**Tableof Contents**

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**SECURITIES AND EXCHANGE COMMISSION**

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**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

| **x****QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES**   |
|-------------------------------------------------------------------------------------|
| **EXCHANGE ACT OF 1934**                                                            |
|                                                                                |
| **For the quarterly period ended  September 30, 2008**                         |
|                                                                                |   |   |
| **o****TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |

 

**Commission File No. 0-51715**

 

**SPORT-HALEY, INC.**

(Exact name of small 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 of principal executive offices)

 

**(303) 320-8800**

(Issuer’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes   x   No   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See the definition of “accelerated filer andnon-accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer o |   | Smaller Reporting Company x |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes  o   No  x

 

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

 

| **Class**                      | ** ** | **Outstanding at November 10, 2008** |
|--------------------------------|------------|-------------------------------------------|
| **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 | **18**   |
|                                                                      |                                                                                        |     |
| ITEM 4                                                                    | CONTROLS AND  PROCEDURES                                                                    | **29**   |
|                                                                      |                                                                                        |     |
| **PART II  - OTHER INFORMATION**                                     |                                                                                        |
|                                                                      |                                                                                        |     |
| ITEM 1                                                                    | LEGAL PROCEEDINGS                                                                           | **31**   |
|                                                                      |                                                                                        |     |
| ITEM 1A                                                                   | RISK FACTORS                                                                                | **31**   |
|                                                                      |                                                                                        |     |
| ITEM 5                                                                    | OTHER INFORMATION                                                                           | **31**   |
|                                                                      |                                                                                        |     |
| ITEM 6                                                                    | EXHIBITS                                                                                    | **33**   |
|                                                                      |                                                                                        |     |
| **SIGNATURES**                                                            | **34**                                                                                      |
|                                                                      |                                                                                        |     |
| **EXHIBITS**                                                              |                                                                                        |     |
|                                                                      |                                                                                        |     |
| 31.1                                                                      | CERTIFICATION OF DONALD W.  JEWELL                                                          | **35**   |
|                                                                      |                                                                                        |     |
| 31.2                                                                      | CERTIFICATION OF PATRICK W.  HURLEY                                                         | **36**   |
|                                                                      |                                                                                        |     |
| 31.1                                                                      | CERTIFICATIONS OF DONALD W.  JEWELL AND PATRICK W. HURLEY                                   | **37**   |
|                                                                           |                                                                                             |          |  |  |

 

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                         | ** ** | **SEPTEMBER**** 30,** | ** ** | **JUNE**** 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **2008**                   | ** ** | **2008**              | ** ** |
| ** **                                                                                         | ** ** | **(Unaudited)**            | ** ** | **(***)**             | ** ** |
| **ASSETS**                                                                                         |       |                       |       |                  |       |
| **CURRENT ASSETS**                                                                                 |       |                       |       |                  |       |
| Cash and cash  equivalents                                                                         |       | $                          | 1,549,000  |                  | $          | 2,830,000 |   |
| Marketable  securities                                                                             |       | 200,000                    |       | 200,000               |       |
| Accounts  receivable, net of allowances of $337,000 and $278,000, respectively                     |       | 1,793,000                  |       | 2,791,000             |       |
| Inventories                                                                                        |       | 7,272,000                  |       | 5,947,000             |       |
| Prepaid expenses  and other                                                                        |       | 257,000                    |       | 264,000               |       |
| Total current  assets                                                                              |       | 11,071,000                 |       | 12,032,000            |       |
| ** **                                                                                         |       |                       |       |                  |       |
| **PROPERTY AND EQUIPMENT**, net                                                                    |       | 154,000                    |       | 197,000               |       |
| **OTHER ASSETS**                                                                                   |       | 3,000                      |       | 3,000                 |       |
| ** **                                                                                         |       |                       |       |                  |       |
| **TOTAL ASSETS**                                                                                   |       | $                          | 11,228,000 |                  | $          | 12,232,000 |   |
| ** **                                                                                         | ** ** | ** **                 | ** ** | ** **            | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                      |       |                       |       |                  |       |
| **CURRENT LIABILITIES**                                                                            |       |                       |       |                  |       |
| Accounts payable                                                                                   |       | $                          | 1,481,000  |                  | $          | 1,421,000 |   |
| Accrued  royalties payable                                                                         |       | 71,000                     |       | 52,000                |       |
| Accrued  commissions payable                                                                       |       | 120,000                    |       | 180,000               |       |
| Accrued payroll                                                                                    |       | 68,000                     |       | 138,000               |       |
| Other                                                                                              |       | 180,000                    |       | 177,000               |       |
|                                                                                               |       | 1,920,000                  |       | 1,968,000             |       |
| ** **                                                                                         |       |                       |       |                  |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                  |       |                       |       |                  |       |
| Minimum  royalties payable (current)                                                               |       | 164,000                    |       | 80,000                |       |
| ** **                                                                                         |       |                       |       |                  |       |
| **TOTAL LIABILITIES - CURRENT**                                                                    |       | 2,084,000                  |       | 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)                                                                       |       | (958,000                   | )          | 82,000                |       |
| Total  shareholders’ equity                                                                   |       | 9,144,000                  |       | 10,184,000            |       |
| ** **                                                                                         |       |                       |       |                  |       |
| **TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                |       | $                          | 11,228,000 |                  | $          | 12,232,000 |   |

 

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***  Taken from the auditedbalance sheet at that date

 

See accompanying notes to these condensedconsolidated financial statements.

 

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                             | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **SEPTEMBER**** 30,**       | ** ** |
| ** **                                             | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)** | ** ** |
|                                                   |       |                             |       | **As  Corrected** |   |
| ** **                                             |       |                             |       | **(Note 2)** |   |
| ** **                                             |       |                             |       | ** ** |   |
| **NET SALES**                                          |       | $                                | 2,824,000  |   | $ | 3,528,000 |   |
| ** **                                             |       |                             |       |   |   |
| **COST OF GOODS SOLD**                                 |       |                             |       |   |   |
| Cost of goods  sold                                    |       | 1,776,000                        |       | 2,233,000 |   |
| Impairments                                            |       | 278,000                          |       | 154,000 |   |
| Total cost of  goods sold                              |       | 2,054,000                        |       | 2,387,000 |   |
|                                                   |       |                             |       |   |   |
| **GROSS PROFIT**                                       |       | 770,000                          |       | 1,141,000 |   |
| ** **                                             |       |                             |       |   |   |
| **OTHER OPERATING COSTS**                              |       |                             |       |   |   |
| Selling, general  and administrative expenses          |       | 1,620,000                        |       | 1,725,000 |   |
| Royalty expense                                        |       | 155,000                          |       | 126,000 |   |
| Total other  operating costs                           |       | 1,775,000                        |       | 1,851,000 |   |
|                                                   |       |                             |       |   |   |
| **LOSS FROM OPERATIONS**                               |       | (1,005,000                       | )          | (710,000 | ) |
| ** **                                             |       |                             |       |   |   |
| Other income  (expense), net                           |       | (33,000                          | )          | 48,000 |   |
|                                                   |       |                             |       |   |   |
| Provision for  income taxes                            |       | (2,000                           | )          | (7,000 | ) |
|                                                   |       |                             |       |   |   |
| **NET LOSS**                                           |       | $                                | (1,040,000 | ) | $ | (669,000 | ) |
| ** **                                             |       |                             |       |   |   |
| **NET LOSS PER SHARE**                                 |       |                             |       |   |   |
| Basic and  diluted loss per common share               |       | $                                | (0.46      | ) | $ | (0.29 | ) |
|                                                   |       |                             |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**                |       |                             |       |   |   |
| Basic and  diluted weighted average shares outstanding |       | 2,284,000                        |       | 2,284,000 |   |

 

See accompanying notes to these condensedconsolidated financial statements.

 

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **THREE MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **SEPTEMBER**** 30,**       | ** ** |
| ** **                                                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)** | ** ** |
| ** **                                                                   |       |                             |       | **As Corrected** |   |
| ** **                                                                   |       |                             |       | **(Note 2)** |   |
| ** **                                                                   |       |                             |       | ** ** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                     |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (1,040,000 | ) | $ | (669,000 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                               |       | 46,000                           |       | 54,000 |   |
| Impairments and  write-downs                                                 |       | 278,000                          |       | 154,000 |   |
| Allowance for  doubtful accounts                                             |       | (10,000                          | )          | 30,000 |   |
| Cash provided  (used) due to changes in assets and liabilities:              |       |                             |       |   |   |
| Accounts  receivable                                                         |       | 1,008,000                        |       | 519,000 |   |
| Inventory                                                                    |       | (1,603,000                       | )          | (1,053,000 | ) |
| Other assets                                                                 |       | 7,000                            |       | (152,000 | ) |
| Accounts payable                                                             |       | 60,000                           |       | (406,000 | ) |
| Accrued  commissions and other expenses                                      |       | (24,000                          | )          | (204,000 | ) |
| Net cash used by  operating activities                                       |       | (1,278,000                       | )          | (1,727,000 | ) |
|                                                                         |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                     |       |                             |       |   |   |
| Purchase of  fixed assets                                                    |       | (3,000                           | )          | — |   |
| Net cash used by  investing activities                                       |       | (3,000                           | )     | — |   |
|                                                                         |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                     |       |                             |       |   |   |
| Borrowings under  line of credit                                             |       | —                           |       | 700,000 |   |
| Repayments under  line of credit                                             |       | —                           |       | (300,000 | ) |
| Net cash  provided by financing activities                                   |       | —                           |       | 400,000 |   |
|                                                                         |       |                             |       |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                |       | (1,281,000                       | )          | (1,327,000 | ) |
| ** **                                                                   |       |                             |       |   |   |
| **CASH AND CASH EQUIVALENTS**,****beginning of  period                       |       | 2,830,000                        |       | 4,464,000 |   |
| ** **                                                                   |       |                             |       |   |   |
| **CASH AND CASH EQUIVALENTS**,****end of  period                             |       | $                                | 1,549,000  |   | $ | 3,137,000 |   |
| ** **                                                                   |       |                             |       |   |   |
| **SUPPLEMENTAL CASH FLOW INFORMATION**                                       |       |                             |       |   |   |
| Cash paid during  the period for:                                            |       |                             |       |   |   |
| Income taxes                                                                 |       | $                                | 2,000      |   | $ | 7,000 |   |

 

See accompanying notes to these condensedconsolidated financial statements.

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1****             SIGNIFICANTACCOUNTING POLICIES**

 

*Principlesof Consolidation* Our condensed consolidated financialstatements include the accounts of Sport-Haley, Inc. (“Sport Haley”) andReserve Apparel Group LLC (“Reserve Apparel”). Sport Haley and Reserve Apparelmay collectively be referred to as “the Company,” “we,” “us” or “our.” Allsignificant inter-company transactions between Sport Haley and Reserve Apparelhave been eliminated.

 

*Nature ofOperations* Sport Haley, organized as a Coloradocorporation in January 1991, designs, purchases or contracts for themanufacture of, markets and distributes women’s and men’s fashion golf appareland outerwear under the SPORT HALEY® and Ben Hogan® labels. Our fashion golfapparel collections, known for their innovative designs, quality fabrics,generous fits and classic styles, are primarily marketed in the premium andmid-priced markets, through a network of independent sales representatives anddistributors, to golf professional shops, country clubs, resorts and exclusivedepartment stores within the United States. Ben Hogan® fashion golf apparel isdistributed per the terms of a license agreement with Callaway Golf Company (“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 consolidatedbalance sheets and interim condensed consolidated statements of operations andcash flows include all adjustments (consisting only of normal recurring items)necessary for their fair representation. The preparation of consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets, liabilities,revenues and expenses and the disclosure 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.

 

*MarketableSecurities* Marketable securities generally consist ofcertificates of deposit that have an initial maturity of greater than threemonths and are classified as held-to-maturity. Due to the short-term nature ofthe investments, there are no material unrealized gains or losses on theseinvestments. As a result, the carrying values of marketable securitiesapproximate their fair value.

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

*Stock-BasedCompensation*In January 2008, we adopted a new stock option plan, entitled theSport-Haley 2008 Stock Option Plan (the “2008 Plan”), which was approved by ourshareholders in February 2008. Under the 2008 Plan, the CompensationCommittee of the Company’s Board of Directors is authorized to grant up to50,000 non-qualified stock options and up to 150,000 incentive stock options.No options or other awards have been granted under the 2008 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 September 30, 2008,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 May 2011 and January 2013. All outstanding options are fullyvested. No options were exercised during the three months ended September 30,2008, and 9,000 expired.

 

*Recent Pronouncements*– In May 2008, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 163 (“SFAS 163”), *“Accounting for Financial Guarantee Insurance Contracts — AnInterpretation of FASB Statement No. 60.”* Diversity exists inpractice in accounting for financial guarantee insurance contracts by insuranceenterprises under FASB Statement No. 60, *“Accountingand Reporting by Insurance Enterprises.”* SFAS 163 requires that aninsurance enterprise recognize a claim liability prior to an event of default(insured event) when there is evidence that credit deterioration has occurredin an insured financial obligation. SFAS 163 requires expanded disclosuresabout financial guarantee insurance contracts. The accounting and disclosurerequirements of SFAS 163 are expected to improve the quality of informationprovided to users of financial statements. Our adoption of SFAS 163 upon itseffective date is not expected to have a material effect on our financialcondition or the results of our operations.

 

In May 2008, theFASB issued Statement of Financial Accounting Standards No. 162 (“SFAS 162”),*“The Hierarchy of Generally Accepted AccountingPrinciples*(“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 

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

date is not expected tohave a material effect on our financial condition or the results of ouroperations.

 

In March 2008,the FASB 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. SFAS 161 amends and expands the disclosure requirements of SFAS 131with the intent to provide users of financial statements with an enhancedunderstanding of: (i) how and why an entity uses derivative instruments; (ii) howderivative instruments and related hedged items are accounted for under SFAS133 and its related interpretations; and, (iii) how derivative instrumentsand related hedged items affect an entity’s financial position, financialperformance and cash flows. To meet those objectives, SFAS 161 requiresqualitative disclosures about objectives and strategies for using derivatives,quantitative disclosures about fair value amounts of gains and losses onderivative instruments and disclosures about credit-risk-related contingentfeatures in derivative agreements. SFAS 161 is effective for fiscal years, andinterim periods within those fiscal years, beginning after November 15,2008, with earlier adoption encouraged. SFAS 161 further encourages, but doesnot require, comparative disclosures for earlier periods at initial adoption.We do not anticipate early adoption, and our adoption of SFAS 161 upon itseffective date is not expected to have a material effect on our financialcondition or the results of our 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****             CORRECTIONOF PREVIOUSLY ISSUED 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. This issue was brought toour attention by a third party and was not an intentional concealment or act onthe part of the Company or any of its officers, directors or employees. Forsuch imports, the information received by our customs agent had failed toinclude the value of the fabric in the total declared value of the apparel.

 

In order tocorrect the amount of duty payable to US Customs and Border Protection for suchimports, we began voluntarily preparing a Prior Disclosure in September 2008.A Prior Disclosure 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. In September 2008, we retained an import duties specialist toassist us with the Prior Disclosure. The specialist advised us that, upon ourdelivery of the Prior Disclosure and an agreement to pay the applicable 

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

amounts andinterest thereon, it is highly unlikely (but we can give no assurance to thecontrary) that US Customs and Border Protection will assess further finesand/or penalties with regard to this matter. Therefore, we believe that upondelivery of our Prior Disclosure and the related payment agreement, US Customsand Border Protection will consider this matter closed. We determined thatadditional customs duties owed for the period from approximately November 2003through September 2008 totaled $713,000 and accrued interest due thereontotaled $93,000. Our Prior Disclosure, submitted in November 2008, totaled$715,000 in additional customs duties plus $97,000 in accrued interest duethereon.

 

As previouslyreported, in order to assess materiality with regard to the underpaid customsduties, we applied the concepts set forth in Staff Accounting Bulletin No. 108(“SAB 108”), *“Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements,”* issued by the Securities and Exchange Commission andFASB Concepts Statement No. 2, *“QualitativeCharacteristics of Accounting Information.”* We applied the ironcurtain and rollover approaches proscribed by SAB 108 to quantify the effectson the current and prior fiscal years caused by the underpaid customs duties.Per SAB 108, “[T]he iron curtain approach quantifies a misstatement based uponthe effects of correcting the misstatement existing in the balance sheet at theend of the current year, irrespective of the misstatements year(s) oforigination.” The rollover approach quantifies a misstatement based on theamount of the error originating in the income statement for the year in whichthe error occurred. Per FASB Concepts Statement No. 2, qualitativemateriality determinations are based upon whether “it is probable that thejudgment of a reasonable person relying upon the report would have been changedor influenced by the inclusion or correction of the item.”

 

Our qualitative analysis and our quantitative analysis under therollover approach each yielded results that indicate the correction of prioryear financial statement amounts is immaterial in each case. Our quantitativeanalysis under the iron curtain approach yielded results that indicateapplication of the iron curtain method would have caused our fiscal 2008financial statements to be materially misstated. When analyzing materialityunder the iron curtain and rollover approaches, SAB 108 directs, “[A]registrant’s financial statements would require adjustment when either approachresults in quantifying a misstatement that is material, after considering allrelevant quantitative and qualitative factors.” SAB 108 further instructs, “[A]fterall of the relevant quantitative and qualitative factors are considered, theprior year financial statements should be corrected, even though such revisionpreviously was and continues to be immaterial to the prior year financialstatements. Correcting prior year financial statements for immaterial errorswould not require previously filed reports to be amended. Such correction maybe made the next time the registrant files the prior year financial statements.”Accordingly, we have corrected our financial statements for the three-monthperiod ended September 30, 2007, which are included in this report on Form 10-Q.

 

Corrections of the Company’s prior period financial statements resultedin a reduction of $404,000 in total shareholders’ equity as of July 1,2007. The following comparison of consolidated balance sheets as of September 30,2007, and the comparison of consolidated statements of income and cash flowsfor the three months ended September 30, 2007, present the effectsresulting from correcting the Company’s financial statements for theaforementioned reason.

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**COMPARISONOF CONSOLIDATED BALANCE SHEETS**

** **
| ** **                                           | ** ** | **SEPTEMBER 30, 2007** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                           | ** ** | ** **                       | ** ** | **As Previously** | ** ** |
| ** **                                           | ** ** | **As Corrected**            | ** ** | **Reported** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)** | ** ** |
| ** **                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **ASSETS**                                           |       |                             |       |   |   |
| **CURRENT ASSETS**                                   |       |                             |       |   |   |
| Cash and cash  equivalents                           |       | $                                | 3,137,000  |   | $ | 3,137,000 |   |
| Accounts  receivable, net of allowances              |       | 2,517,000                        |       | 2,517,000 |   |
| Inventories                                          |       | 6,785,000                        |       | 6,729,000 |   |
| Prepaid expenses  and other                          |       | 355,000                          |       | 355,000 |   |
| Total current  assets                                |       | 12,794,000                       |       | 12,738,000 |   |
|                                                 |       |                             |       |   |   |
| **PROPERTY  AND EQUIPMENT**, net                     |       | 345,000                          |       | 345,000 |   |
| **OTHER  ASSETS**                                    |       | 3,000                            |       | 3,000 |   |
|                                                 |       |                             |       |   |   |
| **TOTAL  ASSETS**                                    |       | $                                | 13,142,000 |   | $ | 13,086,000 |   |
|                                                 |       |                             |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’S EQUTY**        |       |                             |       |   |   |
| **CURRENT  LIABILITIES**                             |       |                             |       |   |   |
| Notes payable                                        |       | $                                | 400,000    |   | $ | 400,000 |   |
| Accounts payable                                     |       | 1,636,000                        |       | 1,134,000 |   |
| Accrued  royalties payable                           |       | 126,000                          |       | 126,000 |   |
| Accrued  commissions payable                         |       | 144,000                          |       | 144,000 |   |
| Accrued payroll                                      |       | 167,000                          |       | 167,000 |   |
| Other                                                |       | 182,000                          |       | 182,000 |   |
|                                                 |       | 2,655,000                        |       | 2,153,000 |   |
|                                                 |       |                             |       |   |   |
| **COMMITMENTS  AND CONTINGENCIES**                   |       |                             |       |   |   |
| Minimum  royalties payable (current)                 |       | 178,000                          |       | 178,000 |   |
|                                                 |       |                             |       |   |   |
| **TOTAL  LIABILITIES - CURRENT**                     |       | 2,833,000                        |       | 2,331,000 |   |
|                                                 |       |                             |       |   |   |
| **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                                   |       | 207,000                          |       | 653,000 |   |
| Total  shareholders’ equity                     |       | 10,309,000                       |       | 10,755,000 |   |
|                                                 |       |                             |       |   |   |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY** |       | $                                | 13,142,000 |   | $ | 13,086,000 |   |

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**COMPARISONOF CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                             | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **SEPTEMBER 30, 2007** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | **As Previously** | ** ** |
| ** **                                             | ** ** | **As Corrected**            | ** ** | **Reported** | ** ** |
| ** **                                             | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)** | ** ** |
|                                                   |       |                             |       |   |   |
| **NET SALES**                                          |       | $                                | 3,528,000  |   | $ | 3,528,000 |   |
|                                                   |       |                             |       |   |   |
| **COST OF GOODS SOLD**                                 |       |                             |       |   |   |
| Cost of goods  sold                                    |       | 2,233,000                        |       | 2,191,000 |   |
| Impairments                                            |       | 154,000                          |       | 154,000 |   |
| Total cost of  goods sold                              |       | 2,387,000                        |       | 2,345,000 |   |
|                                                   |       |                             |       |   |   |
| **GROSS PROFIT**                                       |       | 1,141,000                        |       | 1,183,000 |   |
|                                                   |       |                             |       |   |   |
| **OTHER OPERATING COSTS**                              |       |                             |       |   |   |
| Selling, general  and administrative expenses          |       | 1,725,000                        |       | 1,725,000 |   |
| Royalty expense                                        |       | 126,000                          |       | 126,000 |   |
| Total other  operating costs                           |       | 1,851,000                        |       | 1,851,000 |   |
|                                                   |       |                             |       |   |   |
| **LOSS FROM OPERATIONS**                               |       | (710,000                         | )          | (668,000 | ) |
|                                                   |       |                             |       |   |   |
| Other income  (expense), net                           |       | 48,000                           |       | 48,000 |   |
|                                                   |       |                             |       |   |   |
| Provision for  income tax                              |       | (7,000                           | )          | (7,000 | ) |
|                                                   |       |                             |       |   |   |
| **NET LOSS**                                           |       | $                                | (669,000   | ) | $ | (627,000 | ) |
|                                                   |       |                             |       |   |   |
| **NET LOSS PER SHARE**                                 |       |                             |       |   |   |
| Basic and  diluted loss per common share               |       | $                                | (0.29      | ) | $ | (0.27 | ) |
|                                                   |       |                             |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING**                |       |                             |       |   |   |
| Basic and  diluted weighted average shares outstanding |       | 2,284,000                        |       | 2,284,000 |   |

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**COMPARISONOF CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                   | ** ** | **THREE MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **SEPTEMBER 30, 2007** | ** ** |
| ** **                                                                   | ** ** | ** **                       | ** ** | **As Previously** | ** ** |
| ** **                                                                   | ** ** | **As Corrected**            | ** ** | **Reported** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)** | ** ** |
|                                                                         |       |                             |       |   |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES**                                     |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (669,000   | ) | $ | (627,000 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                               |       | 54,000                           |       | 54,000 |   |
| Impairments and  write-downs                                                 |       | 154,000                          |       | 154,000 |   |
| Allowance for  doubtful accounts                                             |       | 30,000                           |       | 30,000 |   |
| Cash provided  (used) due to changes in assets and liabilities:              |       |                             |       |   |   |
| Accounts  receivable                                                         |       | 519,000                          |       | 519,000 |   |
| Inventory                                                                    |       | (1,053,000                       | )          | (1,069,000 | ) |
| Other assets                                                                 |       | (152,000                         | )          | (152,000 | ) |
| Accounts payable                                                             |       | (406,000                         | )          | (432,000 | ) |
| Accrued  commissions and other expenses                                      |       | (204,000                         | )          | (204,000 | ) |
| Net cash used by  operating activities                                       |       | (1,727,000                       | )          | (1,727,000 | ) |
|                                                                         |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES**                                     |       |                             |       |   |   |
| Purchase of  fixed assets                                                    |       | —                           |       | — |   |
| Net cash used by  investing activities                                       |       | —                           |       | — |   |
|                                                                         |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES**                                     |       |                             |       |   |   |
| Borrowings under  line of credit                                             |       | 700,000                          |       | 700,000 |   |
| Repayments under  line of credit                                             |       | (300,000                         | )          | (300,000 | ) |
| Net cash  provided by financing activities                                   |       | 400,000                          |       | 400,000 |   |
|                                                                         |       |                             |       |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**                                |       | (1,327,000                       | )          | (1,327,000 | ) |
|                                                                         |       |                             |       |   |   |
| **CASH AND CASH EQUIVALENTS,**beginning  of period                           |       | 4,464,000                        |       | 4,464,000 |   |
|                                                                         |       |                             |       |   |   |
| **CASH AND CASH EQUIVALENTS,**end  of period                                 |       | $                                | 3,137,000  |   | $ | 3,137,000 |   |
|                                                                         |       |                             |       |   |   |
| **SUPPLEMENTAL CASH FLOW INFORMATION**                                       |       |                             |       |   |   |
| Cash paid during  the period for:                                            |       |                             |       |   |   |
| Income taxes                                                                 |       | $                                | 7,000      |   | $ | 7,000 |   |

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 3****             INVENTORIES**

 
| ** **                               | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| Inventories  consisted of the following: |       |                   |       |              |       |
| Component                                |       | $                      | 339,000    |              | $          | 331,000 |   |
| Finished goods                           |       | 6,933,000              |       | 5,616,000         |       |
|                                     |       |                   |       |              |       |
|                                     |       | $                      | 7,272,000  |              | $          | 5,947,000 |   |

 

Included in finished goods inventories balances are allowances forinventory write-downs of $446,000 and $168,000 for September 30, 2008, andJune 30, 2008, respectively.

 

**NOTE 4****             LINEOF 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 no collateralized deposits, and therefore hadno borrowing availability under the business loan agreement, at September 30,2008. Borrowings under the business loan agreement accrue interest at the Bankof Oklahoma Financial (“BOKF”) National Prime Rate less 1.500%. We generally entered into the business loanagreement to facilitate the issuance of letters of credit for inventorypurchases from offshore suppliers. We did not have any balances due on thebusiness loan agreement at September 30, 2008, or June 30, 2008,respectively. Outstanding letters of credit reduce the amount availablefor borrowing under the business loan agreement. At September 30, 2008,and June 30, 2008, we had outstanding letters of credit of $0 and$1,144,000, respectively, issued through Bank of Oklahoma for purchaseobligations under outstanding letters of credit.

 

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 expires onDecember 5, 2008, provides 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 earns a market rate of interest. Borrowings under the amendedline of credit agreement accrue interest at 1.250% plus the one-month LIBOR rate.At December 5, 2007, the line of credit had previously been amended toprovide 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. We havegenerally 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 September 30, 2008, or June 30, 2008,respectively. Outstanding letters of credit reduce the amount available forborrowing under the line of credit agreement. At September 30, 2008, and June 30,2008, we had outstanding letters of 

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

credit of $0 and $0, respectively, issued through US Bank for purchaseobligations under outstanding letters of credit.

 

**NOTE 5****             COMMITMENTSAND CONTINGENCIES**

 

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 expect that royalties generated on sales of Ben Hogan® fashionapparel will 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. During the three monthsended September 30, 2008, $84,000 of our royalty expense related to theminimum contractual requirement for that period. We are currently discussing areduction of the minimum royalty requirements for calendar years 2008 and 2009under the license agreement with Callaway, but can give no assurance thatCallaway will agree to such a reduction.

 

**NOTE 6****             EARNINGSPER SHARE**

 

Effective with the year ended June 30, 1998, we adopted theprovisions of Statement of Financial Accounting Standards No. 128 (SFAS128), *Earnings per Share*. SFAS 128 requiresthe presentation of basic and diluted earnings (loss) per common share. Thefollowing table provides a reconciliation of the numerator and denominator ofbasic and diluted earnings (loss) per common share:

 
| ** **                                     | ** ** | **Three Months ended September 30, 2008** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                                            | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Loss**                                                           | ** ** | **Average Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                         |       |                                                               |       |   |   |   |   |
| Basic loss per  share                          |       | $                                                                  | (1,040,000 | ) | 2,284,000 |   | $ | (0.46 | ) |
| Effect of  dilutive securities options **(A)** |       | —                                                             |       | — |   | — |   |
|                                           |       |                                                               |       |   |   |   |   |
| Diluted loss per  share                        |       | $                                                                  | (1,040,000 | ) | 2,284,000 |   | $ | (0.46 | ) |

 
| ** **                                    | ** ** | **Three Months ended September 30, 2007** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Net**                                                            | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Loss**                                                           | ** ** | **Average Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share (as Corrected)         |       |                                                               |       |   |   |   |   |
| Basic loss per  share                         |       | $                                                                  | (669,000   | ) | 2,284,000 |   | $ | (0.29 | ) |
| Effect of  dilutive securities options**(A)** |       | —                                                             |       | — |   | — |   |
|                                          |       |                                                               |       |   |   |   |   |
| Diluted loss per  share                       |       | $                                                                  | (669,000   | ) | 2,284,000 |   | $ | (0.29 | ) |

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

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**(A)**Due to the Company’s net losses, all options were anti-dilutive and thereforeexcluded from the loss per share calculations.

 

**NOTE 7****             SEGMENTINFORMATION**

 

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 and distributors to golf professional shops,country clubs, resorts and exclusive department stores within the UnitedStates. Top-Flite® men’s branded apparel was marketed by Reserve Apparel tomass retailers and other big-box type high sales volume retail stores withinthe United States. Ben Hogan® fashion apparel and Top-Flite® branded apparelhave been distributed 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 September 30, 2008,and June 30, 2008 (in thousands):*

 
| ** **                              | ** ** | **September 30, 2008** | ** ** | **June 30, 2008** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Fashion**                      | ** ** | **Branded**                 | ** ** | ** ** | ** ** | **Fashion** | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Apparel**                      | ** ** | **Apparel**                 | ** ** | **Total** | ** ** | **Apparel** | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| Cash and cash  equivalents              |       | $                                | 1,525      |                        | $          | 24 |   | $ | 1,549 |   | $ | 2,798 |   | $ | 32 |   | $ | 2,830 |   |
| Marketable  securities                  |       | 200                              |       | —                      |       | 200 |   | 200 |   | — |   | 200 |   |
| Accounts  receivable, net of allowances |       | 1,676                            |       | 117                         |       | 1,793 |   | 2,439 |   | 352 |   | 2,791 |   |
| Inventories                             |       | 7,272                            |       | —                      |       | 7,272 |   | 5,947 |   | — |   | 5,947 |   |
| Prepaid expenses                        |       | 257                              |       | —                      |       | 257 |   | 264 |   | — |   | 264 |   |
| Property and  equipment, net            |       | 154                              |       | —                      |       | 154 |   | 197 |   | — |   | 197 |   |
| Other assets                            |       | 3                                |       | —                      |       | 3 |   | 3 |   | — |   | 3 |   |
| Total Assets                            |       | $                                | 11,087     |                        | $          | 141 |   | $ | 11,228 |   | $ | 11,848 |   | $ | 384 |   | $ | 12,232 |   |
|                                    |       |                             |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts payable                        |       | $                                | 1,481      |                        | $          | — |   | $ | 1,481 |   | $ | 1,185 |   | $ | 236 |   | $ | 1,421 |   |
| Accrued  royalties payable              |       | 71                               |       | —                      |       | 71 |   | 52 |   | — |   | 52 |   |
| Accrued  commissions payable            |       | 120                              |       | —                      |       | 120 |   | 180 |   | — |   | 180 |   |
| Accrued payroll                         |       | 68                               |       | —                      |       | 68 |   | 138 |   | — |   | 138 |   |
| Other  liabilities                      |       | 180                              |       | —                      |       | 180 |   | 177 |   | — |   | 177 |   |
| Total Current  Liabilities              |       | 1,920                            |       | —                      |       | 1,920 |   | 1,732 |   | 236 |   | 1,968 |   |
| Minimum  royalties payable              |       | 164                              |       | —                      |       | 164 |   | 80 |   | — |   | 80 |   |
| Total Contingent  Liabilities           |       | 164                              |       | —                      |       | 164 |   | 80 |   | — |   | 80 |   |
| Total  Liabilities                      |       | $                                | 2,084      |                        | $          | — |   | $ | 2,084 |   | $ | 1,812 |   | $ | 236 |   | $ | 2,048 |   |

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

*CondensedConsolidated Statements of Operations Segment Information for the Three MonthsEnded September 30, 2008 and 2007 (in thousands):*

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | **(As Corrected)**          | ** ** |
| ** **                           | ** ** | **Fashion**                      | ** ** | **Branded**                      | ** ** | ** ** | ** ** | **Fashion** | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Apparel**                      | ** ** | **Apparel**                      | ** ** | **Total** | ** ** | **Apparel** | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| Net Sales                            |       | $                                | 2,824      |                             | $          | — |   | $ | 2,824 |   | $ | 3,408 |   | $ | 120 |   | $ | 3,528 |   |
| Cost of goods  sold                  |       | 1,776                            |       | —                           |       | 1,776 |   | 2,138 |   | 95 |   | 2,233 |   |
| Inventory  impairments               |       | 278                              |       | —                           |       | 278 |   | 154 |   | — |   | 154 |   |
| Total cost of  goods sold            |       | 2,054                            |       | —                           |       | 2,054 |   | 2,292 |   | 95 |   | 2,387 |   |
| Gross profit                         |       | 770                              |       | —                           |       | 770 |   | 1,116 |   | 25 |   | 1,141 |   |
| Selling, general  and admin expenses |       | 1,583                            |       | 37                               |       | 1,620 |   | 1,624 |   | 101 |   | 1,725 |   |
| Royalty expense                      |       | 155                              |       | —                           |       | 155 |   | 119 |   | 7 |   | 126 |   |
| Total other  operating costs         |       | 1,738                            |       | 37                               |       | 1,775 |   | 1,743 |   | 108 |   | 1,851 |   |
| Income (loss)  from operations       |       | (968                             | )          | (37                              | )          | (1,005 | ) | (627 | ) | (83 | ) | (710 | ) |
| Other income  (expense), net         |       | (33                              | )          | —                           |       | (33 | ) | 47 |   | 1 |   | 48 |   |
| Provision for  income taxes          |       | (2                               | )          | —                           |       | (2 | ) | — |   | (7 | ) | (7 | ) |
| Net income  (loss)                   |       | $                                | (1,003     | )                                | $          | (37 | ) | $ | (1,040 | ) | $ | (580 | ) | $ | (89 | ) | $ | (669 | ) |

 

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 8****             LEGALPROCEEDINGS**

 

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. Among other things, the Plaintiffs alleged thatthe Defendants misapplied an inventory deposit of $291,135 paid to theDefendants in March 2006 by Sport Haley, which the Defendants used tooffset certain amounts purportedly owed to the Defendants by Explorer Headgear, Inc.,and that the Defendants failed to return $176,877 which was overpaid by SportHaley as of July 2006. The Plaintiffs alleged claims against theDefendants for conversion and violation of the Colorado civil theft statute aswell as for unjust enrichment and negligence. The Plaintiffs originally soughtrepayment of the $291,135 and $176,877 amounts and other relief. At thecommencement of the trial, which occurred on September 23, 2008, thePlaintiffs agreed to withdraw their claim for the $176,877 amount that theypreviously alleged was overpaid to the Defendants. At the conclusion of thetrial, the Court awarded judgment in the Plaintiff’s favor and against theDefendants, jointly and severally, in the amount of $291,135 with regard to thePlaintiff’s claims for conversion and unjust enrichment, and the Courtdismissed all of the other claims. On November 4, 2008, the Defendantsfiled a Notice of Appeal in the Colorado Court of Appeals, citing variousissues proposed to be raised on appeal. At this time, we cannot determinewhether the Court of Appeals will affirm or reverse, in whole or in part, theDistrict Court’s judgment.

 

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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 of these words, and anystatement regarding possible or assumed future results of operations of ourbusiness, the markets for our products, anticipated expenditures, regulatorydevelopments or competition, or other statements regarding matters that are nothistorical facts, are intended to identify forward-looking statements, althoughnot all forward-looking statements contain such identifying words. The readershould be aware that our actual results could differ materially from thosecontained in forward-looking statements. Our financial condition and theresults of our operations will depend on a number of factors, including, butnot limited to, the following: our ability to successfully anticipate fashiontrends, design favorably accepted fashion golf apparel, effectively advertiseand communicate within the marketplace, and penetrate our chosen distributionchannels; competition within golf apparel markets; business conditions andgrowth in the fashion golf apparel market and the general economy; our abilityto successfully forecast sales and optimize inventory levels; our ability tosuccessfully manage risks associated with a high relative percentage of saleswith respect to licensed apparel, such as the Ben Hogan® apparel collections;loss of certain third party suppliers, and/or delays in receiving garments fromthird party suppliers caused by various factors, including lost or reducedmanufacturing capacity of significant suppliers, labor shortages, timely performanceof third parties, transportation difficulties, and others; significant delaysin deliveries from third party suppliers; unsatisfactory recourse with regardto nonconforming 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 relationships withcommercial 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 fiscalyears correspond with the fiscal year of Sport-Haley, Inc., 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 influencesintended to develop and maintain brand recognition and loyalty, on or off thegolf course. While each product in the SPORT 

 

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HALEY®apparel line is sold separately, the line is intentionally designed in groupswith coordinated styles, color schemes and fabrics to encourage customers topurchase multiple garments. SPORT HALEY® women’s fashion apparel includes avariety of fabrics and weave patterns, including interlock, pique, Frenchterry, jersey and twill, and may feature a unique trim, a special fabric finishor extra needlework. The SPORT HALEY® name has been highly recognized as awomen’s fashion apparel brand within the premium and mid-priced golf apparelmarkets for over 20 years, in part, because of the cohesiveness of our designstaff. Catherine B. Blair, our Vice President – Merchandising and Design, hasprovided direction for the SPORT HALEY® brand for over 16 years. Ms. Blairis keenly aware of fashion trends within the women’s golf apparel market andhas kept our SPORT HALEY® fashion apparel collections on the leading edge ofthe market by including moisture wicking technical performance fabrics, such asAerocool® and Dry-Tech® 18, and several leading edge, younger looking, athleticstyle garments, while maintaining the time-honored elegance of the SPORT HALEY®brand. Certain of our premium priced SPORT HALEY® garments are trimmed withSwarovski® Austrian cut crystals, the unique and patented cutting process whichproduces ultimate brilliance, and come with a “Made with CrystallizedSwarovski® Elements” hangtag for authenticity. The technical performance fabrics,athletic style garments and Swarovski® trims have all been well received by ourcustomers.

 

BenHogan® men’s fashion apparel is designed utilizing elegant time-honored classicstyles intended to garner nearly instantaneous brand recognition. The Ben Hogan®label has been widely recognized within the golf apparel industry for severalyears 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 is 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 weaggressively marketed the Top-Flite® apparel line to several mass retailers andbig-box type high sales volume retail stores. While we expected our marketingefforts would result in the establishment of business relationships with one ormore mass retailers and other big-box type high sales volume retail stores, weonly received one order for Top-Flite® apparel from such a retailer for a testin 50 of its stores, which we shipped in September and October 2007.Since our 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.

 

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**CRITICAL ACCOUNTING POLICIESAND ESTIMATES**

 

Our financial statements have been prepared inaccordance with standards of the Public Company Accounting Oversight Board(United States), which require us to make estimates and judgments that 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 historical experiencescombined with management’s understanding of current facts and circumstances.Certain of our accounting policies are considered critical as they are bothimportant to the portrayal of our financial condition and the results of ouroperations and require significant or complex judgments on the part ofmanagement. We believe that the following critical accounting policies affectthe more significant judgments and estimates used in the preparation of ourfinancial statements.

 

*Inventories*

 

Our inventories,predominately comprised of finished goods, are generally valued at the lower ofcost (weighted average) or market. Costs include amounts paid to suppliers forpackaged apparel and/or materials and labor, import costs, such as customsduties, freight-in and other miscellaneous costs, and allocated overhead.Excess fashion apparel inventories, consisting of discontinued or agingmerchandise, are a natural component of a seasonal apparel business. Whilecertain fashion apparel items will sell out in any particular selling season,quantities of other fashion apparel items will remain at the end of eachselling season. We market excess fashion apparel finished goods inventories atreduced wholesale prices to our customers in the normal course of business. Remainingexcess inventories are liquidated through other markets. In the ordinary courseof business, we maintain reserves for inventory write-downs due to theobsolescence of excess inventories. We perform analyses on a quarterly basis toidentify unsold excess inventories and adjust our reserves for inventoryobsolescence to reduce the carrying value of excess inventories to theirestimated net realizable value, which is estimated based on management’sdisposition plans and historical experiences. Generally, branded apparelinventories are not prone to impairment, because we usually order brandedapparel in quantities per specific customer orders.

 

We believe that the recentsignificant downturn in the United States economy negatively impacted the valueof our excess fashion apparel inventories, and we reduced the carrying value ofour excess fashion apparel inventories at September 30, 2008, accordingly.We adjusted our reserve for inventory obsolescence and recorded impairments of$278,000 and $154,000 with regard to fashion apparel inventories for thethree-month periods ended September 30, 2008 and 2007, respectively. Thebalances of our reserves for inventory obsolescence totaled $446,000 and$390,000 at September 30, 2008 and 2007, respectively. While we believethat our processes produce fair valuations of our excess inventories, if actualfuture market conditions are less favorable than those projected by management,additional allowances may be required.

 

*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 

 

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on a common stock investment. Governing regulations require that ouroperating losses be carried forward for income tax purposes. We maintain avaluation allowance to reduce deferred tax assets to the net amount expected tobe recovered in future periods. The estimates for deferred tax assets and thecorresponding valuation allowance require us to exercise complex judgments. Weperiodically review and adjust those estimates based upon the most currentinformation available. In accordance with Statement of Financial AccountingStandards No. 109 (“SFAS 109”), *“Accounting for IncomeTaxes,”* and based upon a review at September 30, 2008, of ourutilization of deferred tax assets, we maintained a valuation allowance thateffectively reduces our net deferred tax assets to zero. While we continue toexplore 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*

 

Our allowance for doubtful accounts reflects areserve that reduces our customer accounts receivable to the net amountestimated to be collectible. Estimating the credit worthiness of customers andthe recoverability of customer accounts requires us to exercise considerablejudgment. In estimating the reserve for uncollectible accounts, we considerfactors such as general economic and industry-specific conditions, historicaland anticipated customer performance. From time to time, we also identifydelinquent customer accounts for which a specific reserve is required. At September 30,2008, our allowance for doubtful accounts totaled $256,000, including aspecific reserve of $175,000 with respect to the potential non-recovery of anet amount due to Reserve Apparel from a former inventory broker. In September 2008,the Court awarded judgment in our favor and against the former inventory brokerand its principal in the amount of $291,135. In order to collect from theformer broker, we will need to domesticate the judgment in the province ofOntario, Canada. Because we agreed at the commencement of the trial to withdrawthe claim that we had overpaid $176,877 to the former inventory broker, weadjusted our receivable with regard to this matter to $291,135 at September 30,2008. Since collection of the judgment is not assured, we also adjusted ourreserve for potential non-recovery at September 30, 2008, to $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*

 

We record allowances for sales returns as netadjustments to customer accounts receivable. When recording an allowance, thenet method reduces customer accounts receivable and net sales by the estimatedgross margin effect of the anticipated sales return. Generally, our sellingterms preclude return of our products subsequent to the sale. However, we havetraditionally maintained limited programs that offer various customers theright to return certain fashion apparel items under predefined conditions,which we include as a component within our estimate of allowance for salesreturns. We review historical data and consider factors such as generaleconomic and industry-specific conditions and anticipated customer performancewhen evaluating the adequacy of our allowance for sales returns. At September 30,2008, our allowance for sales returns was $81,000. Significant changes ingeneral economic or industry conditions may yield sales returns that differmaterially from 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 September 30, 2008, are more meaningfulwhen compared with the corresponding balance sheet amounts at September 30,2007, 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 $8,987,000, 9,984,000 and $9,961,000 at September 30,2008, June 30, 2008, and September 30, 2007, as corrected,respectively. Cash and cash equivalents totaled $1,549,000, $2,830,000 and$3,137,000 at September 30, 2008, June 30, 2008, and September 30,2007, respectively. For purposes of the statements of cash flows, we considerall highly liquid instruments purchased with an original maturity of threemonths or less to be cash equivalents, if they are readily convertible to knownamounts of cash and present an insignificant risk of change in value due tochanges in interest rates. As of September 30, 2008, we had accrued$806,000 in import duties due to US Customs and Border Protection, includingaccrued interest thereon of $93,000, with regard to the Prior Disclosure wesubmitted in November 2008. We expect to negotiate the terms of a paymentplan with the National Finance Center. If we are required to pay the entirebalance of import duties and interest in a lump sum payment with regard to thePrior Disclosure, our cash on hand will be significantly impacted and we mayneed to obtain additional sources of capital to sustain the working capitalneeds of our operations. However, we can give no assurance that such sources ofcapital will be available to us, given the current status of capital markets inthe United States. Our capital needs will depend on many factors, including theneed to finance required inventory levels, the success of current sales andmarketing programs, and our ability to timely collect customer accountsreceivable.

 

When compared with the June 30, 2008, balance of $2,791,000, ournet accounts receivable balance at September 30, 2008, decreased by$998,000, or 36%, to $1,793,000. Our net accounts receivable balance at September 30,2008, decreased by $724,000, or 29%, when compared with the September 30,2007, balance of $2,517,000. The decreases correlate with correspondingdecreases in net sales between the comparable periods. Our net accountsreceivable balance relating to fashion apparel was $1,676,000 at September 30,2008, a decrease of $369,000, or 18%, from the balance of $2,045,000 at September 30,2007. Our net accounts receivable balance relating to branded apparel was$117,000 at September 30, 2008, a decrease of $355,000, or 75%, from thebalance of $472,000 at September 30, 2007. Changes in our accountsreceivable balances provided operating cash of $998,000 and $549,000 for thefiscal quarters ended September 30, 2008 and 2007, respectively.

 

Inventories have increased by $1,325,000, or 22%, to $7,272,000 at September 30,2008, from $5,947,000 at June 30, 2008. Our fashion apparel inventories generally increaseduring our fiscal quarter ended September 30 each year when compared withthe June 30 balance in the prior fiscal year. We generally receive asubstantial amount of fashion apparel inventories at or near the end of our September 30fiscal quarter each year in order to fulfill customer orders for the springseason that we begin shipping by early November each year. Inventories at September 30,2008, were greater by $487,000, or 7%, than inventories of $6,785,000 at September 30,2007, primarily due to an increase in our fall 2008 Ben 

 

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Hogan® fashion apparel inventories on hand at September 30, 2008,when compared with fall 2007 Ben Hogan® fashion apparel inventories that wereon hand at September 30, 2007. The comparative increase in Ben Hogan®fashion apparel inventories correlates with a corresponding decrease in salesof Ben Hogan ® fashion apparel for the comparative three month periods ended September 30,2008 and 2007, respectively. Branded apparel inventories were $65,000 at September 30,2007. We had less than $1,000 in branded apparel inventories at September 30,2008. Changes in our inventory balances used operating cash of $1,325,000 forthe three months ended September 30, 2008, and $899,000 for the threemonths ended September 30, 2007, as corrected.

 

Our continued reliance on foreign suppliers sustains the risk that ourrevenues could be adversely affected if a foreign shipment or shipments werereceived late or lost. We maintain insurance for risk of loss relating to goodsshipped from our foreign and domestic suppliers. However, our predominantreliance upon a certain foreign person and certain significant foreignsuppliers also sustains the risk that we would be left with inadequate orunsatisfactory recourse should the goods received from a foreign supplier benonconforming.

 

Total liabilities increased by $36,000, or 2%, to $2,084,000 at September 30,2008, from $2,048,000 at June 30, 2008. Total liabilities decreased by$749,000, or 36%, at September 30, 2008, from $2,833,000 at September 30,2007, as corrected. The decrease between the comparative September 30amounts was comprised of the following: $400,000 decrease in notes payable;$155,000 decrease in trade accounts payable: $69,000 decrease in accruedroyalties payable; $24,000 decrease in sales commissions payable; $99,000decrease in accrued payroll; and, $2,000 decrease in other payables. Thedecrease in trade accounts payable relate to the differences between the natureand timing of payments, and the decreases in accrued royalties payable andsales commissions payable relate to a corresponding decrease in net salesbetween the comparative three month periods ended September 30, 2008 and2007, as corrected. The decrease in accrued payroll expenses consistedprimarily of a decrease in the amount of severance and other compensationpayable to our former chief executive officer, who received such paymentsthrough March 2008. Accrued severance and other compensation was $0 and$80,000 at September 30, 2008, and September 30, 2007, respectively.

 

Due to the combination of the factors discussed above, and others, ouroperating activities used cash of $1,278,000 for the three months ended September 30,2008. Comparatively, for the three months ended September 30, 2007, ascorrected, our operating activities used cash of $1,727,000.

 

For the three months ended September 30,2008 and 2007, as corrected, investing activities used cash of $3,000 and $0,respectively, for the purchase of fixed assets. For the three months ended September 30,2008 and 2007, as corrected, $46,000 and $54,000 in depreciation andamortization was charged to current operations, respectively.

 

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 no collateralized deposits at September 30,2008. 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 

 

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purchases from offshore suppliers. We did not have any balances due onthe business loan agreement at September 30, 2008 or 2007, respectively. Outstanding letters of credit reduce theamount available for borrowing under the business loan agreement. At September 30,2008 and 2007, we had outstanding letters of credit of $0 and $0, respectively,issued through Bank of Oklahoma for purchase obligations under outstandingletters of credit.

 

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 expires onDecember 5, 2008, provides for a maximum loan amount of $200,000, collateralizedby a certificate of deposit held at US Bank in the amount of $200,000, whichearns a market rate of interest. Borrowings under the amended line of creditagreement accrue interest at 1.250% plus the one-month LIBOR rate. As of December 2007,the line of credit had previously been amended to provide for a maximum loanamount of $2,000,000, collateralized by a certificate of deposit held at USBank in the amount of $2,000,000. We have generally maintained the line ofcredit to facilitate the issuance of letters of credit for inventory purchasesfrom offshore suppliers and, if necessary, to fund any temporary workingcapital needs. Balances due on the line of credit totaled $0 and $400,000 at September 30,2008 and 2007, respectively. Outstanding letters of credit reduce the amountavailable for borrowing under the line of credit agreement. At September 30,2008 and 2007, we had outstanding letters of credit of $0 and $119,000,respectively, issued through US Bank for purchase obligations under outstandingletters of credit.

 

### **RESULTS OF OPERATIONS**

### ** **

Total net sales for the three months ended September 30, 2008,were $2,824,000, a decrease of $704,000, or 20%, from total net sales of$3,528,000 for the three months ended September 30, 2007. Net sales offashion apparel for the three months ended September 30, 2008, were$2,824,000, a decrease of $584,000, or 17%, from net sales of fashion apparelof $3,408,000 for the three months ended September 30, 2007. Net sales ofbranded apparel for the three months ended September 30, 2008 and 2007, ascorrected, were $0 and $120,000, respectively. The remainder of our net sales for the three months ended September 30,2008 and 2007, respectively, were comprised of embroidery and shippingrevenues.

 

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,on a consolidated basis, the operations of Reserve Apparel, which distributedTop-Flite® branded apparel until November 2007 to the mass retail marketat much lower price points and gross margins than those expected to be achievedin the premium and mid-price markets where we distribute our SPORT HALEY® andBen Hogan® fashion apparel brands. Other fashion apparel companies within thegolf industry may or may not also operate within the lower price markets. Weinclude royalty payments, relating to sales of licensed apparel, in selling,general and administrative expenses.

 

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*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 September 30,2008, were $2,824,000, a decrease of $584,000, or 17%, from net sales of fashionapparel of $3,408,000 for the three months ended September 30, 2007. Thedecrease in sales of fashion apparel for the comparative three-month periodswas primarily comprised of decreases in sales of SPORT HALEY® and Ben Hogan®fashion apparel between the respective periods. Net sales of our SPORT HALEY®fashion apparel collections were $1,463,000 and $1,580,000 for the three monthsended September 30, 2008 and 2007, as corrected, respectively, a decreaseof $117,000, or 7%. Net sales of our Ben Hogan® fashion apparel collectionswere $1,262,000 and $1,702,000 for the three months ended September 30,2008 and 2007, as corrected, respectively, a decrease of $440,000, or 26%. Theremainder of our fashion apparel net sales was comprised of embroidery and shippingrevenues. We consider the weakening United States economy to be a contributingfactor to the decrease in our fashion apparel sales. We believe that our SPORTHALEY® fashion apparel brand may be better positioned to maintain market sharein weak economic times than our Ben Hogan® fashion apparel brand, which issubject to greater competition within the country club and resort markets inwhich we primarily operate. Historically, the country club and resort marketshave preferred to sell high-quality apparel that was not widely distributedwithin other retail markets. However, the broad market acceptance of apparelbrands such as Nike, Adidas and Under Armour, which are primarily comprised ofperformance fabrics and are globally distributed into numerous markets otherthan country clubs and resorts, appear to have diluted the value associatedwith the exclusivity of fashion apparel brands such as Ben Hogan®. We considerBen Hogan® fashion apparel, which is marketed in accordance with a licensingagreement we maintain with Callaway for such apparel, to be a key component ofour fashion apparel business, and we have continued to focus our marketingefforts with regard to Ben Hogan® fashion apparel on increasing our marketpresence in upscale retail stores and on penetrating further into corporatemarkets, in order to bolster future sales. Over the past year, we haveintroduced Ben Hogan® fashion apparel to a few upscale retail stores and wehave continued to search for ways to increase our presence in the corporatemarket, but net sales to date have not been significant within either of thosemarkets.

 

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. Webelieve that the recent significant downturn in the United States economynegatively impacted the value of our excess fashion apparel inventories, and wereduced the carrying value of our excess fashion apparel inventories at September 30,2008, accordingly. For the three months ended September 30, 2008, werecorded net sales of $43,000 and gross profit of $2,000, with regard to thedisposition of excess fashion apparel inventories. For the three months ended September 30,2007, we did not record net sales with regard to the disposition of excessfashion apparel inventories. For the three months ended September 30, 2008and 2007, we recorded impairments of $278,000 and $154,000, respectively, withregard to the valuation of excess fashion apparel inventories to the lower ofcost or market. As percentage of net sales, gross profit

 

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of our fashion apparel, was 27% and 33% for the three months ended September 30,2008 and 2007, as corrected, respectively.

 

Selling, general and administrative expenses with regard to fashionapparel decreased by $41,000, or 3%, to $1,583,000 for the three months ended September 30,2008, from $1,624,000 for the three months ended September 30, 2007, ascorrected. The comparative decrease was generally comprised of increases inadvertising, tradeshow and legal and other expenses that were more than offsetby decreases in sales commissions on correspondingly lower sales and variousother expenses. As a percentage of net sales, selling, general andadministrative expenses with regard to our fashion apparel were 56% and 48% forthe three-month periods ended September 30, 2008 and 2007, as corrected,respectively.

 

Royalty expense is due to Callaway in accordance with the license theypreviously granted us to market men’s fashion apparel bearing the Ben Hogan®label. We recorded royalty expense of $155,000 for the three months ended September 30,2008, an increase of $36,000, or 30%, from $119,000 for the three months ended September 30,2007, as corrected. The increase in royalty expense is inverse as compared withour decrease in sales of Ben Hogan® fashion apparel over the comparablethree-month periods. We expect that royalties generated on sales of Ben Hogan®fashion apparel will 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. During the three monthsended September 30, 2008, $84,000 of our royalty expense related to theminimum contractual requirement for that period. We did not record royaltyexpense in the comparable three-month period in the prior fiscal year with regardto the minimum contractual requirement in effect as of September 30, 2007,for our Ben Hogan® fashion apparel. We are currently discussing a reduction ofthe minimum royalty requirements for calendar years 2008 and 2009 under thelicense agreement with Callaway, but can give no assurance that Callaway willagree to such a reduction.

 

Loss from operations with regard to fashion apparel for the threemonths ended September 30, 2008, was ($968,000), a difference of($341,000), or 54%, from ($627,000) for the three months ended September 30,2007, as corrected. Our sales are historically weakest for the three monthsending September 30, our first fiscal quarter each year, than for any ofour other fiscal quarterly periods, and, historically, we have not generatedincome from fashion apparel operations during the thee months ended September 30in any given fiscal year.

 

*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 $120,000 forthe three months ended September 30, 2007, were comprised of shipments toa retailer for a test in 50 of its stores. Since our concerted efforts failedto generate orders from a major customer, we discontinued marketing apparelbearing the Top-Flite® label in November 2007, and in March 2008 thelicense agreement with Callaway 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

 

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distributeour SPORT HALEY® and Ben Hogan® fashion apparel brands. Wholesale prices aregenerally expected to be much lower for branded apparel than for higher qualityfashion apparel, and gross margins are also expected to be lower for brandedapparel than for fashion apparel. Other companies within the golf apparelindustry may or may not operate within the lower-price branded apparel markets.As a percentage of net sales, gross margins with respect to net sales ofbranded apparel were 21% for the three months ended September 30, 2007.

 

Selling,general and administrative expenses were $37,000 with regard to branded apparelfor the three months ended September 30, 2008, a decrease of $64,000, or63%, from $101,000 for the three months ended September 30, 2007. Thedecrease in selling, general and administrative expenses was primarily due tothe discontinuance of our marketing efforts with regard to Top-Flite® brandedapparel in November 2007. Selling, general and administrative expenses forthe three months ended September 30, 2008, primarily consisted of legalexpenses with regard to the September 2008 trial of our lawsuit wepreviously filed against a former inventory broker. As a percentage of netbranded apparel sales, related selling, general and administrative expenseswere 84% for the three months ended September 30, 2007.

 

Royaltyexpense was due to Callaway through December 31, 2007, in accordance withthe license they previously granted us to market branded apparel bearing theTop-Flite® label. We recorded royalty expense of $7,000 for the three monthsended September 30, 2007, with respect to net sales of branded apparel.

 

Lossfrom operations with regard to branded apparel for the three months ended September 30,2008, was ($37,000), a difference of $46,000, or 55%, from ($83,000) for thethree months ended September 30, 2007.

 

*Other income (expense), net*

 

Other income (expense), net, was ($33,000) for the three months ended September 30,2008, a decrease of $81,000, or 169%, from $48,000 for the three months ended September 30,2007, as corrected. Other income, net, was primarily derived from interestearned on cash and cash equivalent balances held at various financialinstitutions. The decrease was generally attributable to our lower balance ofcash and cash equivalents during the respective periods plus the additionalaccrual during the three months ended September 30, 2008, of $49,000 ininterest due on customs duties owed with regard to our Prior Disclosure that wesubmitted to US Customs and Border Protection in November 2008.

 

*Net income (loss)*

 

Net loss for the three months ended September 30, 2008, was($1,040,000), a difference of ($371,000), or 55%, as compared with the net lossof ($669,000) for the three months ended September 30, 2007, as corrected.We had federal and state net operating loss carry forwards of $8,761,000 and$10,697,000 at September 30, 2008, that we estimated may be recoverable atincome tax rates of 34% and 5%, respectively. In accordance with SFAS 109 andbased upon a review at September 30, 2008, of our utilization of deferredtax assets, we maintained a valuation allowance that effectively reduces ournet deferred tax assets to zero. While we continue to explore variousstrategies to return the Company to profitability, including expanding ourSPORT HALEY® and Ben Hogan® fashion apparel distribution channels within retailand corporate markets, we cannot be certain that our efforts will result in thegeneration of future profits sufficient to offset our significant net operatingloss carry forwards prior to

 

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** **

their expirations. Accordingly, we did not record benefits from incometaxes associated with the corresponding losses for the respective three-monthperiod ended September 30, 2008.

 

*Earnings (loss) per share*

 

Basicand diluted loss per common share was ($0.46) for the three months ended September 30,2008, and was ($0.29) for the three months ended September 30, 2007, ascorrected. All securities options were anti-dilutive and therefore excludedfrom the per share calculations with respect to periods in which net losseswere incurred.

 

*Book value*

 

Ourbook value per common share was $4.00 at September 30, 2008, $4.46 at June 30,2008 and $4.51 at September 30, 2007, as corrected.

 

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**SPORT-HALEY, INC.**

**ITEM 4 CONTROLS AND PROCEDURES**

 

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

 

We designed our disclosure controls and procedures to providereasonable assurance of achieving our desired disclosure control objectives. Wemaintain disclosure controls and procedures to ensure that information requiredto be disclosed in the reports we file pursuant to the Securities Act of 1934,as amended (the “Exchange Act”), are recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission, and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andour Chief Financial Officer as appropriate, to allow timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls andprocedures, management recognizes that any control and procedure, no matter howwell designed and operated, can only provide reasonable assurance of achievingthe desired control objectives, and in reaching a reasonable level of assurancemanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures.

 

Our management, with the participation of our ChiefExecutive Officer and our Chief Financial Officer, conducted an evaluation ofthe effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15under the Exchange Act as of the end of the period covered by this report.Based on that evaluation, management, including our Chief Executive Officer andour Chief Financial Officer, concluded that, as of the end of the periodcovered by this report, our disclosure controls and procedures were effectivein reaching a reasonable level of assurance that: (a) all materialinformation relating to the Company, required to be disclosed in this report,was made known to management in a timely manner; and (b) information was recorded,processed, summarized and reported within the time periods specified in the SEC’srules and regulations.

 

**(b)****                  ****Changes in Internal ControlsOver Financial Reporting**

 

Our management, including our Chief Executive Officer and our ChiefFinancial Officer, does not expect that our internal controls over financialreporting will, in all instances, prevent all errors and all fraud. A controlsystem, no matter how well conceived or operated, can only provide reasonable,not absolute, assurance that the objectives of the control system are met.While our control systems provide a reasonable assurance level, the design ofour control systems reflects the fact that there are resource constraints, andthe benefits of such controls were considered relative to their costs. Becauseof the inherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, within the financial reports of Sport-Haley, Inc. have beendetected. 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.

 

As previously reported, during fiscal 2008, under the supervision ofour Chief Executive Officer and our Chief Financial Officer, we completed thedesign, documentation and implementation of our internal controls overfinancial reporting. We believe that we have purposely designed our controls toprovide reasonable assurance regarding the reliability of our financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted

 

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accounting principles. However, the Company was not in compliance with Section 404of the Sarbanes-Oxley Act of 2002, as of June 30, 2008, and managementcould not state whether or not our internal controls over financial reportingare effective. We began testing our controls by utilizing the framework setforth in the report entitled *“InternalControl – Integrated Framework”* published by the Committee ofSponsoring Organizations of the Treadway Commission, known as “COSO,” as abasis to evaluate the effectiveness of our internal controls over financialreporting, but did not complete the detailed testing of all our controls by June 30,2008. Further, as previously reported, in August 2008, we became awarethat our controls were ineffective to prevent the underpayment of customsduties on certain of our imports of fashion apparel purchased from foreignsuppliers. *See Item 5 Other Informationbelow for our detailed explanation of this matter.* We discoveredthat we were underpaying import duties with regard to fashion apparel receivedfrom foreign suppliers for which fabric had been purchased from another foreignsupplier, because the information received by our customs agent had failed toinclude the value of the fabric in the total declared value of the apparel. Wedetermined that the underpayment of customs duties revealed a significantdeficiency in our internal controls over financial reporting, and in September 2008our remediation procedures included designing and implementing specificinternal controls to ensure that our customs broker receives complete andaccurate information to compute the correct value to be declared for importcustoms valuations. We expect to design a plan to complete the testing of allour controls by December 31, 2008.

 

Except as noted above, there have been no significant changes in ourinternal controls over financial reporting, as defined in Rules 13a-15(f) or15d-15(f) under the Exchange Act, during the three months ended September 30,2008, that materially affected, or are reasonably likely to materially affect,our internal controls over financial reporting.

 

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**SPORT-HALEY, INC.**

**PART IIOTHER 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. Among other things, the Plaintiffs alleged thatthe Defendants misapplied an inventory deposit of $291,135 paid to theDefendants in March 2006 by Sport Haley, which the Defendants used tooffset certain amounts purportedly owed to the Defendants by Explorer Headgear, Inc.,and that the Defendants failed to return $176,877 which was overpaid by SportHaley as of July 2006. The Plaintiffs alleged claims against theDefendants for conversion and violation of the Colorado civil theft statute aswell as for unjust enrichment and negligence. The Plaintiffs originally soughtrepayment of the $291,135 and $176,877 amounts and other relief. At thecommencement of the trial, which occurred on September 23, 2008, thePlaintiffs agreed to withdraw their claim for the $176,877 amount that theypreviously alleged was overpaid to the Defendants. At the conclusion of thetrial, the Court awarded judgment in the Plaintiff’s favor and against theDefendants, jointly and severally, in the amount of $291,135 with regard to thePlaintiff’s claims for conversion and unjust enrichment, and the Courtdismissed all of the other claims. On November 4, 2008, the Defendantsfiled a Notice of Appeal in the Colorado Court of Appeals, citing variousissues proposed to be raised on appeal. At this time, we cannot determinewhether the Court of Appeals will affirm or reverse, in whole or in part, theDistrict Court’s judgment.

 

**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****5****       ****OTHER INFORMATION**

** **

(a)     As previously reported, in August 2008,we determined that we were underpaying customs duties with regard to importedfashion apparel for which fabric had been purchased separately from anotherforeign supplier. This issue was brought to our attention by a third party andwas not an intentional concealment or act on the part of the Company or any ofits officers, directors or employees. For such imports, the informationreceived by our customs agent had failed to include the value of the fabric inthe total declared value of the apparel.

 

In order to correct the amount of duty payable to US Customs and BorderProtection for such imports, we began voluntarily preparing a Prior Disclosurein September 2008. A Prior Disclosure is a specific procedure proscribedby US Customs and Border Protection for the purpose of identifying andcorrecting amounts which were previously declared or omitted from declaration.Our Prior Disclosure corrected amounts with regard to our imports for thefive-year period immediately prior to the date the Prior Disclosure wassubmitted to US Customs and Border Protection. In September 2008, weretained an import duties specialist to

 

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assist us with the Prior Disclosure. The specialist advised us that,upon our delivery of the Prior Disclosure and an agreement to pay theapplicable amounts and interest thereon, it is highly unlikely (but we can giveno assurance to the contrary) that US Customs and Border Protection will assessfurther fines and/or penalties with regard to this matter. Therefore, webelieve that upon delivery of our Prior Disclosure and the related paymentagreement, US Customs and Border Protection will consider this matter closed.We determined that additional customs duties owed for the period fromapproximately November 2003 through September 2008 totaled $713,000and accrued interest due thereon totaled $93,000. Our Prior Disclosure,submitted in November 2008, totaled $715,000 in additional customs dutiesplus $97,000 in accrued interest due thereon.

 

As previously reported, in order to assess materiality with regard tothe underpaid customs duties, we applied the concepts set forth in StaffAccounting Bulletin No. 108 (“SAB 108”), *“Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements,”* issued by the Securities andExchange Commission and FASB Concepts Statement No. 2, *“Qualitative Characteristics of AccountingInformation.”* We applied the iron curtain and rollover approachesproscribed by SAB 108 to quantify the effects on the current and prior fiscalyears caused by the underpaid customs duties. Per SAB 108, “[T]he iron curtainapproach quantifies a misstatement based upon the effects of correcting themisstatement existing in the balance sheet at the end of the current year,irrespective of the misstatements year(s) of origination.” The rolloverapproach quantifies a misstatement based on the amount of the error originatingin the income statement for the year in which the error occurred. Per FASBConcepts Statement No. 2, qualitative materiality determinations are basedupon whether “it is probable that the judgment of a reasonable person relyingupon the report would have been changed or influenced by the inclusion orcorrection of the item.”

 

Our qualitative analysis and our quantitative analysis under therollover approach each yielded results that indicate the correction of prioryear financial statement amounts is immaterial in each case. Our quantitativeanalysis under the iron curtain approach yielded results that indicateapplication of the iron curtain method would have caused our fiscal 2008financial statements to be materially misstated. When analyzing materialityunder the iron curtain and rollover approaches, SAB 108 directs, “[A]registrant’s financial statements would require adjustment when either approachresults in quantifying a misstatement that is material, after considering allrelevant quantitative and qualitative factors.” SAB 108 further instructs, “[A]fterall of the relevant quantitative and qualitative factors are considered, theprior year financial statements should be corrected, even though such revisionpreviously was and continues to be immaterial to the prior year financialstatements. Correcting prior year financial statements for immaterial errorswould not require previously filed reports to be amended. Such correction maybe made the next time the registrant files the prior year financial statements.”Accordingly, we have corrected our financial statements for the three-monthperiod ended September 30, 2007, which are included in this report on Form 10-Q.

 

(b)     During the first quarter of fiscal 2009, wemade no material changes to the procedures by which our shareholders mayrecommend nominees to our Board of Directors.

 

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**ITEM****6****         ****EXHIBITS**

** **

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

 

Exhibit 31.2 – Certification of Patrick W. Hurley pursuant toExchange 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 ofthe Sarbanes-Oxley Act of 2002

 

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**SPORT-HALEY, INC.**

**SIGNATURES**

 

In accordance with the requirements of the Securities Exchange Act of1934, the Registrant caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   |                    | **SPORT-HALEY, INC.**                                       |
|--------|-------------------------|-------------------------------------------------------------|
|   |                    | (Registrant)                                                |
|   |                    |                                                        |
|   |                    |                                                        |
| Date:  | November 19,  2008 |                                                        | /s/  PATRICK W. HURLEY |
|   |                    | Patrick  W. Hurley                                          |
|   |                    | Chief  Financial Officer                                    |
|   |                    | *  (Principal Financial  and Accounting Officer)* |
|        |                         |                                                             |  |

 

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