SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 / / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT COMMISSION FILE NO. 1-12888 SPORT-HALEY, INC. (Exact name of small business issuer as specified in its charter) COLORADO 84-1111669 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4600 E. 48TH AVENUE, DENVER, COLORADO 80216 (Address of principal executive offices) (303) 320-8800 (Issuer's telephone number including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes /X/ No / / State the number of shares outstanding in each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MARCH 9, 2001 COMMON STOCK, NO PAR VALUE 3,441,985 Transitional Small Business Disclosure Format (check one): Yes / / No /X/ TABLE OF CONTENTS PAGE ---- PART 1 - CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS 3 CONSOLIDATED STATEMENTS OF INCOME 4 CONSOLIDATED STATEMENTS OF CASH FLOWS 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 PART II - OTHER INFORMATION 19 SIGNATURES 20 SPORT-HALEY, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARES OF STOCK) DECEMBER 31, JUNE 30, 1998 1998 ----------- ----------- (UNAUDITED) (***) ASSETS Current assets: Cash and cash equivalents $ 4,809 $ 4,505 Marketable securities 983 1,996 Accounts receivable, net of allowances of $127 and $261, respectively 4,954 6,647 Inventories 16,065 16,445 Other current assets 949 340 Deferred taxes 172 179 ------- ------- Total current assets 27,932 30,112 Property and equipment, net 2,409 2,271 Net assets of discontinued operations 419 441 Goodwill 89 94 Deferred taxes 101 53 Other assets 36 37 ------- ------- Total Assets $30,986 $33,008 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 600 $ 500 Accounts payable 321 1,847 Accrued commissions and other expenses 490 1,005 ------- ------- Total current liabilities 1,411 3,352 ------- ------- Minority interest -- 60 ------- ------- Shareholders' equity: Preferred stock, no par value; 1,500,000 shares authorized; none issued and outstanding -- -- Common stock, no par value; 15,000,000 shares authorized; 4,408,362 and 4,512,962 shares issued and outstanding, respectively 17,324 18,416 Additional paid-in capital 1,516 1,386 Retained earnings 10,735 9,794 ------- ------- Total shareholders' equity 29,575 29,596 ------- ------- Total Liabilities and Shareholders' Equity $30,986 $33,008 ======= ======= *** Taken from the audited balance sheet at that date. See accompanying notes to consolidated financial statements. 3 SPORT-HALEY, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales $ 5,559 $ 6,338 $ 12,909 $ 12,983 Cost of goods sold 3,729 4,266 7,846 8,260 -------- -------- -------- -------- Gross profit 1,830 2,072 5,063 4,723 Selling, general and administrative expense 1,675 1,554 3,707 3,334 -------- -------- -------- -------- Income from operations 155 518 1,356 1,389 Other income, net 111 193 230 351 Recognized loss on available for sale securities -- -- -- (215) -------- -------- -------- -------- Income from continuing operations before minority loss and provision for income taxes 266 711 1,586 1,525 Minority loss 54 -- 60 -- Provision for income taxes (172) (262) (678) (638) -------- -------- -------- -------- Income from continuing operations 148 449 968 887 Discontinued operations: Loss from discontinued operations, net of income tax benefit of 17, 21, 17, and 4, respectively (25) (35) (27) (7) -------- -------- -------- -------- Net income $ 123 $ 414 $ 941 $ 880 ======== ======== ======== ======== Basic and diluted earnings per common share $ 0.03 $ 0.09 $ 0.21 $ 0.19 ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 4 SPORT-HALEY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SIX MONTHS ENDED DECEMBER 31, ------------------------- AS AS AMENDED AMENDED 1998 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 941 $ 880 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 319 237 Deferred taxes and other (42) (94) Allowance for doubtful accounts 57 -- Stock option compensation 131 155 Minority interest (60) -- Recognized loss on available for sale securities -- 215 Cash provided (used) due to changes in assets and liabilities: Accounts receivable 1,637 740 Inventory 380 (3,996) Other assets (611) 103 Accounts payable (1,526) 910 Accrued commissions and other expenses (515) (35) Income taxes payable -- 273 ------- ------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 711 (612) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Redemption of held-to-maturity investments 2,000 5,932 Sale of fixed assets 45 -- Purchase of fixed assets (476) (248) Purchase of held-to-maturity investments (983) (4,630) ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES 586 1,054 ------- ------- See accompanying notes to consolidated financial statements. 5 SPORT-HALEY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) SIX MONTHS ENDED DECEMBER 31, ------------------------- AS AS AMENDED AMENDED 1998 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Advance on note payable $ 99 $ -- Net proceeds from issuance of common stock 46 395 Repurchase of common stock (1,138) (2,488) ------- ------- NET CASH USED BY FINANCING ACTIVITIES (993) (2,093) ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 304 (1,651) CASH AND CASH EQUIVALENTS, BEGINNING 4,505 7,828 ------- ------- CASH AND CASH EQUIVALENTS, ENDING $ 4,809 $ 6,177 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 694 $ 466 ======= ======= Interest $ 22 $ -- ======= ======= See accompanying notes to consolidated financial statements. 6 SPORT-HALEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements included herein have been prepared by Sport-Haley, Inc. (the "Company") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations. The Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company's annual audited consolidated financial statements dated June 30, 2000, included in the Company's annual report on Form 10-K as filed with the Securities and Exchange Commission. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. The management of the Company believes that the accompanying unaudited condensed consolidated financial statements prepared in conformity with generally accepted accounting principles, which require the use of management estimates, contain all adjustments (including normal recurring adjustments) necessary to present fairly the operations and cash flows for the periods presented. The consolidated financial statements include the accounts of Sport-Haley, Inc., and its subsidiary, B&L Sportswear, Inc. (collectively referred to as the Company). All significant inter-company accounts and transactions have been eliminated. NOTE 2 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS The Company determined that its financial statements for the years ended June 30, 1999 and 1998 required restatement. The restatements resulted from corrections related to accounting for work- in-progress inventory, capitalization of certain prepaid and fixed assets, the acquisition of the Company's subsidiary and the related minority interest in the subsidiary's losses, certain losses relating to discontinued operations and the income tax benefit from stock options exercised. The following comparison of consolidated statements of income for the three months and six months ended December 31, 1998 and 1997 present the effects resulting from restating the Company's financial statements for the aforementioned reasons, as applicable to these amended interim financial statements. 7 SPORT-HALEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------ AS ORIGINALLY AS AS ORIGINALLY AS REPORTED AMENDED REPORTED AMENDED 1998 1998 1997 1997 ------------- ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales $ 5,640 $ 5,559 $ 6,464 $ 6,338 Cost of goods sold 3,713 3,729 4,059 4,266 ------- ------- ------- ------- Gross profit 1,927 1,830 2,405 2,072 Selling, general and administrative expense 1,670 1,675 1,717 1,554 ------- ------- ------- ------- Income from operations 257 155 688 518 Other income, net 112 111 193 193 Recognized loss on available for sale securities -- -- -- -- ------- ------- ------- ------- Income from continuing operations before minority loss and provision for income taxes 369 266 881 711 Minority loss 85 54 -- -- Provision for income taxes (182) (172) (92) (262) ------- ------- ------- ------- Income from continuing operations 272 148 789 449 Discontinued operations: Loss from discontinued operations, net of income tax benefit of 0, 17, 0, and 21, respectively -- (25) -- (35) ------- ------- ------- ------- Net income 272 123 789 414 Other comprehensive income: Unrealized holding losses on available for sale securities -- -- -- -- ------- ------- ------- ------- Comprehensive income $ 272 $ 123 $ 789 $ 414 ======= ======= ======= ======= Basic and diluted earnings per common share $ 0.07 $ 0.03 $ 0.17 $ 0.09 ======= ======= ======= ======= 8 SPORT-HALEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) --------------------------------------------------------- AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED AMENDED REPORTED AMENDED 1998 1998 1997 1997 ------------- ----------- ------------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Net sales $ 13,136 $ 12,909 $ 13,299 $ 12,983 Cost of goods sold 8,322 7,846 8,317 8,260 -------- -------- -------- -------- Gross profit 4,814 5,063 4,982 4,723 Selling, general and administrative expense 3,512 3,707 3,369 3,334 -------- -------- -------- -------- Income from operations 1,302 1,356 1,613 1,389 Other income, net 231 230 352 351 Recognized loss on available for sale securities -- -- -- (215) -------- -------- -------- -------- Income from continuing operations before minority loss and provision for income taxes 1,533 1,586 1,965 1,525 Minority loss 98 60 -- -- Provision for income taxes (532) (678) (372) (638) -------- -------- -------- -------- Income from continuing operations 1,099 968 1,593 887 Discontinued operations: Loss from continuing operations, net of income tax benefit of 0,17,0, and 4, respectively -- (27) -- (7) -------- -------- -------- -------- Net income 1,099 941 1,593 880 Other comprehensive income: Unrealized holding losses on available for sale securities -- -- (52) -- -------- -------- -------- -------- Comprehensive income $ 1,099 $ 941 $ 1,541 $ 880 ======== ======== ======== ======== Basic and diluted earnings per common share $ 0.25 $ 0.21 $ 0.33 $ 0.19 ======== ======== ======== ======== 9 SPORT-HALEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 REPURCHASE OF COMMON STOCK The Company's Board of Directors previously authorized the repurchase of up to 1,820,000 shares of the Company's issued and outstanding common stock. The shares may be repurchased from time to time in open market transactions at prevailing market prices or in privately negotiated transactions. The Company has no commitment or obligation to repurchase all or any portion of the shares authorized for repurchase. All shares repurchased by the Company are canceled and returned to the status of authorized but unissued common stock. Through December 31, 1998, the Company repurchased a total of 572,000 shares of its common stock at a cumulative cost of approximately $5.8 million. NOTE 4 COMMON STOCK OPTIONS At December 31, 1998, there were outstanding options to purchase 436,099 shares of the Company's common stock at prices ranging from $2.50 to $12.75, with expiration dates between March 15, 2002, and August 10, 2008. During the six-month period ended December 31, 1998, 7,400 options were exercised, on which the Company realized gross proceeds of approximately $46,000. 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 price of the Company's stock. Included in net income for the six months ended December 31, 1998 is a charge of approximately $131,000 which is a result of applying Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION. 10 SPORT-HALEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 EARNINGS PER SHARE The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, (SFAS No. 128) effective with the year ended June 30, 1998. SFAS No. 128 requires the presentation of basic and diluted earnings per common share. The following table provides a reconciliation of the numerator and denominator of basic and diluted earnings per common share: THREE MONTHS ENDED DECEMBER 31, 1998 --------------------------------------- NET WEIGHTED INCOME AVERAGE SHARES PER SHARE ---------- -------------- --------- EARNINGS PER COMMON SHARE Basic earnings per share $ 123,000 4,425,208 $ 0.03 Effect of dilutive securities options and warrants -- 69,588 -- --------- --------- -------- Diluted earnings per share $ 123,000 4,494,796 $ 0.03 ========= ========= ======== SIX MONTHS ENDED DECEMBER 31, 1998 --------------------------------------- NET WEIGHTED INCOME AVERAGE SHARES PER SHARE ---------- -------------- --------- EARNINGS PER COMMON SHARE Basic earnings per share $ 941,000 4,463,577 $ 0.21 Effect of dilutive securities options and warrants -- 75,481 -- --------- --------- -------- Diluted earnings per share $ 941,000 4,539,058 $ 0.21 ========= ========= ======== THREE MONTHS ENDED DECEMBER 31, 1997 --------------------------------------- NET WEIGHTED INCOME AVERAGE SHARES PER SHARE ---------- -------------- --------- EARNINGS PER COMMON SHARE Basic earnings per share $ 414,000 4,600,992 $ 0.09 Effect of dilutive securities options and warrants -- 82,374 -- --------- --------- -------- Diluted earnings per share $ 414,000 4,683,366 $ 0.09 ========= ========= ======== 11 SPORT-HALEY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED DECEMBER 31, 1997 --------------------------------------- NET WEIGHTED INCOME AVERAGE SHARES PER SHARE ---------- -------------- --------- EARNINGS PER COMMON SHARE Basic earnings per share $ 880,000 4,630,563 $ 0.19 Effect of dilutive securities options and warrants -- 119,223 -- --------- --------- -------- Diluted earnings per share $ 880,000 4,539,058 $ 0.19 ========= ========= ======== 12 SPORT-HALEY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report on Form 10-Q contains certain forward-looking statements. When used in this report, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "believe" and similar 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. FINANCIAL CONDITION The Company relied on cash generated from operations and available cash on hand to finance its working capital requirements for the 12-month period following December 31, 1998. The Company did not make any periodic borrowings under its revolving line of credit during the same 12-month period. Working capital at December 31, 1998 was approximately $26.5 million and was approximately $26.8 million at June 30, 1998. During the six months ended December 31, 1998, the Company expended approximately $1.1 million to repurchase 112,000 shares of its common stock. The Board of Directors had authorized the repurchase, and management believed that the repurchase of these shares would benefit the shareholders by increasing book value per share with no material adverse effect on working capital. Book value per share at December 31, 1998 increased by approximately $0.15 per share since June 30, 1998 to approximately $6.71 per share. Cash and cash equivalents increased since June 30, 1998 by approximately $304,000. Net accounts receivable decreased by approximately $1.6 million to $5.0 million from $6.6 million at June 30, 1998. Since June 30, 1998, inventories decreased by approximately $380,000 to $16.1 million from $16.4 million. Due to the combination of these and other factors, during the six months ended December 31, 1998, operating activities provided cash of approximately $711,000. Other current assets increased by approximately $609,000 since June 30, 1998 to approximately $949,000. The change was due primarily to an increase of approximately $332,000 in income taxes receivable and an increase of approximately $154,000 in other receivables during the six months ended December 31, 1998. For the six months ended December 31, 1998, the Company spent approximately $476,000 for the purchase of property and equipment, and approximately $319,000 in depreciation and amortization was charged to current operations. During the same six-month period, investing activities provided cash of approximately $586,000, due to redemption and purchase of held-to-maturity investments combined with sales and purchases of fixed assets. 13 SPORT-HALEY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Accounts payable and accrued expenses decreased by approximately $2.0 million since June 30, 1998. The decrease was due to a combination of several factors including decreases of approximately $1.5 million in accounts payable, $261,000 in accrued sales commissions payable and $176,000 in accrued payroll expenses. Total shareholders' equity decreased by approximately $21,000 for the six months period ended December 31, 1998. The decrease was primarily attributable to the repurchase of 112,000 shares of the Company's common stock during the six-month period at a cost of approximately $1.1 million combined with net income for the same period. Book value per share increased by approximately $0.15 to $6.71 per share at December 31, 1998 as compared with $6.56 per share at June 30, 1998. RECENT DEVELOPMENTS In July 2000, as previously reported, the Company'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 the 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 accounting errors consisted 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) incorrect accounting for the acquisition of the Company's subsidiary (the "Subsidiary") and the related minority interest in the losses of the Subsidiary; (iv) incorrect recording of certain losses relating to discontinued operations; and, (v) the income tax benefit from stock options exercised. See Note 2 to the consolidated financial statements. The Company retained a new independent accounting firm shortly after June 30, 2000. The Company engaged the new accounting firm to audit the Company's financial statements for the year ended June 30, 2000 and to re-audit the previously issued financial statements for the years ended June 30, 1999 and 1998, which the Company restated. The Audit Committee 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, presented fairly in all material respects the Company's financial position, results of operations and cash flows for the fiscal years ended June 30, 2000, 1999 and 1998, in conformity with generally accepted accounting principles. The Audit Committee does not believe that the accounting 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. 14 SPORT-HALEY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The effects of significant financial statement adjustments related to the restatements for the years ended June 30, 1999 and 1998 are set forth in the Company's Form 10-K for the fiscal year ended June 30, 2000, which was filed with the Securities and Exchange Commission on November 3, 2000. The effects of the restatements on the specific line items of the income statement and earnings per share for the periods ended December 31, 1998 and 1997 are set forth in the notes to the financial statements accompanying this amended quarterly report (Note 2). The restatements described above 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. The Company has incurred approximately $380,000 in expenses related to the restatements of its fiscal year 1999 and 1998 financial statements and the correction of material quarterly information for fiscal years 2000, 1999 and 1998. The Company is presently evaluating whether such expenses will be recoverable in a future reporting period. As previously reported, on October 16, 2000, The Nasdaq Stock Marketr ("Nasdaq"), halted trading in the securities of the Company and requested additional information from the Company. Nasdaq 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 advised the Company that the trading halt would continue until the Company complied with Nasdaq's request for additional information, which the Company provided. Nasdaq further proposed to de-list the Company's securities from trading on the Nasdaq National Market. The Company appeared at a hearing before the Nasdaq Listing Qualifications Panel (the "Panel") on November 10, 2000 in order to address the proposed de-listing of the Company's securities. On December 11, 2000, the Panel rendered its decision, granting an exception to the filing requirement set forth in Nasdaq Marketplace Rule 4310, requiring that on or before January 15, 2001, the Company file amended Forms 10-Q for all quarters during fiscal years 2000, 1999 and 1998. Further, the Panel determined that the Company's late filings of Form 10-K for the fiscal year ended June 30, 2000 and its Form 10-Q for the period ended September 30, 2000 merited the application of additional and more stringent criteria under Marketplace Rule 4300. Accordingly, the Panel stated that if the Company satisfies the first portion of the Panel's exception expiring January 15, 2001, the Company must also timely file all periodic reports with the Securities and Exchange Commission and Nasdaq for all reporting periods ending on or before December 31, 2001. The Panel stated in its decision that if the Company fails to make any filings in accordance with the exception granted, the Company will not be entitled to a new hearing and its securities will be de-listed from Nasdaq. Based upon its determination, the Panel ordered that trading resume in the Company's securities on Nasdaq effective December 12, 2000. 15 SPORT-HALEY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On December 26, 2000, the Company notified Nasdaq of its request that the Nasdaq Listing Review Council (the "Review Council") review the Panel's decision. The Company requested that the Review Council grant it additional time in which to comply with the filing of historical amended Forms 10-Q and requested that the additional and more stringent criteria under Marketplace Rule 4300 be applied only in the event the Company fails to make any current filing during the calendar year 2001, or has not filed the amended quarterly Forms 10-Q for fiscal years 2000, 1999 and 1998 by March 15, 2001. The Company filed amended Forms 10-Q for fiscal year 2000 on January 16, 2001. On or about January 25, 2001, the Review Council granted the Company the requested extension to file the remaining amended quarterly filings on or before March 15, 2001. The Review Council's review of the remaining portions of the Panel's decision is pending. The Company was advised in a letter dated November 7, 2000 that the Securities and Exchange Commission (the "Commission") is conducting an informal inquiry into matters concerning the Company. The Commission made an informal request that the Company voluntarily produce certain documents. The Company provided the requested documents to the Commission. In addition, the Company voluntarily provided testimony to the Commission. RESULTS OF OPERATIONS The Company's business is seasonal in nature, and therefore the results for any one or more quarters are not necessarily indicative of the annual results or continuing trends. Net sales for the fiscal quarter and six months ended December 31, 1998, were approximately $5.6 million and $12.9 million, respectively, decreases of approximately $779,000 or 12%, and $74,000 or 1%, from net sales of approximately $6.3 million and $13.0 million for the same periods in the prior fiscal year. The decrease in net sales was primarily due to slower sales to golf professional shops, many of which had larger inventories than in prior years remaining from their previous purchases of spring selling season merchandise. The Company's gross profit, as a percentage of net sales, was approximately 33% and 39% for the quarter and six months ended December 31, 1998, respectively, and 33% and 36% for the same periods in the prior fiscal year. The increase in gross profit for the six months ended December 31, 1998 was primarily due to a lower percentage of sales discounts and term discounts allowed during the prior fiscal quarter ended September 30, 1998. Selling, general and administrative expenses for the quarter and six months ended December 31, 1998 increased by approximately $121,000 and $373,000, or 8% and 11%, respectively to approximately $1.7 million and $3.7 million from $1.6 million and $3.3 million for the same periods in the prior fiscal year. The increase was primarily attributable to the implementation of the Company's new corporate sales marketing program during the six months ended December 31, 1998. As a percentage of sales, selling, general and administrative expenses for the quarter and six months ended December 31, 1998 were 30% and 29%, respectively, as compared with 25% and 26% for the same period in the prior fiscal year. 16 SPORT-HALEY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other income, net for the six months ended December 31, 1998 was approximately $230,000, a decrease of approximately $121,000, or 34%, as compared with $351,000 for the same six-month period in the prior fiscal year. The decrease was primarily attributable to lower interest income earned on a decreased amount of cash equivalents and held to maturity investments. Income from continuing operations before minority loss and provision for income taxes decreased by approximately $445,000, or 61%, to approximately $266,000 for the fiscal quarter ended December 31, 1998, from $711,000 for the same three-month period in the prior fiscal year. Income from continuing operations before minority loss and provision for income taxes increased by approximately $61,000, or 4%, to approximately $1.6 million for the six months ended December 31, 1998, from $1.5 million for the same period in the prior fiscal year. The increase for the six- month period was primarily attributable to higher gross margins achieved during the six-month period combined with the loss on available for sale securities that was recognized during the fiscal quarter ended September 30, 1997. During the fiscal year ended June 30, 1996, the Company invested approximately $234,000 in the common stock of Brassie Golf. During the fiscal quarter ended September 30, 1997, management determined that the Company's investment in Brassie Golf was permanently impaired, and the Company recognized a loss on available for sale securities of approximately $215,000 during that fiscal quarter. The Company's effective tax rates for the six months ended December 31, 1998 and 1997 were 41% and 42%, respectively. The effective tax rate in any fiscal period can vary significantly from the effective tax rate in another period due to differences between the recording of certain transactions for financial versus tax purposes. Certain deductions recognized for tax purposes may not be expensed for financial statement purposes, and certain expenses recorded for financial statement purposes may not be deductible for tax purposes. For the fiscal quarter ended December 31, 1998, income from continuing operations decreased by approximately $301,000 or 67% when compared to the same three-month period in the prior fiscal year. For the six months ended December 31, 1998, income from continuing operations increased by approximately $81,000, or 9%, when compared with the same six-month period in the prior fiscal year. The increase for the six-month period ended December 31, 1998 was primarily the result of lower sales volume, higher gross margins and higher percentage of sales with respect to selling, general and administrative expenses combined with the loss recognized on available for sale securities during the fiscal quarter ended September 30, 1997. The Company discontinued the manufacturing and sale of headwear during the fiscal year ended June 30, 1999, and had disposed of all inventories and equipment related to its headwear operations as of December 31, 1999. Included in earnings for the fiscal quarter and six months ended December 31, 1998 were losses of approximately $25,000 and $27,000, net of income tax benefit of approximately $17,000 and $17,000, respectively, from discontinued headwear manufacturing operations. Comparatively, losses from discontinued headwear operations for the fiscal quarter and six months ended December 31, 1997 were approximately $35,000 and $7,000, net of income tax benefit of approximately $21,000 and $4,000, respectively. 17 SPORT-HALEY, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Both the basic and diluted earnings per share were $0.03 and $0.21 for the fiscal quarter and six months ended December 31, 1998, respectively. This compares to basic and diluted earnings per share of $0.09 and $0.19 for the same periods in prior fiscal year. 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 March 15, 2001, the Company had not experienced, nor does it expect to experience any disruptions related to Year 2000 issues in the operation of its systems. 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 systems caused by the Year 2000 issues. 18 SPORT-HALEY, INC. PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS - NONE ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS- NONE ITEM 3 DEFAULTS UPON SENIOR SECURITIES - NONE ITEM 4 SUBMISSION TO MATTERS TO A VOTE OF SECURITY HOLDERS - NONE ITEM 5 OTHER INFORMATION - NONE ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS - NONE (B) REPORTS ON FORM 8-K - NONE 19 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPORT-HALEY, INC. (Registrant) Date: March 15, 2001 /s/ Robert G. Tomlinson -------------------------------- Robert G. Tomlinson Chief Executive Officer Date: March 15, 2001 /s/ Patrick W. Hurley -------------------------------- Patrick W. Hurley Chief Financial Officer 20