<PAGE>
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number: 1-12888
SPORT-HALEY, INC.
(Exact Name of Registrant as Specified in Its Charter)
COLORADO 84-1111669
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
4600 EAST 48TH AVENUE
DENVER, COLORADO 80216
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (303) 320-8800
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, NO PAR VALUE PER SHARE PACIFIC STOCK EXCHANGE
Securities registered pursuant to section 12(g) of the Exchange Act:
NONE
Indicate by checkmark whether the registrant (1) filed all reports required
to be filed by Section 13 or 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 such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 18, 1998, the aggregate market value of the 4,335,079 shares
of Common Stock (the registrant's only common equity) held by non-affiliates
was $42,808,905 based on the closing sale price of the Registrant's Common
Stock on the Nasdaq National Market-Registered Trademark- on such date. For
purposes of the foregoing calculation only, each of the Registrant's officers
and directors is deemed to be an affiliate.
There were 4,472,962 shares of the registrant's Common Stock outstanding at
the close of business on September 18, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. BUSINESS
GENERAL
Sport-Haley designs, contracts for the manufacture of, and markets
men's and women's quality fashion golf apparel known for its innovative
design, quality fabrics, generous fit and classic style. The Company's
apparel is sold under the distinctive Haley-Registered Trademark- label in
the premium and mid-price market through a network of independent sales
representatives and distributors, primarily to golf professional shops,
country clubs and resorts throughout the United States and internationally.
The Company has historically marketed its apparel to higher quality golf
professional shops, which generally offer superior customer service and which
enhance the appeal of the Haley brand name. These golf professional shops
prefer to sell quality apparel which is not broadly distributed in the retail
market. The Company has, over the years, expanded its marketing program and
is currently focusing those expanded marketing efforts on the corporate
market. The Company custom embroiders a majority of its men's apparel with a
customer's club, resort, or corporate logo, thereby promoting the image of
both Sport-Haley and its customers and enhancing the marketability of the
Company's products. Sport-Haley's apparel is presented semi-annually to the
golf industry in spring and fall collections. The Company was incorporated in
Colorado in January 1991. Its principal executive offices are located at 4600
East 48th Avenue, Denver, Colorado 80216, and its telephone number is (303)
320-8800.
PRODUCTS AND PRODUCT DESIGN
The Company's golf apparel currently consists of a men's line, a
women's line, the Elements line and a headwear line, all four of which are
marketed under the distinctive Haley-Registered Trademark- label. The Company
introduces spring and fall collections of those lines at the two major
industry trade shows, generally held in January and September of each year.
The spring collection typically accounts for approximately 60% of sales, with
the fall collection accounting for the remaining sales.
As the Company's sales have increased, the Company has expanded the
number of items available in each of the men's and women's lines, offering a
more extensive selection of styles, colors and fabrics. Each of the men's and
women's lines currently has between 130 and 150 pieces of apparel, including
shirts, pullovers, vests, shorts, sweaters, jackets and pants. The Company
also expanded the lines available by introducing the "Elements line" in
January 1996 and a headwear line in the fall of 1996. The Elements line is a
collection of outerwear for both men and women, currently consisting of over
80 pieces of apparel items such as rain suits, casual jackets, windshirts,
vests and pants. The headwear line consists of high quality fabric caps and
visors, designed in popular styles and a range of colors, typically
embroidered with the Company logo or a customer logo.
The Company's golf apparel is sold in the premium and mid- price
market. Apparel designed for premium pricing features larger sizing, higher
quality materials and more detailed designs. The following table sets forth
information regarding suggested retail price ranges for various apparel items.
<TABLE>
<CAPTION>
SUGGESTED RETAIL SUGGESTED RETAIL
MEN'S APPAREL PRICE RANGE WOMEN'S APPAREL PRICE RANGE
------------- ---------------- --------------- ----------------
<S> <C> <C> <C>
Shirts $45 - $80 Tops $48 - $70
Shorts $60 - $70 Shorts $60 - $84
Pants $80 - $120 Pants $70 - $112
Pullovers/Vests $50 - $100 Sweaters $50 - $140
Outerwear $50 - $380 Outerwear $50 - $225
Headwear $ 8 - $18 Headwear $ 9 - $18
</TABLE>
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The Company's golf apparel is designed in the classic style with
contemporary influences intended to develop and maintain brand recognition
and loyalty. Each product in a line of apparel is sold separately, although
the Company's designers use coordinated styles, color schemes and fabrics to
encourage purchase of multiple garments and headwear. The Company's garments
are manufactured from a variety of fabrics and weave patterns, including
interlock, pique, french terry and twill, and feature a unique trim, a
special fabric finish and extra needlework. Most of the garments are made
from 100% cotton fabric. The exceptions are certain women's apparel made of
silk and rayon and certain garments in the Elements outerwear line which use
Gore-tex-Registered Trademark- products, including Gore
Windstopper-Registered Trademark- fabric, non-exclusive rights to which are
licensed by the Company.
The design function within the Company is closely attuned to both
sales and production operations. The design process for each collection is an
ongoing process of coloring, styling, manufacturing of sample products and
the selection of sewing techniques. The Company relies on in-house designers
as well as outside contract designers in the development of its apparel
collections. The Company's design staff is responsible for coordinating
pattern and sample making, negotiating price and quantity with cutting and
sewing contractors, purchasing fabric and trim, and coordinating production
schedules with the Company's production personnel. The design staff also
coordinates inspection of fabric supplies, as well as sample testing of
fabric for shrinkage and colorfastness.
A majority of the men's apparel, and a smaller percentage of
women's apparel, is custom embroidered with a customer's club or resort logo
or the Company's Haley logo. In addition, the Company custom embroiders
shirts and other garments for tournaments, promotional events, and corporate
sales and gifts. Custom embroidery is performed on the Company's premises
using ten computer-controlled embroidering machines which together can
embroider over 3,000 custom logos in the two 8-hour daily shifts. The Company
currently has a library of over 3,000 custom logos. Embroidery charges are
added to the customer's wholesale cost and therefore represent an additional
source of revenue to the Company.
SALES AND MARKETING
OVERVIEW. The Company's marketing strategy is to enhance its
position as a leading provider of fashion golf apparel by capitalizing on the
market awareness of the Haley brand name and expanding distribution of
existing and proposed apparel lines. The Company intends to implement this
strategy by (i) increasing distribution through expansion of its network of
independent sales representatives, adding new golf professional shops to its
customer base and increasing purchases from existing customers, (ii) adding
new product lines, (iii) securing and exploiting distribution arrangements
for international sales, (iv) diversifying product lines by developing new
styles and designs which are natural variations on its existing apparel
designs, and (iv) increasing market penetration in the corporate market.
In the fiscal year ended June 30, 1998 ("fiscal 1998"),
approximately 84% of the Company's sales were made to domestic and foreign
golf course professional shops, country clubs and resorts. Approximately 15%
of the balance of the Company's sales were made to corporate, special event
and retail customers and the remaining 1% was sold through the Company's
factory outlet store in Laughlin, Nevada. No single customer accounted for 5%
or more of the Company's net sales.
GOLF PROFESSIONAL SHOPS, COUNTRY CLUBS AND RESORTS. Domestic sales
are made primarily through a network of approximately 34 independent sales
representatives who sell the Company's apparel, on a commission basis,
primarily to golf professional shops, country clubs and resorts. These
independent sales representatives, many of whom may also carry other
golf-related lines, are responsible for generating and serving customers in a
specific geographic territory. In January 1997, the Company starting entering
into buying programs with various entities whose golf professional shop members
can purchase directly from the Company under the programs. These buying programs
accounted for less than 10% of sales in fiscal 1998. International sales are
made through distributors in Canada, Puerto Rico, the Carribean Islands, Mexico,
Ireland, Japan, Chile, portions of Southeast Asia, the Philippines, Hong Kong,
Portugal and for U.S. military bases overseas. Although the Company has
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distributors in foreign countries, historically most of its sales have been
in the United States. Foreign sales represented only approximately 2% of
sales in fiscal 1998.
The Company's sales and marketing employees are responsible for
implementing marketing plans and sales programs, coordinating the Company's
network of independent sales representatives, providing customer service and
participating in industry trade shows. The Company supports the sales
activities of the independent sales representatives and distributors by
making customer service personnel available to them, providing detailed
catalogs for each collection which present pricing, sizing and style options,
and providing access to the Company's VRLink, a private electronic network
designed for the apparel industry. Using notebook computers, the
representatives can access current inventory availability and create and
transmit orders from a remote location, which enhances the representatives'
order processing speed and accuracy and reduces the risk of orders which
cannot be timely filled. VRLink also interfaces with the Company's management
system which provides management with key sales data which facilitates
planning, production scheduling, product tracking and standard cost control.
The Company also maintains a homepage at "www.sporthaley.com" on the
internet. The page is purely informational at present, providing limited
information about the Company and its apparel.
The Company introduces its golf apparel collections at the two
major golf industry trade shows held generally in January and September of
each year in Orlando, Florida, and Las Vegas, Nevada, respectively. Because
many buyers for golf professional shops attend one or both of these trade
shows, the Company will usually receive a significant number of customer
orders at or following each trade show. At these trade shows, the Company
also obtains consumer response to apparel designs, fabrics and styles and
other information necessary to prepare more accurate and detailed sales
forecasts.
In order to enhance the visibility of the Haley brand, the Company
has endorsement agreements with several select PGA and LPGA professionals.
The Company also has an agreement with a Canadian Tour professional, which
exemplifies the Company's commitment to the international markets. The
endorsement agreements generally provide that the professionals will endorse
and wear the Company's apparel. The compensation received by the endorsing
professionals consists of apparel allowances and in some cases, cash. In the
past, the Company granted stock options based upon the professionals
achieving certain benchmarks at designated PGA Tour or other major
tournaments as a portion of the professionals' endorsement compensation.
The Company advertises its apparel in several golf industry
publications which are distributed primarily to operators of golf
professional shops. The Company also expends a portion of its advertising
budget to support the sales activities of its network of independent sales
representatives. International distributors provide and pay for advertising
in their respective geographic territories.
CORPORATE MARKET. The Company believes that there is a natural
synergy between the golf market and corporate market as both markets can be
served from substantially the same inventory, allowing the Company to respond
quickly to a shifting demand in either market. The Company has developed
several direct corporate accounts. In March 1998, the Company hired a new
Vice President of Corporate Sales to pursue sales in the corporate market
more aggressively. The Company is actively pursuing this market primarily
though promotional product companies, who source and supply a variety of
products for corporate fulfillment programs and special events. These
promotional product companies generally create a corporate catalog containing
products bearing the corporate logo, which products are used for employee
recognition, customer appreciation and other corporate purposes. The
promotional product company will also source and supply a specific product or
products for special events sponsored by the corporation. The Company's
apparel is currently appearing, or confirmed to appear, in a variety of
catalogs, including catalogs for several Fortune 500 companies. The Company
does not enter into a formal agreement or contract with these promotional
product companies but does agree that it will keep an inventory of the
products advertised in any specific catalog during the period the catalog is
being used, generally a one year period. The Company generally selects a
limited number of its most popular styles of golf apparel
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and includes those in its corporate catalog. As this inventory must be
maintained for a longer period of time, the Company does not feature two
different annual collections in its corporate catalog.
RETAIL AND FACTORY OUTLET SALES. The Company sells a small
percentage of its apparel in the upscale retail market. The Company also
maintains a 2,200 square feet factory outlet store in Laughlin, Nevada. Since
June 1996, the Company has used this facility to sell close-out inventory and
discontinued styles at discounted retail prices, as opposed to discounted
wholesale prices, enabling the Company to maximize sales revenue attributable
to close-out inventory.
COMPETITION
The golf apparel market, both domestically or internationally, is
highly fragmented and no single company has in excess of 10% of the market.
The Company currently views Ashworth, Izod Club, Polo/Ralph Lauren
Corporation, Tommy Hilfiger and Cutter & Buck Inc. as its most significant
competitors in the golf apparel market. In addition to competing with golf
apparel manufacturers, the Company must also compete with manufacturers of
high quality men's and women's sportswear and general leisure wear such as
Nike, Polo/Ralph Lauren Corporation, Tommy Hilfiger and Nautica Enterprises
Inc. Many of these same companies are competitors in the corporate market.
Competition is intense and is based primarily on brand recognition and
loyalty, quality, price, style and design, service and availability of shelf
space in the golf apparel market. Many of the Company's competitors have
longer operating histories, better name recognition and greater financial,
marketing and other resources than the Company. Because of the intense
competition, there can be no assurance that the Company will be able to
increase or even maintain its market share or that it will not be required to
reduce prices or accept reduced margins.
RAW MATERIALS SOURCING AND FINISHED GOODS PURCHASING
The Company purchases its fabric in bulk from approximately 15
different domestic and foreign mills, the seven largest of which accounted
for approximately 68% of the Company's fabric expenditures in fiscal 1998.
Substantially all of the Company's apparel is manufactured with 100% cotton
fabrics, except certain women's apparel made of silk and rayon and certain
garments in the Elements outerwear line which use the Gore
Windstopper-Registered Trademark- fabric. The Company utilizes various
suppliers to provide different portions of the Elements line, but loss of one
or more of these suppliers could potentially affect the Company's ability to
make timely delivery of outerwear. The Company's raw materials also include
trim consisting principally of buttons, collars, bands, linings, labels,
zippers and headwear components such as bills and adjustable bands. The
Company purchased trim from several suppliers during fiscal 1998, with the
four largest suppliers accounting for approximately 80% of total trim
expenditures.
The Company does not have any formal contractual arrangements for
the purchase of raw materials from its suppliers, but issues purchase orders
as raw materials are required. Although the Company believes that all of the
components of its apparel are available from a large number of domestic and
foreign sources, the inability of the Company to secure raw materials from
existing suppliers during periods of high seasonal demand could result in
delays in deliveries to customers, thereby adversely affecting the Company's
profitability.
The Company's production personnel oversee its raw material
sourcing. Production personnel are responsible for ensuring on-time delivery
of raw materials and negotiating costs consistent with the Company's desired
profit margins. Production personnel inspect samples of each item prior to
the commencement of actual production and consult with design personnel in
order to ensure that the Company's high quality standards are maintained.
The Company also purchases finished goods which are manufactured by
outside suppliers to the Company's specifications. The Company assists
outside suppliers in sourcing of raw materials for these finished
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products, but does not purchase the fabric and trim for the suppliers. In
fiscal 1998, the Company estimates that approximately 15% to 20% of the
Company's apparel was purchased as finished goods.
MANUFACTURING
With the exception of embroidery operations and headwear sewing and
assembly which are done at the Company's facility in Denver, Colorado., all
manufacturing activities are undertaken by "cutting and sewing" contractors.
Following the purchase of raw materials, the Company arranges for shipment of
these materials directly to cutting and sewing contractors who are located
primarily in the United States and its territories. These contractors are
responsible for cutting and sewing apparel to the Company's specifications.
During fiscal 1998, the Company used nine cutting and sewing contractors,
although approximately 75% of the Company's apparel was produced by five of
these cutting and sewing contractors. In April 1998, the Company acquired a
52% ownership interest in one of its principal cutting and sewing
contractors. As a majority-owned subsidiary of the Company (the
"Subsidiary"), that contractor is manufacturing exclusively for the Company.
Purchase of the contractor assures the Company of the manufacturing capacity
necessary to expand corporate and retail sales and to position the Company
to remain competitive and maintain historical margins. The Company has no
contractual arrangements other than purchase orders with any of its other
cutting and sewing contractors and believes that these services may be
purchased by the Company from a large number of domestic and foreign sources.
The Company receives its orders for the spring or fall collections
over a period commencing when samples are first shown to customers and
continuing through the season. The Company must schedule production in
advance of order placement, although it can respond to order trends over the
period by sequencing production with reorders. Because production of the
Company's apparel collections is time-sensitive, the Company devotes
considerable efforts to the preparation of forecasts of apparel sales by item
and style. The Company's computer management system provides management with
key data which facilitates planning, production scheduling, product tracking
and standard cost control, as well as providing a perpetual inventory record
and inventory availability.
Finished apparel is shipped to the Company's warehouse facilities
in Denver, Colorado, for embroidery, final inspection by the Company's
quality assurance personnel, packaging and shipping. The Company maintains
ten computer-controlled embroidering machines on its premises which together
can embroider a minimum of 3,000 custom logos in the two 8-hour daily shifts
run by the Company. One of the Company's 15-head embroidery machines is used
primarily for headwear embroidery operations. A majority of the Company's
men's shirts are custom embroidered with a golf course, country club, resort
or company logo, or with the Company's own Haley logo. A lesser percentage of
women's apparel is similarly embroidered.
NATURE OF BUSINESS
Golf apparel sales in golf professional shops tend to be seasonal
in nature, with a disproportionate share of sales occurring from January
through June, which are the Company's third and fourth fiscal quarters of
each year. Note 25 in the accompanying financial statements shows unaudited
quarterly comparisons of sales during the past two fiscal years. Increases in
sales in other markets, such as the corporate market and the international
market, should reduce the impact of seasonality.
The amount of backlog at any particular time is affected by a
number of factors, including the timely flow of product from suppliers and
contractors, which can impact the Company's ability to ship on time, and
timing of orders from customers. Accordingly, a comparison of the Company's
very small backlog of orders from period to period is not necessarily
meaningful and may not be indicative of eventual actual shipments during any
specific period. In addition, the Company ships partial orders if they are at
least 75% to 80% complete. Orders may be changed or canceled up to 30 days
prior to the ship date of the order. The Company does not sell its apparel on
consignment nor accept returns of purchased apparel other than apparel which
is damaged or which is delivered after the specified delivery date. The
Company's returns and allowances were approximately 3% of net sales in
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fiscal 1997 and 4% in fiscal 1998. The Company's experience has been that the
cancellations, rejections or returns of orders do not materially reduce the
amount of sales realized from its backlog.
TRADEMARK
The Company markets its products under the Haley label. The
Company has registered the Haley mark and the distinctive "H" design with the
United States Patent and Trademark Office. The Company has also registered
the Haley mark in a number of foreign countries.
EMPLOYEES
At June 30, 1998, the Company had 130 full-time employees and 12
part-time employees, including 35 full-time and two part-time administrative
employees, 10 marketing employees, 69 full-time and 3 part-time personnel in
inspection, packaging, embroidering and distribution operations, one
full-time and seven part-time retail employees in the factory outlet store,
and 15 full-time employees in headwear operations. The Company's employees
are not represented by a union and the Company considers its relations with
its employees to be good. The Company's Subsidiary has four administrative
employees and 97 manufacturing employees.
MANAGEMENT INFORMATION SYSTEMS AND INVENTORY MANAGEMENT
The Company utilizes an integrated computer system to manage all
business transactions, historical data and record keeping, from sourcing to
warehousing to embroidery to shipping. This system provides information to
all departments in the Company's infrastructure. The VRLink system used by
the Company's sales representatives interfaces with the main system to
provide sales representatives with inventory information and order entry
capability which has allowed the sales force to order against actual
inventory availability. The Company's computer system has improved the
Company's operations by providing information critical to forecasting such as
analysis of sales history, purchasing history, and future customer commitments
which allows the Company to better manage and purchase inventory. It also has
allows the Company to control and manage existing inventory.
YEAR 2000 COMPUTER CONVERSION
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 code field. These date code fields will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. The issue
is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or fail.
As a result, in less than two years, computer systems and/or
software used by the Company will need to be upgraded to comply with such
Year 2000 requirements. The Company 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 Company does not anticipate any
material expenditures will be required in future periods to achieve Year 2000
compliance.The Company has initiated discussions with significant suppliers,
large customers and financial institutions to ensure those parties have
appropriate plans to solve Year 2000 issues where their systems interface
with the Company's system or otherwise impact its operations. The Company is
assessing the extent to which its operations are vulnerable should those
organizations fail to properly solve Year 2000 issues, if any.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 AND RISK FACTORS
This Report on Form 10-K contains certain forward-looking
statements . When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," "believe" and
similar expressions are intended to identify forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934 regarding events, conditions and
financial trends including, without limitation, business conditions and
growth in the fashion golf apparel market and the general economy,
competitive factors, price pressures in the high-end market; inventory risks
due to shifts in market and/or price erosion of purchased apparel, raw fabric
and trim; changes in product mix; and other risks or uncertainties detailed
in other of the Company's Securities and Exchange Commission filings . Such
statements are based on management's current expectations and are subject to
risks, uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
the Company's actual plan of operations, business strategy, operating results
and financial position could differ materially from those expressed in, or
implied by, such forward-looking statements.
ITEM 2. PROPERTIES
The Company's executive offices and warehouse facilities are
located in Denver, Colorado and consist of 96,500 square feet of floor space.
The facility is currently leased for an annual base rent of approximately
$198,300, which increases incrementally to $206,000 in 2001. The Company is
obligated to pay taxes, insurance and maintenance expenses for the leased
space through expiration of the lease in October 2001. The Company also
leases approximately 2,200 square feet of retail space in its factory outlet
store in Laughlin, Nevada. The annual base rental for this space is $44,000
during the first three years of the lease and $48,000 for the remaining four
years. The Company's majority owned Subsidiary leases 22,000 square foot of
manufacturing facilities in Four Oaks, North Carolina from the Subsidiary's
two minority shareholders. The lease commenced on April 1, 1998 and expires
March 31, 2008, subject to the Subsidiary's right to extend the lease term
for two additional five year periods. The annual lease payments are $64,991
and the Subsidiary must pay all utilities, taxes, insurance and certain
fixture repairs.
ITEM 3. LEGAL PROCEEDINGS
At June 30, 1998, the Company was not a party to any material legal
proceeding. However, the Company and its Chief Executive Officer are named
as defendants in counterclaims to a complaint filed by the Company against a
former officer, director and principal shareholder of the Company. The
Company's complaint alleges breach of a consulting and non-compete agreement,
breach of duty of loyalty and interference with contracts. The counterclaim
against the Company alleges breach of the agreement and defamation and the
counterclaim against the Company's Chief Executive Officer alleges
defamation. The Company's Chief Executive Officer filed a counterclaim
alleging breach of the agreement and defamation. The Company and its Chief
Executive Officer deny the counterclaim allegations and intend to vigorously
prosecute this action. Although the eventual outcome cannot be predicted,
management believes that neither the Company's financial position nor results
of its operations will be materially affected by this legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1998 to
a vote of security holders through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is quoted on The Nasdaq Stock
Market-Registered Trademark- under the trading symbol SPOR and on the Pacific
Stock Exchange under the symbol SHY. The following table sets forth the range
of high and low sale prices, as reported by The Nasdaq Stock Market, from
July 1, 1995 through June 30, 1998. The prices set forth below reflect
interdealer quotations, without retail markups, markdowns or commissions, and
may not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR 1996 HIGH LOW
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<S> <C> <C>
First Quarter $ 10 1/2 $ 8 7/8
Second Quarter 10 5/8 8 7/8
Third Quarter 12 9 5/8
Fourth Quarter 16 7/8 11
FISCAL YEAR 1997
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First Quarter $ 16 1/8 $ 10 7/8
Second Quarter 16 3/8 12 1/4
Third Quarter 18 1/2 12 1/2
Fourth Quarter 20 1/8 14 5/8
FISCAL YEAR 1998
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First Quarter $ 18 1/8 $ 12 1/4
Second Quarter 15 3/8 10
Third Quarter 13 9
Fourth Quarter 14 1/8 10 1/4
</TABLE>
On September 18, 1998 the closing sale price of the Common Stock
was $9.875. As of September 18, 1998, the number of record holders of the
Company's Common Stock was approximately 78. Based on the number of broker
requests for proxy material for the 1997 Annual Meeting of Shareholders, the
Company believes that it has approximately 2,500 beneficial holders.
Holders of Common Stock are entitled to receive such dividends as
may be declared by the Company's Board of Directors. No dividends on the
Common Stock have been paid by the Company, nor does the Company anticipate
that dividends will be paid in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data should be read
in conjunction with the Consolidated Financial Statements and related Notes
thereto appearing elsewhere in this report on Form 10-K and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The consolidated statements of operations data for each of the years in the
three-year period ended June 30, 1998 and the balance sheet data at June 30,
1998 and 1997 are derived from the consolidated financial statements of the
Company which have been audited by Levine, Hughes & Mithuen, Inc., the
Company's independent auditors, as indicated in their report included herein.
The statements of operations data for each of the years in the two-year
period ended June 30, 1995 and the balance sheet data at June 30, 1996, 1995
and 1994 are derived from the financial statements of the Company which have
been audited by Levine, Hughes & Mithuen, Inc., the Company's independent
auditors, but their report for such periods are not included herein. The
selected financial data provided below is not necessarily indicative of the
future results of operations or financial performance of the Company.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 31,299 $ 28,900 $ 20,287 $ 12,567 $ 6,649
Cost of Goods Sold............................ 18,406 16,820 11,719 7,465 4,296
Gross profit.................................. 12,893 12,080 8,568 5,102 2,352
Selling, general and administrative expenses.. 7,681 6,970 4,995 3,361 1,747
Income from operations........................ 5,212 5,110 3,573 1,741 605
Interest and other income, net................ 290 390 352 279 50
Income before minority interest and
provision for income taxes.................. 5,502 5,500 3,925 2,020 655
Income taxes.................................. 1,238 1,590 1,453 743 248
Net income.................................... 4,264 3,910 2,472 1,277 407
Net income per common and
equivalent shares outstanding (basic)....... .93 .84 .66 .40 .23
Net income per common and
equivalent shares outstanding (diluted)..... .93 .84 .65 .40 .22
Weighted average common and
equivalent shares outstanding (basic)...... 4,564,355 4,658,796 3,769,859 3,201,303 1,769,565
Weighted average common and
equivalent shares outstanding (diluted).... 4,592,751 4,627,879 3,787,251 3,201,303 1,805,989
<CAPTION>
JUNE 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................... $ 28,658 $ 26,251 $ 21,427 $ 10,786 $ 5,233
Total assets.................................. 35,236 30,922 27,766 14,211 6,711
Total liabilities............................. 3,771 2,216 3,400 2,269 1,118
Shareholders' equity.......................... 31,465 28,706 24,365 11,942 5,593
</TABLE>
-10-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND NOTES THERETO.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of net sales represented by items included in or derived from the
Company's statements of income:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. 58.8 58.2 57.8 59.4 64.6
------ ------ ------ ------ ------
Gross profit................................... 41.2 41.8 42.2 40.6 35.4
Selling, general and administrative expenses... 24.5 24.1 24.6 26.7 26.3
------ ------ ------ ------ ------
Income from operations......................... 16.7 17.7 17.6 13.9 9.1
Interest and other, net........................ .9 1.3 1.8 2.2 .7
------ ------ ------ ------ ------
Income before minority interest and
provision for income taxes................... 17.6 19.0 19.4 16.1 9.8
Income taxes................................... 4.0 5.5 7.2 (5.9) 3.7
------ ------ ------ ------ ------
Net income..................................... 13.6% 13.5% 12.2% 10.2% 6.1%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1998 AND 1997. Net sales
for the year ended June 30, 1998 ("fiscal 1998") were approximately $31.3
million, an increase of approximately $2.4 million, or 8%, as compared to
approximately $28.9 million for the fiscal year ended June 30, 1997 ("fiscal
1997"). This increase was due to many of the same factors which have
contributed to increases in prior years, including a greater number of
products offered within each line, greater sales volume, greater market
penetration, and higher sales per account. Other factors which contributed to
the increase during fiscal 1998 were a full year's sales of the headwear line
and growth in the Elements line. The men's and women's line accounted for
approximately 45% and 44%, respectively, of total net sales, the Elements
line accounted for approximately 8% of total net sales and the headwear line
accounted for approximately 3%. Although net sales increased, growth was
slower than it has been historically. Management believes that sales growth
was negatively impacted by canceled sales orders and increased returns and
allowance costs, primarily resulting from late shipments during the UPS strike.
Management also believes that inclement weather attributed to El Nino
dampened sales in fiscal 1998 to many of its golf professional shops in
California, North and South Carolina, Florida and Arizona.
Gross profit increased by approximately $800,000, or 7%, from
approximately $12.1 million in fiscal 1997 to approximately $12.9 million in
fiscal 1998. Increased sales was the primary factor contributing to this
increase. The cost of goods sold as a percentage of net sales increased
slightly due to certain overhead costs which must be included in cost of
goods sold and higher shipping costs during the UPS strike. This percentage
increase in cost of goods sold resulted in a corresponding slight decrease in
gross profit as a percentage of net sales.
Selling, general and administrative expenses for fiscal 1998 were
approximately $7.7 million, an increase of approximately $700,000, or
approximately 10%, compared to $7.0 million for fiscal 1997. As in prior
years, factors contributing to the increase included commissions to
independent sales representatives on higher sales levels and increased
marketing expenditures. Selling, general and administrative expenses for
fiscal 1998 increased only slightly as a percentage of net sales, from 24.1%
in fiscal 1997 to 24.5% in fiscal 1998.
-11-
<PAGE>
Net other income and expenses decreased from approximately $389,000
in fiscal 1997 to approximately $285,000 in fiscal 1998, resulting primarily
from a decrease in investment income, a write down of a security and no tax
refund as in the prior year.
Income before minority interest and provision for income taxes of
approximately $5.5 million in fiscal 1997 decreased by approximately $3,000.
In fiscal 1998, the Company acquired a 52% interest in one of its cutting and
sewing contractors. The minority shareholders' share of income of
approximately $6,000 was deducted from income. Provision for income taxes
decreased approximately $351,000 from approximately $1.6 million in fiscal
1997 to approximately $1.2 million in fiscal 1998 with the effective tax rate
for fiscal 1997 being 29% and for fiscal 1998 being 23%. The decrease in the
tax rate in fiscal 1998 was because of a higher deduction for stock
option compensation recognized for tax purposes but not recorded on the
Company's books for financial statement purposes.
Net income increased from approximately $3.9 million in fiscal 1997
to approximately $4.3 million in fiscal 1998, an increase of 10%. This
increase can be attributed to the factors discussed above, and resulted
primarily from increases in sales volume, the Company's control of the cost
of goods and corresponding margins, its control of operating expenditures and
a decrease in income taxes.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1996. Net sales
for the year ended June 30, 1997 ("fiscal 1997") were $28.9 million, an
increase of $8.6 million, or approximately 42%, as compared to $20.3 million
for the fiscal year ended June 30, 1996 ("fiscal 1996"). This increase was
due to many of the same factors which have contributed to increases in the
prior years, including a greater number of products offered within each line,
greater market penetration, and higher sales per account. Other factors which
contributed to the increase during fiscal 1997 were a full year's sales of
the Elements line, the introduction of the headwear line and the opening of
the factory outlet store. The men's and women's line accounted for
approximately 52% and 47%, respectively, of total net sales. Men's line and
women's line sales increased 52% and 31%, respectively, in fiscal 1997 over
fiscal 1996.
Gross profit increased by $3.5 million, or approximately 41%, from
$8.6 million in fiscal 1996 to $12.1 million in fiscal 1997. The increase in
gross profit was primarily a result of the same factors as in prior years,
which were a combination of increased sales, volume purchasing of raw
materials and better pricing from outside cutting and sewing contractors. The
cost of goods sold as a percentage of net sales increased slightly due to an
increase in certain design costs and due to changes in the product sales mix,
as the various lines have different margins.
Selling, general and administrative expenses for fiscal 1997 were
$7.0 million, an increase of $2.0 million, or approximately 40%, compared to
$5.0 million for fiscal 1996. This increase was primarily attributable to
payroll costs associated with the additional personnel required to handle
increased sales volume, manufacturing of the headwear line and operation of
the factory outlet store. In addition, as in prior years, other factors
contributing to the increase included commissions to independent sales
representatives on higher sales levels and increased advertising and
marketing expenditures. And finally, the Company incurred lease expense for
the factory outlet store and a full years' increased costs for the additional
space leased at the Company's facility for the new headwear line. However, as
a percentage of net sales, selling, general and administrative expenses
decreased from 24.6% in fiscal 1996 to 24.1% in fiscal 1997.
Net other income and expenses increased from $353,000 in fiscal
1996 to $389,000 in fiscal 1997, resulting primarily from an increase in
interest earned on invested funds and an income tax refund, offset by
expenditures to repurchase non-qualified stock options.
Income before provision for income taxes increased $1.6 million, or
approximately 41%, from $3.9 million in fiscal 1996 to $5.5 million in fiscal
1997. Provision for income taxes increased $136,000 from $1.5 million in
fiscal 1996 to $1.6 million in fiscal 1997. Income taxes for both of these
fiscal years were affected by
-12-
<PAGE>
certain income tax timing differences between book and taxable income. The
effective tax rate for fiscal 1996 was 37% and for fiscal 1997 was 29%.
Net income increased from $2.5 million in fiscal 1996 to $3.9
million in fiscal 1997, an increase of 56%. This increase can be attributed
to the factors discussed above, but resulted primarily from increases in
sales volume and the Company's control of cost of goods sold and operating
expenditures. This represents growth in net income as a percentage of net
sales from 12.2% in fiscal 1996 to 13.5% in fiscal 1997.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1996 AND 1995. Net sales
for fiscal 1996 were approximately $20.3 million, an increase of $7.7
million, or approximately 61%, as compared to approximately $12.6 million for
the fiscal year ended June 30, 1995 ("fiscal 1995"). This increase was due to
a combination of factors, including a greater number of products offered
within each line, greater market penetration, and higher sales per account
among a majority of accounts. The men's and women's line each accounted for
approximately 50% of total net sales. Men's line and women's line sales
increased 58% and 67%, respectively, in fiscal 1996 over fiscal 1995.
Gross profit increased by $3.5 million, or 68%, from $5.1 million
in fiscal 1995 to $8.6 million in fiscal 1996. The decrease in cost of goods
sold as a percentage of net sales and the increase in gross profit as a
percentage of net sales was primarily a result of the combination of
increased sales, volume purchasing of raw materials and greater economies in
the utilization of outside contractors for manufacturing services.
Selling, general and administrative expenses for fiscal 1996 were
$5.0 million, an increase of $1.7 million, or approximately 52%, compared to
$3.3 million for fiscal 1995. This increase was primarily attributable to
personnel additions necessary to handle increased sales volume, commissions
to independent sales representatives on higher sales levels, increased
advertising and marketing expenditures, and increased costs for the
additional space leased at the Company's facility during fiscal 1996 for its
new headwear division. However, as a percentage of net sales, selling,
general and administrative expenses decreased from 26.7% in fiscal 1995 to
24.6% in fiscal 1996.
Net other income increased from $279,000 in fiscal 1995 to $353,000
in fiscal 1996, resulting primarily from increased interest on invested funds.
Income before provision for income taxes increased $1.9 million, or
approximately 95%, from $2.0 million in fiscal 1995 to $3.9 million in fiscal
1996. Provision for income taxes increased $711,000 from $743,000 in fiscal
1995 to $1.5 million in fiscal 1996. Income taxes for both of these fiscal
years were affected by certain tax timing differences between book and
taxable income. The effective tax rate for each of the two years was 37%.
Net income increased from $1.3 million in fiscal 1995 to $2.5
million in fiscal 1996, or 92%. This increase can be attributed to increases
in sales volume, and the Company's control of cost of goods sold and
operating expenditures. This represents growth in net income as a percentage
of net sales from 10% in fiscal 1995 to 12% in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant growth in the past five
years, with its net sales increasing from $4.0 million in fiscal 1993 to
$31.3 million in fiscal 1998. Historically, the Company has financed its
operations through a combination of bank loans, related party borrowings, the
private and public sale of equity, and revenue from operations.
-13-
<PAGE>
Since April 1994, the Company maintained a revolving line of credit
with the same bank. The revolving line of credit agreement, which has been
renewed through October 31, 1999, provides for interest at 1/2% below the
bank's prime rate. At the time of its most recent renewal, the revolving line
of credit provided for a maximum loan amount of $10.0 million. Subsequent to
the purchase of the Subsidiary, the revolving line of credit agreement was
amended and divided into two agreements, one of which provides for a maximum
loan amount of $9.0 million to the Company secured by a lien on substantially
all of the Company's assets and the other of which provides for a maximum
loan amount of $1.0 million to the Subsidiary secured by a lien on
substantially all of the Subsidiary's assets. The Company generally maintains
its line of credit solely to facilitate the issuance of letters of credit for
inventory purchases from offshore suppliers and to fund any temporary working
capital needs. The Subsidiary drew approximately $500,000 on its revolving
line of credit in May of 1998 in order to repay a $386,317 loan made by the
Company to the Subsidiary at closing of the Subsidiary's acquisition, to
purchase additional equipment and to use as operating capital.
In March and April, 1996 the Company completed a public offering of
1,020,000 shares of its Common Stock, which included an over allotment of
150,000 shares. The Common Stock was offered at $10.50 per share. The Company
realized gross proceeds of approximately $10.7 million and net proceeds of
approximately $9.6 million after deducting stock offering costs of
approximately $1.1 million. The Company used a portion of the proceeds to
fund expenditures related to its new headwear operations and has retained the
balance of the proceeds to finance, as needed, growth in inventories,
accounts receivable and other operating expenditures. The Company has also
received $688,000 and $1.9 million in proceeds from the exercise of stock
options and warrants during fiscal 1998 and fiscal 1997, respectively.
Since December 1994, management has had the Board of Directors'
authorization to repurchase shares of the Company's Common Stock. Of the
850,000 shares which have been authorized for repurchase, 400,000 had been
repurchased at June 30, 1998 at an aggregate cost of approximately $4.7
million. In fiscal 1998, the Company repurchased 240,000 shares at a cost of
approximately $2.7 million. The Board's authorization is based on its belief
that the Company's Common Stock is underpriced at times given its earnings
and prospects. The shares may be repurchased 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 authorized shares. All
shares purchased are canceled and returned to the status of authorized but
unissued Common Stock.
Net cash used by operating activities totaled approximately $2.2
million for fiscal 1998 as compared to net cash provided by operating
activities of $100,000 in fiscal 1997. The primary component of cash used in
operating activities was inventory. Inventory increased to $17.9 million at
June 30, 1998 as compared to $10.0 million at June 30, 1997. The growth in
inventory reflects trends in sales, the determination to expand corporate
sales and the consequential necessity to carry inventory for a period of one
to three years to fulfill corporate catalog orders, a slight change in the
manufacturing timetable to ensure timely deliveries of the fall collection,
and the success of the Elements line.
Working capital requirements are expected to continue to grow as
the Company expands its inventory and, seeks to increase sales. Working
capital was approximately $28.7 million at June 30, 1998, compared to
approximately $26.3 million and $21.4 million at the end of fiscal 1997 and
1996, respectively. In March 1998, the Company acquired 52% of the
outstanding shares of capital stock of the Subsidiary for $171,980 in cash
paid out of working capital. As of June 30, 1998, the Company had cash and
cash equivalents of approximately $6.5 million.
The Company intends to rely on cash generated from operations and
cash from 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
periodically borrow under its revolving line of credit.
-14-
<PAGE>
All of the Company's purchases from off-shore manufacturers and
sales to foreign distributors are U.S. Dollar denominated and, consequently,
there is no currency exchange risk.
Management believes that inflation has not had a material effect on
the Company's results of operations during the three most recent fiscal years.
NEW ACCOUNTING STANDARDS
Please refer to Note 2 - Summary of Significant Accounting Policies
in the accompanying financial statements for recent pronouncements by the
Financial Accounting Standards Board ("FASB") of Statements of Financial
Accounting Standards No. 130 and 131 and Note 20 - Net Income Per Share in
the accompanying financial statements for a recent pronouncement of Statement
of Financial Accounting Standard No. 128.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants.................. F-1
Consolidated Balance Sheets......................................... F-2
Consolidated Statements of Income................................... F-3
Consolidated Statement of Shareholders' Equity...................... F-4
Consolidated Statements of Cash Flows............................... F-5
Notes to Consolidated Financial Statements.......................... F-6
</TABLE>
SELECTED QUARTERLY FINANCIAL DATA
Please refer to Note 25 - Quarterly Financial Information
(Unaudited) in the accompanying financial statements for a comparison of
certain unaudited financial data for each of the quarters in fiscal 1997 and
1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-15-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ---------
<S> <C> <C>
Robert G. Tomlinson(1) 57 Chairman of the Board and
Chief Executive Officer
Robert W. Haley 53 President and Director
Steve S. Auger 53 Secretary, Treasurer and Controller
Catherine B. Blair 47 Vice President - Merchandising/Design
Kevin M. Tomlinson 38 Vice President - Operations
Grant M. Beeman 39 Vice President - Manufacturing
William L. Blair 56 Vice President - Corporate Sales
Mark J. Stevenson(1)(2) 60 Director
Ronald J. Norick(2) 57 Director
James H. Everest(1)(2) 50 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Officers are appointed by and serve at the discretion of the Board
of Directors except in those instances that officers are employed under
employment agreements. Each director holds office until the next annual
meeting of shareholders or until a successor has been duly elected and
qualified. All of the Company's officers devote full-time to the Company's
business and affairs.
ROBERT G. TOMLINSON has served as Chairman of the Board and Chief
Executive Officer of the Company since October 1992. Since March 1998, he
has also served as a director of the Subsidiary. Prior to joining the
Company, Mr. Tomlinson was a partner in Tomlinson Enterprises, a real estate
investment partnership, and also engaged in management of his personal
investment portfolio. Mr. Tomlinson is the father of Kevin Tomlinson, the
Vice President of Operations.
ROBERT W. HALEY has served as President and a director of the
Company since May 30, 1996. From January 1992 until his appointment to such
positions, he served as Vice President of Marketing of the Company. Prior to
joining the Company, Mr. Haley served in various marketing positions for golf
apparel manufacturers. Mr. Haley is a Class A PGA professional golfer with
25 years experience in the golf industry.
STEVE S. AUGER served as Controller of the Company since July 1993.
In January 1996, he was appointed Secretary and Treasurer. Since March
1998, he has also served as a director of the Subsidiary and as its Secretary
and Treasurer. Prior to joining the Company, Mr. Auger served in various
accounting positions.
-16-
<PAGE>
CATHERINE B. BLAIR has served as Vice President of
Merchandising/Design since her appointment in May 1996. Ms. Blair has been
part of the Company's design team since 1992, and was appointed Director of
Design in 1995. Prior to joining the Company, she was a designer for a
golfwear company and also worked as a freelance designer for companies such
as Macy's, Bloomingdale's, Ann Taylor and The Gap.
KEVIN M. TOMLINSON has served as Vice President of Operations since
December 1997. From 1992 until joining the Company, Mr. Tomlinson was
employed by Nu-Kote International, Inc., an office products manufacturer and
distributor, in capacities including vice president of product marketing,
vice president of marketing, vice president of global procurement and vice
president of retail sales. Prior to that time, he was employed by other
office products manufacturers and distributors in various marketing,
purchasing, merchandising and operations capacities. Mr. Tomlinson is the son
of R.G. Tomlinson, the Chairman and Chief Executive Officer of the Company.
GRANT M. BEEMAN has served as Vice President of Manufacturing since
November 1997 and since March 1998, he has also served as a Vice President of
the Subsidiary. From September 1992 until joining the Company, Mr. Beeman was
employed by Carlyle Golf, Inc., a Denver based manufacturer of men's golf
apparel, as vice president of Manufacturing and Design. Prior to that time,
he was a designer and salesman for a design company he founded. That company
manufactured active sportswear for polo clubs and retail stores, such as
Bloomingdale's.
WILLIAM L. BLAIR has served as Vice President of Corporate Sales
since March 1998. From September 1996 until joining the Company, Mr. Blair
was director of marketing for the Activewear Division of Fruit of the Loom.
From 1992 to 1996, Mr. Blair was a director of and consultant to Osterman
API, Inc., a promotional product company. Prior to that, he held various
executive positions with outerwear manufacturers, headwear manufacturers and
companies in the promotional products industry.
MARK J. STEVENSON has been a director of the Company since November
1993. Since June 1, 1994, Mr. Stevenson has served as chairman of the board,
president and chief executive officer of Electronic Manufacturing Systems,
Longmont, Colorado, a contract manufacturer serving the computer, data
storage, telecommunications and medical equipment industries. From 1992 to
1994, Mr. Stevenson served as chairman of the board of Micro Insurance
Software, Inc., Boulder, Colorado, a manufacturer of computer software
oriented to the insurance industry. Prior to that time, he served in various
positions in which he was responsible for sales, marketing, customer support
and product management.
RONALD J. NORICK has been a director of the Company since November
1993. From April 1987 until April 1998, Mr. Norick served as the elected
Mayor of the City of Oklahoma City, Oklahoma. From 1960 to 1992, Mr. Norick
served in various capacities, including serving as president from 1981 to
1992, of a closely-held printing company which was acquired by Reynolds &
Reynolds in June 1992. Mr. Norick serves on a number of civic, community,
educational, corporate and public boards, commissions and committees. Mr.
Norick serves as manager of Norick Investments Company LLC, a family-owned
limited liability company which is engaged in investments.
JAMES H. EVEREST has been a director of the Company since November
1993. Mr. Everest has served as president of the Jean I. Everest Foundation,
Oklahoma City, Oklahoma, since 1991. The Jean I. Everest Foundation was
organized by Mr. Everest's father to conduct charitable activities. Mr.
Everest has been the managing partner of Everest Brothers, a general
partnership active in oil and gas exploration and development, since 1984.
Mr. Everest has also been engaged in managing his personal investments since
1984. Mr. Everest is a member of the Oklahoma Bar Association and the
American Bar Association and serves in a number of capacities for various
civic and community organizations.
-17-
<PAGE>
BOARD COMMITTEES
The Board of Directors has delegated certain of its authority to a
Compensation Committee and an Audit Committee. The Compensation Committee is
composed of Messrs. Stevenson, Norick and Everest. The Audit Committee is
composed of Messrs. Tomlinson, Stevenson and Everest. No member of either
committee is a former or current officer or employee of the Company with the
exception of Mr. Tomlinson.
The Compensation Committee held two meetings in fiscal 1998. The
primary function of the Compensation Committee is to review and make
recommendations to the Board with respect to the compensation, including
bonuses, of the Company's officers and to administer the Company's Option
Plan. See "- Compensation Committee Report."
The Audit Committee had no formal meetings in fiscal 1998. The
function of the Audit Committee is to review and approve the scope of audit
procedures employed by the Company's independent auditors, to review and
approve the audit reports rendered by the Company's independent auditors and
to approve the audit fee charged by the independent auditors. The Audit
Committee reports to the Board of Directors with respect to such matters and
recommends the selection of independent auditors.
In fiscal 1998, the Board of Directors held two meetings. Each
director except Mark Stevenson attended all board and committee meetings held
during fiscal 1998.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the
annual and long-term compensation for services in all capacities to the
Company for the three fiscal years ended June 30, 1998 of Robert G.
Tomlinson, the Chief Executive Officer, and Robert W. Haley, President, the
only executive officers of the Company whose total annual salary and bonus
exceeded $100,000 during the year ended June 30, 1998 (the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
AWARDS
ANNUAL COMPENSATION -------
FISCAL -------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION(1)
- --------------------------- ----- -------- ------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert G. Tomlinson, 1998 $218,219 $22,000 30,000 $1,022
Chairman of the Board and 1997 192,726 45,000 30,000 796
Chief Executive Officer 1996 117,308 49,419 -0- 796
Robert W. Haley, 1998 $170,571 $15,000 20,001 $1,022
President 1997 154,164 36,000 30,000 664
1996 112,115 98,026 18,750 664
</TABLE>
- -------------------
(1) Comprised of Company contributions to the Named Officer's 401(k) plan
and $138 per year per each Named Officer for term life insurance
premiums.
-18-
<PAGE>
OPTION/SAR GRANTS TABLE. The following table sets forth information
on grants of options pursuant to the Company's 1993 Stock Option Plan, as
amended, during fiscal 1998 to the Named Officers. The hypothetical gains or
"option spreads" that would exist for the respective options are set forth in
accordance with the rules of the Securities and Exchange Commission. These
gain are based on the assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the option was granted over the full
option term and do not represent any assurance that the shares of Common
Stock will appreciate in value. The actual value realized may be greater or
less than the potential realizable value set forth in the table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERM
-------------------------------------------------------------- ----------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL EXERCISE OR
UNDERLYING OPTIONS/ OPTIONS/SARS GRANTED TO BASE PRICE EXPIRATION
NAME SARS GRANTED EMPLOYEES IN FISCAL YEAR ($/SHARE)(1) DATE 5% ($) 10% ($)
- ----------------- -------------------- ------------------------ ------------ ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Robert G. Tomlinson 30,000 21.1% $10.625 11/12/08 $200,460 $508,005
Robert W. Haley 20,001 14.0 $10.625 11/12/08 133,647 338,687
</TABLE>
- ---------------
(1) The exercise price is equal to the market price of the underlying
security on the date of grant. Mr. Tomlinson's options are currently
exercisable and one-third of Mr. Haley's options become exercisable each
November 13, commencing November 13, 1999, subject to earlier vesting
under certain circumstances.
FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDER- VALUE OF UNEXERCISED IN-
LYING UNEXERCISED OPTIONS/ THE-MONEY OPTIONS/SARS
SHARES SARS AT FISCAL YEAR-END AT FISCAL YEAR-END($)(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert G. Tomlinson -0- -0- 40,000 20,000 $75,000 -0-
Robert W. Haley -0- -0- 10,000 40,001 -0- $50,002
</TABLE>
- ---------------
(1) The dollar values are calculated by determining the difference between
the exercise price of the options and the closing bid price for the
Common Stock of $13.125 on June 30, 1998.
No employee of the Company receives any additional compensation for
his services as a director. Non-management directors receive no salary for
their services as such, but receive a fee of $250 per meeting attended. The
Board of Directors has also authorized payment of reasonable travel or other
out-of-pocket expenses incurred by non-management directors in attending
meetings of the Board of Directors. During fiscal 1998, no non-employee
directors were granted any options.
EMPLOYMENT AGREEMENTS. Effective January 1, 1997, the Company
entered into a new employment agreement with Mr. Robert G. Tomlinson. The
agreement requires that he devote his full business time to the Company as
Chief Executive Officer and/or Chairman of the Board at an annual salary of
$200,000, be provided an automobile and such bonuses as awarded by the Board
of Directors. The employment agreement extends for a three-year term. Mr.
Tomlinson has the option to convert the employment agreement to a consulting
agreement in the event of a change in control of the Company or upon his
resignation. Subject to the right of the Company to terminate the consulting
agreement for cause, Mr. Tomlinson is entitled to serve as a consultant to
the Company for the duration of the agreement and to continue to receive
compensation in the amount of 60% of his annual salary. If Mr. Tomlinson
terminates the agreement with "cause" (as defined in the agreement), or the
Company terminates the agreement for other than "cause" (as defined in the
agreement), or if there is a change in control of the Company or if Mr.
Tomlinson dies, Mr. Tomlinson or his estate, as applicable, is entitled to
receive severance compensation for three years from the date of termination
in an amount equal to his annual salary and bonus payments during the
preceding 12 months. During the time he is receiving such severance
compensation, he is
-19-
<PAGE>
entitled to participate in all employee benefit plans, at the Company's
expense. The change of control provisions and death benefits entitle Mr.
Tomlinson or his estate, as applicable, to receive such amount in a lump sum.
If Mr. Tomlinson becomes totally disabled during the term of the agreement,
his full salary will be continued for one year from the date of disability.
If termination is for any reason other than by the Company with cause, all
options previously granted shall become fully vested on the date of
termination. The agreement contains a non-competition provision for one year
following termination.
Effective January 1, 1997, the Company entered into an employment
agreement with Mr. Robert W. Haley. The agreement requires that he devote his
full business time to the Company as President or Senior Executive Officer at
an annual salary of $160,000 and such bonuses as awarded by the Board of
Directors. The employment agreement extends through December 31, 1998. If the
Company terminates the agreement for other than "cause" (as defined in the
agreement), Mr. Haley is entitled to receive severance compensation for one
year from the date of termination in an amount equal to his annual salary and
bonus payment during the preceding 12 months. If Mr. Haley terminates the
agreement with or without cause, Mr. Haley is entitled to receive severance
compensation for one year in an amount equal to 60% of his annual salary and
bonus payment during the preceding 12 months. During the time he is receiving
any such severance compensation, he is eligible to participate in all
employee benefit plans, at the Company's expense. If there is a
non-negotiated change in control of the Company or if Mr. Haley dies, Mr.
Haley or his estate, as applicable, is entitled to lump sum severance
compensation equal to three times his annual salary and bonus payment during
the preceding 12 months. If Mr. Haley becomes disabled during the term of the
agreement, his full salary will be continued for one year from the date of
disability. If termination is for any reason other than by the Company with
cause, all options previously granted shall become fully vested on the date
of termination. The agreement contains a non-competition provision for one
year following termination.
STOCK OPTION PLAN
The Company adopted a stock option plan in 1993 (as amended, the
"Option Plan"). The Option Plan, as amended, provides for the granting of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, non-qualified stock options and stock
appreciation rights ("SARs"), up to a maximum number of 1,350,000 shares.
Non-qualified options may be granted to employees, directors and consultants
of the Company, while incentive options may be granted only to employees. No
options may be granted under the Option Plan subsequent to February 28, 2003.
The Option Plan is administered by the Compensation Committee of
the Board of Directors, which determines the terms and conditions of the
options and SARs granted under the Option Plan, including the exercise price,
number of shares subject to the option and the exercisability thereof.
The exercise price of all incentive options granted under the
Option Plan must be at least equal to the fair market value of the Common
Stock of the Company on the date of grant. In the case of an optionee who
owns stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Company, the exercise price of incentive
options shall be not less than 110% of the fair market value of the Common
Stock on the date of grant. The exercise price of all non-qualified stock
options granted under the Option Plan shall be determined by the Compensation
Committee, but shall not be less than 85% of the fair market value of the
Common Stock. The term of all non-qualified stock options granted under the
Option Plan may not exceed ten years and the term of all incentive options
may not exceed five years. The Option Plan may be amended or terminated by
the Board of Directors.
The Option Plan provides the Board of Directors or the Compensation
Committee the discretion to determine when options granted thereunder shall
become exercisable and the vesting period of such options. Upon termination
of a participant's employment or consulting relationship with the Company,
all unvested options terminate and are no longer exercisable. Vested options
shall remain exercisable for a specified period of time
-20-
<PAGE>
following the termination date. The length of such extended exercise period
generally ranges from 30 days to one year, depending on the nature and
circumstances of the termination.
The Option Plan provides that, in the event the Company enters into
an agreement providing for the merger of the Company into another corporation
or the sale of substantially all of the Company's assets, any outstanding
unexercised option shall become exercisable at any time prior to the
effective date of such agreement. Upon the consummation of a merger or sale
of assets, such options shall terminate unless they are assumed or another
option is substituted therefor by the successor corporation.
As of June 30, 1998, a total of 421,999 non-qualified and incentive
options were outstanding, with exercise prices ranging from $2.50 to $14.25
per share and a weighted average exercise price per share of $10.85.
401(k) PLAN
In January 1996, the Company adopted a defined contribution savings
plan (the "401(k) Plan") to provide retirement income to employees of the
Company. The 401(k) Plan is intended to be qualified under Section 401(a) of
the Internal Revenue Code of 1986, as amended. The 401(k) Plan covers all
employees who are at least age 18 and have been employed at least three
months. It is funded by voluntary pre-tax contributions from employees up to
a maximum amount equal to 15% of annual compensation and through matching
contributions by the Company up to 5% of the employee's annual compensation.
Upon leaving the Company, each participant is 100% vested with respect to the
participant's contributions and is vested based on years of service with
respect to the Company's matching contributions. Contributions are invested
as directed by the participant in investment funds available under the 401(k)
Plan. Full retirement benefits are payable to each participant in a single
cash payment or an actuarial equivalent form of annuity on the first day of
the month following the participant's retirement. Because the 401(k) Plan was
not in effect prior to January 1996, the Company incurred no administrative
expense and made no contributions prior to such time on behalf of employees
of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the securities laws of the United States, the Company's
directors, its executive officers, and any persons holding more than ten
percent of the Company's Common Stock are required to report their initial
ownership of the Company's Common Stock and any subsequent changes in that
ownership to the Securities and Exchange Commission, The Nasdaq Stock Market,
Inc., the Pacific Stock Exchange and the Company. Specific due dates for
these reports have been established and the Company is required to disclose
in this annual report on Form 10-K any failure to file, or late filing, of
such reports with respect to the period ended June 30, 1996. Based solely on
the Company's review of Forms 3, 4 and 5 and amendments thereto furnished to
the Company and all written representations with respect to filing of such
Forms, the Company is aware that Mr. Blair filed his Form 3 late and that
Messrs. Tomlinson and Haley and Ms. Blair filed their respective Form 5's to
report the grant of options during the year late.
COMPENSATION COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the
previous filings made by the Company under the Securities Act of 1933, as
amended, or the Securities Act of 1934, as amended, that might incorporate
future filings, including, but not limited to, this Report on Form 10-K, in
whole or in part, the following Compensation Committee Report and the
performance graph appearing herein shall not be deemed to be incorporated by
reference into any such future filings.
This Compensation Committee Report discusses the Company's
executive compensation policies and the basis for the compensation paid to
the Company's executive officers, including its Chief Executive Officer,
during fiscal 1998.
-21-
<PAGE>
Compensation Policy. The Company's policy with respect to
executive compensation has been designed to:
- Adequately and fairly compensate executive officers in relation
to their responsibilities, capabilities and contributions to the
Company in a manner that is commensurate with compensation paid
by companies of comparable size or within the Company's industry;
- Reward executive officers for the achievement of short-term
operating goals and for the enhancement of the long-term value
of the Company; and
- Align the interests of the executive officers with those of the
Company's shareholders with respect to short-term operating
goals and long-term increases in the price of the Company's
Common Stock.
The components of compensation paid to certain executive officers
consist of (a) base salary and (b) incentive compensation in the form of
discretionary annual bonus payments and other awards made by the Company
(through the Compensation Committee) under the Company's Option Plan.
BASE SALARY. For fiscal 1998, the Compensation Committee reviewed
and approved the base salary paid by the Company to its executive officers
and to the new executive officers who were hired during the year under their
respective employment agreements. Annual adjustments to base salaries are
determined based upon a number of factors, including the Company's
performance (to the extent such performance can fairly be attributed or
related to each executive officer's performance), as well as the nature of
each executive officer's responsibilities, capabilities and contributions. In
addition, for fiscal 1998, the Compensation Committee reviewed the base
salaries of its executive officers in an attempt to ascertain whether those
salaries fairly reflect job responsibilities and prevailing market conditions
and rates of pay. The Compensation Committee believes that base salaries for
the Company's executive officers have been reasonable in relation to the
Company's size and performance in comparison with the compensation paid by
similarly sized companies or companies within the Company's industry.
INCENTIVE COMPENSATION. The Company has no formal bonus incentive
plan for executive officers. During fiscal 1998, bonuses made to executive
officers were discretionary and based on achievement of business targets and
objectives, which the Compensation Committee feels will dictate, in large
part, the Company's future operating results. The Compensation Committee
believes that its policy of compensating certain of its executive officers
with incentive-based compensation fairly and adequately compensates those
individuals in relation to their responsibilities, capabilities and
contribution to the Company, and in a manner that is commensurate with
compensation paid by companies of comparable size or within the Company's
industry. The Compensation Committee has authority to select the executive
officers and employees who will be granted bonuses and other awards and to
determine the timing, pricing and amount of any such bonuses or awards.
OTHER BENEFITS. The Company does not maintain any other plans and
arrangements for the benefit of its executive officers except to provide a
life insurance policy for the benefit of certain executive officers' named
beneficiaries. The Company believes these benefits are reasonable in relation
to the executive compensation practices of other similarly sized companies or
companies within the Company's industry.
The Compensation Committee believes that the concepts discussed
above further the shareholders' interests and that officer compensation
encourages responsible management of the Company. The Compensation Committee
regularly considers the effect of management compensation on shareholder
interests. In the past, the Board of Directors based its review in part on
the experience of its own members and on information requested from
management personnel. These same factors will be used in the future in
determining officer compensation.
This report was furnished by Mark J. Stevenson, Ronald J. Norick
and James H. Everest
-22-
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Mark J. Stevenson,
Ronald J. Norick and James H. Everest, all of whom are independent directors
of the Company. None of these members have ever been an officer or employee
of the Company or its Subsidiary nor have any of them ever had a relationship
which would require disclosure under the "Certain Relationship and Related
Transactions" captions of any of the Company's filings with the Commission.
PERFORMANCE GRAPH
Set forth below is a line graph prepared by Media General Financial
Services comparing the yearly percentage change in the Company's cumulative
total shareholder return (share price appreciation plus dividends) on the
Company's Common Stock with the cumulative total return of (i) the Nasdaq
Stock Market and (ii) the stocks of apparel manufacturers having Standard
Industrial Classification codes from industry group numbers 231 through 235,
which is deemed as a market weighted index of publicly traded peers, for the
period from April 5, 1994 (the first date on which the Company's Common Stock
began trading on The Nasdaq Stock Market) through June 30, 1998 (the
"Measurement Period"). The graph assumes that $100 is invested in each of the
Common Stock, the Nasdaq Stock Market Index and the publicly traded peers on
April 5, 1994 and that all dividends were reinvested (there were no dividends
paid by the Company during the Measurement Period). The Company's shareholder
return is calculated by dividing (i) the difference between the Company's
share price at the beginning ($5.00 at April 5, 1994) and at each June 30 of
the Measurement Period by (ii) the share price at the beginning of the
Measurement Period.
COMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURN
AMONG SPORT-HALEY, INC., PEER GROUP INDEX AND NASDAQ MARKET INDEX
[Chart]
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30,
---------------------------------------------
1994 1995 1996 1997 1998
April 5, 1994 ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sport-Haley, Inc. 100.00 120.71 175.15 276.92 317.16 248.52
Industry Peer Group Index 100.00 93.48 94.82 131.29 154.32 182.68
Nasdaq Market Index 100.00 99.15 116.29 146.39 176.34 233.75
</TABLE>
-23-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of September 18, 1998
by (i) each person known by the Company to own beneficially more than 5% of
the outstanding Common Stock, (ii) each director or nominee, and (iii) all
executive officers and directors as a group. The information with respect to
institutional investors is derived solely from statements filed with the
Commission under Section 13(d) or 13(g) of the Exchange Act. Each person has
sole voting and sole investment or dispositive power with respect to the
shares shown except as noted.
<TABLE>
<CAPTION>
SHAREHOLDINGS ON SEPTEMBER 18, 1998
--------------------------------------
NAME AND ADDRESS (1) NUMBER OF SHARES (2) PERCENT OF CLASS (3)
- ------------------------------- -------------------- --------------------
<S> <C> <C>
Robert G. Tomlinson(4)..................................... 78,000 1.7%
Robert W. Haley(5)......................................... 38, 283 *
Steve S. Auger(6).......................................... 2,600 *
Catherine Blair(7)......................................... 8,333 *
Kevin M. Tomlinson(8)...................................... 25,000 *
Grant M. Beeman(8)......................................... 10,000 *
William L. Blair........................................... -0- *
Mark J. Stevenson(7)....................................... 8,333 *
Ronald J. Norick(9)........................................ 69,833 1.6%
James H. Everest(7)........................................ 33,333 *
Woodland Partners, LLC..................................... 914,900 20.5%
60 South Sixth Street, Suite 3750
Minneapolis, Minnesota 55402
U.S. Bancorp............................................... 369,600 8.3%
601 Second Avenue South
Minneapolis, Minnesota 55402
Delaware Management Holdings, Inc.......................... 236,900 5.3%
2005 Market Street
Philadelphia, Pennsylvania 19103
All directors and officers as a group
(Ten persons)(10).......................................... 273,715 5.9%
</TABLE>
- -------------------------
* Less than 1%
(1) Except as noted above, the address for all persons listed is 4600 E.
48th Avenue, Denver, Colorado 80216.
(2) Ownership includes both outstanding Common Stock and shares issuable
upon exercise of options that are currently exercisable or will become
exercisable within 60 days after the date hereof.
(3) All percentages are calculated based on the number of outstanding shares
in addition to shares which a person or group has the right to acquire
within 60 days of September 28, 1998.
(4) Includes 40,000 shares subject to currently exercisable options.
(5) Includes 16,667 shares subject to currently exercisable options or
options which will become exercisable within 60 days after the date
hereof.
(6) Includes 2,500 shares subject to currently exercisable options.
(7) Includes 8,333 shares subject to currently exercisable options or
options which will become exercisable within 60 days after the date
hereof.
(8) Consists solely of shares subject to currently exercisable options.
(9) Includes 16,666 shares subject to currently exercisable options.
(10) Includes 135,832 shares of Common Stock subject to currently exercisable
options. Excludes shares of Common Stock as to which officers and
directors disclaim beneficial ownership.
-24-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted a policy pursuant to which material
transactions between the Company and its executive officers, directors and
principal shareholders (i.e. shareholders owning beneficially 5% or more of
the outstanding voting securities of the Company) shall be submitted to the
Board of Directors for approval by a disinterested majority of the directors
voting with respect to the transaction. For this purpose, a transaction is
deemed material if such transaction, alone or together with a series of
similar transactions during the same fiscal year, involves an amount which
exceeds $60,000.
-25-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and
are incorporated herein by this reference:
(1) FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Balance Sheets - June 30, 1998 and 1997
Statements of Income for the years ended June 30, 1998, 1997 and 1996
Statement of Shareholders' Equity for the years ended June 30, 1998, 1997
and 1996
Statements of Cash Flows for the years ended June 30, 1998, 1997 and 1996
Notes to Financial Statements for the years ended June 30, 1998, 1997
and 1996
(2) FINANCIAL STATEMENT SCHEDULES
None
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
----------- ---------
<S> <C>
- - 3.1 Articles of Incorporation of the Company as filed on January
1, 1991, and as amended on March 25, 1991, September 18, 1992
and September 2, 1993, with the Secretary of State of the
State of Colorado.
- - 3.1.2 Amended and Restated Articles of Incorporation of the Company
as filed on March 7, 1994 with the Secretary of State of the
State of Colorado.
- -- 3.2.3 Amended and Restated By-laws of the Company as adopted January
10, 1996.
- - 4.1 Form of Specimen Certificate for Common Stock of the Company.
- - 4.1.1 Form of Representative's Warrant issued by the Company to
Schneider Securities, Inc.
+ 4.1.2 Form of Advisor's Warrant issued to Cruttenden Roth
Incorporated.
++ 10.1.3 1993 Stock Option Plan, effective March 1993, as amended.
x 10.2.1 Employment Agreement, dated January 1, 1997, by and between
Robert G. Tomlinson and the Company.
+ 10.2.2 Employment Agreement, dated July 12, 1995, by and between
William J. McCabe and the Company.
+ 10.2.3 Consulting Agreement, dated July 12, 1995, by and between
M-Corp. and the Company.
x 10.2.4 Employment Agreement, dated July 1, 1997, by and between
Catherine B. Blair and the Company.
-26-
<PAGE>
x 10.2.5 Employment Agreement, dated January 1, 1997, by and between
Robert W. Haley and the Company.
+ 10.2.7 Endorsement Agreement, dated on or about December 1, 1994, by
and between Neal Lancaster and the Company.
+ 10.2.8 Endorsement Agreement, dated on or about November 29, 1994, by
and between Hal Sutton and the Company.
+ 10.2.9 Endorsement Agreement, dated on or about January 1, 1996, by
and between Jim Rutledge and the Company.
x 10.2.10 Form of standard Endorsement Agreement by and between various
golf professionals and the Company.
++++ 10.3.1 Business Loan Agreement, dated October 30, 1996, by and between
Colorado National Bank and the Company.
++ 10.4.1 Lease Agreement, dated July 29, 1994, by and among Thomas J.
Hilb, individually, Thomas J. Hilb, as Trustee of the Connie
Hilb Trust, and the Company.
- -- 10.4.2 Amendment to Lease Agreement, dated January 12, 1996, by and
among Thomas J. Hilb, individually, Thomas J. Hilb, as Trustee
of the Connie Hilb Trust, and the Company.
+ 10.4.4 Laughlin Factory Outlet Store Lease, dated March 10, 1995,
between Horizon Outlet Centers Limited Partnership and the
Company.
** 10.4.5 Lease Agreement, dated April, 1998, between Larry M. Jones and
Roberta C. Jones, and B&L Sportswear, Inc.
- - 10.5 Form of Independent Sales Representative Agreement.
+ 10.7 Trademark Registrations, dated February 21, 1995, issued by
the United States Patent and Trademark Office to the Company.
+ 10.8 Agreement, dated July 13, 1995, by and between Rogue Golf Co.,
Ltd. and the Company.
++ 10.9 Agreement, dated October 5, 1995, by and between Mplus &
Company, Yokohama, Japan, and the Company.
- -- 10.10 Trademark Licensing Agreement, dated October 14, 1995, by and
between W.L. Gore & Associates, Inc. and the Company.
+ 10.11 Distribution Agreement, dated February 22, 1996, by and
between Transview Golf Pte Ltd. and the Company.
+ 10.12 Amendment to Distribution Agreement, dated May 25, 1996, by
and between Rogue Golf Co. Ltd. and the Company.
+ 10.13 Distribution Agreement, dated May 7, 1996, by and between
Silva Golf and the Company.
+ 10.14 Consulting Agreement, dated May 29, 1996, by and between Nancy
Haley and the Company.
-27-
<PAGE>
x 10.15 Form of Distribution Agreement by and between the Company and
Pacsports Phils, Inc., Pacsports, Ltd. and Bossports.
xx 10.16 Stock Purchase Agreement among the Company, Marvin Urquhart,
Larry M. Jones and Roberta C. Jones, and B&L Sportswear, Inc.
** 11 Schedule Computing Net Income Per Common Share
** 21 Subsidiaries of the Registrant
** 23. Consent of Levine Hughes & Mithuen, Inc., independent certified
public accountants for the Company.
** 27. Financial Data Schedule.
* Incorporated by reference from the Company's Registration Statement on
Form SB-2 (File No. 333-1214).
- - Incorporated by reference from the Company's Registration Statement on
Form SB-2 (File No. 33-74876-D).
+ Incorporated by reference from the Company's Form 10-KSB filed October
6, 1995 (File No. 1-12888).
++ Incorporated by reference from the Company's Form 10-KSB filed September
14, 1994 (File No. 1-12888).
++ Incorporated by reference from the Company's Form 10-QSB filed November
14, 1995 (File No. 1-12888).
- -- Incorporated by reference from the Company's Form 10-QSBA/1 filed
February 2, 1996 (File No. 1-12888).
+ Incorporated by reference from the Company's Form 10-KSB filed on
October 11, 1996.
++ Incorporated by reference from the Company's Form 10-QSB filed on May
12, 1997 (File No. 1-12888).
++++ Incorporated by reference from the Company's Registration Statement on
Form S-3 (File No. 333-18831).
x Incorporated by reference from the Company's Form 10-KSB filed on
September 29,1997 (File No. 1-12888).
x Incorporated by reference from the Company's Form 8-K filed on April 27,
1998 (File No. 1-12888).
** Filed herewith.
</TABLE>
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on April 23, 1998 reporting the
Company's purchase of 52% of the outstanding shares of the capital stock of
B&L Sportswear, Inc. under Item 5 of such Form.
-28-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders
Sport-Haley, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Sport-Haley,
Inc. as of June 30, 1998 and 1997 and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in
the period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits of the financial
statements provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Sport-Haley, Inc. as of June 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
LEVINE, HUGHES & MITHUEN, INC.
ENGLEWOOD, COLORADO
SEPTEMBER 4, 1998
F-1
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,501,568 $ 10,273,466
Short-term investments and marketable securities 12,920 1,319,470
Accounts receivable, net of allowance of $155,231
and $71,157, respectively 6,553,684 5,756,451
Inventories 17,892,610 9,981,521
Prepaid expenses 1,285,171 1,060,522
Deferred taxes 118,649 54,551
------------ ------------
TOTAL CURRENT ASSETS 32,364,602 28,445,981
PROPERTY AND EQUIPMENT, NET 2,744,583 2,408,904
OTHER ASSETS 127,296 67,262
------------ ------------
$ 35,236,481 $ 30,922,147
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Capital lease obligations maturing within one year $ 454 $ 1,801
Note payable 500,000 --
Accounts payable 1,861,538 1,319,155
Accrued income taxes 317,538 --
Accrued commissions and other expenses 1,027,449 874,505
------------ ------------
TOTAL CURRENT LIABILITIES 3,706,979 2,195,461
------------ ------------
LONG-TERM LIABILITIES:
Capital lease obligation, net of current maturities -- 874
Deferred rent -- 912
Deferred taxes 4,060 18,880
------------ ------------
4,060 20,666
------------ ------------
3,711,039 2,216,127
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 10, 13, 14, 15 and 21)
MINORITY INTEREST 60,111 --
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; authorized 1,500,000
shares; none issued and outstanding -- --
Common stock, no par value; 15,000,000 shares
authorized; 4,512,962 and 4,651,073 shares
issued and outstanding, respectively 18,416,463 20,439,509
Additional paid-in capital 597,669 285,676
Retained earnings 12,451,199 8,186,858
Unrealized loss on marketable securities -- (206,023)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 31,465,331 28,706,020
------------ ------------
$ 35,236,481 $ 30,922,147
------------ ------------
------------ ------------
</TABLE>
See accountants' audit report
and notes to financial statements.
F-2
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 31,299,008 $ 28,900,350 $ 20,287,277
COST OF GOODS SOLD 18,423,435 16,820,275 11,719,115
------------ ------------ ------------
GROSS PROFIT 12,875,573 12,080,075 8,568,162
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,681,240 6,969,656 4,995,382
------------ ------------ ------------
INCOME FROM OPERATIONS 5,194,333 5,110,419 3,572,780
------------ ------------ ------------
OTHER INCOME AND (EXPENSE):
Interest income 438,461 410,611 296,225
Other income 180,743 338,846 56,337
Other expense (317,177) (360,174) --
------------ ------------ ------------
302,027 389,283 352,562
------------ ------------ ------------
INCOME BEFORE MINORITY INTEREST AND
PROVISION FOR INCOME TAXES 5,496,360 5,499,702 3,925,342
MINORITY INTEREST (6,259) -- --
PROVISION FOR INCOME TAXES 1,238,278 1,589,748 1,453,507
------------ ------------ ------------
NET INCOME $ 4,264,341 $ 3,909,954 $ 2,471,835
------------ ------------ ------------
------------ ------------ ------------
NET INCOME PER COMMON SHARE - BASIC $ .93 $ .84 $ .66
- DILUTED $ .93 $ .84 $ .65
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC 4,564,355 4,658,796 3,769,859
- DILUTED 4,592,751 4,627,879 3,787,257
</TABLE>
See accountants' audit report
and notes to financial statements.
F-3
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED LOSS TOTAL
------------------------- PAID-IN RETAINED ON MARKETABLE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY
--------- ------------ --------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995 3,118,188 $ 10,062,354 $ 75,161 $ 1,805,069 $ -- $ 11,942,584
Issuance of common stock for cash 1,020,000 10,710,000 -- -- -- 10,710,000
Common stock offering costs -- (1,113,450) -- -- -- (1,113,450)
Stock options exercised 313,793 872,886 -- -- -- 872,886
Repurchase of stock options -- -- (12,500) -- -- (12,500)
Repurchase of common stock (32,710) (365,684) -- -- -- (365,684)
Unrealized loss on securities
available for sale -- -- -- -- (140,273) (140,273)
Net income -- -- -- 2,471,835 -- 2,471,835
--------- ------------ --------- ------------- ---------- ------------
BALANCE AT JUNE 30, 1996 4,419,271 20,166,106 62,661 4,276,904 (140,273) 24,365,398
Stock options exercised 319,905 1,657,967 -- -- -- 1,657,967
Warrants exercised 39,187 240,865 -- -- -- 240,865
Repurchase of common stock (127,290) (1,625,429) -- -- -- (1,625,429)
Stock option compensation -- -- 223,015 -- -- 223,015
Unrealized loss on securities
available for sale -- -- -- -- (65,750) (65,750)
Net income -- -- -- 3,909,954 3,909,954
--------- ------------ --------- ------------- ---------- ------------
BALANCE AT JUNE 30, 1997 4,651,073 20,439,509 285,676 8,186,858 (206,023) 28,706,020
Stock options exercised 73,326 469,731 -- -- -- 469,731
Warrants exercised 28,563 218,160 -- -- -- 218,160
Repurchase of common stock (240,000) (2,710,937) -- -- -- (2,710,937)
Stock option compensation -- -- 311,993 -- -- 311,993
Change in unrealized loss on
securities available for sale -- -- -- -- 206,023 206,023
Net income -- -- -- 4,264,341 -- 4,264,341
--------- ------------ --------- ------------- ---------- ------------
BALANCE AT JUNE 30, 1998 4,512,962 $ 18,416,463 $ 597,669 $ 12,451,199 $ -- $ 31,465,331
--------- ------------ --------- ------------- ---------- ------------
--------- ------------ --------- ------------- ---------- ------------
</TABLE>
See accountants' audit report
and notes to financial statements.
F-4
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,264,341 $ 3,909,954 $ 2,471,835
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 577,274 449,862 324,543
Deferred taxes, and other (78,918) (64,800) 2,592
Provision for doubtful accounts 53,000 154,000 219,000
Loss on disposal of assets 334,230 -- 7,207
Amortization of investment premiums 21,420 126,747 23,442
Stock option compensation 311,993 223,015 --
Cash provided (used) due to changes in assets and
liabilities net of B&L Sportwear, Inc., acquisition:
Accounts receivable (632,752) (1,361,250) (1,586,258)
Inventory (7,896,453) (2,265,133) (3,342,387)
Prepaid expenses (224,649) 1,549 (403,207)
Other assets 33,555 (35,617) (16,505)
Accounts payable 557,931 (822,300) 752,299
Accrued commissions and other expenses 141,235 149,454 391,714
Accrued income taxes 317,538 (464,483) (23,836)
Minority interest (6,259) -- --
----------- ----------- -----------
Net cash provided (used) by operating activities (2,226,514) 998 (1,179,561)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of B&L Sportswear, Inc., net of cash acquired (151,694) -- --
Purchase of fixed assets (838,844) (1,158,750) (833,881)
Purchase of short-term investments and marketable securities -- -- (4,187,120)
Maturities of short-term investments and marketable securities 1,270,000 -- --
Sale of short-term investments and marketable securities -- 2,511,439 --
Proceeds from the disposal of fixed assets 21,078 -- --
----------- ----------- -----------
Net cash provided (used) by investing activities 300,540 1,352,689 (5,021,001)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease obligations (2,221) (1,360) (1,014)
Advances on notes payable 179,343 -- --
Proceeds from issuance of common stock -- -- 10,710,000
Proceeds from exercised stock options and warrants 687,891 1,898,832 872,886
Common stock offering costs -- -- (1,113,450)
Repurchase of common stock (2,710,937) (1,625,429) (365,684)
Repurchase of stock options -- -- (12,500)
----------- ----------- -----------
Net cash provided (used) by financing activities (1,845,924) 272,043 10,090,238
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (3,771,898) 1,625,730 3,889,676
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,273,466 8,647,736 4,758,060
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,501,568 $10,273,466 $ 8,647,736
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 35,476 $ 7,594 $ 4,997
----------- ----------- -----------
----------- ----------- -----------
Taxes $ 983,000 $ 2,130,562 $ 2,361,208
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accountants' audit report
and notes to financial statements.
F-5
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND NATURE OF OPERATIONS
-------------------------------------
ORGANIZATION AND NATURE OF OPERATIONS:
Sport-Haley designs, markets, and contracts for the manufacture of
quality men's and women's fashion golf apparel under the distinctive
Haley-Registered Trademark- label. The Company's fashion golf apparel
is known for its innovative styling, high quality fabrics, generous
fit and classic appearance. The Company's apparel is sold in the
premium and mid-price market through a network of independent sales
representatives and distributors to primarily golf professional
shops, country clubs and resorts throughout the United States and
internationally. The Company also sells to college, university and
corporate markets. The Company was organized as a Colorado
corporation on January 1, 1991 as a wholly owned subsidiary of Haley
& Company, Inc. Effective June 30, 1992, the Company ceased being a
wholly owned subsidiary of Haley and Company, Inc. as a result of a
transaction that was structured as a tax free spin-off.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of
Sport-Haley, Inc and its majority-owned subsidiary, B&L Sportwear,
Inc. (collectively referred to as the Company). All significant
intercompany accounts and transactions have been eliminated.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company maintains a perpetual inventory system and
adjusts inventories annually based upon the results of its physical
inventory taken at its fiscal year end. Cost includes materials,
labor and manufacturing overhead.
BAD DEBTS:
Bad debts are provided for using the allowance method based on
historical experience and evaluation of outstanding accounts
receivable at year end.
DEPRECIATION AND AMORTIZATION:
Furniture, fixtures and equipment are stated at cost. Depreciation is
provided over the estimated useful lives of the assets ranging from
three to twelve years using the straight-line method of depreciation.
Depreciation and amortization expense at June 30, 1998, 1997 and 1996
was $577,274, $449,862 and $324,543, respectively.
Leasehold improvements are stated at cost and amortized over the
remaining life of the lease, using the straight-line method.
Upon disposing of assets, the related cost and accumulated
depreciation are removed from the books and the resulting gain or
loss, if any, is recognized in the year of the disposition.
F-6
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
LONG-LIVED ASSETS:
The Company periodically evaluates the recoverability of its
long-lived assets based upon the estimated future cash flows from the
related asset. Impairment would be recognized in operations if
permanent diminution in value occurs.
REVENUE RECOGNITION:
The Company recognizes revenue upon shipment of its products.
DEFERRED RENT:
Deferred rent is recognized for the difference between rent expense,
which the Company records applying the straight-line method over the
life of the lease, and the monthly payments called for in the lease
agreement.
DEFERRED TAXES:
Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end,
based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
CERTAIN RISKS AND CONCENTRATIONS:
The Company's operations consist of the design, manufacture and
wholesale of golf apparel for men and women. The Company's
headquarters are located in Colorado and its customers are located
throughout the United States and abroad. As of June 30, 1998 and 1997
the majority of the Company's receivables are from companies in the
golfing industry. The Company maintains adequate allowance for
potential credit losses and performs on-going credit evaluations.
EXCESS COST OVER NET ASSETS ACQUIRED:
The excess cost over the net assets acquired of B&L Sportswear, Inc.
is being amortized on a straight-line basis over ten years.
STATEMENT OF CASH FLOWS:
For purposes of the statement of cash flows, the Company considers
all highly liquid instruments purchased with an original maturity of
three months or less, that are readily convertible to known amounts
of cash and present an insignificant risk of change in value because
of changes in interest rate, to be cash equivalents.
F-7
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
------------------------------------------
RECENT PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 130 (SFAS 130), REPORTING COMPREHENSIVE INCOME, which
establishes standards for reporting and display of comprehensive
income and its components (net revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The Company
will adopt SFAS 130 in its fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which changes the
way public companies report information about operating segments.
SFAS No. 131, which is based on the management approach to segment
reporting, establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about
products and services, major customers and the material countries in
which the entity holds assets and report revenues. The Company has
not yet evaluated the effects of this change on its reporting of
segment information. If necessary, the Company will adopt SFAS No.
131 in its fiscal year 1999.
RECLASSIFICATIONS:
Certain reclassifications have been made to the 1997 and 1996 amounts
to conform to the current year presentation.
FINANCIAL INSTRUMENTS:
The Company periodically maintains cash balances at a commercial bank
in excess of the Federal Deposit Insurance Corporation insurance
limit of $100,000.
NOTE 3 FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The estimated fair value of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,501,568 $ 6,501,568 $10,273,466 $10,273,466
Short-term investments
and marketable securities 12,290 12,290 1,319,470 1,319,470
</TABLE>
The carrying amount of cash and cash equivalents and short-term
investments and marketable securities approximates fair value.
The carrying value of all other financial instruments potentially
subject to valuation risk, principally consisting of accounts
receivable and accounts payable, also approximate fair value.
F-8
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents consist of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
---------------------------
<S> <C> <C>
Cash in banks $ 2,522,942 $ 2,039,832
Short-term securities 3,978,626 8,233,634
----------- -----------
$ 6,501,568 $10,273,466
=========== ===========
</TABLE>
NOTE 5 USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
NOTE 6 INVESTMENTS AND MARKETABLE SECURITIES
-------------------------------------
The Company's investment in debt securities are generally held to
maturity and valued at amortized cost, which approximates fair value.
The fair value at June 30, 1997 was $1,291,420 for investments in
debt securities. At June 30, 1998 the Company had no investments in
"held to maturity" debt securities.
The Company's investments in marketable equity securities are held
for an indefinite period and are classified as "available for sale."
The fair value of these securities at June 30, 1998, was $12,920.
The Company recognized a permanent decline in the fair value of
these securities of $221,153 for the year ended June 30, 1998.
NOTE 7 INVENTORIES
-----------
Inventories consist of the following at June 30, 1998:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Component inventory $ 6,963,746 $ 4,751,026
Finished goods 10,928,864 5,230,495
----------- -----------
$17,892,610 $ 9,981,521
=========== ===========
</TABLE>
NOTE 8 ADVERTISING
-----------
The Company expenses the production costs of advertising the first
time the advertising takes place, except for direct-response
advertising, which is capitalized and amortized over its expected
period of future benefits.
Direct-response advertising consists primarily of future advertising
costs incurred in association with the Company's independent sales
representatives. These capitalized costs are amortized over the
future selling seasons, generally five to seven months, the period in
which the revenue is recognized. At June 30, 1998 and 1997,
approximately $438,842 and $260,670 of advertising was capitalized.
Advertising expense was $413,981, $457,542 and $544,099 for the years
ended June 30, 1998, 1997 and 1996, respectively.
F-9
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 PROPERTY AND EQUIPMENT
----------------------
Property and equipment are recorded at cost and are
comprised of the following at June 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Plant equipment $2,282,370 $1,797,670
Furniture and equipment 1,443,049 985,696
Leasehold improvements 432,233 393,028
Transportation equipment 35,597 66,627
Property held under capital lease 6,685 6,685
---------- ----------
4,199,934 3,249,706
Less, accumulated depreciation
and amortization 1,455,351 840,802
---------- ----------
$2,744,583 $2,408,904
---------- ----------
---------- ----------
</TABLE>
NOTE 10 LINE OF CREDIT AGREEMENT
------------------------
Since April 1994, the Company maintained a revolving line of credit
with the same bank. The revolving line of credit agreement, which has
been renewed through October 31, 1999, provides for interest at 1/2%
below the bank's prime rate. At the time of its most recent renewal,
the revolving line of credit provided for a maximum loan amount of
$10.0 million. Subsequent to the purchase of the Subsidiary, the
revolving line of credit agreement was amended and divided into two
agreements, one of which provides for a maximum loan amount of $9.0
million to the Company secured by a lien on substantially all of the
Company's assets and the other of which provides for a maximum loan
amount of $1.0 million to the Subsidiary secured by a lien on
substantially all of the Subsidiary's assets. The Company generally
maintains its line of credit solely to facilitate the issuance of
letters of credit for inventory purchases from offshore suppliers and
to fund any temporary working capital needs. The Subsidiary drew
approximately $500,000 on its revolving line of credit in May of 1998
in order to repay a $386,317 loan made by the Company to the
Subsidiary at closing of the Subsidiary's acquisition, to purchase
additional equipment and to use as operating capital.
NOTE 11 ACQUISITION
-----------
On March 27, 1998, the Company closed on its purchase of 52% of the
outstanding shares of capital stock of B&L Sportswear, Inc. ("B&L").
The acquisition was completed pursuant to the terms of a stock
purchase agreement. The Company paid $165,498 in cash to acquire its
52% ownership interest of B&L. The cash payments were made out of the
Company's working capital. The Company and remaining shareholders
entered into a buy-sell agreement restricting transfer of their
shares of B&L and granted the other party a right of first refusal
upon the occurrence of certain events which could lead to a change in
ownership of the shares.
B&L, headquartered in Four Oaks, North Carolina, has been a principal
cutting and sewing contractor utilized by the Company for several
years and is expected to manufacture the Company's products on an
exclusive basis in the future. The Company's management believes that
the acquisition of a controlling interest in B&L will enhance the
Company's ability to control costs, product delivery and inventory.
It also believes that by utilizing a captive cutting and sewing
contractor, the Company will be able to expand its corporate and
retail sales efforts, remain competitive and maintain historical
margins.
F-10
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 INCOME TAXES
The components of income tax expense are as follows at June 30:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $1,136,200 $1,423,300 $1,253,119
State 180,996 227,600 193,906
---------- ---------- ----------
1,317,196 1,650,900 1,447,025
---------- ---------- ----------
Deferred
Federal (68,800) (53,312) 5,651
State (10,118) (7,840) 831
---------- ---------- ----------
(78,918) (61,152) 6,482
---------- ---------- ----------
Total $1,238,278 $1,589,748 $1,453,507
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The difference between the U.S. Federal statutory rate and the
Company's effective rate is as follows at June 30:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
U.S. Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal benefits 3.3 4.1 4.9
Increase (decrease) in deferred taxes (1.4) (1.1) .1
Stock options (15.1) (4.5) --
Other 1.7 (3.6) (2.0)
---------- ---------- ----------
Effective tax rate 22.5% 28.9% 37.0%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the net deferred tax asset and net deferred tax
liability recognized in the accompanying balance sheets are as
follows at June 30:
<TABLE>
<CAPTION>
1998 1997
------------------------ -----------------------
Current Long-Term Current Long-Term
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Deferred tax liability $ -- $(167,815) $ -- $ (100,981)
Deferred tax asset 118,649 163,755 54,551 82,101
--------- --------- -------- ----------
$118,649 $ (4,060) $ 54,551 $ (18,880)
--------- --------- -------- ----------
--------- --------- -------- ----------
</TABLE>
The types of temporary differences between the tax bases of assets
and liabilities and their financial reporting amounts that give rise
to a significant portion of the deferred tax asset and liability and
their appropriate tax effects are as follows at June 30:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- ---------------------------------------
Tax Effect Tax Effect
Temporary --------------------- Temporary -----------------------
Difference Current Long-Term Difference Current Long-Term
---------- -------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts $ 155,231 $ 32,449 $ -- $ 71,157 $ 27,751 $ --
Accumulated
depreciation 430,294 -- (167,815) 258,925 -- (100,981)
Stock options 419,884 -- 163,755 210,515 -- 82,101
Loss on stock 221,153 86,200 -- 68,718 26,800 --
--------- --------- --------- --------
$ 118,649 $ (4,060) $ 54,551 $(18,880)
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
F-11
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 EQUIPMENT UNDER CAPITAL LEASE
The Company acquired certain equipment under a capital lease. The
future minimum lease payments as of June 30, 1998 are $454.
NOTE 14 OPERATING LEASES
The Company leases its corporate offices, production and warehouse
facilities under an operating lease which expires in
fiscal year 2001. During January 1996, the Company amended this
facilities lease agreement to provide for additional space, located
within the Company's premises, which consists of 15,860 square feet.
The Company acquired the additional space for its headwear division
and commenced operations in October 1996. The lease term and
expiration of the additional space will run concurrent with the
original lease dated July 29, 1994. During October 1994, the Company
subleased its former facilities in Lakewood, Colorado. The sublease
is for the period January 1, 1995 to September 30, 1997.
Additionally, during fiscal year 1994, the Company entered into a
non-cancelable operating lease for freight systems and folding
equipment.
During March 1995, the Company entered into a lease for a factory
outlet store located in Laughlin, Nevada. The leased facility
consists of approximately 2,200 square feet and is leased for a term
of seven years, with an option to extend the lease for an additional
five year period following the initial term. The store opened in June
1996. The lease provides for a base rental of $44,000 per year in the
first three years of the lease and $48,400 per year in the last four
years of the lease.
In April, 1998 the Company's subsidiary entered into a lease for the
operating facilities of the subsidiary located in Four Oaks, North
Carolina with the minority shareholders of the subsidiary. The leased
facility consists of approximately 22,000 square feet and has an
initial term of ten years and may be extended for two additional five
year periods following the initial term. The lease provides for base
rental of $64,991 annually.
Rent expense for the years ended June 30, 1998, 1997 and 1996 was
$267,168, $289,909 and $232,558, respectively.
The future minimum lease payments under noncancelable leases with
initial terms of one year or more as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Annual
Years Ended June 30, Payments
-------------------- -----------
<S> <C>
1999 $ 309,950
2000 319,600
2001 319,600
2002 178,800
2003 113,400
Thereafter 308,700
----------
$1,550,050
==========
</TABLE>
F-12
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 COMMITMENTS
EMPLOYMENT AGREEMENTS:
Effective January, 1997 the Company, with the approval of its
Compensation Committee, entered into an Employment Agreement (the
"Agreement") with Robert G. Tomlinson ("Tomlinson") and Robert W.
Haley ("Mr. Haley") who currently serve as the Company's Chief
Executive Officer and President, respectively. Pursuant to the terms
of the Agreements, Messrs. Tomlinson and Haley will continue to serve
in their respective positions through December 31, 1999. Annual
bonuses, if any, will be determined by the Company's Board of
Directors.
Effective July 1, 1997 the Company with the approval of its Board of
Directors, entered into in Employment Agreement (the "Agreement")
with Catherine B. Blair ("Blair"). Pursuant to the terms of the
Agreement, Blair will serve as the Company's Vice-President of
merchandising and Design for two years through June 30, 1999. Annual
bonuses, if any, will be determined by the Company's Board of
Directory. The Agreement is subject to automatic one year extensions.
CONSULTING AGREEMENT:
During May 1996, the Company entered into a consulting agreement (the
"Agreement") with Nancy Haley ("Ms. Haley") who formerly served as an
officer and director of the Company. The Agreement provided for
certain consulting services to be rendered in the areas of product
design, advertising and public relations. The Agreement commenced
June 1, 1996 with annual compensation of $90,000 per year for three
years, payable in equal monthly installments of $7,500. The Agreement
could be terminated by Ms. Haley at any time after the first ninety
(90) days of the Agreement by giving written notice at least ten (10)
days prior to the date of termination. The Agreement provided for
certain covenants by Ms. Haley during the term of the Agreement which
included among other things, a covenant not to compete. On April 2,
1997, Ms. Haley gave her notice to terminate the Agreement. Total
fees paid at June 30, 1997 and 1996 were $70,500 and $7,500,
respectively.
AGREEMENT FOR PROFESSIONAL SERVICES:
During May 1996, the Company entered into an agreement for
professional services (the "Agreement") with CLS & Associates, Inc.
("CLS"). Pursuant to the terms of the Agreement, CLS provided certain
engineering and consulting services related to the startup of the
Company's headwear division. The Agreement provided for a term of 125
working days commencing on or about June 1, 1996, for a total fee of
$93,750. Total fees and reimbursed expenses paid at June 30, 1997 and
1996 were $108,952 and $7,880, respectively.
F-13
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 COMMITMENTS (continued)
ENDORSEMENT AGREEMENTS WITH PGA PROFESSIONALS:
The Company has endorsement agreements with certain PGA
professionals. Under the terms of these agreements, the Company is
obligated to pay cash compensation, provide apparel and issue stock
options to purchase shares of the Company's common stock. The number
of options granted to purchase shares of the Company's common stock
were issued based upon the professional's performance in certain
listed PGA events. The stock options are granted at the market value
of the Company's common stock at the date of the agreements. During
the fiscal year ended June 30, 1998, the Company issued 5,000 stock
option shares pursuant to endorsement agreements.
OUTSTANDING LETTERS OF CREDIT:
The Company, in the ordinary course of business, has entered into a
letter of credit arrangement with a bank to facilitate the purchase
of inventory and fabric from various offshore suppliers. At June 30,
1998 the Company has approximately $769,156 of outstanding letters of
credit.
NOTE 16 SHAREHOLDERS' EQUITY
COMPLETION OF PUBLIC OFFERING:
In March and April, 1996 the Company completed its second public
offering of 1,020,000 shares of its common stock, which included an
over allotment of 150,000 common shares. The common stock was offered
at $10.50 per share. The Company realized gross proceeds of
approximately $10.710 million and net proceeds of approximately
$9.597 million after deducting stock offering costs of approximately
$1.113 million.
REPURCHASE OF 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 repurchased, thus bringing the
total common shares authorized for repurchase under the plan to
450,000 shares. Through June 30, 1998, the Company has repurchased a
total of 400,000 shares of its common stock at a cost of
approximately $4.702 million.
The repurchase of the Company's common stock is based upon the Board
of Directors' belief the Company's common stock is underpriced 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 canceled and returned to the status of authorized
but unissued common stock.
During August, 1998, the Company repurchased 15,000 shares of its
common stock at a cost of approximately $190,000.
F-14
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 SHAREHOLDERS' EQUITY (continued)
COMMON STOCK OPTIONS:
In March 1993, the Company, adopted a Stock Option Plan (the "Plan").
The Plan, as originally adopted, provided for the reservation of
750,000 shares of the Company's common stock for issuance pursuant to
the Plan. In January 1995, February 1997 and February 1998, the
shareholders approved increasing the number of shares reserved for
issuance under the Plan to the current authorization of 1,350,000
shares. In March 1995, the Board of Directors approved a restatement
of the Plan to provide clarification regarding the terms, conditions
and administration of the Plan. In February 1997, the shareholders of
the Company voted to amend and restate the Plan to simplify
administration of the Plan in accordance with revisions to Section 16
of the Securities Exchange Act of 1934, as amended.
Under the Plan, the Company may grant options to purchase common
stock to employees, directors and consultants of the Company and any
subsidiary thereof. Generally, the options vest over three years, are
granted at fair market value on the date of grant, expire ten years
from that date, are non-transferrable and cannot be exercised for a
period of six (6) months from the date granted. The Plan, as
restated, is administered by the Compensation Committee, which, at
its discretion, determines the optionees, number of options granted
and exercise periods.
The Company has registered the common stock reserved for issuance
under the Plan with the Securities and Exchange Commission.
In May 1996, the Company's Board of Directors authorized the Company
to prepare and issue a "net issuance" offer to purchase the interests
of non-employee holders of the Company's non-qualified stock options.
The Company offered to pay the difference between the exercise price
of the non-qualified stock option and the fair market value of the
Company's common stock on the date the option holder accepted the
offer. On April 1, 1997, the Company's Board of Directors vote to
terminate the "net issuance" offer. Accordingly, the Company will no
longer accept tendered offers to purchase non-qualified stock options
from option holders. Under this offer, the Company repurchased 30,909
options for approximately $360,000.
At June 30, 1998, the Company had 1,350,000 shares of common stock
reserved for issuance pursuant to the Plan, of which 227,267 options
(110,878 and 181,094 at June 30, 1997 and 1996, respectively) were
exercisable. During fiscal years 1998, 1997 and 1996 option holders
exercised and purchased 73,326, 319,905 and 313,793 shares of the
Company's common stock and the Company realized gross proceeds of
approximately $469,731, $1.657 million and $872,886, respectively.
F-15
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 SHAREHOLDERS' EQUITY (continued)
--------------------
The activity under the Company's Plan is set forth below:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------------------------------------
AGGREGATE WEIGHTED AVERAGE
NUMBER OF RANGE EXERCISE EXERCISE PRICE
OPTIONS PER SHARE PRICE PER SHARE
--------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
BALANCES, JUNE 30, 1995 447,331 $1.60- 6.50 $1,160,158 $ 2.59
Onions granted 296,505 2.50-12.75 2,044,598 6.90
Options canceled (5,103) 2.50- 2.50 (12,758) (2.50)
Options repurchased (1,000) 2.50- 2.50 (2,500) (2.50)
Options exercised (313,793) 1.60- 6.50 (940,592) (3.00)
-------- ----------- ---------- ------
BALANCES, JUNE 30, 1996 423,940 1.60-12.75 2,248,906 5.30
Options granted 309,319 5.00-14.25 3,224,627 10.42
Options canceled (15,892) 5.00- 7.75 (104,913) (6.56)
Options repurchased (29,909) 2.50- 7.75 (100,420) (3.36)
Options exercised (319,905) 1.60-12.12 (1,589,081)
-------- ----------- ---------- ------
BALANCES, JUNE 30, 1997 367,553 2.50-14.25 3,679,119 10.01
Options granted 162,001 6.50-10.63 1,673,135 10.33
Options canceled (34,229) 6.50-14.25 (307,073) (8.89)
Options repurchased -- -- -- --
Options exercised (73,326) 6.50- 7.75 (469,918) (6.41)
-------- ----------- ---------- ------
BALANCES, JUNE 30, 1998 421,999 $2.50-14.25 $4,577,885 $10.85
-------- ----------- ---------- ------
-------- ----------- ---------- ------
</TABLE>
The weighted average fair value of options granted during fiscal
1998, 1997 and 1996 was $10.33, $10.42 and $6.90 per share
respectively.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock Based
Compensation effective for fiscal year 1997 for all issuances of
stock options to non-employees of the Company. The Company will
continue to apply APB Opinion No. 25 (Opinion 25), Accounting for
Stock Issued to Employees for all issuances of stock options to its
employees. Generally, all stock options issued to the Company's
employees, pursuant to the Plan, are not compensatory. No
compensation cost has been recognized for fiscal 1998, 1997 and 1996
under the Plan. Had compensation cost for the Plan been determined
based upon the fair value at the grant date for options granted
consistent with the provisions of SFAS 123, the Company's net income
and net income per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income - as reported $ 4,264,341 $ 3,909,954 $ 2,471,835
Net income - pro forma $ 4,219,146 $ 3,611,462 $ 2,460,156
Earnings per share - as reported $ .93 $ .84 $ .66
Earnings per share - pro forma $ .92 $ .78 $ .65
</TABLE>
F-16
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 SHAREHOLDER'S EQUITY (continued)
--------------------
The fair value of each option grant under the Plan is estimated on
the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
<TABLE>
<S> <C>
Risk-free interest 5.5% - 6.0%
Expected life 3 years
Expected volatility 32% - 35%
Expected dividend $0
</TABLE>
The expected life was determined based on the Plan's vesting period
and exercise behavior of the employees.
The following table summarizes the stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ ---------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.50 27,333 5 $ 2.50 27,333 $ 2.50
6.50 5,000 6 6.50 5,000 6.50
7.75-10.63 199,666 7 9.95 100,768 9.89
12.13-14.25 190,000 8.5 13.16 74,999 13.07
------- -------
421,999 208,100
------- -------
------- -------
</TABLE>
NOTE 17 UNDERWRITER'S WARRANTS
----------------------
The Company, in connection with its initial public offering, sold to
the underwriter for a nominal amount, warrants to purchase up to
70,000 shares of the Company's common stock at $6.50 per share. The
underwriter's warrants are exercisable until April 4, 1999. The
underwriter's warrants also contain antidilution provisions and
certain demand and "piggyback" registration rights. In December 1996,
the holders of the underwriter's warrants utilized their demand
registration rights and the Company filed a registration statement on
Form S-3 to register the underlying shares. Such registration
statement became effective in January 1997. During the fiscal year
ended June 30, 1998, the Company realized gross proceeds of $218,160
from the exercise of 28,563 warrants. At June 30, 1998, warrants to
purchase 20,000 shares of common stock were outstanding.
NOTE 18 PREFERRED STOCK
---------------
The Articles of Incorporation of the Company authorize issuance of a
maximum of 1,500,000 shares of preferred stock. The Articles of
Incorporation vest the Board of Directors of the Company with
authority to divide the class of preferred stock into series and to
fix and determine the relative rights and preferences of the shares
of any such series so established to the full extent permitted by the
laws of the State of Colorado and the Articles of Incorporation. As
of June 30, 1998, the Company had no preferred stock issued or
outstanding.
F-17
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 INVESTMENT BANKING AGREEMENT
----------------------------
During July 1995, the Company entered into an investment banking
agreement with an investment banking firm. The agreement provided the
investment banking firm would serve as the Company's exclusive
financial advisor for 12 months. The Company issued to that firm
"Advisor's Warrants" to purchase 20,000 shares of the Company's
common stock. The Advisor's Warrants were exercisable until July 1998
at an exercise price of $8.125 per share. The Advisor's Warrants
carried piggyback registration rights and the underlying shares were
registered on Form S-3, which became effective during January 1997.
As of June 30, 1998 all of the Advisor Warrants had been exercised
and the Company has realized gross proceeds of $162,500.
NOTE 20 NET INCOME PER SHARE
--------------------
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128),
effective with the year ended June 30, 1998. SFAS 128 requires the
presentation of basic and diluted net income per share. Basic net
income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for that period. Diluted net income per share is computed
giving effect to all dilutive potential common shares that were
outstanding during the period. Dilutive potential common shares
consist of incremental common shares issuable upon exercise of stock
options and warrants for all periods. All prior period net income
per-share amounts have been restated to comply with SFAS 128.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted
net income per share is provided as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1998 1997 1996
------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic and diluted net income
(numerator) $4,264,341 $3,909,954 $2,471,835
Shares used in basic net income
per-share calcuations
(denominator)
Weighted average shares of
common stock outstanding 4,564,355 4,658,796 3,769,859
Shares used in diluted net income
per-share calculations
(denominator)
Weighted average shares of
common stock outstanding 4,564,355 4,658,796 3,769,859
Dilutive effect of stock options 28,396 30,917 3,787,257
---------- ---------- ----------
4,592,751 4,627,879 3,787,257
---------- ---------- ----------
Basic net income per share $ .93 $ .84 $ .66
Diluted net income per share $ .93 $ .84 $ .65
</TABLE>
F-18
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 AGREEMENTS WITH SALES REPRESENTATIVES
-------------------------------------
The Company has entered into Sales Representative Agreements (the
"Agreements") with various individuals whereby, among other things,
the Company has established an independent contractor relationship
with its sales representatives. Pursuant to the terms of the
Agreements the sales representatives' income from the Company is
derived primarily from commissions paid by the Company from sales
generated directly or indirectly by the sales representatives. The
sales representatives are responsible for and assume all income tax
liabilities on commissions and other payments received from the
Company and further agree to hold the Company harmless and to
indemnify the Company for any or all claims that may arise from the
sales representative's actions or inactions. The Agreements provide
no present or future guarantee of income. The sales representatives
are paid a commission of up to 10% of the sales price of Company
products, generated by the sales representatives and delivered to the
customer. The Company reserves the right to amend the commission
terms from time to time. Total commission expense for fiscal years
1998, 1997 and 1996 was $2,389,940, $2,289,494 and $1,682,384,
respectively.
NOTE 22 LITIGATION
----------
The Company is named as defendant in counterclaims to a complaint
filed by the Company. The Company is denying the counterclaim
allegations and intends to vigorously defend itself against them.
Although the eventual outcome cannot be predicted, management
believes that neither the Company's financial position nor results of
its operations will be materially affected by this legal proceeding.
NOTE 23 RETIREMENT PLAN
---------------
In January 1996, the Company adopted a defined contribution savings
plan ( the "401(k) Plan") to provide retirement income to employees
of the Company. The 401(k) Plan is intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended. The
401(k) Plan covers all employees who are at least age 18 and have
been employed at least three months. It is funded by voluntary
pre-tax contributions from employees up to a maximum amount equal to
15% of annual compensation. During 1998, 1997 and 1996, the Company
matched $.25 for each dollar contributed by employees, up to the
first 5% of each employee's compensation contributed to the plan.
Upon leaving the Company, each participant is 100% vested with
respect to the participant's contributions and is vested based upon
years of service with respect to the Company's matching
contributions. Contributions are invested as directed by the
participant in investment funds available under the 401(k) Plan. Full
retirement benefits are payable to each participant in a single cash
payment or an actuarial equivalent form of annuity on the first day
of the month following the participant's retirement. For the years
ended June 30, 1998, 1997 and 1996 the Company contributed $14,019,
$13,257 and $4,457, respectively, to the 401(k) Plan on behalf of
Company employees. The Company has no defined benefit pension plan
nor any other post-retirement or post-employment benefit plan.
F-19
<PAGE>
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24 YEAR 2000 ISSUE (UNAUDITED)
---------------------------
The Company is cognizant of the issues associated with the
programming code in existing computer systems as the Year 2000
approaches. The "Year 2000" problelm 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. As a result, in less than two
years computer systems and/or software used by the Company will need
to be upgraded to comply with such Year 2000 requirements. The
Company 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 Company has initiated
discussions with significant suppliers, large customers and financial
institutions to ensure those parties have appropriate plans to
remediate Year 2000 issues where their systems interface 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.
NOTE 25 QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
--------------------------------------------
The following summarizes selected quarterly financial information for
each of the two years in the period ended June 30, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) First Second Third Fourth Year
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Net sales $6,835 $6,464 $8,610 $9,390 $31,299
Gross profit 2,577 2,405 3,614 4,297 12,893
Net income 752 789 1,359 1,364 4,264
Net income per common share- basic .16 .17 .30 .30 .93
Net income per common share- diluted .16 .17 .30 .30 .93
1997
Net sales 6,266 5,733 8,823 8,078 28,900
Gross profit 2,620 2,467 3,734 3,259 12,080
Net income 797 831 1,199 1,083 3,910
Net income per common share- basic .18 .19 .27 .20 .84
Net income per common share- diluted $ .17 $ .18 $ .25 $ .24 $ .84
</TABLE>
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SPORT-HALEY, INC.
September 28, 1998 By: /S/ ROBERT G. TOMLINSON
------------------------------------------
Robert G. Tomlinson, Chairman of the Board
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ ROBERT G. TOMLINSON Chairman of the Board and Chief Executive September 28, 1998
- ------------------------------ Officer (Principal Executive Officer)
Robert G. Tomlinson
/S/ ROBERT W. HALEY President and Director September 28, 1998
- ------------------------------
Robert W. Haley
/S/ STEVE S. AUGER Treasurer (Principal Financial and September 28, 1998
- ------------------------------ Accounting Officer)
Steve S. Auger
/S/ MARK J. STEVENSON Director September 28, 1998
- ------------------------------
Mark J. Stevenson
/S/ RONALD J. NORICK Director September 28, 1998
- ------------------------------
Ronald J. Norick
/S/ JAMES H. EVEREST Director September 28, 1998
- ------------------------------
James H. Everest
</TABLE>
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF JOHNSTON
THIS LEASE AGREEMENT, made as of this 1st day of April, 1998, between
LARRY M. JONES AND ROBERTA C. JONES, hereinafter "Landlord", and B & L
SPORTSWEAR, INC., a North Carolina corporation, hereinafter "Tenant."
W-I-T-N-E-S-S-E-T-H:
That Landlord, in consideration of the rents, covenants and conditions
herein contained, to be paid, kept and performed by Tenant, does hereby
demise and lease to Tenant, and Tenant does hereby hire and lease from
Landlord, those certain premises (the "Premises") hereinafter described.
NOW, THEREFORE, for and in consideration of the payments to be made by
Tenant and of the prompt and faithful performance of the covenants and
conditions hereinafter to be performed, Landlord hereby leases to Tenant and
Tenant takes and hires from Landlord those certain premises located on U.S.
Highway 301 in or near the Town of Four Oaks, Johnston County, North
Carolina, hereinafter referred to as the "Premises" and shown on the said
plat attached hereto as Exhibit "A", (less and except the property outlined
in blue on Exhibit B), together with the manufacturing buildings known as the
B & L Sportswear Plant, hereinafter collectively referred to as the
"Buildings", together with the non-exclusive right in common with others
lawfully entitled thereto, to the use of the entrance and driveways to and
from the Premises and U.S. Highway 301 South.
<PAGE>
IN CONSIDERATION THEREOF, Landlord and Tenant agree as follows:
1. COVENANT OF TITLE AND QUIET ENJOYMENT: Landlord covenants and
warrants that Landlord alone has full right and lawful authority to enter
into this Lease for the full term hereof; that Landlord is lawfully seized of
the Premises in fee simple or has good title thereto sufficient to be able to
convey this Leasehold and any easement or rights described and perform all
conditions herein required, free and clear of all tenancies, restrictions and
encumbrances, except those acceptable to Tenant, and that at all times during
the term of this Lease and any extensions of said term, Tenant's quiet and
peaceful enjoyment of the Premises and rights as provided herein, shall not
be disturbed or interfered with by anyone.
2. (a) INITIAL TERM: The initial term of this Lease shall be for ten
(10) years, commencing on the 1ST day of April, 1998, and expiring on the
31st day of March, 2008, (a twelve-month period subsequent to the
commencement date shall constitute a "Lease year," as hereinafter referred
to.)
(b) EXTENSION OF TERM: It is agreed that, at the expiration of the
initial term of this Lease, if this Lease shall then be in full force and
effect and Tenant shall have performed all of its obligations, terms and
conditions provided in this Lease, Tenant may, at its option, extend this
Lease for two (2) additional terms of five (5) years each by giving to the
Landlord written notice of its intention to do so not later than ninety (90)
days prior to the end of the initial term or then existing term of this
Lease; and in the event of such extension, all of the terms
- 2 -
<PAGE>
and conditions of this Lease applicable to the initial term of this Lease
shall continue in full force and effect. If Tenant fails to give said notice
to Landlord within such time period, it shall be conclusively deemed that
Tenant has elected not to renew and extend the then existing term of this
Lease and this Lease shall terminate at the end of the then existing term.
3. RENT: Subject to the provisions of Paragraph 6(b) providing for
the payment of Additional Rent, Tenant shall pay to Landlord for the use of
the Premises during the term of this Lease, the following rent: Sixty-Four
Thousand Nine Hundred Ninety One Dollars ($64,991.00) each Lease year of the
Initial Term and any Extended Term payable in monthly installments of
$5,415.92 each.
All monthly payments of rent shall be paid on the 1st day of the month
in advance, commencing on the 1st day of April, 1998, and shall be paid by
Tenant to Landlord, at the address hereinafter designated for notices,
without set-off and without further notice or demand, until Tenant is further
notified by Landlord. All rent shall be payable in the current legal tender
of the United States of America. Any extension of time for the payment of
rent or the acceptance by Landlord or its agent of any money other than the
kind or amount herein specified shall not be a waiver of the right of
Landlord to insist upon the subsequent payments of rent being made in the
manner and at the time herein specified.
4. USE: The Premises may be used by Tenant for the operation of a
clothing manufacturing plant and with the prior written consent of
Landlord, which consent shall not be unreasonably withheld, for other
- 3 -
<PAGE>
commodities. In no event shall the Premises or parking area be used for the
storage of explosives, petroleum or products which create an obnoxious odor
or fail to comply with the environmental requirements hereinafter set forth.
Tenant shall have the right to erect upon the Buildings at the loading docks
on the Premises, a sign in compliance with applicable governmental laws and
regulations and Landlord's approval. In occupying the Premises, Tenant shall
comply with all laws, ordinances, orders and regulations of any lawful
authority and shall keep the Premises in a neat and clean condition and shall
comply with all requirements, ordinances, orders, and regulations of any
lawful authority for the removal of snow and ice or other obstructions from
sidewalks and driveways on the Premises and parking area.
5. TENANT'S EQUIPMENT AND STOCK: Tenant shall have the right to
deliver to and install in the Premises any equipment, trade fixtures, stock
or other material to be used by it in the operation of its business. All
such equipment, trade fixtures and stock used shall be supplied and installed
at the sole cost and expense of Tenant and shall at all times be the sole
property of Tenant.
6. ALTERATIONS TO PREMISES:
(a) Tenant shall not, without Landlord's prior written consent, make any
alterations and additions to any part of the Buildings on the Premises. All
alterations, decorations, installations, additions or improvements upon the
Premises, made by Landlord or Tenant, including, but not limited to, all wiring,
paneling, flooring and installation of walls, shall, unless Landlord elects
otherwise, become the property of
- 4 -
<PAGE>
Landlord, and shall remain upon, and be surrendered with the Premises, as a
part thereof, at the end of the term or any renewal term, as the case may be.
Provided, Tenant shall have the continuing right, without Landlord's consent,
to erect, install, maintain, and operate on the Premises such equipment and
fixtures as Tenant may deem advisable. It is mutually agreed that with
respect to the usual trade fixtures and equipment, that all such trade
fixtures and equipment shall not be deemed to become part of the Premises but
shall remain chattels and the sole and exclusive property of Tenant, except
as otherwise provided in Paragraph 8 of this Lease.
(b) Landlord shall have the option of erecting or causing to be
erected, at Landlord's expense, such structural additions to the Buildings on
the Premises requested by Tenant at any time during the initial term or any
extended term of this Lease, substantially in accordance with plans,
specifications and estimated costs thereof, prepared by Tenant and approved
by Landlord. Landlord may elect to (i) construct or cause to be constructed
such structural additions requested by Tenant within a reasonable time after
notice from Tenant, in a workmanlike manner. In consideration thereof,
Tenant shall pay to Landlord as Additional Rent an amount equal to ten
percent (10%) of Landlord's cost of said improvements, said Additional Rent
to be payable for the remaining part of the Lease year in which the
improvements are completed and for each Lease year of the then existing term
and any extended term thereafter, payable in equal monthly installments
commencing on the first day of the month following completion of said
- 5 -
<PAGE>
structural additions; Additional Rent shall be paid in a manner pursuant to
Paragraph 3 of this Lease; or (ii) elect not to construct said structural
additions, in which event Tenant may exercise its option to purchase the
Premises in accordance with the terms and conditions set forth in Paragraph
26 of this Lease. All additions, alterations and improvements made in or to
the Premises by either Landlord or Tenant shall become the property of the
Landlord and be surrendered with the Premises at the termination of this
Lease.
7. REMOVAL OF EQUIPMENT AND FIXTURES: Tenant shall have the right at
any time during the term of this Lease and at the end of the term to enter
upon and remove or cause to be removed from the Premises any of its equipment
or trade fixtures. All damage caused to the premises by such removal shall
be repaired by Tenant within ten (10) days after removal; provided, however,
that no such property shall be removed if such removal would cause permanent
injury to the structure of the Buildings or Premises. Any personal property
of Tenant or any subtenant or assignee which shall remain in the Premises
after the termination of this Lease and the removal of Tenant or such
subtenant from the Premises, may, at the option of Landlord, be deemed to
have been abandoned by Tenant or such subtenant or assignee and may be either
retained by Landlord as its property or be disposed of, without
accountability, in such a manner as Landlord may see fit (including having
the same stored at the risk and expense of Tenant), or if Landlord shall give
written notice to Tenant to such effect, such property shall be removed by
Tenant at Tenant's sole cost and expense.
- 6 -
<PAGE>
The foregoing provisions of this paragraph shall be without prejudice to
any election by Landlord that Tenant's failure to remove its property
constitutes a holding over by Tenant.
8. MAINTENANCE AND REPAIRS: Landlord shall keep the roof, exterior
walls, foundations, load bearing walls and all structural parts of the
Buildings on the Premises in good repair except for any damages thereto
caused by the negligence of Tenant, its agents, servants and employees, which
damages shall be promptly repaired by Tenant at Tenant's sole expense.
Tenant acknowledges that at the time of the execution of this Lease, the
roof, exterior walls, load bearing walls and all structural parts of the
Buildings on the Premises are in good repair. In the event of any leak in
the roof, Tenant shall immediately report the same to Landlord. Landlord
shall not be responsible for any damage resulting from unreported leaks, or
leaks which occur from damage and destruction beyond the control of Landlord.
Landlord, at its sole cost and expense, shall make all other repairs to
the interior of the Buildings on the Premises including the floor, electrical
and plumbing repairs, except damages thereto caused by the negligence of the
Tenant, its agents, servants, employees and invitees, which repairs shall be
made by Tenant. Tenant agrees to maintain the interior of the Buildings in
good repair, ordinary wear and tear excepted. Landlord shall maintain the
heating and air conditioning equipment during the first Lease year and Tenant
shall maintain said equipment thereafter. Upon the termination of this
Lease, Tenant shall surrender the Premises and all attached improvements
thereon to Landlord
- 7 -
<PAGE>
in as good a condition as existing at the time of its initial occupancy,
ordinary wear and tear excepted. If Tenant defaults in keeping or performing
its obligations hereunder, Landlord shall have the right, after fifteen (15)
days notice (except no notice need be sent in cases of emergency), to keep or
perform Tenant's obligation in its behalf and the cost of the same shall be
added to the next rent payment as the same becomes due.
9. UTILITY PAYMENTS: Upon the presentation by Landlord to Tenant of a
statement from Carolina Power and Light for the utility charges for the
Buildings, Tenant shall pay the entire amount of said statement to Landlord
within five (5) days thereafter. Said amount shall be considered additional
rent. Except with respect to the installation of additional utilities in
connection with the construction of improvements pursuant to Paragraph 6(b)
of this Lease, if Tenant desires additional utilities or additional propane
or natural gas service on the Premises, any installation and all charges for
the use thereof shall be at Tenant's expense. Landlord shall not be required
to furnish any security system. Tenant may secure any gas supply and
security system which Tenant may desire, at Tenant's expense.
10. TAXES AND ASSESSMENTS: Tenant shall list and promptly pay as when
the same become due and payable all taxes, levies and assessments upon the
Premises during each year. Tenant shall list and promptly pay when the same
shall become due all taxes, levies and assessments upon the trade fixtures,
equipment and other personal property located upon the Premises.
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11. FIRE INSURANCE: Tenant shall maintain and pay all premiums
required to keep the Premises, the Buildings and improvements thereon insured
against loss or damage by fire and such other risks as may be included in the
standard form of extended coverage from time to time available to the extent
the full insurable value thereof. Tenant shall keep, maintain, and pay such
insurance as it deems reasonable and necessary to protect Tenant with respect
to its equipment, inventory, contents and personal property located on the
Premises. The proceeds of said policy or policies of insurance upon the
Premises, Buildings and improvements thereon shall belong to Landlord and the
proceeds thereof shall be applied by Landlord as hereinafter set forth. The
proceeds of insurance on Tenant's equipment, inventory, contents and personal
property shall belong to Tenant.
12. SUBROGATION: The parties hereto agree to use their best efforts to
have any and all fire, extended coverage or any and all material damage
insurance which may be carried pursuant to this Lease endorsed with the
following subrogation clause: "This insurance shall not be invalidated
should the insured waive prior to a loss any or all right of recovery against
any party for loss occurring to the property described herein." Each party
hereto hereby waives all claims for recovery from the other party for any
loss or damage to any of its property insured under valid and collectible
insurance policies to the extent of any recovery collectible under such
insurance.
13. DAMAGE OR DESTRUCTION OF PREMISES: If the part of the Buildings
located on the Premises shall be damaged by fire or other
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casualty during the term of this Lease, the following terms and conditions
shall apply:
(a) If part of the Buildings on the Premises is damaged by fire or
other casualty during the term or any extended term of this Lease, so that it
can, with reasonable diligence, be repaired within sixty (60) days and
entirely from the insurance proceeds available to Landlord, the Landlord
shall have that part of the Buildings repaired as quickly as is reasonably
possible and the rent shall be abated for such time and as to the extent that
the Premises remains unfit for occupancy with respect to the intended use by
Tenant. In no event shall Landlord be required to repair the improvements
upon the leased Premises at a cost greater than the insurance proceeds
available to Landlord.
(b) If, during the term of this Lease, part of the Buildings the
Premises are damaged by fire or other casualty, so that it cannot, with
reasonable diligence, be repaired within the time and in the manner and
entirely from the insurance proceeds as set forth in sub-section (a) above,
then either Landlord or Tenant may, at its option, notify the other party in
writing of its intention to terminate said lease, said notice of termination
to be given within fifteen (15) days of the date of the fire or other
casualty, and Tenant shall not thereafter be responsible for the rent. In
the event that either Landlord or Tenant exercises the foregoing right to
terminate this Lease, the proceeds from the insurance policies provided for
under Paragraph 12 herein for the Premises shall belong to Landlord. The
proceeds from policies on
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Tenant's equipment, inventory, contents and personal property shall belong to
Tenant.
14. EMINENT DOMAIN: In the event the Premises shall be taken by or
pursuant to any governmental authority or through the exercise of the right
of eminent domain, Landlord and Tenant shall join and cooperate in resisting
such proceeding if such resistance is feasible and desirable to Tenant and,
if it is not, shall join and cooperate in prosecuting their respective claims
for damages incurred from the successful exercise of such right or proceeding.
If the whole of the Premises shall be taken or condemned by any
competent authority for any public use or purpose during the term of this
Lease, all obligations of the Tenant shall cease upon the date of the taking
and any unearned rent paid by Tenant shall be refunded. So much of the award
as represents the value of the land and the Buildings and improvements shall
belong to Landlord. Tenant shall be entitled to all other damages which may
be awarded based upon loss of its leasehold interest, signs, equipment or
interruption of business.
In the event that a part of the Premises shall be taken or condemned,
and the taking in any other way reduces or damages the Premises to an extent
that it may not be effectively used for the purposes hereof; then and in any
such event the Tenant may, at any time either prior to or within a period of
thirty (30) days after the date when possession of the Premises shall be
required by the condemning authority, elect to terminate this Lease. The
separate awards shall belong to Landlord and Tenant respectively as
hereinbefore set forth.
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In the event that Tenant shall fail to exercise any such option to terminate
this Lease, or in the event that a part of the Premises shall be taken or
condemned under circumstances under which the Tenant will have no such
option, then in either such event this Lease shall continue in effect with
respect to the portion of the Premises not so taken, and Tenant will, with
all due diligence and with all proceeds of the award available for the
Buildings and improvements, repair and restore the Premises or what may
remain thereof to their former condition. Any remaining part of the award
shall be divided between Landlord and Tenant as hereinbefore set forth with
respect to a taking of the whole of the Premises. Upon the completion of
such work, the monthly rent due Landlord under this Lease shall be reduced to
reflect any loss sustained in area and usability. In the event that
agreement is not reached with respect to reduced rent, an appraisal shall be
made by a competent appraiser selected by Landlord and Tenant, and the
reduced rental shall be the amount determined by the appraiser to be the fair
market rental.
15. INDEMNITY-LIABILITY INSURANCE: Tenant agrees to save Landlord
harmless and to indemnify Landlord from and against any and all claims by or
on behalf of any person or entity arising from or relating to (i) Tenant's
use, occupancy, conduct, operation or management of the Premises during the
term or (ii) any work or thing whatsoever done or not done on the Premises by
Tenant or any of its agents, contractors, servants, employees, licensees or
invitees during the term, or (iii) any breach or default by Tenant in
performing any of its obligations under the provisions of this Lease or
applicable law, or (iv) any negligent,
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tortious or other act or omission of Tenant or any of its agents,
contractors, servants, employees, licensees, or invitees (while on the
Premises or on the parking area) during the term or any extended term of this
Lease, as well as from and against all expenses and liabilities incurred in
connection with any such claim or any action or proceeding brought thereon
(including, by way of example rather than of limitation, the fees of
attorneys, litigation expenses, investigations and experts), all regardless
of whether such claim is asserted before or after the expiration of the term
or any earlier termination of this Lease. Tenant shall provide and keep in
force during the term of this Lease and any extension of said term for the
mutual benefit of Landlord and Tenant, commercial general liability insurance
against claims for bodily injury, death or property damage with respect to
the Premises and parking area, as the case may be, with the other party named
as an additional insured, such insurance to afford minimum protection of not
less than Two-Million Dollars ($2,000,000.00) combined single limit coverage
per occurrence, in form approved by Landlord. Tenant shall provide, also,
Worker's Compensation insurance to comply with applicable state law. Any of
such insurance may be carried under a blanket policy covering the Premises
and other locations of Tenant. Certificates of all policies of insurance
shall be delivered to Landlord or a party designated by Landlord upon written
request.
16. DEFAULT OF TENANT:
(a) If Tenant shall fail to pay any installments of rent when due or
fail to keep and perform any other covenant of this Lease and if
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Tenant shall continue in any such failure or default for a period of fifteen
(15) days in the event of non-payment of rent or thirty (30) days in the
event of any other default after Landlord has given Tenant written notice
thereof and demand for payment of rent or correction of default, as the case
may be, Landlord may reenter the Premises and take possession of the same,
including the Buildings, parking area, improvements and attached fixtures,
other than the removable trade fixtures and equipment, either with or without
process of law, and expel Tenant therefrom without prejudice to any other
legal or equitable remedies available to Landlord. No such entry by
Landlord, either with or without process of law, shall bar Landlord from the
recovery of damages as hereinafter set forth. If any default shall occur
(other than in the payment of rent) which cannot with due diligence be cured
within a period of thirty (30) days, and Tenant, prior to the expiration of
thirty (30) days from and after the giving of notice as aforesaid, commences
to eliminate such default and proceeds diligently to take steps to cure the
same, Landlord shall not have the right to reenter as hereinbefore provided.
(b) If Landlord elects to reenter, as herein provided, or should
take possession of the Premises, Buildings and parking area pursuant to legal
proceedings or pursuant to any notice provided for by law, Landlord may
either terminate this Lease or may, from time to time without terminating
this Lease and to mitigate damages, make such alterations and repairs as may
be necessary in order to relet the Premises, and relet said Premises or any
part thereof for such term or terms and at such rental and upon such other
terms and conditions as
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Landlord may deem advisable; and, upon each such reletting, all rental
received by Landlord from such reletting shall be applied, first, to payment
of any indebtedness other than rent due hereunder from Tenant to Landlord;
second, to the payment of any costs and expenses of any such reletting,
including attorney's fees and costs of such alterations and repairs; third,
to the payment of rent due and unpaid hereunder, and the residue, if any,
shall be held by Landlord and applied in payment of future rent as the same
may become due and payable hereunder. If such rentals received from such
reletting during any month be less than that to be paid during that month by
Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly by Tenant within ten (10)
days after the receipt of said calculation from Landlord. If such deficiency
be not paid, Landlord may sue monthly, periodically or at the end of the term
to recover the same with the other charges set forth herein, as Landlord may
elect. No such reentry or taking possession of said Premises by Landlord
shall be construed as an election on its part to terminate this Lease unless
a written notice of such intention be given to Tenant by Landlord.
Notwithstanding any such reletting without termination, Landlord may at any
time thereafter elect to terminate this Lease for such previous breach. If
Landlord at any time terminates this Lease for any breach, it shall be
entitled to recover from Tenant the costs of recovering the Premises,
reasonable attorney's fees and the worth at the time of such termination of
the excess, if any, of the amount of rent and charges reserved in this Lease
for the remainder of the term for which Tenant is
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obligated over the then reasonable rental value of the Premises for the
remainder of the term for which Tenant is obligated.
17. BANKRUPTCY: In the event Tenant shall file a voluntary petition
in bankruptcy, or be by any court adjudicated a bankrupt or insolvent, or
shall be placed in liquidation or reorganization, or a temporary or permanent
receiver or trustee of Tenant's property shall be appointed by any court, or
if Tenant shall make a general assignment, or if any execution or attachment
shall be issued against Tenant, or any of Tenant's property, whereby the
Premises shall be taken or occupied or attempted to be taken or occupied by
someone other than Tenant, or if this Lease or any part thereof shall, by
operation of law, devolve upon or pass to any person or persons other than
Tenant, then Landlord shall have the right, at its option, to declare this
Lease terminated, and from thenceforth it shall be lawful for Landlord to
reenter and repossess itself of the Premises by force or otherwise and to
dispossess and remove therefrom Tenant its legal representatives or other
occupants thereof, and their effects, and to hold the same as if this Lease
had not been made, and the Tenant hereby expressly waives notice of intention
to reenter or instituting legal proceedings to that end.
18. ENVIRONMENTAL CONDITIONS COMPLIANCE: Tenant shall not (either with
or without negligence) cause or permit the escape, disposal or release of any
biologically active or other hazardous substances or materials in any manner
not sanctioned by law or by the highest standards prevailing in the industry
for the storage and use of such substances or materials, nor allow to be
brought into the Premises (as defined below)
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any such materials or substances. Tenant covenants and agrees that it will
do nothing that would cause the Premises to be in violation of existing or
hereafter enacted statutes, laws, rules, ordinances, or orders, permits, and
regulations of all state, federal, local, and other governmental and
regulatory authorities, agencies, and bodies applicable to the Premises,
pertaining to environmental matters, or regulating, prohibiting or otherwise
having to do with petroleum asbestos and all other toxic, radioactive, or
hazardous substances or material.
As used in this Lease, the term "hazardous substance' means any
substance, element, compound, mixture, solution, waste, pollutant,
contaminant or material that: (i) is designated, defined or listed; (ii) has
characteristics identified; or (iii) is considered hazardous, dangerous or
toxic in, under or pursuant to any of the following; (a) the Federal Water
Pollution Control Act; (b) the Comprehensive Environmental Response,
Compensation and Liability Act, (c) the Solid Waste Disposal Act, (d) the
Clean Air Act, (e) the Clean Water Act, (f) any "Superfund" or "Superlien"
law, and (g) any other laws now or hereafter in effect. All hereinafter
collectively referred to as the "Laws".
The term "hazardous substance" also means: (a) any imminently
hazardous, dangerous or toxic substance, element, compound, mixture,
solution, waste, pollutant, contaminant or material that is subject to any
action taken in, under or pursuant to the Toxic Substances Control Act; (b)
any petroleum products or byproducts, including crude oil or any fraction
thereof and any other liquid hydrocarbon, which is not specifically
designated, defined or listed, or has no characteristics
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identified in, under or pursuant to any Laws, as well as natural gas, natural
gas liquids, liquified natural gas, synthetic gas usable for fuel and any
mixtures of any such natural gas or synthetic gas; and (c) any other
substance, element, compound, mixture, solution, waste pollutant, contaminant
or material which may pose a threat or risk of harm to human health property,
the environment or the surface, soils, geologic materials, groundwater or air
in, at, on, under, about or surrounding the Premises or Buildings or parking
area.
Tenant shall hold Landlord free, harmless, and indemnified from any
penalty, fine, claim, demand, liability, cost, or charge of any kind
whatsoever which Landlord shall incur, or which Landlord would otherwise
incur, by reason of Tenant's failure to comply with any of the provisions
herein, including, without limitation, (1) the cost of bringing the Premises
into compliance with all Laws; (2) the cost of all appropriate or necessary
tests and examinations of the Premises to confirm that the Premises have been
brought into compliance with all Laws; and (3) the fees and expenses of
Landlord"s attorneys, engineers, and consultants incurred by Landlord in
enforcing or confirming compliance with the provisions herein.
For the purpose of applying the covenants herein, the Premises shall
also mean, refer to and include that part of the Buildings on the Premises,
and all improvements thereon; all personal property used in connection with
the Premises and parking area (including that owned by Tenant); and the soil,
ground water, and surface water of the parking area described in this Lease.
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The foregoing covenants and undertakings of Tenant contained herein
shall nevertheless not apply to any condition or matter constituting a
violation of any Laws: (1) which existed prior to the commencement of
Tenant's use or occupancy of the Premises or parking area or was not caused,
in whole or in part, by Tenant or Tenant's agents, representatives,
employees, officers, partners, contractors, licensees, or invitees; or (2) to
the extent such violation is caused by the willful acts or negligence of
Landlord or Landlord's agents, representatives, employees, officers,
partners, contractors, licensees, or invitees.
The covenants contained herein shall survive the expiration or
termination of this Lease, and shall continue for so long as Landlord and its
successors and assigns may be subject to any expense, liability, charge,
penalty, or obligation against which Tenant has agreed to indemnify Landlord
under the terms hereof.
19. ASSIGNMENT AND SUBLETTING: Tenant may not, without the prior
written consent of Landlord, sublet, assign or transfer this Lease to any
person, natural or corporate, whomsoever. In such event, however, Tenant
shall remain primarily liable for the keeping and performance of all its
covenants hereunder, including, but not limited to the prompt and due payment
of rent. The consent of Landlord shall not be unreasonably withheld, but it
is agreed that the withholding of consent because of any sublessee, assignee
or transferee engaging in a hazardous activity or creating additional expense
to the Landlord shall not be deemed unreasonable.
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19.01 PERMITTED ASSIGNEES: Notwithstanding the provisions of Paragraph
19, and provided Tenant is not in default under any term or condition of this
Lease, this Lease may be assigned to any corporation into or with which
Tenant may be merged or consolidated or to any corporation which shall be an
affiliate, subsidiary, parent or successor of Tenant, or of a corporation
into or with which Tenant may be merged or consolidated, or to a partnership,
the majority interest in which shall be owned by stockholders of Tenant or of
any such corporation. If there shall be an assignment to a corporation or
partnership, referred to in the immediately preceding sentence, the
provisions of Paragraph 19 with respect to assignment or subletting, shall
then apply to such corporation or partnership.
For the purpose of this Section a "subsidiary" or "affiliate" or a
"successor" of Tenant shall mean the following:
(a) An "affiliate" shall mean any corporation which, directly or
indirectly, controls or is controlled by or is under common control with
Tenant. For purpose, "control" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such corporation whether through the ownership of voting
securities or by contract or otherwise.
(b) A "subsidiary" shall mean any corporation not less than fifty
percent (50%) of whose outstanding stock shall, at the time, be owned
directly or indirectly by Tenant.
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(c) A "successor" of Tenant shall mean:
(i) A corporation in which or with which Tenant, its corporate
successors or assigns is merged or consolidated, in accordance with
applicable statutory provisions for merger or consolidations of corporation,
provided that by operation of law or by effective provisions contained in the
instruments of merger or consolidation, the liabilities of the corporations
participating in such merger or consolidation are assumed by the corporations
surviving such merger or created by such consolidation, or
(ii) A corporation acquiring this Lease and the term hereby
demised and a substantial portion of the property and assets or stock of
Tenant, its corporate successors or assigns, or
(iii) Any corporate successors to a successor corporation becoming
such by either of the methods described in (i) or (ii), provided that on the
completion of such merger, consolidation, acquisition, or assumption, the
successor shall have a net worth of no less than Tenant's net worth
immediately prior to such merger, consolidation, acquisition or assumption.
Acquisition by Tenant or its corporate successors of a substantial
portion of the assets, together with the assumption of all or substantially
all of the obligations and liabilities of any corporation, shall be deemed a
merger of such corporation into Tenant for the purpose of this Paragraph.
Any assignment pursuant to this Paragraph 19.01 shall not release Tenant
of its liability under this Lease.
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20. WAIVER: Any waiver at any time of any breach of any condition of
this Lease shall extend only to the particular breach so waived and shall not
impair or affect the existence of such condition or the right of Landlord
thereafter to avail itself of any remedies for any breach thereof subsequent
to any such waiver. Failure or neglect of Landlord to act upon a breach of
one or more of the covenants, terms and conditions of this Lease shall not be
construed as a waiver of such breach or any subsequent breach or of any right
created thereby.
21. RIGHTS OF PARTIES: Each and every provision of this Lease shall
bind and inure to the benefit of the parties hereto, their legal
representatives, heirs, successors and assigns. All provisions of this Lease
apply in the plural sense where there is more than one Landlord and
corporations, associations, partner-ships, individual males or females, shall
be deemed fully included, and the neuter pronouns shall be construed to mean
masculine or feminine, singular or plural, where such construction is
necessary to make any provisions of this Lease applicable to any person,
persons, firms, corporation, association, thing or act at any time.
22. NOTICES: All notices authorized or required to be given to
Landlord shall be in writing and shall be deemed to have been given when
mailed by certified or registered mail with prepaid postage addressed to:
Larry M. Jones and Roberta C. Jones, 3469 Batchelor Road, Nashville, North
Carolina 27856, and those authorized or required to be given to Tenant shall
be in writing and shall be deemed to have been given when mailed in the same
manner to B & L Sportswear, Inc., 4600 East 48th
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Avenue, Denver, Colorado, 80216, subject to the right of either Landlord or
Tenant to designate by notice in writing a new address to which said notices
or demands must be sent.
23. RECORDATION OF MEMORANDUM OF LEASE: Upon the request of either
Landlord or Tenant, the other party will in good faith cooperate in the
preparation and execution of a recordable instrument describing the parties,
the leased Premises, any easement in connection therewith, any restrictions,
the basic terms of this Lease and such other portions hereof as either party
may desire to be included in such instrument. The cost of preparing and
recording such instrument shall be paid by the requesting party.
24. END OF TERM, HOLDING OVER AND ATTORNEY'S FEES: Upon the expiration
of the term or other termination of this Lease, tenant shall quit and
surrender to landlord the Premises, broom clean and in as good order and
condition as the Premises were at the time of Tenant's occupancy thereof,
ordinary wear and tear, damage by fire or other casualty not caused by
Tenant, its servants, agents or employees and alterations, additions and
improvements to the Premises consented to in writing by Landlord excepted,
and Tenant shall remove from the Premises all of its property.
If Tenant shall hold over after the expiration of the term or other
termination of this Lease, such holding over shall not be deemed to be a
renewal of this Lease but shall be deemed to create a tenancy from
month-to-month and by such holding over Tenant shall be deemed to have
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agreed to be bound by all of the terms and conditions of this Lease except as
to the term hereof.
If any rent owing under this Lease is collected by or through an
attorney-at-law, Tenant agrees to pay Landlord's reasonable attorney's fees
not in excess of fifteen (15%) percent (or if the statutes or other laws of
the State of North Carolina in effect at the time of such collection limit
the amount so payable as attorney's fees, then the maximum percentage not in
excess of fifteen (15%) percent allowed by such laws or statutes) of the
amount so collected. The provisions of this Paragraph 24 do not exclude
Landlord's rights of re-entry or any other right reserved hereunder.
25. SUBORDINATION: Tenant agrees that this Lease is and shall remain
subject and subordinate to and may be assigned as security for any present
and all future mortgages or deeds of trust which may now or hereafter affect
this Lease or the Buildings or the real property upon which the Buildings is
located and to and for all renewals, modifications, consolidations,
replacements and extensions thereof. This clause shall be self-operative and
no further instrument shall be necessary to effect such subordination;
however, Tenant shall execute promptly and deliver to Landlord any such
certificate or certificates in writing as Landlord may request evidencing the
subordination of this Lease to or the assignment of this Lease as additional
security for such mortgage or deed of trust. Landlord, however, shall
exercise its best efforts to arrange with such mortgagee for an agreement
providing that if, by foreclosure or otherwise, such holder, or any successor
in
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interest comes into possession of the Premises, becomes the owner of the
Premises, or takes over the rights of Landlord in the Premises, it will not
disturb the possession, use or enjoyment of the Premises by Tenant, its
successors or assigns, or disaffirm this Lease or Tenant's rights or estate
hereunder so long as Tenant's obligations are fully performed in accordance
with terms of this Lease.
26. TENANT'S OPTION TO PURCHASE:
(a) OPTION TO PURCHASE: Landlord grants to Tenant the option to
purchase the Premises at the time, for the consideration, and upon the terms
and conditions set forth below.
(b) OPTION DATE, TERM: Tenant may purchase the Premises only on
the option date. For the purposes of this option, the term "option date"
shall be a date thirty (30) days from the date Landlord notifies Tenant of
Landlord's election not to construct structural additions requested by Tenant
as provided in Paragraph 6(b) of this Lease.
(c) EXERCISE OF OPTION: Tenant's election to exercise this option
must be evidenced by a written notice to Landlord not less than thirty (30)
days prior to the option date, which notice shall be deemed to have been
given when mailed by registered or certified mail, with postage prepaid, to
the address of Landlord set forth in Paragraph 22, or any other new address
which has been designated in writing to which notices may be sent as
provided in said Paragraph 22.
(d) OPTION PRICE: The price to be paid by Tenant to Landlord for
the Premises, if the option is exercised, shall be $714,902.85, plus
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the cost to Landlord of any structural additions made by Landlord pursuant to
Paragraph 6(b), plus ten percent (10%) of the costs to Landlord of said
structural additions.
(e) EXPENSES, MORTGAGE: The option price to be paid to Landlord,
as provided above, shall be a net amount to Landlord and all expenses in
connection with the transfer of the Premises, including, but not limited to,
title insurance, recording fees, documentary stamps, and all other closing
costs, shall be paid by Tenant. The option price, reduced by the amount of
any existing mortgage, shall be paid by Tenant in cash to landlord
concurrently with the conveyance of the Premises by Landlord to Tenant.
(f) TRANSFER OF TITLE: Except as provided below, Landlord shall
convey the Premises to Tenant free and clear of any mortgage or other
encumbrance. Any such transfer shall be effected by a warranty deed
containing special covenants of warranty by Landlord.
(g) FIRST DEED OF TRUST: Tenant's rights under this option are
and shall be subject and subordinate to any deed of trust constituting a
first lien on the Premises, or any part thereof, whether such deed of trust
has heretofore been, or may hereafter be, placed upon the Premises to secure
an indebtedness to any savings bank, bank, trust company, or other
institutional lender, private or public, and to any renewal, modification,
consolidation, replacement, or extension of any such deed of trust. This
subordination is limited and relates only to a first mortgage securing an
indebtedness that will not on any option date exceed the price at which this
option may then be exercised on that
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date, as herein provided. This subordination shall be self-operative and no
further instrument of subordination shall be required. Tenant shall,
nevertheless, execute and deliver, from time to time, any instrument and
certificate affirming and confirming such subordination that Landlord may
reasonably request. Landlord will cause any such deed of trust to contain
provisions requiring the holder of the indebtedness secured by deed of trust
to mail to Tenant by registered mail, addressed to Tenant at its office as
set forth in this Lease, a copy of each notice of breach of covenant,
default, or foreclosure given by the holder or the trustee under such deed of
trust to Landlord. Notwithstanding the provisions of Paragraph 26(b), Tenant
may, upon receiving notice of breach of covenant, default or foreclosure,
under such deed of trust, exercise the option for the price and upon such
other terms set forth in this Paragraph 26.
(h) PERFORMANCE OF LEASE: The right to exercise this option is
conditioned upon the faithful performance by Tenant of all its covenants,
conditions, and agreement under this Lease, and the payment by Tenant of all
rent and any other special payments as provided in this Lease to the date of
the completion of the purchase of the property by Tenant.
(i) ADJUSTMENTS: Adjustments and prorations of taxes, insurance
premiums, and similar items shall be made as of the date of the closing of
title.
(j) ASSIGNMENT: Tenant may not assign its rights under this
option separately from all of its other rights under this Lease.
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<PAGE>
(k) TERMINATION: If this Lease expires or is terminated in any
manner or for any reason (except as the result of Landlord's failure to
perform its covenants thereunder), all of Tenant's rights under this option
shall cease, and this option shall be void. This provision shall be
applicable in all events, and despite a separate assignment by Tenant of its
rights under this option.
27. ATTORNEYS FEES, COSTS: If suit shall be brought for recovery of
possession of the Premises, rent or any other amount due under the provisions
of this Lease, or due to a breach of any covenant herein contained on the
part of Tenant or Landlord to be kept or performed, and a breach shall be
established, the prevailing party shall be entitled to its reasonable and
necessary expense incurred therefor, including reasonable attorney's fees and
court costs.
28. JUDICIAL INTERPRETATION: Not withstanding the presumption of law
whereby an ambiguity or conflict in provisions shall be construed against the
drafter, the parties hereto hereby agree that although one party may have
generated this Agreement, both parties have been represented by counsel, this
Agreement has been heavily negotiated, and they have equally participated in
the drafting of this Agreement. Therefore, such presumption shall not be
applied if any provision or term of this Agreement required judicial
interpretation.
IN WITNESS WHEREOF, Landlord and Tenant have each executed or caused
this Lease Agreement to be executed in duplicate originals in their behalf in
the manner prescribed by law.
- 28 -
<PAGE>
LANDLORD:
/s/ Larry M. Jones (SEAL)
--------------------------
LARRY M. JONES
/s/ Roberta C. Jones (SEAL)
--------------------------
ROBERTA C. JONES
TENANT:
B & L SPORTSWEAR, INC.
ATTEST: BY: /s/ Grant M. Beeman
--------------------------
Vice President
/s/ Steve S. Auger
- --------------------------
Secretary
(CORPORATE SEAL)
NORTH CAROLINA
COUNTY OF NASH
I, SHERYL L. HARRIS, a Notary Public of the County and State aforesaid,
certify that LARRY M. JONES AND ROBERTA C. JONES, personally appeared before
me this day and acknowledged the execution of the foregoing Lease Agreement.
WITNESS my hand and notarial stamp or seal, this 24th day of March, 1998.
/s/ Sheryl L. Harris
--------------------------
Notary Public
My Commission Expires: 6/30/01
- 29 -
<PAGE>
State of Colorado
COUNTY OF DENVER
I, JOAN M. MELGARD, a Notary Public of the County and State aforesaid,
certify that STEVE AUGER, personally appeared before me this day and
acknowledged that he/she is Secretary of B & L SPORTSWEAR, INC., a North
Carolina corporation, and that by authority duly given and as the act of the
corporation, the foregoing Lease Agreement was signed in its name by its VICE
President, sealed with its corporate seal and attested by himself/herself as
its Secretary.
WITNESS my hand and notarial stamp or seal, this 27th day of March, 1998.
/s/ Joan M. Melgard
--------------------------
Notary Public
My Commission Expires: 8/2/99
- 30 -
<PAGE>
Exhibit 11
NET INCOME PER SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128), effective with the year
ended June 30, 1998. SFAS 128 requires the presentation of basic and
diluted net income per share. Basic net income per share is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for that period. Diluted net income
per share is computed giving effect to all dilutive potential common shares
that were outstanding during the period. Dilutive potential common shares
consist of incremental common shares issuable upon exercise of stock
options and warrants for all periods. All prior period net income
per-share amounts have been restated to comply with SFAS 128.
In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted net
income per share is provided as follows:
<TABLE>
<CAPTION>
Years ended June 30, 1998 1997 1996
-------------------- ---- ---- ----
<S> <C> <C> <C>
Basic and diluted net income
(numerator) $4,264,341 $3,909,954 $2,471,835
Shares used in basic net income
per-share calcuations
(denominator)
Weighted average shares of
common stock outstanding 4,564,355 4,658,796 3,769,859
Shares used in diluted net income
per-share calculations
(denominator)
Weighted average shares of
common stock outstanding 4,564,355 4,658,796 3,769,859
Dilutive effect of stock options 28,396 30,917 3,787,257
---------- ---------- ---------
4,592,751 4,627,879 3,787,257
---------- ---------- ----------
Basic net income per share $ .93 $ .84 $ .66
Diluted net income per share $ .93 $ .84 $ .65
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
B&L Sportswear, Inc.
<PAGE>
[LETTERHEAD]
EXHIBIT 23
CONSENT OF LEVINE, HUGHES & MITHUEN, INC.
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements No.
33-88948, No. 333-26221 and No. 333-42787 on Form S-8 and Registration
Statement No. 333-18831 on Form S-3 of Sport-Haley, Inc., of our report dated
September 4, 1998 on the financial statements of Sport-Haley, Inc., appearing
in this Annual Report on Form 10-K of Sport-Haley, Inc. for the year ended
June 30, 1998.
/s/ Levine, Hughes & Mithuen, Inc.
Englewood, Colorado
September 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 6502
<SECURITIES> 13
<RECEIVABLES> 6554
<ALLOWANCES> 155
<INVENTORY> 17893
<CURRENT-ASSETS> 32365
<PP&E> 4200
<DEPRECIATION> 1455
<TOTAL-ASSETS> 35236
<CURRENT-LIABILITIES> 3707
<BONDS> 0
0
0
<COMMON> 18416
<OTHER-SE> 13049
<TOTAL-LIABILITY-AND-EQUITY> 35236
<SALES> 31299
<TOTAL-REVENUES> 31299
<CGS> 18423
<TOTAL-COSTS> 18423
<OTHER-EXPENSES> 7681
<LOSS-PROVISION> 52
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> 5496
<INCOME-TAX> 1238
<INCOME-CONTINUING> 4264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4264
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
