** **

**SECURITIES AND EXCHANGECOMMISSION**

** **

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q/A**

**(Amendment No. 1)**

 

**ý****   QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d)********OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2005**

 

**o****  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE********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 ý  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|---------------------------|--------|---------------------|--------|------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.  Yes  o  No  ý

 

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 14,  2005** |
|--------------------------------|------------|--------------------------------------------|
| **Common Stock, no par value** | ** ** | **2,770,252**                              |

 

 

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**TABLE OF CONTENTS**

 
| AMENDMENT NO. 1 EXPLANATORY NOTE                          |                                                                                        |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                      |                                                                                        |   |
| **PART 1  – FINANCIAL INFORMATION (UNAUDITED)** |                                                                                        |
|                                                      |                                                                                        |   |
| ITEM 1                                                    | CONDENSED  FINANCIAL STATEMENTS                                                             |   |
|                                                      |                                                                                        |   |
|                                                      | CONDENSED BALANCE SHEETS                                                                    |   |
|                                                      |                                                                                        |   |
|                                                      | CONDENSED STATEMENTS OF  OPERATIONS                                                         |   |
|                                                      |                                                                                        |   |
|                                                      | CONDENSED STATEMENTS OF CASH  FLOWS                                                         |   |
|                                                      |                                                                                        |   |
|                                                      | NOTES TO CONDENSED FINANCIAL  STATEMENTS                                                    |   |
|                                                      |                                                                                        |   |
| ITEM  2                                                   | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|                                                      |                                                                                        |   |
| ITEM  3                                                   | QUALITATIVE AND QUANTITATIVE  DISCLOSURES ABOUT MARKET RISK                                 |   |
|                                                      |                                                                                        |   |
| ITEM 4                                                    | CONTROLS AND PROCEDURES                                                                     |   |
|                                                      |                                                                                        |   |
| **PART II - OTHER INFORMATION**                      |                                                                                        |
|                                                      |                                                                                        |   |
| ITEM 1                                                    | LEGAL PROCEEDINGS                                                                           |   |
|                                                      |                                                                                        |   |
| ITEM 5                                                    | OTHER INFORMATION                                                                           |   |
|                                                      |                                                                                        |   |
| ITEM 6                                                    | EXHIBITS                                                                                    |   |
|                                                      |                                                                                        |   |
| **SIGNATURES**                                            |                                                                                        |
|                                                      |                                                                                        |   |
| **EXHIBITS**                                              |                                                                                        |   |

 

2

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**SPORT-HALEY, INC.**

**AMENDMENT NO. 1 EXPLANATORY NOTE**

 

Sport-Haley, Inc.(“Sport-Haley” or the “Company”) is filing this Amendment No. 1 to theCompany’s quarterly report on Form 10-Q for the period ended September 30,2005, to amend and restate the Company’s condensed financial statements andother financial information contained in this report to reflect adjustments foraccounting errors related to executive and key employee bonuses. In the Company’sForm 10-Q for the period ended September 30, 2005, filed on November 21,2005 ( the “Original Form 10-Q”), the bonuses had not been recorded, butwere originally recorded on the Company’s books when the bonuses were paid in October 2005.The Company’s Audit Committee, along with senior management, determined thatthe bonuses should have been recorded in the quarter ended September 30,2005, and that this error required restatement. Accordingly, the amended and restatedstatements of operations and cash flows for the three months ended September 30,2005, set forth in Item 1 of this Amendment No. 1 reflect the correctionto record these bonuses in the fiscal quarter ended September 30, 2005.

 

Thebonuses included $75,000 in cash plus a vehicle with an estimated value of$14,000. Because the Compensation Committee met and resolved prior to September 30,2005, that such bonuses, which did not relate to future services, should bepaid, the Audit Committee and senior management of the Company have determinedthat the compensation expense should have been recorded in the quarter ended September 30,2005. The Company had recorded the bonuses when they were paid in October 2005.On February 20, 2006, the Audit Committee and senior management concludedthat the statements of operations and cash flows for the three months ended September 30,2005, contained in the Original Form 10-Q, should not be relied upon.

 

Asa result of these adjustments, Sport-Haley’s net loss for the fiscal quarterended September 30, 2005, increased by $102,000. For further discussion ofthe effects of the restatement of the Company’s financial statements as of September 30,2005, see Part I Item 1. Notes to Condensed Consolidated FinancialStatements, Note 2.

 

ThisAmendment No. 1 also amends Part I, Item 2, Management’s Discussionand Analysis of Financial Condition and Results of Operations, and Item 4,Disclosure Controls and Procedures.

 

Exceptas otherwise expressly noted herein, this Amendment does not reflect eventsoccurring after the November 21, 2005, filing of our Original Form 10-Qin any way, except to reflect the changes discussed in this amendment. TheRegistrant does not undertake to update any item in that Quarterly Report otherthan those items set forth below. Accordingly, this Amendment No. 1 shouldbe read in conjunction with the Original Form 10-Q.

 

Asa result of these amendments, the Company is also filing as exhibits to thisAmendment No. 1 the certifications pursuant to Section 302 and 906 ofthe Sarbanes-Oxley Act of 2002. Except for the amendments described above, thisAmendment No. 1 does not modify or update other disclosures in, orexhibits to, the Original Form 10-Q.

 

3

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**SPORT-HALEY, INC.**

**CONDENSEDBALANCE SHEETS**

 
| ** **                                                                                                                      | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                      | ** ** | **2005**               | ** ** | **2005**          | ** ** |
| ** **                                                                                                                      | ** ** | **(Unaudited)**        | ** ** | **(***)**         | ** ** |
| **ASSETS**                                                                                                                      |       |                   |       |              |       |
|                                                                                                                            |       |                   |       |              |       |
| Current assets:                                                                                                                 |       |                   |       |              |       |
| Cash and cash equivalents                                                                                                       |       | $                      | 8,406,000  |              | $          | 7,721,000 |   |
| Accounts receivable, net of allowances of $545,000  and $691,000, respectively                                                  |       | 2,807,000              |       | 4,495,000         |       |
| Inventories                                                                                                                     |       | 4,768,000              |       | 4,153,000         |       |
| Prepaid expenses and other                                                                                                      |       | 281,000                |       | 196,000           |       |
|                                                                                                                            |       |                   |       |              |       |
| Total current assets                                                                                                            |       | 16,262,000             |       | 16,565,000        |       |
|                                                                                                                            |       |                   |       |              |       |
| Property and equipment, net                                                                                                     |       | 818,000                |       | 922,000           |       |
| Other assets                                                                                                                    |       | 3,000                  |       | 3,000             |       |
|                                                                                                                            |       |                   |       |              |       |
|                                                                                                                            |       | $                      | 17,083,000 |              | $          | 17,490,000 |   |
|                                                                                                                            |       |                   |       |              |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                   | ** ** | ** **             | ** ** | ** **        | ** ** |
| ** **                                                                                                                      | ** ** | ** **             | ** ** | ** **        | ** ** |
| Current liabilities:                                                                                                            |       |                   |       |              |       |
| Accounts payable                                                                                                                |       | $                      | 539,000    |              | $          | 582,000 |   |
| Accrued royalties payable                                                                                                       |       | 161,000                |       | 294,000           |       |
| Accrued commissions payable                                                                                                     |       | 149,000                |       | 249,000           |       |
| Accrued payroll                                                                                                                 |       | 543,000                |       | 533,000           |       |
| Other                                                                                                                           |       | 96,000                 |       | 93,000            |       |
|                                                                                                                            |       |                   |       |              |       |
| Total current liabilities                                                                                                       |       | 1,488,000              |       | 1,751,000         |       |
|                                                                                                                            |       |                   |       |              |       |
| Commitments and Contingencies (Notes 4 and 5)                                                                                   |       |                   |       |              |       |
|                                                                                                                            |       |                   |       |              |       |
| 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; 2,770,252 and 2,645,585 shares issued and outstanding,  respectively |       | 10,813,000             |       | 10,460,000        |       |
| Additional paid-in capital                                                                                                      |       | 1,621,000              |       | 1,590,000         |       |
| Retained earnings                                                                                                               |       | 3,161,000              |       | 3,689,000         |       |
| Total shareholders’ equity                                                                                                 |       | 15,595,000             |       | 15,739,000        |       |
|                                                                                                                            |       |                   |       |              |       |
|                                                                                                                            |       | $                      | 17,083,000 |              | $          | 17,490,000 |   |

 

----

***  Taken from the audited balance sheet at thatdate

 

See accompanying notes to condensed financial statements.

 

4

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**SPORT-HALEY, INC.**

**CONDENSED STATEMENTS OFOPERATIONS**

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **September 30,** | ** ** |
| ** **                                             | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(Unaudited**         | **)**      | **(Unaudited)** | ** ** |
|                                                   |       |                   |       |   |   |
| Net sales                                              |       | $                      | 4,011,000  |   | $ | 5,570,000 |   |
|                                                   |       |                   |       |   |   |
| Cost of goods sold                                     |       | 2,641,000              |       | 3,257,000 |   |
| Impairments                                            |       | 65,000                 |       | 543,000 |   |
| Total cost of goods sold                               |       | 2,706,000              |       | 3,800,000 |   |
|                                                   |       |                   |       |   |   |
| Gross profit                                           |       | 1,305,000              |       | 1,770,000 |   |
|                                                   |       |                   |       |   |   |
| Other Operating Costs:                                 |       |                   |       |   |   |
| Selling, general and administrative expenses           |       | 1,724,000              |       | 2,859,000 |   |
| Royalty expense                                        |       | 163,000                |       | 198,000 |   |
| Total other operating costs                            |       | 1,887,000              |       | 3,057,000 |   |
|                                                   |       |                   |       |   |   |
| Loss from operations                                   |       | (582,000               | )          | (1,287,000 | ) |
|                                                   |       |                   |       |   |   |
| Other income, net                                      |       | 53,000                 |       | 11,000 |   |
|                                                   |       |                   |       |   |   |
| Loss before benefit from income taxes                  |       | (529,000               | )          | (1,276,000 | ) |
|                                                   |       |                   |       |   |   |
| Benefit from income taxes                              |       | 1,000                  |       | — |   |
|                                                   |       |                   |       |   |   |
| Net loss                                               |       | $                      | (528,000   | ) | $ | (1,276,000 | ) |
|                                                   |       |                   |       |   |   |
| Basic and diluted loss per common share                |       | $                      | (0.20      | ) | $ | (0.52 | ) |
|                                                   |       |                   |       |   |   |
| Basic and diluted weighted average shares  outstanding |       | 2,685,000              |       | 2,456,000 |   |

 

See accompanying notes to condensed financial statements.

 

5

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**SPORT-HALEY, INC.**

**CONDENSED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **September 30,** | ** ** |
| ** **                                                                       | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                       | ** ** | **(Unaudited)**        | ** ** | **(Unaudited)** | ** ** |
|                                                                             |       |                   |       |   |   |
| **Cash flows from operating activities:**                                        |       |                   |       |   |   |
| Net loss                                                                         |       | $                      | (528,000   | ) | $ | (1,276,000 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                    |       | 84,000                 |       | 86,000 |   |
| Impairments and write-downs                                                      |       | 65,000                 |       | 543,000 |   |
| Allowance for doubtful accounts                                                  |       | 15,000                 |       | 60,000 |   |
| Common stock options                                                             |       | 31,000                 |       | 16,000 |   |
| Loss on disposal of assets                                                       |       | 11,000                 |       | 3,000 |   |
| Cash provided (used) due to changes in assets and  liabilities:                  |       |                   |       |   |   |
| Accounts receivable                                                              |       | 1,673,000              |       | 1,643,000 |   |
| Inventory                                                                        |       | (680,000               | )          | (562,000 | ) |
| Other assets                                                                     |       | (85,000                | )          | 36,000 |   |
| Accounts payable                                                                 |       | (43,000                | )          | (397,000 | ) |
| Accrued commissions and other expenses                                           |       | (220,000               | )          | 37,000 |   |
| Net cash provided by operating activities                                        |       | 323,000                |       | 189,000 |   |
|                                                                             |       |                   |       |   |   |
| **Cash flows from investing activities:**                                        |       |                   |       |   |   |
| Redemptions of held to maturity investments                                      |       | —                 |       | 538,000 |   |
| Proceeds from sale of fixed assets                                               |       | 14,000                 |       | — |   |
| Purchase of fixed assets                                                         |       | (5,000                 | )          | (19,000 | ) |
| Net cash provided (used) by investing activities                                 |       | 9,000                  |       | 519,000 |   |
|                                                                             |       |                   |       |   |   |
| **Cash flows from financing activities:**                                        |       |                   |       |   |   |
| Issuance of common stock                                                         |       | 353,000                |       | 63,000 |   |
| Net cash provided by financing activities                                        |       | 353,000                |       | 63,000 |   |
|                                                                             |       |                   |       |   |   |
| **Net increase in cash and cash equivalents**                                    |       | 685,000                |       | 771,000 |   |
|                                                                             |       |                   |       |   |   |
| **Cash and cash equivalents, beginning**                                         |       | 7,721,000              |       | 3,890,000 |   |
|                                                                             |       |                   |       |   |   |
| **Cash and cash equivalents, ending**                                            |       | $                      | 8,406,000  |   | $ | 4,661,000 |   |
|                                                                             |       |                   |       |   |   |
| **Supplemental disclosure of cash flow  information:**                           |       |                   |       |   |   |
| Cash received during the period for:                                             |       |                   |       |   |   |
| Income taxes                                                                     |       | $                      | 1,000      |   | $ | — |   |
| Cash paid during the period for:                                                 |       |                   |       |   |   |
| Income taxes                                                                     |       | $                      | —     |   | $ | 7,000 |   |

 

See accompanying notes to condensed financial statements.

 

6

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED FINANCIALSTATEMENTS**

 

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

 

*Condensed Financial Statements*- The accompanying condensed balance sheets and interim condensed statements ofoperations and cash flows include all adjustments (consisting only of normalrecurring items) necessary for their fair representation. The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses and the disclosure of contingent assets and liabilities. Ourrevenues are seasonal, and, therefore, interim results are not necessarilyindicative of results to be expected for the full year.

 

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, 2005, included in the Company’sfiling on Form 10-K.

 

*Stock-Based Compensation* - Our StockOption Plan (the “Plan”) expired by its terms on February 28, 2003. Optionagreements that were issued in accordance with the Plan prior to February 28,2003, 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, 2005,there were outstanding options to purchase 688,500 shares of our common stockat exercise prices ranging from $2.71 to $9.78 per share and expiration datesbetween November 2005 and January 2013. In the quarter ended September 30,2005, 125,000 options were exercised and 25,000 options expired. We receivedproceeds of $353,000 with respect to options exercised during the quarter endedSeptember 30, 2005.

 

In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 123(R)(“SFAS 123R”), *“Share-Based Payment,”* which is arevision of Statement of Financial Accounting Standards No. 123, *“Accounting for Stock-Based Compensation.”* SFAS 123R iseffective for annual periods beginning after July 1, 2005, supersedesAccounting Principles Board Opinion No. 25, *“Accountingfor Stock Issued to Employees,”* and amends Statement of FinancialAccounting Standards No. 95, *“Statement of Cash Flows.”*SFAS 123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the statement of operations basedupon their fair values and rescinds the acceptance of pro forma disclosure.SFAS 123R permits two methods of adoption, a “modified prospective” method anda “modified retrospective” method. Under the modified prospective method,stock-based compensation cost is recognized, beginning with the effective date,based on the requirements of SFAS 123R for all share-based payments grantedafter the effective date and for all awards granted prior to the effective datethat remain unvested on the effective date. The modified retrospective methodincludes the requirements of the modified

 

7

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prospective method and also permits restatement ofprior periods based on amounts previously reported in pro forma disclosurespursuant to SFAS 123 for either all periods presented or for only prior interimperiods of the year of adoption. We adopted the modified prospective methodprescribed in SFAS 123R, effective July 1, 2005.

 

Previously, we accounted for stock-based compensationusing the intrinsic value method prescribed in Accounting Principles BoardOpinion No. 25, “*Accounting for StockIssued to Employees*,” and related interpretations and elected toapply the disclosure-only provisions of Statement of Financial AccountingStandards (SFAS) No. 123, “*Accountingfor Stock-Based Compensation*,” as amended by SFAS No. 148, “*Accounting for Stock-Based Compensation – Transitionand Disclosure*.” Under the intrinsic value method, compensationexpense for stock options was recognized over the vesting period of the grantbased on the excess, if any, of the market price of our common stock at thedate of grant over the stock option exercise price. As governed by the Plan,stock options were generally granted at or near fair market value on the dateof grant.

 

If we had previously accounted for stock-basedcompensation in interim periods using the fair value method rather than theintrinsic value method, the pro forma amounts of our net loss and loss percommon share would have been reported as follows:

 
| ** **                                                                           | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                                  | ** ** | **2004** | ** ** |
|                                                                                 |       |                                      |       |   |   |
| Net loss - as reported                                                               |       | $                                         | (528,000   | ) | $ | (1,276,000 | ) |
| Effect of employee stock-based compensation included  in reported net loss           |       | 31,000                                    |       | 16,000 |   |
| Effect of employee stock-based compensation per SFAS  123                            |       | (31,000                                   | )          | (106,000 | ) |
| Net loss applicable to common stock (pro forma 2004)                                 |       | $                                         | (528,000   | ) | $ | (1,366,000 | ) |
|                                                                                 |       |                                      |       |   |   |
| Basic and Diluted:                                                                   |       |                                      |       |   |   |
| Loss per share - as reported                                                         |       | $                                         | (0.20      | ) | $ | (0.52 | ) |
| Per share effect of employee stock-based  compensation included in reported net loss |       | 0.01                                      |       | 0.00 |   |
| Per share effect of employee stock-based  compensation per SFAS 123                  |       | (0.01                                     | )          | (0.04 | ) |
| Loss per share applicable to common stock (pro forma  2004)                          |       | $                                         | (0.20      | ) | $ | (0.56 | ) |

 

In December 2004, the Financial AccountingStandards Board issued Statement of Financial Accounting Standards No. 153(“SFAS 153”), *“Exchanges of Nonmonetary Assets,”*which changes the guidance in Accounting Principles Board Opinion No. 29 (“APB29”), *“Accounting for Nonmonetary Transactions.”*  SFAS 153 amends APB 29 to

 

8

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eliminate the exception for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges on nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. SFAS153 is effective during fiscal years beginning after June 15, 2005. We donot believe the adoption of SFAS 153 will have a material impact on the resultsof our operations and financial condition.

 

*Segments* – We have one operating segment: designing,purchasing, contracting for the manufacture of and marketing and distributing men’sand women’s fashion golf apparel and outerwear. The information for thissegment is the information used by our chief decision maker to evaluateoperating performance.

 

**NOTE 2****             RESTATEMENTOF CONDENSED FINANCIAL RESULTS:**

 

On February 20,2006, the Audit Committee of our Board of Directors, along with seniormanagement, determined that our condensed statements of operations and cashflows included in our quarterly report on Form 10-Q for the period ended September 30,2005 (the “Original Form 10-Q”), contained an error, which when corrected,would result in a material impact on results of our operations for the quarterended September 30, 2005. Therefore, the Audit Committee and seniormanagement determined that our condensed statements of operations and cashflows for the quarter ended September 30, 2005, required restatement.

 

TheAudit Committee and senior management concluded that the condensed statements ofoperations and cash flows within the Original Form 10-Q should not berelied upon. The condensed balance sheets, condensed statements of operationsand condensed statements of cash flows contained herein Amendment No. 1have been restated to correct the error, which relates to our accounting forbonuses paid to certain executives and a key employee in October 2005.Prior to September 30, 2005, the Compensation Committee of our Board ofDirectors met and resolved that such bonuses, which did not relate to futureservices, should be paid in October 2005. The bonuses totaled $75,000 incash plus a vehicle with an estimated value of $14,000. The Audit Committee andsenior management determined that the related compensation expense should havebeen recorded in the quarter ended September 30, 2005. Compensationexpense relating to the bonuses had originally been recorded in October 2005.

 

Thecondensed balance sheet as of September 30, 2005, and the condensedstatements of operations and cash flows for the three months ended September 30,2005, contained herein Amendment No. 1 have been restated to incorporatethe adjustments with regard to correcting the error.

 

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Thefollowing table sets forth selected consolidated financial data showingpreviously reported and restated amounts as of September 30, 2005:

 
| ** **                        | ** ** | **September 30, 2005**  | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **As Previously   Reported** | ** ** | **Effect of   Change** | ** ** | **As Restated** | ** ** |
| *Condensed  Balance Sheets Data:* |       |                         |       |   |   |   |   |
| Property and  equipment, net      |       | $                            | 843,000    |   | $ | (25,000 | ) | $ | 818,000 |   |
| Accrued payroll  liabilities      |       | 466,000                      |       | 77,000 |   | 543,000 |   |
| Retained  earnings                |       | 3,263,000                    |       | (102,000 | ) | 3,161,000 |   |
|                                   |            |                              |            |  |  |  |  |  |  |  |

 

Thefollowing table sets forth selected consolidated financial data showingpreviously reported and restated amounts for the three months ended September 30,2005:

 
| ** **                                  | ** ** | **Three Months Ended September 30,  2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **As Previously   Reported**                    | ** ** | **Effect of   Change** | ** ** | **As Restated** | ** ** |
|                                        |       |                                            |       |   |   |   |   |
| *Condensed Statements of Operations Data:*  |       |                                            |       |   |   |   |   |
| Selling, general and administrative expense |       | $                                               | 1,633,000  |   | $ | 91,000 |   | $ | 1,724,000 |   |
| Loss from operations                        |       | (491,000                                        | )          | (91,000 | ) | (582,000 | ) |
| Other income, net                           |       | 64,000                                          |       | (11,000 | ) | 53,000 |   |
| Loss before benefit from income taxes       |       | (427,000                                        | )          | (102,000 | ) | (529,000 | ) |
| Net loss                                    |       | (426,000                                        | )          | (102,000 | ) | (528,000 | ) |
|                                        |       |                                            |       |   |   |   |   |
| *Condensed Statements of Cash Flows Data:*  |       |                                            |       |   |   |   |   |
| Loss on disposal of assets                  |       | —                                          |       | 11,000 |   | 11,000 |   |
| Accrued commissions and other expenses      |       | (297,000                                        | )          | 77,000 |   | (220,000 | ) |
| Proceeds from sale of fixed assets          |       | —                                          |       | 14,000 |   | 14,000 |   |
|                                             |            |                                                 |            |  |  |  |  |  |  |  |

 

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

 
| ** **                              | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2005**               | ** ** | **2005**          | ** ** |
| Inventories consisted of the following: |       |                   |       |              |       |
| Component                               |       | $                      | 85,000     |              | $          | 387,000 |   |
| Finished goods                          |       | 4,683,000              |       | 3,766,000         |       |
|                                    |       |                   |       |              |       |
|                                    |       | $                      | 4,768,000  |              | $          | 4,153,000 |   |

 

**NOTE 4****             LINEOF CREDIT AGREEMENT:**

 

Wemaintain a revolving line of credit agreement with a commercial bank. Therevolving line of credit agreement, renewed by amendment through December 5,2005, provides for a maximum loan amount of $5,000,000, collateralized by alien on substantially all of the our assets, and for interest at the bank’sprime rate. In accordance with the amendment agreement, we must maintainminimum tangible net worth of $14,000,000. We generally

 

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maintainthe line of credit to facilitate the issuance of letters of credit forinventory purchases from offshore suppliers and, if necessary, to fund anytemporary working capital needs. We did not have any balances due on the lineof credit at September 30, 2005, or June 30, 2005, respectively.

 

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

 

At September 30, 2005, wehad $818,000 in outstanding letters of credit that were issued to foreignsuppliers in accordance with finished goods inventory purchase commitments.Outstanding letters of credit reduce the amount available for borrowing underthe line of credit agreement.

 

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

 

Effective with the year ended June 30,1998, we adopted the provisions of Statement of Financial Accounting Standards No. 128(SFAS No. 128), *Earnings per Share*.SFAS No. 128 requires the presentation of basic and diluted earnings(loss) per common share. The following table provides a reconciliation of thenumerator and denominator of basic and diluted earnings (loss) per commonshare:

 
| ** **                                    | ** ** | **Three Months ended September 30,  2005** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **Net   Loss**                                  | ** ** | **Weighted   Average Shares** | ** ** | **Per Share** | ** ** |
|                                          |       |                                            |       |   |   |   |   |
| Loss Per Common  Share                        |       |                                            |       |   |   |   |   |
|                                          |       |                                            |       |   |   |   |   |
| Basic loss per  share                         |       | $                                               | (528,000   | ) | 2,685,000 |   | $ | (0.20 | ) |
|                                          |       |                                            |       |   |   |   |   |
| Effect of  dilutive securities options**(A)** |       | —                                          |       | — |   | — |   |
|                                          |       |                                            |       |   |   |   |   |
| Diluted loss per  share                       |       | $                                               | (528,000   | ) | 2,685,000 |   | $ | (0.20 | ) |

 
| ** **                                    | ** ** | **Three Months ended September 30,  2004** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                    | ** ** | **Net   Loss**                                  | ** ** | **Weighted   Average Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                        |       |                                            |       |   |   |   |   |
|                                          |       |                                            |       |   |   |   |   |
| Basic loss per  share                         |       | $                                               | (1,276,000 | ) | 2,456,000 |   | $ | (0.52 | ) |
|                                          |       |                                            |       |   |   |   |   |
| Effect of  dilutive securities options**(A)** |       | —                                          |       | — |   | — |   |
|                                          |       |                                            |       |   |   |   |   |
| Diluted loss per  share                       |       | $                                               | (1,276,000 | ) | 2,456,000 |   | $ | (0.52 | ) |

 

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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****             SUBSEQUENTEVENTS:**

 

On November 8,2005, we announced that we entered into a joint venture with Explorer Gear USA,which will be operated as a separate Colorado limited liability company

 

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(“LLC”).The LLC intends to use our license with Callaway to manufacture and marketTop-FliteTM branded apparel to Wal-Mart Stores, Inc. in the United States.The license, previously granted to us by Callaway, allows us to manufacture anddistribute Top-FliteTM branded apparel in the United States and certain othercountries. Callaway has given us its consent to use the Top-FliteTM license inconnection with the LLC, subject to certain conditions.

 

ExplorerGear USA is affiliated by ownership with Explorer Headgear, Inc., a Canadiancorporation located in Markham, Ontario. Explorer Headgear, Inc. islicensed by Callaway to manufacture and market Top-FliteTM apparel in Canada.Explorer Headgear, Inc. and Explorer Gear USA are affiliated with certainmanufacturing plants in China, which are expected to manufacture Top-FliteTMapparel for the LLC. We anticipate that the first significant deliveries ofTop-FliteTM apparel to Wal-Mart Stores, Inc., in the United States will bemade in approximately January 2006.

 

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**ITEM 2 MANAGEMENT’S DISCUSSIONAND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

ThisReport on Form 10-Q contains certain forward-looking statements, withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. The words “may,” “will,” “expect,” “anticipate,”“continue,” “estimate,” “project,” “intend,” “believe,” and similarexpressions, variations or the negative of these words, and any statementregarding possible or assumed future results of operations of the Company’sbusiness, the markets for its 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. The Company’s financial condition andthe results of its operations will depend on a number of factors, including,but not limited to, the following: our ability to control costs and expenses;our ability to successfully anticipate fashion trends, design favorablyaccepted fashion golf apparel, effectively advertise and communicate within themarketplace, and penetrate our chosen distribution channels; our ability tosuccessfully forecast sales and optimize inventory levels; our ability tosuccessfully manage risks associated with the trend of increasing sales withrespect to licensed apparel, such as the Ben Hogan® apparel collections;relations with and performance of suppliers; competition within golf apparelmarkets; business conditions and growth in the fashion golf apparel market andthe general economy; political and international trade relations; changes ininternational trade quota systems for apparel; consumer spending on golfapparel; general global economic and political conditions resulting fromthreats or acts of war or terrorism and responses thereto; timely performanceof third parties, such as freight forwarders, including risks of labor disputesand/or labor strikes; changes in product mix; inventory risks due to shifts inmarket and/or price erosion of purchased apparel; lost or reduced manufacturingcapacity of significant suppliers; loss or delay of shipments from foreignsuppliers; access to capital; maintaining satisfactory relationships withcommercial banking institutions; and, establishing controls with regard to andmaintaining the integrity of technology and information systems. Additionalinformation on these and other factors that could affect our financial resultsis included in the discussion below and in the Company’s Form 10-K for theyear ended June 30, 2005. There may be other factors not mentioned above,in the discussion below or included in our Securities and Exchange Commission (“SEC”)filings that may cause actual results to differ materially from anyforward-looking statements. The reader should not place undue reliance on anyforward-looking statements. Neither the Company nor any of its corporateofficers or key employees assumes any obligation to update any forward-lookingstatements as a result of new information, future events or developments,except as required by securities laws.

 

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

 

##### **OVERVIEW**

##### ** **

##### **Sport-Haley, Inc.designs, purchases, contracts for the manufacture of, markets and distributesquality women’s and men’s fashion golf apparel and outerwear under the SPORT HALEYTMand Ben Hogan® labels. Our fashion golf apparel collections, known for theirinnovative designs, quality fabrics, generous fits and classic styles, areprimarily marketed in the premium and mid-priced markets through a network ofindependent wholesale sales representatives and distributors to golfprofessional shops, country clubs and resorts and exclusive department storeswithin the United States and by certain distributors within internationalmarkets. We distribute Ben Hogan® apparel pursuant to a licensing agreementwith Callaway Golf Company (“Callaway”).**

##### ** **

We are represented by anetwork of independent wholesale sales representatives and employ a vice-

 

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president of sales and aregional sales manager, each with responsibilities for both of our brandedlabels of apparel. Most of the independent wholesale sales representativessolicit sales of both SPORT HALEYTM and Ben Hogan® apparel on our behalf.

 

We continue to focus onstabilizing revenues associated with our SPORT HALEYTM label and growth ofrevenues associated with our Ben Hogan® label. We previously discontinuedmarketing SPORT HALEYTM men’s fashion apparel, in part, because we believe thatthere are natural synergies common to Ben Hogan® men’s fashion apparel and SPORTHALEYTM women’s fashion apparel. By marketing SPORT HALEYTM women’s apparel inconjunction with Ben Hogan® men’s apparel, we are attempting to maintain ourmarket share with current women’s apparel customers and expect to expand thedistribution channels for fashion women’s apparel into markets that we hadpreviously only been able to penetrate via the marketing of Ben Hogan® men’sapparel.

 

In November 2005, weannounced that we plan to introduce initial collections of Top-FliteTM men’sapparel in approximately January 2006. Top-FliteTM apparel will bedistributed via a vendor agreement with Wal-Mart Stores through a joint venturewith Explorer Gear USA. We will distribute Top-FliteTM apparel pursuant to ourlicensing agreement with Callaway.

 

##### **RECENTDEVELOPMENTS**

##### ** **

OnNovember 8, 2005, we announced that we entered into a joint venture withExplorer Gear USA, which will be operated as a separate Colorado limitedliability company (“LLC”). The LLC intends to use our license with Callaway tomanufacture and market Top-FliteTM branded apparel to Wal-Mart Stores, Inc.in the United States. The license, previously granted to us by Callaway, allowsus to manufacture and distribute Top-FliteTM branded apparel in the UnitedStates and certain other countries. Callaway has given us its consent to usethe Top-FliteTM license in connection with the LLC, subject to certainconditions.

 

ExplorerGear USA is affiliated by ownership with Explorer Headgear, Inc., aCanadian corporation located in Markham, Ontario. Explorer Headgear, Inc.is licensed by Callaway to manufacture and market Top-FliteTM apparel in Canada.Explorer Headgear, Inc. and Explorer Gear USA are affiliated with certainmanufacturing plants in China, which are expected to manufacture Top-FliteTMapparel for the LLC. We anticipate that the first significant deliveries ofTop-FliteTM apparel to Wal-Mart Stores, Inc., in the United States will bemade in approximately January 2006.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Our financial statementshave been prepared in accordance with standards of the Public CompanyAccounting Oversight Board (United States), which require us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and the related disclosures. A summary of those significantaccounting policies can be found in the Footnotes to the Financial Statementsincluded in our Report on Form 10-K for the fiscal year ended June 30,2005. The estimates used by managementare based upon our historical experiences combined with management’sunderstanding of current facts and circumstances. Certain of our accountingpolicies are considered critical as they are both important to the portrayal ofour financial condition and the results of our operations and requiresignificant or complex judgments on the part of management. We believe that the

 

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followingcritical accounting policies affect the more significant judgments andestimates used in the preparation of our financial statements.

 

*Inventories*

 

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. Afterwe implemented our operations software in January 2004, we discoveredcertain programming and human errors within the new system that adverselyaffected the software’s ability to accurately compute the valuation of ourfinished goods inventories using a weighted average method. We consider theprogramming and human errors, which caused us to use a standard cost method inprior periods, to be a material weakness in our internal controls overfinancial reporting with respect to inventory valuation. This weakness in ourcontrols prevented us from relying upon the system-recorded transactions withrespect to inventory valuations during fiscal 2005. During the 2005 fiscal year,we concluded with reasonable assurance that recomputing the value of ourfinished goods inventories using a standard cost method yielded a fairestimation of the value of our finished goods inventories. We used the standardcost method to value our finished goods inventories from the fiscal quarterended March 31, 2004, through the fiscal quarter ended March 31,2005. Had we been able to rely upon the system to properly compute the cost ofour finished goods inventories using the weighted average method, we believethat the weighted average method would not have yielded a materially differentcomputation of the value than the standard cost method that we applied.

 

AtSeptember 30, 2005, a relatively small percentage our inventory itemsremained on hand that had been valued in prior periods using the standard costmethod. Based upon tests we performed during the quarter ended September 30,2005, we believe that the computer software has been properly programmed, andemployees have been adequately trained to utilize the proscribed systemprocedures, so that prospectively we may rely upon the computer system toaccurately compute our finished goods inventory valuations using a weightedaverage cost assumption. During the quarter ending December 31, 2005, weplan to design and implement additional controls to periodically test theaccuracy of the system-generated valuation entries that comprise the weightedaverage cost components of our finished goods inventories.

 

Thematerial weakness in our internal controls over financial reporting withrespect to inventory valuation also impaired our ability to rely uponinformation created by our computer system to fairly present, in all materialrespects, our financial condition, results of operations and cash flows inperiods during the periods covered by this report. The inability of ourcomputer system to properly calculate the valuation of our finished goodsinventories using a weighted average cost assumption also affected thesystem-recorded amounts within our cost of goods sold in periods in the periodscovered by this report. Because we concluded with reasonable assurance that ourusing a standard cost assumption yielded a fair estimation of our finishedgoods inventories, and because we consistently recorded adjustments toinventories as components of cost of goods sold, we believe with reasonableassurance that our cost of goods sold are fairly stated for the periods coveredby this report. Therefore, we believe that the procedures we applied to valueour finished goods inventories for the periods covered by this report provideus with reasonable assurance that our condensed financial statements and thenotes thereto fairly state, in all material respects, our financial condition,the results of our operations and our cash flows.

 

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Excessfinished goods inventories are a natural component of a seasonal apparelbusiness. While certain finished goods items will sell out in any particularselling season, quantities of other finished goods items will remain at the endof each selling season. We market previous seasons’ finished goods inventoriesat reduced wholesale prices to our customers in the normal course of business.Remaining excess inventories are liquidated through other markets. In theordinary course of business, we maintain reserves for inventory write downs dueto the obsolescence of discontinued or aging merchandise. We perform analyseson a quarterly basis to identify unsold discontinued or aging merchandise andadjust our reserves for inventory obsolescence to reduce the carrying value ofdiscontinued or aging merchandise to its estimated net realizable value. Thenet realizable value of the discontinued or aging merchandise is estimatedbased on management’s disposition plans and historical experiences. During thequarter ended September 30, 2005, we recorded finished goods inventorieswrite-downs of $65,000. While management believes that our processes producefair valuations of obsolete inventories, if actual market conditions are lessfavorable than those projected by management, additional allowances may berequired.

 

*Deferred Income Taxes*

 

Deferred income taxes are recognized for the expectedtax consequences in future years for differences between the tax bases ofassets and liabilities and their financial reporting amounts, based uponenacted tax laws and statutory tax rates applicable to the periods in which thedifferences are expected to affect taxable income. Our significant deferred taxassets are related to net operating loss carry forwards for federal and stateincome tax purposes, stock-based compensation and an unrealized loss for taxpurposes on a common stock investment. Governing regulations require that ouroperating losses be carried forward for income tax purposes. We haveestablished a valuation allowance to reduce deferred tax assets to the netamount expected to be recovered in future periods. The estimates for deferredtax assets and the corresponding valuation allowance require us to exercisecomplex judgments. We periodically review and adjust those estimates based uponthe most current information available. In accordance with SFAS 109 and basedupon a review at September 30, 2005, of our utilization of deferred taxassets, we maintained a valuation allowance that effectively reduces our netdeferred tax assets to zero. While we continue to explore various strategies toreturn the Company to profitability, including the introduction of Top-FliteTMbranded 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.

 

*Allowancefor Doubtful Accounts*

 

Our allowance fordoubtful accounts reflects a reserve that reduces our customer accountsreceivable to the net amount estimated to be collectible. Estimating the creditworthiness of customers and the recoverability of customer accounts requires usto exercise considerable judgment. In estimating the reserve for uncollectibleaccounts, we consider factors such as general economic and industry-specificconditions, historical customer performance and anticipated customerperformance. From time to time, we also identify delinquent customer accountsfor which a specific reserve is required. Our allowance for doubtful accountstotaled $259,000 at September 30, 2005, including specific reservesapproximating $18,000 with respect to certain delinquent customer accounts.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.

 

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*Allowancefor Sales Returns*

 

We record allowances forsales returns as net adjustments to customer accounts receivable. Whenrecording an allowance, the net method reduces customer accounts receivable andnet sales by the estimated gross margin effect of the anticipated sales return.Generally, our selling terms preclude return of our products subsequent to thesale. However, we have traditionally maintained limited programs that offersome customers the right to return certain finished goods items underpredefined conditions, which we include as a component within our estimate ofallowance for sales returns. We review historical data and consider factorssuch as general economic and industry-specific conditions and anticipatedcustomer performance when evaluating the adequacy of our allowance for salesreturns. At September 30, 2005, the Company’s allowance for sales returnswas $286,000. Significant changes in general economic or industry conditionsmay yield sales returns that differ materially from our estimates

 

### **LIQUIDITY ANDCAPITAL RESOURCES**

### ** **

Because the golf apparelbusiness is highly seasonal in nature, our balance sheet amounts as of September 30,2005, may be more meaningful when compared with the balance sheet amounts as ofSeptember 30, 2004, rather than with the balance sheet amounts at June 30,2005.

 

Our primary sources ofliquidity are comprised of available cash and cash equivalents, cash flows fromoperations and a working capital line of credit with a commercial bank. Werequire cash for general working capital purposes. We do not anticipate therequirements of material amounts of cash for capital expenditures over theremainder of the current fiscal year. Our working capital requirements arehighly seasonal 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.

 

Our net accountsreceivable decreased by $1,688,000 to $2,807,000 at September 30, 2005,from $4,495,000 at June 30, 2005. When compared with the September 30,2004, balance, the net accounts receivable balance at September 30, 2005, decreasedby $1,436,000, or 34%. Historically, our net sales are weakest during our firstfiscal quarter, and our net accounts receivable balance generally declinesduring our first fiscal quarter when compared with the balance at the previousfiscal year end. While a large portion of our fourth fiscal quarter sales areshipped in the month of June each year, sales are generally shipped moreevenly throughout our first fiscal quarter. Because a large portion of oursales are shipped with “Net 30” payment terms, our collections are generallygreater than our sales during our first fiscal quarter, because a significantportion of our June sales are generally collected by September 30each year. Changes in our net accounts receivable balances provided operatingcash of $1,688,000 and $1,703,000 for the fiscal quarters ended September 30,2005 and 2004, respectively.

 

The balances of our inventorieshave increased slightly since June 30, 2005. Inventories increased by$615,000, or 15%, to $4,768,000 at September 30, 2005, from $4,153,000 at June 30,2005. When compared with the balance at September 30, 2004, ourinventories decreased by $4,059,000, or 46%, from $8,827,000. The comparativedecreases are attributable to several separate factors. Near the end of fiscal2004, we established initiatives designed to reduce excess inventories and toset target thresholds for expected future levels of finished goods inventories.One of our initiatives reduced the number of items offered for sale in each ofthe SPORT HALEYTM and Ben Hogan® apparel collections, thereby reducinginventories related to the initial purchases of finished goods items at thebeginning of each

 

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season. Anotherinitiative was enacted to identify and dispose of excess obsolete or agingfinished goods inventories. In fiscal 2005, we sold substantially all of ourexcess obsolete or aging finished goods inventories. During fiscal 2005, wedeveloped new methods that we believe provide us with better information totimely identify and value excess amounts of finished goods inventories from acurrent selling season. In fiscal 2005,we also developed new methods to optimize reorders of finished goodsinventories based upon the anticipated required future delivery dates ofpre-booked customer orders. We believe that the new reorder methods haveallowed us to minimize the quantities of finished goods inventories expected toremain at the end of each selling season. The differences between theperiods in pending ocean deliveries of finished goods also contributed to thecomparative differences in total finished goods inventories. Pending oceandeliveries of finished goods were $824,000, $459,000 and $317,000 at September 30,2005, June 30, 2005, and September 30, 2004, respectively. Changes inour inventory balances provided operating cash of $2,765,000 and used operatingcash of $3,092,000 for the nine-month periods ended March 31, 2005 and2004, respectively. Changes in our inventory balances used operating cash of$615,000 and $19,000 for the quarters ended September 30, 2005 and 2004,respectively.

 

Our continued reliance onforeign suppliers sustains the risk that our revenues could be adverselyaffected if a foreign shipment or shipments were received late or lost. Wemaintain insurance for risk of loss relating to goods shipped from its foreignand domestic suppliers. However, our predominant reliance upon foreignsuppliers, and significant reliance on six separate foreign suppliers, alsosustains the risk that we would be left with inadequate or unsatisfactoryrecourse should the goods received from a foreign supplier be nonconforming.

 

Accounts payable andaccrued expenses decreased by $263,000 to $1,488,000 at September 30, 2005,from $1,751,000 at June 30, 2005. Accounts payable and accrued expensesdecreased by $300,000, or 17%, from $1,788,000 at September 30, 2004. Thecomparative decreases in accounts payable and accrued expenses are indicativeof management’s efforts to reduce overall operating expenses. Accrued payrollliabilities at September 30, 2005, included $75,000 related to bonusespaid in October 2005 to certain executives and a key employee.

 

Due to the combination ofthe factors discussed above, and others, our operating activities provided cashof $323,000 for the three months ended September 30, 2005. Comparatively,for the quarter ended September 30, 2004, our operating activitiesprovided cash of $189,000.

 

For the three months ended September 30, 2005,investing activities provided cash of $9,000. Comparatively, for the threemonths ended September 30, 2004, investing activities provided cash of $519,000.Our cash flows from investing activities are primarily derived from purchasesand redemptions of held-to-maturity investments. Generally, ourheld-to-maturity investments consist of short-term federal agency securities. Proceedsfrom the sale of fixed assets for the three months ended September 30,2005, were derived from the transfer of the Company vehicle to our InterimChief Executive Officer that was included in executive bonuses which wereaccrued at September 30, 2005. During the three months ended September 30,2005, we expended $5,000 for the purchase of property and equipment, and $84,000in depreciation and amortization was charged to current operations.

 

We maintain a revolvingline of credit agreement with a commercial bank. The revolving line of creditagreement, renewed by amendment through December 5, 2005, provides for amaximum loan amount of $5,000,000, collateralized by a lien on substantiallyall of our assets, and for interest at the bank’s prime

 

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rate. In accordance withthe amendment agreement, we must maintain tangible net worth of $14,000,000. Wegenerally maintain the line of credit to facilitate the issuance of letters ofcredit for inventory purchases from offshore suppliers and, if necessary, tofund any temporary working capital needs. Outstanding letters of credit reducethe amount available for borrowing under the line of credit agreement. At September 30,2005, we had $818,000 in outstanding letters of credit that were issued toforeign suppliers in accordance with finished goods inventory purchasecommitments.

 

We believe that cash onhand and cash generated from operations, as well as the ability to borrow underthe bank line of credit, will be sufficient to meet our cash requirementsduring the remainder of fiscal 2006. We also have alternative sources offinancing, including the factoring of customer accounts receivable. Althoughthey are available to the Company, we do not anticipate using alternativesources of financing during the remainder of fiscal 2006. However, our capitalneeds will depend on many factors, including the Company’s growth rate, theneed to finance required inventory levels, the success of various sales andmarketing programs, expenses related to the defense of pending law suits andvarious other factors.

 

### **RESULTS OFOPERATIONS**

### ** **

Our business is seasonalin nature, and sales occurring from January through June, which compriseour third and fourth quarters of each fiscal year, are generallydisproportionately higher than sales occurring from July through December.

 

Net sales for the threemonths ended September 30, 2005, were $4,011,000, a decrease of $1,559,000,or 28%, from net sales of $5,570,000 for the comparable period in the priorfiscal year. We attribute the decrease in net sales to factors such as the previouslyreported discontinuance of our HALEY RESERVE men’s fashion apparel and differencesbetween the periods with the timing of shipments relating to our respectivefall seasons. The difference caused by our discontinuance of the HALEY RESERVEmen’s collections totaled slightly over $1,000,000, the amount of net HALEYRESERVE sales recorded during the three months ended September 30, 2004.While net sales of our SPORT HALEYTM women’s collections were substantiallysimilar between the comparable three-month periods, sales of our Ben Hogan® men’scollections declined between the periods by approximately $349,000. Weattribute the decline in Ben Hogan® net sales to differences between theperiods with the timing of shipments relating to our respective fall seasons. Whilewe have not specifically quantified sales differences between the respectiveperiods, we believe that the decrease in Ben Hogan® sales primarily relates toour shipping a larger percentage of our fall collections prior to June 30this year as compared with the same period last year. Net sales of Ben Hogan®apparel collections were $2,349,000 and $2,698,000 for the three months ended September 30,2005 and 2004, respectively. Ben Hogan® apparel is marketed in accordance witha licensing agreement we maintain with Callaway Golf Company (“Callaway”) forsuch apparel. We consider the licensing agreement with Callaway to be a keycomponent of our business strategies. While we strive to maintain a goodworking relationship with Callaway, the trend for the last several periods,reflecting a continued increase in sales of licensed apparel, sustains a riskof loss, should the licensing agreement with Callaway be terminated by eitherparty.

 

Grossprofit, as a percentage of net sales, was 33% for the quarter ended September 30,2005, and 32% for the same quarter in the prior fiscal year. Our gross profitis generally affected by sales discounts offered to customers on variousmarketing programs, payment discounts offered to certain customers,dispositions of excess inventories at reduced sales prices and the valuation ofexcess inventories to the

 

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lowerof cost or market. The disposition of excess inventories negatively impacts ourgross profit percentage even when such inventories are properly valued to thelower of cost or market, because such valuation causes sales to be recorded withgross profit at or near zero. For the three months ended September 30,2005, we recorded net sales of $539,000 and gross profit of $15,000 withrespect to sales of excess inventories. The valuation of inventories to thelower of cost or market also negatively impacts our gross profit percentage,because a reduction of inventory value causes an increase in our cost of goodssold, thereby reducing our gross profit. Our gross profit was negativelyimpacted by $65,000 for the three months ended September 30, 2005, by theadjustment of our finished goods inventories to the lower of cost or market.Comparatively, our gross profit was negatively impacted by $543,000 for thethree months ended September 30, 2004, by a similar lower of cost ormarket adjustment. We believe that the substantially lower adjustment recordedin the September 2005 period is indicative of our successful efforts tominimize the amount of our finished goods inventories expected to remain onhand at the end of each selling season and to better estimate the recoverablevalue of our excess finished goods inventories.

 

Ourgross 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 a portion of our distribution costs, such as receiving, inspection andshipping costs, but we include some of the other costs of distribution, such asa portion of our warehousing and other handling costs, in selling, general andadministrative expenses.

 

Selling, general andadministrative expenses decreased by $1,135,000, or 40%, to $1,724,000 for thequarter ended September 30, 2005, from $2,859,000 for the same quarter inthe prior fiscal year. The decrease was primarily attributable to the accrual atSeptember 30, 2004, of $650,000 in severance and other compensationpayable to our late Chairman’s estate subsequent to his death combined with ageneral decrease in selling, general and administrative expenses. Selling,general and administrative expenses for the quarter ended September 30,2005, include compensation expense of $89,000 relating to bonuses awarded tocertain executives and a key employee, including the Interim Chief ExecutiveOfficer who was awarded a cash bonus of $50,000 and title to a Company vehiclewith an estimated value of $14,000. As previously reported, shortly after December 30,2004, we performed a detailed review of our selling, general and administrativecosts and formed a plan to reduce costs in several categories. The comparativedecrease at September 30, 2005, is indicative of the cost reductions thathave been achieved as a result of implementing cost reduction initiatives. As apercentage of net sales, selling, general and administrative expenditures wereapproximately 43% and 51% for the quarters ended September 30, 2005 and2004, respectively.

 

Werecorded royalty expense of $163,000 and $198,000 for the quarters ended September 30,2005 and 2004, respectively. Royalty expense is due to Callaway in accordancewith the license they previously granted us to market men’s apparel bearing theBen Hogan® label.

 

Netloss for the three months ended September 30, 2005, was ($528,000), adifference of $748,000, or 59%, as compared with the net loss of ($1,276,000)for the same period in the prior fiscal year. At September 30, 2005, wehad federal and state net operating loss carry forwards of $5,700,000 and $8,400,000that we estimated may be recoverable at income tax rates of 34% and 5%,respectively. Because of our continued trend of net losses in the current andmost recent prior fiscal years, we determined that it was more probable thannot that none of our net deferred tax assets will be recovered,

 

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andwe maintained our valuation allowance that effectively reduced our net deferredtax assets to zero. While we are attempting to streamline our businessoperations and to initiate other improvements to return the Company toprofitability, such as the introduction of Top-FliteTM branded apparel, wecannot be certain that our efforts will result in the generation of futureprofits sufficient to offset our significant net operating loss carry forwardsprior to their expirations. Accordingly, during the quarterly periods ended September 30,2005 and 2004, we did not record a benefit from income taxes associated withthe corresponding losses for the respective nine-month periods.

 

Both the basic anddiluted losses per share were ($0.20) for the quarter ended September 30,2005. Both the basic and diluted losses per share were ($0.52) for the samequarter in the prior fiscal year. Due to our net losses for the respectiveperiods, all options were anti-dilutive and therefore excluded from the lossper share calculations.

 

Our book value per sharewas $5.63 at September 30, 2005, $5.95 at June 30, 2005, and $6.85 atSeptember 30, 2004.

 

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**ITEM 3 QUALITATIVE ANDQUANTITATIVE**

**DISCLOSURES ABOUT MARKET RISK**

 

Market risk representsthe risk of loss that may impact the financial position, results of operationsor cash flows due to adverse changes in financial and commodity market pricesand rates. We are exposed to market risk with regard to changes in UnitedStates interest rates. This exposure is directly related to our normaloperating and funding activities. Historically, and as of September 30,2005, we have not used derivative instruments or engaged in hedging activities.Our market risk has not changed significantly from June 30, 2005.

 

**InterestRate Risk**

 

We maintain a revolvingline of credit agreement with a commercial bank that provides for interest atthe bank’s prime rate. The agreement provides for a maximum loan amount of $5,000,000collateralized by a lien on substantially all of our assets. We generallymaintain the line of credit to facilitate the issuance of letters of credit forinventory purchases from offshore suppliers, and, if necessary, to fund anytemporary working capital needs. At September 30, 2005, we did not haveany outstanding borrowings under the line of credit. Increases in the bank’sprime rate could, however, increase the interest expense with respect to futureborrowings, including borrowings under the line of credit. Outstanding lettersof credit reduce the amount available for borrowing under the line of credit.We had outstanding letters of credit of $818,000 at September 30, 2005. Wedo not use derivative financial instruments to manage interest rate risk.

 

From time to time, we maintainshort-term investments in low risk and no risk financial instruments, readilyconvertible into cash, which earn interest at variable rates. Periodically, ourcash balances held at financial institutions exceed federally insured limits.

 

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**ITEM 4 CONTROLS AND PROCEDURES**

 

**(a) Evaluation of Disclosure Controls and Procedures**

 

Ourmanagement, with the participation of our Interim Chief Executive Officer andour Chief Financial Officer, conducted an evaluation of the effectiveness ofour disclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934 as of the end of the period covered by thisreport. Based on that evaluation, management, including the Interim Chief ExecutiveOfficer and Chief Financial Officer, concluded that, as of the end of theperiod covered by this report, our disclosure controls and procedures were not 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 wasrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and regulations.

 

TheCompany’s Quarterly Report on Form 10-Q for the period ended September 30,2005 (the “Original Form 10-Q”), was filed with the Securities andExchange Commission on November 21, 2005. Subsequent to the filing of theOriginal Form 10-Q, the Company’s Audit Committee and senior managementidentified errors in the Company’s statements of operations and statements ofcash flows for the period ended September 30, 2005, caused by the failureto record the effects of bonuses totaling $89,000, including cash bonuses of$75,000 and title to a Company vehicle with an estimated value of $14,000,awarded to certain executives and a key employee. As a result, herein AmendmentNo. 1 the Company restated its financial statements for the period ended September 30,2005, to properly record the compensation expense related to awarding thebonuses during the quarter ended September 30, 2005.

 

Asdiscussed in Part II, Item 2, in *“Management’s Discussionand Analysis of Financial Condition and Results of Operations”*, in *“Critical Accounting Policies and Estimates,”* we considerthe programming and human computational errors, which caused us to use astandard cost method in prior periods, to be a material weakness in ourinternals control over financial reporting with respect to inventory valuationduring the periods covered by this report. After we implemented our operationssoftware in January 2004, we discovered certain programming and humanerrors within the new system that adversely affected the software’s ability toaccurately compute the valuation of our finished goods inventories using aweighted average method. This weakness in our controls prevented us fromrelying upon the system-recorded transactions with respect to finished goodsinventory valuation. During the 2005 fiscal year, we concluded with reasonableassurance that recomputing the value of our finished goods inventories using astandard cost method yielded a fair estimation of the value of our finishedgoods inventories. We used the standard cost method to value our finished goodsinventories from the fiscal quarter ended March 31, 2004, through thefiscal quarter ended March 31, 2005. Had we been able to rely upon thesystem to properly compute the cost of our finished goods inventories using theweighted average method, the Interim Chief Executive Officer and the ChiefFinancial Officer believe that the weighted average method would not haveyielded a materially different computation of the value than the standard costmethod that we applied.

 

At September 30,2005, a relatively small percentage of our inventory items remained on handthat had been valued in prior periods using the standard cost method. Basedupon tests we performed during the quarter ended September 30, 2005, theInterim Chief Executive Officer and the Chief Financial Officer believe thatthe computer software has been properly programmed, and employees have beenadequately trained to utilize the proscribed system procedures, so that

 

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prospectivelywe may rely upon the computer system to accurately compute our finished goodsinventory valuations using a weighted average cost assumption. The InterimChief Executive Officer and the Chief Financial Officer believe that theprocedures we applied to value our finished goods inventories for the periodscovered by this report provide us with reasonable assurance that the Company’sdisclosure controls and procedures were effective as of the end of the periodcovered by this report.

 

Thematerial weakness in our internal controls over financial reporting withrespect to inventory valuation also impaired our ability to rely uponinformation created by our computer system to fairly present, in all materialrespects, our financial condition, results of operations and cash flows for theperiods covered by this report. The inability of our computer system toproperly calculate the valuation of our finished goods inventories alsoaffected the system-recorded amounts within our cost of goods sold during the periodscovered by this report. Because we concluded with reasonable assurance that ourusing a standard cost assumption yielded a fair estimation of our finishedgoods inventories for the periods covered by this report, and because weconsistently recorded adjustments to inventories as components of cost of goodssold during the periods covered by this report, we believe with reasonableassurance that our cost of goods sold are fairly stated during the periodscovered by this report. Therefore, the Interim Chief Executive Officer andChief Financial Officer believe that the procedures we applied to value ourfinished goods inventories for the periods covered by this report provide uswith reasonable assurance that our report fairly states, in all materialrespects, our financial condition, results of operations and cash flows.

 

**(b) Changes in Internal Controls Over Financial Reporting**

 

During the first quarterof fiscal 2006, we did not institute any significant changes in internalcontrols over financial reporting that materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

During the quarter endingDecember 31, 2005, we plan to design and implement additional controls toperiodically test the accuracy of the system-generated valuation entries thatcomprise the weighted average cost components of our finished goodsinventories.

 

Our management, includingthe Interim Chief Executive Officer and the Chief Financial Officer, does notexpect that our disclosure controls and procedures or our internal controlsover financial reporting will, in all instances, prevent all errors and allfraud. A control system, no matter how well conceived or operated, can onlyprovide reasonable, not absolute, assurance that the objectives of the controlsystem are met. While our control systems provide a reasonable assurance level,the design of our control systems reflects the fact that there are resourceconstraints, and the benefits of such controls were considered relative totheir costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the financial reports of Sport-Haley, Inc.have been detected. These inherent limitations include the realities thatjudgments in decision-making can be faulty, and that breakdowns can occurbecause of simple errors or mistakes. Additionally, a control may becircumvented by the individual act of some person, by collusion of two or morepersons, or by management’s override of a specific control. The design of anysystem of controls is also based in part on certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

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Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

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**PART II**

**OTHER INFORMATION**

 

**ITEM1****        LEGALPROCEEDINGS**

### ** **

Aspreviously reported, in September 2003, the United States Securities andExchange Commission (the “Commission”) filed suit in the United States DistrictCourt for the District of Colorado against Sport-Haley, Inc., Robert G.Tomlinson, our late Chairman and former Chief Executive Officer, and Steve S.Auger, our former Controller (the “Defendants”). The Commission filed anamended complaint in October 2003, which added one of our former auditorsto the action as a Defendant. The suit seeks an injunction against futureviolations and other relief, including disgorgement, civil penalties and anorder barring Mr. Tomlinson and Mr. Auger from serving as director orofficer of any publicly held company. The suit alleges that the Defendantsmisrepresented inventories, period costs and losses on the sale of headwearequipment in annual and/or quarterly financial statements for Sport-Haley’sfiscal years 2000, 1999 and 1998. The amended complaint alleges thatSport-Haley, Inc. violated §17(a) of the Securities Act of 1933 (the “SecuritiesAct”), §10(b), §13(b)(2) and §15(d) of the Securities Exchange Act of1934 (the “Exchange Act”) and various other rules promulgated thereunder.The amended complaint further alleges that Mr. Tomlinson and Mr. Augerviolated §17(a) of the Securities Act, §10(b) and §13(b)(5) ofthe Exchange Act and Rules 10b-5 and 13b-2 thereunder. Finally, the suitalleges that Mr. Tomlinson and Mr. Auger aided and abettedSport-Haley, Inc. in violation of §13(b)(2) and §15(d) of theExchange Act and various rules promulgated thereunder. The Commission’ssuit primarily relates to errors in our previously issued financial statementsthat we previously reported when we voluntarily restated our financialstatements for fiscal years 1999 and 1998 and subsequently corrected materialfinancial information for the quarterly periods of fiscal years 2000, 1999 and1998. The Defendants have answered the allegations of the amended complaint,denying the substantive allegations and asserting various defenses. Discoveryin the action has concluded. No trial date has yet been determined. Subject toour Bylaws and Colorado law, we agreed to indemnify Mr. Tomlinson and Mr. Auger,and we have advanced the costs of their defenses, pending final adjudication ofthe Action. The costs of defense of the action by the Defendants are covered bythe applicable liability insurance, subject to a policy retention, which hasbeen satisfied, and other limitations. After Mr. Tomlinson’s death in September 2004,the Commission filed a motion to dismiss Mr. Tomlinson from the actionwithout prejudice, and the Court granted the motion. In July 2005, wesubmitted a settlement proposal to the Commission’s Denver regional office,which the parties agreed to amend in September 2005. If the amendedsettlement proposal is approved by the full Commission in Washington D.C., thelitigation against us would end, without further material impact on ourfinancial position or the results of our operations. Counsel to Mr. Augerhas informed us that a settlement proposal has also been submitted to theDenver office on his behalf, which, if approved, would also end the litigationagainst him. The Court issued an Order requiring the settlements, if approvedby the full Commission, be submitted to the Court by no later than November 30,2005. Based upon the information that is currently available, management cannotreasonably estimate the amount of future costs that we will incur defending theCommission’s allegations if our amended settlement offer is not accepted.However, if the suit were determined in favor of the Commission and against theDefendants, the possible monetary penalties and other relief that we might berequired to pay could further negatively impact our financial position and theresults of our operations.

 

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Infiling our annual report on Form 10-K for fiscal 2000, we restatedpreviously issued financial statements. In March 2001, we retained legalcounsel to possibly pursue claims against our former auditors in connectionwith damages suffered as a result of the restatements of our financial statementsfor fiscal years 1999 and 1998 and the corrections of material information forthe quarterly periods of fiscal years 2000, 1999 and 1998. Also, counsel to theformer auditors previously advised us that the former auditors may file certainclaims against us, possibly including allegations of unpaid fees. Neither havewe nor our former auditors filed any legal action to assert any of theseclaims. Based upon the information that is currently available, we do notbelieve the impact, if any, of an award to the former auditors, if they were toinitiate a formal action against us, would materially affect our financialposition or the results of our operations. The parties have scheduled anon-binding mediation session before a neutral party in November 2005.

 

As of September 30,2005, we had cumulatively incurred $1,104,000 in potentially recoverable costsrelated to the restatements of our fiscal year 1999 and 1998 financialstatements and the correction of material information for the fiscal quartersof years 2000, 1999 and 1998, an investigation and subsequent civil actioninitiated by the Commission and a class action lawsuit that has been settled.The policy retention for such costs has been satisfied, and one of ourinsurance carriers had reimbursed us $409,000 as of September 30, 2005.Amounts recovered from our insurance carriers are generally offset againstother related legal expenses in the period within which they are recovered, orrecoverability is reasonably assured, except that amounts recovered areincluded in other income to the extent that such recovery exceeds legalexpenses for related matters incurred within the period for which the recoveryis recorded.

 

We aresubject to various other legal proceedings and claims which arise in theordinary course of our business. Based upon information that is currentlyavailable, management does not believe that the total impact of the variousother legal proceedings will materially affect our financial position or theresults of our operations.

 

### **ITEM 5**       OTHER INFORMATION

 

On October 19, 2005, Mark Maley,Vice-President, Sales of Sport-Haley, Inc., submitted a letter ofresignation, dated and effective October 18, 2005. Pursuant to the letter ofresignation and Mr. Maley’s executive employment agreement, Mr. Maleyprovided notice of his intended resignation ninety days before such resignationwill become effective on January 16, 2006. The Board of Directors has notappointed anyone to act as Vice-President, Sales upon Mr. Maley’sdeparture. Barry L. Hyman, our Regional Sales Manager, has agreed to serve asNational Sales Manager on an interim basis.

 

On November 8, 2005, we announced that weentered into a joint venture with Explorer Gear USA, which will be operated asa separate Colorado limited liability company (“LLC”). The LLC intends to useour license with Callaway to manufacture and market Top-FliteTM branded apparelto Wal-Mart Stores, Inc. in the United States. The license, previouslygranted to us by Callaway, allows us to manufacture and distribute Top-FliteTMbranded apparel in the United States and certain other countries. Callaway hasgiven us its consent to use the Top-FliteTM license in connection with the LLC,subject to certain conditions.

 

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Explorer Gear USA is affiliated by ownership withExplorer Headgear, Inc., a Canadian corporation located in Markham,Ontario. Explorer Headgear, Inc. is licensed by Callaway to manufactureand market Top-FliteTM apparel in Canada. Explorer Headgear, Inc. and ExplorerGear USA are affiliated with certain manufacturing plants in China, which areexpected to manufacture Top-FliteTM apparel for the LLC. We anticipate that thefirst significant deliveries of Top-FliteTM apparel to Wal-Mart Stores, Inc.,in the United States will be made in approximately January 2006.

 

### **ITEM 6**       EXHIBITS

 

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

 

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

 

Exhibit 32.1– Certifications of Donald W. Jewell and Patrick W. Hurley pursuant to 18U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002

 

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**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, the Registrant caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|   | **SPORT-HALEY,  INC.**                                |   |
|--------|-------------------------------------------------------|--------|
|   | (Registrant)                                          |   |
|   |                                                  |   |
|   |                                                  |   |
| Date:  | February 28,  2006                               |   | /s/ PATRICK W.  HURLEY |   |
|   | Patrick W.  Hurley                                    |   |
|   | Chief Financial  Officer                              |   |
|   | * (Principal Financial and  Accounting Officer)* |
|        |                                                       |        |  |  |

 

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