**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

| ** ****ý**                                                                                                                                                                   | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                             |
| **For the quarterly period ended  June 30, 2004.**                                                                                                                                |
| ** **                                                                                                                                                                             |
| **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 inits 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 mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

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

 

 

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

 

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

 

As of August 10, 2004, there were 7,203,322 shares of theRegistrant’s common stock outstanding.

 

 

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**Haggar Corp. and Subsidiaries**

 

**Index**

 
| Part I. Financial Information |    |
|-------------------------------|---------|
|                          |    |   |   |
|                          | Item 1. | Financial Statements |   |
|                          |    |   |
|                          |    | Consolidated Balance Sheets  (As of June 30, 2004 and September 30, 2003) |   |
|                          |    |   |   |
|                          |    | Consolidated Statements of Operations and  Comprehensive Income  (Three and nine months ended June 30, 2004 and 2003) |   |
|                          |    |   |   |
|                          |    | Consolidated Statements of Cash Flows  (Nine months ended June 30, 2004 and 2003) |   |
|                          |    |   |   |
|                          |    | 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. | Changes in 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 and Reports on Form 8-K |   |
|                          |    |
| Signatures                    |    |
|                               |         |  |  |  |

 

2

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**Haggar Corp. and Subsidiaries**

 

**ConsolidatedBalance Sheets**

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

 
| ** **                                                                                                                                                                                 | ** ** | **June 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **(unaudited)**         | ** ** | ** **                   | ** ** |
| **Assets**                                                                                                                                                                                 | ** ** | ** **              | ** ** | ** **                   | ** ** |
| Current  assets:                                                                                                                                                                           |       |                    |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                       | 20,687     |                         | $          | 7,674 |   |
| Accounts receivable, net                                                                                                                                                                   |       | 51,790                  |       | 56,528                       |       |
| Inventories, net                                                                                                                                                                           |       | 96,164                  |       | 96,959                       |       |
| Deferred tax asset                                                                                                                                                                         |       | 10,505                  |       | 10,505                       |       |
| Other current assets                                                                                                                                                                       |       | 5,116                   |       | 3,557                        |       |
| Total  current assets                                                                                                                                                                      |       | 184,262                 |       | 175,223                      |       |
|                                                                                                                                                                                       |       |                    |       |                         |       |
| Property, plant and equipment, net                                                                                                                                                         |       | 44,559                  |       | 45,932                       |       |
| Goodwill, net                                                                                                                                                                              |       | 9,472                   |       | 9,472                        |       |
| Other assets                                                                                                                                                                               |       | 7,142                   |       | 7,580                        |       |
| Total assets                                                                                                                                                                               |       | $                       | 245,435    |                         | $          | 238,207 |   |
|                                                                                                                                                                                       |       |                    |       |                         |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                             |       |                    |       |                         |       |
| Current liabilities:                                                                                                                                                                       |       |                    |       |                         |       |
| Accounts payable                                                                                                                                                                           |       | $                       | 20,837     |                         | $          | 26,245 |   |
| Accrued liabilities                                                                                                                                                                        |       | 35,373                  |       | 31,898                       |       |
| Accrued wages and other employee  compensation                                                                                                                                             |       | 6,167                   |       | 7,228                        |       |
| Current portion of long-term debt                                                                                                                                                          |       | 3,673                   |       | 3,671                        |       |
| Total  current liabilities                                                                                                                                                                 |       | 66,050                  |       | 69,042                       |       |
| Other  non-current liabilities                                                                                                                                                             |       | 10,782                  |       | 9,554                        |       |
| Deferred  tax liability                                                                                                                                                                    |       | 523                     |       | 523                          |       |
| Long-term debt                                                                                                                                                                             |       | 2,000                   |       | 5,671                        |       |
| Total liabilities                                                                                                                                                                          |       | 79,355                  |       | 84,790                       |       |
|                                                                                                                                                                                       |       |                    |       |                         |       |
| Commitments and contingencies                                                                                                                                                              |       |                    |       |                         |       |
|                                                                                                                                                                                       | ** ** | ** **              | ** ** | ** **                   | ** ** |
| Stockholders’  equity:                                                                                                                                                                | ** ** | ** **              | ** ** | ** **                   | ** ** |
| Preferred  stock – par value $0.10 per share; 250,000 shares authorized and no shares  issued and outstanding at June 30, 2004 or September 30, 2003                        |       | —                  |       | —                       |       |
| Common stock  – par value $0.10 per share; 25,000,000 shares authorized;  9,445,192 and 8,718,609 shares issued at  June 30, 2004 and September 30, 2003, respectively |       | 944                     |       | 872                          |       |
| Additional paid-in capital                                                                                                                                                                 |       | 53,345                  |       | 43,653                       |       |
| Deferred compensation                                                                                                                                                                      |       | (1,978                  | )          | —                       |       |
| Foreign currency translation adjustment                                                                                                                                                    |       | 230                     |       | (163                         | )          |
| Retained earnings                                                                                                                                                                          |       | 138,500                 |       | 134,016                      |       |
|                                                                                                                                                                                       |       | 191,041                 |       | 178,378                      |       |
| Less – Treasury stock, 2,242,183 shares at  cost at June 30, 2004 and September 30, 2003                                                                                    |       | (24,961                 | )          | (24,961                      | )          |
| Total stockholders’ equity                                                                                                                                                            |       | 166,080                 |       | 153,417                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                            |       | $                       | 245,435    |                         | $          | 238,207 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

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**Haggar Corp. and Subsidiaries**

 

**Consolidated Statements of Operations andComprehensive Income**

*(unaudited, inthousands, except per share amounts)*

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net sales                                              |       | $                                     | 116,347    |                                 | $          | 107,435 |   | $ | 356,146 |   | $ | 356,828 |   |
| Cost of goods sold                                     |       | 84,109                                |       | 76,166                               |       | 255,690 |   | 262,106 |   |
| Gross profit                                           |       | 32,238                                |       | 31,269                               |       | 100,456 |   | 94,722 |   |
| Selling, general and administrative  expenses          |       | (29,368                               | )          | (26,556                              | )          | (91,429 | ) | (90,079 | ) |
| Royalty income                                         |       | 255                                   |       | 378                                  |       | 854 |   | 1,052 |   |
| Other income (expense), net                            |       | (30                                   | )          | 102                                  |       | 369 |   | 603 |   |
| Interest expense                                       |       | (393                                  | )          | (570                                 | )          | (1,309 | ) | (1,973 | ) |
| Income before provision for income taxes               |       | 2,702                                 |       | 4,623                                |       | 8,941 |   | 4,325 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Provision for income taxes                             |       | 1,032                                 |       | 1,919                                |       | 3,415 |   | 1,795 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                             |       | $                                     | 1,670      |                                 | $          | 2,704 |   | $ | 5,526 |   | $ | 2,530 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Other comprehensive income:                            |       |                                  |       |                                 |       |   |   |   |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Foreign currency translation adjustment                |       | $                                     | 135        |                                 | $          | 195 |   | $ | 393 |   | $ | 180 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Comprehensive income                                   |       | $                                     | 1,805      |                                 | $          | 2,899 |   | $ | 5,919 |   | $ | 2,710 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| NET INCOME PER COMMON SHARE:                           |       |                                  |       |                                 |       |   |   |   |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| •  Basic                                          |       | $                                     | 0.24       |                                 | $          | 0.42 |   | $ | 0.81 |   | $ | 0.39 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| •  Diluted                                        |       | $                                     | 0.23       |                                 | $          | 0.42 |   | $ | 0.79 |   | $ | 0.39 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average number of common shares  outstanding: |       |                                  |       |                                 |       |   |   |   |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| •  Basic                                          |       | 7,049                                 |       | 6,418                                |       | 6,810 |   | 6,418 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| •  Diluted                                        |       | 7,164                                 |       | 6,418                                |       | 6,962 |   | 6,427 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

4

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**Haggar Corp. and Subsidiaries**

 

**Consolidated Statements of Cash Flows**

*(unaudited, inthousands)*

 
| ** **                                                                         | ** ** | **Nine Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
|                                                                               |       |                                 |       |   |   |
| **Cash  Flows from Operating Activities**                                          |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 5,526      |   | $ | 2,530 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 4,548                                |       | 6,213 |   |
| Deferred tax expense                                                               |       | —                               |       | 392 |   |
| Gain on the disposal of property, plant and  equipment                             |       | (232                                 | )          | (248 | ) |
| Stock-based compensation expense                                                   |       | 389                                  |       | — |   |
| Increase in cash surrender value of  officers’ life insurance policies        |       | (370                                 | )          | (179 | ) |
| Changes in assets and liabilities:                                                 |       |                                 |       |   |   |
| Accounts receivable, net                                                           |       | 5,079                                |       | 25,987 |   |
| Inventories, net                                                                   |       | 956                                  |       | 2,125 |   |
| Other current assets                                                               |       | (1,662                               | )          | (567 | ) |
| Other assets                                                                       |       | (21                                  | )          | — |   |
| Accounts payable                                                                   |       | (1,233                               | )          | (484 | ) |
| Accrued liabilities                                                                |       | 3,475                                |       | (4,781 | ) |
| Accrued wages and other employee  compensation                                     |       | (1,139                               | )          | (1,056 | ) |
| Other non-current liabilities                                                      |       | 1,228                                |       | 1,163 |   |
| Net cash provided by operating activities                                          |       | 16,544                               |       | 31,095 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash  Flows from Investing Activities**                                          |       |                                 |       |   |   |
| Purchases of property, plant and equipment,  net                                   |       | (2,846                               | )          | (1,307 | ) |
| Proceeds from sale of property, plant and  equipment                               |       | 232                                  |       | 2,493 |   |
| Decrease in restricted cash                                                        |       | 1,287                                |       | — |   |
| Proceeds from officers’ life insurance  policies                              |       | 471                                  |       | — |   |
| Premiums for officers’ life insurance  policies                               |       | (693                                 | )          | (680 | ) |
| Net cash provided by (used in) investing  activities                               |       | (1,549                               | )          | 506 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash  Flows from Financing Activities**                                          |       |                                 |       |   |   |
| Proceeds from issuance of long-term debt                                           |       | 66,000                               |       | 213,000 |   |
| Payments on long-term debt                                                         |       | (69,669                              | )          | (228,743 | ) |
| Proceeds from exercise of employee stock  options                                  |       | 7,474                                |       | — |   |
| Debt issuance costs                                                                |       | (420                                 | )          | — |   |
| Decrease in book overdrafts                                                        |       | (4,472                               | )          | (6,000 | ) |
| Payments of cash dividends                                                         |       | (1,043                               | )          | (963 | ) |
| Net cash used in financing activities                                              |       | (2,130                               | )          | (22,706 | ) |
|                                                                               |       |                                 |       |   |   |
| Effect of exchange rates on cash and cash  equivalents                             |       | 148                                  |       | 28 |   |
|                                                                               |       |                                 |       |   |   |
| Increase in cash and cash equivalents                                              |       | 13,013                               |       | 8,923 |   |
| Cash and cash equivalents, beginning of  period                                    |       | 7,674                                |       | 4,124 |   |
| Cash and cash equivalents, end of period                                           |       | $                                    | 20,687     |   | $ | 13,047 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

5

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**Haggar Corp. and Subsidiaries**

 

**Notes to Consolidated Financial Statements**

*(unaudited)*

 

**1. Basis of Presentation**

 

*Financial Statement Preparation*

 

The consolidated balance sheet as of June 30, 2004, theconsolidated statements of operations and comprehensive income for the threemonths and nine months ended June 30, 2004 and 2003, and the consolidatedstatements of cash flows for the nine months ended June 30, 2004 and 2003,have been prepared by Haggar Corp. (together with its subsidiaries, the“Company”) without audit.  Theconsolidated balance sheet as of September 30, 2003 has been derived fromthe 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 (which include only normal recurring adjustments) to present fairlythe consolidated financial position, results of operations, and cash flows ofthe Company at June 30, 2004, and for all other periods presented, havebeen made.  Certain information anddisclosures normally included in financial statements prepared in accordancewith generally accepted accounting principles have been omitted in accordancewith the Securities and Exchange Commission’s rules for interim reporting.  Accordingly, these financial statementsshould be read in conjunction with the financial statements and accompanyingnotes thereto in the Company’s Annual Report on Form 10-K for the fiscal yearended September 30, 2003.

 

*Accounting for Stock Based Compensation*

 

The Company accounts for the long-term incentive plans under AccountingPrinciples Board Opinion No. 25.  Asrequired under Statement of Financial Accounting Standards No. 123 (“SFAS No.123”), “Accounting for Stock-Based Compensation,” the pro forma effects ofstock-based compensation on net income and net income per common share are asfollows *(in thousands, except per shareamounts)*:

 

 
| ** **                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income:                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                               |       | $                                     | 1,670      |                                 | $          | 2,704 |   | 5,526 |   | $ | 2,530 |   |
| Add back:   Stock-based compensation included in net income as reported, net of  related tax effects |       | 106                                   |       | —                               |       | 241 |   | — |   |
| Less:   Pro-forma stock-based compensation expense, net of related tax effects                       |       | (114                                  | )          | (25                                  | )          | (266 | ) | (75 | ) |
| Pro-forma net income                                                                                      |       | $                                     | 1,662      |                                 | $          | 2,679 |   | $ | 5,501 |   | $ | 2,455 |   |
| Net income per common share:                                                                              |       |                                  |       |                                 |       |   |   |   |   |
|                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| •Basic                                                                                               |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                               |       | $                                     | 0.24       |                                 | $          | 0.42 |   | $ | 0.81 |   | $ | 0.39 |   |
| Pro forma                                                                                                 |       | $                                     | 0.24       |                                 | $          | 0.42 |   | $ | 0.81 |   | $ | 0.38 |   |
|                                                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| •Diluted                                                                                             |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                               |       | $                                     | 0.23       |                                 | $          | 0.42 |   | $ | 0.79 |   | $ | 0.39 |   |
| Pro forma                                                                                                 |       | $                                     | 0.23       |                                 | $          | 0.42 |   | $ | 0.79 |   | $ | 0.38 |   |

 

6

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On March 11, 2004, the Company granted an aggregate of 15,000options to certain directors.  Theoptions vest over three years.  The fairvalue of the option grants of $7.50 was estimated on the date of grant usingthe Black-Scholes option pricing model with the following weighted averageassumptions:  risk-free interest rate of2.72%; expected lives of 5.53 years; expected volatility of 45.27% and anexpected dividend rate of $0.20.

 

In the second quarter of fiscal 2004, 125,000shares of restricted stock with fair values ranging from $19.69 – $19.85 pershare were granted to certain officers and directors of the Company under theCompany’s long-term incentive plan adopted in fiscal 2003.  The shares have dividend rights and votingrights, but are subject to restrictions on transfer and risk of forfeitureuntil vested.  The shares vest in threeequal annual installments.  The Companyrecorded deferred compensation of $2.5 million related to the grants instockholders’ equity, which will be amortized as expense on a straight-linebasis over the vesting periods of the awards. In May 2004, one of the Company’s officers resigned and forfeited 10,000nonvested shares.  The Company reversed$0.2 million in deferred compensation related to these shares, as well asminimal expense the Company had recognized through the date of forfeiture.

 

*Reclassifications*

 

Certain items in the prior period presentation have been reclassifiedto current period presentation.

 

**2.  Inventories, net**

 

Inventories, net are stated at the lower of cost (first-in, first-out)or market and consisted of the following at June 30, 2004, andSeptember 30, 2003 *(in thousands)*:

 

| ** **               | ** ** | **June 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|--------------------------|------------|-------------------------|------------|------------------------------|------------|
| Piece goods              |       | $                       | 7,434      |                         | $          | 7,664 |   |
| Trimmings & supplies |       | 2,334                   |       | 3,660                        |       |
| Work-in-process          |       | 5,035                   |       | 4,838                        |       |
| Finished garments        |       | 82,268                  |       | 82,157                       |       |
|                     |       | 97,071                  |       | 98,319                       |       |
| Inventory reserves       |       | (907                    | )          | (1,360                       | )          |
| Total inventories, net   |       | $                       | 96,164     |                         | $          | 96,959 |   |

 

Work-in-process and finished garments inventories consisted ofmaterials, labor and manufacturing overhead.

 

**3. Long-Term Debt**

 

Long-term debt consisted of the following at June 30, 2004, andSeptember 30, 2003 *(in thousands)*:

 
| ** **                             | ** ** | **June 30,  2004** | ** ** | **September 30,  2003** | ** ** |
|----------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Borrowings under revolving credit line |       | $                       | —     |                         | $          | — |   |
| Industrial Development Revenue Bonds   |       | 2,100                   |       | 2,200                        |       |
| Senior notes                           |       | 3,573                   |       | 7,142                        |       |
| Total debt                             |       | 5,673                   |       | 9,342                        |       |
| Less – current portion            |       | (3,673                  | )          | (3,671                       | )          |
| Long-term debt                         |       | $                       | 2,000      |                         | $          | 5,671 |   |

 

In May 2004, the Company amended and restated its unsecured revolvingcredit agreement (the “Agreement”) with certain banks primarily to extend thematurity date to June 30, 2007 and increase the maximum borrowings to$111.0 million.  The available borrowingcapacity was restricted to $66.0 million at June 30, 2004, under theAgreement’s funded debt to operating cash flow covenant.  The Company incurred approximately $0.2million in commitment

 

7

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fees related to the available borrowingcapacity during the nine months ended June 30, 2004. The interest ratesranged from 2.34% to 4.00% during the nine months ended June 30, 2004, andwere based upon both margins over a bank base rate and margins over LIBOR,depending on the borrowing option selected by the Company.  The Agreement 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 June 30, 2004, the Company was in full compliance with its financialand other covenants under the Agreement.

 

Long-term debt also includes $3.6 million in senior notes atJune 30, 2004.  Significant terms ofthe senior notes include interest payable semi-annually at 8.49% per annum withthe final principal payment of $3.6 million due on October 30, 2004.  The terms and conditions of the note purchaseagreement governing the senior notes include restrictions on the sale ofassets, limitations on additional indebtedness and the maintenance of certainnet worth requirements.

 

Long-term debt also includes $2.1 million inIndustrial Development Revenue (“IDR”) bonds at June 30, 2004.  Significant terms of the IDR bonds includeinterest at a rate equal to that of high quality, short-term, tax exemptobligations, as defined in the agreement. The interest rate at June 30, 2004, was 1.1%.  The IDR bonds mature in fiscal 2026, but theCompany has the option to prepay the balance without penalty in fiscal2006.  The Company plans to exercise theprepayment option, and to make principal payments of $0.1 and $2.0 million infiscal 2005 and 2006, respectively.  TheIDR bonds are collateralized by certain buildings and equipment of $0.3 millionas of June 30, 2004.

 

Certain of the Company’s long-term debt facilities contain restrictionson the ability of the Company’s subsidiaries to transfer funds to the Company.

 

**4.  Segment Reporting**

 

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 and the UnitedKingdom.  The Company also operates aretail segment, which markets Haggar® branded products through 69 Companyoperated stores located in outlet malls throughout the United States, and alicensing segment, which generates royalty income by licensing the Company’strademarks for use by other manufacturers of specified products in specifiedgeographic areas.  The retail andlicensing segments are not material for separate disclosure, and have beencombined in the results below.  TheCompany evaluates performance and 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 is comprised of segment netincome before interest expense and provision for income taxes.

 

8

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The table below reflects the Company’ssegment results for the three and nine months ended June 30, 2004 and 2003*(in thousands):*

 

| **Three  Months Ended  June 30,** | ** ** | **Wholesale** | ** ** | **Retail and  Licensing** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|---------------|------------|---------------------------|------------|------------------|------------|
| **2004**                               |       |          |       |                      |       |             |       |
| Net sales                              |       | $             | 103,173    |                      | $          | 13,174           |       | $ | 116,347 |   |
| Segment profit                         |       | $             | 2,337      |                      | $          | 758              |       | $ | 3,095 |   |
| **2003**                               |       |          |       |                      |       |             |       |
| Net sales                              |       | $             | 95,743     |                      | $          | 11,692           |       | $ | 107,435 |   |
| Segment profit                         |       | $             | 4,958      |                      | $          | 235              |       | $ | 5,193 |   |

 

| **Nine  Months Ended  June 30,** | ** ** | **Wholesale** | ** ** | **Retail and  Licensing** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|---------------|------------|---------------------------|------------|------------------|------------|
| **2004**                              |       |          |       |                      |       |             |       |
| Net sales                             |       | $             | 317,629    |                      | $          | 38,517           |       | $ | 356,146 |   |
| Segment profit                        |       | $             | 8,389      |                      | $          | 1,861            |       | $ | 10,250 |   |
| **2003**                              |       |          |       |                      |       |             |       |
| Net sales                             |       | $             | 322,829    |                      | $          | 33,999           |       | $ | 356,828 |   |
| Segment profit                        |       | $             | 6,262      |                      | $          | 36               |       | $ | 6,298 |   |

 

A reconciliation of total segment profit to consolidated income beforeprovision for income taxes is as follows *(inthousands)*:

 

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Segment profit                                         |       | $                                     | 3,095      |                                 | $          | 5,193 |   | $ | 10,250 |   | $ | 6,298 |   |
| Interest expense                                       |       | (393                                  | )          | (570                                 | )          | (1,309 | ) | (1,973 | ) |
| Consolidated income before provision for  income taxes |       | $                                     | 2,702      |                                 | $          | 4,623 |   | $ | 8,941 |   | $ | 4,325 |   |

 

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

 

**5. Commitments and Contingencies**

 

The Company maintains an operating lease for its corporate aircraft,which contains a residual guarantee for the market value of the plane at the endof the lease term in December 2004. Under the lease, the Company has 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 sale proceeds are less than $4.0 million, the Company is requiredto reimburse the lessor for the deficiency. If the sale proceeds exceed $4.0 million, the Company is entitled to allof such excess amounts.

 

9

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Based on an estimated $3.1 million market value for the aircraft whenthe lease ends in 2004, the Company began accruing a $0.9 million expecteddeficiency in fiscal 2003.  The Companyobtained an updated estimate as of June 30, 2004, which reflected arevised market value for the aircraft of $3.3 million.   As of June 30, 2004, the Companyincluded $0.7 million in accrued liabilities, which had been accrued based onthe previous estimate of the market value of the aircraft.  As the amount accrued as of June 30,2004 represents the anticipated deficiency based on the most recent estimate ofmarket value, the Company will not record additional accruals related to theresidual value guarantee until the lease termination date.

 

The Company has been named as a defendant in several legal actionsarising from its operations in the normal  course of business, including actions brought by certain terminatedemployees.  Although exact settlementamounts, if any, related to these actions cannot accurately be predicted, theclaims and damages alleged, the progress of the litigation to date, and pastexperience with similar litigation leads the Company to believe that anyliability resulting from these actions and those described below will notindividually, or collectively, have a material adverse effect on the Company.

 

During March 2004, the Company reached a settlement agreementrelated to an action for trademark infringement.  Under the terms of the settlement, theCompany paid $0.6 million to the plaintiff, which the Company had accrued infiscal 2003, net of anticipated insurance proceeds, based on the Company’sestimated range of probable loss.   InApril 2004, the Company received reimbursement for a portion of thesettlement from an insurer of $0.3 million. The Company does not anticipate additional reimbursement for theremainder of the settlement.

 

The Company is a defendant in awrongful termination lawsuit in which a jury rendered a verdict in favor of theplaintiff against the Company in the amount of $843,000, subject to potentialdoubling in the event judgment is entered on the jury’s finding of willfuldiscrimination, plus pre- and post-judgment interest and attorneys’ fees.  The trial court reversed the jury’s verdictand rendered a judgment in favor of the Company denying all recovery on thebasis that the plaintiff had failed to prove any liability of the Company.  The plaintiff appealed to the United StatesCourt of Appeals for the Fifth Circuit, which reversed the judgment of thetrial court and remanded the matter back to the trial court for furtherproceedings.  The United States SupremeCourt subsequently denied the Company’s request for review of the case.  As a result of this ruling, during the secondquarter of fiscal 2004 the Company recorded $0.5 million based on the estimatedrange of probable loss in the case, which is included in accrued liabilities asof June 30, 2004.  

 

Upon remand, the Companyrequested that the trial court set aside the jury’s finding of willfuldiscrimination and reduce the jury’s calculation of damages.  On August 4, 2004, the trial court denied theCompany’s motion, but deferred entering judgment on the jury verdict pending ahearing on interest, attorneys’ fees and front pay.  Based on management’s evaluation of allinformation received, including the August 4, 2004 ruling, the Company believesthe $0.5 million accrued liability continues to be adequate for the estimatedloss in this case.  However, upon theentry of a final judgment by the trial court, the Company intends tore-evaluate its estimate of probable loss in the case in light of the amount ofthe final judgment, its determination whether to appeal the judgment and itsassessment of the potential outcomes of any such appeal.  Any increase in the estimate of probable lossfrom this lawsuit could have a material adverse impact on the Company’s resultsof operations for the fourth quarter and full year of fiscal 2004.

 

One attorney has filed five separate suits against certain subsidiariesof the Company alleging injuries to approximately 2,200 former employees fromairborne fibers and chemicals in certain of the Company’s now closed facilitieslocated in south Texas.  All proceedingsin one suit naming over 2,100 plaintiffs have been stayed due to the unrelatedbankruptcy of one of the other defendants. Another suit, which named 71 plaintiffs, has been dismissed, butplaintiffs’ counsel has sought reconsideration of the dismissal; the Company isawaiting a decision by the trial court. After taking discovery in one of the remaining cases, the Companybelieves that all of these cases and claims are frivolous and that theplaintiffs have no factual or legal basis for their allegations.  In addition, the Company believes that it hasmeritorious defenses to all of the asserted claims.  The Company intends to vigorously defend allof these suits.

 

Jury verdicts in two cases totaling approximately $1.7 million in theaggregate were returned in fiscal 2000 against subsidiaries of the Companyrelated to claims by former employees of now closed manufacturing facilitiesfor wrongful discharge and common law tort. Both cases are currently on appeal, as management and legal counsel believethe verdicts in the lawsuits are both legally and factually incorrect.

 

**6. Shipping and Handling Fees**

 

The Company records shipping and handling fees as selling, general andadministrative expense.  For the threeand nine months ended June 30, 2004, such costs were $2.9 million and $8.9million, respectively.  For the three andnine months ended June 30, 2003, such costs were $3.1 million and $9.5million, respectively.

 

10

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**7.   Basic and Diluted CommonShares**

 

The following table sets forth the computation of basic and dilutedweighted average common shares *(inthousands)*:

 
| ** **                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Nine Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Weighted average common shares outstanding                     |       | 7,049                                 |       | 6,418                                |       | 6,810 |   | 6,418 |   |
| Shares equivalents, due to stock options  and restricted stock |       | 115                                   |       | —                               |       | 152 |   | 9 |   |
| Weighted average diluted shares outstanding                    |       | 7,164                                 |       | 6,418                                |       | 6,962 |   | 6,427 |   |

 

**8. Dividends**

 

During the third quarter of fiscal 2004, the Company declared a cashdividend of $0.05 per share payable on August 23, 2004 to the stockholdersof record as of August 9, 2004.  Thesecond quarter of fiscal 2004 dividend of approximately $0.4 million was paidin May 2004.

 

**9.  Related Party Transactions**

 

A director of the Company is a partner of a law firm that renderedvarious legal services to the Company during the three and nine months endedJune 30, 2004 and 2003.  The Companypaid the law firm approximately $0.1 million and $0.8 million for legalservices during the three and nine months ended June 30, 2004,respectively.  The Company paid the lawfirm approximately $0.1 million and $0.4 million for legal services during thethree and nine months ended June 30, 2003, respectively.  There were $0.1 million in unpaid fees due tothe law firm at both June 30, 2004 and September 30, 2003, which wereincluded in accrued liabilities.

 

**10. 2001 Reorganization**

 

Liabilities for the 2001 reorganization costs are summarized as follows*(in millions)*:

 
| ** **                              | ** ** | **Balance  March 31, 2001** | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **Balance  June 30, 2004** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------|------------|-----------------|------------|---------------------------------|------------|
| Employee termination and  related costs |       | $                                | 8.1        |         | $          | (6.0            | )          | $                               | (1.2       | ) | $ | 0.9 | ** ** |
|                                    |       |                             |       |         |       |            |       |                            | ** ** |
| Legal costs                             |       | 8.6                              |       | (3.9         | )          | (3.2            | )          | 1.5                             |       |
|                                         |            |                                  |            |              |            |                 |            |                                 |            |  |  |  |  |

 

No payments or adjustments were made during the nine months endedJune 30, 2004.

 

**11. Recently Issued and Adopted Financial Accounting Standards**

 

On December 23, 2003, the Financial Accounting Standards Boardissued SFAS No. 132 (Revised 2003) (“SFAS No. 132”), “Employers’ Disclosures About Pensions and Other Postretirement Benefits.”  SFAS No. 132 increases the existingdisclosure requirements by requiring companies to disclose more details aboutpension plan assets, benefit obligations, cash flows, benefit costs and relatedinformation. Companies will be required to segregate plan assets by category,such as debt, equity and real estate, and to provide certain expected rates ofreturn and other informational disclosures. SFAS No. 132 also requirescompanies to disclose various elements of pension and postretirement benefitcosts in interim-period financial statements for quarters beginning afterDecember 15, 2003. The Company has determined that no additionaldisclosures are required due to the immateriality of the Company’s pension planassets and benefit obligations.

 

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

 

The following discussion and analysis of the consolidated results ofoperations and financial condition of the Company should be read in conjunctionwith the accompanying consolidated financial statements and the notes theretoand the Company’s Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2003.

 

**Forward Looking Statements**

 

This Quarterly Report on Form 10-Q includes forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933 (the“Securities Act”) and Section 21E of the Securities Exchange Act of 1934(the “Exchange Act”).  All statementsother than statements of historical facts contained in this report, includingstatements regarding the Company’s future financial position, business strategyand plans and objectives of management for future operations, areforward-looking statements.  The words“believe,” “may,” “will,” “estimate,” “continue,” “anticipate,”“intend,” “expect” and similar expressions, as they relate to the Company, areintended to identify forward-looking statements.  The Company has based these forward-lookingstatements largely on its current expectations and projections about futureevents and financial trends that the Company believes may affect its financialcondition, results of operations, business strategy and financial needs.  These forward-looking statements are subjectto a number of known and unknown risks, uncertainties and assumptions thatcould affect the results of the Company or the apparel industry generally andcould cause the Company’s expected results to differ materially from thoseexpressed 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 12, 2003, and include, among other things:

 

•                  changes in general business conditions,

 

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

 

•                  seasonality of the Company’s business,

 

•                  changes in retailer and consumer acceptance of new productsand the success of advertising, marketing, and promotional campaigns,

 

•                  impact of competition in the apparel industry,

 

•                  availability and cost of raw materials,

 

•                  changes in laws and other regulatory actions,

 

•                  changes in labor relations,

 

•                  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,

 

•                  unexpected judicial decisions,

 

•                  changes in interest rates and capital market conditions,

 

•                  acquisitions or dissolution of business enterprises,including the ability to integrate acquired businesses effectively,

 

•                  natural disasters, and

 

•                  unusual or infrequent items that cannot be foreseen or arenot susceptible to estimation.

 

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In light of these risks, uncertainties andassumptions, the forward-looking events and circumstances discussed in thisQuarterly Report on Form 10-Q may not occur and actual results could differmaterially from those anticipated or implied in the forward-lookingstatements.  Accordingly, readers arecautioned not to place 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 inits expectations 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 dressmen’s and women’s apparel products, including pants, shorts, suits, sportcoats,sweaters, shirts, dresses, skirts and vests, in the United States andabroad.  The Company’s operations areorganized into three business units, wholesale, retail and licensing, each ofwhich offers similar 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 69 Companyoperated retail stores located in outlet malls throughout the United States.  The Company’s licensing segment generatesroyalty income by licensing the Company’s trademarks for use by othermanufacturers of specified products in specified geographic regions.

 

**Critical Accounting Policies**

 

There have been no material changes to the Company’s criticalaccounting policies during the nine months ended June 30, 2004.

 

Management’sDiscussion and Analysis discusses the results of operations and financialcondition as reflected in the Company’s consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States of America. The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, disclosure of contingent assetsand liabilities at the date of the financial statements and reported amounts ofrevenues and expenses during the reporting period. On an ongoing basis,management evaluates its estimates and judgments, including those related toaccounts receivable; inventory valuation; amortization and recoverability oflong-lived assets, including goodwill; litigation accruals; workers’compensation liabilities; revenue recognition; and reorganization charges.Management bases its estimates and judgments on the Company’s substantialhistorical experience and other relevant factors, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.

 

While theCompany believes that the historical experience and other factors consideredprovide a meaningful basis for the accounting policies applied in thepreparation of the consolidated financial statements, the Company cannotguarantee that its estimates and assumptions will be accurate.  If such estimates and assumptions prove to beinaccurate, the Company may be required to make adjustments to these estimatesin future periods.

 

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**Comparison of Three Months EndedJune 30, 2004 to Three Months Ended June 30, 2003**

 

*Net Sales*

 

Net sales increased $8.9 million, or 8.3%, to $116.3 million for thethird quarter of fiscal 2004, compared to net sales of $107.4 million for thethird quarter of fiscal 2003.  Theincrease in net sales was primarily attributable to increased sales of KennethCole® and Claiborne® licensed products, improved sales at the Company’s retailstores, and an increase in lower-margin closeout sales.** **Theoverall sales increase related to a decrease in unit sales of approximately2.2% and an increase in average sales price of approximately 10.5%,attributable mainly to Kenneth Cole®, men’s private label andretail sales.

 

*Gross Profit*

 

Gross profit as a percentage of net sales decreased to 27.7% in thethird quarter of fiscal 2004, compared to 29.1% in the third quarter of fiscal2003.  The decrease in gross profitpercentage was primarily due to the timing of lower-margin closeout sales ofmen’s wear products, offset in part by improved gross profit in the women’swear division and the Company’s retail stores.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative expenses as a percentage of netsales increased to 25.2% in the third quarter of fiscal 2004, compared to 24.7%in the third quarter of fiscal 2003.  The$2.8 million, or 10.6%, increase in selling, general and administrativeexpenses was primarily due to a $0.8 million increase in media advertisingexpense, as a significant portion of the fiscal 2003 media advertising expenseswere incurred to launch the comfort equipped waist band pants during the firstquarter.  Fiscal 2004 media advertisingprograms have been scheduled more evenly throughout the year.  The Company also incurred $1.4 million inadditional volume-related expenses, consistent with a sales increase forKenneth Cole® and other programs.

 

*Interest Expense*

 

Interest expense decreased $0.2 million, or 31.1%, to $0.4 million forthe third quarter of fiscal 2004, compared to $0.6 million for the thirdquarter of fiscal 2003, primarily due to reduced borrowings under the Company’srevolving credit facility during the third quarter of fiscal 2004.

 

*Income Taxes*

 

The Company’s income tax provision as a percentage of income beforeincome tax was 38.2% for the third quarter of fiscal 2004.  Comparatively, the Company’s income taxprovision as a percentage of income before income tax was 41.5% for the thirdquarter of fiscal 2003.  The decrease inthe effective tax rate was primarily due to an increase in estimated annualearnings before tax for fiscal 2004 as compared to fiscal 2003, as well as areduction of estimated unfavorable permanent differences for fiscal 2004 ascompared to the amount used in the effective tax rate calculation at June 30,2003.

 

14

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**Comparison of Nine Months Ended June 30,2004 to Nine Months Ended June 30, 2003**

 

*Net Sales*

 

Net sales decreased $0.7 million, or 0.2%, to $356.1 million for thenine months ended June 30, 2004, compared to net sales of $356.8 millionfor the nine months ended June 30, 2003. The decrease primarily related to decreases in sales of women’s wear andHaggar® branded products, offset by an increase in retail store sales and salesof Kenneth Cole® products.  The overallsales decrease related to a decrease in unit sales of approximately 3.8% and anincrease in average sales price of approximately 3.6%.

 

*Gross Profit*

 

Gross profit as a percentage of net sales increased to 28.2% in thenine months ended June 30, 2004, compared to 26.5% in the nine monthsended June 30, 2003.  The increasein gross profit percentage was primarily related to improved margins on women’swear sales due to the addition of higher volume replenishment pant programs andreduced fixed overhead costs for the women’s division, lower negotiated costsfor men’s private label products and improved gross profit contribution fromthe Company’s retail stores.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative expenses as a percentage of netsales increased to 25.7% in the nine months ended June 30, 2004, comparedto 25.2% in the nine months ended June 30, 2003.  The $1.4 million, or 1.5%, increase inselling, general and administrative expenses primarily related to $0.8 millionin one-time expenses incurred due to the global headquarters relocation, a $0.9million increase in the cost of employee benefits and $1.2 million inadditional volume-related expenses consistent with the sales increase forKenneth Cole® and other programs.** **The increases were offset by a netdecrease in media advertising expense of $0.8 million, as a significant portionof the fiscal 2003 media advertising expenses were incurred to launch thecomfort equipped waist band pants during the first quarter.  Fiscal 2004 media advertising programs havebeen scheduled more evenly throughout the year. Legal expenses also decreased $0.9 million, primarily due to legalexpenses of $1.7 million incurred in the prior period related to a proxycontest and a settlement with a former landlord which did not recur.

 

*Other Income (Expense)*

 

Other income decreased $0.2 million, or 38.8%, to $0.4 million duringthe nine months ended June 30, 2004, compared to $0.6 million for the ninemonths ended June 30, 2003.  Theprior period includes a gain on the sale of the Edinburg, Texas manufacturingfacility of $0.3 million, while the current period includes a gain on the saleof another property of $0.2 million.

 

*Interest Expense*

 

Interest expense decreased $0.7 million, or 33.7%, to $1.3 million forthe nine months ended June 30, 2004, compared to $2.0 million for the ninemonths ended June 30, 2003, primarily due to significantly reduced debtlevels throughout the nine months ended June 30, 2004 combined with lowerinterest rates on variable rate debt.

 

*Income Taxes*

 

The Company’s income tax provision as a percentage of income beforeincome tax was 38.2% for the nine months ended June 30, 2004.  Comparatively, the Company’s income taxprovision as a percentage of income before income tax was 41.5% for the ninemonths ended June 30, 2003.  Thedecrease in the effective tax rate was primarily due to an increase inestimated annual earnings before tax for fiscal 2004 as compared to fiscal2003, as well as a reduction of estimated unfavorable permanent differences forfiscal 2004 as compared to the amount used in the effective tax ratecalculation at June 30, 2003.

 

15

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**2001 Reorganization**

 

Liabilities for the 2001 reorganization costs are summarized as follows*(in millions)*:

 
| ** **                             | ** ** | **Balance  March 31, 2001** | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **Balance  June 30, 2004** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------|------------|-----------------|------------|---------------------------------|------------|
| Employee termination and related costs |       | $                                | 8.1        |         | $          | (6.0            | )          | $                               | (1.2       | ) | $ | 0.9 |   |
|                                   |       |                             |       |         |       |            |       |                            |       |
| Legal costs                            |       | 8.6                              |       | (3.9         | )          | (3.2            | )          | 1.5                             |       |
|                                        |            |                                  |            |              |            |                 |            |                                 |            |  |  |  |  |

 

No payments or adjustments were made during the nine months endedJune 30, 2004.

 

**Segment Profitability**

 

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 and the UnitedKingdom.  The Company also operates aretail segment, which markets Haggar® branded products through 69 Companyoperated stores located in outlet malls throughout the United States, and alicensing segment, which generates royalty income by licensing the Company’s trademarksfor use by other manufacturers of specified products in specified geographicareas.  The retail and licensing segmentsare not material for separate disclosure, and have been combined in the resultsbelow.  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 is comprised of segment netincome before interest expense and provision for income taxes.

 

The table below reflects the Company’ssegment results for the three and nine months ended June 30, 2004 and 2003*(in thousands)*:

 
| **Three  Months Ended  June 30,** | ** ** | **Wholesale** | ** ** | **Retail and  Licensing** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|---------------|------------|---------------------------|------------|------------------|------------|
| **2004**                               |       |          |       |                      |       |             |       |
| Net sales                              |       | $             | 103,173    |                      | $          | 13,174           |       | $ | 116,347 |   |
| Segment profit                         |       | $             | 2,337      |                      | $          | 758              |       | $ | 3,095 |   |
| **2003**                               |       |          |       |                      |       |             |       |
| Net sales                              |       | $             | 95,743     |                      | $          | 11,692           |       | $ | 107,435 |   |
| Segment profit                         |       | $             | 4,958      |                      | $          | 235              |       | $ | 5,193 |   |

 
| **Nine  Months Ended  June 30,** | ** ** | **Wholesale** | ** ** | **Retail and  Licensing** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|---------------|------------|---------------------------|------------|------------------|------------|
| **2004**                              |       |          |       |                      |       |             |       |
| Net sales                             |       | $             | 317,629    |                      | $          | 38,517           |       | $ | 356,146 |   |
| Segment profit                        |       | $             | 8,389      |                      | $          | 1,861            |       | $ | 10,250 |   |
| **2003**                              |       |          |       |                      |       |             |       |
| Net sales                             |       | $             | 322,829    |                      | $          | 33,999           |       | $ | 356,828 |   |
| Segment profit                        |       | $             | 6,262      |                      | $          | 36               |       | $ | 6,298 |   |

 

*Wholesale Segment*

 

Wholesale segment net sales increased $7.5 million, or 7.8%, to $103.2million for the third quarter of fiscal 2004, compared to $95.7 million for thethird quarter of fiscal 2003.  Theincrease in wholesale segment net sales during

 

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the third quarter of fiscal 2004 wasprimarily attributable to increased sales of Kenneth Cole® and Claiborne®programs, as well as an increase in lower-margin closeout sales.

 

Wholesale segment net sales decreased $5.2 million, or 1.6%, to $317.6million for the nine months ended June 30, 2004, compared to $322.8million for the nine months ended June 30, 2003.  The decrease primarily related to decrease insales of women’s wear and Haggar® branded products, offset by an increase insales of Kenneth Cole® products.

 

Wholesale segment profit decreased $2.7 million,or 52.9% to $2.3 million for the third quarter of fiscal 2004, compared to $5.0million for the third quarter of fiscal 2003. The decrease in segment profit was attributable to a decrease in grossprofit percentage primarily due to the timing of lower-margin closeout sales.  Selling, general and administrative expensesalso increased related to the timing of advertising programs during the periodand additional volume-related expenses consistent with an increase in sales.

 

Wholesale segment profit increased $2.1 million to $8.4 million for thenine months ended June 30, 2004, compared to $6.3 million for the ninemonths ended June 30, 2003.  Theincrease in segment profit was primarily attributable to improved margins onwomen’s wear sales due to the addition of higher volume replenishment pantprograms and reduced fixed overhead costs for the women’s division, as well aslower negotiated costs for men’s private label products.  The increase in segment profit was offset byan increase in selling, general and administrative expenses due to the globalheadquarters relocation, additional volume-related expenses and increasedemployee benefits costs.

 

*Retail and Licensing Segments*

 

Retail and licensing segments net sales increased $1.5 million, or12.7%, to $13.2 million for the third quarter of fiscal 2004, compared to $11.7million for the third quarter of fiscal 2003. The increase in retail and licensing segments net sales during the thirdquarter of fiscal 2004 was primarily attributable to increased sales atexisting retail stores.

 

Retail and licensing segments net sales increased $4.5 million, or13.3%, to $38.5 million for the nine months ended June 30, 2004, comparedto $34.0 million for the nine months ended June 30, 2003.  The increase in retail and licensing segmentsnet sales during the nine months ended June 30, 2004 was primarilyattributable to increased sales at existing retail stores.

 

Retail and licensing segments profit increased $0.6 million to $0.8million for the third quarter of fiscal 2004, compared to $0.2 million for thethird quarter of fiscal 2003.  Theincrease in retail and licensing segments profit was primarily attributable toincreased net sales at existing retail stores, combined with improved grossprofit due to an improved product mix in the retail stores and fewer closeoutsales at retail.

 

Retail and licensing segments profit increased $1.9 million to $1.9million for the nine months ended June 30, 2004 compared to $36,000 forthe nine months ended June 30, 2003. The increase in retail and licensing segments profit was primarilyattributable to increased net sales at existing retail stores, combined withimproved gross profit due to an improved product mix in the retail stores andfewer closeout sales at retail.

 

**Goodwill Impairment**

 

The ongoing evaluation for impairment of the goodwill related to the1999 acquisition of the Company’s women’s wear subsidiary requires significantmanagement estimation and judgment. Changes in overall business strategy, negative industry or economictrends or actual results which do not meet the Company’s current plan for thewomen’s wear business may trigger a future impairment charge, which couldnegatively affect the Company’s results of operations in the period in whichthe charge is recorded.

 

**Liquidity and Capital Resources**

 

The Company’s principal sources of liquidity are cash flows fromoperations and borrowings under its unsecured revolving credit facility.  As of June 30, 2004, the Company hadcash and cash equivalents of $20.7 million.

 

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In May 2004, the Company amended and restated its unsecured revolvingcredit agreement (the “Agreement”) with certain banks primarily to extend thematurity date to June 30, 2007 and increase the maximum borrowings to$111.0 million.  The available borrowingcapacity was restricted to $66.0 million at June 30, 2004, under theAgreement’s funded debt to operating cash flow covenant.  The Company incurred approximately $0.2million in commitment fees related to the available borrowing capacity duringthe nine months ended June 30, 2004. The interest rates ranged from 2.34%to 4.00% during the nine months ended June 30, 2004, and were based uponboth margins over a bank base rate and margins over LIBOR, depending on theborrowing option selected by the Company. The Agreement prohibits the Company from pledging its accountsreceivable and inventories, contains limitations on incurring additionalindebtedness, requires maintaining minimum net worth levels of the Company andthe Company’s main operating subsidiary, and requires the maintenance ofcertain financial ratios.  The Agreementalso prohibits the payment of any dividend if a default exists after givingeffect to such a dividend.  As ofJune 30, 2004, the Company was in full compliance with its financial andother covenants under the Agreement.

 

Long-term debt also includes $3.6 million in senior notes.  Significant terms of the senior notes includeinterest payable semi-annually at 8.49% per annum with the final principalpayment of $3.6 million due on October 30, 2004.  The terms and conditions of the note purchaseagreement governing the senior notes include restrictions on the sale ofassets, limitations on additional indebtedness and the maintenance of certainnet worth requirements.

 

Long-term debt also includes $2.1 million inIndustrial Development Revenue (“IDR”) bonds. 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 atJune 30, 2004, was 1.1%.  The IDRbonds mature in fiscal 2026, but the Company has the option to prepay thebalance without penalty in fiscal 2006. The Company plans to exercise the prepayment option, and to makeprincipal payments of $0.1 and $2.0 million in fiscal 2005 and 2006, respectively.  The IDR bonds are collateralized by certainbuildings and equipment of $0.3 million as of June 30, 2004.

 

Certain of the Company’s long-term debtfacilities contain restrictions on the ability of the Company’s subsidiaries totransfer funds to the Company.

 

The Company maintains an operating lease for its corporate aircraft,which contains a residual guarantee for the market value of the plane at theend of the lease term in December 2004. Under the lease, the Company has 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 sale proceeds are less than $4.0 million, the Company is requiredto reimburse the lessor for the deficiency. If the sale proceeds exceed $4.0 million, the Company is entitled to allof such excess amounts.

 

Based on an estimated $3.1 million market value for the aircraft whenthe lease ends in 2004, the Company began accruing a $0.9 million expecteddeficiency in fiscal 2003.  The Companyobtained an updated estimate as of June 30, 2004, which reflected arevised market value for the aircraft of $3.3 million.   As of June 30, 2004, the Companyincluded $0.7 million in accrued liabilities, which had been accrued based onthe previous estimate of the market value of the aircraft.  As the amount accrued as of June 30,2004 represents the anticipated deficiency based on the most recent estimate ofmarket value, the Company will not record additional accruals related to theresidual value guarantee until the lease termination date.  As of June 30, 2004, the Company isactively marketing the aircraft and plans to sell the plane.

 

During the third quarter of fiscal 2004, the Company declared a cashdividend of $0.05 per share payable on August 23, 2004 to the stockholdersof record as of August 9, 2004.  Thesecond quarter of fiscal 2004 dividend of approximately $0.4 million was paidin May 2004.

 

The Company has other contractual obligations and commercialcommitments as described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Disclosures About Contractual Obligations AndCommercial Commitments” of the Company’s Annual Report on Form 10-K filed withthe Securities and Exchange Commission on December 12, 2003.  There have been no material changes in theCompany’s contractual obligations and commercial commitments sinceSeptember 30, 2003.

 

18

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*Cash Flow Results for the Nine Months EndedJune 30, 2004*

 

Net cash provided by operating activities decreased $14.6 million, or 46.8% to $16.5 million during the nine monthsended June 30, 2004, compared to $31.1 million during the nine monthsended June 30, 2003.  The decreasein cash provided by operating activities was primarily attributable to asmaller decrease in the accounts receivable balance during the nine monthsended June 30, 2004 as compared to the prior period due to increased thirdquarter sales in fiscal 2004.  Thedecrease in operating cash flows was offset by the Company’s improvedprofitability when comparing the nine months ended June 30, 2004 to thenine months ended June 30, 2003. The changes in the accrued liability balance related primarily to thetiming of receipt of and payment for finished goods inventory in transit.

 

The Company used $1.5 million in investing activities during the ninemonths ended June 30, 2004, compared to cash provided by investingactivities of $0.5 during the nine months ended June 30, 2003.  Investing activities for the nine monthsended June 30, 2004 included an additional $2.8 million related to capitalimprovements of the new global headquarters facility, $1.3 million of whichwere financed with funds transferred from restricted cash.  A portion of the Company’s capitalexpenditures for the period also related to the development of retailstores.  Investing activities for thenine months ended June 30, 2003 included $2.5 million in proceeds from thesale of the Company’s Edinburg, Texas manufacturing facility and capitalimprovements of $1.3 million.

 

Net cash used in financing activities decreased $20.6 million, or90.6%, to $2.1 million in the nine months ended June 30, 2004 from $22.7million in the nine months ended June 30, 2003.  The decrease in net cash used was primarilydue to a lower net reduction in borrowings during the nine-month period forfiscal 2004, as well as proceeds from the exercise of employee stock options.

 

**Recently Issued and Adopted FinancialAccounting Standards**

 

On December 23, 2003, the Financial Accounting Standards Boardissued SFAS No. 132 (Revised 2003) (“SFAS No. 132”), “Employers’ Disclosures About Pensions and Other Postretirement Benefits.”  SFAS No. 132 increases the existingdisclosure requirements by requiring companies to disclose more details aboutpension plan assets, benefit obligations, cash flows, benefit costs and relatedinformation. Companies will be required to segregate plan assets by category,such as debt, equity and real estate, and to provide certain expected rates ofreturn and other informational disclosures. SFAS No. 132 also requirescompanies to disclose various elements of pension and postretirement benefitcosts in interim-period financial statements for quarters beginning afterDecember 15, 2003. The Company has determined that no additionaldisclosures are required due to the immateriality of the Company’s pension planassets and benefit obligations.

 

**Item 3****.****  Quantitative andQualitative Disclosures about Market Risk.**

 

The Company is exposed to market risk from changes in foreign currencyexchange risk and interest rate risk, which may adversely affect its financialposition, results of operations and cash flows. The Company does not usefinancial instruments for trading or other speculative purposes and is not aparty to any derivative financial instrument. As of June 30, 2004, the Company’s exposure to interest rate riskwas minimal due to the low level of variable rate debt.

 

**Item 4****.**** ****Controls andProcedures**

 

The Chief Executive Officer and Chief Financial Officer of the Companyhave reviewed and evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as defined in the Securities Exchange Act of 1934Rules 240.13a-15(e) and 15d-15(e)), and have concluded that, as of the end ofthe period covered by this Quarterly Report on Form 10-Q, such disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company required to be disclosed in the periodicreports the Company files or submits under the Securities Exchange Act of1934.  During the most recent fiscalquarter, there have not been any changes in the Company’s internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PartII. ****Other Information.**

 

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

 

The Company has been named as a defendant in several legal actionsarising from its operations in the normal  course of business, including actions brought by certain terminatedemployees.  Although exact settlementamounts, if any, related to these actions cannot accurately be predicted, theclaims and damages alleged, the progress of the litigation to date, and pastexperience with similar litigation leads the Company to believe that anyliability resulting from these actions and those described below will notindividually, or collectively, have a material adverse effect on the Company.

 

During March 2004, the Company reached a settlement agreementrelated to an action for trademark infringement.  Under the terms of the settlement, theCompany paid $0.6 million to the plaintiff, which the Company had accrued infiscal 2003, net of anticipated insurance proceeds, based on the Company’sestimated range of probable loss.   InApril 2004, the Company received reimbursement for a portion of thesettlement from an insurer of $0.3 million. The Company does not anticipate additional reimbursement for theremainder of the settlement.

 

The Company is a defendant in awrongful termination lawsuit in which a jury rendered a verdict in favor of theplaintiff against the Company in the amount of $843,000, subject to potentialdoubling in the event judgment is entered on the jury’s finding of willfuldiscrimination, plus pre- and post-judgment interest and attorneys’ fees.  The trial court reversed the jury’s verdictand rendered a judgment in favor of the Company denying all recovery on thebasis that the plaintiff had failed to prove any liability of the Company.  The plaintiff appealed to the United StatesCourt of Appeals for the Fifth Circuit, which reversed the judgment of thetrial court and remanded the matter back to the trial court for furtherproceedings.  The United States SupremeCourt subsequently denied the Company’s request for review of the case.  As a result of this ruling, during the secondquarter of fiscal 2004 the Company recorded $0.5 million based on the estimatedrange of probable loss in the case, which is included in accrued liabilities asof June 30, 2004.  

 

Upon remand, the Company requested that the trial court set aside thejury’s finding of willful discrimination and reduce the jury’s calculation ofdamages.  On August 4, 2004, the trialcourt denied the Company’s motion, but deferred entering judgment on the juryverdict pending a hearing on interest, attorneys’ fees and front pay.  Based on management’s evaluation of allinformation received, including the August 4, 2004 ruling, the Company believesthe $0.5 million accrued liability continues to be adequate for the estimatedloss in this case.  However, upon theentry of a final judgment by the trial court, the Company intends tore-evaluate its estimate of probable loss in the case in light of the amount ofthe final judgment, its determination whether to appeal the judgment and itsassessment of the potential outcomes of any such appeal.  Any increase in the estimate of probable lossfrom this lawsuit could have a material adverse impact on the Company’s resultsof operations for the fourth quarter and full year of fiscal 2004.

 

One attorney has filed five separate suits against certain subsidiariesof the Company alleging injuries to approximately 2,200 former employees fromairborne fibers and chemicals in certain of the Company’s now closed facilitieslocated in south Texas.  All proceedingsin one suit naming over 2,100 plaintiffs have been stayed due to the unrelatedbankruptcy of one of the other defendants. Another suit, which named 71 plaintiffs, has been dismissed, butplaintiffs’ counsel has sought reconsideration of the dismissal; the Company isawaiting a decision by the trial court. After taking discovery in one of the remaining cases, the Companybelieves that all of these cases and claims are frivolous and that theplaintiffs have no factual or legal basis for their allegations.  In addition, the Company believes that it hasmeritorious defenses to all of the asserted claims.  The Company intends to vigorously defend allof these suits.

 

Jury verdicts in two cases totaling approximately $1.7 million in theaggregate were returned in fiscal 2000 against subsidiaries of the Companyrelated to claims by former employees of now closed manufacturing facilitiesfor wrongful discharge and common law tort. Both cases are currently on appeal, as management and legal counselbelieve the verdicts in the lawsuits are both legally and factually incorrect.

 

**Item 2.****  Changes in Securities and Use of Proceeds**

 

None.

 

**Item 3.****  Defaults Upon SeniorSecurities**

 

None.

 

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**Item 4.****  Submission of Matters to a Vote of SecurityHolders**

 

None.

 

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

 

None.

 

**Item 6.****Exhibits and Reports onForm 8-K**

 

(a)          Exhibits.

 
| 10(a)  |   | Third Amendment to Second Amended and Restated Credit Agreement dated  May 27, 2004, between the Company and JPMorgan Chase Bank, as Agent for a  bank syndicate. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                              |
| 31(a)  |   | Certification of Chief Executive Officer required by Rule 13a-14(a)  or Rule 15d-14(a)                                                                            |
|   |   |                                                                                                                                                              |
| 31(b)  |   | Certification of Chief Financial 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 Financial Officer Pursuant to 18 U.S.C. §1350                                                                                         |

 

(b)         Reports on Form 8-K.

 

A Form 8-K was filed on April 27, 2004, reporting, under Item 7, the issuance of a press release announcing theCompany’s fiscal 2004 second quarter earnings and fiscal 2004 projectedquarterly and annual operating results. A copy of the press release announcing the operating results andincluding financial statements was attached as an exhibit and reported underItem 9 of the Form 8-K.  A Form 8-K wasfiled on May 13, 2004, reporting, under Item 7, the resignation of theCompany’s former Chief Financial Officer. A copy of the press release announcing the resignation was attached asan exhibit and reported under Item 9 of the Form 8-K.

 

**Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                       | Haggar Corp.                |
|----------------------------|-----------------------------|
|                       |
|                       |
| Date: August 11, 2004 |
|                       |
|                       | /s/ John W. Feray           |
|                       | John W. Feray               |
|                       | *(Chief Financial Officer)* |
|                       | * *                    |
|                       | Signed on behalf of the     |
|                       | registrant and as principal |
|                       | financial officer.          |
|                            |                             |  |

 

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**INDEX TO EXHIBITS**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                        |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                   |
|        |       |                                                                                                                                                              |
| 10(a)       |       | Third Amendment to Second Amended and Restated Credit Agreement dated  May 27, 2004, between the Company and JPMorgan Chase Bank, as Agent for a  bank syndicate. |
|        |       |                                                                                                                                                              |
| 31(a)       |       | Certification of Chief Executive Officer required by Rule 13a-14(a)  or Rule 15d-14(a)                                                                            |
|        |       |                                                                                                                                                              |
| 31(b)       |       | Certification of Chief Financial 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 Financial Officer Pursuant to 18 U.S.C. §1350                                                                                         |

 

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