**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

|                                                   | **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**                                        |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|
|                                                   |       | **        OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |       |                                                                                        |
| **For the  quarterly period ended September 30, 2003** |
|                                                   |       |                                                                                        |
|                                                   | **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE**                                      |
| **EXCHANGE  ACT**                                      |
|                                                   |
| **Commission  File No. 1-12888**                       |

 

**SPORT-HALEY, INC.**

(Exact name of small business issuer as specified in its charter)

 

| **COLORADO**                                                    |   | **84-1111669**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State of other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  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 markwhether the registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days:   Yes  ý    No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act):   Yes  o    No  ý

 

Indicate the number ofshares outstanding in each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                       |   | **Outstanding  at November 7, 2003** |
|---------------------------------|--------|--------------------------------------|
| **Common  Stock, no par value** |   | **2,444,585**                        |

 

 

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**TABLE OF CONTENTS**

 
| **PART 1 – CONSOLIDATED FINANCIAL INFORMATION  (UNAUDITED)** |   |
|-------------------------------------------------------------------|--------|
|                                                              |   |   |   |
|                                                              | ITEM 1 | FINANCIAL  STATEMENTS |   |
|                                                              |   |   |   |
|                                                              |   |   | BALANCE  SHEETS |   |
|                                                              |   |   |   |
|                                                              |   |   | STATEMENTS OF OPERATIONS |   |
|                                                              |   |   |   |
|                                                              |   |   | STATEMENTS OF CASH FLOWS |   |
|                                                              |   |   |   |
|                                                              |   |   | NOTES TO FINANCIAL STATEMENTS |   |
|                                                              |   |   |   |
|                                                              | ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |
|                                                              |   |   |   |
|                                                              | ITEM 4 | CONTROLS AND PROCEDURES |   |
|                                                              |   |   |   |
| **PART II - OTHER INFORMATION**                                   |   |
|                                                              |   |   |   |
|                                                              | ITEM 1 | LEGAL PROCEEDINGS |   |
|                                                              |   |   |   |
|                                                              | ITEM 5 | OTHER INFORMATION |   |
|                                                              |   |   |   |
|                                                              | ITEM 6 | EXHIBITS AND REPORTS ON FORM 8-K |   |
|                                                              |   |   |   |
| **SIGNATURES**                                                    |   |
|                                                              |   |
| **CERTIFICATIONS**                                                |   |

 

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**SPORT-HALEY, INC.**

**BALANCE SHEETS**

 
|                                                                                               |   | **September  30,  2003** |       | **June 30,  2003** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------------|------------|--------------------|--------|
|                                                                                               |   | **(Unaudited)**          |       | **(***)**          |   |
| **ASSETS**                                                                                         |   |                     |       |               |   |
| Current assets:                                                                                    |   |                     |       |               |   |
| Cash and cash equivalents                                                                          |   | $                        | 3,424,000  |               | $      | 4,304,000 |   |
| Marketable securities                                                                              |   | 2,294,000                |       | 2,181,000          |   |
| Accounts receivable, net of allowances of $467,000 and $542,000,  respectively                     |   | 3,880,000                |       | 4,719,000          |   |
| Inventories                                                                                        |   | 9,424,000                |       | 7,828,000          |   |
| Other current assets                                                                               |   | 729,000                  |       | 737,000            |   |
| Taxes receivable                                                                                   |   | 120,000                  |       | 120,000            |   |
| Deferred taxes                                                                                     |   | 362,000                  |       | 409,000            |   |
|                                                                                               |   |                     |       |               |   |
| Total current assets                                                                               |   | 20,233,000               |       | 20,298,000         |   |
|                                                                                               |   |                     |       |               |   |
| Property and equipment, net                                                                        |   | 1,061,000                |       | 1,014,000          |   |
| Deferred taxes                                                                                     |   | 353,000                  |       | 217,000            |   |
| Other assets                                                                                       |   | 15,000                   |       | 16,000             |   |
|                                                                                               |   |                     |       |               |   |
|                                                                                               |   | $                        | 21,662,000 |               | $      | 21,545,000 |   |
|                                                                                               |   |                     |       |               |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                      |   |                     | ** ** |               |   |
|                                                                                               |   |                     |       |               |   |
| Current liabilities:                                                                               |   |                     |       |               |   |
| Accounts payable                                                                                   |   | $                        | 908,000    |               | $      | 669,000 |   |
| Accrued commissions and other expenses                                                             |   | 457,000                  |       | 449,000            |   |
|                                                                                               |   |                     |       |               |   |
| Total current liabilities                                                                          |   | 1,365,000                |       | 1,118,000          |   |
|                                                                                               |   |                     |       |               |   |
| Shareholders’ equity:                                                                         |   |                     |       |               |   |
| Preferred stock, no par value; 1,500,000 shares authorized; none  issued and outstanding           |   | —                   |       | —             |   |
| Common stock, no par value; 15,000,000 shares authorized; 2,444,585  shares issued and outstanding |   | 9,868,000                |       | 9,868,000          |   |
| Additional paid-in capital                                                                         |   | 1,434,000                |       | 1,403,000          |   |
| Retained earnings                                                                                  |   | 8,995,000                |       | 9,156,000          |   |
| Total shareholders’ equity                                                                    |   | 20,297,000               |       | 20,427,000         |   |
|                                                                                               |   |                     |       |               |   |
|                                                                                               |   | $                        | 21,662,000 |               | $      | 21,545,000 |   |

 

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*** Taken from the audited balance sheet at that date

 

See accompanying notes to consolidated financial statements.

 

3

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**SPORT-HALEY, INC.**

**STATEMENTS OF OPERATIONS**

 
|                                        |   | **Three  Months Ended  September 30,** |      |
|---------------------------------------------|--------|----------------------------------------|-----------|
|                                        |   | **2003**                               |      | **2002** |   |
|                                        |   | **(Unaudited)**                        |      | **(Unaudited)** |   |
|                                        |   |                                   |      |   |   |
| Net sales                                   |   | $                                      | 4,312,000 |   | $ | 3,781,000 |   |
|                                        |   |                                   |      |   |   |
| Cost of goods sold                          |   | 2,672,000                              |      | 2,303,000 |   |
|                                        |   |                                   |      |   |   |
| Gross profit                                |   | 1,640,000                              |      | 1,478,000 |   |
|                                        |   |                                   |      |   |   |
| Selling, general and administrative expense |   | 1,945,000                              |      | 1,790,000 |   |
|                                        |   |                                   |      |   |   |
| Loss from operations                        |   | (305,000                               | )         | (312,000 | ) |
|                                        |   |                                   |      |   |   |
| Other income, net                           |   | 54,000                                 |      | 43,000 |   |
|                                        |   |                                   |      |   |   |
| Loss before benefit from income taxes       |   | (251,000                               | )         | (269,000 | ) |
|                                        |   |                                   |      |   |   |
| Benefit from income taxes                   |   | 90,000                                 |      | 96,000 |   |
|                                        |   |                                   |      |   |   |
| Net loss                                    |   | $                                      | (161,000  | ) | $ | (173,000 | ) |
|                                        |   |                                   |      |   |   |
| Basic and diluted loss per common share     |   | $                                      | (0.07     | ) | $ | (0.06 | ) |

 

See accompanying notes to consolidated financial statements.

 

4

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**SPORT-HALEY, INC.**

**STATEMENTSOF CASH FLOWS**

 
|                                                                           |   | **Three  Months Ended  September 30,** |     |
|--------------------------------------------------------------------------------|--------|----------------------------------------|----------|
|                                                                           |   | **2003**                               |     | **2002** |   |
|                                                                           |   | **(Unaudited)**                        |     | **(Unaudited)** |   |
| **Cash flows from operating activities:**                                      |   |                                   |     |   |   |
|                                                                           |   |                                   |     |   |   |
| Net loss                                                                       |   | $                                      | (161,000 | ) | $ | (173,000 | ) |
|                                                                           |   |                                   |     |   |   |
| Adjustments to reconcile net income to net  cash used by operating activities: |   |                                   |     |   |   |
| Depreciation and amortization                                                  |   | 82,000                                 |     | 90,000 |   |
| Deferred taxes and other                                                       |   | (90,000                                | )        | 4,000 |   |
| Allowance for doubtful accounts                                                |   | 30,000                                 |     | 55,000 |   |
| Common stock options                                                           |   | 31,000                                 |     | — |   |
| Cash provided (used) due to changes in  assets and liabilities:                |   |                                   |     |   |   |
| Accounts receivable                                                            |   | 824,000                                |     | 785,000 |   |
| Inventory                                                                      |   | (1,596,000                             | )        | (973,000 | ) |
| Other assets                                                                   |   | 10,000                                 |     | 69,000 |   |
| Taxes receivable                                                               |   | —                                 |     | (85,000 | ) |
| Accounts payable                                                               |   | 239,000                                |     | (573,000 | ) |
| Accrued commissions and other expenses                                         |   | 8,000                                  |     | (125,000 | ) |
|                                                                           |   |                                   |     |   |   |
| **Net cash used by operating activities**                                      |   | (623,000                               | )        | (926,000 | ) |
|                                                                           |   |                                   |     |   |   |
| **Cash flows from investing activities:**                                      |   |                                   |     |   |   |
| Redemptions of held to maturity investments                                    |   | 623,000                                |     | — |   |
| Purchases of held to maturity investments                                      |   | (752,000                               | )        | (329,000 | ) |
| Purchase of fixed assets                                                       |   | (128,000                               | )        | (20,000 | ) |
|                                                                           |   |                                   |     |   |   |
| **Net cash used by investing activities**                                      |   | (257,000                               | )        | (349,000 | ) |
|                                                                                |        |                                        |          |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

5

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**SPORT-HALEY, INC.**

**STATEMENTSOF CASH FLOWS**

 
|                                                  |   | **Three  Months Ended  September 30,** |      |
|-------------------------------------------------------|--------|----------------------------------------|-----------|
|                                                  |   | **2003**                               |      | **2002** |   |
|                                                  |   | **(Unaudited)**                        |      | **(Unaudited)** |   |
| **Cash flows from financing activities:**             |   |                                   |      |   |   |
| Repurchase of common stock                            |   | $                                      | —    |   | $ | — |   |
|                                                  |   |                                   |      |   |   |
| **Net cash provided by financing activities**         |   | —                                 |      | — |   |
|                                                  |   |                                   |      |   |   |
| **Net decrease in cash and cash equivalents**         |   | (880,000                               | )         | (1,275,000 | ) |
|                                                  |   |                                   |      |   |   |
| **Cash and cash equivalents, beginning**              |   | 4,304,000                              |      | 8,428,000 |   |
|                                                  |   |                                   |      |   |   |
| **Cash and cash equivalents, ending**                 |   | $                                      | 3,424,000 |   | $ | 7,153,000 |   |
|                                                  |   |                                   |      |   |   |
| **Supplemental disclosure of cash flow information:** |   |                                   |      |   |   |
| Cash received during the period for:                  |   |                                   |      |   |   |
| Income taxes                                          |   | $                                      | —    |   | $ | 81,000 |   |
|                                                  |   |                                   |      |   |   |
| Cash paid during the period for:                      |   |                                   |      |   |   |
| Income taxes                                          |   | $                                      | —    |   | $ | 61,000 |   |
|                                                  |   |                                   |      |   |   |
| Interest                                              |   | $                                      | —    |   | $ | 9,000 |   |

 

See accompanying notes to consolidated financial statements.

 

6

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**SPORT-HALEY, INC.**

**NOTESTO FINANCIAL STATEMENTS**

 

**NOTE 1****                                        CONDENSEDFINANCIAL STATEMENTS**

 

The financial statements included herein have been prepared by Sport-Haley,Inc. (the “Company”) without audit, pursuant to the rules and regulations ofthe Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles in the United States of Americanhave been condensed or omitted as allowed by such rules and regulations. TheCompany believes that the disclosures are adequate to make the informationpresented not misleading. These financial statements should be read inconjunction with the Company’s annual audited financial statements dated June30, 2003, included in the Company’s annual report on Form 10-K as filed withthe Securities and Exchange Commission. The results for interim periods are notnecessarily indicative of results that may be expected for any other interimperiod or for the full year.

 

The management of the Company believes that the accompanying unauditedcondensed financial statements prepared in conformity with generally acceptedaccounting principles in the United States of America, which require the use ofmanagement estimates, contain all adjustments (including normal recurringadjustments) necessary to present fairly the operations and cash flows for theperiods presented.

 

 

**NOTE 2****                                        INVENTORIES**

 

|                                     |   | **September  30,  2003** |      | **June 30,  2003** |   |
|------------------------------------------|--------|--------------------------|-----------|--------------------|--------|
| Inventories consisted of  the following: |   |                     |      |               |   |
| Component                                |   | $                        | 492,000   |               | $      | 673,000 |   |
| Finished goods                           |   | 8,932,000                |      | 7,155,000          |   |
|                                     |   |                     |      |               |   |
|                                     |   | $                        | 9,424,000 |               | $      | 7,828,000 |   |

 

**NOTE 3****                                        COMMITMENTSAND CONTINGENCIES**

 

At September 30, 2003, the Company had approximately $1,014,000 inoutstanding letters of credit that were issued to foreign suppliers inaccordance with finished goods inventory purchase commitments.

 

7

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**NOTE 4****                                        REPURCHASEOF COMMON STOCK**

 

As of September 30, 2003, the Company’s Board of Directors had authorizedthe repurchase of up to 2,520,000 shares of the Company’s issued andoutstanding common stock. The shares may be repurchased from time to time inopen market transactions at prevailing market prices or privately negotiatedtransactions. The Company has no commitment to repurchase all or any portion ofthe shares. All shares repurchased by the Company are required to be canceledand returned to the status of authorized but unissued common stock.

 

From the inception of the repurchase plan through September 30, 2003, theCompany had repurchased a total of 2,512,800 shares of its common stock at acumulative cost of approximately $13,488,000.

 

**NOTE 5****                                        COMMONSTOCK OPTIONS**

 

The Company’s Stock Option Plan (the “Plan”) expired by its terms onFebruary 28, 2003. Option agreements, issued in accordance with the Plan priorto February 28, 2003, generally remain in force until the earlier of theirexercise, the termination of a grantee’s employment or other relationship withthe Company or expiration by their terms.

 

At September 30, 2003, there were outstanding options to purchase1,210,197 shares of the Company’s common stock at exercise prices ranging from$2.50 to $9.78 per share and expiration dates between November 2003 and January2013.

 

If the Company hadaccounted for its stock-based compensation plan in accordance with Statementsof Accounting Standards No. 123, *Accountingfor Stock-Based Compensation*, the Company’s net loss and loss percommon share would have been reported as follows:

 

|                                                                                 |   | **Three Months Ended September 30,** |     |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|----------|
|                                                                                 |   | **2003**                             |     | **2002** |   |
| Net loss - as reported                                                               |   | $                                    | (161,000 | ) | $ | (173,000 | ) |
| Effect of employee stock-based compensation included  in reported net loss           |   | 19,000                               |     | — |   |
| Effect of employee stock-based compensation per SFAS  123                            |   | (66,000                              | )        | (40,000 | ) |
| Net loss applicable to common stock - pro forma                                      |   | $                                    | (208,000 | ) | $ | (213,000 | ) |
|                                                                                 |   |                                 |     |   |   |
| Basic and Diluted:                                                                   |   |                                 |     |   |   |
| Loss per share - as reported                                                         |   | $                                    | (0.07    | ) | $ | (0.06 | ) |
| 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                  |   | (0.03                                | )        | (0.02 | ) |
| Loss per share applicable to common stock - pro  forma                          |   | $                                    | (0.09    | ) | $ | (0.08 | ) |

 

8

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

 

The Company adopted the provisions of Statements of FinancialAccounting Standards Number 128, *Earnings per Share,* (SFAS 128) effectivewith the year ended June 30, 1998. SFAS 128 requires the presentation of basicand diluted earnings (loss) per common share. The following table provides areconciliation of the numerator and denominator of basic and diluted net income(loss) per common share:

 

 
|                                  |   | **Three  Months ended September 30, 2003** |     |
|---------------------------------------|--------|--------------------------------------------|----------|
|                                  |   | **Net  Loss**                              |     | **Weighted  Average Shares** |   | **Per Share** |   |
| Earnings  (Loss) Per Common Share     |   |                                       |     |   |   |   |   |
|                                  |   |                                       |     |   |   |   |   |
| Basic loss per share                  |   | $                                          | (161,000 | ) | 2,444,585 |   | $ | (0.07 | ) |
|                                  |   |                                       |     |   |   |   |   |
| Effect of dilutive securities options |   | —                                     |     | — |   | — |   |
|                                  |   |                                       |     |   |   |   |   |
| Diluted loss per share                |   | $                                          | (161,000 | ) | 2,444,585 |   | $ | (0.07 | ) |

 
|                                  |   | **Three  Months ended September 30, 2002** | ** ** |
|---------------------------------------|--------|--------------------------------------------|------------|
|                                  |   | **Net  Loss**                              | ** ** | **Weighted  Average Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common Share                 |   |                                       |       |   |   |   |   |
|                                  |   |                                       |       |   |   |   |   |
| Basic loss per share                  |   | $                                          | (173,000   | ) | 2,730,985 |   | $ | (0.06 | ) |
|                                  |   |                                       |       |   |   |   |   |
| Effect of dilutive securities options |   | —                                     |       | — |   | — |   |
|                                  |   |                                       |       |   |   |   |   |
| Diluted loss per share                |   | $                                          | (173,000   | ) | 2,730,985 |   | $ | (0.06 | ) |

 

9

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**SPORT-HALEY, INC.**

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

 

This Report on Form 10-Q contains certain forward-looking statements.When used in this report, the words “may,” “will,” “expect,” “anticipate,”“continue,” “estimate,” “project,” “intend,” “believe” and similar expressionsare intended to identify forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934 regarding events, conditions and financial trends including,without limitation, business conditions and growth in the fashion golf apparelmarket and the general economy, competitive factors, and price pressures in thehigh-end golf-apparel market; general economic conditions resulting fromthreats or acts of war or terrorism; risks associated with an increasingpercentage of sales relating to licensed apparel, such as the Ben Hogan®collections; inventory risks due to shifts in market and/or price erosion ofpurchased apparel, raw fabric and trim; cost controls; changes in product mix;loss or reduced manufacturing capacity of significant suppliers; loss or delayof shipments of finished goods from foreign suppliers; and other risks oruncertainties detailed in other Securities and Exchange Commission (“SEC”) filingsmade by Sport-Haley. Such statements are based on management’s currentexpectations and are subject to risks, uncertainties and assumptions. Shouldone or more of these risks or uncertainties materialize, or should underlyingassumptions prove incorrect, the actual plan of operations, businessstrategies, operating results and financial position of Sport-Haley coulddiffer materially from those expressed in, or implied by, such forward-lookingstatements.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

The Company’s condensed financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America, which require the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andthe related disclosures. A summary of those significant accounting policies canbe found in the Company’s Notes to the Consolidated Financial Statementsincluded in its Report on 10-K for the year ended June 30, 2003, which wasfiled with the SEC on September 29, 2003. The estimates used by management are based upon the Company’s historicalexperiences combined with management’s understanding of current facts andcircumstances. Certain of the Company’s accounting policies are consideredcritical as they are both important to the portrayal of the Company’s financialcondition and the results of its operations and require significant or complexjudgments on the part of management. Management believes that the following representthe critical accounting policies of the Company: inventories; deferred incometaxes; allowance for doubtful accounts; and, allowance for sales returns.

 

Excess finished goods inventories are anatural component of a seasonal apparel business. The valuation of inventoriesinvolves complex judgments on the part of management. Management continuallyevaluates and balances the levels of current seasons’ inventories to meetmarket demands based upon sales projections, current bookings for future deliveriesand at-once business. While certain finished goods items will sell out in anyparticular selling season, quantities of other finished goods items will remainat the end of each selling season. The Company markets previous seasons’finished goods inventories at reduced wholesale prices. However, economicconditions and other factors may depress sales prices for previous seasons’finished goods inventories to less than historical costs.

 

10

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The Company’s management has significantlyimproved controls with respect to the amount of finished goods inventories thatare anticipated to remain at the end of each selling season. The Companytypically evaluates obsolescence and other impairments of its inventories at ornear the end of its fourth fiscal quarter each year. At that time, the Companywrites down its component and finished goods inventories to market values byadjusting its reserves for inventory obsolescence accordingly. While managementbelieves that the Company’s processes produce a fair valuation of inventories,detrimental changes in general economic conditions or in the golf apparelindustry could materially affect valuation of the Company’s inventories.

 

Deferred income taxes are recognized for the expected tax consequencesin future years for differences between the tax bases of assets and liabilitiesand their financial reporting amounts, based upon enacted tax laws andstatutory tax rates applicable to the periods in which the differences are expectedto affect taxable income. The Company’s significant deferred tax assets arerelated to net operating loss carryforwards for federal and state income taxpurposes, a change in accounting methods for federal income tax purposes, stockoptions compensation and an unrealized loss for tax purposes on a common stockinvestment. The Company has established a valuation allowance to reducedeferred tax assets to the net amount expected to be recovered in futureperiods. The estimates for deferred tax assets and the corresponding valuationallowance require management to exercise complex judgments. Managementperiodically reviews and adjusts those estimates based upon the most currentinformation available. However, because the recoverability of deferred tax assetsis directly dependent upon the future operating results of the Company, actualrecoverability of deferred tax assets may differ materially from management’sestimates.

 

The Company’s allowance for doubtful accounts reflects a reserve thatreduces customer accounts receivable to the net amount estimated to becollectible. Estimating the credit worthiness of customers and therecoverability of customer accounts requires management to exerciseconsiderable judgment. In estimating uncollectible amounts, managementconsiders factors such as general economic and industry-specific conditions,historical customer performance and anticipated customer performance. Whilemanagement considers the Company’s processes to be adequate to effectivelyquantify its exposure to doubtful accounts, changes in economic, industry orspecific customer conditions may result in a recoverability of the Company’sdoubtful accounts that materially differs from management’s estimates.

 

The Company records its allowance for sales returns as a net adjustmentto customer accounts receivable. When recording an allowance, the net methodreduces customer accounts receivable and net sales by the estimated grossmargin effect of the anticipated sales return. Generally, the Company’s sellingterms preclude return of its products subsequent to the sale. However, theCompany has traditionally maintained limited programs that offer some customersthe right to return certain finished goods items under predefined conditions,and the percentage of the Company’s customers that refuse receipt ofmerchandise at the time of delivery has increased in recent periods. Managementreviews historical data and considers factors such as general economic andindustry-specific conditions and anticipated customer performance whenevaluating the Company’s allowance for sales returns. Significant changes ingeneral economic or industry conditions may yield sales returns that differmaterially from management’s estimates.

 

11

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**FINANCIALCONDITION**

 

The Company intends to rely oncash generated from operations and available cash on hand to finance itsworking capital requirements for at least the next 12 months. To the extentsuch amounts are insufficient to finance the Company’s working capitalrequirements, the Company may also make periodic borrowings under its revolvingline of credit. Cash and cash equivalents plus marketable securities decreasedsince June 30, 2003 by approximately $767,000. Working capital at September 30,2003 was approximately $18,868,000 and was approximately $19,180,000 at June30, 2003.

 

Net accounts receivabledecreased by approximately $839,000 to $3,380,000 at September 30, 2003, fromapproximately $4,719,000 at June 30, 2003. Because the Company’s net sales forits first (September 30) fiscal quarter are usually less than its net sales forits fourth (June 30) fiscal quarter, net accounts receivable usually decreaseduring its first fiscal quarter. Due to the combination of many factors, duringthe fiscal quarter ended September 30, 2003, operating activities used cash ofapproximately $623,000.

 

Since June 30, 2003,inventories increased by approximately $1,596,000 to $9,424,000 at September30, 2003, from $7,828,000 at June 30, 2003. The approximately 20% increase ininventories primarily consisted of comparative increases in: (a) pendingdeliveries of ocean shipments of finished goods from foreign suppliers; (b)closeout inventories of prior seasons’ women’s apparel; and, (c) Ben Hogan®apparel collections. Pending ocean deliveries of finished goods totaledapproximately $1,488,000 at September 30, 2003 and $195,000 at June 30, 2003.Closeout inventories of prior seasons’ women’s apparel increased primarilybecause the war in Iraq impacted late spring bookings and spring sales ofwomen’s apparel greater than it impacted similar bookings and sales of men’sapparel. Management revised its inventory requirements and adjusted reorderquantities, when possible, to minimize the excess inventories relating to thespring selling season. The increase in Ben Hogan® finished goods inventorieswas necessary to support the continued increase in sales of Ben Hogan® apparelcollections.

 

The Company’s continuedreliance on foreign suppliers sustains the risk that the Company’s revenuescould be adversely affected if a foreign shipment or shipments were receivedlate or lost. The Company maintains insurance for risk of loss relating togoods shipped from its foreign and domestic suppliers. However, the Company’s predominantreliance upon foreign suppliers, and significant reliance on two separateforeign suppliers, also sustains the risk that the Company could be left withinadequate or unsatisfactory recourse should the goods received from a foreignsupplier be nonconforming.

 

For the three months endedSeptember 30, 2003, the Company spent approximately $128,000 for the purchaseof property and equipment, and approximately $82,000 in depreciation andamortization was charged to current operations. The property and equipmentpurchases consisted primarily of implementation costs for new comprehensiveoperations software that the Company expects to be fully operational at or nearthe end of December 2003. During the same three-month period, investingactivities used cash of approximately $257,000, due to the purchases andredemptions of held-to-maturity federally insured marketable securitiescombined with the property and equipment purchases.

 

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Accounts payable and accruedexpenses increased by approximately $247,000 since June 30, 2003. The netincrease in current liabilities was primarily related to the accrued costs ofin-transit ocean shipments of finished goods inventories. The Company’s othertrade accounts and sales commissions payable are generally lower at the end ofits first fiscal quarter, when compared with the previous June 30 balances eachyear. A decrease in sales commissions payable at the end of the first fiscalquarter is consistent with the lower comparative sales volumes typicallyrecorded during the Company’s first (September 30) fiscal quarter as comparedwith its fourth (June 30) fiscal quarter.

 

Total shareholders’ equitydecreased by approximately $130,000 for the fiscal quarter. The decrease wascomprised of the net loss for the fiscal quarter combined with the equityeffect of stock-based compensation expense for the fiscal quarter. Book valueper share decreased by approximately $0.06 to $8.30 per share at September 30,2003 as compared with $8.36 per share at June 30, 2003.

 

**RESULTSOF OPERATIONS**

 

The Company’s business isseasonal in nature, with disproportionately higher sales occurring from Januarythrough June, which are the Company’s third and fourth quarters of each fiscalyears.

 

Net sales for the first fiscalquarter ended September 30, 2003, were approximately $4,312,000, an increase ofapproximately $531,000, or 14%, from net sales of $3,781,000 for the samequarter in the prior fiscal year. Management attributes the increase in net salesto the continued growth of Ben Hogan® apparel collections within upscale golfapparel markets. Net sales of Ben Hogan® apparel were approximately $1,326,000and $637,000 for the fiscal quarters ended September 30, 2003 and 2002,respectively. The overall percentage of net sales relating to Ben Hogan®apparel is indicative of the Company’s efforts to increase revenues associatedwith the licensing agreement with The Top Flite Golf Company for such apparel.The trend indicating an increasing relative percentage of sales relating tolicensed apparel sustains a risk of loss in the event the licensing agreementwere to be terminated by either party. The Company continues to direct itsmarketing efforts with the goals of increasing sales within established distributionchannels and creating new market opportunities for both its HALEY® and BenHogan® product lines. Based upon bookings as of October 31, 2003 for shipmentsafter that date, management expects the Company’s sales trend to continue toshow improvement throughout the current fiscal year.

 

The Company’s gross profit, asa percentage of net sales, was 38% for the quarter ended September 30, 2003,and 39% for the same quarter in the prior fiscal year. The relativelyequivalent gross profit percentages are reflective of management’s continualefforts to source finished apparel at competitive prices from foreign suppliersand to maximize revenues with respect to closeout inventories that must bemarketed at reduced selling prices.

 

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Selling, general andadministrative expenses increased by approximately $155,000, or 9%, toapproximately $1,945,000 for the fiscal quarter ended September 30, 2003, from$1,790,000 for the same quarter in the prior fiscal year. The increase wasprimarily attributable to increasing selling, general and administrativeexpenses with respect to Ben Hogan® apparel which included increases in salescommissions and royalties payable on higher net sales and severancecompensation paid to a former executive. Management continually monitors theCompany’s business operations to operate as efficiently as possible whileattempting to expand its sales growth opportunities. While the total expensesincreased when comparing the fiscal quarters, as a percentage of sales,selling, general and administrative costs decreased for the fiscal quarterended September 30, 2003 when compared with the same quarter in the priorfiscal year. As a percentage of net sales, selling, general and administrative expenditureswere approximately 45% and 47% for the quarters ended September 30, 2003 and2002, respectively.

 

Other income, net,increased by approximately $11,000, or 26%, to $54,000 for the quarter endedSeptember 30, 2003, from approximately $43,000 for the same quarter in theprior fiscal year. The primary component of other income consists of interestearned on cash equivalents and federally insured marketable securities.Interest rates earned on such investments have remained at near historical lowsover the last twelve months.

 

Loss beforebenefit from income taxes for the fiscal quarter ended September 30, 2003, wasapproximately ($251,000), an improvement of $18,000 or 7%, as compared with($269,000) for the same quarter in the prior fiscal year.

 

The Company’s effective taxrate was (36%) for the fiscal quarters ended September 30, 2003 and 2002. Theeffective tax rate in any fiscal year can vary significantly from the effectivetax rate in another year due to differences between the recognition of certaintransactions for financial versus tax purposes. Certain deductions recognizedfor tax purposes may not be expensed for financial statement purposes, andcertain expenses recorded for financial statement purposes may not bedeductible for tax purposes.

 

For the fiscal quarter endedSeptember 30, 2003, net loss improved by approximately $12,000 or 7% whencompared to the same three-month period in the prior fiscal year. Net lossapproximated ($161,000) and ($173,000) for the fiscal quarters ended September30, 2003 and 2002, respectively. The improvement was primarily the result ofthe increase in net sales with respect to Ben Hogan® apparel.

 

Both the basic and dilutedlosses per share were ($0.07) for the quarter ended September 30, 2003. Boththe basic and diluted losses per share were ($0.06) for the same quarter in theprior fiscal year.

 

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**SPORT-HALEY, INC.**

**ITEM 4****  CONTOLS AND PROCEDURES**

 

 

**(a)  Evaluation of Disclosure Controls andProcedures**

 

Management of the Company, with the participation ofthe Chief Executive Officer and the Chief Financial Officer, conducted anevaluation of the effectiveness of the Company’s disclosure controls andprocedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 asof the end of the period covered by this report. Based on that evaluation,management, including the Chief Executive Officer and Chief Financial Officer,concluded that, as of the date of this report, the Company’s disclosurecontrols and procedures were effective in ensuring that: (a) all materialinformation relating to the Company, required to be disclosed in this report,has been made known to management in a timely manner; and, (b) information wasrecorded, processed, summarized and reported within the time periods specifiedin the Security and Exchange Commission’s rules and regulations.

 

**(b)  Changes in Internal Controls Over FinancialReporting**

 

During the first quarter of fiscal 2004, the Companydid not institute any significant changes in internal controls over financialreporting that materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting, except thatthe Company continued the implementation of new management informationsoftware. Management believes that, when fully utilized, the new system willsignificantly improve the Company’s internal controls with respect to orderprocessing, purchasing requirements and timing, receiving and shippingoperations and finished goods inventory management. The new software isexpected to be operational at or near the end of the second quarter of fiscal2004.

 

The Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, does not expect that the Company’sdisclosure controls and procedures or its internal controls over financialreporting will, in all instances, prevent all errors and all fraud. A controlsystem, no matter how well conceived or operated, can only provide reasonable,not absolute, assurance that the objectives of the control system are met.While the Company’s control systems provide a reasonable assurance level, thedesign of its 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 Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple errors ormistakes. Additionally, a control may be circumvented by the individual act ofsome person, by collusion of two or more persons, or by management’s overrideof a specific control. The design of any system of controls is also based inpart on certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

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**SPORT-HALEY, INC.**

**PART II**

**OTHER INFORMATION**

 

 

**ITEM 1****                         LEGALPROCEEDINGS**

 

As previously reported, a former shareholder commenced a putative classaction lawsuit against Sport-Haley and three of its officers and directors (the“Defendants”). Pursuant to a settlement conference, on November 7, 2003, theparties to the class action reached a preliminary agreement to settle theaction against all parties and began drafting a Memorandum of Understanding toset forth the parties’ agreement in principle. Under the contemplatedsettlement, which is subject to further agreement between the parties, courtapproval and other contingencies, the Defendants will pay to the class a totalof $1,000,000. The settlement amount is expected to be derived from proceeds ofthe Defendants’ liability insurance coverage. Although the Defendants believethat it is probable that the parties will complete formal documentation of thesettlement agreement, and that the settlement will be approved by the court,there can be no assurance that completion of the settlement or court approvalwill occur. In the event that the settlement is not completed, the litigationwill continue. The Defendants continue to maintain that they have meritoriousdefenses to the class action claims, but have agreed to the settlement forpractical and other reasons. The Defendants have incurred significant costs andexpenses, including the uses of Company resources and executive time, defendingthe class action. Of those expenses, a considerable portion is not recoverableby applicable insurance. If the settlement is not completed and approved, suchunrecoverable expenses may continue to negatively impact the Company’sfinancial position and the results of its operations.

 

As previously reported, on September 26, 2003, the United StatesSecurities and Exchange Commission (the “Commission”) filed suit in the UnitedStates District Court for the District of Colorado against Sport-Haley, itsChairman and former Chief Executive Officer, Robert G. Tomlinson, and itsformer controller, Steve S. Auger (the “Defendants”). The Commission filed anamended complaint on October 29, 2003, which added one of the Company’s formerauditors to the action as a Defendant. The suit seeks an injunction againstfuture violations and other relief, including disgorgement, civil penalties andan order barring either Mr. Tomlinson or Mr. Auger from serving as a directoror officer 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 the Company’sfiscal years 2000, 1999 and 1998. The complaint alleges that the Companyviolated §17(a) of the Securities Act of 1933 (the “Securities Act”), §10(b),§13(b)(2) and §15(d) of the Securities Exchange Act of 1934 (the “ExchangeAct”) and various other rules promulgated thereunder. The complaint furtheralleges that Mr. Tomlinson and Mr. Auger violated §17(a) of the Securities Act,§10(b) and §13(b)(5) of the Exchange Act and Rules 10b-5 and 13b-2 thereunder.Finally, the suit alleges that Mr. Tomlinson and Mr. Auger aided and abettedthe Company’s violations of §13(b)(2) and §15(d) of the Exchange Act andvarious rules promulgated thereunder. The Commission’s suit primarily relatesto errors in the Company’s previously issued financial statements that theCompany previously reported when it voluntarily restated its financialstatements for fiscal years 1999 and 1998 and subsequently corrected material financialinformation for the quarterly periods of fiscal years 2000, 1999 and 1998. Noneof the Defendants have filed an answer to the allegations of the Complaint.

 

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The Defendants intend to vigorously defend the Commission’sallegations, which the Defendants believe are without merit. Based upon theinformation that is currently available, management cannot reasonably estimatethe amount of future costs that the Company will incur defending the Commission’sallegations. However, if the suit were determined in favor of the Commissionand against the Defendants, the possible monetary penalties and other reliefthat the Company might be required to pay could negatively impact the Company’sfinancial position and the results of its operations.

 

As previously reported, the Company retained legal counsel to possiblypursue claims against its former auditors in connection with damages sufferedas a result of the restatements of its financial statements for the fiscalyears ended June 30, 1999 and 1998 and the corrections of material financialinformation for the quarterly periods of the fiscal years ended June 30, 2000,1999 and 1998. Further, counsel to the former auditors has advised the Companythat the former auditors may bring certain claims against the Company.Management believes that the claims threatened by the former auditors relate toallegations of unpaid fees. Each party continues to deny any liability to theother party. Neither the Company nor its former auditors have yet filed anylegal action to assert any of these claims. As of September 30, 2003, theCompany had cumulatively incurred approximately $649,000 in expenses related tothe restatements of its financial statements and material quarterly information,the investigation by the Commission and the class action lawsuit noted above.

 

The Company is subject to various other legal proceedings and claimswhich arise in the ordinary course of its business. In the opinion ofmanagement, the amount of ultimate liability with respect to those actions willnot materially affect the financial position the Company or the results of itsoperations.

 

 

**ITEM 5****                         OTHERINFORMATION**

 

During the fiscal quarter ended September 30, 2003, the CompensationCommittee of the Board of Directors met to discuss adjustments to the annualsalaries of certain of the Company’s executives. The Compensation Committee suggested an increase in the annual salaryfor one of the Company’s Named Officers, as described in Item 11 of the Company’sForm 10-K for the year ended June 30, 2003. Accordingly, the Company increasedthe annual salary paid to its Senior Vice President to $150,000 per year.

 

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| **ITEM 6** |   | **EXHIBITS AND REPORTS ON FORM 8-K** |
|------------|--------|--------------------------------------|

 

 

(A)          EXHIBITS

Exhibit 31.1 –Certification of Kevin M. Tomlinson pursuant to Exchange Act Rule13a-14(a)/15d-14(a)

 

Exhibit 31.2 –Certification of Patrick W. Hurley pursuant to Exchange Act Rule13a-14(a)/15d-14(a)

 

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

 

(B)            REPORTS ON FORM 8-K

On September 30, 2003, the Company filed a Form 8-K to report that theCompany had issued a news release dated September 25, 2003, which announced itsfinancial results for the quarter and year ended June 30, 2003.

 

On October 31, 2003, the Company filed a Form 8-K to report that theCompany issued a news release on September 30, 2003, which announced that onSeptember 26, 2003, the United States Securities and Exchange Commission filedsuit in the United States District Court for the District of Colorado againstthe Company, its Chairman and former Chief Executive Officer, Robert G.Tomlinson, and its former Controller, Steve S. Auger.

 

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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:  | November 19,  2003 |   | /s/ Kevin M.  Tomlinson  |   |
|   |               |   | Kevin M.  Tomlinson      |
|   |               |   | Chief  Executive Officer |
|   |               |   |                     |
|   |               |   |                     |
| Date:  | November 19,  2003 |   | /s/ Patrick  W. Hurley   |   |
|   |               |   | Patrick W.  Hurley       |
|   |               |   | Chief  Financial Officer |
|        |                    |        |                          |  |  |

 

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