | (7,000 | ) |
| Net cash used by  investing activities                                       |       | (7,000                                    | )          | — |   | (7,000 | ) |
|                                                                         |       |                                      |       |   |   |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                    |       |                                      |       |   |   |   |   |
| Borrowings under  line of credit                                             |       | 1,850,000                                 |       | — |   | 1,850,000 |   |
| Repayments under  line of credit                                             |       | (1,350,000                                | )          | — |   | (1,350,000 | ) |
| Net cash  provided by financing activities                                   |       | 500,000                                   |       | — |   | 500,000 |   |
|                                                                         |       |                                      |       |   |   |   |   |
| **NET  DECREASE IN CASH AND CASH EQUIVALENTS**                               |       | (1,938,000                                | )          | — |   | (1,938,000 | ) |
|                                                                         |       |                                      |       |   |   |   |   |
| **CASH  AND CASH EQUIVALENTS,**                                              |       |                                      |       |   |   |   |   |
| beginning of  period                                                         |       | 4,464,000                                 |       | — |   | 4,464,000 |   |
|                                                                         |       |                                      |       |   |   |   |   |
| **CASH  AND CASH EQUIVALENTS,**                                              |       |                                      |       |   |   |   |   |
| end of period                                                                |       | $                                         | 2,526,000  |   | $ | — |   | $ | 2,526,000 |   |
|                                                                         |       |                                      |       |   |   |   |   |
| **SUPPLEMENTAL  CASH FLOW INFORMATION**                                      |       |                                      |       |   |   |   |   |
| Cash paid during  the period for:                                            |       |                                      |       |   |   |   |   |
| Income taxes                                                                 |       | $                                         | 8,000      |   | $ | — |   | $ | 8,000 |   |

 

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**SPORT-HALEY, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 3****                                     ****INVENTORIES**

 
| ** **                               | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2009**           | ** ** | **2008**          | ** ** |
|                                     |       |               |       |              |       |
| Inventories  consisted of the following: |       |               |       |              |       |
| Component                                |       | $                  | 308,000    |              | $          | 331,000 |   |
| Finished goods                           |       | 5,857,000          |       | 5,616,000         |       |
|                                     |       |               |       |              |       |
|                                     |       | $                  | 6,165,000  |              | $          | 5,947,000 |   |

 

Included in finished goods inventories are allowances for inventorywrite-downs of $695,000 and $168,000 as of March 31, 2009, and June 30,2008, respectively.

 

**NOTE 4****                                     ****LINE OF CREDIT AGREEMENT**

 

In September 2007,we entered into a business loan agreement with Bank of Oklahoma N.A. (“Bank ofOklahoma”), which was amended in October 2008. The amended business loanagreement, which expires on September 30, 2009, provides for a maximumloan amount of $3,000,000, collateralized by deposit amounts maintained at Bankof Oklahoma or its affiliates. While the maximum principal amount allowed underthe business loan agreement is $3,000,000, the Company may not borrow amountsunder the business loan agreement in excess of the combined amounts of itscollateralized deposits. We had collateralized deposits of $605,000 at March 31,2009. Borrowings under the business loan agreement accrue interest at the Bankof Oklahoma Financial (“BOKF”) National Prime Rate less 1.500%. We generallyentered into the business loan agreement to facilitate the issuance of lettersof credit for inventory purchases from offshore suppliers. We did not have anybalances due on the business loan agreement at March 31, 2009, or June 30,2008, respectively. Outstandingletters of credit reduce the amount available for borrowing under the businessloan agreement. At March 31, 2009, and June 30, 2008, we hadoutstanding letters of credit of $262,000 and $1,144,000, respectively, issuedthrough Bank of Oklahoma for purchase obligations under outstanding letters ofcredit.

 

In May 2008, we amended the revolving line of credit agreementthat we maintained with US Bank National Association (“US Bank”) for the pastseveral years. The amended revolving line of credit agreement, which expired onDecember 5, 2008, provided for a maximum loan amount of $200,000,collateralized by a certificate of deposit held at US Bank in the amount of$200,000, which earned a market rate of interest. Borrowings under the amendedline of credit agreement accrued interest at 1.250% plus the one-month LIBORrate. At December 5, 2007, the line of credit had previously been amendedto provide for a maximum loan amount of $2,000,000, collateralized by acertificate of deposit held at US Bank in the amount of $2,000,000. Wegenerally maintained the line of credit to facilitate the issuance of lettersof credit for inventory purchases from offshore suppliers and, if necessary, tofund any temporary working capital needs. We did not have any balances due onthe line of credit at March 31, 2009, or June 30, 2008, respectively.Outstanding letters of credit reduced the amount available for borrowing underthe line of credit agreement. At March 31, 2009, and June 30, 2008,we had outstanding letters of credit of $0 and $0, respectively, issued throughUS Bank for purchase obligations under outstanding letters of credit.

 

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**SPORT-HALEY, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 5****                                     ****COMMITMENTS ANDCONTINGENCIES**

 

The license agreement withCallaway requires us to pay royalties based upon sales of Ben Hogan® fashionapparel. We record royalties governed by the license agreement with Callaway asother operating costs in the periods when such sales are recognized. Certainterms of the license agreement provide for minimum royalties on a calendar yearbasis. We expected that royalties generated on sales of Ben Hogan® fashionapparel would be insufficient to meet the contractual minimum royaltyrequirement for calendar 2008 and, accordingly, we had recorded a contingentliability totaling $164,000 with respect to the calendar year 2008 minimumroyalty requirement as of September 30, 2008. In February 2009, werenegotiated certain terms of the license agreement with Callaway, whereby minimumroyalties due for 2008 were reduced to $350,000. Because sales of Ben Hogan®apparel generated royalties in excess of $350,000 for 2008, at December 31,2008, we reversed the contingent liability of $164,000. We expect thatroyalties generated on sales of Ben Hogan® fashion apparel will be sufficientto meet the contractual minimum royalty requirement for calendar 2009.

 

In April 2009, we reached an agreement with ourlandlord to reduce the monthly rent paid on our office and warehouse facilityto $11,000 per month from May 2009 through April 2010. The amendedlease agreement for our facility previously required monthly rent payments of$24,000. In exchange for the reduced monthly rent payments, we agreed to vacateapproximately 16,000 of the 82,500 square feet of available space in thebuilding.

 

**NOTE 6****                                     ****EARNINGS PER SHARE**

 

Effectivewith the year ended June 30, 1998, we adopted the provisions of Statementof Financial Accounting Standards No. 128 (“SFAS 128”), “*Earnings per Share*.*”* SFAS 128requires the presentation of basic and diluted earnings (loss) per commonshare. The following table provides a reconciliation of the numerator anddenominator of basic and diluted earnings (loss) per common share:

 
| ** **                                     | ** ** | **Three Months ended March 31, 2009** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                    | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                 | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                 | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                           |       |                                       |       |   |   |   |   |
| Basic loss per  share                          |       | $                                          | (997,000   | ) | 2,284,000 |   | $ | (0.43 | ) |
|                                           |       |                                       |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                     |       | — |   | — |   |
|                                           |       |                                       |       |   |   |   |   |
| Diluted earnings  per share                    |       | $                                          | (997,000   | ) | 2,284,000 |   | $ | (0.43 | ) |

 

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**SPORT-HALEY, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                     | ** ** | **Three Months ended March 31, 2008** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                    | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                 | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                 | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                           |       |                                       |       |   |   |   |   |
| Basic loss per  share                          |       | $                                          | (110,000   | ) | 2,284,000 |   | $ | (0.05 | ) |
|                                           |       |                                       |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                     |       | — |   | — |   |
|                                           |       |                                       |       |   |   |   |   |
| Diluted loss per  share                        |       | $                                          | (110,000   | ) | 2,284,000 |   | $ | (0.05 | ) |

 
| ** **                                    | ** ** | **Nine Months ended March 31, 2009** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **Net**                                   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Income**                                | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **(Loss)**                                | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                          |       |                                      |       |   |   |   |   |
| Basic loss per  share (as corrected)          |       | $                                         | (2,179,000 | ) | 2,284,000 |   | $ | (0.95 | ) |
|                                          |       |                                      |       |   |   |   |   |
| Effect of  dilutive securities options**[A]** |       | —                                    |       | — |   | — |   |
|                                          |       |                                      |       |   |   |   |   |
| Diluted loss per  share                       |       | $                                         | (2,179,000 | ) | 2,284,000 |   | $ | (0.95 | ) |

 
| ** **                                     | ** ** | **Nine Months ended March 31, 2008** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                           |       |                                      |       |   |   |   |   |
| Basic loss per  share (as corrected)           |       | $                                         | (802,000   | ) | 2,284,000 |   | $ | (0.35 | ) |
|                                           |       |                                      |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                    |       | — |   | — |   |
|                                           |       |                                      |       |   |   |   |   |
| Diluted loss per  share                        |       | $                                         | (802,000   | ) | 2,284,000 |   | $ | (0.35 | ) |

 

----

**[A]** All securities options wereanti-dilutive and therefore excluded from the loss per share calculations dueto the loss for the period presented.

 

**NOTE 7****                                     ****SEGMENT INFORMATION**

 

The consolidatedCompany has two operating segments which consist of designing, purchasing orcontracting for the manufacture of and wholesale sales of women’s and men’s: (1) fashiongolf apparel and outerwear; and, (2) branded golf apparel, which wediscontinued marketing as of November 2007. SPORT HALEY® and Ben Hogan®fashion golf apparel and outerwear collections are primarily marketed by SportHaley in the premium and mid-priced markets through a network of independentwholesale sales representatives to golf professional shops, country clubs,resorts and exclusive department stores within the United States. Top-Flite®men’s branded apparel was marketed by Reserve Apparel to mass retailers andother big-box type high sales volume retail stores 

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

within the UnitedStates. Ben Hogan® fashion apparel and Top-Flite® branded apparel have beendistributed pursuant to a license agreement with Callaway.

 

Reserve Appareldistributed Top-Flite® apparel exclusively to Wal-Mart from March 2006through August 2006, after which we aggressively marketed Top-Flite®apparel to several mass retailers and big-box type high sales volume retailstores. We expected our marketing efforts would result in the establishment ofbusiness relationships with one or more mass retailers and other big-box typehigh sales volume retail stores. However, we only received one order forTop-Flite® apparel from such a retailer for a test in 50 of its stores, whichwe shipped in September and October 2007. Since our concerted effortsfailed to generate orders from a major customer, we discontinued marketingapparel bearing the Top-Flite® label in November 2007. In March 2008,we reached an agreement with Callaway to remove the Top-Flite® brand from thelicense agreement, effective January 1, 2008.

 

Condensedconsolidated balance sheets information and condensed consolidated statementsof operations information for each of our segments are presented in the tablesbelow.

 

*CondensedConsolidated Balance Sheets Segment Information as of March 31, 2009, and June 30,2008 (in thousands):*

 
| ** **                              | ** ** | **March 31, 2009** | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **Fashion  Apparel**    | ** ** | **Branded  Apparel**   | ** ** | **Total** | ** ** | **Fashion  Apparel** | ** ** | **Branded  Apparel** | ** ** | **Total** | ** ** |
| Cash and cash  equivalents              |       | $                       | 1,395      |                   | $          | — |   | $ | 1,395 |   | $ | 2,798 |   | $ | 32 |   | $ | 2,830 |   |
| Marketable  securities                  |       | —                  |       | —                 |       | — |   | 200 |   | — |   | 200 |   |
| Accounts  receivable, net of allowances |       | 1,786                   |       | 117                    |       | 1,903 |   | 2,439 |   | 352 |   | 2,791 |   |
| Inventories                             |       | 6,165                   |       | —                 |       | 6,165 |   | 5,947 |   | — |   | 5,947 |   |
| Prepaid expenses                        |       | 146                     |       | —                 |       | 146 |   | 264 |   | — |   | 264 |   |
| Property and  equipment, net            |       | 122                     |       | —                 |       | 122 |   | 197 |   | — |   | 197 |   |
| Other assets                            |       | 3                       |       | —                 |       | 3 |   | 3 |   | — |   | 3 |   |
| Total Assets                            |       | $                       | 9,617      |                   | $          | 117 |   | $ | 9,734 |   | $ | 11,848 |   | $ | 384 |   | $ | 12,232 |   |
|                                    |       |                    |       |                   |       |   |   |   |   |   |   |   |   |
| Accounts payable                        |       | $                       | 482        |                   | $          | — |   | $ | 482 |   | $ | 500 |   | $ | 236 |   | $ | 736 |   |
| Accrued  royalties payable              |       | 53                      |       | —                 |       | 53 |   | 52 |   | — |   | 52 |   |
| Accrued  commissions payable            |       | 138                     |       | —                 |       | 138 |   | 180 |   | — |   | 180 |   |
| Accrued payroll                         |       | 49                      |       | —                 |       | 49 |   | 138 |   | — |   | 138 |   |
| Accrued customs duties  payable         |       | 828                     |       | —                 |       | 828 |   | 685 |   | — |   | 685 |   |
| Other  liabilities                      |       | 179                     |       | —                 |       | 179 |   | 177 |   | — |   | 177 |   |
|                                    |       | 1,729                   |       | —                 |       | 1,729 |   | 1,732 |   | 236 |   | 1,968 |   |
| Minimum  royalties payable (current)    |       | —                  |       | —                 |       | — |   | 80 |   | — |   | 80 |   |
| Total  Liabilities - Current            |       | $                       | 1,729      |                   | $          | — |   | $ | 1,729 |   | $ | 1,812 |   | $ | 236 |   | $ | 2,048 |   |

 

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**SPORT-HALEY, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

*CondensedConsolidated Statements of Operations Segment Information for the Three Monthsand Nine Months Ended March 31, 2009 and 2008, as corrected (inthousands):*

 
| ** **                           | ** ** | **Three Months Ended  March 31, 2009** | ** ** | **Three Months Ended  March 31, 2008  (As Corrected)** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                           | ** ** | **Fashion  Apparel**                        | ** ** | **Branded  Apparel**                                        | ** ** | **Total** | ** ** | **Fashion  Apparel** | ** ** | **Branded  Apparel** | ** ** | **Total** | ** ** |
| Net Sales                            |       | $                                           | 2,852      |                                                        | $          | — |   | $ | 2,852 |   | $ | 4,739 |   | $ | 12 |   | $ | 4,751 |   |
| Cost of goods  sold                  |       | 2,125                                       |       | —                                                      |       | 2,125 |   | 2,953 |   | 17 |   | 2,970 |   |
| Inventory  impairments               |       | 254                                         |       | —                                                      |       | 254 |   | 5 |   | — |   | 5 |   |
| Total cost of  goods sold            |       | 2,379                                       |       | —                                                      |       | 2,379 |   | 2,958 |   | 17 |   | 2,975 |   |
| Gross profit                         |       | 473                                         |       | —                                                      |       | 473 |   | 1,781 |   | (5 | ) | 1,776 |   |
| Selling, general  and admin expenses |       | 1,415                                       |       | 1                                                           |       | 1,416 |   | 1,897 |   | 4 |   | 1,901 |   |
| Royalty expense                      |       | 53                                          |       | —                                                      |       | 53 |   | 181 |   | (2 | ) | 179 |   |
| Total other  operating costs         |       | 1,468                                       |       | 1                                                           |       | 1,469 |   | 2,078 |   | 2 |   | 2,080 |   |
| Loss from operations                 |       | (995                                        | )          | (1                                                          | )          | (996 | ) | (297 | ) | (7 | ) | (304 | ) |
| Other income  (expense), net         |       | (1                                          | )          | —                                                      |       | (1 | ) | 18 |   | 178 |   | 196 |   |
| Provision for  income taxes          |       | —                                      |       | —                                                      |       | — |   | (2 | ) | — |   | (2 | ) |
| Net income  (loss)                   |       | $                                           | (996       | )                                                           | $          | (1 | ) | $ | (997 | ) | $ | (281 | ) | $ | 171 |   | $ | (110 | ) |

 
| ** **                           | ** ** | **Nine Months Ended  March 31, 2009** | ** ** | **Nine Months Ended  March 31, 2008  (As Corrected)** | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                           | ** ** | **Fashion  Apparel**                       | ** ** | **Branded  Apparel**                                       | ** ** | **Total** | ** ** | **Fashion  Apparel** | ** ** | **Branded  Apparel** | ** ** | **Total** | ** ** |
| Net Sales                            |       | $                                          | 8,901      |                                                       | $          | — |   | $ | 8,901 |   | $ | 12,532 |   | $ | 158 |   | $ | 12,690 |   |
| Cost of goods  sold                  |       | 6,039                                      |       | —                                                     |       | 6,039 |   | 7,723 |   | 138 |   | 7,861 |   |
| Inventory  impairments               |       | 585                                        |       | —                                                     |       | 585 |   | 159 |   | 20 |   | 179 |   |
| Total cost of  goods sold            |       | 6,624                                      |       | —                                                     |       | 6,624 |   | 7,882 |   | 158 |   | 8,040 |   |
| Gross profit                         |       | 2,277                                      |       | —                                                     |       | 2,277 |   | 4,650 |   | — |   | 4,650 |   |
| Selling, general  and admin expenses |       | 4,246                                      |       | 42                                                         |       | 4,288 |   | 5,140 |   | 132 |   | 5,272 |   |
| Royalty expense                      |       | 209                                        |       | —                                                     |       | 209 |   | 438 |   | 9 |   | 447 |   |
| Total other  operating costs         |       | 4,455                                      |       | 42                                                         |       | 4,497 |   | 5,578 |   | 141 |   | 5,719 |   |
| Loss from  operations                |       | (2,178                                     | )          | (42                                                        | )          | (2,220 | ) | (928 | ) | (141 | ) | (1,069 | ) |
| Other income  (expense), net         |       | 43                                         |       | —                                                     |       | 43 |   | 97 |   | 179 |   | 276 |   |
| Provision for  income taxes          |       | (2                                         | )          | —                                                     |       | (2 | ) | (2 | ) | (7 | ) | (9 | ) |
| Net income  (loss)                   |       | $                                          | (2,137     | )                                                          | $          | (42 | ) | $ | (2,179 | ) | $ | (833 | ) | $ | 31 |   | $ | (802 | ) |

 

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**SPORT-HALEY, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 8****            ****LITIGATION**

 

As previously reported, in March 2007, Sport Haley and ReserveApparel (the “Plaintiffs”) filed a lawsuit in the District Court for the Cityand County of Denver in the State of Colorado. The suit alleged, among otherthings, that a former inventory broker to Reserve Apparel, 1130746 OntarioLtd., a Canadian corporation incorporated in the Province of Ontario, Canada,d/b/a Originals Apparel Group Co., or Originals Apparel Group, and FrancisTat-Mo Chan (the “Defendants”), knowingly, wrongfully and without authorizationconverted Plaintiff’s funds and were unjustly enriched. At the conclusion ofthe trial in September 2008, the Court awarded judgment in the Plaintiff’sfavor and against the Defendants, jointly and severally, in the amount of$291,135. On November 4, 2008, the Defendants filed an appeal of theDistrict Court’s judgment in the Colorado Court of Appeals. The appeal ispending. At this time, we cannot determine whether the Court of Appeals willaffirm or reverse, in whole or in part, the District Court’s judgment.In order to collect from theformer broker and its principal, assuming the Court of Appeals affirms thejudgment we obtained from the District Court, we will need to domesticate thejudgment in the province of Ontario, Canada. Since collection of the previouslyawarded judgment is not assured, we have maintained a reserve for potentialnon-recovery in the amount of $175,000.

 

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**SPORT-HALEY, INC.**

**ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

This Report on Form 10-Q contains certain forward-lookingstatements, within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. The words“may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,”“intend,” “believe,” and similar expressions, variations or the negative ofthese words, and any statement regarding possible or assumed future results ofoperations of our business, the markets for our products, anticipatedexpenditures, regulatory developments or competition, or other statementsregarding matters that are not historical facts, are intended to identifyforward-looking statements, although not all forward-looking statements containsuch identifying words. The reader should be aware that our actual results coulddiffer materially from those contained in forward-looking statements. Ourfinancial condition and the results of our operations will depend on a numberof factors, including, but not limited to, the following: our ability tosuccessfully anticipate fashion trends, design favorably accepted fashion golfapparel, effectively advertise and communicate within the marketplace, andpenetrate our chosen distribution channels; competition within golf apparelmarkets; business conditions and growth in the fashion golf apparel market andthe general economy; our ability to successfully forecast sales and optimizeinventory levels; our ability to successfully manage risks associated withlicensed apparel, such as the Ben Hogan® apparel collections; loss of certainthird party suppliers, and/or delays in receiving garments from third partysuppliers caused by various factors, including lost or reduced manufacturingcapacity of significant suppliers, labor shortages, timely performance of thirdparties, transportation difficulties, and others; significant delays indeliveries from third party suppliers; unsatisfactory recourse with regard tononconforming goods received from foreign suppliers; political andinternational trade relations; changes in international trade quota systems forapparel; significant reliance upon several individual foreign suppliers;reliance upon a certain foreign person responsible for maintainingrelationships with and monitoring the performance of certain of our significantforeign suppliers; consumer spending on golf apparel; general global economicand political conditions resulting from threats or acts of war or terrorism andresponses thereto; access to capital; maintaining satisfactory relationshipswith commercial banking institutions; establishing controls with regard to andmaintaining the integrity of technology and information systems; and, relianceupon executive officers and key employees. Additional information on these andother factors that could affect our financial results is included in thediscussion below and in our Form 10-K for the year ended June 30,2008. There may be other factors not mentioned above, in the discussion belowor included in our Securities and Exchange Commission filings that may causeactual results to differ materially from any forward-looking statement. Thereader should not place undue reliance on any forward-looking statement.Neither the Company nor any of its corporate officers or key employees assumesany obligation to update any forward-looking statement as a result of newinformation, future event or development, except as required by securitieslaws.

 

All references to fiscal years are references to SportHaley’s fiscal year, which ends on June 30.

 

##### **OVERVIEW**

##### ** **

Sport-Haley, Inc.designs, purchases or contracts for the manufacture of, markets and distributeswomen’s and men’s fashion golf apparel and outerwear under the SPORT HALEY® andBen Hogan® labels. Weare represented by a network of independent wholesale sales representatives,most of whom solicit sales of both SPORT HALEY® and Ben Hogan® fashion apparelcollections on our behalf.

 

SPORTHALEY® fashion apparel is comprised almost exclusively of women’s garments andaccessories, designed by utilizing classic styles with contemporary influences intendedto develop and maintain brand recognition and loyalty, on or off the golfcourse. While each product in the SPORT HALEY® apparel line is sold separately,the line is intentionally designed in groups with coordinated 

 

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styles,color schemes and fabrics to encourage customers to purchase multiple garments.SPORT HALEY® women’s fashion apparel includes a variety of fabrics and weavepatterns, including interlock, pique, French terry, jersey and twill, and mayfeature a unique trim, a special fabric finish or extra needlework. The SPORTHALEY® name has been highly recognized as a women’s fashion apparel brand withinthe premium and mid-priced golf apparel markets for over 20 years, in part,because of the cohesiveness of our design staff. Catherine B. Blair, our VicePresident — Merchandising and Design, has provided direction for the SPORTHALEY® brand for over 16 years. Ms. Blair is keenly aware of fashiontrends within the women’s golf apparel market and has kept our SPORT HALEY®fashion apparel collections on the leading edge of the market by includingmoisture wicking technical performance fabrics, such as Aerocool® and Dry-Tech®18, and several leading edge, younger looking, athletic-style garments, whilemaintaining the time-honored elegance of the SPORT HALEY® brand. Certain of ourpremium priced SPORT HALEY® garments are trimmed with Swarovski® Austrian cutcrystals, the unique and patented cutting process which produces ultimatebrilliance, and come with a “Made with Crystallized Swarovski® Elements”hangtag for authenticity. The technical performance fabrics, athletic-stylegarments and Swarovski® trims have all been well received by our customers.

 

BenHogan® men’s fashion apparel is designed utilizing elegant time-honored classicstyles intended to garner nearly instantaneous brand recognition. The BenHogan® label has been widely recognized within the golf apparel industry forseveral years for continually providing elegant men’s fashion golf apparel ofimpeccable quality in keeping with the image of Mr. Hogan. While eachproduct in the Ben Hogan® apparel line is sold separately, the line isintentionally designed in groups with coordinated styles, color schemes andfabrics to encourage customers to purchase multiple garments. Ben Hogan®apparel is manufactured using a variety of fabrics, including wool, silk andcashmere, and weave patterns, including pique, jersey and twill, and mostpieces feature a unique trim, a special fabric finish or extra needlework. BenHogan® men’s apparel is marketed in the premium-price markets to elite golfprofessional shops, upscale resorts and exclusive department stores. Wedistribute Ben Hogan® apparel pursuant to our license agreement with Callaway.

 

Top-Flite®branded golf apparel was designed for distribution to large retail stores inthe low-price markets pursuant to our license agreement with Callaway. Brandedapparel is generally produced in mass quantities and usually utilizes muchsimpler designs and is of much lesser quality than the fashion apparel garmentswhich we sell in the premium and mid-price markets. While our fashion golfapparel was generally designed for two separate selling seasons each year,branded golf apparel may be designed for four or more shorter selling periodseach year. Reserve Apparel distributed Top-Flite® apparel exclusively toWal-Mart from March 2006 through August 2006, after which we aggressivelymarketed the Top-Flite® apparel line to several mass retailers and big-box typehigh sales volume retail stores. While we expected our marketing efforts wouldresult in the establishment of business relationships with one or more massretailers and other big-box type high sales volume retail stores, we onlyreceived one order for Top-Flite® apparel from such a retailer for a test in 50of its stores, which we shipped in September and October 2007. Sinceour concerted efforts failed to generate orders from a major customer, wediscontinued marketing apparel bearing the Top-Flite® label in November 2007, and in March 2008 the licenseagreement with Callaway was amended to remove the Top-Flite® brand, effective January 1,2008.

 

##### **CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

##### ** **

Ourfinancial statements have been prepared in accordance with standards of thePublic Company Accounting Oversight Board (United States), which require us tomake estimates and judgments that 

 

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affectthe reported amounts of assets, liabilities, revenues and expenses, and therelated disclosures. A summary of those significant accounting policies can befound in the Footnotes to the Financial Statements included in our Report on Form 10-Kfor the fiscal year ended June 30, 2008. The estimates used by management are based upon our historicalexperiences combined with management’s understanding of current facts andcircumstances. Certain of our accounting policies are considered critical asthey are both important to the portrayal of our financial condition and theresults of our operations and require significant or complex judgments on the partof management. We believe that the following critical accounting policiesaffect the more significant judgments and estimates used in the preparation ofour financial statements.

 

*Inventories*

 

Our inventories, predominately comprised of finishedgoods, are generally valued at the lower of cost (weighted average) or market.Costs include amounts paid to suppliers for packaged apparel and/or materialsand labor, import costs, such as customs duties, freight-in and othermiscellaneous costs, and allocated overhead. Excess fashion apparelinventories, consisting of discontinued or aging merchandise, are a naturalcomponent of a seasonal apparel business. While certain fashion apparel itemswill sell out in any particular selling season, quantities of other fashionapparel items will remain at the end of each selling season. We market excessfashion apparel finished goods inventories at reduced wholesale prices to ourcustomers in the normal course of business. Remaining excess inventories areliquidated through other markets. In the ordinary course of business, wemaintain reserves for inventory write-downs due to the obsolescence of excessinventories. We perform analyses on a quarterly basis to identify unsold excessinventories and adjust our reserves for inventory obsolescence to reduce thecarrying value of excess inventories to their estimated net realizable value,which is estimated based on management’s disposition plans and historicalexperiences. Generally, branded apparel inventories were not prone toimpairment, because we usually ordered branded apparel in quantities perspecific customer orders.

 

We believe that the recent significant downturn inthe United States economy negatively impacted the value of our excess fashionapparel inventories, and we adjusted the carrying value of our excess fashionapparel inventories, accordingly. We adjusted our reserve for inventoryobsolescence and recorded impairments of $254,000 and $585,000 with regard tofashion apparel inventories for the three-month and nine-month periods ended March 31,2009. Comparatively, we adjusted our reserve for inventory obsolescence andrecorded impairments of $5,000 and $179,000 with regard to fashion apparelinventories for the three-month and nine-month periods ended March 31, 2008.The balances of our reserves for inventory obsolescence totaled $695,000,$168,000 and $178,000 at March 31, 2009, June 30, 2008, and March 31,2008, respectively. While we believe that our processes produce fair valuationsof our excess inventories, if actual future market conditions are lessfavorable than those projected by management, additional allowances may berequired.

 

*Deferred Income Taxes*

 

Deferred income taxes are recognized for the expected tax consequencesin future years for differences between the tax bases of assets and liabilitiesand their financial reporting amounts, based upon enacted tax laws andstatutory tax rates applicable to the periods in which the differences areexpected to affect taxable income. Our significant deferred tax assets arerelated to net operating loss carry forwards for federal and state income taxpurposes, stock-based compensation and an unrealized loss for tax purposes on acommon stock investment. Governing regulations require that our operatinglosses be carried forward for income tax purposes. We maintain a valuationallowance to reduce deferred tax assets to the 

 

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net amount expected to be recovered in future periods. The estimatesfor deferred tax assets and the corresponding valuation allowance require us toexercise complex judgments. We periodically review and adjust those estimatesbased upon the most current information available. In accordance with Statementof Financial Accounting Standards No. 109 (“SFAS 109”), *“Accounting for Income Taxes,”* and based upon a review at March 31,2009, of our utilization of deferred tax assets, we maintained a valuation allowancethat effectively reduces our net deferred tax assets to zero. While we continueto explore various strategies to return the Company to profitability, includingincreasing our presence in retail markets for our SPORT HALEY® and Ben Hogan®fashion apparel, we cannot be certain that our efforts will result in thegeneration of future profits. Because the recoverability of deferred tax assetsis directly dependent upon future operating results, actual recoverability ofdeferred tax assets may differ materially from our estimates.

 

*Allowance for Doubtful Accounts*

 

Ourallowance for doubtful accounts reflects a reserve that reduces our customeraccounts receivable to the net amount estimated to be collectible. Estimatingthe credit worthiness of customers and the recoverability of customer accountsrequires us to exercise considerable judgment. In estimating the reserve foruncollectible accounts, we consider factors such as general economic andindustry-specific conditions, historical and anticipated customer performance.From time to time, we also identify delinquent customer accounts for which aspecific reserve is required. At March 31, 2009, our allowance fordoubtful accounts totaled $265,000, including a specific reserve of $175,000with respect to the potential non-recovery of a net amount due to ReserveApparel from a former inventory broker. In September 2008, the Courtawarded judgment in our favor and against the former inventory broker and itsprincipal in the amount of $291,135. In November, 2008, the former inventorybroker filed an appeal of the District Court’s judgment in the Colorado Courtof Appeals. In order to collect from the former broker and its principal,assuming the Court of Appeals affirms the judgment we obtained from the DistrictCourt, we will need to domesticate the judgment in the province of Ontario,Canada. Since collection of the previously awarded judgment is not assured, wehave maintained a reserve for potential non-recovery in the amount of $175,000.While we consider our processes to be adequate to effectively quantify ourexposure to doubtful accounts, changes in economic, industry or specificcustomer conditions may result in recoverability of our doubtful accounts thatdiffers materially from our estimates.

 

*Allowance for Sales Returns*

 

Werecord allowances for sales returns as net adjustments to customer accountsreceivable. When recording an allowance, the net method reduces customeraccounts receivable and net sales by the estimated gross margin effect of theanticipated sales return. Generally, our selling terms preclude return of ourproducts subsequent to the sale. However, we have traditionally maintainedlimited programs that offer various customers the right to return certainfashion apparel items under predefined conditions, which we include as acomponent within our estimate of allowance for sales returns. We reviewhistorical data and consider factors such as general economic andindustry-specific conditions and anticipated customer performance when evaluatingthe adequacy of our allowance for sales returns. At March 31, 2009, ourallowance for sales returns was $81,000. Significant changes in generaleconomic or industry conditions may yield sales returns that differ materiallyfrom our estimates.

 

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### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

The golf apparel business is highly seasonal in nature, and we believethat our balance sheet amounts at March 31, 2009, are more meaningful whencompared with the corresponding balance sheet amounts at March 31, 2008,rather than with the corresponding balance sheet amounts at June 30, 2008.

 

Our primary sources of liquidity are derived from our available cashand cash equivalents and cash flows from operations. We require cash for ourgeneral working capital purposes. Our working capital requirements are highlyseasonal in nature, with greater requirements from approximately August throughOctober and February through April of each fiscal year, due tothe purchases of finished goods inventories for the spring/summer andfall/holiday selling seasons, respectively. We do not anticipate requiringmaterial amounts of cash for capital expenditures over the next 12 months.

 

Working capital was $7,880,000, $9,984,000 and $9,924,000 at March 31,2009, June 30, 2008, and March 31, 2008, as corrected, respectively.Cash and cash equivalents totaled $1,395,000, $2,830,000 and $2,526,000 at March 31,2009, June 30, 2008, and March 31, 2008, respectively. For purposesof the statements of cash flows, we consider all highly liquid instrumentspurchased with an original maturity of three months or less to be cashequivalents, if they are readily convertible to known amounts of cash andpresent an insignificant risk of change in value due to changes in interestrates. As of March 31, 2009, we had accrued $828,000 in import duties dueto US Customs and Border Protection, including accrued interest thereon of $113,000,with regard to the Prior Disclosure we submitted in November 2008. Weexpect to negotiate the terms of a payment plan with the National FinanceCenter. If we are required to pay the entire balance of import duties andinterest in a lump sum payment with regard to the Prior Disclosure, our cash onhand will be significantly impacted and we may need to obtain additionalsources of capital to sustain the working capital needs of our operations.However, we can give no assurance that such sources of capital will beavailable to us, given the current status of capital markets in the UnitedStates and other factors. Our capital needs will depend on many factors,including the need to finance required inventory levels, the success of currentsales and marketing programs, and our ability to timely collect customeraccounts receivable.

 

When compared with the June 30, 2008, balance of $2,791,000, ournet accounts receivable balance at March 31, 2009, decreased by $888,000,or 32%, to $1,903,000. Our net accounts receivable balance at March 31,2009, decreased by $974,000, or 34%, when compared with the March 31,2008, balance of $2,877,000. The decreases correlate with correspondingdecreases in net sales between the comparable periods. Our net accountsreceivable balance relating to fashion apparel was $1,786,000 at March 31,2009, a decrease of $653,000, or 27%, from the balance of $2,439,000 at June 30,2008, and a decrease of $695,000, or 28%, from the balance of $2,481,000 at March 31,2008. Our net accounts receivable balance relating to branded apparel was$117,000 at March 31, 2009, a decrease of $235,000, or 67%, from thebalance of $352,000 at June 30, 2008, and a decrease of $279,000, or 70%,from the balance of $396,000 at March 31, 2008. Changes in our accountsreceivable balances provided operating cash of $888,000 and $189,000 for thenine months ended March 31, 2009 and 2008, respectively.

 

Our fashionapparel inventories increased by $218,000, or 4%, from $5,947,000 at June 30,2008, to $6,165,000 at March 31, 2009. Our fashion apparel inventoriesincreased by $981,000, or 17%, from $5,886,000 at June 30, 2008, ascorrected, to $6,867,000 at March 31, 2008, as corrected. When comparedwith the balance of $6,867,000 at March 31, 2008, as corrected, ourinventories at March 31, 2009, decreased by $702,000, or 10%. Our branded apparel inventories were lessthan $1,000 at March 31, 2009, and June 30, 2008, and were $3,000 at March 31,2008. Fluctuations in our finished goods 

 

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inventories are caused in part by the timing associated with the deliveryof ocean shipments, generally with terms of free on board at the port ofdeparture. Pendingocean deliveries of finished goods at March 31, 2009, June 30, 2008,and March 31, 2008, totaled approximately $986,000, $264,000 and $692,000respectively. Changes in our inventory balances used operating cash of $218,000and $984,000 for the nine-month periods ended March 31, 2009 and 2008, ascorrected, respectively.

 

Our continuedreliance on foreign suppliers sustains the risk that our revenues could beadversely affected if a foreign shipment or shipments were received late orlost. We maintain insurance for risk of loss relating to goods shipped from ourforeign and domestic suppliers. However, our predominant reliance upon acertain foreign person and certain significant foreign suppliers also sustainsthe risk that we would be left with inadequate or unsatisfactory recourseshould the goods received from a foreign supplier be nonconforming.

 

Total liabilitiesdecreased by $319,000, or 16%, at March 31, 2009, to $1,729,000 from$2,048,000 at June 30, 2008. Total liabilities decreased by $502,000, or16%, at March 31, 2008, to $2,541,000, as corrected, from $3,043,000 at June 30,2007, as corrected. At March 31, 2009, total liabilities decreased by$812,000, or 32%, from $2,541,000 at March 31, 2008, as corrected. Thedecrease between the comparative March 31 amounts was comprised of thefollowing: $500,000 decrease in notes payable; $287,000 decrease in tradeaccounts payable; $88,000 decrease in accrued royalties payable; $61,000decrease in accrued sales commissions payable; $64,000 decrease in accruedpayroll payable; $231,000 increase in accrued customs duties payable; $5,000decrease in other accrued expenses; and, $38,000 decrease in minimum royaltiespayable. The decrease in trade accounts payable relate to the differencesbetween the nature and timing of payments, and the decreases in accruedroyalties payable and sales commissions payable relate to a correspondingdecrease in net sales between the comparative three month periods ended March 31,2009 and 2008, as corrected. At March 31, 2008, accrued payroll expenses included $46,000 inseverance and other compensation payable to our former regional sales managers.One of our former regional sales managers received severance compensationthrough August 2008. Accrued severance and other compensation was $0 at March 31,2009. Changes in our total liabilities used operating cash of $319,000 and$1,002,000 for the nine-month periods ended March 31, 2009 and 2008, ascorrected, respectively.

 

Due to thecombination of the factors discussed above, and others, during the nine monthsended March 31, 2009, our operating activities used cash of $1,594,000.Comparatively, during the nine months ended March 31, 2008, our operatingactivities used cash of $2,431,000.

 

For the nine monthsended March 31, 2009, investing activities provided cash of $159,000,primarily from the maturity of a marketable security. Comparatively, for thenine months ended March 31, 2008, investing activities used cash of$7,000. During the nine months ended March 31, 2009 and 2008, we expended$41,000 and $7,000, respectively, for the purchase of property and equipment,and $117,000 and $157,000, respectively, in depreciation and amortization wascharged to current operations.

 

In September 2007,we entered into a business loan agreement with Bank of Oklahoma N.A. (“Bank ofOklahoma”), which was amended in October 2008. The amended business loanagreement, which expires on September 30, 2009, provides for a maximumloan amount of $3,000,000, collateralized by deposit amounts maintained at Bankof Oklahoma or its affiliates. While the maximum principal amount allowed underthe business loan agreement is $3,000,000, the Company may not borrow amountsunder the business loan agreement in excess of the combined amounts of itscollateralized deposits. We had collateralized deposits of $605,000 at March 31,2009. Borrowings under the business loan agreement 

 

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accrue interest atthe Bank of Oklahoma Financial (“BOKF”) National Prime Rate less 1.500%. We generallyentered into the business loan agreement to facilitate the issuance of lettersof credit for inventory purchases from offshore suppliers. We did not have anybalances due on the business loan agreement at March 31, 2009, or June 30,2008, respectively. Outstandingletters of credit reduce the amount available for borrowing under the businessloan agreement. At March 31, 2009, and June 30, 2008, we hadoutstanding letters of credit of $262,000 and $1,144,000, respectively, issuedthrough Bank of Oklahoma for purchase obligations under outstanding letters ofcredit.

 

In May 2008, we amended the revolving line of credit agreementthat we maintained with US Bank National Association (“US Bank”) for the pastseveral years. The amended revolving line of credit agreement, which expired onDecember 5, 2008, provided for a maximum loan amount of $200,000,collateralized by a certificate of deposit held at US Bank in the amount of$200,000, which earned a market rate of interest. Borrowings under the amendedline of credit agreement accrued interest at 1.250% plus the one-month LIBORrate. At December 5, 2007, the line of credit had previously been amendedto provide for a maximum loan amount of $2,000,000, collateralized by acertificate of deposit held at US Bank in the amount of $2,000,000. Wegenerally maintained the line of credit to facilitate the issuance of lettersof credit for inventory purchases from offshore suppliers and, if necessary, tofund any temporary working capital needs. We did not have any balances due onthe line of credit at March 31, 2009, or June 30, 2008, respectively.Outstanding letters of credit reduced the amount available for borrowing underthe line of credit agreement. At March 31, 2009, and June 30, 2008,we had outstanding letters of credit of $0 and $0, respectively, issued throughUS Bank for purchase obligations under outstanding letters of credit.

 

 **RESULTS OF OPERATIONS**

 

Total net sales for the three months ended March 31, 2009, were$2,852,000, a decrease of $1,899,000, or 40%, from total net sales of$4,751,000 for the three months ended March 31, 2008, primarily due to adecrease in net sales of fashion apparel as explained below. Net sales offashion apparel for the three months ended March 31, 2009, were$2,852,000, a decrease of $1,887,000, or 40%, from net sales of fashion apparelof $4,739,000 for the three months ended March 31, 2008. Net sales ofbranded apparel for the three months ended March 31, 2009 and 2008, were$0 and $12,000, respectively.  Our netsales also include embroidery and shipping revenues.

 

Total net sales for the nine months ended March 31, 2009, were$8,901,000, a decrease of $3,789,000, or 30%, from total net sales of$12,690,000 for the nine months ended March 31, 2008, primarily due to adecrease in net sales of fashion apparel as explained below. Net sales offashion apparel for the nine months ended March 31, 2009, were $8,901,000,a decrease of $3,631,000, or 29%, from net sales of fashion apparel of$12,532,000 for the nine months ended March 31, 2008. Net sales of brandedapparel for the nine months ended March 31, 2009 and 2008, were $0 and$158,000, respectively.  Our net salesalso include embroidery and shipping revenues.

 

Our consolidatedgross margins may not be comparable to other companies within the golf apparelindustry. We have consistently included the cost of merchandise sold, includingimport charges, in-bound freight, allocated overhead, freight out, embroiderycosts and other charges in our cost of goods sold. Our overhead allocationincludes our production costs plus a portion of our distribution costs, such asreceiving and inspection costs, but we include some of the other costs ofdistribution, such as a portion of our warehousing and other handling costs, inselling, general and administrative expenses. Our gross margins also include, ona consolidated basis, the operations of Reserve Apparel, which distributed Top-Flite®

 

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branded apparel untilNovember 2007 to the mass retail market at much lower price points andgross margins than those expected to be achieved in the premium and mid-pricemarkets where we distribute our SPORT HALEY® and Ben Hogan® fashion apparelbrands. Other fashion apparel companies within the golf industry may or may notalso operate within the lower price markets. We include royalty payments,relating to sales of licensed apparel, in selling, general and administrativeexpenses.

 

*Fashion apparel*

 

Our fashion apparel business is seasonal in nature, and sales occurringfrom January through June, which comprise our third and fourth quarters ofeach fiscal year, are generally disproportionately higher than sales occurringfrom July through December.

 

Net sales of fashion apparel for the three months ended March 31,2009, were $2,852,000, a decrease of $1,887,000, or 40%, from net sales offashion apparel of $4,739,000 for the three months ended March 31, 2008.Net sales of fashion apparel for the nine months ended March 31, 2009,were $8,901,000, a decrease of $3,631,000, or 29%, from net sales of fashionapparel of $12,532,000 for the nine months ended March 31, 2008. Thedecreases in sales of fashion apparel for the comparative three-month andnine-month periods was primarily comprised of decreases in sales of SPORTHALEY® and Ben Hogan® fashion apparel between the respective periods. Net salesof our SPORT HALEY® fashion apparel collections were $1,647,000 and $2,196,000for the three months ended March 31, 2009 and 2008, respectively, adecrease of $549,000, or 25%, and were $5,189,000 and $5,945,000 for the ninemonths ended March 31, 2009 and 2008, respectively, a decrease of$756,000, or 13%. Net sales of our Ben Hogan® fashion apparel collections were$1,117,000 and $2,397,000 for the three months ended March 31, 2009 and2008, respectively, a decrease of $1,280,000, or 53%, and were $3,438,000 and$6,185,000 for the nine months ended March 31, 2009 and 2008,respectively, a decrease of $2,747,000, or 44%. The remainder of our fashionapparel net sales for the three months and nine months ended March 31,2009 and 2008, were comprised of embroidery and shipping revenues.

 

We consider the current recession of the United States economy to be alarge contributing factor to the decrease in our fashion apparel sales. Ourcustomers and other apparel distributors have indicated that cutbacks inconsumer spending has caused reductions of fifty percent or more in apparelsales during the economic downturn over the last several months. We believethat our SPORT HALEY® fashion apparel brand may be better positioned tomaintain market share in weak economic times than our Ben Hogan® fashionapparel brand, which is subject to greater competition within the country cluband resort markets in which we primarily operate. Historically, the countryclub and resort markets have preferred to sell high-quality apparel that wasnot widely distributed within other retail markets. However, the broad marketacceptance of major apparel brands such as Nike, Adidas and Under Armour, whichare primarily comprised of performance fabrics and are globally distributedinto numerous markets other than country clubs and resorts, appear to havediluted the value associated with the exclusivity of fashion apparel brandssuch as Ben Hogan®. It appears that men’s apparel brands have been adverselyaffected more than have women’s brands by these and other such major apparelbrands. We consider Ben Hogan® fashion apparel, which is marketed in accordancewith a licensing agreement we maintain with Callaway for such apparel, to be akey component of our fashion apparel business. However, Callaway’s lack ofsupport for the Ben Hogan® brand over the last couple of years may have alsocontributed to the diluted value of the brand. We have continued to focus ourmarketing efforts with regard to Ben Hogan® fashion apparel on increasing ourmarket presence in upscale retail stores and on penetrating further intocorporate markets, in order to bolster future sales. Over the past year, wehave introduced Ben Hogan® 

 

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fashion apparel to a few upscale retail stores and we have continued tosearch for ways to increase our presence in the corporate market, but net salesto date have not been significant within either of those markets. We havefocused our marketing efforts with regard to SPORT HALEY® fashion apparel onmaintaining market share within our core business channels and increasing ourmarket presence in upscale retail markets.

 

Gross profit with regard to our fashion apparel is generally affectedby sales discounts offered to customers in accordance with various marketingprograms, payment discounts offered to certain customers, dispositions ofexcess inventories at reduced sales prices and the valuation of excessinventories to the lower of cost or market. The disposition of excessinventories negatively impacts our gross profit percentage even when suchinventories are properly valued to the lower of cost or market, because suchvaluation causes sales to be recorded with gross profit at or near zero. We believe that the recent significantdownturn in the United States economy negatively impacted the value of ourexcess fashion apparel inventories, and we reduced the carrying value of ourexcess fashion apparel inventories accordingly. For the three months ended March 31,2009, we recorded net sales of $322,000 and loss of $180,000, with regard tothe disposition of excess fashion apparel inventories. For the nine monthsended March 31, 2009, we recorded net sales of $471,000 and loss of$213,000, with regard to the disposition of excess fashion apparel inventories.For the three months ended March 31, 2008, we recorded net sales of$143,000 and profit of $7,000, and for the nine months ended March 31,2008, we recorded net sales of $530,000 and profit of $9,000 with regard to thedisposition of excess fashion apparel inventories. For the three months andnine months ended March 31, 2009, we recorded impairments of $254,000 and$585,000, respectively, with regard to the valuation of excess fashion apparelinventories to the lower of cost or market. Comparatively, for the three monthsand nine months ended March 31, 2008, we recorded impairments of $5,000and $159,000, respectively, with regard to the valuation of excess fashionapparel inventories to the lower of cost or market. As percentage of net sales,gross profit of our fashion apparel, was 17% and 26% for the three months andnine months ended March 31, 2009, and was 38% and 37% for the three monthsand nine months ended March 31, 2008, as corrected, respectively.

 

Selling, general and administrative expenses with regard to fashion appareldecreased by $482,000, or 25%, to $1,415,000 for the three months ended March 31,2009, from $1,897,000 for the comparable three-month period in the prior fiscalyear. Selling, general and administrative expenses with regard to fashionapparel decreased by $894,000, or 17%, to $4,246,000 for the nine months ended March 31,2009, from $5,140,000 for the comparable nine-month period in the prior fiscalyear. The decrease between the comparative nine-month periods was generallycomprised of decreases in advertising expenses, tradeshow costs, personnelcosts due to layoffs and job eliminations, sales commissions on correspondinglylower sales and less significant decreases in numerous other expense categoriesdue to the concerted efforts of management to minimize overall expenses. As apercentage of net sales, selling, general and administrative expenses withregard to our fashion apparel were 50% and 40%, for the three months ended March 31,2009 and 2008, as corrected, and were 48% and 41%, for the nine months ended March 31,2009 and 2008, as corrected, respectively.

 

We recorded royalty expense of $53,000 and$181,000 for the three months, and $209,000 and $438,000, for the nine monthsended March 31, 2009 and 2008, respectively. The decrease in royaltyexpense was attributable to a corresponding decrease in sales of Ben Hogan® fashionapparel for the comparative periods and to the reversal in December 2008of our September 2008 accrual for calendar year 2008 minimum royalties. Royalty expense is due to Callaway inaccordance with the license they previously granted us to market men’s fashionapparel bearing the Ben Hogan® label. In February 2009, we renegotiatedcertain terms of the license agreement with Callaway, whereby minimum royaltiesdue for 

 

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2008 were reduced to $350,000. Because salesof Ben Hogan® apparel generated royalties in excess of $350,000 for 2008, at December 31,2008, we reversed the contingent liability of $164,000, which we had recordedas of September 30, 2008, by reducing royalty expense by $84,000 andrecording other income of $80,000.

 

Loss from operations with regard to fashionapparel for the three months ended March 31, 2009, was ($995,000), adifference of ($698,000), or (235%), from ($297,000) for the comparablethree-month period in the prior fiscal year, as corrected. Loss from operationswith regard to fashion apparel for the nine months ended March 31, 2009,was ($2,178,000), a difference of ($1,250,000), or (135%), from ($928,000) forthe comparable nine-month period in the prior fiscal year, as corrected.

 

*Branded apparel*

 

We previously considered Top-Flite® branded apparel, which we marketedpursuant to our licensing agreement with Callaway for such apparel, to be a keycomponent in our business strategies, designed to return the Company tosustained profitability. We marketed Top-Flite® branded apparel to Wal-Mart andother mass retailers and big-box type high sales volume retail stores from November 2005to November 2007. Net sales of Top-Flite® branded apparel of $12,000 and$158,000 for the three months and nine months ended March 31, 2008, werecomprised of shipments to a retailer for a test in 50 of its stores and thedisposition of inventories related to the cancellation by that retailer of aportion of its original purchase order. Since our concerted efforts failed togenerate orders from a major customer, we discontinued marketing apparelbearing the Top-Flite® label in November 2007, and in March 2008 the license agreement withCallaway was amended to remove the Top-Flite® brand, effective January 1,2008.

 

Ourdistribution of Top-Flite® branded apparel to the mass retail market generallygenerated gross margins lower than those expected to be achieved in the premiumand mid-price markets where we distribute our SPORT HALEY® and Ben Hogan®fashion apparel brands. Wholesale prices are generally expected to be muchlower for branded apparel than for higher quality fashion apparel, and grossmargins are also expected to be lower for branded apparel than for fashionapparel. Other companies within the golf apparel industry may or may notoperate within the lower-price branded apparel markets. As a percentage of netsales, gross margins with respect to net sales of branded apparel were 0% and0% for the three months and nine months ended March 31, 2009, and were(42%) and 0% for the three months and nine months ended March 31, 2008.

 

Selling,general and administrative expenses were $1,000 with regard to branded apparelfor the three months ended March 31, 2009, a decrease of $3,000, or 75%,from $4,000 for the three months ended March 31, 2008. Selling, generaland administrative expenses were $42,000 with regard to branded apparel for thenine months ended March 31, 2009, a decrease of $90,000, or 68%, from$132,000 for the nine months ended March 31, 2008. The decrease inselling, general and administrative expenses was primarily due to thediscontinuance of our marketing efforts with regard to Top-Flite® brandedapparel in November 2007. Selling, general and administrative expenses forthe three months and nine months ended March 31, 2009, primarily consistedof legal expenses with regard to the September 2008 trial of a lawsuit wepreviously filed against a former inventory broker. As a percentage of netbranded apparel sales, related selling, general and administrative expenseswere 0% and 0%, for the three months ended March 31, 2009, and were 33%and 84%, for the nine months ended March 31, 2008, respectively.

 

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Royalty expense was due to Callaway through December 31,2007, in accordance with the license they previously granted us to marketbranded apparel bearing the Top-Flite® label. We recorded royalty expense of $0and $0 for the three months and nine months ended March 31, 2009, and werecorded royalty expense of ($2,000) and $9,000 for the three months and ninemonths ended March 31, 2008, respectively, with regard to net sales ofbranded apparel.

 

Loss from operations with regard to branded apparelwas ($1,000) and ($42,000) for the three months and nine months ended March 31,2009, differences of $6,000, or 80%, and $99,000, or 70%, from ($7,000) and($141,000) for the three months and nine months ended December 31, 2008,respectively.

 

*Other income*

 

Other income, net, was ($1,000) for the threemonths ended March 31, 2009, a decrease of $197,000, or 101%, from$196,000 for the three months ended March 31, 2008. Other income, net, was$43,000 for the nine months ended March 31, 2009, a decrease of $233,000,or 84%, from $276,000 for the nine months ended March 31, 2008. Otherincome, net, generally consisted of interest earned on cash and cash equivalentbalances held at various financial institutions, interest due on customs dutiesowed with regard to our Prior Disclosure that we submitted to US Customs andBorder Protection in November 2008, and other miscellaneous income. Thedecreases for the comparable three-month and nine-month periods were generallyattributable to lower rates of interest earned on our lower balance of cash andcash equivalents during the respective periods plus the reversal of $80,000 at December 31,2008, for calendar year 2008 minimum royalties that had been accrued at September 30,2008, with regard to our Ben Hogan® apparel sales combined with the reversal of $178,000 at March 31,2008, with regard to the extinguishment and forgiveness of calendar year 2007minimum royalties related to the removal of the Top-Flite® brand from our license agreement withCallaway.

 

*Net Loss*

 

Net loss for the three months ended March 31,2009, was ($997,000), a difference of ($887,000), or (806%), as compared withthe net loss of ($110,000) for the three months ended March 31, 2008, ascorrected. Net loss for the nine months ended March 31, 2009, was($2,179,000), a difference of ($1,377,000), or (172%), as compared with the netloss of ($802,000) for the nine months ended March 31, 2008, as corrected.We had federal and state net operating loss carry forwards of $9,789,000 and$11,726,000 at March 31, 2009, that we estimated may be recoverable atincome tax rates of 34% and 5%, respectively. In accordance with SFAS 109and based upon a review at March 31, 2009, of our utilization of deferredtax assets, we maintained a valuation allowance that effectively reduces ournet deferred tax assets to zero. We continue to explore various strategies toreturn the Company to profitability, including maintaining market share for ourSPORT HALEY® fashion apparel and recovering market share for our Ben Hogan®fashion apparel within our core business of resort and country club markets, aswell as expanding our SPORT HALEY® and Ben Hogan® fashion apparel distributionchannels deeper into retail and corporate markets. However, we cannot becertain that our efforts will result in the generation of future profits sufficient to offset our significant netoperating loss carry forwards prior to their expirations. Accordingly, we didnot record benefits from income taxes associated with the corresponding lossesfor the respective three-month or nine-month periods ended March 31, 2009.

 

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* *

*Earnings (loss) per share*

 

Basicand diluted losses per common share were ($0.43) and ($0.05) for thethree-month periods ended March 31, 2009 and 2008, as corrected,respectively. Basic and diluted losses per common share were ($0.95) and($0.35) for the nine-month periods ended March 31, 2009 and 2008, ascorrected, respectively. All securities options were anti-dilutive andtherefore excluded from the per share calculations with respect to periods inwhich net losses were incurred.

 

*Book value*

 

Ourbook value per common share was $3.50 at March 31, 2009, $4.46 at June 30,2008, and $4.45 at March 31, 2008, as corrected.

 

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**SPORT-HALEY, INC.**

**ITEM 4 CONTROLS AND PROCEDURES**

 

**(a)****                     ****Evaluation of DisclosureControls and Procedures**

 

We designed ourdisclosure controls and procedures to provide reasonable assurance of achievingour desired disclosure control objectives. We maintain disclosure controls andprocedures to ensure that information required to be disclosed in the reportswe file pursuant to the Securities Act of 1934, as amended (the “ExchangeAct”), are recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission,and that such information is accumulated and communicated to our management,including our Chief Executive Officer and our Chief Financial Officer asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any control and procedure, no matter how well designed andoperated, can only provide reasonable assurance of achieving the desiredcontrol objectives, and in reaching a reasonable level of assurance managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible disclosure controls and procedures.

 

Ourmanagement, with the participation of our Chief Executive Officer and our ChiefFinancial Officer, conducted an evaluation of the effectiveness of ourdisclosure controls and procedures pursuant to Rule 13a-15 under theExchange Act as of the end of the period covered by this report. Based on thatevaluation, management, including our Chief Executive Officer and our ChiefFinancial Officer, concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective in reaching areasonable level of assurance that: (a) all material information relatingto the Company, required to be disclosed in this report, was made known tomanagement in a timely manner; and (b) information was recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and regulations.

 

**(b)****                     ****Changes in InternalControls Over Financial Reporting**

 

Our management,including our Chief Executive Officer and our Chief Financial Officer, does notexpect that our internal controls over financial reporting will, in allinstances, prevent all errors and all fraud. A control system, no matter howwell conceived or operated, can only provide reasonable, not absolute,assurance that the objectives of the control system are met. While our controlsystems provide a reasonable assurance level, the design of our control systemsreflects the fact that there are resource constraints, and the benefits of suchcontrols were considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the financial reports of Sport-Haley, Inc. have been detected.These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerrors or mistakes. Additionally, a control can be circumvented by theindividual act of some person, by collusion of two or more persons, or bymanagement’s override of a specific control. The design of any system ofcontrols is also based in part on certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Because ofthe inherent limitations in a cost-effective control system, misstatements dueto error or fraud may occur and not be detected.

 

During fiscal2008, under the supervision of our Chief Executive Officer and our ChiefFinancial Officer, we completed the design, documentation and implementation ofour internal control over financial reporting. We believe that we have designedour controls to provide reasonable assurance regarding the reliability of ourfinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Aspreviously 

 

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reported, in August 2008,we became aware that our controls were ineffective to prevent the underpaymentof customs duties on certain of our imports of fashion apparel purchased fromforeign suppliers, which revealed a significant deficiency in our internalcontrol over financial reporting. A significant deficiency in internal controlsmeans a deficiency, or a combination of deficiencies, in internal control overfinancial reporting that is less severe than a material weakness, yet importantenough to merit attention by those responsible for oversight of theregistrant’s financial reporting. In March 2009, we completed anassessment of the effectiveness of our internal control over financialreporting by utilizing the framework set forth in the report entitled *“Internal Control — Integrated Framework”* published by theCommittee of Sponsoring Organizations of the Treadway Commission, known as“COSO.” Our March 2009 assessment revealed no material weaknesses and nosignificant deficiencies, other than the underpayment of customs duties, norany deficiencies which, when combined with other deficiencies, could beconsidered to be a significant deficiency in our internal control overfinancial reporting. However, due to the significant deficiency discovered in August 2008,management concluded that the Company’s internal control over financialreporting was not effective as of June 30, 2008.

 

Exceptas noted above, there have been no significant changes in our internal controlsover financial reporting, as defined in Rules 13a-15(f) or 15d-15(f) underthe Exchange Act, during the three months ended March 31, 2009, thatmaterially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**SPORT-HALEY, INC.**

**PART II**

**OTHER INFORMATION**

 

### **ITEM** 1                      LEGAL PROCEEDINGS

### ** **

As previously reported, in March 2007, Sport Haley and ReserveApparel (the “Plaintiffs”) filed a lawsuit in the District Court for the Cityand County of Denver in the State of Colorado. The suit alleged, among otherthings, that a former inventory broker to Reserve Apparel, 1130746 OntarioLtd., a Canadian corporation incorporated in the Province of Ontario, Canada,d/b/a Originals Apparel Group Co., or Originals Apparel Group, and FrancisTat-Mo Chan (the “Defendants”), knowingly, wrongfully and without authorizationconverted Plaintiff’s funds and were unjustly enriched. At the conclusion ofthe trial in September 2008, the Court awarded judgment in the Plaintiff’sfavor and against the Defendants, jointly and severally, in the amount of$291,135. On November 4, 2008, the Defendants filed an appeal of theDistrict Court’s judgment in the Colorado Court of Appeals. The appeal ispending. At this time, we cannot determine whether the Court of Appeals willaffirm or reverse, in whole or in part, the District Court’s judgment.In order to collect from theformer broker and its principal, assuming the Court of Appeals affirms thejudgment we obtained from the District Court, we will need to domesticate thejudgment in the province of Ontario, Canada. Since collection of the previouslyawarded judgment is not assured, we have maintained a reserve for potentialnon-recovery in the amount of $175,000.

 

### **ITEM** 1A             RISK FACTORS

### ** **

There have been no material changes from the risk factors previouslydisclosed in Item 1A of our annual report on Form 10-K for the year ended June 30,2008.

 

**ITEM 4****                     ****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Sport Haley heldits annual meeting of shareholders on April 17, 2009. The followingmatters were considered and approved by the shareholders:

 

(a)          To elect directors to hold office for one-year termsor until their successors are elected and qualified:

 
| ** **         | ** ** | ** ** | ** ** | **Votes**        | ** ** | ** ** | ** ** |
|--------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **         | ** ** | **Votes**  | ** ** | **Against**      | ** ** | **Total**  | ** ** |
| ** **         | ** ** | **For**    | ** ** | **or  Withheld** | ** ** | **Voted**  | ** ** |
| Ronald J. Norick   |       | 1,367,022  |       | 621,643          |       | 1,988,665  |       |
| James R.  TenBrook |       | 1,367,022  |       | 621,643          |       | 1,988,665  |       |
| Mark J.  Stevenson |       | 1,367,022  |       | 621,643          |       | 1,988,665  |       |
| Donald W. Jewell   |       | 1,367,022  |       | 621,643          |       | 1,988,665  |       |
| Samuel A.  Kidston |       | 237,125    |       | 0                |       | 237,125    |       |
| Lloyd M. Sems      |       | 237,125    |       | 0                |       | 237,125    |       |

 

At the annualmeeting of shareholders, Samuel A. Kidston and Lloyd M. Sems nominatedthemselves for the two open seats on the board of directors. Each Mr. Kidstonand Mr. Sems voted shares held by proxy for one another and withheldvoting for each of the other nominees. Sport-Haley, Inc. ratified andconfirmed the votes of Mr. Kidston and Mr. Sems, and they were dulyelected as directors.

 

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(b)         To ratify the appointment of Eide Bailly LLP as theindependent registered public accountants for Sport Haley:

 
| Votes For        |   | 1,208,119 |   |
|------------------|--------|-----------|--------|
| Votes Against    |   | 532,474   |   |
| Votes Abstaining |   | 248,072   |   |
| Total Voted      |   | 1,988,665 |   |

 

(c)          To authorize to vote upon such other business as mayproperly come before the meeting or any adjournment or postponement thereof:

 
| Votes For        |   | 1,208,119 |   |
|------------------|--------|-----------|--------|
| Votes Against    |   | 532,474   |   |
| Votes Abstaining |   | 10,947    |   |
| Non-Voted        |   | 237,125   |   |

 

### **ITEM** 5                      OTHER INFORMATION

### ** **

On April 28,2009, we reached an agreement with our landlord to reduce the monthly rent paidon our office and warehouse facility to $11,000 per month from May 2009through April 2010. The amended lease agreement for our facilitypreviously required monthly rent payments of $24,000. In exchange for thereduced monthly rent payments, we agreed to vacate approximately 16,000 of the82,500 square feet of available space in the building. A copy of the addendumis attached as Exhibit 10.4.4 and is incorporated herein by thisreference.

 

On April 28,2009, we issued a press release announcing the election of two new outsideBoard members, Samuel A. Kidston and Lloyd M Sems.

 

On April 21,2009, we issued a press release announcing that our Board of Directors hadrecently appointed a Special Committee to explore the possibility of takingproscribed steps to relieve the Company of its public reporting obligationsunder applicable securities laws.

 

As previouslyreported, we received a letter from the Nasdaq Stock Market, Inc.(“Nasdaq”), dated November 14, 2008, notifying us of Nasdaq’s positionthat the Company is not in compliance with the rules for continued listingon the Nasdaq Capital Market, specifically Nasdaq Marketplace Rule 4310(c)(14),because our annual report on Form 10-K for the year ended June 30,2008, did not contain a completed management report on internal control overfinancial reporting as required by Section 404 of the Sarbanes-Oxley Actof 2002. In March 2009, we completed the testing of our internal controls,and on April 13, 2009, we amended our annual report on Form 10-K forthe year ended June 30, 2008, to include a completed management report oninternal control over financial reporting. On April 16, 2009, we receiveda letter from the Nasdaq Stock Market stating that we regained compliance withthe rule and that this matter was closed.

 

On February 18,2009, we reached an agreement with Callaway to amend the terms of our licenseagreement with them. Terms of the amendment provide us with non-exclusivelicenses to develop, manufacture, market and distribute golf apparel bearingthe Ben Hogan® and Tour Edition® trademarks through December 31, 2013,providing that Callaway may terminate the agreement upon 60 days advancewritten notice. The amendment also provides 

 

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for substantialreductions in the minimum annual royalty requirements for calendar years 2008through 2013. Based upon the reduced annual minimum royalty requirement forcalendar 2008, we reversed the $164,000 contingent liability that we hadrecorded as of September 31, 2008, byreducing royalty expense by $84,000 and recording other income of $80,000 at December 31, 2008.

 

### **ITEM** 6                      EXHIBITS

### ** **

Exhibit 10.4.4– Addendum to Lease Agreement, dated April 28, 2009, by and between ThomasJ. Hilb, individually, and as trustee of the Connie Hilb Trust, and Sport-Haley, Inc.

 

Exhibit 31.1 –Certification of Donald W. Jewell pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

 

Exhibit 31.2 –Certification of Patrick W. Hurley pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

 

Exhibit 32.1 –Certifications of Donald W. Jewell and Patrick W. Hurley pursuant to 18 U.S.C.§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002

 

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** **

**SPORT-HALEY, INC.**

**SIGNATURES**

 

In accordance withthe requirements of the Securities Exchange Act of 1934, the Registrant causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| ** **              | **SPORT-HALEY, INC.**                           |
|-------------------------|-------------------------------------------------|
|                    | (Registrant)                                    |
|                    |                                            |
|                    |                                            |
| Date: May 15, 2009 | /s/ PATRICK W.  HURLEY                          |
|                    | Patrick W. Hurley                               |
|                    | Chief Financial Officer                         |
| * *                | *(Principal Financial and  Accounting Officer)* |

 

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