**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**(MarkOne)**

 

| **ý**                                                                                                                                                                                                                | ** ** | **Quarterly report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                      |
| **For the quarterly period ended  March 31, 2005.**                                                                                                                                                                       |
|                                                                                                                                                                                                                      |
| **OR**                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                      |
| **o**                                                                                                                                                                                                                     | ** ** | **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: 0-20850**                                                                                                                                                                                       |

 

**HAGGAR CORP.**

(Exact name of the registrant as specified in its charter)

 
| **Nevada**                                                       | ** ** | **75-2187001**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |
|                                                             |       |                                     |
| **11511  Luna Road  Dallas, Texas 75234**                        |
| (Address of  principal executive offices)  (Zip Code)            |
|                                                             |       |                                     |
| **Telephone  Number: (214) 352-8481**                            |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 
| Yes  ý  | No  o  |
|-----------------------------|-----------------------|

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 
| Yes  ý  | No  o  |
|-----------------------------|-----------------------|

 

**As of May9, 2005, there were 7,078,333 shares of the Registrant’s common stockoutstanding.**

 

 

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**Haggar Corp. andSubsidiaries**

 

**Index**

 
| **Part  I. Financial Information** | ** **                                                                                                                |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 1.**                        | ** **                                                                                                                | **Financial Statements  (Unaudited)** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** |
| ** **                         | **Consolidated  Balance Sheets  (As of March 31, 2005 and September 30, 2004)**                                           | ** ** |
| ** **                         | ** **                                                                                                                | ** ** |
| ** **                         | **Consolidated  Statements of Operations and Comprehensive Income  (Three and six months ended March 31, 2005 and 2004)** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** |
| ** **                         | **Consolidated  Statements of Cash Flows  (Six months ended March 31, 2005 and 2004)**                                    | ** ** |
| ** **                         | ** **                                                                                                                | ** ** |
| ** **                         | **Notes to Consolidated  Financial Statements**                                                                           | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 2.**                        | ** **                                                                                                                | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 3.**                        | ** **                                                                                                                | **Quantitative and  Qualitative Disclosures about Market Risk** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 4.**                        | ** **                                                                                                                | **Controls and Procedures** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Part II. Other  Information.**   | ** **                                                                                                                |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 1.**                        | ** **                                                                                                                | **Legal  Proceedings** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item  2.**                       | ** **                                                                                                                | **Unregistered  Sales of Equity Securities and Use of Proceeds** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 3.**                        | ** **                                                                                                                | **Defaults  Upon Senior Securities** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item  4.**                       | ** **                                                                                                                | **Submission  of Matters to a Vote of Security Holders** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 5.**                        | ** **                                                                                                                | **Other  Information** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Item 6.**                        | ** **                                                                                                                | **Exhibits** | ** ** |
| ** **                         | ** **                                                                                                                | ** ** | ** ** |
| **Signatures**                     | ** **                                                                                                                |
|                                    |                                                                                                                           |  |  |  |

 

2

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**ITEM1**. FINANCIALSTATEMENTS

 

**Haggar Corp. andSubsidiaries**

 

###### **ConsolidatedBalance Sheets**

###### ***(in thousands, except share andper share amounts)***

 
| ** **                                                                                                                                                                   | ** ** | **March 31,  2005** | ** ** | **September 30,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **(unaudited)**     | ** ** | ** **              | ** ** |
| **Assets**                                                                                                                                                                   | ** ** | ** **          | ** ** | ** **              | ** ** |
| Current assets:                                                                                                                                                              |       |                |       |                    |       |
| Cash and cash equivalents                                                                                                                                                    |       | $                   | 9,578      |                    | $          | 30,667 |   |
| Accounts  receivable, net                                                                                                                                                    |       | 64,093              |       | 56,132                  |       |
| Inventories, net                                                                                                                                                             |       | 104,521             |       | 95,229                  |       |
| Property held  for sale                                                                                                                                                      |       | 2,127               |       | —                  |       |
| Deferred tax  asset                                                                                                                                                          |       | 11,021              |       | 11,021                  |       |
| Other current  assets                                                                                                                                                        |       | 7,204               |       | 7,392                   |       |
| Total current assets                                                                                                                                                         |       | 198,544             |       | 200,441                 |       |
|                                                                                                                                                                         |       |                |       |                    |       |
| Property, plant  and equipment, net                                                                                                                                          |       | 42,335              |       | 44,394                  |       |
| Goodwill, net                                                                                                                                                                |       | 9,472               |       | 9,472                   |       |
| Other assets                                                                                                                                                                 |       | 9,624               |       | 7,165                   |       |
| Total assets                                                                                                                                                                 |       | $                   | 259,975    |                    | $          | 261,472 |   |
| ** **                                                                                                                                                                   | ** ** | ** **          | ** ** | ** **              | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                                               |       |                |       |                    |       |
| Current  liabilities:                                                                                                                                                        |       |                |       |                    |       |
| Accounts payable                                                                                                                                                             |       | $                   | 27,213     |                    | $          | 30,621 |   |
| Accrued  liabilities                                                                                                                                                         |       | 36,137              |       | 36,678                  |       |
| Accrued wages  and other employee compensation                                                                                                                               |       | 3,687               |       | 8,538                   |       |
| Current portion  of long-term debt                                                                                                                                           |       | 2,000               |       | 100                     |       |
| Total current liabilities                                                                                                                                                    |       | 69,037              |       | 75,937                  |       |
|                                                                                                                                                                         |       |                |       |                    |       |
| Other non-current liabilities                                                                                                                                                |       | 12,724              |       | 12,760                  |       |
| Deferred tax liability                                                                                                                                                       |       | 374                 |       | 374                     |       |
| Long-term debt                                                                                                                                                               |       | 11,000              |       | 2,000                   |       |
| Total  liabilities                                                                                                                                                           |       | 93,135              |       | 91,071                  |       |
|                                                                                                                                                                         |       |                |       |                    |       |
| Commitments and  contingencies                                                                                                                                               |       |                |       |                    |       |
|                                                                                                                                                                         |       |                |       |                    |       |
| Stockholders’  equity:                                                                                                                                                  | ** ** | ** **          | ** ** | ** **              | ** ** |
| Preferred stock –  par value $0.10 per share; 250,000 shares authorized and no shares issued and  outstanding at March 31, 2005 or September 30, 2004                   |       | —              |       | —                  |       |
| Common stock –  par value $0.10 per share; 25,000,000 shares authorized; 9,525,309 and  9,455,679 shares issued at March 31, 2005 and September 30, 2004,  respectively |       | 952                 |       | 945                     |       |
| Additional  paid-in capital                                                                                                                                                  |       | 56,048              |       | 54,966                  |       |
| Deferred  compensation                                                                                                                                                       |       | (1,522              | )          | (1,796                  | )          |
| Cumulative  translation adjustment                                                                                                                                           |       | 112                 |       | (9                      | )          |
| Retained  earnings                                                                                                                                                           |       | 140,685             |       | 141,256                 |       |
|                                                                                                                                                                         |       | 196,275             |       | 195,362                 |       |
| Less – Treasury  stock, 2,446,976 and 2,242,183 shares at cost at March 31, 2005 and September  30, 2004                                                                |       | (29,435             | )          | (24,961                 | )          |
| Total  stockholders’ equity                                                                                                                                             |       | 166,840             |       | 170,401                 |       |
| Total  liabilities and stockholders’ equity                                                                                                                             |       | $                   | 259,975    |                    | $          | 261,472 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

3

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**Haggar Corp. andSubsidiaries**

** **

**Consolidated Statements of Operations and Comprehensive Income**

*(unaudited,in thousands, except per share amounts)*

 
| ** **                                                 | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Net sales                                                  |       | $                                 | 120,798    |                            | $          | 132,071 |   | $ | 221,341 |   | $ | 239,805 |   |
| Cost of goods  sold                                        |       | 85,942                            |       | 95,168                          |       | 158,699 |   | 171,580 |   |
| Reorganization  costs                                      |       | 795                               |       | —                          |       | 474 |   | — |   |
| Gross profit                                               |       | 34,061                            |       | 36,903                          |       | 62,168 |   | 68,225 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Selling, general  and administrative expenses              |       | (28,921                           | )          | (32,492                         | )          | (62,764 | ) | (62,067 | ) |
| Royalty income                                             |       | 273                               |       | 345                             |       | 628 |   | 598 |   |
| Other income (expense),  net                               |       | (58                               | )          | 26                              |       | 205 |   | 399 |   |
| Interest expense                                           |       | (232                              | )          | (459                            | )          | (441 | ) | (916 | ) |
| Income (loss)  before provision (benefit) for income taxes |       | 5,123                             |       | 4,323                           |       | (204 | ) | 6,239 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Provision  (benefit) for income taxes                      |       | 1,704                             |       | 1,652                           |       | (357 | ) | 2,383 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Net income                                                 |       | $                                 | 3,419      |                            | $          | 2,671 |   | $ | 153 |   | $ | 3,856 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Other  comprehensive income:                               |       |                              |       |                            |       |   |   |   |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Foreign currency  translation adjustment                   |       | $                                 | (74        | )                               | $          | 146 |   | $ | 121 |   | $ | 258 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Comprehensive  income                                      |       | $                                 | 3,345      |                            | $          | 2,817 |   | $ | 274 |   | $ | 4,114 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| NET INCOME PER  COMMON SHARE:                              |       |                              |       |                            |       |   |   |   |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| — Basic                                               |       | $                                 | 0.49       |                            | $          | 0.39 |   | $ | 0.02 |   | $ | 0.58 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| — Diluted                                             |       | $                                 | 0.48       |                            | $          | 0.38 |   | $ | 0.02 |   | $ | 0.56 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| Weighted average  number of common shares outstanding:     |       |                              |       |                            |       |   |   |   |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| — Basic                                               |       | 6,982                             |       | 6,823                           |       | 7,027 |   | 6,691 |   |
|                                                       |       |                              |       |                            |       |   |   |   |   |
| — Diluted                                             |       | 7,083                             |       | 6,986                           |       | 7,139 |   | 6,861 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

4

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**Haggar Corp. andSubsidiaries**

 

**Consolidated Statements of Cash Flows**

*(unaudited,in thousands)*

 
| ** **                                                                     | ** ** | **Six Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                        | ** ** | **2004** | ** ** |
|                                                                           |       |                            |       |   |   |
| **Cash  Flows from Operating Activities**                                      |       |                            |       |   |   |
| Net income                                                                     |       | $                               | 153        |   | $ | 3,856 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                                 |       | 2,786                           |       | 3,119 |   |
| Loss (gain) on  the disposal of property, plant and equipment                  |       | 129                             |       | (227 | ) |
| Stock-based  compensation expense                                              |       | 395                             |       | 140 |   |
| Increase in cash  surrender value of officers’ life insurance policies    |       | (271                            | )          | (468 | ) |
| Tax benefits  from employee stock plans                                        |       | 193                             |       | — |   |
| Changes in  assets and liabilities:                                            |       |                            |       |   |   |
| Accounts  receivable, net                                                      |       | (7,615                          | )          | (11,965 | ) |
| Inventories, net                                                               |       | (9,203                          | )          | (2,220 | ) |
| Other current  assets                                                          |       | 194                             |       | (2,278 | ) |
| Other assets                                                                   |       | 62                              |       | 45 |   |
| Accounts payable                                                               |       | (3,856                          | )          | 1,583 |   |
| Accrued  liabilities                                                           |       | (591                            | )          | 2,660 |   |
| Accrued wages  and other employee compensation                                 |       | (4,851                          | )          | (1,905 | ) |
| Other  non-current liabilities                                                 |       | (36                             | )          | 1,269 |   |
| Net cash used in  operating activities                                         |       | (22,511                         | )          | (6,391 | ) |
|                                                                           |       |                            |       |   |   |
| **Cash  Flows from Investing Activities**                                      |       |                            |       |   |   |
| Purchases of  property, plant and equipment, net                               |       | (2,974                          | )          | (2,384 | ) |
| Proceeds from  sale of property, plant and equipment                           |       | 146                             |       | 227 |   |
| Decrease in  restricted cash                                                   |       | —                          |       | 1,287 |   |
| Net payments of  loans on officers’ life insurance policies               |       | (2,422                          | )          | — |   |
| Proceeds from  officers’ life insurance policies                          |       | —                          |       | 471 |   |
| Net cash used in  investing activities                                         |       | (5,250                          | )          | (399 | ) |
|                                                                           |       |                            |       |   |   |
| **Cash  Flows from Financing Activities**                                      |       |                            |       |   |   |
| Proceeds from  issuance of long-term debt                                      |       | 44,000                          |       | 56,000 |   |
| Payments on  long-term debt                                                    |       | (33,100                         | )          | (53,671 | ) |
| Proceeds from  exercise of employee stock options                              |       | 775                             |       | 6,678 |   |
| Purchases of  treasury stock                                                   |       | (4,474                          | )          | — |   |
| Increase  (decrease) in book overdrafts                                        |       | 154                             |       | (2,508 | ) |
| Payments of cash  dividends                                                    |       | (724                            | )          | (693 | ) |
| Net cash  provided by financing activities                                     |       | 6,631                           |       | 5,806 |   |
|                                                                           |       |                            |       |   |   |
| Effect of  exchange rates on cash and cash equivalents                         |       | 41                              |       | (45 | ) |
|                                                                           |       |                            |       |   |   |
| Decrease in cash  and cash equivalents                                         |       | (21,089                         | )          | (1,029 | ) |
| Cash and cash  equivalents, beginning of period                                |       | 30,667                          |       | 7,674 |   |
| Cash and cash  equivalents, end of period                                      |       | $                               | 9,578      |   | $ | 6,645 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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**Haggar Corp. andSubsidiaries**

 

**Notes to****Consolidated Financial Statements**

*(unaudited)*

 

**1.  Basis of Presentation**

 

*FinancialStatement Preparation*

 

The consolidatedbalance sheet as of March 31, 2005, the consolidated statements of operationsand comprehensive income for the three and six months ended March 31, 2005 and2004, and the consolidated statements of cash flows for the six months endedMarch 31, 2005 and 2004, have been prepared by Haggar Corp. (together with itssubsidiaries, the “Company”) without audit. The consolidated balance sheet as of September 30, 2004 has been derivedfrom the Company’s audited financial statements as of that date but does notinclude all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustmentsnecessary to present fairly the consolidated financial position, results ofoperations, and cash flows of the Company at March 31, 2005, and for all otherperiods presented, have been made. Certain information and disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been omitted in accordance with the Securities and Exchange Commission’srules for interim reporting. Accordingly, these financial statements should be read in conjunctionwith the financial statements and accompanying notes thereto in the Company’sAnnual Report on Form 10-K for the fiscal year ended September 30, 2004.

 

*Accountingfor Stock Based Compensation*

 

The Companyaccounts for its long-term incentive plans under Accounting Principles BoardOpinion No. 25.  As required underStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting forStock-Based Compensation,” the pro forma effects of stock-based compensation onnet income and net income per common share are as follows *(in thousands, except per share amounts)*:

 
| ** **                                                                                          | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income:                                                                                         |       |                              |       |                            |       |   |   |   |   |
| As reported                                                                                         |       | $                                 | 3,419      |                            | $          | 2,671 |   | $ | 153 |   | $ | 3,856 |   |
| Add back:  Stock-based compensation included in net income as reported, net of related  tax effects |       | 134                               |       | 82                              |       | 249 |   | 135 |   |
| Less: Pro-forma  stock-based compensation expense, net of related tax effects                       |       | (147                              | )          | (88                             | )          | (269 | ) | (94 | ) |
| Pro-forma net  income                                                                               |       | $                                 | 3,406      |                            | $          | 2,665 |   | $ | 133 |   | $ | 3,897 |   |
| Net income per common share:                                                                        |       |                              |       |                            |       |   |   |   |   |
|                                                                                                |       |                              |       |                            |       |   |   |   |   |
| —Basic                                                                                         |       |                              |       |                            |       |   |   |   |   |
| As reported                                                                                         |       | $                                 | 0.49       |                            | $          | 0.39 |   | $ | 0.02 |   | $ | 0.58 |   |
| Pro forma                                                                                           |       | $                                 | 0.49       |                            | $          | 0.39 |   | $ | 0.02 |   | $ | 0.58 |   |
|                                                                                                |       |                              |       |                            |       |   |   |   |   |
| —Diluted                                                                                       |       |                              |       |                            |       |   |   |   |   |
| As reported                                                                                         |       | $                                 | 0.48       |                            | $          | 0.38 |   | $ | 0.02 |   | $ | 0.56 |   |
| Pro forma                                                                                           |       | $                                 | 0.48       |                            | $          | 0.38 |   | $ | 0.02 |   | $ | 0.57 |   |

 

6

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The Companygranted options to certain directors in both March 2004 and February 2005 underthe Company’s long-term incentive plan adopted in fiscal 2003 (the “2003 LTIP”).  The options vest over three years.  The fair value of the options granted wasestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions:

 
| **Option Grant  Date** | ** ** | **Options  Granted** | ** ** | **Fair  Value** | ** ** | **Interest  Rate** | ** ** | **Expected  Volatility** | ** ** | **Expected  Dividend  Rate** | ** ** | **Expected  Lives** | ** ** |
|------------------------|------------|----------------------|------------|-----------------|------------|--------------------|------------|--------------------------|------------|------------------------------|------------|---------------------|------------|
| March 2004             |       | 15,000               |       | $               | 7.50       |               | 2.72       | %                        | 45.27      | %                            | $          | 0.20                |       | 5 years |   |
| February 2005          |       | 15,000               |       | $               | 7.09       |               | 2.95       | %                        | 44.30      | %                            | $          | 0.20                |       | 5 years |   |

 

In February 2005,5,000 shares of restricted stock with a fair value of $18.99 per share weregranted to one director of the Company. In the second quarter of fiscal 2004, 125,000 shares of restricted stockwith fair values ranging from $19.69 to $19.85 per share were granted tocertain officers and directors of the Company. The shares, which were granted under the 2003 LTIP, have dividend rightsand voting rights, but are subject to restrictions on transfer and risk offorfeiture until vested.  The shares vestin three equal annual installments.  TheCompany recorded in stockholders’ equity deferred compensation of $0.1 millionand $2.5 million during the second quarters of fiscal 2005 and 2004,respectively, related to the restricted stock grants.  In May 2004, one of the Company’sofficers resigned and forfeited 10,000 nonvested shares.  The Company reversed $0.2 million in deferredcompensation related to these shares, as well as minimal expense the Companyhad recognized through the date of forfeiture. The remaining deferred compensation balance will be amortized as expenseon a straight-line basis over the vesting periods of the respective awards.

 

*Reclassifications*

 

Certain items inthe prior period presentation have been reclassified to current periodpresentation.

 

**2.  2005 Strategic Sourcing Changes**

 

*Sewing Facilities*

 

On May 3, 2005, the Company announced plans to close its two remainingCompany-operated sewing plants, located in Leon, Mexico and La Romana,Dominican Republic, as part of the Company’s plan to focus sourcing efforts inthe Eastern Hemisphere.  As of March 31,2005, the Company employed approximately 1,675 associates at the sewingfacilities.  The Company plans tocomplete the closures during the third quarter of fiscal 2005.

 

As of March 31, 2005, given the plant closures and associated severancecosts were probable, management recorded a $0.8 million pre-tax charge toreorganization costs for severance and other related benefits in accordancewith SFAS No. 112, “Employer’s Accounting for Postemployment Benefits and anAmendment of FASB Statements No. 5 and 43.” A substantial portion of the severance benefits will be paid in lump sumpayments on or about the date of closure at the facilities.  The Company will incur certain charges duringthe remainder of fiscal 2005 primarily related to the accelerated depreciationof certain equipment as well as costs to terminate the lease on the facility inthe Dominican Republic.

 

*Raw Materials Warehouse*

 

On March 31, 2005, the Company closed its owned raw materials warehousefacility in Weslaco, Texas.   The Companyeliminated 16 positions in conjunction with the closure, resulting in a pre-taxcharge of approximately $0.1 million to selling, general and administrativeexpense during the second quarter of fiscal 2005.

 

7

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As of March 31, 2005, the Company was actively marketing the property,which includes a separate building used as a fabric cutting facility until itsclosure in fiscal 2002.  Accordingly,land and building costs of $1.9 million were classified as property held forsale as of March 31, 2005.

 

**3.  Inventories, net**

 

Inventories, netare stated at the lower of cost (first-in, first-out) or market and consistedof the following at March 31, 2005, and September 30, 2004 *(in thousands)*:

 
| ** **                | ** ** | **March 31,  2005** | ** ** | **September 30,  2004** | ** ** |
|---------------------------|------------|---------------------|------------|-------------------------|------------|
| Piece goods               |       | $                   | 4,187      |                    | $          | 4,473 |   |
| Trimmings &  supplies |       | 393                 |       | 1,550                   |       |
| Work-in-process           |       | 3,636               |       | 4,464                   |       |
| Finished  garments        |       | 97,629              |       | 85,526                  |       |
|                      |       | 105,845             |       | 96,013                  |       |
| Inventory  reserves       |       | (1,324              | )          | (784                    | )          |
| Total  inventories, net   |       | $                   | 104,521    |                    | $          | 95,229 |   |

 

Work-in-process andfinished garments inventories consisted of materials, labor and manufacturingoverhead.

 

**4.  Long-Term Debt**

 

Long-term debtconsisted of the following at March 31, 2005, and September 30, 2004 *(in thousands)*:

 
| ** **                              | ** ** | **March 31,  2005** | ** ** | **September 30,  2004** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-------------------------|------------|
| Borrowings under  revolving credit line |       | $                   | 11,000     |                    | $          | — |   |
| Industrial  Development Revenue Bonds   |       | 2,000               |       | 2,100                   |       |
| Total debt                              |       | 13,000              |       | 2,100                   |       |
| Less – current  portion            |       | (2,000              | )          | (100                    | )          |
| Long-term debt                          |       | $                   | 11,000     |                    | $          | 2,000 |   |

 

As of March 31,2005, the Company had $11.0 million outstanding under a $111.0 millionunsecured revolving credit agreement (the “Agreement”).  The available borrowing capacity wasrestricted to $31.1 million at March 31, 2005, under the Agreement’s fundeddebt to operating cash flow covenant. The Company incurred approximately $0.3 million in unused letters ofcredit and commitment fees related to the available borrowing capacity duringthe six months ended March 31, 2005. The interest rates ranged from 2.34% to5.75% during the six months ended March 31, 2005, and were based upon bothmargins over a bank base rate and margins over LIBOR, depending on theborrowing option selected by the Company. The Agreement, which expires in June 2007, prohibits the Company frompledging its accounts receivable and inventories, contains limitations onincurring additional indebtedness, requires maintaining minimum net worthlevels of the Company and the Company’s main operating subsidiary, and requiresthe maintenance of certain financial ratios. The Agreement also prohibits the payment of any dividend if a defaultexists after giving effect to such a dividend. As of March 31, 2005, the Company was in full compliance with itsfinancial and other covenants under the Agreement.

 

Long-term debt also includes $2.0 million in Industrial DevelopmentRevenue (“IDR”) bonds at March 31, 2005. Significant terms of the IDR bonds include interest at a rate equal tothat of high quality, short-term, tax exempt obligations, as defined in theagreement.  The interest rate at March31, 2005, was 2.35%.  The IDR bondsmature in fiscal 2026, but the Company has the option to prepay the balancewithout penalty in fiscal 2006.  The IDRbonds are collateralized by a building and certain equipment located at theCompany’s fabric cutting facility in Weslaco, Texas, which was closed in March2005.  The Company plans to call thebonds prior to December 2005 to obtain

 

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clear title to the collateralized building and equipment and facilitatethe sale of the property.  Accordingly,the remaining balance of the IDR bonds of $2.0 million has been classified ascurrent as of March 31, 2005.

 

**5.  SegmentReporting**

 

The Company’s three operating segments arebusiness units that offer similar products through different distributionchannels.  The Company’s wholesalesegment designs, manufactures, imports and markets casual and dress men’s andwomen’s apparel to retailers throughout North America.  The Company also operates a retail segment,which markets Haggar® branded products through 76 Company-operated storeslocated in outlet and strip malls throughout the United States, and a licensingsegment, which generates royalty income by licensing the Company’s trademarksfor use by other manufacturers of specified products in specified geographicareas.  The Company evaluates performanceand allocates resources based on segment profits.

 

Intercompany sales from the wholesale segmentto the retail segment are not reflected in wholesale segment net sales.  Additionally, there is no profit included onsales from the wholesale segment to the retail segment.  Segment profit (loss) is comprised of segmentnet income (loss) before interest expense and provision (benefit) for incometaxes.

 

The table below reflects the Company’s segmentresults for the three and six months ended March 31, 2005 and 2004 *(in thousands)*:

 
| **Three Months Ended March 31,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                         |       |          |       |       |       |          |       |             |       |
| Net sales                        |       | $             | 109,958    |       | $          | 10,840        |       | $                | —     |   | $ | 120,798 |   |
| Segment profit  (loss)           |       | $             | 5,874      |       | $          | (792          | )          | $                | 273        |   | $ | 5,355 |   |
|                             |       |          |       |       |       |          |       |             |       |
| **2004**                         |       |          |       |       |       |          |       |             |       |
| Net sales                        |       | $             | 122,053    |       | $          | 10,018        |       | $                | —     |   | $ | 132,071 |   |
| Segment profit  (loss)           |       | $             | 5,064      |       | $          | (627          | )          | $                | 345        |   | $ | 4,782 |   |

 
| **Six Months Ended March 31,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|--------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                       |       |          |       |       |       |          |       |             |       |
| Net sales                      |       | $             | 193,916    |       | $          | 27,425        |       | $                | —     |   | $ | 221,341 |   |
| Segment profit  (loss)         |       | $             | (898       | )          | $          | 507           |       | $                | 628        |   | $ | 237 |   |
|                           |       |          |       |       |       |          |       |             |       |
| **2004**                       |       |          |       |       |       |          |       |             |       |
| Net sales                      |       | $             | 214,462    |       | $          | 25,343        |       | $                | —     |   | $ | 239,805 |   |
| Segment profit                 |       | $             | 6,052      |       | $          | 505           |       | $                | 598        |   | $ | 7,155 |   |

 

A reconciliation of total segment profit (loss) toconsolidated income (loss) before provision (benefit) for income taxes is asfollows *(in thousands)*:

 
| ** **                                                              | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total segment  profit                                                   |       | $                                 | 5,355      |                            | $          | 4,782 |   | $ | 237 |   | $ | 7,155 |   |
| Interest expense                                                        |       | (232                              | )          | (459                            | )          | (441 | ) | (916 | ) |
| Consolidated  income (loss) before provision (benefit) for income taxes |       | $                                 | 5,123      |                            | $          | 4,323 |   | $ | (204 | ) | $ | 6,239 |   |

 

9

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The table below reflectsthe net sales related to the Company’s key product lines as a percentage ofconsolidated net sales for the three and six months ended March 31, 2005 and2004*:*

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales by  category:                  |       |                              |       |                            |       |   |   |   |   |
| Men’s Haggar®  branded apparel |       | 61.3                              | %          | 66.9                            | %          | 62.9 | % | 69.0 | % |
| Men’s licensed  apparel             |       | 11.4                              | %          | 6.6                             | %          | 12.3 | % | 7.1 | % |
| Men’s private  label apparel        |       | 16.6                              | %          | 15.0                            | %          | 15.8 | % | 14.0 | % |
| Women’s apparel                     |       | 10.7                              | %          | 11.5                            | %          | 9.0 | % | 9.9 | % |
| Consolidated net  sales                  |       | 100.0                             | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

The Company does not segregate assets on a segment basis for internalmanagement reporting and, therefore, such information is not presented.

 

**6.  Commitments and Contingencies**

 

The Company wasparty to an operating lease for a corporate aircraft that contained a residualvalue guarantee.  Under the lease, whichended in December 2004, the Company had the option of (a) returning theaircraft to the lessor and paying the guaranteed residual value of $3.0million; (b) purchasing the aircraft for $4.0 million; or (c) arranging for thesale of the aircraft to a third party. If the sales proceeds were less than $4.0 million, the Company wasrequired to reimburse the lessor for the deficiency.  If the sales proceeds exceeded $4.0 million,the Company was entitled to all of such excess amounts.

 

In December 2004,the Company completed the sale of the aircraft to a third party for proceeds of$3.2 million, net of commission and expenses of $0.2 million.  The Company reimbursed the lessor for a $0.9million deficiency, which included nominal fees related to the termination ofthe lease prior to December 31, 2004. The Company had accrued $0.7 million of this amount as of September 30,2004, and recorded the additional $0.2 million in selling, general andadministrative expenses during the three months ending December 31, 2004.

 

The Company hasbeen named as a defendant in several legal actions arising from its operationsin the normal course of business, including actions brought by certainterminated employees.  Although exactsettlement amounts, if any, related to these actions cannot accurately bepredicted, the claims and damages alleged, the progress of the litigation to dateand past experience with similar litigation leads the Company to believe thatany liability resulting from these actions and those described below will not,individually or collectively, have a material adverse effect on the Company.

 

The Company is a defendantin a wrongful termination lawsuit brought in federal district court in 2000 bya former salesman.  A jury rendered averdict in January 2002 in favor of the plaintiff against the Company.  After various appeals and remand to the trialcourt, on January 31, 2005, the Company received a Memorandum Order orderingthe Company to pay, after entry of judgment, backpay in the amount of $0.8million, liquidated damages of $0.8 million and front pay of $0.5 million.  The court also ordered the Company to makemonthly payments of $14,583 until the Company reinstates the plaintiff to thefirst available sales associate vacancy in the Dallas area.  The trial court denied, however, plaintiff’srequest for enhanced backpay and prejudgment interest.  During the first quarter of fiscal 2005, theCompany recorded an additional $1.7 million charge to selling, general andadministrative expenses related to this matter. During the second quarter of fiscal 2005, after negotiations with theplaintiff’s counsel, the Company agreed to pay $0.8 million in attorney’s fees,subject to the Company’s right to appeal the damages award.  As a result, the Company recorded anadditional $0.3 million charge to selling, general and administrativeexpenses.  The Company has reserved anaggregate of $3.0 million in accrued liabilities for this matter as of March31, 2005.  The Company filed its noticeof appeal on April 28, 2005.

 

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During fiscal years 2003 and 2004, one attorney filedfive separate suits in Texas state courts against the Company and certain ofits subsidiaries, as well as unrelated third parties, alleging injuries toapproximately 2,200 former employees from airborne fibers and chemicals incertain of the Company’s now closed facilities located in south Texas.  All proceedings in one case, which names over2,100 plaintiffs, have been stayed due to the unrelated bankruptcy of one ofthe other defendants.  The Company isawaiting a decision by the trial court on its motion to dismiss another case,which names 71 plaintiffs.  After takingdiscovery in one of the remaining cases, the Company believes that all of thesecases and claims are frivolous and that the plaintiffs have no factual or legalbasis for any of their allegations.  Inaddition, the Company believes that it has meritorious defenses to all of theasserted claims.  The Company intends tovigorously defend all of these suits, unless a favorable settlement can beachieved.

 

Jury verdicts intwo cases totaling approximately $1.7 million in the aggregate were returned infiscal 2000 against certain subsidiaries of the Company related to claims byformer employees of now closed manufacturing facilities for wrongful dischargeand common law tort.  Both cases wereappealed to the Texas Supreme Court because management and legal counselbelieved the verdicts were both legally and factually incorrect.  On December 31, 2004, the Texas Supreme Courtreversed the judgment of the Court of Appeals and rendered judgment in the Company’sfavor in one of such cases.  As a result,during the first quarter of fiscal 2005, the Company reversed the prior accrualfor such case, resulting in a $0.3 million increase in gross profit for suchquarter.  The other case remains onappeal.  The Company has $2.6 millionreserved in accrued liabilities for the remaining case as of March 31, 2005.

 

**7.  Shipping and Handling Fees**

 

The Companyrecords shipping and handling fees as selling, general and administrativeexpense.  For the three and six monthsended March 31, 2005, such costs were $2.9 million and $6.5 million,respectively.  For the three and sixmonths ended March 31, 2004, such costs were $3.4 million and $6.9 million,respectively.

 

**8.   Basic and Diluted Common Shares**

 

The following tablesets forth the computation of basic and diluted weighted average common shares *(in thousands)*:

 
| ** **                                                     | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  common shares outstanding                    |       | 6,982                             |       | 6,823                           |       | 7,027 |   | 6,691 |   |
| Shares  equivalents, due to stock options and restricted stock |       | 101                               |       | 163                             |       | 112 |   | 170 |   |
| Weighted average  diluted shares outstanding                   |       | 7,083                             |       | 6,986                           |       | 7,139 |   | 6,861 |   |

 

Options topurchase 3,556 and 20,802 shares were excluded from the diluted earnings pershare calculations for the three and six months ended March 31, 2005, becausethe options’ exercise prices were greater than the average market price of thecommon shares during the period.  Options to purchase 8,000 and 9,721 shares were excluded from thediluted earnings per share calculations for the three and six months endedMarch 31, 2004, because the options’ exercise prices were greater than theaverage market price of the common shares during the period.

 

**9.  Dividends**

 

During the second quarter of fiscal 2005, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on May 16,2005, which will be paid on May 31, 2005. The first quarter of fiscal 2005 dividend of approximately $0.4 millionwas paid in March 2005.

 

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**10.  RelatedParty Transactions**

 

A director of theCompany is a partner of a law firm that rendered various legal services to theCompany during the three and six months ended March 31, 2005 and 2004.  The Company paid the law firm approximately$0.2 million for legal services during the three and six months ended March 31,2005.  The Company paid the law firmapproximately $0.3 million and $0.7 million for legal services during the threeand six months ended March 31, 2004, respectively.  There were $0.2 million and $0.1 million inunpaid fees due to the law firm at March 31, 2005 and September 30, 2004,respectively, which were included in accrued liabilities.

 

**11.  Sales Force Reduction**

 

As of September 30, 2004,the Company’s senior management committed to a plan to reduce the Company’ssales force.  Severance benefits for thisreduction in force were to be determined in accordance with an establishedseverance plan communicated to all affected employees.  The Company recorded a $0.4 million pre-taxcharge to selling, general and administrative expenses during fiscal 2004,which approximated average severance benefits for three employees pursuant tothe severance plan.

 

During November2004, management communicated the reduction in force to the sales force andasked for volunteers to accept the severance benefits.  On December 15, 2004, management engaged innegotiations with three volunteers from the sales force and, as a result ofthese negotiations, granted an additional amount over the severance benefitsprescribed by the severance plan.  TheCompany recorded an additional $0.3 million pre-tax charge to selling, generaland administrative expenses during the first quarter of fiscal 2005 for theseincremental severance benefits. Severance payments for these three employees began at their terminationdates in January 2005 and are expected to continue through March 2006.  The Company included $0.6 million in accruedliabilities related to these severance benefits at March 31, 2005.

 

**12.  Officer’s Life Insurance Policy Activity**

 

During fiscal1991, the Company entered into split-dollar life insurance agreements withtrusts established by three former officers of the Company.  Pursuant to these agreements, the Company isentitled to the cumulative premiums it has paid on the policies less theCompany’s interest in policy loans and related accrued interest.  No further premiums are due on thesepolicies.  The Company’s interest in thepolicies was $1.1 million at September 30, 2004, which was net of $9.1 millionin policy loans made to the Company.

 

The Company wasnotified of the death of one of the insured former officers in September2004.  In November 2004, the insurancecompany applied the proceeds of $4.5 million directly to the $4.0 million inoutstanding loans related to this policy, and the Company received net proceedsof $0.4 million, net of interest of $0.1 million, related to this policy.  In October 2004, the Company executed thesurrender of $2.2 million in accumulated cash dividends on the second of thesepolicies, resulting in a reduction of the policy loans for this amount.  In November 2004, the Company repaid theremaining policy loans of $2.9 million for these policies.  As a result of the transactions describedabove, at December 31, 2004, all policy loans had been repaid.  The cash surrender value of the policies atMarch 31, 2005, was $3.6 million.

 

**13.  Equity**

 

On November 30,1999, the Board of Directors authorized the Company to repurchase of up to3,000,000 shares of the Company’s stock (the “1999 Program”).  The 1999 Program does not have an expirationdate.  As of September 30, 2002, theCompany had purchased 2,242,183 shares of stock.  The Company did not purchase any shares infiscal 2003 or fiscal 2004.  On November8, 2004, the Company publicly announced that it was resuming its stock buybackprogram and, during the first quarter of fiscal 2005, purchased 204,793 sharesof outstanding stock for $4.5 million commensurate with that announcement.  There were no additional purchases during thesecond quarter of fiscal 2005.  Theamount and timing of additional purchases will depend upon market conditions.

 

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**14.  Subsequent Event**

 

On April 8, 2005,the Company sold an apartment property located in New York for proceeds of $0.8million.  The Company will record a gainon the sale of approximately $0.6 million to other income during the third quarterof fiscal 2005.  Building costs relatedto the property of $0.2 million were classified as property held for sale as ofMarch 31, 2005.

 

**15.  Recently Issued and Adopted FinancialAccounting Standards**

 

In December 2004,the Financial Accounting Standards Board issued SFAS No. 123R (revised 2004), “Share-BasedPayment”, to amend SFAS No. 123, “Accounting for Stock-Based Compensation” andSFAS No. 95, “Statement of Cash Flows”. This standard eliminates the ability to account for share-basedcompensation using the intrinsic value-based method under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees”.  SFAS No. 123R requires the Company tocalculate equity-based compensation expense for stock options and employeestock purchase plan rights granted to employees based on the fair value of theequity instrument at the time of grant. Currently, the Company discloses thepro forma net income (loss) and related pro forma income (loss) per shareinformation in accordance with previously issued SFAS No. 123 and also SFAS No.148, “Accounting for Stock-Based Compensation Costs—Transition and Disclosure”.

 

On April 14,2005, the Securities and Exchange Commission announced that it would providefor a phased-in implementation process for SFAS No. 123R. The SEC now requiresthat registrants adopt SFAS No. 123R’s fair value method of accounting forshare-based payments to employees no later than the beginning of the firstfiscal year beginning after June 15, 2005. The Company is required toadopt SFAS No. 123R beginning October 1, 2005.

 

The Company isrequired to apply SFAS No. 123R using a modified version of prospectiveapplication. Under that transition method, compensation cost is recognized onor after the date of adoption for the portion of outstanding awards for whichthe requisite service has not yet been rendered based on the grant-date fairvalue of those awards calculated under SFAS No. 123R for pro forma disclosures.For periods before the date of adoption, the Company may elect to apply amodified version of retrospective application under which financial statementsfor prior periods are adjusted on a basis consistent with the pro formadisclosures required for those periods by SFAS No. 123R. The Company believesthe adoption of this statement will not have a material impact on itsconsolidated financial statements.

 

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**Item 2****. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The followingdiscussion and analysis of the consolidated results of operations and financialcondition of the Company should be read in conjunction with the accompanyingconsolidated financial statements and the notes thereto and the Company’sAnnual Report on Form 10-K for the fiscal year ended September 30, 2004.

 

**ForwardLooking Statements**

 

This Quarterly Report on Form 10-Q includes forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 (the “SecuritiesAct”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  All statements other than statements ofhistorical facts contained in this report, including statements regarding theCompany’s future financial position, business strategy and plans and objectivesof management for future operations, are forward-looking statements.  The words “believe,” “may,” “will,” “estimate,”“continue,” “anticipate,” “intend,” “expect” and similar expressions, as theyrelate to the Company, are intended to identify forward-lookingstatements.  The Company has based theseforward-looking statements largely on its current expectations and projectionsabout future events and financial trends that the Company believes may affectits financial condition, results of operations, business strategy and financialneeds.  These forward-looking statementsare subject to a number of known and unknown risks, uncertainties andassumptions that could affect the results of the Company or the apparelindustry generally and could cause the Company’s expected results to differmaterially from those expressed in this Quarterly Report on Form 10-Q.  These risks, uncertainties and assumptionsare described in “Item 1.  Business” ofthe Company’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission on December 10, 2004, and include,among other things:

 

•                  changes ingeneral business conditions,

 

•                  changes in theperformance of the retail sector in general and the apparel industry inparticular,

 

•                  seasonality ofthe Company’s business,

 

•                  changes inretailer and consumer acceptance of new products and the success ofadvertising, marketing, and promotional campaigns,

 

•                  impact ofcompetition in the apparel industry,

 

•                  availabilityand cost of raw materials,

 

•                  changes in lawsand other regulatory actions,

 

•                  changes in laborrelations,

 

•                  political andeconomic events and conditions domestically or in foreign jurisdictions inwhich the Company operates or has apparel products manufactured, including, butnot limited to, acts of terrorism, war, or insurrection,

 

•                  unexpectedjudicial decisions,

 

•                  changes ininterest rates and capital market conditions,

 

•                  acquisitions ordissolution of business enterprises, including the ability to integrateacquired businesses effectively,

 

•                  naturaldisasters,

 

•                  unusual orinfrequent items that cannot be foreseen or are not susceptible to estimation,and

 

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•                  impact of theidentification of material weaknesses in disclosure controls and procedures.

 

In light of these risks, uncertainties and assumptions, theforward-looking events and circumstances discussed in this Quarterly Report onForm 10-Q may not occur and actual results could differ materially from thoseanticipated or implied in the forward-looking statements.  Accordingly, readers are cautioned not toplace undue reliance on such forward-looking statements.  The Company undertakes no obligation toupdate any such statements or publicly announce any updates or revisions to anyof the forward-looking statements contained herein to reflect any change in itsexpectations with regard thereto or any change in events, conditions,circumstances or assumptions underlying such statements.

 

**Overview**

 

The Company designs,manufactures, imports and markets casual and dress men’s and women’s apparelproducts, including pants, shorts, suits, sportcoats, sweaters, shirts,dresses, skirts and vests, in the United States and abroad.  The Company’s operations are organized intothree business units, wholesale, retail and licensing, each of which offerssimilar products through different distribution channels.  The Company’s wholesale segment, which sellsapparel products through approximately 10,000 retail stores operated by theCompany’s retail customers, is the primary distribution channel through whichthe Company sells its products.  TheCompany’s retail segment markets Haggar® branded products through 76Company-operated retail stores located in outlet and strip malls throughout theUnited States.  The Company’s licensingsegment generates royalty income by licensing the Company’s trademarks for useby other manufacturers of specified products in specified geographic regions.

 

Within these segments,the Company’s principal product categories are as follows:

 

*Men’sHaggar® branded apparel*. The Company’s Haggar® branded products consist of high quality,affordable men’s dress and casual pants, shirts, suits, sport coats, sweatersand vests.  These products are soldnationwide in major department stores and marketed through the Company’s ownretail stores located in outlet and strip malls throughout the UnitedStates.  The Haggar® trademark is alsolicensed to manufacturers of related apparel and accessories in categoriesoutside the core product lines of the Company.

 

*Men’slicensed apparel. *TheCompany is the licensee of certain trademarks owned by other apparelcompanies.  The Company has entered intolicense agreements to manufacture and market certain men’s pants and shortsunder the Kenneth Cole New York®, Kenneth Cole Reaction® and Claiborne® trademarks.

 

*Men’sprivate label apparel. *TheCompany’s mass retailer division, The Horizon Group, markets men’s apparelproducts including dress pants, casual pants, shorts, suits, sport coats andshirts.  In addition to manufacturingproducts under its own labels, the Company also manufactures men’s apparel forcertain of its customers under the individual store’s proprietary label. Theseproducts, which are offered at lower price points than Haggar® licensed andbranded apparel, are sold to customers such as Wal-Mart Stores, Inc. and J.C. Penney.

 

*Women’sapparel. *The Company’sWomen’s Wear subsidiary markets women’s sportswear including tops, coats,dresses, skirts, pants, and vests.  Theseproduct lines are primarily sold to major department stores, including Dillard’sand J.C. Penney in the United States and Sears and The Bay in Canada, andcatalog suppliers, such as Coldwater Creek.

 

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**KeyPerformance Indicators**

 

The Company’smanagement evaluates the financial condition and operating performance of thebusiness on the basis of numerous factors, including:

 

*Annualsales growth. *TheCompany has reported modest sales increases in recent years despite a trend inthe apparel industry of declining retail prices and the consolidation of majorretailers.  The Company plans to attainsales growth by maintaining a keen focus on the long-term business strategiesover all the principal product categories. The Company expects reduced overall sales for fiscal 2005 as compared tofiscal 2004 mainly related to a new product called ForeverNewTM that wasunsuccessful.

 

*Returnon equity. *The Company’smanagement believes that a high return on equity is closely correlated withenhancing shareholder value.  The Companydefines return on equity as net income as a percentage of stockholders’ equity.  The Company plans to achieve return on equitygoals by generating long-term sales growth, improving the gross profitpercentage and reducing selling, general and administrative expenses.

 

The Companycontinuously evaluates sourcing alternatives for high-quality, low-costsourcing channels in order to increase gross profit.  In May 2005, the Company announced management’sdecision to close the remaining Company-operated sewing facilities in theWestern Hemisphere to focus more sourcing in the Eastern Hemisphere.

 

Further, theCompany continually pursues initiatives to reduce selling, general andadministrative expenses.  Recentinitiatives include the sale of the corporate aircraft, a headcount reductionin the sales force and the elimination of redundant activities in the men’s andwomen’s wear organizations.

 

*Inventoryturns. *The Companymanages inventory levels by carefully evaluating sales plans and monitoringinventory purchasing lead times.  TheCompany also has introduced a variety of replenishment product programs whichcontribute to higher inventory turns due to the decrease in inventory carryingcosts.

 

**BusinessStrategies**

 

The Company hasadopted the following strategies, as more fully described in the Annual Reporton Form 10-K for the year ended September 30, 2004, to achieve its corporateand financial goals:

 

*IncreaseHaggar® brand equity.* The Company designs comprehensive marketing plans, including nationaladvertising, co-operative advertising, point-of-sale signage and in-storefixtures, to maintain and increase brand awareness and grow market share.

 

*Introducenew products. *TheCompany’s continually seeks to introduce innovative products and technologiesto the marketplace.

 

*Expandlicensing of trademarks. *TheCompany continues to pursue license agreements of Haggar-owned trademarks andthe trademarks of other apparel companies to strengthen its market position.

 

*Expandprivate label women’s wear business. * The Company is attempting to expand its women’sprivate label offerings to service global customers such as J.C. Penney andWal-Mart.

 

*Activelymanage costs and collections. *TheCompany has identified vendors to provide high-quality, low-cost productsourcing from 14 foreign countries, with future sourcing plans to eventuallyreduce the number of countries to six to eight, given the overall apparelmarketplace.  The Company also seeks toactively monitor and pursue timely collections on its receivables from retailercustomers.

 

*Pursuestrategic acquisitions. *TheCompany will continue to seek growth through the identification of acquisitiontargets that are aligned with the Company’s long-term financial goals.

 

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**KeyActivity - Three Months Ended March 31, 2005**

 

Key activity forthe three months ended March 31, 2005 included:

 

•                  Earnings per share increased 26% forthe second quarter of fiscal 2005 as compared to the second quarter of fiscal2004 primarily due to reduced selling, general and administrative expenses andimproved gross profit percentage.

 

•                  Net sales decreased 8.5% for thesecond quarter of fiscal 2005 as compared to net sales for the second quarterof fiscal 2004 primarily due to a decrease in the Haggar® brand business.

 

•                  The Company announced that it willcontinue its strategic sourcing changes by closing its Company-operated sewingfacilities operated by subsidiaries of the Company in Leon, Mexico, and LaRomana, Dominican Republic.  The Companywill begin to utilize other cost effective sourcing alternatives in late fiscal2005.

 

•                  The Company closed its owned rawmaterials warehouse facility in Weslaco, Texas. The Company has outsourced this function to a long-term supplier.  Once the facility is sold, the Companywill be able to reduce the overall operating costs for the owned facility.

 

**CriticalAccounting Policies**

 

There have been no material changes to the Company’s critical accounting policies during the six months ended March 31, 2005.

 

Management’s Discussion and Analysis discusses theresults of operations and financial condition as reflected in the Company’sconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities at the date of thefinancial statements and reported amounts of revenues and expenses during thereporting period. On an ongoing basis, management evaluates its estimates andjudgments, including those related to accounts receivable; inventory valuation;amortization and recoverability of long-lived assets, including goodwill;litigation accruals; workers’ compensation liabilities; revenue recognition;and reorganization charges. Management bases its estimates and judgments on theCompany’s substantial historical experience and other relevant factors, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.

 

While the Companybelieves that the historical experience and other factors considered provide ameaningful basis for the accounting policies applied in the preparation of theconsolidated financial statements, the Company cannot guarantee that itsestimates and assumptions will be accurate. If such estimates and assumptions prove to be inaccurate, the Companymay be required to make adjustments to these estimates in future periods.

 

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**Comparison of Three Months Ended March 31, 2005 to Three Months Ended March 31, 2004**

 

*NetSales*

 

Net salesdecreased $11.3 million, or 8.5%, to $120.8 million for the second quarter offiscal 2005, compared to net sales of $132.1 million for the second quarter offiscal 2004.  The decrease in net salesis primarily attributable to a $13.7 million reduction in Haggar® brandedbusiness due to weak performance of the Company’s ForeverNewTM product duringthe second quarter of fiscal 2005, a shift in the timing of orders in fiscal2005 as compared to fiscal 2004 for one customer, and reduced sales of seasonalsportswear.  The decrease in net sales ofHaggar® branded products was partially offset by a $5.2 million increase insales of Kenneth Coleâ and Claiborneâbranded products.  The Companytransferred its operations in the United Kingdom to a licensee during October2004, which resulted in a $1.7 million decrease in net sales for the secondquarter of fiscal 2005.  The Company’sdomestic women’s wear business decreased $4.5 million due to a continueddecrease in sales to a key customer and to specialty stores.    However, this decrease was offset in partby sales growth of $2.5 million for the Company’s women’s wear products inCanada due to increased sales of new programs to key customers.  The Company’s retail segment reported a $0.8million increase in net sales due to management’s focus on effectivepromotional planning, improved store mix and the opening of eight new stores,net of two stores closed, since March 31, 2004.

 

*ReorganizationCosts*

 

Reorganization costs for the second quarter of fiscal 2005 of $0.8million represent severance costs and other related benefits.  On May 3, 2005, the Company announced plansto close its two remaining Company-operated sewing plants, located in Leon,Mexico, and La Romana, Dominican Republic, as part of the Company’s plan tofocus sourcing efforts in the Eastern Hemisphere.  As of March 31, 2005, the Company employedapproximately 1,675 associates at the sewing facilities.  The Company plans to complete the closuresduring the third quarter of fiscal 2005.

 

As of March 31, 2005, given the plant closures and associated severancecosts were probable, management recorded a $0.8 million pre-tax charge toreorganization costs for severance and other related benefits in accordancewith SFAS No. 112, “Employer’s Accounting for Postemployment Benefits and anAmendment of FASB Statements No. 5 and 43.”

 

The Company will incur certain charges during the remainder of fiscal2005 primarily related to the accelerated depreciation of certain equipment aswell as costs to terminate the lease on the facility in the DominicanRepublic.  The Company anticipates that forthe third quarter of fiscal 2005, the charge will be an estimated $0.6 millionto $1.0 million pre-tax, or $0.4 million to $0.6 million after tax.  The Company estimates that the plant closureswill result in future annual pre-tax savings of $0.9 million to $1.3 million,although management does not anticipate such savings to be realized untilfiscal 2006, depending on the mix of products and sourcing efforts goingforward.

 

The Company plansto sell the land, building and equipment in Mexico, and began activelymarketing the property after the closure was announced.

 

*GrossProfit*

 

Gross profit as apercentage of net sales increased to 28.2% in the second quarter of fiscal2005, compared to 27.9% in the second quarter of fiscal 2004.  Absent $0.8 million in reorganization costs,gross profit as a percentage of net sales would have been 28.9% in the secondquarter of fiscal 2005.  The increase wasprimarily attributable to an improved product mix, better sourcing of productfor private label and women’s wear products and a decrease in customerallowances for Claiborne® branded products due to a change in estimate.

 

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*Selling,General and Administrative Expenses*

 

Selling, generaland administrative expenses as a percentage of net sales decreased to 23.9% inthe second quarter of fiscal 2005, compared to 24.6% in the second quarter offiscal 2004.  The $3.6 million, or 11.0%,decrease in selling, general and administrative expenses is primarily due a$1.3 million decrease in volume-related expenses consistent with the overallsales decrease, a $0.8 million decrease in incentive compensation expense dueto lower overall earnings projections for fiscal 2005, $0.8 million in reducedcosts due to the transfer of operations in the United Kingdom to a licenseeduring the first quarter of fiscal 2005, $0.3 million in savings due to thesale of the corporate aircraft during the first quarter of fiscal 2005, $0.3million in reduced marketing expenses and $0.7 million in one-time expensesincurred in the second quarter of fiscal 2004 due to the Company’s globalheadquarters relocation.  The expensedecreases were offset by a $0.3 million increase in professional fees relatedto the Company’s compliance with the Sarbanes-Oxley Act and a $0.3 millioncharge related to a wrongful termination suit during the second quarter offiscal 2005.

 

*InterestExpense*

 

Interest expensedecreased $0.3 million, or 49.5%, to $0.2 million for the second quarter offiscal 2005, compared to $0.5 million for the second quarter of fiscal 2004,primarily due to the repayment of policy loans on officers’ life insurancepolicies during the first quarter of fiscal 2005 and lower debt levels duringfiscal 2005.

 

*IncomeTaxes*

 

The Company’sincome tax provision as a percentage of income before income tax was 33.3% forthe second quarter of fiscal 2005. Comparatively, the Company’s income tax provision as a percentage ofincome before income tax was 38.2% for the second quarter of fiscal 2004.  The decrease in the effective tax rate wasprimarily due to discrete period adjustments to record a downward revision inthe Company’s estimate of interest owed related to a pending settlement withthe Internal Revenue Service covering tax years 1993 to 1998 and a change inthe estimate of certain potential state tax assessments based on expiredstatutes of limitations for past tax years.

 

**Comparison of Six Months Ended March 31, 2005 to Six Months Ended March 31, 2004**

 

*NetSales*

 

Net salesdecreased $18.5 million, or 7.7%, to $221.3 million for the six months endedMarch 31, 2005, compared to net sales of $239.8 million for the six monthsended March 31, 2004.  The decrease innet sales is primarily attributable to a $25.4 million reduction in Haggar®branded business due to weak performance of the Company’s ForeverNewTM productduring the first six months of fiscal 2005, a shift in the timing of orders infiscal 2005 as compared to fiscal 2004 for one customer and reduced sales ofseasonal sportswear.  The decrease in netsales of Haggar® branded products was partially offset by a $10.3 millionincrease in sales of Kenneth Coleâand Claiborneâ branded products.  The Company transferred its operations in theUnited Kingdom to a licensee during October 2004, which resulted in anadditional $3.1 million decrease in net sales for the six months ended March31, 2005.  The Company’s domestic women’swear business decreased $6.5 million due to the elimination of programs in theJuniors category as well as a continued decrease in sales to a key customer andspecialty stores.  This decrease wasoffset in part by sales growth of $2.7 million for the Company’s women’s wearproducts in Canada due to increased sales of new programs to keycustomers.  The Company’s retail segmentnet sales increased $2.1 million due to management’s focus on effectivepromotional planning, improved store mix and the opening of 8 new stores, netof 2 stores closed, since the six months ended March 31, 2004.

 

The Companyexpects reductions in orders for Haggar® branded men’s wear and Kenneth Cole®and Claiborne® branded products through the remainder of fiscal 2005 ascompared to fiscal 2004.  The Companyintends to explore opportunities for growth with its women’s wear programs inthe United States and in the women’s wear business in Canada to offsetdecreased volume for its traditional women’s wear programs. Additionally, theCompany plans to drive additional net sales increases in its retail division byopening nine additional retail locations subsequent to March 31, 2005, closingone underperforming location and focusing on same-store sales growth.

 

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*ReorganizationCosts*

 

Reorganization costs for the six months ended March 31, 2005 of $0.5million are primarily attributable to $0.8 million in severance costs and otherrelated benefits associated with the shutdown of the two remainingCompany-operating sewing plants, offset by the reversal of a $0.3million accrual to earnings related to a wrongful termination lawsuit in whichthe Company received a favorable judgment on appeal in December 2004.

 

*GrossProfit*

 

Gross profit as apercentage of net sales decreased to 28.1% in the six months ended March 31,2005, compared to 28.5% in the six months ended March 31, 2004.  Absent $0.5 million in reorganization costs,gross profit as a percentage of net sales would have been 28.3% in the sixmonths ended March 31, 2005.  Thedecrease in gross profit was primarily attributable to an increase inallowances during the first quarter of fiscal 2005.  The allowances primarily related to markdownsassociated with the ForeverNewäproducts during the first quarter of fiscal 2005.   Gross profit related to Kenneth Cole®licensed products also decreased during the six months ended March 31, 2005 dueto an increase in lower-margin closeout sales as compared to the six monthsended March 31, 2004.   The decreaseswere offset in part by an increase in gross profit due to an improved productmix for the Company’s men’s private label and women’s wear products and adecrease in customer allowances on Claiborne® branded products due to a changein estimate.

 

The Companycontinues to evaluate sourcing options, including closing the Company-operatedsewing plants as noted above and streamlining the number of suppliers to reducecosts, enhance product quality and improve product deliveries.

 

*Selling,General and Administrative Expenses*

 

Selling, generaland administrative expenses as a percentage of net sales increased to 28.4% inthe six months ended March 31, 2005, compared to 25.9% in the six months endedMarch 31, 2004.  The $0.7 million, or1.1%, increase in selling, general and administrative expenses primarilyrelates to $2.4 million in incremental media advertising expense, as $3.9 millionin advertising expense was incurred during the first quarter of fiscal 2005 tointroduce the ForeverNewä product line, and$2.0 million in connection with a wrongful termination lawsuit.  The increase in selling, general andadministrative expenses was also attributable to a $0.3 million increase inprofessional fees related to the Company’s compliance with the Sarbanes-OxleyAct, as well as $0.2 million in other administrative expense increases.  The increases were partially offset by a $1.0million decrease in legal defense costs, a $1.2 million decrease in incentivecompensation expense due to lower overall earnings projections for fiscal 2005,$1.1 million in reduced costs due to the transfer of operations in the UnitedKingdom to a licensee during the first quarter of fiscal 2005, $0.3 million insavings due to the sale of the corporate aircraft during the first quarter offiscal 2005 and a $0.9 million decrease in expenses related to the Company’sglobal headquarters relocation in the first six months of fiscal 2004.

 

During the first quarterof fiscal 2005, the Company also recorded a $0.3 million charge for additionalseverance benefits to three sales force employees.  The Company recorded a $0.4 million chargeduring fiscal 2004 when management committed to this reduction in force.  Severance payments for these three employeesbegan at their termination dates in January 2005 and are expected to continuethrough March 2006.  The Company included$0.6 million in accrued liabilities related to these severance benefits as ofMarch 31, 2005.

 

*OtherIncome*

 

Other incomedecreased $0.2 million to $0.2 million during the six months ended March 31,2005, compared to $0.4 million for the six months ended March 31, 2004 as theprior period includes a gain on the sale of a property of $0.2 million inaddition to foreign currency exchange gains related to the Company’s divisionin Canada.   Other income for the sixmonths ended March 31, 2005 primarily relates to foreign currency activity.

 

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On April 8, 2005,the Company sold an apartment property located in New York for proceeds of $0.8million.  The Company will record a gainon the sale of $0.6 million to other income during the third quarter of fiscal2005.  Building costs related to theproperty of $0.2 million were classified as property held for sale as of March31, 2005.

 

*InterestExpense*

 

Interest expensedecreased $0.5 million, or 51.9%, to $0.4 million for the six months endedMarch 31, 2005, compared to $0.9 million for the six months ended March 31,2004, primarily due to the repayment of policy loans on officers’ lifeinsurance policies during the first quarter of fiscal 2005 and lower debtlevels during fiscal 2005.

 

*IncomeTaxes*

 

The Company’sincome tax benefit as a percentage of loss before income tax benefit, beforeconsidering certain discrete period adjustments, was 39.0% for the six monthsended March 31, 2005.  Comparatively, theCompany’s income tax benefit as a percentage of loss before income tax was38.2% for the six months ended March 31, 2004. The increase in the effective tax rate for the six months ended March31, 2005 was primarily due to certain non-deductible penalties related to a taxassessment incurred during fiscal 2005. The Company also recorded discrete period adjustments to reflect adownward revision in the Company’s estimate of interest owed related to apending settlement with the Internal Revenue Service covering tax years 1993 to1998 and a change in the estimate of certain potential state tax assessments basedon expired statutes of limitations for past tax years.

 

**SegmentProfitability**

 

The Company’s three operating segments arebusiness units that offer similar products through different distributionchannels.  The Company’s wholesalesegment designs, manufactures, imports and markets casual and dress men’s andwomen’s apparel to retailers throughout North America.  The Company also operates a retail segment,which markets Haggar® branded products through 76 Company operated storeslocated in outlet and strip malls throughout the United States, and a licensingsegment, which generates royalty income by licensing the Company’s trademarksfor use by other manufacturers of specified products in specified geographicareas.  The Company evaluates performanceand allocates resources based on segment profits.

 

Intercompany sales from the wholesale segmentto the retail segment are not reflected in wholesale segment net sales.  Additionally, there is no profit included onsales from the wholesale segment to the retail segment.  Segment profit (loss) is comprised of segmentnet income (loss) before interest expense and provision (benefit) for incometaxes.

 

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The table below reflects the Company’ssegment results for the three and six months ended March 31, 2005 and 2004:

 
| **Three Months Ended March 31,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                         |       |          |       |       |       |          |       |             |       |
| Net sales                        |       | $             | 109,958    |       | $          | 10,840        |       | $                | —     |   | $ | 120,798 |   |
| Segment profit  (loss)           |       | $             | 5,874      |       | $          | (792          | )          | $                | 273        |   | $ | 5,355 |   |
|                             |       |          |       |       |       |          |       |             |       |
| **2004**                         |       |          |       |       |       |          |       |             |       |
| Net sales                        |       | $             | 122,053    |       | $          | 10,018        |       | $                | —     |   | $ | 132,071 |   |
| Segment profit  (loss)           |       | $             | 5,064      |       | $          | (627          | )          | $                | 345        |   | $ | 4,782 |   |

 

 
| **Six Months Ended March 31,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|--------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                       |       |          |       |       |       |          |       |             |       |
| Net sales                      |       | $             | 193,916    |       | $          | 27,425        |       | $                | —     |   | $ | 221,341 |   |
| Segment profit  (loss)         |       | $             | (898       | )          | $          | 507           |       | $                | 628        |   | $ | 237 |   |
|                           |       |          |       |       |       |          |       |             |       |
| **2004**                       |       |          |       |       |       |          |       |             |       |
| Net sales                      |       | $             | 214,462    |       | $          | 25,343        |       | $                | —     |   | $ | 239,805 |   |
| Segment profit                 |       | $             | 6,052      |       | $          | 505           |       | $                | 598        |   | $ | 7,155 |   |

 

The table below reflects the net sales related to the Company’s keyproduct lines as a percentage of consolidated net sales for the three and sixmonths ended March 31, 2005 and 2004*:*

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** | **Six Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **2005**                          | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales by  category:                  |       |                              |       |                            |       |   |   |   |   |
| Men’s Haggar®  branded apparel |       | 61.3                              | %          | 66.9                            | %          | 62.9 | % | 69.0 | % |
| Men’s licensed  apparel             |       | 11.4                              | %          | 6.6                             | %          | 12.3 | % | 7.1 | % |
| Men’s private  label apparel        |       | 16.6                              | %          | 15.0                            | %          | 15.8 | % | 14.0 | % |
| Women’s apparel                     |       | 10.7                              | %          | 11.5                            | %          | 9.0 | % | 9.9 | % |
| Consolidated net  sales                  |       | 100.0                             | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

The Company does not segregate assets on a segment basis for internalmanagement reporting and, therefore, such information is not presented.

 

*WholesaleSegment*

 

Wholesale segment netsales decreased $12.1 million, or 9.9%, to $110.0 million for the secondquarter of fiscal 2005, compared to $122.1 million for the second quarter offiscal 2004.  The decrease in wholesalesegment net sales is primarily attributable to a $13.7 million reduction inHaggar® branded business due to weak performance of the Company’s ForeverNewTMproduct during the second quarter of fiscal 2005, a shift in the timing oforders in fiscal 2005 as compared to fiscal 2004 for one customer and reducedsales of seasonal sportswear.  TheCompany transferred its operations in the United Kingdom to a licensee duringOctober 2004, which resulted in a $1.7 million decrease in net sales for thesecond quarter of fiscal 2005.  Thedecrease in net sales of Haggar® branded products was offset in part by a $5.2 millionincrease in sales of Kenneth Coleâand Claiborneâ licensed products.  The Company’s domestic women’s wear businessdecreased $4.5 million due to a continued decrease in sales to a key customerand to specialty stores.  However, thisdecrease was offset in part by sales growth of $2.5 million for the Company’swomen’s wear products in Canada due to increased sales of new programs keycustomers.

 

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Wholesale segment netsales decreased $20.6 million, or 9.6%, to $193.9 million for the six monthsended March 31, 2005, compared to $214.5 million for the six months ended March31, 2004.  The decrease in wholesalesegment net sales is primarily attributable to a $25.4 million reduction inHaggar® branded business due to weak performance of the Company’s ForeverNewTMproduct during the first six months of fiscal 2005 and a shift in the timing oforders in fiscal 2005 as compared to fiscal 2004 for one customer, offset inpart by reduced customer allowance reserves. The Company transferred its operations in the United Kingdom to alicensee during October 2004, which resulted in an additional $3.1 milliondecrease in net sales for the six months ended March 31, 2005.   The decrease in net sales of Haggar® brandedproducts was offset in part by a $10.3 million increase in sales of KennethColeâ and Claiborneâbranded products.  The Company’s domesticwomen’s wear business decreased $6.5 million due to the elimination of programsin the Juniors category as well as a continued decrease in sales to a key customerand to specialty stores.  The decrease inthe women’s business was offset in part by sales growth of $2.7 million for theCompany’s women’s wear products in Canada due to increased sales of newprograms to key customers.

 

Wholesale segmentprofit increased $0.8 million, or 16.0% to $5.9 million for the second quarterof fiscal 2005, compared to $5.1 million for the second quarter of fiscal2004.  Although wholesale segment salesdecreased $12.1 million, as noted above, the impact of this decrease onwholesale segment profit was mitigated by a $3.8 million decrease in selling,general and administrative expenses primarily due to a $1.3 million decrease involume-related expenses consistent with the overall sales decrease, a $0.8million decrease in incentive compensation expense due to lower overallearnings projections for fiscal 2005, $0.8 million in reduced costs due to thetransfer of operations in the United Kingdom to a licensee during the firstquarter of fiscal 2005, $0.3 million in savings due to the sale of thecorporate aircraft during the first quarter of fiscal 2005, $0.3 million inreduced marketing expenses, $0.7 million in one-time expenses incurred in thesecond quarter of fiscal 2004 due to the Company’s global headquartersrelocation and $0.2 million in other miscellaneous expense decreases.  The expense decreases were offset by a $0.3million increase in professional fees related to the Company’s compliance withthe Sarbanes-Oxley Act and a $0.3 million charge related to a wrongful terminationsuit.  Wholesale segment profit alsoincreased due to a 0.2% increase in gross profit as a percentage of net salesfor the wholesale segment primarily attributable to an improved product mix,better sourcing of private label and women’s wear products and a decrease incustomer allowances on Claiborne® branded products due to a change in estimate.

 

Wholesale segmentprofit decreased $7.0 million to $0.9 million loss for the six months endedMarch 31, 2005, compared to $6.1 million profit for the six months ended March31, 2004.  The decrease in segment profitis primarily attributable to a $20.6 million decrease in net sales as notedabove.  The decrease in segment profit isalso due to a 0.8% decrease in gross profit as a percentage of net sales forthe wholesale segment, primarily attributable to an increase in allowancesduring the first quarter of fiscal 2005. The allowances primarily related to markdowns associated with theForeverNewä products duringthe first quarter of fiscal 2005.  Grossprofit related to Kenneth Cole® licensed products decreased during the sixmonths ended March 31, 2005 due to an increase in lower-margin closeout salesas compared to the six months ended March 31, 2004.   The decreases were offset in part by anincrease in gross profit due to an improved product mix, better sourcing ofprivate label and women’s wear products and a decrease in customer allowanceson Claiborne® branded products due to a change in estimate.

 

*RetailSegment*

 

Retail segment netsales increased $0.8 million, or 8.2%, to $10.8 million for the second quarterof fiscal 2005, compared to $10.0 million for the second quarter of fiscal2004.  Retail segment net sales increased$2.1 million, or 8.2%, to $27.4 million for the six months ended March 31, 2005,compared to $25.3 million for the six months ended March 31, 2004.  The increase in net sales for the retailsegment for both periods is primarily due to management’s focus on effectivepromotional planning, improved store mix and the opening of eight new stores,net of two stores closed, since March 31, 2004.

 

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Retail segment profitdecreased $0.2 million, or 26.3%, to a $0.8 million loss for the second quarterof fiscal 2005, compared to a $0.6 million loss for the second quarter offiscal 2004.  The decrease in retailsegment profit is primarily attributable to a 3.3% decrease in gross profit asa percentage of sales, which offset the $0.8 million net sales increase for thesecond quarter for fiscal 2005 as compare to the second quarter of fiscal2004.  The decrease in gross profitpercentage is primarily due to a favorable book to physical inventory countadjustment during the second quarter of fiscal 2004.  The decrease in retail segment profit is alsoattributable to a $0.2 million increase in selling, general and administrativeexpenses due to increased employee compensation expenses, increased storeopening expenses and other volume-related expense increases.

 

Retail segment profit wasconsistent at $0.5 million for the six months ended March 31, 2005 as comparedto the six months ended March 31, 2004.

 

**Liquidityand Capital Resources**

 

The Company’s principal sources of liquidity are cash flows from operations and borrowings under its unsecured revolving credit facility.  As of March 31, 2005, the Company had cash and cash equivalents of $9.6 million.

 

As of March 31,2005, the Company had $11.0 million outstanding under a $111.0 millionunsecured revolving credit agreement (the “Agreement”).  The available borrowing capacity wasrestricted to $31.1 million at March 31, 2005, under the Agreement’s fundeddebt to operating cash flow covenant. The Company incurred approximately $0.3 million in unused letters ofcredit and commitment fees related to the available borrowing capacity duringthe six months ended March 31, 2005. The interest rates ranged from 2.34% to5.75% during the six months ended March 31, 2005, and were based upon bothmargins over a bank base rate and margins over LIBOR, depending on theborrowing option selected by the Company. The Agreement, which expires in June 2007, prohibits the Company frompledging its accounts receivable and inventories, contains limitations onincurring additional indebtedness, requires maintaining minimum net worthlevels of the Company and the Company’s main operating subsidiary, and requiresthe maintenance of certain financial ratios. The Agreement also prohibits the payment of any dividend if a defaultexists after giving effect to such a dividend. As of March 31, 2005, the Company was in full compliance with itsfinancial and other covenants under the Agreement.

 

Long-term debt also includes $2.0 million in Industrial DevelopmentRevenue (“IDR”) bonds at March 31, 2005. Significant terms of the IDR bonds include interest at a rate equal tothat of high quality, short-term, tax exempt obligations, as defined in theagreement.  The interest rate at March31, 2005, was 2.35%.  The IDR bondsmature in fiscal 2026, but the Company has the option to prepay the balancewithout penalty in fiscal 2006.  The IDRbonds are collateralized by a building and certain equipment located at theCompany’s raw materials warehouse in Weslaco, Texas, which was closed in March2005.  The Company plans to call thebonds prior to December 2005 to obtain clear title to the collateralizedbuilding and equipment and facilitate the sale of the property.  Accordingly, the remaining balance of the IDRbonds of $2.0 million has been classified as current as of March 31, 2005.

 

In February 2005,the Company purchased software related to a new financial managementsystem.  The implementation of the systemwill begin during the third quarter of fiscal 2005, and is scheduled forcompletion during the third quarter of fiscal 2006.  The Company anticipates that costs toimplement the new system will be approximately $2.0 million to $3.0 millionover the next twelve months.

 

The Company alsoplans to replace the merchandising and point-of-sale systems at the retailsegment, although vendor selection has not been completed.  The Company anticipates that implementationof these systems will begin during January 2006 and conclude by the end offiscal 2006.  The Company estimates thatcosts to implement the new retail systems will be approximately $1.5 to $2.5million.  The Company is currentlyevaluating financing alternatives to fund both these systems implementations.

 

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The Company wasparty to an operating lease for a corporate aircraft, that contained a residualvalue guarantee.  Under the lease, whichended in December 2004, the Company had the option of (a) returning theaircraft to the lessor and paying the guaranteed residual value of $3.0million; (b) purchasing the aircraft for $4.0 million; or (c) arranging for thesale of the aircraft to a third party. If the sales proceeds were less than $4.0 million, the Company wasrequired to reimburse the lessor for the deficiency.  If the sales proceeds exceeded $4.0 million,the Company was entitled to all of such excess amounts.

 

On December 16,2004, the Company completed the sale of the aircraft to a third party forproceeds of $3.2 million net of commissions and expenses of $0.2 million.  The Company reimbursed the lessor for a $0.9million deficiency, which included minimal fees related to the termination ofthe lease prior to December 31, 2004. The Company had accrued $0.7 million of this amount as of September 30,2004, and recorded the additional $0.2 million in selling, general and administrativeexpenses during the three months ending December 31, 2004.

 

During fiscal1991, the Company entered into split-dollar life insurance agreements withtrusts established by three former officers of the Company.  Pursuant to these agreements, the Company isentitled to the cumulative premiums it has paid on the policies less theCompany’s interest in policy loans and related accrued interest.  No further premiums are due on thesepolicies.  The Company’s interest in thepolicies was $1.1 million at September 30, 2004, which was net of $9.1 millionin policy loans made to the Company.

 

The Company wasnotified of the death of one of the insured former officers in September2004.  In November 2004, the insurancecompany applied the proceeds of $4.5 million directly to the $4.0 million inoutstanding loans related to this policy, and the Company received net proceedsof $0.4 million, net of interest of $0.1 million, related to this policy.  In October 2004, the Company executed thesurrender of $2.2 million in accumulated cash dividends on the second of thesepolicies, resulting in a reduction of the policy loans for this amount.  In November 2004, the Company repaid theremaining policy loans of $2.9 million for these policies.  As a result of the transactions describedabove, at December 31, 2004, all policy loans had been repaid.  The cash surrender value of the policies atMarch 31, 2005 was $3.6 million.

 

On November 30, 1999, the Board of Directors authorized the Company torepurchase of up to 3,000,000 shares of the Company’s stock (the “1999 Program”).  The 1999 Program does not have an expirationdate.  As of September 30, 2002, theCompany had purchased 2,242,183 shares of stock.  The Company did not purchase any shares infiscal 2003 or fiscal 2004.  On November8, 2004, the Company publicly announced that it was resuming its stock buybackprogram and, during the first quarter of fiscal 2005, purchased 204,793 sharesof outstanding stock for $4.5 million commensurate with that announcement.  There were no additional purchases during thesecond quarter of fiscal 2005.  Theamount and timing of additional purchases will depend upon market conditions.

 

During the second quarter of fiscal 2005, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on May 16,2005, which will be paid on May 31, 2005. The first quarter of fiscal 2005 dividend of approximately $0.4 millionwas paid in March 2005.

 

From time to time,the Company will sell or dispose of assets, which it feels are under-performingor are no longer needed in the businesses in which the Company operates. Therecan be no assurance that the Company will be able to sell or dispose of theassets in a manner that is profitable to the Company, or at all.  In addition, the Company will makeinvestments in assets that management believes are needed to acquire andmaintain the businesses in which the Company operates.  Again, there can be no assurance that theCompany can obtain a reasonable return on any such investments.

 

The ongoingevaluation for impairment of the goodwill related to the 1999 acquisition ofthe Women’s Wear subsidiary requires significant management estimation andjudgment.  Changes in overall businessstrategy, negative industry or economic trends or actual results which do notmeet the Company’s current plan for the women’s wear business may trigger afuture impairment charge, which could negatively affect the Company’s resultsof operations in the period in which the charge is recorded.

 

25

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On March 18, 2005, the Company extended the term of its license agreement to manufacture and market men’s pants and shorts under the Claiborne® trademark through December 2010.  There were no other material revisions to the terms of this license agreement.

 

The Company has other contractual obligations and commercial commitments as described in “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations — Disclosures About Contractual Obligations And Commercial Commitments” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2004.  There have been no other material changes in the Company’s contractual obligations and commercial commitments since September 30, 2004.

 

*CashFlow Results for the Six Months Ended March 31, 2005*

 

Net cash used inoperating activities increased $16.1 million to $22.5 million during the sixmonths ended March 31, 2005, compared to $6.4 million during the six monthsended March 31, 2004.  The increase innet cash used in operating activities was primarily due to a decrease in theCompany’s profitability when comparing the six months ended March 31, 2005 tothe six months ended March 31, 2004, increased inventory purchased during theperiod, payment of a $0.9 million residual value guarantee related to the leaseon the Company’s corporate aircraft, a decrease in accrued employee bonuses forfiscal 2005 and a decrease in the accounts payable balance due to the timing ofpayments.

 

Net cash used ininvesting activities increased $4.9 million to $5.3 million during the sixmonths ended March 31, 2005, compared to $0.4 million during the six monthsended March 31, 2004.  Investingactivities for the six months ended March 31, 2005 included an additional $0.5million related the purchase of software for the Company’s new financial systemto be implemented in fiscal 2006 and other capital expenditures related to newretail stores.  Investing activities forthe six months ended March 31, 2005 also included $2.4 million in net paymentson officer’s life insurance policy loans.  Investing activities for the six months ended March 31, 2004 included$2.0 million related to capital improvements of the new global headquartersfacility, $1.3 million of which were financed with funds transferred fromrestricted cash.

 

Net cash providedby financing activities increased $0.8 million, or 14.2%, to $6.6 million inthe six months ended March 31, 2005 from $5.8 million in the six months endedMarch 31, 2004.  The increase wasprimarily due to an  $8.6 millionincrease in net borrowings and a $2.7 million increase in book overdraftsduring the six months ended March 31, 2005, partially offset by a decrease of$5.9 million in proceeds from the exercise of employee stock options andpurchases of treasury stock of $4.5 million.

 

**Risks Related to the Company’s Business**

 

An investmentin the Company involves certain risks and uncertainties.  The risks and uncertainties described belowand elsewhere in this Quarterly Report on Form 10-Q should be carefullyconsidered.  If any of the eventsdescribed below or elsewhere occurs, the Company’s business could be adverselyaffected in a material way.

 

*Dependence on Key Customers*

 

The Company’s four largest customers accounted for approximately 51% and 53% of the Company’s net sales during the six months ended March 31, 2005 and 2004, respectively.  The same four customers accounted for approximately 56% and 62% of trade receivables as of March 31, 2005 and September 30, 2004, respectively.  The loss of the business of one or more of the Company’s larger customers could have a material adverse effect on the Company.

 

26

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*Uncertainties in Apparel Retailing*

 

The apparel industry historically has been subject to substantial cyclical variations, and a recession in the general economy or uncertainties regarding future economic prospects that affect consumer spending habits could have a material adverse effect on the Company. While various retailers, including some of the Company’s customers, experienced financial difficulties in the past three years, which increased the risk of extending credit to such retailers, the Company’s bad debt experience has been limited. Under the Company’s current credit and collection arrangements, the bankruptcy of a customer which continues to operate and carry the Company’s products should not have a material adverse effect on the Company.

 

*Competition*

 

The apparel industry is highly competitive in the United States and abroad. The Company competes with numerous domestic and foreign designers, brands and manufacturers of apparel, some of which may be significantly larger and have greater marketing and financial resources than the Company. Management believes that the Company’s ability to compete effectively depends upon its continued flexibility in responding to market demand and its ability to offer fashion conscious consumers a wide variety of high quality apparel at competitive prices.

 

*Dependence on Third-Party Manufacturers*

 

The Company will be dependent upon third parties for the manufacture of 100% of its products after the closure of the remaining Company-operated sewing plants. The inability of a manufacturer to ship orders of the Company’s products in a timely manner or to meet quality standards could cause the Company to miss the delivery date requirements of its customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect on the Company. The Company has no long-term formal arrangements with any of its suppliers and historically has experienced only limited difficulty in satisfying its raw material and finished goods requirements. Although the Company believes it could replace such suppliers without a material adverse effect on the Company, there can be no assurance that such suppliers could be replaced in a timely manner and the loss of such suppliers could have a material adverse effect on the Company’s short-term operating results.

 

Substantially all of the Company’s products are manufactured outside the United States.  The Company’s foreign production and sourcing operations are subject to various risks of doing business abroad, including quotas, work stoppages and other restrictions and regulations relating to imports and, in certain parts of the world, political or economic instability.  Although the Company’s operations have not been materially adversely affected by any of such factors to date, any substantial disruption of its foreign production or supply could adversely affect its operations.  Some of the Company’s imported merchandise is subject to United States Customs duties.  Any material increase in duty levels could materially adversely affect the Company.

 

*Dependence on Customer Service Center in Fort Worth, Texas*

 

The Companyoperates the majority of its warehouse and distribution activities in theUnited States out of its main distribution center in Fort Worth, Texas.  Any major work disruption at the Company’sFort Worth facility could have a material adverse effect on the Company.  Although the Company believes it couldutilize other warehousing companies to satisfy its shipping and distributionfunctions, there can be no assurance that these warehousing companies could beutilized in a timely manner, and the inability to service the Company’scustomers for any period of time could materially adversely affect the Company.

 

27

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*Risksof Acquisition Strategy*

 

The Companycontinues to seek growth through strategic acquisitions of other apparelbusinesses.  However, the Company cannotgive any assurances that its acquisition strategy will be successful.  The success of the Company’s acquisitionstrategy is dependent upon a number of factors, including:

 

•                  the Company’sability to identify suitable acquisition candidates;

•                  the Company’sability to negotiate favorable acquisition terms, including purchase price,which may be adversely affected due to increased competition with other buyers;

•                  the availabilityof financing to the Company, or on terms favorable to the Company;

•                  the Company’sability to integrate effectively the systems and operations of acquired businesses;and

•                  the Company’sability to retain key personnel of acquired businesses.

 

Acquisitionsinvolve a number of other risks, including diversion of management’s attentionfrom other business concerns and the assumption of known or unknown liabilitiesof acquired businesses.  The integrationof acquired businesses may place significant strains on the Company’s currentoperating and financial systems and controls. The Company may not successfully overcome these risks or any otherproblems encountered in connection with its acquisition strategy.

 

*Weaknessesin Internal Controls*

 

Weaknesses ininternal controls and procedures could have a material adverse effect on theCompany.  For further discussion of theCompany’s internal control over financial reporting, including significantdeficiencies and material weaknesses identified and the related remediationeffort, see “Item 4. Controls and Procedures.” Other instances of weaknesses in the Company’s internal controls andprocedures could occur or be identified in the future. Any such weaknesses mayhave a material adverse effect on the Company and the market price of theCompany’s securities.

 

**RecentlyIssued and Adopted Financial Accounting Standards**

 

In December 2004,the Financial Accounting Standards Board issued SFAS No. 123R (revised 2004), “Share-BasedPayment”, to amend SFAS No. 123, “Accounting for Stock-Based Compensation” andSFAS No. 95, “Statement of Cash Flows”. This standard eliminates the ability to account for share-basedcompensation using the intrinsic value-based method under Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees”.  SFAS No. 123R requires the Company tocalculate equity-based compensation expense for stock options and employeestock purchase plan rights granted to employees based on the fair value of theequity instrument at the time of grant. Currently, the Company discloses thepro forma net income (loss) and related pro forma income (loss) per shareinformation in accordance with previously issued SFAS No. 123 and also SFAS No.148, “Accounting for Stock-Based Compensation Costs—Transition and Disclosure”.

 

28

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On April 14,2005, the Securities and Exchange Commission announced that it would providefor a phased-in implementation process for SFAS No. 123R. The SEC now requiresthat registrants adopt SFAS No. 123R’s fair value method of accounting forshare-based payments to employees no later than the beginning of the firstfiscal year beginning after June 15, 2005. The Company is required toadopt SFAS No. 123R beginning October 1, 2005.

 

The Company isrequired to apply SFAS No. 123R using a modified version of prospectiveapplication. Under that transition method, compensation cost is recognized onor after the date of adoption for the portion of outstanding awards for whichthe requisite service has not yet been rendered based on the grant-date fairvalue of those awards calculated under SFAS No. 123R for pro forma disclosures.For periods before the date of adoption, the Company may elect to apply amodified version of retrospective application under which financial statementsfor prior periods are adjusted on a basis consistent with the pro formadisclosures required for those periods by SFAS No. 123R. The Company believesthe adoption of this statement will not have a material impact on itsconsolidated financial statements.

 

**Item 3****.  Quantitative and QualitativeDisclosures about Market Risk.**

 

The Company is exposed to market risk from changes in foreign currency exchange risk and interest rate risk, which may adversely affect its financial position, results of operations and cash flows. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any derivative financial instrument.  As of March 31, 2005, the Company’s exposure to interest rate risk was minimal due to the low level of variable rate debt.

 

**Item 4****. ****Controls and Procedures**

 

*(a)**                               **Evaluation of Disclosure Controls and Procedures***

 

TheChief Executive Officer and Chief Accounting Officer of the Company havereviewed and evaluated the effectiveness of the Company’s disclosure controlsand procedures (as defined in the Securities Exchange Act of 1934 Rules240.13a-15(e) and 15d-15(e)), and have concluded, as more fully described belowin Item 4(b), that as of the end of the period covered by this Quarterly Reporton Form 10-Q, such disclosure controls and procedures were ineffective intimely alerting them to material information relating to the Company requiredto be disclosed in the periodic reports the Company files or submits under theSecurities Exchange Act of 1934.  Suchdisclosure controls and procedures were also ineffective in ensuring that thisinformation is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Accounting Officer, asappropriate, to allow timely decisions regarding required disclosure.  Due to the material weakness discussed below,in preparing our financial statements at and for the three and six month periodended March 31, 2005 we performed additional procedures, as described in Item4(c)(iii), designed to ensure that such financial statements were fairlypresented in all material respects in accordance with generally acceptedaccounting principles.

 

*(b)**                               **Internal Control overFinancial Reporting***

 

In professional auditing literature, “significantdeficiencies” are referred to as “reportable conditions,” which are controlissues that could have a significant adverse effect on the ability to record,process, summarize and report financial data in financial statements. Auditingliterature defines “material weakness” as a particularly serious reportablecondition where the internal control does not reduce to a relatively low levelthe risk that misstatements caused by error or fraud may occur in amounts thatwould be material in relation to the financial statements and the risk thatsuch misstatements would not be detected within a timely period by employees inthe normal course of performing their assigned functions.

 

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In connection with a review of all outstandingcustomer allowance reserves in February 2005, the Company’s managementidentified control deficiencies that, when considered in the aggregate,management believed constituted a material weakness in its internalcontrols.  Management determined that akey control requiring adequate supporting documentation and periodic review forcustomer allowance reserves was not operating effectively.  Management also noted that there were nocontrols in place to ensure adequate monitoring of customer allowance reservesby sales management personnel and timely communication of such allowances withaccounting personnel.

 

Management’sassessment of the Company’s internal control over financial reporting pursuantto the Sarbanes Oxley Act of 2002 is ongoing and is, therefore, incomplete.However, management has identified a significant deficiency that couldpotentially be, if not remediated, a material weakness.  The significant deficiency relates tocontrols over the access to financial application programs and data.  Specifically, the Company does not maintaineffective controls over the granting, maintenance and termination of useridentification and passwords for employees, the required segregation of dutieswithin certain financial applications and the independent monitoring andverification of internal user access to data.

 

*(c)**                                **Changes in Internal Controlover Financial Reporting***

 

(i)             In connection withthe financial statement close process for December 31, 2004, the Company’smanagement identified two control deficiencies which management believedconstituted material weaknesses in its internal controls. The first of theserelated to the finished goods inventory valuation process.  Management believed that there was inadequateanalysis of the capitalized cost factors used in the finished goods inventoryvaluation.  During January 2005, theCompany remediated this weakness in its internal control over financialreporting by implementing a detailed review of the calculation of capitalizedcost factors.  The review includes aprocess to verify completeness and accuracy of general ledger accounts includedin the calculation of the cost capitalization factors, as well as a review ofthe appropriateness of the expenses included within those accounts.  The Company also implemented a more robustmonthly analytical review of the trend of capitalized cost factors compared toprior periods.

 

(ii)          The second material weakness related to internal controls for customer allowance reserves.  The Company periodically grants allowances for certain customers.  The Company’s management identified customer allowances for which a reserve was not recorded on a timely basis.  During January 2005, the Company remediated this weakness in internal controls by conducting training on the Company’s accounting for customer allowance reserves for those senior sales personnel with the responsibility for customer allowances.

 

(iii)       To remediate the control deficiencies related tocustomer allowances described in Item 4(b), which were identified duringFebruary 2005, the Company has enhanced the periodic review process by salespersonnel for all customer allowances granted as well as the supportingdocumentation that is required to record such allowances.  In addition, although the Company conductedtraining in January 2005 on customer allowances, the Company believed, giventhe new occurrence, that additional training was required.  That additional training was conducted in May2005 with sales personnel, and emphasized timely communication on allarrangements with customers and the importance of documentation of such transactions.

 

(iv)      Toaddress the significant deficiency related to systems access, the Company hasbegun to implement controls to require monthly updates of all user access liststo all financial applications.  TheCompany will also implement its new financial management systems during fiscal2006.  The benefits of thisimplementation include an enhanced security model as compared to the Company’scurrent system.

 

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**Part II****.  Other Information.**

 

**Item 1.  Legal****Proceedings**

 

The Company hasbeen named as a defendant in several legal actions arising from its operationsin the normal course of business, including actions brought by certainterminated employees.  Although exactsettlement amounts, if any, related to these actions cannot accurately bepredicted, the claims and damages alleged, the progress of the litigation todate and past experience with similar litigation leads the Company to believethat any liability resulting from these actions and those described below willnot, individually or collectively, have a material adverse effect on theCompany.

 

The Company is adefendant in a wrongful termination lawsuit brought in federal district courtin 2000 by a former salesman.  A juryrendered a verdict in January 2002 in favor of the plaintiff against theCompany.  After various appeals andremand to the trial court, on January 31, 2005, the Company received aMemorandum Order ordering the Company to pay, after entry of judgment, backpayin the amount of $0.8 million, liquidated damages of $0.8 million and front payof $0.5 million.  The court also orderedthe Company to make monthly payments of $14,583 until the Company reinstatesthe plaintiff to the first available sales associate vacancy in the Dallasarea.  The trial court denied, however,plaintiff’s request for enhanced backpay and prejudgment interest.  During the first quarter of fiscal 2005, theCompany recorded an additional $1.7 million charge to selling, general andadministrative expenses related to this matter. During the second quarter of fiscal 2005, after negotiations with theplaintiff’s counsel, the Company agreed to pay $0.8 million in attorney’s fees,subject to the Company’s right to appeal the damages award.  As a result, the Company recorded anadditional $0.3 million charge to selling, general and administrativeexpenses.  The Company has reserved anaggregate of $3.0 million in accrued liabilities for this matter as of March31, 2005.  The Company filed its noticeof appeal on April 28, 2005.

 

During fiscal years 2003 and 2004, one attorney filedfive separate suits in Texas state court against the Company and certain of itssubsidiaries, as well as unrelated third parties, alleging injuries toapproximately 2,200 former employees from airborne fibers and chemicals incertain of the Company’s now closed facilities located in south Texas.  All proceedings in one case, which names over2,100 plaintiffs, have been stayed due to the unrelated bankruptcy of one ofthe other defendants.  The Company isawaiting a decision by the trial court on its motion to dismiss another case,which names 71 plaintiffs.  After takingdiscovery in one of the remaining cases, the Company believes that all of thesecases and claims are frivolous and that the plaintiffs have no factual or legalbasis for any of their allegations.  Inaddition, the Company believes that it has meritorious defenses to all of theasserted claims.  The Company intends tovigorously defend all of these suits, unless a favorable settlement can beachieved.

 

Jury verdicts intwo cases totaling approximately $1.7 million in the aggregate were returned infiscal 2000 against certain subsidiaries of the Company related to claims byformer employees of now closed manufacturing facilities for wrongful dischargeand common law tort.  Both cases wereappealed to the Texas Supreme Court because management and legal counselbelieve the verdicts were both legally and factually incorrect.  On December 31, 2004, the Texas Supreme Courtreversed the judgment of the Court of Appeals and rendered judgment in theCompany’s favor in one of such cases.  Asa result, during the first quarter of fiscal 2005, the Company reversed theprior accrual for such case, resulting in a $0.3 million increase in grossprofit for such quarter.  The other caseremains on appeal.  The Company has $2.6million reserved in accrued liabilities for the remaining case as of March 31,2005.

 

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**Item 2.  Unregistered****Sales of Equity Securities and Use of Proceeds**

 

On November 30,1999, the Board of Directors authorized the Company to repurchase of up to3,000,000 shares of the Company’s stock (the “1999 Program”).  The 1999 Program does not have an expirationdate.  As of September 30, 2002, theCompany had purchased 2,242,183 shares of stock.  The Company did not purchase any shares infiscal 2003 or fiscal 2004.  On November8, 2004, the Company publicly announced, that it was resuming its stock buybackprogram and has since purchased 204,793 shares of outstanding stock commensuratewith that announcement.  The amount andtiming of additional purchases will depend upon market conditions.

 
| **Period**                                  | ** ** | **Total Number of****Shares Purchased** | ** ** | **Average Price****Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Program** | ** ** | **Maximum Number of  Shares That May  Yet Be Purchased  Under the Plans or  Program** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
|                                        |       |                                    |       |                                |       |                                                                                    |       |                                                                                  |       |
| October 1, 2004  through October 31, 2004   |       | —                                  |       | —                              |       | —                                                                                  |       | 757,817                                                                               |       |
| November 1, 2004  through November 30, 2004 |       | 65,400                                  |       | $                                   | 19.91      |                                                                                    | 2,307,583  |                                                                                  | 692,417    |   |
| December 1, 2004  through December 31, 2004 |       | 139,393                                 |       | $                                   | 22.71      |                                                                                    | 2,446,976  |                                                                                  | 553,024    |   |
| **Total**                                   |       | 204,793                                 |       | $                                   | 21.82      |                                                                                    |       |                                                                                  | 553,024    |   |

 

**Item 3. Defaults****Upon Senior Securities**

 

None.

 

**Item 4. Submission****of Matters to a Vote ofSecurity Holders**

 

The Company’s Annual Meeting of Stockholders was held on February 9, 2005.  At such meeting, Frank D. Bracken, Thomas G. Kahn and John C. Tolleson were elected to serve as Class III directors of the Company for a three year term and until their respective successors are elected and qualified. Of the 6,037,458 shares represented at the meeting in person or by proxy, Mssrs. Bracken, Kahn and Tolleson received 5,490,825, 6,010,161 and 5,941,082 votes, respectively, for their election as Class III directors.  Of the shares represented, 546,633, 27,297 and 96,376 shares withheld vote for the election of Mssrs. Bracken, Kahn and Tolleson, respectively.  The other directors whose terms of office continued after the meeting are as follows: Rae F. Evans, Donald E. Godwin, J.M. Haggar, III, Richard W. Heath and James Neal Thomas.

 

The stockholders also ratified the selection of PricewaterhouseCoopers LLP as the independent registered public accountants for the Company for the fiscal year ended September 30, 2005.  The votes with respect to this resolution were 5,995,419 for the resolution and 39,976 against, with 2,063 shares abstaining on the matter.

 

**Item 5.  Other****Information**

 

None.

 

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**Item 6. Exhibits**

 
| **Exhibit  Number** | ** **  | **Description** |
|---------------------|-------------|-----------------|
|                |        |            |
|                |   3(a) |            | Third Amended and Fully  Restated Articles of Incorporation. (Incorporated by reference from Exhibit  3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended  September 30, 1993 [File No. 0-20850].) |
|                |        |            |   |
|                |   3(b) |            | Amended and Restated  Bylaws of the Company, as amended, dated October 10, 2002. (Incorporated by  reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K filed  October 15, 2002 [File No. 0-20850].) |
|                |        |            |   |
|                |   4(a) |            | Specimen Certificate  evidencing Common Stock (and Preferred Stock Purchase Right). (Incorporated  by reference from Exhibit 4(a) to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 30, 1994 [File No. 0-20850].) |
|                |        |            |   |
|                |   4(b) |            | Rights Agreement, dated  as of October 10, 2002, between the Company and Mellon Investor Services,  LLC, as Rights Agent, specifying the terms of the Rights, which includes the  description of Series B Junior Participating Preferred Stock as Exhibit A,  the form of Rights Certificate as Exhibit B and the form of the Summary of  Rights as Exhibit C. (Incorporated by reference from Exhibit 99.3 to the  Company’s Current Report on Form 8-K, filed October 15, 2002 [File No.  0-20850].) |
|                |        |            |   |
|                |   4(c) |            | Form of Rights  Certificate. (Incorporated by reference from Exhibit 99.4 to the Company’s  Current Report on  Form 8-K, filed October 15, 2002 [File No. 0-20850].) |
|                |        |            |   |
|                |   4(d) |            | Form of Summary of  Rights. (Incorporated by reference from Exhibit 99.5 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].) |
|                |        |            |   |
|                | 31(a)*      |            | Certification of Chief  Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
|                |        |            |   |
|                | 31(b)*      |            | Certification of Chief  Accounting Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
|                |        |            |   |
|                | 32(a)**     |            | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. §1350. |
|                |        |            |   |
|                | 32(b)**     |            | Certification of Chief  Accounting Officer Pursuant to 18 U.S.C. §1350. |

 

----

| *  |   |   | Filed herewith     |
|----|--------|--------|--------------------|
| ** |   |   | Furnished herewith |

 

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**Signatures**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|               | Haggar Corp. |
|--------------------|--------------|
|               |         |   |
|               |         |   |
| Date: May 10, 2005 |         |   |
|               |         |   |
|               |         | /s/ John W. Feray |
|               |         | John W. Feray |
| * *           | * *     | *(Chief Accounting Officer)* |
|               |         |   |
|               |         | Signed on behalf of the registrant  and as chief accounting officer. |

 

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**INDEX TO EXHIBITS**
| **Exhibit  Number** | ** **  | **Description** |
|---------------------|-------------|-----------------|
|                |        |            |
|                |   3(a) |            | Third Amended and Fully  Restated Articles of Incorporation. (Incorporated by reference from Exhibit  3(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended  September 30, 1993 [File No. 0-20850].) |
|                |        |            |   |
|                |   3(b) |            | Amended and Restated  Bylaws of the Company, as amended, dated October 10, 2002. (Incorporated by  reference from Exhibit 99.2 to the Company’s Current Report on Form 8-K filed  October 15, 2002 [File No. 0-20850].) |
|                |        |            |   |
|                |   4(a) |            | Specimen Certificate  evidencing Common Stock (and Preferred Stock Purchase Right). (Incorporated  by reference from Exhibit 4(a) to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 30, 1994 [File No. 0-20850].) |
|                |        |            |   |
|                |   4(b) |            | Rights Agreement, dated  as of October 10, 2002, between the Company and Mellon Investor Services,  LLC, as Rights Agent, specifying the terms of the Rights, which includes the  description of Series B Junior Participating Preferred Stock as Exhibit A,  the form of Rights Certificate as Exhibit B and the form of the Summary of  Rights as Exhibit C. (Incorporated by reference from Exhibit 99.3 to the  Company’s Current Report on Form 8-K, filed October 15, 2002 [File No.  0-20850].) |
|                |        |            |   |
|                |   4(c) |            | Form of Rights Certificate.  (Incorporated by reference from Exhibit 99.4 to the Company’s Current Report  on  Form 8-K, filed October 15, 2002 [File No. 0-20850].) |
|                |        |            |   |
|                |   4(d) |            | Form of Summary of  Rights. (Incorporated by reference from Exhibit 99.5 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].) |
|                |        |            |   |
|                | 31(a)*      |            | Certification of Chief  Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
|                |        |            |   |
|                | 31(b)*      |            | Certification of Chief  Accounting Officer required by Rule 13a-14(a) or Rule 15d-14(a). |
|                |        |            |   |
|                | 32(a)**     |            | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. §1350. |
|                |        |            |   |
|                | 32(b)**     |            | Certification of Chief  Accounting Officer Pursuant to 18 U.S.C. §1350. |

 

----

| *  |   |   | Filed herewith     |
|----|--------|--------|--------------------|
| ** |   |   | Furnished herewith |

 

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