<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
--- EXCHANGE ACT
COMMISSION FILE NO. 1-12888
SPORT-HALEY, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1111669
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4600 E. 48TH AVENUE, DENVER, COLORADO 80216
(Address of principal executive offices)
(303) 320-8800
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days: Yes X No
----- -----
State the number of shares outstanding in each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 9, 1999
COMMON STOCK, NO PAR VALUE 3,767,555
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART 1 - CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 3
CONSOLIDATED STATEMENTS OF INCOME 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7-9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULT OF OPERATIONS 10-13
PART II - OTHER INFORMATION 14
SIGNATURES 15
</TABLE>
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SPORT-HALEY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1999 1999
(UNAUDITED) (NOTE)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,876 $ 8,581
Short-term investments and marketable securities 1 1
Accounts receivable, net of allowances of
$82 and $87, respectively 4,618 5,671
Inventories 12,993 13,283
Other current assets 1,273 1,585
Deferred taxes 123 124
-------- --------
Total current assets 27,884 29,245
Property and equipment, net 2,351 2,468
Net assets of discontinued operations 180 306
Goodwill, net of amortization 266 84
Deferred taxes 96 51
Other assets 310 313
-------- --------
$ 31,087 $ 32,467
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable $ 600 $ 600
Accounts payable 416 788
Accrued income taxes 84 -
Accrued commissions and other expenses 1,065 769
-------- --------
Total current liabilities 2,165 2,157
-------- --------
Minority interest (10) (191)
-------- --------
Shareholders' equity:
Preferred stock, no par value; 1,500,000 shares
authorized; none issued and outstanding - -
Common stock, no par value; 15,000,000 shares
authorized; 3,842,552 and 4,257,522 shares
issued and outstanding, respectively 14,648 16,355
Additional paid-in capital 928 880
Retained earnings 13,356 13,266
-------- --------
Total shareholders' equity 28,932 30,501
-------- --------
$ 31,087 $ 32,467
======== ========
</TABLE>
Note: Taken from the audited balance sheet at that date.
3
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $ 5,208 $ 7,496
Cost of goods sold 3,556 4,609
------- -------
Gross profit 1,652 2,887
Selling, general and administrative expense 1,545 1,842
------- -------
Income from operations 107 1,045
Other income (expense):
Other income, net 34 119
------- -------
Income before income taxes and
minority interest 141 1,164
Minority interest benefit 3 13
Provision for income taxes (55) (350)
------- -------
Net income $ 89 $ 827
======= =======
Basic earnings per common share $ 0.02 $ 0.18
======= =======
Diluted earnings per common share $ 0.02 $ 0.18
======= =======
</TABLE>
4
<PAGE>
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 89 $ 827
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 172 131
Deferred taxes and other (12) -
Allowance for doubtful accounts 15 15
Stock option compensation 56 65
Loss on disposal of assets 92 -
Cash provided (used) due to changes in assets
and liabilities:
Accounts receivable 1,038 438
Inventory 290 324
Other assets 133 (322)
Accounts payable (372) (1,511)
Accrued commissions and other expenses 295 (355)
Accrued income taxes 84 34
Other liabilities - (4)
Minority interest 179 (10)
------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 2,059 (368)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (89) (101)
Proceeds from disposal of fixed assets 32 -
Purchases of held to maturity investments - (959)
------- -------
NET CASH USED BY INVESTING ACTIVITIES (57) (1,060)
------- -------
</TABLE>
5
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SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock $(1,707) $ (650)
Net proceeds from issuance of common stock - 16
------- -------
NET CASH USED BY FINANCING ACTIVITIES (1,707) (634)
------- -------
NET INCREASE (DECREASE) IN CASH 295 (2,062)
CASH AND CASH EQUIVALENTS, BEGINNING 8,581 6,502
------- -------
CASH AND CASH EQUIVALENTS, ENDING $ 8,876 $ 4,440
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ - $ 330
======= =======
Interest $ 12 $ 10
======= =======
</TABLE>
6
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SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been
prepared by Sport-Haley, Inc. (the "Company") without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as allowed by such
rules and regulations. The Company believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with
the Company's annual audited consolidated financial statements dated
June 30, 1999, included in the Company's annual report on Form 10-K as
filed with the Securities and Exchange Commission. While management
believes the procedures followed in preparing these financial
statements are reasonable, the accuracy of the amounts are, in some
respects, dependent upon the facts that will exist, and procedures that
will be accomplished by the Company later in the year.
The management of the Company believes that the accompanying unaudited
condensed consolidated financial statements prepared in conformity with
generally accepted accounting principles, which require the use of
management estimates, contain all adjustments (including normal
recurring adjustments) necessary to present fairly the operations and
cash flows for the period presented.
The consolidated financial statements include the accounts of
Sport-Haley, Inc., and its majority owned subsidiary, B&L Sportswear,
Inc. (collectively referred to as the Company). All significant
intercompany accounts and transactions have been eliminated.
NOTE 2 INVENTORIES
Inventories at September 30, 1999 consist of the following:
<TABLE>
<S> <C>
Raw materials $ 5,781,000
Finished goods 7,212,000
-------------
$ 12,993,000
=============
</TABLE>
NOTE 3 INCOME TAXES
The components of the deferred tax asset and net deferred tax liability
recognized in the accompanying balance sheet as of September 30, 1999,
are as follows:
<TABLE>
<CAPTION>
Current Long-Term
---------- ----------
<S> <C> <C>
Deferred tax liability $ - $ -
Deferred tax asset 123,000 96,000
---------- ----------
$ 123,000 $ 96,000
========== ==========
</TABLE>
7
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SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 INCOME TAXES (Continued)
The types of temporary differences between the tax bases of assets and
liabilities and the financial reporting amounts that give rise to a
significant portion of the deferred tax liability and their appropriate
tax effects at September 30, 1999, are as follows:
<TABLE>
<CAPTION>
Tax Effect
Difference Current Long-Term
---------- --------- ----------
<S> <C> <C> <C>
Loss on stock $ 233,000 $ 91,000 $ -
Allowance for doubtful accounts 82,000 32,000 -
Stock option compensation 703,000 - 274,000
Accumulated depreciation 456,000 - (178,000)
--------- ----------
$ 123,000 $ 96,000
========= ==========
</TABLE>
The components of income tax expenses are as follows:
<TABLE>
<S> <C>
Current:
Federal $ 73,000
State 12,000
---------
85,000
---------
Deferred:
Federal (26,000)
State (4,000)
---------
(30,000)
---------
$ 55,000
=========
</TABLE>
NOTE 4 REPURCHASE OF COMMON STOCK
The repurchase of the Company's common stock is based upon the Board of
Directors' belief that the Company's common stock is underpriced given
its earnings, book value, working capital, and prospects for future
operations. Repurchases may be made periodically in the open market,
block purchases or in privately negotiated transactions, depending on
market conditions and other factors. The Company has no commitment or
obligation to repurchase all or any portion of the shares. All shares
repurchased by the Company are cancelled and returned to the status of
authorized but un-issued common stock.
From December 1994 through September 1999, the Company's Board of
Directors has authorized the repurchase of up to a total of 1,500,000
shares. Through September 30, 1999, the Company has repurchased a total
of 1,102,000 shares at a cost of approximately $8.7 million.
8
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SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 REPURCHASE OF COMMON STOCK (continued)
From October 1, 1999 through November 9, 1999, the Company repurchased
an additional 75,000 shares of its common stock at a cost of
approximately $317,000.
NOTE 5 COMMON STOCK OPTIONS
At September 30, 1999, the Company had outstanding options to purchase
402,214 shares of common stock at prices ranging from $2.50 to $10.63,
with expiration dates between March 15, 2002 and January 4, 2009.
During the three months ended September 30, 1999, no options were
exercised.
Included in the Company's net income for the quarter ended September
30, 1999, is a charge of approximately $57,000 which is a result of
applying Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK BASED COMPENSATION.
NOTE 6 EARNINGS PER SHARE
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE, (SFAS No. 128)
effective with the year ended June 30, 1998. SFAS No. 128 requires the
presentation of basic and diluted earnings per common share. The
following table provides a reconciliation of the numerator and
denominator of basic and diluted net income per common share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------------
Net Weighted
Income Average Shares Per Share
--------- -------------- ---------
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE
Basic earnings per share $ 89,000 3,842,552 $ 0.02
Effect of dilutive securities
options - -
--------- ---------
Diluted earnings per share $ 89,000 3,842,552 $ 0.02
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------
<S> <C> <C> <C>
EARNINGS PER COMMON SHARE
Basic earnings per share $ 827,000 4,501,946 $ 0.18
Effect of dilutive securities
options - -
--------- ---------
Diluted earnings per share $ 827,000 4,501,946 $ 0.18
========= ========= ========
</TABLE>
9
<PAGE>
SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company intends to rely on cash generated from operations and available
cash on hand to finance its working capital requirements for at least the
next 12 months. To the extent such amounts are insufficient to finance the
Company's working capital requirements, the Company may also make periodic
borrowings under its revolving line of credit. Working capital at September
30, 1999 was approximately $25.8 million compared to $28.8 million at
September 30, 1998. The principal reason for the decrease in working capital
can be attributed to the $3.4 million the Company spent to repurchase 642,000
shares of its common stock during the prior twelve months.
Cash and cash equivalents have increased since June 30, 1999 by approximately
$295,000. During the three months ended September 30, 1999, operating
activities provided cash of approximately $2.0 million. The Company, during
the same three month period, expended approximately $1.7 million to
repurchase 415,000 shares of its common stock. The Board of Directors had
authorized the repurchase, and management believed the repurchase of these
shares would not have a negative effect on working capital and would benefit
the shareholders by increasing book value. The book value per share at
September 30, 1999 increased by approximately $.39 per share since June 30,
1999. Additionally, the Company expended approximately $89,000 on fixed
assets.
Since June 30, 1999, inventories decreased by approximately $290,000 from
approximately $13.3 million. During the same period, receivables decreased by
approximately $1.0 million from approximately $5.7 million which is a
reflection of fewer orders placed by golf professional shops for the fall
season.
Other current assets decreased by approximately $312,000 since June 30, 1999
to approximately $1.3 million. Most of the change was in prepaid expenses as
capitalized expenditures have been reduced.
For the three months ended September 30, 1999, the Company spent
approximately $89,000 for the purchase of property and equipment. The Company
also received approximately $32,000 from the partial sale of its headwear
equipment, which had a book value of approximately $124,000, resulting in a
loss on disposition of approximately $92,000. During the three month period
ended September 30, 1999, approximately $172,000 in depreciation and
amortization was charged to current operations.
During the three months ended September 30, 1999, the Company used
approximately $372,000 in funds to reduce the June 30, 1999 accounts payable
balance of approximately $788,000. Accrued income taxes and other accrued
liabilities have increased approximately $380,000 since June 30, 1999.
Total shareholders' equity decreased by approximately $1.6 million for the
quarter. This was primarily the result of the repurchase by the Company of
415,000 shares of its common stock at a cost of approximately $1.7 million.
However, as indicated above, book value per share increased by $.39 per share
due to fewer outstanding shares.
RESULTS OF OPERATIONS
The Company's business is seasonal in nature, and therefore the results for
any one or more quarters are not necessarily indicative of the annual results
or continuing trends.
10
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (continued)
Net sales for the first quarter ended September 30, 1999, were approximately
$5.2 million, a decrease of approximately $2.2 million, or 30%, from net
sales of $7.5 million for the same quarter in the prior fiscal year. The
decrease in net sales was primarily due to fewer orders placed by golf
professional shops for the fall season.
The Company's gross profit, as a percentage of net sales, was 32% for the
quarter ended September 30, 1999, and 39% for the same quarter in the prior
fiscal year. The decrease in gross profit is due to a combination of factors,
including the disposal of excess prior season inventories at reduced sale
prices, the discontinuance of the headwear line during the fiscal year ended
June 30, 1999, and increases in indirect allocable costs.
Selling, general and administrative expenses decreased by approximately
$297,000, or 16%, to $1.5 million for the first quarter ended September 30,
1999, from $1.8 million for the same quarter in the prior fiscal year. The
decrease can be attributed to commissions paid to independent sales
representatives on lower sales volume and decreased advertising and general
and administrative expenditures.
Other income (expense) decreased by approximately $68,000 for the first
fiscal quarter ended September 30, 1999 as compared to the same quarter in
the prior fiscal year. The decrease is attributed to the $92,000 loss on the
disposal of headwear equipment. The disposal loss was offset by an increase
in interest income.
Effective July 1, 1999, the Company increased its 52% ownership in its
subsidiary to a 93% interest by exchanging debt owed by the subsidiary to the
Company for additional equity in the subsidiary. The subsidiary incurred a
loss for the three month period ended September 30, 1999. The minority
interest in the loss was approximately $3,000.
Income before provision for income taxes and minority interest decreased by
approximately $1.0 million, or 88%, to $89,000 for the first fiscal quarter
ended September 30, 1999, from $1.1 million for the same quarter in the prior
fiscal year.
The Company's effective tax rates for the quarters ended September 30, 1999
and September 30, 1998 were 39% and 30%, respectively. The increase in the
effective rate for September 30, 1999 is due to the decrease in certain book
and tax timing deductions that were available in the prior years.
For the three month period ended September 30, 1999, net income decreased by
approximately $738,000 or 89% when compared to the same three month period in
the prior fiscal year. The decrease in the three month period in the current
fiscal year is the result of reduced sales, lower gross margins and higher
tax rates.
Both the basic and diluted earnings per share were $.02, for the first
quarter ended September 30, 1999. This compares to basic and diluted earnings
per share of $.18 for the same quarter in fiscal 1998.
11
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE
The Company is cognizant of the issues associated with the programming code
in existing computer systems as the Year 2000 approaches. The "Year 2000"
problem is pervasive and complex, as virtually every computer operation will
be affected in some way. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date 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 months from the date of this report, computer
systems and/or software used by the Company will need to be Year 2000
compliant. The Company has tested most of its systems and anticipates the
remaining testing will be completed in November 1999. The Company's computer
operations currently run on an IBM RS6000 computer. The Company's software is
based upon an established, fully integrated, relational database system
designed for manufacturing companies and adapted for the apparel industry.
The software programs running on the Company's computer have been modified to
accommodate the Year 2000.
The costs associated with the Company's Year 2000 initiative are charged to
expense as incurred and the Company estimates that these costs should not
exceed $50,000. The Company does not maintain a project tracking system that
tracks the cost and time that its own internal employees spend on Year 2000
issues.
Presently, the Company has received written notification from most of its
vendors that they believe their systems are Year 2000 complaint. The Company
continues to address this issue to ensure the availability and integrity of
its financial systems and the reliability of its operational systems and is
presently evaluating and upgrading its software and hardware, so that its
computer systems will function properly with respect to Year 2000 and beyond.
The Company is continuing to monitor the Year 2000 notices of other
significant suppliers and financial institutions with whom the Company has a
relationship, to ensure those parties have appropriate plans to remediate
Year 2000 issues particularly where their systems interface with the
Company's systems or otherwise impact its operations.
12
<PAGE>
SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 ISSUE (continued)
If the vendors of the Company's most important goods and services, or the
suppliers of the Company's necessary energy, telecommunications and
transportation needs, fail to provide the Company with the materials and
services which are necessary to produce, distribute and sell its products,
and the electrical power and other utilities to sustain its operations, or
reliable means of obtaining supplies and transporting products to its
customers, such failure could have a material adverse effect on the results
of operations, liquidity and financial condition of the Company. The Company
is in the process of developing a contingency plan to address these and other
issues.
If any of the Company's remediated or replaced internal computer systems fail
the testing phase, or if any software applications or embedded
microprocessors critical to the Company's operations are overlooked in the
assessment and implementation phases, there could be a material adverse
effect on the Company's results of operations, liquidity and financial
condition of a magnitude which the Company has not yet fully analyzed.
13
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS - NONE
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS- NONE
ITEM 3 DEFAULTS UPON SENIOR SECURITIES - NONE
ITEM 4 SUBMISSION TO MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5 OTHER INFORMATION - NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K - NONE
14
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SPORT-HALEY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPORT-HALEY, INC.
(Registrant)
Date: November 12, 1999 /s/ Robert G. Tomlinson
Robert G. Tomlinson
Chief Executive Officer
Date: November 12, 1999 /s/ Patrick W. Hurley
Patrick W. Hurley
Chief Accounting Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8876
<SECURITIES> 1
<RECEIVABLES> 4700
<ALLOWANCES> 82
<INVENTORY> 12993
<CURRENT-ASSETS> 27884
<PP&E> 4442
<DEPRECIATION> 1811
<TOTAL-ASSETS> 31087
<CURRENT-LIABILITIES> 2165
<BONDS> 0
0
0
<COMMON> 14648
<OTHER-SE> 14284
<TOTAL-LIABILITY-AND-EQUITY> 31087
<SALES> 5208
<TOTAL-REVENUES> 5208
<CGS> 3556
<TOTAL-COSTS> 3556
<OTHER-EXPENSES> 1545
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 141
<INCOME-TAX> 55
<INCOME-CONTINUING> 89
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
