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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, 2000
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
NONE NONE
Securities registered pursuant to section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE PER SHARE
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 No X
_____ _____
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 October 16, 2000, the aggregate market value of the 3,460,385 shares of
Common Stock (the Registrant's only common equity) held by non-affiliates was
$15,355,458 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 3,460,385 shares of the Registrant's Common Stock outstanding at the
close of business on October 16, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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. Sport-Haley's
apparel is sold under the distinctive Haley-Registered Trademark- label in
the premium and mid-price market, primarily to golf professional shops,
country clubs and resorts throughout the United States and internationally.
Sport-Haley has historically marketed its apparel through a network of
independent sales representatives and distributors. Sport-Haley markets its
apparel primarily to golf professional shops located at private and resort
courses. Appeal for the Haley brand name is enhanced because golf
professional shops generally prefer to sell quality apparel that is not
broadly distributed in the retail market. Sport-Haley continually seeks to
expand its marketing programs. During the past three years, Sport-Haley
focused its marketing efforts on expanding demand for Haley-Registered
Trademark- brand apparel in the corporate market. Sport-Haley offers custom
embroidering of its apparel with each customer's personalized club, resort or
corporate logo, thereby promoting the image of both Sport-Haley and its
customers and enhancing the marketability of its products. Sport-Haley 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
During the fiscal year ended June 30, 2000, Sport-Haley's golf apparel
consisted of a men's line, a women's line, the Elements line that consists of
men's and women's outerwear collections, and a corporate collection. All of
the lines were marketed under the distinctive Haley-Registered Trademark-
label. Sport-Haley introduces spring and fall collections for all of its
lines at each of the two major golf 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.
Over the years, Sport-Haley 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 Elements line currently consists of
over 70 pieces of apparel such as rain suits, casual jackets, windshirts, vests
and pants.
Sport-Haley'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.
SUGGESTED RETAIL SUGGESTED RETAIL
MEN'S APPAREL PRICE RANGE WOMEN'S APPAREL PRICE RANGE
--------------- ----------------- --------------- -----------------
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
Elements Outerwear $ 50 - $ 380 Elements Outerwear $ 50 - $ 225
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Sport-Haley'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
lines are designed using coordinated styles, color schemes and fabrics to
encourage purchase of multiple garments. Apparel is manufactured from a variety
of fabrics and weave patterns, including interlock, pique, French terry and
twill, and may feature a unique trim, a special fabric finish or extra
needlework.
Sport-Haley closely coordinates the design function with sales and
production operations. The design process for each collection is an ongoing
process of selecting fabric and weave patterns, coloring, styling, and sewing
techniques and includes manufacturing of prototype garments. Sport-Haley relies
on in-house designers as well as outside contract designers in the development
of its apparel collections. Sport-Haley's design staff is responsible for
purchasing fabric and trim, negotiating price and quantity with cutting and
sewing companies, arranging for pattern and sample manufacturing, and
coordinating production schedules with production personnel. The design staff
also supervises the quality controls for inspection of fabric samples, as well
as the testing of fabric samples for shrinkage and colorfastness.
Sport-Haley men's and women's apparel is generally embroidered with
the Haley logo on the right sleeve of each garment. A large percentage of the
men's apparel, and a smaller percentage of women's apparel, is also custom
embroidered with each customer's personalized club or resort logo. Shirts and
other garments for tournaments, promotional events, and corporate sales are
custom embroidered with a sponsor or corporate logo and the Haley-Registered
Trademark- logo. Garments are embroidered on Sport-Haley's premises using
nine computer-controlled embroidering machines. The embroidering machines
allow Sport-Haley to embroider approximately 2,300 garments per day.
Sport-Haley currently has a library of over 8,000 custom logos. Embroidering
charges represent an additional source of revenue.
SALES AND MARKETING
OVERVIEW. Sport-Haley initiates marketing strategies to enhance its
position as a high-quality provider of fashion golf apparel by capitalizing on
the market awareness of the Haley brand name and expanding distribution channels
for existing apparel lines. It implements these strategies by (i) increasing
distribution channels through expansion of its network of independent sales
representatives in an effort to add new golf professional shops to its customer
base and increase purchases from existing customers, (ii) securing and utilizing
distributor arrangements for international sales, (iii) diversifying product
lines by developing new styles and designs that are natural variations on its
existing apparel designs, and (iv) intensifying marketing efforts in the
corporate market.
In the fiscal year ended June 30, 2000 ("fiscal 2000"), domestic and
international golf course professional shops, country clubs and resorts
accounted for approximately 67% of Sport-Haley's net sales. Corporate, special
event and retail customers accounted for 25% of net sales, 1% was sold through a
factory outlet store in Laughlin, Nevada, and the remaining 7% consisted of
excess inventory sold to a limited number of customers at discounted wholesale
prices. No single customer accounted for 5% or more of net sales.
GOLF PROFESSIONAL SHOPS, COUNTRY CLUBS AND RESORTS. Domestic sales are
solicited primarily through a network of approximately 35 independent sales
representatives who sell Sport-Haley apparel, on a commission basis, mainly to
golf professional shops, country clubs and resorts in all of the 50 states and
Canada. These independent sales representatives, many of whom may also carry
other golf-related lines, are responsible for generating new business and
serving customers in specific geographic territories. In January 1997,
Sport-Haley initiated buying programs with various entities whereby the golf
professional shop members may purchase directly from Sport-Haley in accordance
with specific promotional programs.
-3-
These promotional programs accounted for less than 18% of sales in fiscal 2000.
International sales are made through distributors in Puerto Rico, the Caribbean
Islands, Mexico, Ireland, Japan, Chile, portions of Southeast Asia, the
Philippines, Hong Kong, Portugal and to U.S. military bases overseas.
Historically, the vast majority of Sport-Haley's sales have been to United
States customers. International sales represented less than 3% of net sales in
fiscal 2000.
Sport-Haley's sales and marketing executives are responsible for
implementing marketing plans and sales programs, coordinating the network of
independent sales representatives, providing customer service and participating
in industry trade shows. Sport-Haley supports the sales activities of the
independent sales representatives and distributors by assigning specific
customer service personnel to specific geographic regions, providing detailed
catalogs for each collection that present pricing, sizing and style options, and
providing access to a private electronic network designed to expedite sales
order processing. Via personal computers, each sales representative can access
current inventory availability and create and transmit orders from a remote
location. Remote computer access enhances the representative's order processing
speed and accuracy and reduces the risk of placing customer orders that cannot
be timely delivered. The electronic network also interfaces with Sport-Haley's
management information system that provides key sales data to assist management
with planning, production scheduling, sales trends and standard cost control.
Sport-Haley also maintains an internet webpage at "www.sporthaley.com". The
Sport-Haley webpage is purely informational at present, providing limited
information about Sport-Haley and its apparel. Sport-Haley is continuing to
develop a highly comprehensive website that will provide much more detailed
information about Sport-Haley and the products it offers for sale.
Sport-Haley introduces its distinctive golf apparel collections at the
two major golf industry trade shows that are generally held 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, Sport-Haley usually books a significant number of customer orders
at or following each show. These trade shows also provide Sport-Haley with
direct consumer feedback regarding apparel designs, fabrics, styles, fashion
trends and other information necessary to assist management with the preparation
of detailed sales forecasts and production schedules.
In order to enhance the visibility of the Haley brand, Sport-Haley has
obtained oral endorsement agreements with several select PGA and LPGA
professionals. Sport-Haley also has an agreement with a Canadian Tour
professional, which exemplifies its commitment to the international markets.
Under these endorsement agreements, Sport-Haley provides apparel allowances to
the respective professionals.
Sport-Haley advertises its apparel in several golf industry publications,
including those that are distributed primarily to operators of golf professional
shops. It 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.
Sport-Haley maintains a program to provide select customers with
distinctive fixtures dedicated to displaying Sport-Haley apparel. If the
customer agrees to maintain a pre-determined amount of inventory for a specified
period of time, the fixture becomes the property of the customer for a nominal
delivery fee. This fixture program encourages customers to strengthen their
commitment to Sport-Haley by prominently displaying a large selection of Haley
apparel.
-4-
CORPORATE MARKET. Sport-Haley believes there is a natural synergy between
the golf market and the corporate market, because both markets can be served
from some of the same inventory, allowing quick response to a shifting demand in
either market. Sport-Haley has developed several direct corporate accounts, and
is actively pursuing this market primarily though promotional product companies
that source and supply a variety of products for corporate fulfillment programs
and special events. These promotional product companies generally produce
corporate catalogs containing apparel and other products that may be used for
employee recognition, customer appreciation and other corporate purposes. A
promotional product company will also source and supply a specific product or
products for special events sponsored by a corporation. Sport-Haley's apparel is
currently included, or confirmed to be included, in a variety of catalogs,
including catalogs for several Fortune 500 companies. Sport-Haley does not enter
into formal agreements or contracts 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. Sport-Haley generally selects a limited number of its most
popular, classic styles of golf apparel and includes those in its corporate
catalog. Because the corporate apparel inventory must be maintained for a longer
period of time and the classic styles of corporate apparel are generally not
designed for one specific season, Sport-Haley features one collection in its
corporate catalog each year. Corporate sales are made periodically throughout
the year, and thus are not quantifiable in fixed or seasonal selling periods.
FACTORY OUTLET AND RETAIL SALES. Sport-Haley maintains a 2,200 square
feet factory outlet store in Laughlin, Nevada. Since June 1996, Sport-Haley has
used this facility to sell closeout inventory and discontinued styles at
discounted retail prices, as opposed to discounted wholesale prices, enabling
Sport-Haley to maximize sales revenue. Sport-Haley also sells a small percentage
of its apparel in the retail market through a selected upscale department store
chain.
COMPETITION
The golf apparel market, both domestically or internationally, is highly
fragmented and the leading supplier has only slightly over a 10% market share.
Sport-Haley currently views Ashworth, Cutter & Buck, Inc., Izod Club, Polo/Ralph
Lauren Corporation, and Tommy Hilfiger as its most significant competitors in
the golf apparel market. In addition to competing with golf apparel
manufacturers, Sport-Haley must also compete with manufacturers of high quality
men's and women's sportswear and general leisure wear such as Nike 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 and leisure wear markets. Many of Sport-Haley's
competitors have longer operating histories, better name recognition and greater
financial, marketing and other resources than Sport-Haley. Because of the
intense competition in the golf apparel and leisure wear markets, Sport-Haley
cannot be assured of obtaining or maintaining its market share, and market
conditions may dictate a reduction in selling prices that could result in
reduced margins.
RAW MATERIALS SOURCING AND FINISHED GOODS PURCHASING
Sport-Haley purchases fabric in bulk from approximately fifteen
separate domestic and international mills, the seven largest of which
accounted for approximately 70% of fabric expenditures in fiscal 2000. Most
of Sport-Haley's garments are made from 100% cotton fabrics. Certain women's
apparel is made from silk and rayon fabrics or micro-fiber and certain
garments in the Elements outerwear line use micro-fiber, fleece, nylon or
Gore-tex-Registered Trademark- products, including Gore
Windstopper-Registered Trademark- fabric, in accordance with non-exclusive
licensing rights. Sport-Haley utilizes various suppliers to produce certain
garments in the Elements line, and the loss of one or more of these suppliers
could potentially affect its ability to make timely delivery of outerwear.
Raw materials also include trim consisting principally of buttons, collars,
bands, linings, labels
-5-
and zippers. Sport-Haley purchased trim from several suppliers during fiscal
2000, with the four largest suppliers accounting for approximately 80% of total
trim expenditures.
Sport-Haley 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 Sport-Haley believes that all of the components
of its apparel are available from a large number of domestic and foreign
sources, its inability to secure raw materials from existing suppliers during
periods of high seasonal demand could result in delays in deliveries to
customers, thereby adversely affecting profitability.
Sport-Haley's production personnel assist the design department with the
sourcing of raw materials, negotiating costs consistent with desired profit
margins and the inspection of sample fabrics prior to the commencement of actual
production. Production personnel are responsible for ensuring on-time delivery
of raw materials, scheduling actual production and timely-receipt of finished
goods.
Sport-Haley also purchases made-to-order finished goods, which are
manufactured by outside suppliers to Sport-Haley's custom quality and styling
specifications. Sport-Haley may assist outside suppliers in sourcing of raw
materials for these finished products, but does not purchase the fabric and trim
for the suppliers. In fiscal 2000, Sport-Haley purchased approximately 15% to
20% of its apparel as finished goods.
MANUFACTURING
With the exception of custom embroidering, which is done at Sport-Haley's
facility in Denver, Colorado, all manufacturing activities are undertaken by
"cutting and sewing" companies, one of which is the Company's wholly-owned
subsidiary. Following the purchase of raw materials, Sport-Haley arranges for
shipment of these materials directly to cutting and sewing companies that are
located primarily in the United States and its territories. The companies are
responsible for cutting and sewing apparel to Sport-Haley specifications. During
fiscal 2000, Sport-Haley used fourteen cutting and sewing companies other than
its wholly-owned subsidiary. Sport-Haley did not purchase ten percent or more of
its component materials or apparel as finished goods from any one outside
supplier. In fiscal 2000, Sport-Haley increased its ownership in one of its
principal cutting and sewing companies (the "Subsidiary") to a 100% interest
through a combination of transactions consisting of exchanging debt owed by the
Subsidiary to Sport-Haley for additional equity in the Subsidiary and purchasing
the remaining shares from the minority shareholders. The Subsidiary operates
exclusively for the benefit of Sport-Haley, and in fiscal 2000 it produced
approximately 75% of Sport-Haley's shirts and tops for men and women. Management
believes the purchase of the Subsidiary assures Sport-Haley of the manufacturing
capacity necessary to expand corporate and retail sales and to position
Sport-Haley to remain competitive. Sport-Haley has no contractual arrangements
other than purchase orders with any of its other cutting and sewing companies
and believes that these services may be obtained from a large number of other
domestic and international sources.
Sport-Haley receives orders for the spring and fall collections over a
period commencing when samples are first shown to customers and continuing
through the respective season. Sport-Haley 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 apparel collections
is time-sensitive, Sport-Haley devotes considerable efforts to the preparation
of forecasts of apparel sales by item and style. Sport-Haley's computerized
management information system provides management with key data that facilitates
planning, production scheduling, product tracking and standard cost control, as
well as providing perpetual inventory records and inventory availability.
-6-
Finished apparel is shipped by the cutting and sewing companies or the
ready-made manufacturers to Sport-Haley's warehouse and distribution
facilities in Denver, Colorado. Some apparel, primarily shirts and tops, is
embroidered with the Haley-Registered Trademark- logo and approximately 75%
of men's shirts are custom embroidered with a golf course, country club,
resort or company logo, whereas only approximately 40% of women's apparel is
similarly embroidered. Sport-Haley maintains nine computer-controlled
embroidering machines on its premises, which together can embroider
approximately 2,300 custom logos each day. After being embroidered to the
customer's specifications, all apparel receives a final inspection by quality
assurance personnel, and is packaged and shipped.
MANAGEMENT INFORMATION SYSTEMS AND INVENTORY MANAGEMENT
Sport-Haley utilizes an integrated computer system to manage all business
transactions, historical data and record keeping, including sourcing,
warehousing, embroidering and shipping. This system provides information to all
departments. The electronic computer system used by Sport-Haley's sales
representatives interfaces with the main system to provide sales representatives
with inventory information and order entry capability and has allowed the sales
force to order against actual inventory availability. The computer system has
improved operations by providing information critical to forecasting such as
analysis of sales history, purchasing history, and future customer commitments,
all of which allow for better management and purchasing of inventory.
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 Sport-Haley's third and fourth quarters of each fiscal year.
Sport-Haley continues to seek to reduce the impact of seasonal revenues by
attempting to increase sales in other markets, such as the corporate market and
the international market.
The amount of back orders outstanding at any particular time is affected
by a number of factors, including the timely flow of product from suppliers and
the sufficiency of labor maintained by suppliers, which can impact the ability
to ship on time, and timing of orders from customers. Accordingly, a comparison
of Sport-Haley's 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, partial orders are shipped 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. Sport-Haley does not sell its apparel on consignment
and generally does not accept returns of purchased apparel other than apparel
which is damaged or which is delivered after the specified delivery date.
Returns and allowances were approximately 3% of net sales in fiscal 1999 and
fiscal 2000. Historically, cancellations, rejections and returns of orders have
not materially reduced the amount of sales due to the backlog of orders.
TRADEMARK
Sport-Haley markets its products under the Haley-Registered Trademark-
label. Sport-Haley has registered the Haley-Registered Trademark- mark and
the distinctive "H" design with the United States Patent and Trademark
Office. Sport-Haley has also registered the Haley-Registered Trademark- mark
in a number of international jurisdictions.
EMPLOYEES
At June 30, 2000, Sport-Haley had 86 full-time employees and 10 part-time
employees, including 37 full-time executive and administrative employees, 5
marketing and corporate sales employees, 43 full-time and 8 part-time personnel
in inspection, packaging, embroidering and distribution operations, and one
full-time and two part-time retail employees in the factory outlet store. The
Subsidiary had one
-7-
administrative employee and 71 manufacturing employees. Neither any of
Sport-Haley's employees nor the Subsidiary's employees are represented by any
labor unions and each considers their relations with employees to be good.
YEAR 2000 COMPUTER CONVERSION
The Company was cognizant of the Year 2000 issues associated with
programming code in computer systems. The Company utilizes an integrated
computer system to manage all business transactions, historical data and record
keeping, including sourcing, warehousing, embroidering, and shipping. In
preparation for the Year 2000, the Company installed a Year 2000 compliant
upgrade to the software for this system and tested all other systems. As of June
30, 2000, the Company had not experienced, nor does it expect to experience any
disruption related to Year 2000 issues in the operation of its system. To the
best knowledge of the Company, none of the material suppliers, vendors and
financial institutions with which the Company has a business relationship
experienced any failures or disruptions in their computer system caused by Year
2000 issues.
ITEM 2. PROPERTIES
Sport-Haley'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 $201,000, which
increases incrementally to $206,000 in 2001. Sport-Haley is obligated to pay
taxes, insurance and maintenance expenses for the leased space through
expiration of the lease in October 2001. Sport-Haley also leases approximately
2,200 square feet of retail space for its factory outlet store in Laughlin,
Nevada. The annual base rental for this space for the remaining three-year term
of the lease is approximately $48,000. The Subsidiary leases 22,000 square feet
of manufacturing facilities in Four Oaks, North Carolina from the Subsidiary's
two former 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
approximately $65,000, and the Subsidiary must pay all utilities, taxes,
insurance and certain repair costs.
ITEM 3. LEGAL PROCEEDINGS
On June 30, 1999, Sport-Haley filed a complaint against Ben Elias
Industries Corp. in the District Court in and for the City and County of Denver
and State of Colorado. Sport-Haley alleges that Ben Elias Industries failed to
pay for goods that were shipped to it on approximately March 23, 1999. The total
amount invoiced to Ben Elias Industries was approximately $280,000. The Court
dismissed one of Sport-Haley's claims, but denied Ben Elias Industries' Motion
to Dismiss as to the other claims for relief and denied Ben Elias Industries'
Motion to Quash Service of Process. The matter is currently scheduled for trial
to commence on May 21, 2001. The Company intends to prosecute the action against
Ben Elias Industries vigorously.
Sport-Haley is subject to various other legal proceedings and claims
which arise in the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to those actions will
not materially affect the financial position or results of operations of
Sport-Haley.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 2000 to a vote of
security holders through the solicitation of proxies or otherwise.
-8-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Sport-Haley's Common Stock is quoted on the Nasdaq National
Market-Registered Trademark- under the trading symbol "SPOR." The following
table sets forth the range of high and low sale prices of the Common Stock,
as reported by The Nasdaq Stock Market-Registered Trademark-, from July 1,
1997 through June 30, 2000. The prices set forth below reflect interdealer
quotations, without retail markups, markdowns or commissions, and may not
represent actual transactions.
HIGH LOW
---- ---
FISCAL YEAR 1998
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
FISCAL YEAR 1999
First Quarter $ 13 3/4 $ 9 1/2
Second Quarter 11 8
Third Quarter 10 1/4 8 1/8
Fourth Quarter 8 5/8 3 15/16
FISCAL YEAR 2000
First Quarter $ 5 1/8 $ 4
Second Quarter 4 5/8 3 15/16
Third Quarter 5 3 15/16
Fourth Quarter 4 7/8 3 15/16
On October 16, 2000, The Nasdaq Stock Market-Registered Trademark-
("Nasdaq") halted trading in the securities of the Company and requested
additional information. Nasdaq has advised the Company that the trading halt
was instituted because of the Company's alleged failure to observe certain
corporate governance requirements for ongoing listing of its securities on
the Nasdaq National Market. Nasdaq has advised the Company that the trading
halt will continue until the Company complies with Nasdaq's request for
additional information, which the Company has provided. Nasdaq has further
proposed to de-list the Company's securities from trading on the Nasdaq
National Market. The Company has requested a hearing before the Nasdaq
Listing Qualifications Panel, which has been scheduled, in order to address
the proposed de-listing of the Company's securities. The Company believes
that its positions concerning observance of NASDAQ listing requirements are
meritorious.
On October 16, 2000 the closing sale price of the Common Stock was
$4.4375. As of September 28, 2000, the number of record holders of Sport-Haley's
Common Stock was approximately 60. Based on the number of broker requests for
proxy material for the last annual meeting of shareholders, Sport-Haley believes
that it has approximately 1,400 beneficial holders of its Common Stock.
Holders of Common Stock are entitled to receive such dividends as may be
declared by Sport-Haley's Board of Directors. No dividends on the Common Stock
have been paid, and there is no anticipation that dividends will be paid in the
foreseeable future.
-9-
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, 2000 and the balance sheet data at June 30, 2000 and 1999 are
derived from the consolidated financial statements of Sport-Haley which have
been audited by Hein + Associates LLP, independent auditors, as indicated in
their report included herein. The selected financial data provided below is not
necessarily indicative of the future results of operations or financial
performance of Sport-Haley.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below, regarding certain accounting errors discovered
during the audit of the Company's financial statements for the year ended June
30, 2000. As noted, the Company restated its financial statements for 1999 and
1998. The Company's beginning account balances as of July 1, 1997 have been
corrected for certain accounting errors in prior periods. See Note 2 to the
Consolidated Financial Statements. The Company made an adjustment to reduce the
retained earnings balance as of July 1, 1997 by $872,000. It has not been
possible, at present, to allocate the $872,000 to specific prior years or to
calculate related accounting adjustments in those years, such as tax effects.
Therefore, the Company has not provided comparison financial information for the
years ending June 30, 1997 and 1996. The following consolidated selected
financial information for the years ended June 30, 1999 and 1998 are derived
from the restated financial statements for those years.
FOR THE YEAR ENDED JUNE 30,
2000 1999 1998
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales........................................... $23,139 $27,541 $30,449
Cost of goods sold.................................. 15,879 18,833 19,363
Gross profit........................................ 7,260 8,708 11,806
Selling, general and administrative expenses........ 6,948 7,776 7,616
Income from operations ............................. 312 932 3,470
Other income and expense, net....................... 686 454 336
Income from operations before provision
for income taxes................................. 998 1,386 3,806
Provision for income taxes.......................... (344) (810) (1,404)
Income from continuing operations .................. 654 576 2,402
Income (loss) from discontinued operations.......... --- (428) 77
Cumulative effect of change in accounting principle. 361 --- ---
Net income ......................................... 1,015 148 2,479
Income (loss) per common and equivalent shares
outstanding:
From continuing operations (basic).................. .17 .13 .52
Income (loss) from discontinued operations (basic).. --- (.10) .02
Cumulative effect of change in accounting
principle (basic)............................... .10 --- ---
Net income (basic).................................. .27 .03 .54
From continuing operations (diluted)................ .17 .13 .51
Income (loss) from discontinued operations
-10-
(diluted)....................................... --- (.10) .02
Cumulative effect of change in accounting principle
(diluted)....................................... .10 --- ---
Net income (diluted)................................ .27 .03 .53
Weighted average common and equivalent shares
outstanding (basic)............................. 3,755 4,408 4,564
Weighted average common and
equivalent shares outstanding (diluted)......... 3,784 4,452 4,658
JUNE 30,
------------------------------------------------------
2000 1999 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................... $22,499 $24,969 $26,756
Total assets...................................... 26,622 30,155 33,012
Long-term debt.................................... --- --- ---
Total liabilities................................. 1,380 2,133 3,356
Shareholders' equity.............................. 25,242 28,022 29,595
Net book value per share of common stock.......... 7.29 6.58 6.56
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, and price
pressures in the high-end golf-apparel market; inventory risks due to shifts in
market and/or price erosion of purchased apparel, raw fabric and trim; cost
controls; changes in product mix; and other risks or uncertainties detailed in
other Securities and Exchange Commission filings made by Sport-Haley. 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
actual plan of operations, business strategy, operating results and financial
position of Sport-Haley could differ materially from those expressed in, or
implied by, such forward-looking statements. Sport-Haley's business in general
is subject to certain risks including the following:
- - The demand for Sport-Haley's products may decrease if the popularity of
golf decreases or if other factors, such as inclement weather, cause
golfers not to patronize golf professional shops.
- - Sport-Haley must continue to design apparel that is accepted by consumers
as fashionable and stylish in order to continue to have market acceptance.
- - Sport-Haley's sales are seasonal, and historically sales from July through
December, Sport-Haley's first and second fiscal quarters, are weaker than
sales from January through June, which are Sport-Haley's third and fourth
fiscal quarters.
-11-
- - The market for golf apparel is extremely competitive; price competition or
industry consolidation could weaken Sport-Haley's competitive position.
- - Sport-Haley maintains a significant level of inventory to support sales
volume and its corporate apparel program. Disposal of excess prior seasons'
inventory is an ongoing part of operations, but a significant amount of
sales at the lower margins dictated by inventory reduction may impair
Sport-Haley's financial condition. Inventory write-downs may also affect
its financial condition.
- - Sport-Haley depends on timely delivery of raw materials and garments from
its suppliers. The loss of certain suppliers, and/or delays in receiving
materials or garments from suppliers caused by various factors, including
labor shortages and transportation difficulties, could potentially
adversely affect the Company's ability to make timely delivery of finished
garments to its customers.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales represented by
items included in or derived from Sport-Haley's statements of income for fiscal
2000, and as restated for fiscal years 1999 and 1998:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------------
2000 1999 1998
---------- ---- ----
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 68.6 68.4 63.6
---- ---- ----
Gross profit....................................... 31.4 31.6 36.4
Selling, general and administrative expenses....... 30.0 28.2 25.0
---- ---- ----
Income from operations............................. 1.4 3.4 11.4
Other income and expenses, net..................... 2.9 1.6 1.1
--- --- ---
Income from operations before provision for
income taxes.................................. 4.3 5.0 12.5
Provision for income taxes......................... (1.5) (2.9) (4.6)
Income (loss) from discontinued operations......... --- (1.6) .2
Cumulative effect of change in accounting
principle..................................... 1.6 --- ---
--- --- ---
Net income......................................... 4.4% 0.5% 8.1%
=== === ====
RECENT DEVELOPMENTS
In July 2000, as previously announced, Sport-Haley's audit committee
recommended that the Company's prior independent auditors be discharged and that
the Company retain a new independent public accountant to audit the Company's
financial statements for the year ended June 30, 2000. As a result of a review
initiated by senior management and conducted prior to completion of the audit
process for the Company's 2000 fiscal year, information was developed that
indicated certain accounting errors might exist in prior years' financial
statements that, when corrected, would result in a material impact on results of
operations for the 2000 fiscal year and certain prior periods. At the conclusion
of the review, the Company determined that the financial statements for the
years ended June 30, 1999 and 1998 required restatement due to accounting
errors. The errors consist primarily of the following: (i) incorrect recording,
classification and valuation of inventory work in process; (ii) incorrect
recording of certain prepaid and fixed assets; (iii)
-12-
incorrect accounting for the acquisition of the Company's Subsidiary and the
related minority interest in the loss of the Subsidiary; (iv) incorrect
recording of certain losses relating to discontinued operations; (v) and the
income tax benefit from stock options exercised.
The Company requested its independent accounting firm that was retained
following the year ended June 30, 2000 to re-audit the financial statements for
the years ended June 30, 1999 and 1998, which the Company restated. The audit
committee of the Board of Directors of the Company retained an independent
consultant to assist it in evaluating the restatements that were necessary in
order that the Company's financial statements, as restated and taken as a whole,
present fairly in all material respects the Company's financial position,
results of operations and cash flows for the fiscal years ended June 30, 1998,
1999 and 2000, in conformity with generally accepted accounting principles. The
audit committee of the Board of Directors does not believe that the errors that
have been identified by the Company constitute irregularities. As a result of
recommendations made by the audit committee and the Company's senior management,
and concurred in by the independent consultant, the Company has taken
appropriate action to ensure that these errors do not reoccur in the future.
The effects of significant financial statement adjustments prior to
income taxes related to the restatements were as follows:
- - Work in process inventories decreased by approximately $1.396 million at
June 30, 1999.
- - Prepaid expenses decreased by approximately $1.331 million at June 30,
1999.
- - Net assets of discontinued operations decreased by approximately
$260,000 at June 30, 1999.
- - Minority interest in the equity of the subsidiary increased by
approximately $191,000 at June 30, 1999.
- - Cost of goods sold decreased by approximately $428,000 for the year
ended June 30, 1999, and increased by approximately $1.427 million for
the year ended June 30, 1998.
- - Selling, general and administrative expenses increased by approximately
$557,000 for the year ended June 30, 1999, and increased by
approximately $135,000 for the year ended June 30, 1998.
- - Other income related to minority interest benefit decreased by
approximately $191,000 for the year ended June 30, 1999.
- - Loss on disposal of assets, net of income tax benefit, increased by
approximately $158,000 for the year ended June 30, 1999.
- - Net income decreased by approximately $667,000 for the year ended
June 30, 1999, and decreased by approximately $1,785,000 for the year
ended June 30, 1998.
- - Other comprehensive income related to the change in unrealized loss on
available for sale securities increased by approximately $206,000 for
the year ended June 30, 1998.
- - Comprehensive income decreased by approximately $667,000 for the year
ended June 30, 1999, and decreased by approximately $1,579,000 for the
year ended June 30, 1998.
-13-
- - Net deferred tax assets and income taxes were adjusted by approximately
$788,000 and for the tax impact of the other adjustments described above.
- - Basic income per share from continuing operations decreased by
approximately $.12 per share for the year ended June 30, 1999, and
decreased by approximately $.39 per share for the year ended June 30,
1998.
- - Basic loss per share from discontinued operations increased by
approximately $.03 per share for the year ended June 30, 1999.
- - Basic net income per share decreased by approximately $.15 per share
for the year ended June 30, 1999, and decreased by approximately $.39
per share for the year ended June 30, 1998.
- - Diluted income per share from continuing operations decreased by
approximately $.12 per share for the year ended June 30, 1999, and
decreased by approximately $.39 per share for the year ended June 30,
1998.
- - Diluted income per share from discontinued operations decreased by
approximately $.03 per share for the year ended June 30, 1999, and
decreased by approximately $.01 for the year ended June 30, 1998.
- - Diluted net income per share decreased by approximately $.15 per share
for the year ended June 30, 1999, and decreased by approximately $.40
per share for the year ended June 30, 1998.
None of the quarterly filings for the years covered by the Consolidated
Financial Statements have been restated to give effect to these adjustments.
Sport-Haley expects to restate material quarterly financial information for
prior periods in fiscal 1998, 1999 and 2000.
The restatements described above for the years ending June 30, 1999 and
1998 may lead to litigation against the Company. There is no litigation
currently pending or threatened against the Company concerning the restatements.
However, if such litigation is initiated, it could have a material adverse
impact on the Company's income from continuing operations.
On October 16, 2000, The Nasdaq Stock Market-Registered Trademark-
("Nasdaq") halted trading in the securities of the Company and requested
additional information. Nasdaq has advised the Company that the trading halt
was instituted because of the Company's alleged failure to observe certain
corporate governance requirements for ongoing listing of its securities on
the Nasdaq National Market. Nasdaq has advised the Company that the trading
halt will continue until the Company complies with Nasdaq's request for
additional information, which the Company has provided. Nasdaq has further
proposed to de-list the Company's securities from trading on the Nasdaq
National Market. The Company has requested a hearing before the Nasdaq
Listing Qualifications Panel, which has been scheduled, in order to address
the proposed de-listing of the Company's securities. The Company believes
that its positions concerning observance of NASDAQ listing requirements are
meritorious.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 2000 AND 1999. Net sales for the
year ended June 30, 2000 ("fiscal 2000") were approximately $23.1 million, a
decrease of approximately $4.4 million, or 16%, as compared to approximately
$27.5 million for the fiscal year ended June 30, 1999 ("fiscal 1999"). The
decrease was primarily attributable to several factors. In the past few
years, competition within the golf apparel industry has increased
significantly due mainly to several well known companies with strong
financial resources entering the sportswear market. These companies' name
recognition allows them to market golf apparel effectively in the retail and
catalog markets which, in turn, adversely impacts sales of
-14-
golf apparel in the club and resort markets, where the Company primarily
operates. Further, increased competition in the sportswear market generally
has significantly increased competition among the companies competing in the
resort and club market. As a result of increased competition, sales prices
have decreased in the resort and club markets, which has contributed to the
downward trend in the Company's net sales.
The Company experienced a significant increase in the backlog of customer
orders near the end of fiscal 2000. The increase in backlog orders was primarily
attributable to the combination of the inability of several suppliers to timely
deliver component materials to the Subsidiary and the inability of two suppliers
to timely deliver apparel as finished goods to the Company's distribution
facility. As a result, the Company lost approximately $1.5 million in gross
sales due to the combination of late shipments and canceled customer orders at
the end of fiscal 2000. The company sells fashion garments in multiple groups
consisting of mixes of items manufactured either by the Subsidiary or other
finished goods suppliers. Because customers order apparel by specific fashion
groups and the Company is dependent upon more than one supplier to deliver
garments in any one fashion group, it is impossible to quantify how the
inability of any individual supplier to deliver goods on a timely basis directly
relates to the loss of sales due to the late shipment to, or canceled orders by,
any one customer. In order to mitigate the non-timely shipment and cancellation
of customer orders, the Company implemented controls to monitor its Subsidiary
and suppliers to ensure more timely receipt of component materials and apparel
as finished goods inventories. Specific controls include terminating business
relationships with poorly performing suppliers, increasing the total number of
suppliers used and establishing business relationships with a greater number of
offshore suppliers. Adding suppliers is expected to minimize the detrimental
effect of late delivery by one or more suppliers, although there is no assurance
of this result. The increased use of offshore suppliers is expected to increase
gross margins achieved in future periods.
For fiscal 2000, the men's and women's lines accounted for approximately
47% and 41% of total net sales, respectively. The Elements line accounted for
approximately 8% of total net sales. The remaining 4% was comprised of
embroidering, shipping and retail factory outlet store sales, which the Company
has used to sell prior seasons' and other inventories at discounted retail
prices.
For fiscal 1999, the men's and women's lines accounted for approximately
46% and 40% of total net sales, respectively. The Elements line accounted for
approximately 8% of total net sales, and the headwear line accounted for
approximately 2%. The remaining 4% of net sales was comprised of embroidering,
shipping and sales at the retail factory outlet store.
Gross profit for fiscal 2000 was approximately $7.3 million, a decrease
of approximately $1.4 million or 17%, as compared with approximately $8.7
million in fiscal 1999. The decrease is consistent with the corresponding
decline in net sales in fiscal 2000.
Gross margin for fiscal 2000 was approximately 31%, a decrease of
approximately 1%, from approximately 32% in fiscal 1999. The decrease was
chiefly attributable to proportionately higher incentive sales discounts offered
in fiscal 2000 as compared with fiscal 1999. In both fiscal 2000 and 1999, gross
margins were negatively impacted by dispositions of excess and prior seasons'
inventories ("closeout inventories") at discounted sales prices. Disposition of
closeout inventories is common within the seasonal apparel business in general.
An increase in closeout inventories is indicative of increased competition
within the club and resort markets and other factors. Sales of closeout
inventories accounted for approximately 10% of net sales in both fiscal 2000 and
1999. By comparison, in fiscal 1998, sales of closeout inventories accounted for
approximately 2% of net sales. The Company estimates that sales of closeout
inventories at reduced sales prices negatively impacted gross margins by
approximately 6% in both fiscal 2000 and 1999, as compared with the gross margin
achieved in fiscal 1998. However, the Company generated approximately $2.2
million in operating cash from the reduction of inventories in fiscal 2000.
-15-
Selling, general and administrative expenses for fiscal 2000 were
approximately $6.9 million, a reduction of approximately $828,000, or 11%, as
compared with approximately $7.8 million for fiscal 1999. Selling expenses
decreased in fiscal 2000 primarily due to a reduction in sales commissions
corresponding to a decreased sales volume. Sales commissions for fiscal 2000
were approximately $1.6 million, a decrease of approximately $400,000, or 20%,
as compared with approximately $2.0 million for fiscal 1999. As a percentage of
net sales, sales commissions were approximately 7% for both fiscal 2000 and
1999. The Company implemented certain cost-containment measures during fiscal
2000 that were specifically designed to reduce general and administrative
expenses. Other than advertising expenses, which increased by approximately 2%
due to increased marketing efforts, general and administrative costs generally
decreased for fiscal 2000, as compared with fiscal 1999, primarily because of a
reduction in the number of employees of the Company. Salaries and related
payroll taxes for fiscal 2000 were approximately $3.0 million, a decrease of
approximately $600,000, or 12%, as compared with approximately $3.6 million for
fiscal 1999. While total selling, general and administrative expenses decreased
for fiscal 2000 as compared with fiscal 1999, as a percentage of net sales,
selling, general and administrative expenses increased for fiscal 2000, as
compared with fiscal 1999. Selling, general and administrative expenses as a
percentage of net sales for fiscal 2000 were approximately 30%, an increase of
approximately 2%, as compared with 28% for fiscal 1999. This increase is mainly
attributable to lower net sales in fiscal 2000 over which fixed costs were
allocated.
Total other income for fiscal 2000 was approximately $686,000, an
increase of approximately $232,000, or 51%, as compared with approximately
$454,000 for fiscal 1999. The increase is primarily due to refunds of state
income taxes and interest earned on the refunds relating to certain expenditures
in prior years.
Income from operations before provision for income taxes for fiscal 2000
was approximately $998,000, a decrease of approximately $388,000, or 28%, as
compared with approximately $1.4 million for fiscal 1999. Income from continuing
operations for fiscal 2000 was approximately $654,000, an increase of
approximately $78,000, or 14%, as compared with approximately $576,000 for
fiscal 1999. The disparity between the decrease in income from operations before
provision for income taxes and the increase in income from continuing operations
arose because of the difference in effective tax rates for financial statement,
as opposed to income tax, purposes. The effective tax rate in any fiscal year
can vary significantly from the effective tax rate in another year due to
differences between the recording of certain transactions for financial
statement versus tax purposes. Certain deductions recognized for tax purposes
may not be expensed for financial statement purposes in the same fiscal year,
and certain expenses recorded for financial statement purposes may not be
deductible for tax purposes in the same fiscal year. The disparity was primarily
caused by differences in the recording of transactions relating to accounting
for the equity interest in the loss of the Subsidiary that was not consolidated
for tax purposes in fiscal 1999 and changes in deferred tax valuation allowances
related to the Subsidiary. The effective tax rate for fiscal 2000 was
approximately 35% as compared with approximately 79% for fiscal 1999.
As described in Note 1 to the Consolidated Financial Statements, the
Company adopted Financial Accounting Standards Board Interpretation No. 44 ("FIN
44") in fiscal 2000. Because of that newly issued standard, the Company changed
its accounting for stock options issued to non-employee directors. The change
resulted in a cumulative effect adjustment of $361,000, net of taxes, in fiscal
2000.
Net income for fiscal 2000 was approximately $1.0 million, an increase of
approximately $867,000, or 586%, as compared with approximately $148,000 for
fiscal 1999. The increase is attributable primarily to the cumulative effect of
changing the accounting method for stock-based compensation of non-employee
directors in fiscal 2000, in accordance with recent financial accounting
pronouncements, and the loss recognized on the discontinuance of headwear
operations in fiscal 1999.
-16-
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1999 AND 1998. Net sales for the year
ended June 30, 1999 ("fiscal 1999") were approximately $27.5 million, a decrease
of approximately $3.0 million, or 10%, as compared with approximately $30.5
million for the fiscal year ended June 30, 1998 ("fiscal 1998"). The decrease
was primarily due to slower sales to golf professional shops, many of which had
unusually large inventories remaining from prior years. The Company's slower
sales comport with publications that reported a general industry-wide slowdown
of sales in both golf equipment and apparel during the same periods. Another
factor contributing to the decrease in net sales during fiscal 1999 was the sale
of excess and prior seasons' ("closeout") inventories at less than wholesale
prices. Disposition of closeout inventories is common within the seasonal
apparel business in general. The slowdown of golf apparel sales indicated that
excess inventories were prevalent within golf professional shops throughout
fiscal 1999. Slower sales and excess inventories are factors that applied
downward pressure on sales prices, and contributed to lower net sales in fiscal
1999. The Company's excess inventories resulted from producing inventories in
accordance with sales forecasts that were not achieved in fiscal 1999 and 1998.
Prior to fiscal 1998, the Company experienced substantial increases in sales
from year to year. When sales did not meet expectations for fiscal 1998, the
Company disposed of large quantities of closeout inventories at less than
wholesale prices in fiscal 1999. Sales of closeout inventories for fiscal 1999
were approximately $2.9 million, an increase of approximately $2.1 million, or
260%, as compared with approximately $800,000 for fiscal 1998. During fiscal
1999, the Company revised sales forecasts and production schedules in order to
reduce the amount of inventory left over from each selling season. As a result,
the Company generated approximately $4.6 million in operating cash in fiscal
1999 from the combination of sales of closeout inventories and production cost
decreases attributable to revised sales forecasts.
For fiscal 1999, the men's and women's lines accounted for approximately
46% and 40% of total net sales, respectively. The Elements line accounted for
approximately 8% of total net sales, and the headwear line accounted for
approximately 2%. The remaining 4% of net sales was comprised of embroidering,
shipping and sales at the retail factory outlet store, which the Company has
used to sell prior seasons' and other inventories at discounted retail prices.
For fiscal 1998, the men's and women's lines accounted for approximately
45% and 44% of total net sales, respectively. The Elements line accounted for
approximately 8% of total net sales and the headwear line accounted for
approximately 8% of total net sales and the headwear accounted for approximately
3%.
Cost of sales for fiscal 1999 as a percentage of net sales was
approximately 68%, an increase of approximately 4%, as compared with
approximately 64% of net sales for fiscal 1998. The increase was primarily due
to the sale of closeout inventories at less than wholesale prices.
Gross profit for fiscal 1999 was approximately $8.7 million, a decrease
of approximately $2.4 million, or 22%, as compared with approximately $11.1
million for fiscal 1998. The decrease was primarily due to the slowdown in sales
and disposition of closeout inventories at less than wholesale prices, as
discussed above.
Gross margin for fiscal 1999 was approximately 32%, a decrease of
approximately 4%, as compared with approximately 36% for fiscal 1998. Gross
margin was negatively impacted in fiscal 1999 primarily by dispositions of
closeout inventories at discounted sales prices. Sales of closeout inventories
accounted for approximately 10% of net sales in fiscal 1999, a five-fold
increase over approximately 2% in fiscal 1998. Sales of closeout inventories at
reduced sales prices negatively impacted gross margin by approximately 6% in
fiscal 1999, as compared with the gross margin achieved in fiscal 1998.
Selling, general and administrative expenses for fiscal 1999 were
approximately $7.8 million, an increase of approximately $160,000, or 2%, as
compared with approximately $7.6 million for fiscal 1998.
-17-
As a percentage of sales, selling, general and administrative expenses for
fiscal 1999 were approximately 28%, an increase of approximately 3%, as compared
with approximately 25% for fiscal 1998. The increase in fiscal 1999 was
attributable to lower net sales in 1999 available to cover fixed costs and other
factors. Because expenses did not decrease in direct proportion to net sales,
the Company implemented certain cost-containment measures that were specifically
designed to reduce general and administrative expenses.
Total other income for fiscal 1999 was approximately $454,000, an
increase of approximately $118,000, or 35%, as compared with approximately
$336,000 for fiscal 1998. The increase was due primarily to the permanent
impairment of available-for-sale securities recorded in fiscal 1998 and a lesser
rate of interest earned on cash equivalents and marketable securities in fiscal
1999.
Income from operations before provision for income taxes for fiscal 1999
was approximately $1.4 million, a decrease of approximately $2.4 million, or
63%, as compared with approximately $3.8 million for fiscal 1998. The decrease
was caused primarily by the lower gross margin obtained on lower sales volume
and the other factors discussed above.
Income from continuing operations for fiscal 1999 was approximately
$576,000, a decrease of approximately $1.8 million, or 75%, as compared with
approximately $2.4 million for fiscal 1998. The disparity between the
decrease in income from operations before provision for income taxes and the
decrease in income from continuing operations arose because of the difference
in effective tax rates for financial statement, as opposed to income tax,
purposes. The effective tax rate in any fiscal year can vary significantly
from the effective tax rate in another year due to differences between the
recording of certain transactions for financial statement versus tax
purposes. Certain deductions recognized for tax purposes may not be expensed
for financial statement purposes in the same fiscal year, and certain
expenses recorded for financial statement purposes may not be deductible for
tax purposes in the same fiscal year. The disparity was primarily caused by
differences in the recording of transactions relating to the equity interest
in the loss of the Subsidiary that was not consolidated for tax purposes in
fiscal 1999, and changes in deferred tax valuation allowances related to the
Subsidiary in fiscal 1999. The effective tax rate for fiscal 1999 was
approximately 79% as compared with approximately 37% for fiscal 1998.
The Company adopted a formal plan to discontinue its headwear product
line and cease headwear production operations for fiscal 1999. The assets of
the headwear operations to be sold consisted primarily of inventory, property
and equipment. Before the effect of income taxes, the Company's headwear
operations incurred an operations loss of approximately $112,000 in fiscal
1999 and recognized a $571,000 write-down to finished goods inventories and
fixed assets. Net sales of the headwear operations for fiscal 1999 and 1998
were $420,000 and $837,000, respectively. These amounts are not included in
net sales in the accompanying consolidated financial statements.
Net income for fiscal 1999 was approximately $148,000, a decrease of
approximately $2.4 million, or 96%, as compared with approximately $2.5 million
for fiscal 1998. The decrease can be attributed to all of the factors discussed
above, but resulted primarily because of the difference in effective tax rates,
reduced sales volume and lower gross margin.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Sport-Haley has financed its operations through a
combination of revenue from operations and the public sale of equity.
Sport-Haley intends to rely on cash generated from operations to finance its
working capital requirements for at least the next 12 months. To the extent such
amounts are insufficient to finance Sport-Haley's working capital requirements
or if working capital requirements are greater than estimated, Sport-Haley may
take down borrowings under its revolving line of credit.
-18-
Net cash provided by (used in) operating activities totaled approximately
$4.584 million, $4.879 million, and ($2.430 million) for fiscal years 2000,
1999, and 1998, respectively. The primary components of adjustments to reconcile
net income to cash provided by (used in) operating activities were changes
between fiscal years relating to inventories, accounts receivable, other assets,
accrued commissions and other expenses, income taxes receivable, accounts
payable, and prepaid expenses.
- - Inventories provided operating cash of approximately $2.228 million in
fiscal 2000, provided operating cash of approximately $4.589 million in
fiscal 1999, and used operating cash of approximately $6.460 million in
fiscal 1998. Inventories decreased from approximately $11.887 million
at June 30, 1999 to approximately $9.659 million at June 30, 2000.
- - Accounts receivable provided operating cash of approximately $472,000
in fiscal 2000, provided operating cash of approximately $1.061 million
in fiscal 1999, and used operating cash of approximately $825,000 in
fiscal 1998. Accounts receivable net of allowances decreased from
approximately $5.466 million at June 30, 1999 to approximately $4.795
million at June 30, 2000.
- - Other assets provided operating cash of approximately $188,000 in
fiscal 2000, used operating cash of approximately $1.048 million in
fiscal 1999, and used operating cash of approximately $22,000 in fiscal
1998. Other assets decreased from approximately $305,000 at June 30,
1999 to approximately $176,000 at June 30, 2000.
- - Accrued commissions and other expenses used operating cash of
approximately $212,000 in fiscal 2000, used operating cash of
approximately $1.015 million in fiscal 1999, and provided operating
cash of approximately $1.074 million in fiscal 1998. Accrued
commissions and other expenses decreased from approximately $744,000 at
June 30, 1999 to approximately $532,000 at June 30, 2000.
- - Income taxes receivable provided operating cash of approximately
$770,000 in fiscal 2000 and provided operating cash of approximately
$94,000 in fiscal 1998. Income taxes receivable decreased from
approximately $770,000 at June 30, 1999 to $0 at June 30, 2000.
- - Accounts payable provided operating cash of approximately $59,000 in
fiscal 2000, used operating cash of approximately $336,000 in fiscal
1999, and used operating cash of approximately $469,000 in fiscal 1998.
Accounts payable increased by approximately $789,000 at June 30, 1999
to approximately $848,000 at June 30, 2000.
- - Prepaid expenses used operating cash of approximately $416,000 in
fiscal 2000, provided operating cash of approximately $87,000 in fiscal
1999, and used operating cash of approximately $30,000 in fiscal 1998.
Prepaid expenses increased from approximately $253,000 at June 30, 1999
to approximately $669,000 at June 30, 2000.
Working capital requirements are expected to remain constant. Working
capital was approximately $22.499 million at June 30, 2000 and approximately
$24.969 million at June 30, 1999. Cash and cash equivalents totaled
approximately $6.676 million and approximately $8.581 million at June 30, 2000
and 1999, respectively.
Net cash provided by (used in) investing activities totaled approximately
($2.642 million), $1.218 million, and ($1.315 million) for fiscal years 2000,
1999, and 1998, respectively. The primary components of net cash provided by
(used in) investing activities were maturities (purchases) of marketable
securities and purchases of fixed assets.
-19-
- - Maturities (purchases) of marketable securities used investing
activities cash of approximately $1.967 million in fiscal 2000,
provided investing activities cash of approximately $1.996 million in
fiscal 1999, and used investing activities cash of approximately
$677,000 in fiscal 1998. Marketable securities increased from $0 at
June 30, 1999 to approximately $1.967 million at June 30, 2000.
- - Purchases of fixed assets used investing activities cash of
approximately $679,000, $803,000, and $562,000 in fiscal 2000, 1999,
and 1998, respectively. Property and equipment, at cost, increased from
approximately $3.958 million at June 30, 1999 to approximately $4.552
million at June 30, 2000. The 1999 amount does not include the assets
of discontinued operations.
The Company had no long-term debt at June 30, 2000 or 1999. Since
April 1994, Sport-Haley has maintained a revolving line of credit with the
same bank. The revolving line of credit agreement, which has been renewed
through November 5, 2000, provides for interest at 1/2% below the bank's
prime rate. The revolving line of credit agreement is divided into two parts,
one of which provides for a maximum loan amount of $9.0 million to
Sport-Haley secured by a lien on substantially all of Sport-Haley'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 and guaranteed by Sport-Haley. Sport-Haley 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. Sport-Haley has no outstanding borrowings under the line of
credit.
Sport-Haley, in the ordinary course of its business, has entered into a
letter of credit arrangement with a bank to facilitate the purchase of inventory
and fabric from various offshore suppliers. As of June 30, 2000, the Company had
letters of credit outstanding totaling $594,000, which reduces the amount
available for borrowing under the line of credit.
Gross proceeds received by Sport-Haley from the exercise of stock options
and warrants have fluctuated significantly from year to year. Sport-Haley
realized proceeds from exercise of stock options and warrant of approximately
$32,000 in fiscal 2000, $206,000 in fiscal 1999, and $688,000 during fiscal
1998.
Since December 1994, the Board of Directors has authorized management to
repurchase shares of Sport-Haley's Common Stock, and an aggregate of 1,497,000
shares had been repurchased at June 30, 2000 at an aggregate cost of
approximately $10.2 million. In fiscal 2000 and 1999, Sport-Haley repurchased
810,000 and 287,000 shares at a cost of approximately $3.3 million and $2.3
million, respectively. The Board's authorization is based on its belief that
Sport-Haley's Common Stock is underpriced at times given its earnings, working
capital, liquidity, assets, book value and future prospects. The shares may be
repurchased from time to time in open market, block purchases or in privately
negotiated transactions depending upon market conditions and other factors.
Sport-Haley 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.
All of Sport-Haley's purchases from offshore manufacturers and sales to
foreign distributors are U.S. Dollar denominated and, consequently, Sport-Haley
has no currency exchange risk. Sport-Haley is not currently using derivative
financial instruments to reduce its exposure to changes in foreign exchange
rates in connection with sales in Canada. To the extent that it has receivables
denominated in Canadian currency that are not hedged, it will be subject to
foreign currency transaction gains and losses.
Management believes that inflation has not materially affected the
results of operations during the three most recent fiscal years.
-20-
NEW ACCOUNTING STANDARDS
In fiscal 1999, the Statement of Financial Accounting Standards ("SFAS")
Board issued Statement No. 133, entitled, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 is effective beginning July 1, 2000 for
the Company. The Company does not currently utilize any derivative instruments
covered by SFAS No. 133 nor does it hedge any transaction. Therefore, no
material financial statement impact is expected from the adoption of SFAS No.
133.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") 101, entitled, "Revenue Recognition in Financial
Statements." SAB 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria: persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's price
to the buyer is fixed or determinable, and collectibility is reasonably assured.
SAB 101, as amended by SAB 101B, is effective no later than the fourth fiscal
quarter of the Company's fiscal year ending June 30, 2001. The Company does not
believe that the adoption of SAB 101 will have a material effect on its
financial position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
-----
PAGE
----
Report of Independent Certified Public Accountants............................................ F-2
Consolidated Balance Sheets................................................................... F-3
Consolidated Statements of Income and Comprehensive Income.................................... F-4
Consolidated Statement of Shareholders' Equity................................................ F-5
Consolidated Statements of Cash Flows......................................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
Schedule II - Valuation and Qualifying Accounts............................................... F-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported, as of July 13, 2000, at the recommendation of the
Audit Committee, the Company terminated the services of Levine, Hughes &
Mithuen, Inc. The report of Levine, Hughes & Mithuen, Inc. on the Company's
financial statements for the years ending June 30, 1999 and 1998 did not contain
any adverse opinion or disclaimer of opinion, and was not qualified or modified
as to uncertainty, audit scope or accounting principles. At the advice of the
Audit Committee, the Company has retained the services of Hein + Associates LLP.
-21-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
Robert G. Tomlinson 59 Chairman of the Board and
Chief Executive Officer
Kevin M. Tomlinson 40 Chief Operating Officer, Executive Vice
President - Operations and Director
Robert W. Haley 55 President and Director
Patrick W. Hurley 48 Secretary, Treasurer and Controller
Catherine B. Blair 49 Vice President - Merchandising/Design
William L. Blair 58 Vice President - Corporate Sales
Mark J. Stevenson(1)(2) 62 Director
Ronald J. Norick(1)(2) 59 Director
James H. Everest(1)(2) 52 Director
------------------------
(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
Sport-Haley's officers devote full-time to Sport-Haley's business and affairs.
ROBERT G. TOMLINSON has served as Chairman of the Board and Chief
Executive Officer of Sport-Haley since October 1992. Since March 1998, he has
also served as a director of the Subsidiary. Prior to joining Sport-Haley, 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 Chief Operating
Officer and Executive Vice President.
KEVIN M. TOMLINSON served as Vice President of Operations from December
1997 until January 1999, when he became the Chief Operating Officer and
Executive Vice President-Operations. In September 1999, he became a director and
vice-president of the Subsidiary. From 1992 until joining Sport-Haley, 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. Mr. Tomlinson is the son of Robert G. Tomlinson,
the Chairman and Chief Executive Officer of Sport-Haley.
ROBERT W. HALEY has served as President and a director of Sport-Haley
since May 1996. From January 1992 until his appointment to such positions, he
served as Vice President of Marketing of Sport-Haley. Prior to joining
Sport-Haley, Mr. Haley served in various marketing positions for golf apparel
-22-
manufacturers. Mr. Haley is a Class A PGA professional golfer with 25 years+
experience in the golf industry.
PATRICK W. HURLEY served as Secretary, Treasurer and Controller since
November 1999. Prior to joining Sport-Haley, he was employed as a Senior Staff
Accountant at Saltzman Hamma Nelson Massaro LLP, Denver, Colorado, where among
other things, he supervised or participated in the preparation of audited and
unaudited financial statements and income tax returns, and provided advice and
training for business clients regarding selection and implementation of
accounting systems and procedures. Mr. Hurley is a certified public accountant
and received a Bachelor of Science in Accounting in 1991. He is a member of the
American Institute of Certified Public Accountants and the Colorado Society of
Certified Public Accountants.
CATHERINE B. BLAIR has served as Vice President of Merchandising/Design
since her appointment in May 1996. Ms. Blair has been part of Sport-Haley's
design team since 1992, and was appointed Director of Design in 1995. Prior to
joining Sport-Haley, 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.
WILLIAM L. BLAIR has served as Vice President of Corporate Sales since
March 1998. From September 1996 until joining Sport-Haley, 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.
MARK J. STEVENSON has been a director of Sport-Haley since November 1993.
Since June 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.
RONALD J. NORICK has been a director of Sport-Haley 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 also 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 Sport-Haley 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.
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. Norick, Stevenson and Everest. No member of either committee
is a former or current officer or employee of Sport-Haley.
-23-
The Compensation Committee held one meeting in fiscal 2000. The primary
function of the Compensation Committee is to review and make recommendations to
the Board with respect to the compensation, including bonuses, of Sport-Haley's
officers and to administer Sport-Haley's Option Plan. See "Compensation
Committee Report."
The Audit Committee held one meeting in fiscal 2000. The function of the
Audit Committee is to review and approve the scope of audit procedures employed
by Sport-Haley's independent auditors, to review and approve the audit reports
rendered by Sport-Haley'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.
The Board of Directors authorized the hiring of a consultant to assist
the Audit Committee with the review of financial statements in accordance with
recently promulgated regulations of the Securities and Exchange Commission.
In fiscal 2000, the Board of Directors held two formal meetings. Messrs.
Haley and Stevenson attended one of the two meetings and each other director
attended all board and committee meetings held during fiscal 2000.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual and
long-term compensation for services in all capacities to Sport-Haley for the
three fiscal years ended June 30, 2000 of Robert G. Tomlinson, Chief Executive
Officer, Kevin M. Tomlinson, Chief Operating Officer, Robert W. Haley,
President, and William L. Blair, Vice President-Corporate Sales, the only
executive officers of Sport-Haley whose total annual salary and bonus exceeded
$100,000 during the year ended June 30, 2000 (the "Named Officers").
LONG TERM COMPENSATION
----------------------
AWARDS
------
FISCAL ANNUAL COMPENSATION SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION
------ ------ ----- ------------------ ------------
Robert G. Tomlinson, 2000 $ 176,539 $ -0- $ -0- $ 2,213 (1)
Chairman of the Board and 1999 202,692 -0- -0- 1,022 (1)
Chief Executive Officer 1998 218,219 22,000 30,000 1,022 (1)
Kevin M. Tomlinson,
Chief Operating Officer, Executive 2000 129,885 -0- -0- 1,278 (1)
Vice President - Operations and
Director
Robert W. Haley, 2000 155,769 -0- -0- 1,000 (1)
President 1999 171,154 -0- -0- 1,022 (1)
1998 170,571 15,000 20,001 1,022 (1)
William L. Blair, 2000 124,154 -0- -0- 135 (2)
Vice President-Corporate Sales 1999 114,461 -0- -0- 138 (2)
1998 34,615(3) -0- 20,000 46
- ------------------------
-24-
(1) Comprised of contributions by Sport-Haley to the Named Officer's 401(k)
plan and term life insurance premiums.
(2) Comprised solely of term life insurance premiums.
(3) Mr. Blair was first employed by Sport-Haley as an executive officer in
March 1998. Accordingly, compensation in fiscal 1998 was paid only for a
four month period.
OPTION/SAR GRANTS TABLE. The following table sets forth information on
grants of options pursuant to the Sport-Haley 1993 Stock Option Plan, as
amended, during fiscal 2000 to the Named Officers.
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL EXERCISE OR MARKET PRICE
UNDERLYING OPTIONS/ OPTIONS/SARS GRANTED TO BASE PRICE ON DATE OF EXPIRATION
NAME SARS GRANTED(2) EMPLOYEES IN FISCAL YEAR ($/SHARE)(3) GRANT ($/SHARE) DATE
-------- -------------------- ------------------------ ------------ --------------- ----------
Robert G. Tomlinson 25,000(2) 15.1% $3.00 $3.50 01/05/10
Kevin M. Tomlinson 25,000(2) 15.1 3.00 3.50 01/05/10
Robert W. Haley 25,000(2) 15.1 3.00 3.50 01/05/10
William L. Blair 15,000(2) 9 3.00 3.50 01/05/10
- ---------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM (1)
- ------------------------------------------------------------------------------------
MARKET VALUE
ON DATE OF
GRANT
NAME 0% ($) 5% ($) 10% ($)
- ----------- ------ ------ -------
Robert G. Tomlinson $87,500 $67,528.28 $151,952.47
Kevin M. Tomlinson 87,500 67,528.28 151,952.47
Robert W. Haley 87,500 67,528.28 151,952.47
William L. Blair 52,500 40,516.97 91,171.48
- ---------------
(1) The hypothetical gains or "option spreads" that would exist for the
respective options are included in accordance with the rules of the
Securities and Exchange Commission. As mandated by the Securities and
Exchange Commission, these gains are based on the assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option
was granted over the full option term. They do not represent any
assurance that the shares of Common Stock will appreciate in value and do
not represent any estimated or projected future prices. The actual value,
if any, realized may be greater or less than the potential realizable
value set forth in the table. If the Common Stock does not appreciate,
the Named Officers will receive no benefit from the options.
(2) One-third of each option becomes exercisable on each January 5,
commencing January 5, 2001.
-25-
(3) None of the options have an exercise price equal to the fair market value
of the underlying Common Stock on the date of grant.
FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE.
NUMBER OF SECURITIES UNDER- VALUE OF UNEXERCISED IN-
SHARES LYING UNEXERCISED OPTIONS/ THE-MONEY(1) OPTIONS/SARS
ACQUIRED VALUE SARS AT FISCAL YEAR-END AT FISCAL YEAR-END($)(2)
NAME ON EXERCISE REALIZED --------------------------- ---------------------------
- -------------- ----------- -------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Robert G. Tomlinson -0- -0- 60,000 25,000 -0- $28,125
Kevin M. Tomlinson -0- -0- 45,000 25,000 -0- 28,125
Robert W. Haley -0- -0- 43,334 31,667 -0- 28,125
William L. Blair -0- -0- 13,334 21,666 -0- 16,875
- ---------------
(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise or base price of the option.
(2) The dollar values are calculated by determining the difference between
the fair market value of the securities underlying the options at fiscal
year end and the exercise or base price of the options. The closing bid
price for the Common Stock was $4.125 on June 30, 2000.
No employee of Sport-Haley receives any additional compensation for his
services as a director. Non-management directors receive no salary for their
services as such, but may 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 2000, no non-employee
directors were granted any options.
EMPLOYMENT AGREEMENTS. Effective January 1, 1997, Sport-Haley entered
into an employment agreement with Mr. Robert G. Tomlinson. The agreement
requires that he devote his full business time to Sport-Haley 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 Sport-Haley or upon his resignation. Subject to
the right of Sport-Haley to terminate the consulting agreement for cause, Mr.
Tomlinson is entitled to serve as a consultant to Sport-Haley 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 Sport-Haley terminates the agreement for other
than "cause" (as defined in the agreement), or if there is a change in control
of Sport-Haley 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 entitled to participate in all employee benefit
plans, at Sport-Haley'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 Sport-Haley 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 December 1, 1999, Sport-Haley entered into an employment
agreement with Mr. Kevin Tomlinson. The agreement requires that he devote his
full business time to Sport-Haley as Chief Operating
-26-
Officer and Executive Vice President-Operations at an annual salary of $140,000
per year and such bonuses as awarded by the Board of Directors. The employment
agreement extends from December 1, 1999 to December 1, 2002, subject to
automatic one (1) year extensions at the end of each year. If Sport-Haley
terminates the agreement for other than "cause" (as defined in the agreement),
Mr. Tomlinson is entitled to receive severance compensation equal to 12
months salary and bonus and incentive payments over the last 12 months.
During the time he is receiving any such severance compensation, he is eligible
to participate in all employee benefit plans, at Sport-Haley's expense. If there
is a non-negotiated change in control of Sport-Haley, he is entitled to lump sum
severance compensation equal to three times his annual salary and bonus payment
during the preceding 12 months. If Mr. Tomlinson becomes disabled during the
term of the agreement, his full salary shall be continued for one year from the
date of disability. If termination is for any reason other than by Sport-Haley
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, Sport-Haley entered into an employment
agreement with Mr. Robert W. Haley. The agreement requires that he devote his
full business time to Sport-Haley 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 extended through December 31, 1998 and has subsequently
automatically renewed for additional one-year terms. If Sport-Haley 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
Sport-Haley's expense. If there is a non-negotiated change in control of
Sport-Haley 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 Sport-Haley 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.
Sport-Haley entered into an employment agreement with Mr. William Blair
effective March 2, 1998. The agreement requires that he devote his full business
time to Sport-Haley as Vice President of Corporate Sales at an annual salary of
$120,000 and such bonuses as awarded by the Board of Directors. The employment
agreement for Mr. Blair extends through March 1, 2001 and by its terms
automatically renews for one additional year unless notice of termination is
given by either party. If Sport-Haley terminates the agreement for other than
"cause" (as defined in the agreement) or if Mr. Blair terminates the agreement
with or without "cause", he is entitled to receive severance compensation equal
to six months salary and 50% of the last annual bonus. During the time he is
receiving any such severance compensation, he is eligible to participate in all
employee benefit plans, at Sport-Haley's expense. If there is a non-negotiated
change in control of Sport-Haley, he is entitled to lump sum severance
compensation equal to three times his annual salary and bonus payment during the
preceding 12 months. Options previously granted may become fully vested on the
date of termination, depending on the reason for termination. The agreement
contains a non-competition agreement for six months following termination,
provided Mr. Blair may be released from the non-compete if the agreement is
terminated without cause and he elects to forego any severance pay.
-27-
STOCK OPTION PLAN
Sport-Haley 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. In calendar 1999, the
Board of Directors approved increasing the number of shares reserved for
issuance under the Plan by 350,000. As a result of the Board electing not to
obtain shareholder approval, all options granted as a result of the 1999
increase will be granted as non-qualified options. Non-qualified options may be
granted to employees, directors and consultants of Sport-Haley, 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
Sport-Haley 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 Sport-Haley, 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 Sport-Haley, all
unvested options terminate and are no longer exercisable. Vested options shall
remain exercisable for a specified period of time 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 Sport-Haley enters into an
agreement providing for the merger of Sport-Haley into another corporation or
the sale of substantially all of Sport-Haley'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, 2000, a total of 547,881 non-qualified and incentive
options were outstanding, with exercise prices ranging from $2.50 to $10.63 per
share and a weighted average exercise price per share of $6.79.
401(K) PLAN
In January 1996, Sport-Haley adopted a defined contribution savings plan
(the "401(k) Plan") to provide retirement income to employees of Sport-Haley.
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 Sport-Haley of
$0.25 on the dollar for employee contributions on the first 5% of the employee's
annual compensation. Upon leaving Sport-Haley, each participant is 100% vested
with respect to the participant's contributions and is vested based on years of
service with respect to Sport-Haley's matching contributions. Contributions are
invested as directed by the participant in investment funds
-28-
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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the securities laws of the United States, Sport-Haley's directors,
its executive officers, and any persons holding more than ten percent of its
Common Stock are required to report their initial ownership of Common Stock and
other equity securities and any subsequent changes in that ownership to the
Securities and Exchange Commission and Sport-Haley. Specific due dates for these
reports have been established and Sport-Haley 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, 2000. Based solely on Sport-Haley's
review of the reports furnished to Sport-Haley and written representations that
no other reports were required during fiscal 2000, Sport-Haley's officers,
directors and beneficial owners of more than ten percent of its Common Stock
complied with all Section 16(a) filing requirements.
COMPENSATION COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the previous
filings made by Sport-Haley under the Securities Act of 1933, as amended, or the
Securities Exchange 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 shall not be deemed to be
"filed" with the Securities and Exchange Commission nor shall it be incorporated
by reference into any such future filings.
This Compensation Committee Report discusses Sport-Haley's executive
compensation policies and the basis for the compensation paid to Sport-Haley's
executive officers, including its Chief Executive Officer, during fiscal 2000.
COMPENSATION POLICY. Sport-Haley'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 Sport-Haley in a
manner that is commensurate with compensation paid by companies of
comparable size or within the golf apparel industry;
- - Reward executive officers for the achievement of short-term operating
goals and for the enhancement of the long-term value of Sport-Haley; and
- - Align the interests of the executive officers with those of Sport-Haley's
shareholders.
The components of compensation paid to certain executive officers consist
of (a) base salary, (b) incentive compensation in the form of discretionary
annual bonus payments, (c) long-term incentive compensation in the form of
awards under Sport-Haley's Option Plan, and (d) various other benefits.
BASE SALARY. For fiscal 2000, the Compensation Committee reviewed the
base salary paid by Sport-Haley to its executive officers under their respective
employment agreements. Annual adjustments to base salaries, if any, are
determined based upon a number of factors, including Sport-Haley's performance
(to the extent such performance can fairly be attributed or related to each
executive officer's performance), as well as the value of each executive
officer's responsibilities, capabilities and contributions and internal
compensation equity considerations. In addition, for fiscal 2000, the
Compensation Committee reviewed the base salaries of its executive officers in
an attempt to ascertain whether those salaries fairly reflect job
-29-
responsibilities and prevailing market conditions and rates of pay. The
Compensation Committee believes that base salaries for Sport-Haley's executive
officers have been reasonable in relation to its size and performance in
comparison with the compensation paid by similarly sized companies or companies
within the golf apparel industry. The Compensation Committee did not increase
the base pay of any executive officer in fiscal 2000, except for one officer
whose job responsibilities were changed.
INCENTIVE CASH BONUS COMPENSATION. The Compensation Committee feels that
a relatively lower level of base salary and relatively higher level of incentive
compensation, in the form of bonuses and grants of options, most effectively
aligns the interests of management with that of shareholders. It also believes
that its policy regarding incentive compensation is similar to policies of other
companies of comparable size within the golf apparel industry. The decision on
whether to award incentive cash bonus compensation is based on a combination of
achievement of business targets and objectives and certain other financial
measures which the Compensation Committee feels will dictate, in large part,
Sport-Haley's future operating results, and on an officer's responsibilities,
capabilities and contribution to Sport-Haley. There is no formal written bonus
incentive plan for executive officers, although certain executive officers'
employment agreements provide that the executive is eligible for a discretionary
bonus of up to a specified percentage of his or her base salary. Although all of
the executive officers' contributions were noted and commended, the Compensation
Committee did not award any incentive cash bonuses to any of the executive
officers because it did not believe that such bonuses were merited in view of
the significant slow down in growth of Sport-Haley in fiscal 2000.
LONG-TERM INCENTIVE (OPTION) COMPENSATION. The Compensation Committee
also has authority to select the executive officers and employees who will be
granted options and other awards and to determine the timing, pricing and amount
of any such options or awards. As stated above, the Compensation Committee
believes that incentive compensation, in the form of bonuses and grants of
options, most effectively aligns the interests of management with that of
shareholders. In fiscal 2000, the Compensation Committee granted a total of
166,000 shares to executive and employees of the Company, at an exercise price
of $3.00 per share.
OTHER BENEFITS. Executive officers are eligible for various benefits,
including health and welfare plans generally available to all full-time
employees. In addition, the executive officers are eligible to participate in
the 401(k) Plan, also generally available to all employees, whereby they may
elect to defer part or all of their base and incentive cash compensation, with
matching contributions from Sport-Haley. Sport-Haley 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 and vehicles for its Chief Executive Officer and Chief
Operating Officer. The Compensation Committee believes these benefits are
reasonable in relation to the executive compensation practices of other
similarly sized companies or companies within the golf apparel industry.
TAX CONSIDERATIONS. Beginning in 1994, the Internal Revenue Code limited
the federal income tax deductibility of compensation paid to a company's chief
executive officer and to each of the four most highly compensated executive
officers. For this purpose, compensation can include, in addition to cash
compensation, the difference between the exercise price of stock options and the
value of the underlying stock on the date of exercise. A company may deduct
compensation with respect to any of these individuals only to the extent that
during any fiscal year such compensation does not exceed $1 million or meets
certain other conditions (such as shareholder approval). Considering current
compensation plans and policy and the exercise price of currently outstanding
stock options held by the executive officers, the Compensation Committee
believes that, for the near future, there is little risk that Sport-Haley will
lose any significant tax deduction relating to executive compensation. At such
time, if any, that the deductibility of executive compensation becomes an issue,
modifications to compensation plans and policies will be considered by the
Compensation Committee.
-30-
CEO COMPENSATION. In reviewing the Chairman and Chief Executive Officer's
compensation package, the Committee pursues the same objectives, which apply for
other executive officers. The overall goal is to base the Chairman and Chief
Executive Officer's salary at a base comparable to those of persons employed in
similar capacities with competitors that are similar in industry size and
performance. However, the actual level approved by the Committee may be higher
or lower based upon the Committee's subjective evaluation of the annual and
long-term performance of Sport-Haley, the individual performance of the Chairman
and Chief Executive Officer particularly with respect to leadership and
strategic vision, and the cash resources and needs of Sport-Haley. The Committee
believes that Mr. Tomlinson's leadership has been essential in growing
Sport-Haley's revenues up to seven fold from 1994 to 2000. The Compensation
Committee noted that Mr. Tomlinson previously had made a voluntary decision to
reduce his base salary and commended that action as a demonstration of his
continued leadership and administration of resources. In fiscal 2000, no raises
or cash bonuses were awarded to Mr. Tomlinson. Mr. Tomlinson's voluntary
reduction in his salary has continued into fiscal 2000 and he is currently being
paid at an annual rate of $170,000, rather than the $220,000 to which he is
entitled under his employment agreement.
The Compensation Committee believes that the concepts discussed above
further the shareholders interests and that officer compensation encourages
responsible management of Sport-Haley. The Compensation Committee 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, all of the members of the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All of the Compensation Committee members are independent directors of
Sport-Haley. None of these members have ever been an officer or employee of
Sport-Haley or its Subsidiary nor have any of them had a relationship, which
would require disclosure under the "Certain Relationship and Related
Transactions" captions of any of Sport-Haley's filings with the Commission
during the past three fiscal years.
PERFORMANCE GRAPH
Notwithstanding anything to the contrary set forth in any of the previous
filings made by Sport-Haley under the Securities Act of 1933, as amended, or the
Securities Exchange 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 performance graph shall not be deemed to be incorporated by
reference into any such future filings.
Set forth below is a line graph prepared by Media General Financial
Services comparing the yearly percentage change in Sport-Haley's cumulative
total shareholder return (share price appreciation plus dividends) on
Sport-Haley's Common Stock with the cumulative total return of (i) a Nasdaq
Market Index 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 July 1, 1995 through June 30, 2000 (the "Measurement Period"). The
graph assumes that $100 is invested in each of Sport Haley's Common Stock, the
Nasdaq Market Index and the publicly traded peers on July 1, 1995 and that all
dividends were reinvested (there were no dividends paid by Sport-Haley during
the Measurement Period). Sport-Haley's shareholder return is calculated by
dividing (i) the difference between Sport-Haley's share price at July 1, 1995
and at each June 30 of the Measurement Period by (ii) the share price at the
beginning of the Measurement Period.
-31-
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG SPORT-HALEY, INC.
NASDAQ MARKET INDEX AND PEER GROUP INDEX
FISCAL YEAR ENDING JUNE 30, 2000
----------------------------------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
Sport-Haley, Inc. 100.00 158.11 181.08 141.89 52.03 44.59
Industry Peer Group Index 100.00 141.98 164.06 194.66 167.82 127.74
Nasdaq Market Index 100.00 125.88 151.64 201.01 281.68 423.84
-32-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Sport-Haley's Common Stock as of September 28, 2000 by (i) each
person known by Sport-Haley 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 Securities Exchange Act. Each person has sole
voting and sole investment or dispositive power with respect to the shares shown
except as noted.
SHAREHOLDINGS ON SEPTEMBER 28, 2000
--------------------------------------------
NAME AND ADDRESS (1) NUMBER OF SHARES (2) PERCENT OF CLASS (3)
-------------------- -------------------- --------------------
Robert G. Tomlinson (4).................................................. 113,000 3.0%
Kevin M. Tomlinson (7)................................................... 45,000 1.2
Robert W. Haley (5)...................................................... 54,950 1.7
Patrick W. Hurley........................................................ -0- *
Catherine Blair (6)...................................................... 17,500 *
William L. Blair (7)..................................................... 13,334 *
Mark J. Stevenson (7).................................................... 25,000 *
Ronald J. Norick (8)..................................................... 63,117 1.7
James H. Everest (9)..................................................... 65,000 1.7
U.S. Bancorp (10)........................................................ 338,189 9.07
601 Second Avenue South
Minneapolis, Minnesota 55402
Catalyst Master Fund, L.P. (11)
c/o W.S. Walker & Co.
Walker House, Mary Street P.O. Box 265GT
George Town, Grand Cayman, Cayman Islands ......................... 210,085 5.8
Dimensional Fund Advisors Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401(12)................................. 231,400 6.21
Michael Cook Asset Management, Inc.
d/b/a Cook Mayer Taylor
5170 Sanderlin Avenue, Suite 200
Memphis, Tennessee 38117(13)....................................... 351,200 10.15
All directors and officers as a group
(Nine persons)(14)....................................................... 406,901 10.1
- -------------------
* 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.
-33-
(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, 2000.
(4) Includes 60,000 shares subject to currently exercisable options.
(5) Includes 43,334 shares subject to currently exercisable options or
options which will become exercisable within 60 days after the date
hereof.
(6) Includes 17,500 shares subject to currently exercisable options or
options which will become exercisable within 60 days after the date
hereof.
(7) Consists solely of shares subject to currently exercisable options.
(8) Includes 25,000 shares subject to currently exercisable options.
(9) Includes 16,667 shares subject to currently exercisable options.
(10) U.S. Bancorp is a parent holding company, which, beneficially owns shares
owned of record by The Regional Equity Fund, a mutual fund of the First
American Investment Funds, Inc., an open-end investment company.
(11) Catalyst Master Fund, L.P. has sole voting power and sole dispositive
power over 210,085 of the shares shown and Newcastle Partners, L.P. has
sole voting power and sole dispositive power over 5,000 of the shares.
Newcastle Partners, L.P. may be deemed to be related to Catalyst Master
Fund, L.P. and thereby beneficially owns the 210,085 shares owned by
Catalyst Master Fund, L.P.
(12) Dimensional Funds Advisors Inc., is an investment advisor company, which,
beneficially owns shares of owned of record by advisory clients of
Dimensional Funds Advisors Inc.
(13) Michael Cook Asset Management, Inc. has sole voting power and sole
dispositive power over 351,200 of the shares shown.
(14) Includes 213,335 shares of Common Stock subject to currently exercisable
options. Excludes shares of Common Stock as to which officers and
directors disclaim beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sport-Haley has adopted a policy pursuant to which material transactions
between Sport-Haley and its executive officers, directors and principal
shareholders (i.e. shareholders owning beneficially 5% or more of the
outstanding voting securities of Sport-Haley) 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. No such
transactions occurred in fiscal 2000.
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
Consolidated Balance Sheets - June 30, 2000 and 1999
Consolidated Statements of Income and Comprehensive Income for the years
ended June 30, 2000, 1999 and 1998
Consolidated Statement of Shareholders' Equity for the years ended
June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended June 30, 2000,
1999 and 1998
Notes to Consolidated Financial Statements for the years ended June 30,
2000, 1999 and 1998
-34-
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
(3) EXHIBITS
EXHIBIT NO. DOCUMENT
- ----------- --------
*/ 3.1.2 Amended and Restated Articles of Incorporation of Sport-Haley
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 Sport-Haley as adopted
January 10, 1996.
*/ 4.1 Form of Specimen Certificate for Common Stock of Sport-Haley.
# 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 Sport-Haley.
*** 10.2.4 Employment Agreement, dated December 1, 1999, by and between
Kevin Tomlinson and Sport-Haley.
x 10.2.5 Employment Agreement, dated July 1, 1997, by and between
Catherine B. Blair and Sport-Haley.
x 10.2.6 Employment Agreement, dated January 1, 1997, by and between
Robert W. Haley and Sport-Haley.
x 10.2.10 Form of standard Endorsement Agreement by and between various
golf professionals and Sport-Haley.
II 10.3.2 Business Loan Agreement, dated November 5, 1998, by and
between U.S. Bank National Association, Sport-Haley and B&L
Sportswear, Inc..
++ 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 Sport-Haley.
- - 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 Sport-Haley.
+ 10.4.4 Laughlin Factory Outlet Store Lease, dated March 10, 1995,
between Horizon Outlet Centers Limited Partnership and
Sport-Haley.
** 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.
-35-
+ 10.7 Trademark Registrations, dated February 21, 1995, issued by the
United States Patent and Trademark Office to Sport-Haley.
- - 10.10 Trademark Licensing Agreement, dated October 14, 1995, by and
between W.L. Gore & Associates, Inc. and Sport-Haley.
+/- 10.17 Letter regarding change in Certified Public Accountants
** 21 Subsidiaries of the Registrant
*** 23. Consent of Hein + Associates, LLP, independent certified public
accountants for Sport-Haley.
*** 27.1 Financial Data Schedule.
*** 27.2 Restated Financial Data Schedule for 1999 and 1998.
*/ Incorporated by reference from Sport-Haley's Registration Statement on
Form SB-2 (File No. 33-74876-D).
+ Incorporated by reference from Sport-Haley's Form 10-KSB filed October 6,
1995 (File No. 1-12888).
++ Incorporated by reference from Sport-Haley's Form 10-KSB filed September
14, 1994 (File No. 1-12888).
- - Incorporated by reference from Sport-Haley's Form 10-QSBA/1 filed
February 2, 1996 (File No. 1-12888).
# Incorporated by reference from Sport-Haley's Form 10-QSB filed on May 12,
1997 (File No. 1-12888).
x Incorporated by reference from Sport-Haley's Form 10-KSB filed on
September 29,1997 (File No. 1-12888).
** Incorporated by reference from Sport-Haley's Form 10-K filed on September
28,1998 (File No. 1-12888).
II Incorporated by reference from Sport-Haley's Form 10-Q filed on February
16, 1999(File No. 333-18831).
+/- Incorporated by reference from Sport Haley's Form 8-K filed on July 20,
2000 (File No. 1-12888).
*** Filed herewith.
(b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on July 20, 2000 reporting the Company's
change in independent accounting firms under Item 4 of such Form.
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.
November 3, 2000 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.
-36-
SIGNATURE TITLE DATE
--------- ----- -----
/s/ ROBERT G. TOMLINSON Chairman of the Board and Chief Executive November 3, 2000
- -------------------------- Officer (Principal Executive Officer)
Robert G. Tomlinson
/s/ KEVIN M. TOMLINSON Chief Operating Officer, Executive November 3, 2000
- -------------------------- Vice President - Operations and Director
Kevin M. Tomlinson
/s/ ROBERT W. HALEY President and Director November 3, 2000
- --------------------------
Robert W. Haley
/s/ PATRICK W. HURLEY Treasurer (Principal Financial and November 3, 2000
- -------------------------- Accounting Officer)
Patrick W. Hurley
/s/ MARK J. STEVENSON Director November 3, 2000
- --------------------------
Mark J. Stevenson
/s/ RONALD J. NORICK Director November 3, 2000
- --------------------------
Ronald J. Norick
/s/ JAMES H. EVEREST Director November 3, 2000
- -----------------------
James H. Everest
-37-
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT................................................... F-2
CONSOLIDATED BALANCE SHEETS - June 30, 2000 and 1999........................... F-3
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME - For the Years Ended June 30, 2000, 1999 and 1998.................... F-4
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - For
the Years Ended June 30, 2000, 1999 and 1998................................. F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the
Years Ended June 30, 2000, 1999 and 1998 .................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................... F-7
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS................................ F-28
F-1
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Sport-Haley, Inc. and Subsidiary
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Sport-Haley,
Inc. and Subsidiary as of June 30, 2000 and 1999, and the related consolidated
statements of income and comprehensive income, shareholders' equity and cash
flows for each of the three years in the period ending June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sport-Haley, Inc.
and Subsidiary as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company has
restated its financial statements for the years ended June 30, 1999 and 1998. In
the period ending June 30, 2000, the Company also changed its method of
accounting for stock options issued to outside directors, as discussed in Note 1
to the consolidated financial statements.
As discussed in Note 11, the Company has an unasserted claim relating to the
restatement of its consolidated financial statements.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
HEIN + ASSOCIATES LLP
Denver, Colorado
October 20, 2000
F-2
SPORT-HALEY, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
----------------------------
2000 1999
----------- -----------
As Restated
(Note 2)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,676,000 $ 8,581,000
Marketable securities 1,967,000 --
Accounts receivable, net of allowance
of $130,000 and $183,000, respectively 4,795,000 5,466,000
Inventories 9,659,000 11,887,000
Prepaid expenses and other 669,000 253,000
Current tax receivable -- 770,000
Deferred taxes 113,000 145,000
----------- -----------
Total current assets 23,879,000 27,102,000
PROPERTY AND EQUIPMENT, net 2,364,000 2,456,000
NET ASSETS OF DISCONTINUED OPERATIONS -- 46,000
GOODWILL, net of amortization of $9,000 -- 84,000
DEFERRED TAXES 203,000 162,000
OTHER ASSETS 176,000 305,000
----------- -----------
TOTAL ASSETS $26,622,000 $30,155,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ -- $ 600,000
Accounts payable 848,000 789,000
Accrued commissions payable 327,000 434,000
Accrued payroll 94,000 169,000
Other 111,000 141,000
----------- -----------
Total current liabilities 1,380,000 2,133,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,500,000 shares
authorized; none issued and outstanding -- --
Common stock, no par value; 15,000,00 shares
authorized; 3,460,385 and 4,257,552 shares
issued and outstanding, respectively 13,108,000 16,355,000
Additional paid-in capital 1,177,000 1,725,000
Retained earnings 10,957,000 9,942,000
----------- -----------
Total shareholders' equity 25,242,000 28,022,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,622,000 $30,155,000
=========== ===========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
As Restated As Restated
(Note 2) (Note 2)
NET SALES $ 23,139,000 $ 27,541,000 $ 30,449,000
Cost of goods sold 15,879,000 18,833,000 19,363,000
------------ ------------ ------------
GROSS PROFIT 7,260,000 8,708,000 11,086,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,948,000 7,776,000 7,616,000
------------ ------------ ------------
INCOME FROM OPERATIONS 312,000 932,000 3,470,000
------------ ------------ ------------
OTHER INCOME AND (EXPENSE):
Interest income, net 499,000 240,000 393,000
Other income 211,000 173,000 214,000
Other expense (24,000) (19,000) (257,000)
Minority interest benefit (expense) -- 60,000 (14,000)
------------ ------------ ------------
Total other income 686,000 454,000 336,000
------------ ------------ ------------
INCOME FROM OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 998,000 1,386,000 3,806,000
Provision for income taxes (344,000) (810,000) (1,404,000)
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 654,000 576,000 2,402,000
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations,
net of income tax benefit (provision)
of $42,000 in 1999, and ($46,000) in 1998 -- (70,000) 77,000
Loss on disposal of assets, net of income
tax benefit of $213,000 -- (358,000) --
------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (428,000) 77,000
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 654,000 148,000 2,479,000
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
NET OF INCOME TAX PROVISION OF ($213,000) 361,000 -- --
------------ ------------ ------------
NET INCOME 1,015,000 148,000 2,479,000
OTHER COMPREHENSIVE INCOME:
Change in unrealized loss on available for sale securities -- -- 206,000
------------ ------------ ------------
COMPREHENSIVE INCOME $ 1,015,000 $ 148,000 $ 2,685,000
============ ============ ============
INCOME PER SHARE:
Basic:
Income from continuing operations $ .17 $ .13 $ .52
Income (loss) from discontinued operations -- (.10) .02
Cumulative effect of change in accounting principle .10 -- --
------------ ------------ ------------
Net income $ .27 $ .03 $ .54
============ ============ ============
Diluted:
Income from continuing operations .17 $ .13 $ .51
Income (loss) from discontinued operations -- (.10) .02
Cumulative effect of change in accounting principle .10 -- --
------------ ------------ ------------
Net income $ .27 $ .03 $ .53
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 3,755,000 4,408,000 4,564,000
============ ============ ============
Diluted 3,784,000 4,452,000 4,658,000
============ ============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
SPORT-HALEY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 1999, AND 1998
UNREALIZED
ADDITIONAL LOSS ON TOTAL
COMMON STOCK PAID-IN RETAINED MARKETABLE SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SECURITIES EQUITY
--------- ------------ ------------ ------------ ----------- ------------
BALANCES as previously
reported, July 1, 1997 4,651,073 $ 20,439,000 $ 286,000 $ 8,187,000 $ (206,000) $ 28,706,000
RESTATEMENTS (Note 2) -- -- -- (872,000) -- (872,000)
--------- ------------ ------------ ------------ ------------ ------------
BALANCES, as of July 1, 1997
(as restated, Note 2) 4,651,073 $ 20,439,000 $ 286,000 $ 7,315,000 $ (206,000) $ 27,834,000
Stock options exercised 73,326 470,000 -- -- -- 470,000
Warrants exercised 28,563 218,000 -- -- -- 218,000
Repurchase of common stock (240,000) (2,711,000) -- -- -- (2,711,000)
Stock option compensation -- -- 312,000 -- -- 312,000
Income tax benefit from
stock options exercised -- -- 788,000 -- -- 788,000
Change in unrealized loss
on securities available
for sale -- -- -- -- 206,000 206,000
Net income -- -- -- 2,479,000 -- 2,479,000
--------- ------------ ------------ ------------ ------------ ------------
BALANCES, as of June 30, 1998
(as restated, Note 2) 4,512,962 18,416,000 1,386,000 9,794,000 -- 29,596,000
Stock options exercised 9,340 61,000 -- -- -- 61,000
Warrants exercised 22,250 145,000 -- -- -- 145,000
Repurchase of common stock (287,000) (2,267,000) -- -- -- (2,267,000)
Stock option compensation -- -- 339,000 -- -- 339,000
Net income -- -- -- 148,000 -- 148,000
--------- ------------ ------------ ------------ ------------ ------------
BALANCES, as of June 30, 1999 4,257,552 16,355,000 1,725,000 9,942,000 -- 28,022,000
(as restated, Note 2)
Stock options exercised 12,833 32,000 -- -- -- 32,000
Repurchase of common stock (810,000) (3,279,000) -- -- -- (3,279,000)
Stock option compensation -- -- 26,000 -- -- 26,000
Cumulative effect of change
in accounting principle -- -- (574,000) -- -- (574,000)
Net income -- -- -- 1,015,000 -- 1,015,000
--------- ------------ ------------ ------------ ------------ ------------
BALANCES, June 30, 2000 3,460,385 $ 13,108,000 $ 1,177,000 $ 10,957,000 $ -- $ 25,242,000
========= ============ ============ ============ ============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-5
SPORT-HALEY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
As Restated As Restated
Note (2) Note (2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,015,000 $ 149,000 $ 2,479,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 769,000 633,000 531,000
Deferred taxes and other 62,000 (65,000) (179,000)
Provision for doubtful accounts 199,000 120,000 53,000
Income tax benefit from stock options exercised -- -- 788,000
Gain/loss on disposal of assets (2,000) 365,000 4,000
Permanent impairment of available for sale
securities -- -- 206,000
Stock option compensation 26,000 339,000 312,000
Cumulative effect of change in accounting
principle (574,000) -- --
Changes in assets and liabilities, net of
B&L Sportswear, Inc., acquisition:
Accounts receivable 472,000 1,061,000 (825,000)
Inventory 2,228,000 4,589,000 (6,460,000)
Prepaid expenses (416,000) 87,000 (30,000)
Tax receivable 770,000 -- 94,000
Other assets 188,000 (1,048,000) (22,000)
Accounts payable 59,000 (336,000) (469,000)
Accrued commissions and other expenses (212,000) (1,015,000) 1,074,000
Minority interest -- (60,000) 14,000
------------ ------------ ------------
Net cash provided by (used in) operating
activities 4,584,000 4,819,000 (2,430,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of B&L Sportswear, Inc., net of cash acquired -- -- (94,000)
Purchase of fixed assets (679,000) (803,000) (562,000)
Maturities (purchases)of marketable securities (1,967,000) 1,996,000 (677,000)
Proceeds from the disposal of fixed assets 4,000 25,000 18,000
------------ ------------ ------------
Net cash provided by (used in) investing activities (2,642,000) 1,218,000 (1,315,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on notes payable -- 100,000 --
Repayments on notes payable (600,000) -- --
Proceeds from exercised stock options and warrants 32,000 206,000 688,000
Repurchase of common stock (3,279,000) (2,267,000) (2,711,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities (3,847,000) (1,961,000) (2,023,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,905,000) 4,076,000 (5,768,000)
CASH AND CASH EQUIVALENTS, Beginning of year 8,581,000 4,505,000 10,273,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of year $ 6,676,000 $ 8,581,000 $ 4,505,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 28,000 $ 51,000 $ 28,000
============ ============ ============
Income taxes $ 13,000 $ 1,165,000 $ 994,000
============ ============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-6
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS - Sport-Haley designs, markets, and contracts for the
manufacture of quality men's and women's fashion golf apparel under the
Haley-Registered Trademark- label. The Company's fashion golf apparel is
known for its innovative styling, high quality fabrics, generous 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.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Sport-Haley, Inc. and its wholly-owned subsidiary, B&L
Sportwear, Inc. (collectively referred to as the Company). All significant
intercompany accounts and transactions have been eliminated. The Company
purchased 7%, 41%, and 52% of B&L Sportwear, Inc. during the years ended
June 30, 2000, 1999, and 1998, respectively (see Note 8). Prior to
Sport-Haley's obtaining a 100% interest in B&L, other shareholder's
interest in B&L has been recorded as minority interest in the consolidated
financial statements.
During 1999, the minority interest basis in B&L was reduced to $-0- as a
result of the minority interest in the losses of B&L. The Company recorded
100% of the losses of B&L subsequent to the minority interest basis in B&L
reaching $-0-.
MARKETABLE SECURITIES - Marketable securities consist of United States
government and mortgage backed debt securities which mature within one year
or less. The securities are classified as held to maturity. Due to the
short-term nature of the investments, there are no material unrealized
gains or losses on these investments. As a result, the carrying value
approximates the fair market value.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market. Cost includes materials, labor and manufacturing
overhead. Generally, slow moving inventories are written down to market
value during the period in which the impairment is identified.
PROPERTY AND EQUIPMENT - Property 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. Leasehold improvements are stated at cost and amortized over
the remaining life of the lease, using the straight-line method. The cost
of normal maintenance and repairs is charged to operating expenses as
incurred. Material expenditures which increase the life of an asset are
capitalized and depreciated over the estimated remaining useful life of the
asset. 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.
IMPAIRMENT OF LONG-LIVED ASSETS - In the event that facts and circumstances
indicate that the cost of assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to
market value or discounted cash flow value is required.
REVENUE RECOGNITION - The Company recognizes revenue when risk and title on
its products passes to the buyer. Generally, both risk and title pass to
the Company's customers at date of shipment via common carrier.
F-7
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. The Company had no amounts capitalized for direct response
advertising at June 30, 2000 and 1999. Advertising expense was $676,000,
$526,000, and $607,000 for the years ended June 30, 2000, 1999, and 1998,
respectively.
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.
USE OF ESTIMATES - The preparation of consolidated 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.
CERTAIN RISKS AND CONCENTRATIONS - The Company's operations consist of the
design, manufacture and wholesale distribution 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, 2000
and 1999, 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 (GOODWILL) - Goodwill related to the
purchase of B&L Sportswear, Inc. was being amortized on a straight-line
basis over 10 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.
RECENT PRONOUNCEMENTS - In fiscal 1999, the Statement of Financial
Accounting Standards (SFAS) Board issued Statement No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 is effective
beginning July 1, 2000 for the Company. The Company does not currently
utilize any derivative instruments covered by SFAS No. 133 nor does it
hedge any transaction, therefore, no material financial statement impact is
expected from the adoption of SFAS No. 133.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria; persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's
price to the buyer is fixed or determinable, and collectibility is
reasonably assured. SAB 101, as amended by SAB 101B, is effective no later
than the fourth fiscal quarter of the Company's fiscal year ending year
2001. The Company does not believe that the adoption of SAB 101 will have a
material effect on its financial position or result of operations.
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.
F-8
COMPREHENSIVE INCOME (LOSS) - Comprehensive income is defined as all
changes in shareholders' equity (deficit), exclusive of transactions with
owners, such as capital investments. Comprehensive income includes income
or loss from changes in certain assets and liabilities that are reported
directly in equity such as the Company's unrealized loss on available for
sale securities.
EARNINGS PER SHARE - Basic EPS is calculated by dividing the income or loss
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock.
STOCK-BASED COMPENSATION - As permitted under the SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, the Company accounts for its stock-based
compensation in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. As
such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price.
Certain pro forma net income and EPS disclosures for employee stock option
grants are also included in the notes to the financial statements as if the
fair value method as defined in SFAS No. 123 had been applied. Transactions
in equity instruments with non-employees for goods or services are
accounted for by the fair value method. In 1998 and 1999, the Company
accounted for options issued to outside directors as a transaction with
non-employees. In Fiscal 2000, the Company adopted the Financial Accounting
Standards Board Interpretation No. 44 which requires that outside directors
be considered employees for purposes of stock option accounting, if the
Company is accounting for its employee stock-based compensation in
accordance with APB 25. Interpretation No. 44 states that the effects of
adopting the interpretation should be accounted for as a cumulative change
in accounting principle.
F-9
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma amounts (unaudited), as compared with actual results assuming the
new accounting principle was applied during all periods presented, are as
follows:
For the Years Ended June 30
-------------------------------------------------
2000 1999 1998
------------- ----------- -------------
Income before cumulative effect of
change in accounting principle:
As reported $ 654,000 $ 148,000 $ 2,479,000
Pro forma 654,000 274,000 2,605,000
Net income:
As reported 1,015,000 148,000 2,479,000
Pro forma 654,000 274,000 2,605,000
Income before cumulative effect of
change in accounting principle:
As reported:
Basic .17 .03 .54
Diluted .17 .03 .53
Pro forma:
Basic .17 .06 .57
Diluted .17 .06 .56
Net income per share:
As reported:
Basic .27 .03 .54
Diluted .27 .03 .53
Pro forma:
Basic .17 .06 .57
Diluted .17 .06 .56
RECLASSIFICATION - Certain prior amounts have been reclassified to conform
with the year 2000 presentation.
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS:
The Company has determined that its prior year financial statements require
restatement. The restatement resulted from corrections related to
accounting for work-in-process inventory, capitalization of certain
F-10
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prepaid and fixed assets, the acquisition of the Company's wholly-owned
subsidiary and the related minority interest in the subsidiary's loss, and
certain losses relating to discontinued operations.
The charge to retained earnings at July 1, 1997, related primarily to
correcting amounts that were improperly categorized as prepaid expenses in
the Company's financial statements previously issued for the fiscal years
preceding July 1, 1997. If financial statements for the years ended June
30, 1996, and prior were restated, the cumulative effect of correcting the
accounting for prepaid expenses and other items in those periods would
resulted in a net reduction of income totaling $872,000. Because periods
prior to July 1, 1997 are not presented, this adjustment is reflected as a
charge to retained earnings as of the beginning of the periods presented.
The following comparison of consolidated statements of income and
comprehensive income for the years ended June 30, 1999, and 1998, and
comparison of consolidated balance sheets as of June 30, 1999, present the
effects resulting from restating the Company's financial statements for the
aforementioned reasons.
COMPARISON OF CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED JUNE 30,
---------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
------------ ------------ ------------ ------------
NET SALES $ 27,531,000 $ 27,541,000 $ 30,462,000 $ 30,449,000
Cost of goods sold 19,261,000 18,833,000 17,936,000 19,363,000
------------ ------------ ------------ ------------
GROSS PROFIT 8,270,000 8,708,000 12,526,000 11,086,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,219,000 7,776,000 7,481,000 7,616,000
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,051,000 932,000 5,045,000 3,470,000
------------ ------------ ------------ ------------
OTHER INCOME AND (EXPENSE):
Interest income, net 284,000 240,000 438,000 393,000
Other income 174,000 173,000 181,000 214,000
Other expense (63,000) (19,000) (317,000) (257,000)
Minority interest benefit (expense) 251,000 60,000 6,000 (14,000)
------------ ------------ ------------ ------------
Total other income 646,000 454,000 308,000 336,000
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS BEFORE
PROVISION FOR INCOME TAXES 1,697,000 1,386,000 5,353,000 3,806,000
Provision for income taxes (610,000) (810,000) (1,205,000) (1,404,000)
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 1,087,000 576,000 4,148,000 2,402,000
------------ ------------ ------------ ------------
F-11
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30,
------------------------------------------------------------------
1999 1998
----------------------------- ------------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
----------- ----------- ------------- -----------
DISCONTINUED OPERATIONS:
Income (loss) from discontinued
operations, net of income tax
benefit (provision) (72,000) (70,000) 116,000 77,000
Loss on disposal of assets, net of
income tax benefit (200,000) (358,000) -- --
----------- ----------- ------------- -----------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (272,000) (428,000) 116,000 77,000
----------- ----------- ------------- -----------
NET INCOME 815,000 148,000 4,264,000 2,479,000
OTHER COMPREHENSIVE INCOME:
Change in unrealized loss on
available for sale securities -- -- -- 206,000
----------- ----------- ------------- -----------
COMPREHENSIVE INCOME $ 815,000 $ 148,000 $ 4,264,000 $ 2,685,000
=========== =========== ============= ===========
INCOME PER SHARE:
Basic:
Income from continuing operations $ .25 $ .13 $ .91 $ .52
Income (loss) from discontinued
operations (.07) (.10) .02 .02
Cumulative effect of change in
accounting principle -- -- -- --
----------- ----------- ------------- -----------
Net income $ .18 $ .03 $ .93 $ .54
=========== =========== ============= ===========
Diluted:
Income from continuing operations $ .25 $ .13 $ .90 $ .51
Income (loss) from discontinued
operations (.07) (.10) .03 .02
Cumulative effect of change in
accounting principle -- -- -- --
----------- ----------- ------------- -----------
Net income $ .18 $ .03 $ .93 $ .53
=========== =========== ============= ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 4,408,000 4,408,000 4,564,000 4,564,000
=========== =========== ============= ===========
Diluted 4,408,000 4,452,000 4,593,000 4,658,000
=========== =========== ============= ===========
F-12
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPARISON OF CONSOLIDATED BALANCE SHEETS
June 30, 1999
-------------
As
Previously As
Reported Restated
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,581,000 $ 8,581,000
Marketable securities 1,000 --
Accounts receivable 5,671,000 5,466,000
Inventories 13,283,000 11,887,000
Prepaid expenses and other 1,584,000 253,000
Current tax receivable -- 770,000
Deferred taxes 125,000 145,000
------------ ------------
Total current assets 29,245,000 27,102,000
PROPERTY AND EQUIPMENT, net 2,468,000 2,456,000
NET ASSETS OF DISCONTINUED OPERATIONS 306,000 46,000
GOODWILL 84,000 84,000
DEFERRED TAXES 51,000 162,000
OTHER ASSETS 313,000 305,000
------------ ------------
TOTAL ASSETS $ 32,467,000 $ 30,155,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 600,000 $ 600,000
Accounts payable 788,000 789,000
Accrued commissions 434,000 434,000
Accrued payroll 169,000 169,000
Accrued other 167,000 141,000
------------ ------------
Total current liabilities 2,158,000 2,133,000
------------ ------------
MINORITY INTEREST (191,000) --
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock -- --
Common stock 16,355,000 16,355,000
Additional paid-in capital 879,000 1,725,000
Retained earnings 13,266,000 9,942,000
------------ ------------
Total shareholders' equity 30,500,000 28,022,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,467,000 $ 30,155,000
============ ============
F-13
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair value of the Company's financial instruments are as
follows:
2000 1999
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Cash and cash equivalents $6,676,000 $6,676,000 $8,581,000 $8,581,000
Marketable securities 1,967,000 1,967,000 -- --
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.
4. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of the following at June 30:
2000 1999
---------- ----------
Cash in banks $1,583,000 $3,620,000
Short-term securities with maturities of three months or less 5,093,000 4,961,000
---------- ----------
$6,676,000 $8,581,000
========== ==========
5. INVENTORIES:
Inventories consist of the following at June 30:
2000 1999
----------- -----------
Component inventory $ 4,087,000 $ 4,028,000
Finished goods 5,572,000 7,859,000
----------- -----------
$ 9,659,000 $11,887,000
=========== ===========
F-14
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost and are comprised of the
following at June 30:
2000 1999
----------- -----------
Plant equipment $ 2,060,000 $ 1,703,000
Leasehold improvements 416,000 416,000
Furniture, fixtures and computer equipment 1,957,000 1,720,000
Other 119,000 119,000
----------- -----------
4,552,000 3,958,000
Less accumulated depreciation and amortization (2,188,000) (1,502,000)
----------- -----------
$ 2,364,000 $ 2,456,000
=========== ===========
The 1999 amounts disclosed above, do not include $46,000 in net assets of
discontinued operations. All such assets were disposed of during 2000.
Depreciation and amortization expense at June 30, 2000, 1999, and 1998 was
$761,000, $625,000, and $531,000, respectively.
F-15
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LINE-OF-CREDIT AGREEMENT:
The Company has two separate revolving line-of-credit agreements with the
same bank. These revolving line-of-credit agreements, which have been
renewed through November 5, 2000, provide for interest at 1/2% below the
bank's prime rate. One agreement provides for a maximum loan amount of $9.0
million to Sport-Haley secured by a lien on substantially all of the
Company's assets. The other agreement provides for a maximum loan amount of
$1.0 million to Sport-Haley's subsidiary secured by a lien on substantially
all of the subsidiary's assets and guaranteed by Sport-Haley, Inc. 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 Company has
a balance due of $-0- and $600,000 on its lines of credit at June 30, 2000
and 1999, respectively.
At June 30, 2000, the Company had letters of credit outstanding totaling
$594,000, which reduces the amount available for borrowing under the lines.
8. 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 $165,000 in cash to acquire its 52% ownership
interest of B&L. Effective July 1, 1999, the Company increased its
ownership in B&L to a 93% interest by exchanging $290,000 of debt owed by
B&L to Sport-Haley for additional equity in B&L. During fiscal 2000, the
Company purchased the remaining 7% of the outstanding shares of capital
stock of B&L for cash of $23,500 and by exchanging $250,000 of debt owed by
B&L to Sport-Haley for additional equity in B&L. These transactions were
accounted for using the purchase method and resulted in approximately
$93,000 of goodwill, representing the excess of purchase price over the
fair value of net assets acquired. The operations of B&L have been included
in the consolidated financial statements since the Company's purchase of
its 52% interest in B&L. The Company and certain of the prior B&L
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. Additionally, these prior
shareholders of B&L have an option to purchase; (i) all of the shares of
common stock of B&L owned by Sport-Haley at the per share price paid for by
Sport-Haley and/or, (ii) newly issued shares of common stock of B&L at
$5.00 per share up to 48% of the issued and outstanding shares of common
stock after the purchase.
F-16
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES:
The difference between the U.S. Federal statutory rate and the Company's
effective rate is as follows at June 30:
2000 1999 1998
----------- ----------- -----------
U.S. Federal statutory rate $ 584,000 $ 239,000 $ 1,336,000
State income taxes 58,000 61,000 87,000
Change in deferred tax valuation allowance (88,000) 138,000 31,000
Equity interest in loss of subsidiary not
consolidated for tax purposes -- 157,000 3,000
Tax-exempt interest -- (4,000) (17,000)
Other 3,000 (36,000) 10,000
----------- ----------- -----------
Total tax (current and deferred) $ 557,000 $ 555,000 $ 1,450,000
=========== =========== ===========
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:
2000 1999
------------------------ ------------------------
Current Long-Term Current Long-Term
--------- --------- --------- ---------
Deferred tax liability $ -- $(105,000) $ -- $(196,000)
Deferred tax asset 113,000 308,000 145,000 527,000
--------- --------- --------- ---------
Net deferred tax asset before valuation
allowance 113,000 203,000 145,000 331,000
Valuation allowance -- -- -- (169,000)
--------- --------- --------- ---------
$ 113,000 $ 203,000 $ 145,000 $ 162,000
========= ========= ========= =========
F-17
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of income tax expense benefits are as follows at June 30:
2000 1999 1998
--------- --------- ----------
Federal $ 441,000 $ 558,000 $1,558,000
State 54,000 62,000 89,000
Deferred 62,000 (65,000) (197,000)
--------- --------- ----------
$ 557,000 $ 555,000 $1,450,000
========= ========= ==========
The tax benefits associated with the exercise of non-qualified options
in 1998 reduced the taxes currently payable at June 30, 1998 by $788,000.
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:
F-18
2000 1999
--------------------------------------- ----------------------------------------
Temporary Temporary
Difference Current Long-Term Difference Current Long-Term
---------- --------- --------- ---------- --------- ---------
Allowance for doubtful
accounts $ 62,000 $ 23,000 $ -- $87,0000 $ 32,000 $ --
Reserve for sales returns 68,000 25,000 -- 96,000 36,000 --
Prepaid expenses 112,000 42,000 -- 150,000 56,000 --
Accrued vacation 62,000 23,000 -- 54,000 21,000 --
Accumulated depreciation 166,000 -- (72,000) 437,000 -- (163,000)
Stock option 49,000 -- 18,000 637,000 -- 238,000
Unrealized loss on 234,000 -- 87,000 234,000 -- 87,000
investment
B&L net operating losses 545,000 -- 203,000 545,000 -- 202,000
B&L accumulated
depreciation 90,000 -- (33,000) 90,000 -- (33,0000)
--------- --------- --------- -------- --------- ---------
Net deferred tax asset
before valuation allowance 113,000 203,000 145,000 331,000
Valuation allowance -- -- -- (169,000)
--------- --------- --------- ---------
$ 113,000 $ 203,000 $ 145,000 $ 162,000
========= ========= ========= =========
At June 30, 2000, B&L has a net operating loss carryforward of
approximately $545,000 which can only be utilized by B&L on a stand-alone
basis. A substantial amount of the B&L net operating loss may be subject to
limitation as a result of a change in ownership.
Effective July 1, 1999, Sport-Haley acquired in excess of 80% ownership in
B&L and as such, consolidated B&L for tax purposes in fiscal 2000. Deferred
tax assets of B&L resulting from operations of B&L prior to its
consolidation for tax purposes have a 100% valuation allowance at June 30,
1999 resulting from the inability to predict sufficient B&L future taxable
income to utilize the assets. During fiscal 2000, Sport-Haley obtained 100%
control of B&L. As a result of the ability to include B&L in its
consolidated tax return, the Company believes it is more likely than not
that it can utilize the net operating loss of B&L. As a result, the
valuation allowance relating to B&L has been reduced to $0, with $81,000 of
the reduction allocated to reduce goodwill associated with the B&L
acquisition. The valuation allowance for fiscal 2000, 1999, and 1998
(decrease) increased $(169,000), $138,000, and $31,000, respectively.
F-19
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. OPERATING LEASES:
The Company leases its corporate offices, production and warehouse
facilities under an operating lease, which expires in October 2001.
During March 1995, the Company entered into a lease for a factory outlet
store located in Laughlin, Nevada. The facility is leased for a term of
seven years.
In April 1998, B&L entered into a lease for its operating facilities with
the minority shareholders of B&L. The leased facility has an initial term
of 10 years and may be extended for two additional five-year periods
following the initial term.
Rent expense for the years ended June 30, 2000, 1999, and 1998 was
$321,000, $312,000, and $255,000, respectively, of which $65,000, $65,000,
and $16,000 pertained to the B&L lease.
The future minimum lease payments under non-cancelable leases with initial
terms of one year or more as of June 30, 2000 are as follows:
Years Ending
June 30, Amount
----------- ----------
2001 $ 290,000
2002 166,000
2003 65,000
2004 65,000
2005 65,000
Thereafter 179,000
---------
$ 830,000
=========
11. COMMITMENTS AND CONTINGENCIES:
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.
As discussed in Note 2 to the financial statements, the Company has
restated previously issued financial statements. The Company's counsel has
advised it that such restatement may lead to claims or
F-20
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assessments from various parties. No such claim has yet been asserted. The
Company cannot make an estimate of any possible losses from any unasserted
claims.
EMPLOYMENT AGREEMENTS - The Company has entered into several employment and
non-compete agreements with officers and key employees of the Company.
Except for the chief executive officer's (CEO) employment and non-compete
agreement, the remaining agreements are subject to automatic one-year
extensions. The CEO's agreement is a three-year employment and non-compete
agreement so long as the executive is CEO or Chairman of the Board, subject
to automatic one-year extensions. Employment and non-compete agreements
provide for minimum salary levels totaling $765,000 per year excluding
bonuses, as well as severance payments upon termination of employment
without cause.
12. SHAREHOLDERS' EQUITY:
REPURCHASE OF COMMON STOCK - The Company's Board of Directors authorized
the repurchase of up to 1,820,000 shares of the Company's issued and
outstanding common stock. The shares may be purchased from time to time in
open market transactions at prevailing market prices or privately
negotiated transactions. 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. Through June 30, 2000, the Company has repurchased a
total of 1,497,000 shares of its common stock at a cost of approximately
$10,248,000.
PREFERRED STOCK - 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, 2000, the
Company had no preferred stock issued or outstanding.
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 1,350,000 shares. In calendar 1999, the Board of
Directors approved increasing the number of shares reserved for issuance
under the Plan by 350,000. As a result of the Board electing not to obtain
shareholder approval, all options granted as a result of the 1999 increase
will be granted as non-qualified options. 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 10 years from that date, are non-transferrable and cannot
be exercised for a period of six 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.
At June 30, 2000, the Company has outstanding options to purchase 547,881
shares of common stock at prices ranging from $2.50 to $14.25 with
expiration dates between fiscal 2003 and fiscal 2010. During
F-21
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fiscal years 2000, 1999, and 1998, option holders exercised and purchased
12,833, 9,340, and 73,326 shares of the Company's common stock and the
Company realized gross proceeds of approximately $32,000, $61,000, and
$470,000, respectively.
During October 1998, the Compensation Committee of the Board of Directors
authorized the re-pricing of certain stock options, previously granted
under the Company's stock option plan, that were deemed to be "out of the
money" based upon the prevailing quoted market prices of the Company's
common stock.
F-22
The activity under the Company's Plan is set forth below:
Employee Options Outstanding
------------------------------------------------
Weighted Average
Number of Range Exercise Price
Options Per Share Per Share
-------- -------------- ----------------
BALANCES, July 1, 1997 175,000 $ 6.50 - 14.25 $ 11.54
Options granted 149,500 9.25 - 10.63 10.42
Options canceled (30,000) 6.50 - 14.25 9.08
Options exercised (35,000) 6.50 6.50
--------
BALANCES, June 30, 1998 259,500 9.25 - 14.25 11.86
Options granted 20,000 8.50 8.50
Options canceled (37,500) 10.63 - 12.75 11.05
Options canceled related to repricing (194,500) 10.25 - 14.25 12.34
Options issued related to repricing 194,501 8.63 8.63
--------
BALANCES, June 30, 1999 242,001 8.50 - 10.63 8.73
Options granted 166,000 3.00 3.00
Options canceled (7,500) 8.63 8.63
--------
BALANCES, June 30, 2000 400,501 $ 3.00 - 10.63 $ 6.36
======== ============== =======
Employees options vest as follows:
Weighted
Average
Number of Exercise
Amounts vested at: Options Price
------------------ --------- --------
June 30, 2000 216,334 $ 8.31
June 30, 2001 73,500 3.48
June 30, 2002 55,334 2.79
June 30, 2003 55,333 3.03
-------
400,501 $ 6.36
======= ========
F-23
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Employee Options Outstanding
----------------------------------------------
Weighted Average
Number of Range Exercise Price
Options Per Share Per Share
--------- -------------- --------------
BALANCES, July 1, 1997 192,553 $ 2.50 - 12.13 $ 8.56
Options granted 12,500 6.50 - 10.63 8.98
Options canceled (4,229) 5.88 - 7.75 7.56
Options exercised (38,326) 2.50 - 7.75 6.33
--------
BALANCES, June 30, 1998 162,498 2.50 - 12.13 9.15
Options granted 9,000 9.78 9.78
Options canceled (1,945) 7.75 7.75
Options canceled related to repricing (87,500) 10.63 - 12.13 12.00
Options issued related to repricing 87,500 8.63 8.63
Options exercised (9,340) 2.50 - 7.50 6.49
--------
BALANCES, June 30, 1999 160,213 2.50 - 9.78 7.52
Options exercised (12,833) 2.50 2.50
--------
BALANCES, June 30, 2000 147,380 $ 2.50 - 9.78 $ 7.95
======== ============= ======
All non-employee options are fully vested at June 30, 2000. Included in the
Company's net income for the year ended June 30, 2000, 1999, and 1998 are
charges of approximately $26,000, $339,000, and $312,000, respectively,
which are a result of applying the SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, to non-employees. $574,000 of previously recognized SFAS No.
123 expense was reversed in fiscal 2000
F-24
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as a result of accounting for stock options issued to outside directors
under APB Opinion 25, instead of SFAS No. 123.
The weighted average fair value of options granted during fiscal 2000,
1999, and 1998 was $2.71, $5.98, and $6.72 per share, respectively. All
options granted in 2000 had exercise prices below the market price of the
Company's stock on the date of grant. In 1999 and 1998, all options were
granted at an exercise price that equaled the market price.
The Company adopted the provisions of SFAS No. 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 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 stock
options granted to employees 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:
2000 1999 1998
------------- ----------- -------------
Net income - as reported $ 1,015,000 $ 148,000 $ 2,479,000
Net income - pro forma 731,000 (197,000) 2,269,000
Earnings per share - as reported:
Basic $ .27 $ .03 $ .54
Diluted .27 .03 .53
Earnings per share - pro forma:
Basic $ .19 $ (.04) $ .50
Diluted .19 (.04) .49
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:
Risk-free interest $5.5% - 6.5%
Expected life 10 years
Expected volatility 32% - 42%
Expected dividend $-0-
F-25
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The expected life was determined based on the Plan's vesting period and
exercise behavior of the employees.
If not exercised earlier, options outstanding as of June 30, 2000 will
expire as follows:
Employees Non-Employees
------------------------------------ ------------------------------------
Weighted Weighted
Average Range of Average Range of
Number of Exercise Exercise Number of Exercise Exercise
Options Price Price Options Price Price
--------- -------- -------- --------- -------- --------
2003 -- $ -- $ -- 1,760 $ 2.50 $ 2.50
2004 -- -- -- 12,250 2.50 2.50
2005 -- -- -- 21,870 7.75 7.75
2006 17,500 8.63 8.63 10,000 9.25 9.25
2007 77,500 8.63 8.63 85,000 8.50 6.50-8.63
2008 119,501 8.86 8.63-10.63 16,500 9.26 8.63-9.78
2009 20,000 8.50 8.50 -- -- --
2010 166,000 3.00 3.00 -- -- --
13. NET INCOME PER SHARE:
In the reconciliation of basic to diluted earnings per share, there were no
reconciling items affecting the numerator in any year presented. The only
items offsetting the denominator were the effects of stock options, which
increased the basic weighted average shares by 29,000, 44,000, and 93,000
in 2000, 1999, and 1998, respectively. These additional dilutive securities
had no effect on 2000 or 1999 earnings per share and caused a decrease of
.02 on earnings per share in 1998.
The diluted weighted average shares outstanding computation excludes
518,000, 358,000, and 329,000 options in 2000, 1999, and 1998,
respectively, because inclusion of such options would be anti-dilutive.
14. 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. It is funded by voluntary pre-tax contributions from employees up
to a maximum amount equal to 15% of annual compensation and through
matching
F-26
SPORT-HALEY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contributions by the Company of $0.25 on the dollar for employee
contributions on the first 5% of the employee annual compensation. For the
years ended June 30, 2000, 1999, and 1998, the Company contributed $15,000,
$14,000, and $14,000, respectively, to the 401(k) Plan on behalf of Company
employees.
15. SEGMENT INFORMATION:
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, effective May 1, 1998. Reportable
segments are based on products and services, geography, legal structure,
management structure, and any other method in which management
disaggregates a company. Based on the management approach model, the
Company has determined its business operations are classified into two
principal reporting segments. Separate management of each segment is
required because each business unit is subject to different marketing,
sales, and implementation strategies.
Reportable Segment 1, the Company's apparel segment, derives its revenues
from the sales of men's and women's golfing apparel. Segment 2, the
Company's discontinued headwear segment, derived its revenues from sales of
men's and women's headgear (see Note 16). The headwear segment did not meet
the separate disclosure criteria pursuant to SFAS No. 131.
16. DISCONTINUED OPERATIONS:
On May 28, 1999, the Company adopted a formal plan to discontinue its
headwear product line and cease headwear production operations. The assets
of the headwear segment to be sold consisted primarily of inventory and
property and equipment.
The Company's headwear operations incurred an operating loss of
approximately $113,000 in fiscal 1999 and recognized a $479,000 write-down
to finished goods inventories and fixed assets. Net sales of the headwear
segment for fiscal years 1999 and 1998 were $420,000 and $837,000,
respectively. These amounts are not included in net sales in the
accompanying income statements.
F-27
SCHEDULE II
SPORT-HALEY, INC.
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------ ---------- ---------- ---------- ---------
ADDITIONS
---------------------------------------------------
Charged to
Balance at Revenues, Charged to Balance
Beginning of Costs and Other at End
Period Expenses Accounts Deductions of Period
------------ ---------- ---------- ---------- ---------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
June 30,
1998 $ 71,000 $ 53,000 $ -- $ 31,000 (1) $155,000
1999 $155,000 $120,000 $ -- $(188,000) (1) $ 87,000
2000 $ 87,000 $199,000 $ -- $(224,000) (1) $ 62,000
ALLOWANCE FOR SALES RETURN
June 30,
1998 $ 67,000 $943,000 $ -- $(903,000) (2) $107,000
1999 $107,000 $917,000 $ -- $(928,000) (2) $ 96,000
2000 $ 96,000 $670,000 $ -- $(698,000) (2) $ 68,000
- -------------------
(1) WRITEOFF OF UNCOLLECTIBLE ACCOUNTS, NET OF RECOVERIES OF PREVIOUSLY
WRITTEN-OFF UNCOLLECTIBLE ACCOUNTS.
(2) ACTUAL SALES RETURN.
F-28