<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 (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)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:
Yes X No
--- ---
State the number of shares outstanding in each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 9, 1998
COMMON STOCK, NO PAR VALUE 4,426,831
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART 1 - CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OPERATIONS 11-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
</TABLE>
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SPORT-HALEY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
---------------- ----------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,440 $ 6,502
Short-term investments and marketable securities 972 13
Accounts receivable, net of allowances of
$54,000 and $155,000, respectively 6,101 6,554
Inventories 17,569 17,893
Other current assets 1,582 1,403
---------------- ----------------
30,664 32,365
---------------- ----------------
Property and equipment 4,013 4,193
Property held under capital leases -- 7
Less accumulated depreciation (1,298) (1,455)
---------------- ----------------
2,715 2,745
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Other assets:
Other assets 270 126
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$ 33,649 $ 35,236
---------------- ----------------
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 351 $ 1,862
Note payable 500 500
Accrued income taxes 351 318
Accrued commissions and other expenses 672 1,027
---------------- ----------------
1,874 3,707
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Long-term liabilities:
Other -- 4
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1,874 3,711
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Minority interest 50 60
Stockholders' 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; 4,455,254 and
4,512,962 shares issued and outstanding, respectively 17,783 18,416
Additional paid in capital 663 598
Retained earnings 13,279 12,451
Accumulated other comprehensive income -- --
---------------- ----------------
31,725 31,465
---------------- ----------------
Total Liabilities and Stockholders' Equity $ 33,649 $ 35,236
---------------- ----------------
---------------- ----------------
</TABLE>
Note: Taken from the audited balance sheet at that date.
3
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SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 7,496 $ 6,835
Cost of goods sold 4,609 4,258
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Gross profit 2,887 2,577
Selling, general and administrative expense 1,842 1,652
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Income from operations 1,045 925
Other income (expense):
Other income, net 119 107
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Income before income taxes and
minority interest 1,164 1,032
Minority interest income 13 --
Provision for income taxes 350 280
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Net income $ 827 $ 752
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Other comprehensive income:
Unrealized holding losses on available for
sale securities -- (164)
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Comprehensive income $ 827 $ 588
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------------- -------------
Net income per common share - basic $ 0.18 $ 0.16
Net income per common share - diluted $ 0.18 $ 0.16
</TABLE>
4
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 827 $ 752
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 131 132
Amortization of investment premium -- 17
Allowance for doubtful accounts 15 93
Stock option compensation 65 67
Realized loss on investment -- 52
Cash provided (used) due to changes in assets and liabilities:
Short-term investments to maturity -- (699)
Accounts receivable 438 380
Inventory 324 (774)
Other assets (322) (158)
Accounts payable (1,511) 26
Accrued commissions and other expenses (355) 615
Accrued income taxes 34 302
Other liabilities (4) (4)
Minority interest (10) --
----------- ------------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (368) 801
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (101) (154)
Purchases of held to maturity investments (959) --
----------- ------------
NET CASH USED BY INVESTING ACTIVITIES (1,060) (154)
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</TABLE>
5
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
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(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligation $ -- $ (1)
Repurchase of common stock (650)
Net proceeds from issuance of common stock 16 112
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (634) 111
----------- -----------
NET INCREASE (DECREASE) IN CASH (2,062) 758
CASH AND CASH EQUIVALENTS, BEGINNING 6,502 10,273
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING $ 4,440 $ 11,031
----------- -----------
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 330 $ 4
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Interest $ 10 $ --
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SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
At September 30, 1997, the Company had unrealized holding losses on marketable
securities of approximately $164,000.
</TABLE>
6
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SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have
been prepared by Sport-Haley, Inc. (the "Company") without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by such
rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these financial statements be
read in conjunction with the Company's annual audited
consolidated financial statements dated June 30, 1998. While
management believes the procedures followed in preparing these
financial statements are reasonable, the accuracy of the
amounts are, in some respects, dependent upon the facts that
will exist, and procedures that will be accomplished by the
Company later in the year.
The management of the Company believes that the accompanying
unaudited condensed consolidated financial statements prepared
in conformity with generally accepted accounting principles,
which require the use of management estimates, contain all
adjustments (including normal recurring adjustments) necessary
to present fairly the operations and cash flows for the period
presented.
The consolidated financial statements include the account of
Sport-Haley, Inc., and its majority owned subsidiary, B&L
Sportswear, Inc. (collectively referred to as the Company).
All significant intercompany accounts and transactions have
been eliminated.
Certain reclassifications have been made to the 1997
consolidated financial statements to conform with the 1998
presentation.
NOTE 2 INVENTORIES
Inventories at September 30, 1998 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials $ 6,786,546
Finished goods 10,782,170
------------
$ 17,568,716
------------
------------
</TABLE>
NOTE 3 INCOME TAXES
The components of the deferred tax asset and net deferred tax
liability recognized in the accompanying balance sheet as of
September 30, 1998, are as follows:
<TABLE>
<CAPTION>
Current Long-Term
--------- ---------
<S> <C> <C>
Deferred tax liability $ - $ -
Deferred tax asset 107,262 21,458
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$ 107,262 $ 21,458
--------- ---------
--------- ---------
</TABLE>
7
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SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 INCOME TAXES (Continued)
The types of temporary differences between the tax bases of
assets and liabilities and the financial reporting amounts
that give rise to a significant portion of the deferred tax
liability and their appropriate tax effects at September 30,
1998, are as follows:
<TABLE>
<CAPTION>
Tax Effect
Difference Current Long-Term
---------- ------- ---------
<S> <C> <C> <C>
Loss on stock $ 221,153 $ 86,200 $ -
Allowance for doubtful accounts 54,005 21,062 -
Stock option compensation 485,367 - 189,293
Accumulated depreciation 430,345 - (167,835)
--------- --------
$ 107,262 $ 21,458
--------- --------
--------- --------
</TABLE>
The components of income tax expenses are as follows:
<TABLE>
<S> <C>
Current:
Federal $ 314,200
State 49,650
---------
363,850
---------
Deferred:
Federal (12,319)
State (1,812)
---------
(14,131)
---------
$ 349,719
----------
----------
</TABLE>
NOTE 4 REPURCHASE OF COMMON STOCK
The repurchase of the Company's common stock is based upon the
Board of Director's belief the Company's common stock is under
priced given its earnings and prospects for future operations.
The shares may be purchased from time to time in open market
transactions at prevailing market prices. The Company has no
commitment or obligation to purchase all or any portion of the
shares. All shares purchased by the Company will be cancelled
and returned to the status of authorized but unissued common
stock.
During December 1994, the Company's Board of Directors
authorized the repurchase of up to 150,000 shares of the
Company's issued and outstanding common stock. Additionally
the Board of Directors authorized increases of 150,000 common
shares during October 1996 and 1997, respectively, that may be
purchased, thus bringing the total common shares authorized
for repurchase under the plan to 450,000 shares. During
September 1998, the Company's Board of Directors authorized
another increase of an additional 400,000 common shares that
the Company may repurchase thus bringing the
8
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SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 REPURCHASE OF COMMON STOCK (continued)
total common shares authorized for repurchase to 850,000.
Through September 30, 1998, the Company has repurchased a
total of 460,000 shares of its common stock at a cost of
approximately $5.4 million.
From October 1, 1998 through November 9, 1998, the Company
repurchased an additional 32,000 shares of its common stock at
a cost of approximately $286,000.
NOTE 5 COMMON STOCK OPTIONS
At September 30, 1998, the Company had outstanding options to
purchase 439,630 shares of common stock at prices ranging from
$2.50 to $14.25, with expiration dates between March 15, 2002
and September 22, 2008. During the three months ended
September 30, 1998, option holders exercised and purchased
2,292 shares of the Company's common stock. The Company
realized gross proceeds of approximately $16,000. During the
quarter ending September 30, 1998, the Company cancelled 7,500
options to purchase common shares granted to individuals no
longer covered under the Company's option plan.
Included in the Company's first quarter net income is a charge
of approximately $65,000 which is a result of applying
Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK BASED COMPENSATION.
NOTE 6 EARNINGS PER SHARE
The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE,
(SFAS No. 128) effective with the year ended June 30, 1998.
SFAS No. 128 requires the presentation of basic and diluted
net income per common share. The following table provides a
reconciliation of the numerator and denominator of basic and
diluted net income per common share:
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
---------------------------------------
Net Weighted
Income Average Shares Per Share
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<S> <C> <C> <C>
Net Income Per Common Share
---------------------------
Basic and Diluted Net Income $827,000 4,501,946 $ 0.18
Effect of Dilutive Securities
Warrants - -
Options - -
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Diluted Net Income Per Share $827,000 4,501,946 $ 0.18
--------- --------- ----------
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</TABLE>
9
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SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
---------------------------------------
<S> <C> <C> <C>
Net Income Per Common Share
---------------------------
Basic and Diluted Net Income $752,000 4,659,185 $ 0.16
Effect of Dilutive Securities
Warrants - 28,183
Options - 112,437
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Diluted Net Income Per Share $752,000 4,799,805 $ 0.16
-------- --------- ------
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</TABLE>
NOTE 7 YEAR 2000 ISSUE
The Company is cognizant of the issues associated with the
programming code in existing computer systems as the year 2000
approaches. The "Year 2000" problem is pervasive and complex,
as virtually every computer operation will be affected in some
way. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the
date field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th
century dates. Systems not able to recognize the date
correctly could generate erroneous data or fail.
As a result, in slightly over one year computer systems and/or
software used by the Company will need to be tested and
upgraded, if necessary, to comply with such Year 2000
requirements. The Company continues to address this issue to
ensure the availability and integrity of its financial systems
and the reliability of its operational systems and is
presently evaluating and upgrading its software and hardware,
so that its computer systems will function properly with
respect to Year 2000 and beyond. The costs associated with
the Company's Year 2000 initiative are charged to expense as
incurred and are not material to its financial position and
results of operations. The Company has initiated discussions
with significant suppliers and financial institutions with
whom the Company has a relationship, to ensure those parties
have appropriate plans to remediate Year 2000 issues
particularly where their systems interface with the Company's
systems or otherwise impact its operations. The Company is
assessing the extent to which its operations are vulnerable,
should those organizations fail to properly remediate their
computer systems.
10
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's financial position continues to be strong as a result of growth
in net sales and an increase in net income. The Company intends to rely on
cash generated from operations and investments to finance its working capital
requirements for at least the next 12 months. To the extent such amounts are
insufficient to finance the Company's working capital requirements, the
Company may also make periodic borrowings under its revolving line of credit.
During the quarter ended September 30, 1998, current assets and current
liabilities decreased by approximately $1.7 million and $1.8 million,
respectively. The decreases are attributed to the use of current assets to
reduce current liabilities.
For the three months ended September 30, 1998, the Company spent
approximately $101,000 for property and equipment, primarily for office
furniture and equipment and computer equipment.
The Company received proceeds of approximately $16,000 from the exercise of
stock options during the quarter ended September 30, 1998. Stockholders'
equity increased by approximately $260,000 for the quarter due primarily from
net income of $827,000, which was offset by the repurchase of the Company's
common stock at a cost of approximately $650,000.
RESULTS OF OPERATIONS
The Company's business is seasonal in nature, and therefore the results for
any one or more quarters are not necessarily indicative of the annual results
or continuing trends.
Net sales for the first quarter ended September 30, 1998, were approximately
$7.5 million, an increase of approximately $661,000, or 9%, from net sales of
$6.8 million for the same quarter in the prior fiscal year. The increase in
net sales is due to a combination of factors, including a wider distribution
of the women's and men's product lines.
The Company's gross profit, as a percentage of net sales, was 38% for both
the quarter ended September 30, 1998, and for the same quarter in the prior
fiscal year.
Selling, general and administrative expenses increased by approximately
$190,000 or 11% to $1.8 million for the first quarter ended September 30,
1998, from $1.7 million for the same quarter in the prior fiscal year. The
increase can be attributed to commissions paid to independent sales
representatives on higher sales volume, increased advertising and general
administration expenditures.
11
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Other income (expense) increased by approximately $8,000 for the first fiscal
quarter ended September 30, 1998 as compared to the same quarter in the prior
fiscal year. The increase is attributed to the write-down in the carrying
value of an available for sale investment security in the prior fiscal year.
Income before provision for income taxes and minority interest increased by
approximately $132,000, or 13%, for the first fiscal quarter ended September
30, 1998, from $1.0 million for the same quarter in the prior fiscal year.
The Company's effective tax rates for the quarters ended September 30, 1998
and September 30, 1997 were approximately 30% and 27%, respectively. The
increase in the effective rate for the current quarter was due to the
reduction in certain stock option tax deductions net of SFAS No. 123,
ACCOUNTING FOR STOCK BASED COMPENSATION book deductions.
Net income increased by approximately $75,000 or 25% to $827,000 for the
first fiscal quarter ended September 30, 1998 from approximately $752,000 for
the same quarter in the prior fiscal year.
Basic and diluted net income per share was $.18 for the quarter ended
September 30, 1998. This compares to basic and diluted earnings per share of
$.16 per share for the same quarter in the prior fiscal year.
12
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS - NONE
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS- NONE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4 SUBMISSION TO MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5 OTHER INFORMATION - NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K - NONE
13
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORT-HALEY, INC.
(Registrant)
Date: November 12, 1998 /s/ Robert G. Tomlinson
----------------- ------------------------
Robert G. Tomlinson
Chief Executive Officer
Date: November 12, 1998 /s/ Steve S. Auger
----------------- ------------------------
Steve S. Auger
Chief Accounting Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4440
<SECURITIES> 972
<RECEIVABLES> 6101
<ALLOWANCES> 54
<INVENTORY> 17569
<CURRENT-ASSETS> 30664
<PP&E> 4013
<DEPRECIATION> 1298
<TOTAL-ASSETS> 33649
<CURRENT-LIABILITIES> 1874
<BONDS> 0
0
0
<COMMON> 17783
<OTHER-SE> 13942
<TOTAL-LIABILITY-AND-EQUITY> 33649
<SALES> 7496
<TOTAL-REVENUES> 7496
<CGS> 4609
<TOTAL-COSTS> 4609
<OTHER-EXPENSES> 1842
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 1164
<INCOME-TAX> 350
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 827
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
