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| SPOR > SEC Filings for SPOR > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
This Report on Form 10-Q contains certain 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. The words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "believe," and similar expressions, variations or the negative of these words, and any statement regarding possible or assumed future results of operations of our business, the markets for our products, anticipated expenditures, regulatory developments or competition, or other statements regarding matters that are not historical facts, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. The reader should be aware that our actual results could differ materially from those contained in forward-looking statements. Our financial condition and the results of our operations will depend on a number of factors, including, but not limited to, the following: our ability to successfully anticipate fashion trends, design favorably accepted fashion golf apparel, effectively advertise and communicate within the marketplace, and penetrate our chosen distribution channels; competition within golf apparel markets; business conditions and growth in the fashion golf apparel market and the general economy; our ability to successfully forecast sales and optimize inventory levels; our ability to successfully manage risks associated with a high relative percentage of sales with respect to licensed apparel, such as the Ben Hogan® apparel collections; loss of certain third party suppliers, and/or delays in receiving garments from third party suppliers caused by various factors, including lost or reduced manufacturing capacity of significant suppliers, labor shortages, timely performance of third parties, transportation difficulties, and others; significant delays in deliveries from third party suppliers; unsatisfactory recourse with regard to nonconforming goods received from foreign suppliers; political and international trade relations; changes in international trade quota systems for apparel; significant reliance upon several individual foreign suppliers; reliance upon a certain foreign person responsible for maintaining relationships with and monitoring the performance of certain of our significant foreign suppliers; consumer spending on golf apparel; general global economic and political conditions resulting from threats or acts of war or terrorism and responses thereto; access to capital; maintaining satisfactory relationships with commercial banking institutions; establishing controls with regard to and maintaining the integrity of technology and information systems; and, reliance upon executive officers and key employees. Additional information on these and other factors that could affect our financial results is included in the discussion below and in our Form 10-K for the year ended June 30, 2008. There may be other factors not mentioned above, in the discussion below or included in our Securities and Exchange Commission filings that may cause actual results to differ materially from any forward-looking statement. The reader should not place undue reliance on any forward-looking statement. Neither the Company nor any of its corporate officers or key employees assumes any obligation to update any forward-looking statement as a result of new information, future event or development, except as required by securities laws.
All references to fiscal years correspond with the fiscal year of Sport-Haley, Inc., which ends on June 30.
OVERVIEW
Sport-Haley, Inc. designs, purchases or contracts for the manufacture of, markets and distributes women's and men's fashion golf apparel and outerwear under the SPORT HALEY® and Ben Hogan® labels. We are represented by a network of independent wholesale sales representatives, most of whom solicit sales of both SPORT HALEY® and Ben Hogan® fashion apparel collections on our behalf.
SPORT HALEY® fashion apparel is comprised almost exclusively of women's garments and accessories, designed by utilizing classic styles with contemporary influences intended to develop and maintain brand recognition and loyalty, on or off the golf course. While each product in the SPORT
HALEY® apparel line is sold separately, the line is intentionally designed in groups with coordinated styles, color schemes and fabrics to encourage customers to purchase multiple garments. SPORT HALEY® women's fashion apparel includes a variety of fabrics and weave patterns, including interlock, pique, French terry, jersey and twill, and may feature a unique trim, a special fabric finish or extra needlework. The SPORT HALEY® name has been highly recognized as a women's fashion apparel brand within the premium and mid-priced golf apparel markets for over 20 years, in part, because of the cohesiveness of our design staff. Catherine B. Blair, our Vice President - Merchandising and Design, has provided direction for the SPORT HALEY® brand for over 16 years. Ms. Blair is keenly aware of fashion trends within the women's golf apparel market and has kept our SPORT HALEY® fashion apparel collections on the leading edge of the market by including moisture wicking technical performance fabrics, such as Aerocool® and Dry-Tech® 18, and several leading edge, younger looking, athletic style garments, while maintaining the time-honored elegance of the SPORT HALEY® brand. Certain of our premium priced SPORT HALEY® garments are trimmed with Swarovski® Austrian cut crystals, the unique and patented cutting process which produces ultimate brilliance, and come with a "Made with Crystallized Swarovski® Elements" hangtag for authenticity. The technical performance fabrics, athletic style garments and Swarovski® trims have all been well received by our customers.
Ben Hogan® men's fashion apparel is designed utilizing elegant time-honored classic styles intended to garner nearly instantaneous brand recognition. The Ben Hogan® label has been widely recognized within the golf apparel industry for several years for continually providing elegant men's fashion golf apparel of impeccable quality in keeping with the image of Mr. Hogan. While each product in the Ben Hogan® apparel line is sold separately, the line is intentionally designed in groups with coordinated styles, color schemes and fabrics to encourage customers to purchase multiple garments. Ben Hogan® apparel is manufactured using a variety of fabrics, including wool, silk and cashmere, and weave patterns, including pique, jersey and twill, and most pieces feature a unique trim, a special fabric finish or extra needlework. Ben Hogan® men's apparel is marketed in the premium-price markets to elite golf professional shops, upscale resorts and exclusive department stores. We distribute Ben Hogan® apparel pursuant to our license agreement with Callaway.
Top-Flite® branded golf apparel was designed for distribution to large retail stores in the low-price markets pursuant to our license agreement with Callaway. Branded apparel is generally produced in mass quantities and usually utilizes much simpler designs and is of much lesser quality than the fashion apparel garments which we sell in the premium and mid-price markets. While our fashion golf apparel is generally designed for two separate selling seasons each year, branded golf apparel may be designed for four or more shorter selling periods each year. Reserve Apparel distributed Top-Flite® apparel exclusively to Wal-Mart from March 2006 through August 2006, after which we aggressively marketed the Top-Flite® apparel line to several mass retailers and big-box type high sales volume retail stores. While we expected our marketing efforts would result in the establishment of business relationships with one or more mass retailers and other big-box type high sales volume retail stores, we only received one order for Top-Flite® apparel from such a retailer for a test in 50 of its stores, which we shipped in September and October 2007. Since our concerted efforts failed to generate orders from a major customer, we discontinued marketing apparel bearing the Top-Flite® label in November 2007, and in March 2008 the license agreement with Callaway was amended to remove the Top-Flite® brand, effective January 1, 2008.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial statements have been prepared in accordance with standards of the Public Company Accounting Oversight Board (United States), which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. A summary of those significant accounting policies can be found in the Footnotes to the Financial Statements included in our Report on Form 10-K for the fiscal year ended June 30, 2008. The estimates used by management are based upon our historical experiences combined with management's understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and the results of our operations and require significant or complex judgments on the part of management. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.
Inventories
Our inventories, predominately comprised of finished goods, are generally valued at the lower of cost (weighted average) or market. Costs include amounts paid to suppliers for packaged apparel and/or materials and labor, import costs, such as customs duties, freight-in and other miscellaneous costs, and allocated overhead. Excess fashion apparel inventories, consisting of discontinued or aging merchandise, are a natural component of a seasonal apparel business. While certain fashion apparel items will sell out in any particular selling season, quantities of other fashion apparel items will remain at the end of each selling season. We market excess fashion apparel finished goods inventories at reduced wholesale prices to our customers in the normal course of business. Remaining excess inventories are liquidated through other markets. In the ordinary course of business, we maintain reserves for inventory write-downs due to the obsolescence of excess inventories. We perform analyses on a quarterly basis to identify unsold excess inventories and adjust our reserves for inventory obsolescence to reduce the carrying value of excess inventories to their estimated net realizable value, which is estimated based on management's disposition plans and historical experiences. Generally, branded apparel inventories are not prone to impairment, because we usually order branded apparel in quantities per specific customer orders.
We believe that the recent significant downturn in the United States economy negatively impacted the value of our excess fashion apparel inventories, and we reduced the carrying value of our excess fashion apparel inventories at September 30, 2008, accordingly. We adjusted our reserve for inventory obsolescence and recorded impairments of $278,000 and $154,000 with regard to fashion apparel inventories for the three-month periods ended September 30, 2008 and 2007, respectively. The balances of our reserves for inventory obsolescence totaled $446,000 and $390,000 at September 30, 2008 and 2007, respectively. While we believe that our processes produce fair valuations of our excess inventories, if actual future market conditions are less favorable than those projected by management, additional allowances may be required.
Deferred Income Taxes
Deferred income taxes are recognized for the expected tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts, based upon enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Our significant deferred tax assets are related to net operating loss carry forwards for federal and state income tax purposes, stock-based compensation and an unrealized loss for tax purposes
on a common stock investment. Governing regulations require that our operating losses be carried forward for income tax purposes. We maintain a valuation allowance to reduce deferred tax assets to the net amount expected to be recovered in future periods. The estimates for deferred tax assets and the corresponding valuation allowance require us to exercise complex judgments. We periodically review and adjust those estimates based upon the most current information available. In accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," and based upon a review at September 30, 2008, of our utilization of deferred tax assets, we maintained a valuation allowance that effectively reduces our net deferred tax assets to zero. While we continue to explore various strategies to return the Company to profitability, including increasing our presence in retail markets for our SPORT HALEY® and Ben Hogan® fashion apparel, we cannot be certain that our efforts will result in the generation of future profits. Because the recoverability of deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially from our estimates.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts reflects a reserve that reduces our customer accounts receivable to the net amount estimated to be collectible. Estimating the credit worthiness of customers and the recoverability of customer accounts requires us to exercise considerable judgment. In estimating the reserve for uncollectible accounts, we consider factors such as general economic and industry-specific conditions, historical and anticipated customer performance. From time to time, we also identify delinquent customer accounts for which a specific reserve is required. At September 30, 2008, our allowance for doubtful accounts totaled $256,000, including a specific reserve of $175,000 with respect to the potential non-recovery of a net amount due to Reserve Apparel from a former inventory broker. In September 2008, the Court awarded judgment in our favor and against the former inventory broker and its principal in the amount of $291,135. In order to collect from the former broker, we will need to domesticate the judgment in the province of Ontario, Canada. Because we agreed at the commencement of the trial to withdraw the claim that we had overpaid $176,877 to the former inventory broker, we adjusted our receivable with regard to this matter to $291,135 at September 30, 2008. Since collection of the judgment is not assured, we also adjusted our reserve for potential non-recovery at September 30, 2008, to $175,000. While we consider our processes to be adequate to effectively quantify our exposure to doubtful accounts, changes in economic, industry or specific customer conditions may result in recoverability of our doubtful accounts that differs materially from our estimates.
Allowance for Sales Returns
We record allowances for sales returns as net adjustments to customer accounts receivable. When recording an allowance, the net method reduces customer accounts receivable and net sales by the estimated gross margin effect of the anticipated sales return. Generally, our selling terms preclude return of our products subsequent to the sale. However, we have traditionally maintained limited programs that offer various customers the right to return certain fashion apparel items under predefined conditions, which we include as a component within our estimate of allowance for sales returns. We review historical data and consider factors such as general economic and industry-specific conditions and anticipated customer performance when evaluating the adequacy of our allowance for sales returns. At September 30, 2008, our allowance for sales returns was $81,000. Significant changes in general economic or industry conditions may yield sales returns that differ materially from our estimates.
LIQUIDITY AND CAPITAL RESOURCES
The golf apparel business is highly seasonal in nature, and we believe that our balance sheet amounts at September 30, 2008, are more meaningful when compared with the corresponding balance sheet amounts at September 30, 2007, rather than with the corresponding balance sheet amounts at June 30, 2008.
Our primary sources of liquidity are derived from our available cash and cash equivalents and cash flows from operations. We require cash for our general working capital purposes. Our working capital requirements are highly seasonal in nature, with greater requirements from approximately August through October and February through April of each fiscal year, due to the purchases of finished goods inventories for the spring/summer and fall/holiday selling seasons, respectively. We do not anticipate requiring material amounts of cash for capital expenditures over the next 12 months.
Working capital was $8,987,000, 9,984,000 and $9,961,000 at September 30, 2008, June 30, 2008, and September 30, 2007, as corrected, respectively. Cash and cash equivalents totaled $1,549,000, $2,830,000 and $3,137,000 at September 30, 2008, June 30, 2008, and September 30, 2007, respectively. For purposes of the statements of cash flows, we consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents, if they are readily convertible to known amounts of cash and present an insignificant risk of change in value due to changes in interest rates. As of September 30, 2008, we had accrued $806,000 in import duties due to US Customs and Border Protection, including accrued interest thereon of $93,000, with regard to the Prior Disclosure we submitted in November 2008. We expect to negotiate the terms of a payment plan with the National Finance Center. If we are required to pay the entire balance of import duties and interest in a lump sum payment with regard to the Prior Disclosure, our cash on hand will be significantly impacted and we may need to obtain additional sources of capital to sustain the working capital needs of our operations. However, we can give no assurance that such sources of capital will be available to us, given the current status of capital markets in the United States. Our capital needs will depend on many factors, including the need to finance required inventory levels, the success of current sales and marketing programs, and our ability to timely collect customer accounts receivable.
When compared with the June 30, 2008, balance of $2,791,000, our net accounts receivable balance at September 30, 2008, decreased by $998,000, or 36%, to $1,793,000. Our net accounts receivable balance at September 30, 2008, decreased by $724,000, or 29%, when compared with the September 30, 2007, balance of $2,517,000. The decreases correlate with corresponding decreases in net sales between the comparable periods. Our net accounts receivable balance relating to fashion apparel was $1,676,000 at September 30, 2008, a decrease of $369,000, or 18%, from the balance of $2,045,000 at September 30, 2007. Our net accounts receivable balance relating to branded apparel was $117,000 at September 30, 2008, a decrease of $355,000, or 75%, from the balance of $472,000 at September 30, 2007. Changes in our accounts receivable balances provided operating cash of $998,000 and $549,000 for the fiscal quarters ended September 30, 2008 and 2007, respectively.
Inventories have increased by $1,325,000, or 22%, to $7,272,000 at September 30, 2008, from $5,947,000 at June 30, 2008. Our fashion apparel inventories generally increase during our fiscal quarter ended September 30 each year when compared with the June 30 balance in the prior fiscal year. We generally receive a substantial amount of fashion apparel inventories at or near the end of our September 30 fiscal quarter each year in order to fulfill customer orders for the spring season that we begin shipping by early November each year. Inventories at September 30, 2008, were greater by $487,000, or 7%, than inventories of $6,785,000 at September 30, 2007, primarily due to an increase in our fall 2008 Ben
Hogan® fashion apparel inventories on hand at September 30, 2008, when compared with fall 2007 Ben Hogan® fashion apparel inventories that were on hand at September 30, 2007. The comparative increase in Ben Hogan® fashion apparel inventories correlates with a corresponding decrease in sales of Ben Hogan ® fashion apparel for the comparative three month periods ended September 30, 2008 and 2007, respectively. Branded apparel inventories were $65,000 at September 30, 2007. We had less than $1,000 in branded apparel inventories at September 30, 2008. Changes in our inventory balances used operating cash of $1,325,000 for the three months ended September 30, 2008, and $899,000 for the three months ended September 30, 2007, as corrected.
Our continued reliance on foreign suppliers sustains the risk that our revenues could be adversely affected if a foreign shipment or shipments were received late or lost. We maintain insurance for risk of loss relating to goods shipped from our foreign and domestic suppliers. However, our predominant reliance upon a certain foreign person and certain significant foreign suppliers also sustains the risk that we would be left with inadequate or unsatisfactory recourse should the goods received from a foreign supplier be nonconforming.
Total liabilities increased by $36,000, or 2%, to $2,084,000 at September 30, 2008, from $2,048,000 at June 30, 2008. Total liabilities decreased by $749,000, or 36%, at September 30, 2008, from $2,833,000 at September 30, 2007, as corrected. The decrease between the comparative September 30 amounts was comprised of the following: $400,000 decrease in notes payable; $155,000 decrease in trade accounts payable: $69,000 decrease in accrued royalties payable; $24,000 decrease in sales commissions payable; $99,000 decrease in accrued payroll; and, $2,000 decrease in other payables. The decrease in trade accounts payable relate to the differences between the nature and timing of payments, and the decreases in accrued royalties payable and sales commissions payable relate to a corresponding decrease in net sales between the comparative three month periods ended September 30, 2008 and 2007, as corrected. The decrease in accrued payroll expenses consisted primarily of a decrease in the amount of severance and other compensation payable to our former chief executive officer, who received such payments through March 2008. Accrued severance and other compensation was $0 and $80,000 at September 30, 2008, and September 30, 2007, respectively.
Due to the combination of the factors discussed above, and others, our operating activities used cash of $1,278,000 for the three months ended September 30, 2008. Comparatively, for the three months ended September 30, 2007, as corrected, our operating activities used cash of $1,727,000.
For the three months ended September 30, 2008 and 2007, as corrected, investing activities used cash of $3,000 and $0, respectively, for the purchase of fixed assets. For the three months ended September 30, 2008 and 2007, as corrected, $46,000 and $54,000 in depreciation and amortization was charged to current operations, respectively.
In September 2007, we entered into a business loan agreement with Bank of Oklahoma N.A. ("Bank of Oklahoma"), which was amended in October 2008. The amended business loan agreement, which expires on September 30, 2009, provides for a maximum loan amount of $3,000,000, collateralized by deposit amounts maintained at Bank of Oklahoma or its affiliates. While the maximum principal amount allowed under the business loan agreement is $3,000,000, the Company may not borrow amounts under the business loan agreement in excess of the combined amounts of its collateralized deposits. We had no collateralized deposits at September 30, 2008. Borrowings under the business loan agreement accrue interest at the Bank of Oklahoma Financial ("BOKF") National Prime Rate less 1.500%. We generally entered into the business loan agreement to facilitate the issuance of letters of credit for inventory
purchases from offshore suppliers. We did not have any balances due on the business loan agreement at September 30, 2008 or 2007, respectively. Outstanding letters of credit reduce the amount available for borrowing under the business loan agreement. At September 30, 2008 and 2007, we had outstanding letters of credit of $0 and $0, respectively, issued through Bank of Oklahoma for purchase obligations under outstanding letters of credit.
In May 2008, we amended the revolving line of credit agreement that we maintained with US Bank National Association ("US Bank") for the past several years. The amended revolving line of credit agreement, which expires on December 5, 2008, provides for a maximum loan amount of $200,000, collateralized by a certificate of deposit held at US Bank in the amount of $200,000, which earns a market rate of interest. Borrowings under the amended line of credit agreement accrue interest at 1.250% plus the one-month LIBOR rate. As of December 2007, the line of credit had previously been amended to provide for a maximum loan amount of $2,000,000, collateralized by a certificate of deposit held at US Bank in the amount of $2,000,000. We have generally maintained the line of credit to facilitate the issuance of letters of credit for inventory purchases from offshore suppliers and, if necessary, to fund any temporary working capital needs. Balances due on the line of credit totaled $0 and $400,000 at September 30, 2008 and 2007, respectively. Outstanding letters of credit reduce the amount available for borrowing under the line of credit agreement. At September 30, 2008 and 2007, we had outstanding letters of credit of $0 and $119,000, respectively, issued through US Bank for purchase obligations under outstanding letters of credit.
RESULTS OF OPERATIONS
Total net sales for the three months ended September 30, 2008, were $2,824,000, a decrease of $704,000, or 20%, from total net sales of $3,528,000 for the three months ended September 30, 2007. Net sales of fashion apparel for the three months ended September 30, 2008, were $2,824,000, a decrease of $584,000, or 17%, from net sales of fashion apparel of $3,408,000 for the three months ended September 30, 2007. Net sales of branded apparel for the three months ended September 30, 2008 and 2007, as corrected, were $0 and $120,000, respectively. The remainder of our net sales for the three months ended September 30, 2008 and 2007, respectively, were comprised of embroidery and shipping revenues.
Our consolidated gross margins may not be comparable to other companies within the golf apparel industry. We have consistently included the cost of merchandise sold, including import charges, in-bound freight, allocated overhead, freight out, embroidery costs and other charges in our cost of goods sold. Our overhead allocation includes our production costs plus a portion of our distribution costs, such as receiving and inspection costs, but we include some of the other costs of distribution, such as a portion of our warehousing and other handling costs, in selling, general and administrative expenses. Our gross margins also . . .
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