**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**FORM 10-Q**

 

----

** **

| **(Mark One)**                                      |                                                                                          |   |
|-----------------------------------------------------|-----------------------------------------------------------------------------------------------|--------|
|                                                |                                                                                          |   |
| **ý**                                          | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|                                                |                                                                                          |   |
| **For  the quarterly period ended March 31, 2004.** |
|                                                |                                                                                          |   |
|                                                |                                                                                          | **OR** |
|                                                |                                                                                          |   |
| **o**                                               | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                                                     |                                                                                               |        |  |

 

**For thetransition period from                    to                    .**

 

**CommissionFile Number:**  **0-20850**

 

**HAGGAR CORP.**

(Exact name of theregistrant as specified in its charter)

 

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 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 markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

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

 

**As of May 11, 2004, there were7,151,656 shares of the Registrant’s common stock outstanding.**

 

 

----

 

**Haggar Corp. andSubsidiaries**

** **

**Index**

 
| **Part I.** Financial Information |                                                                                                                             |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                             |   |
|                                   | **Item 1.  Financial Statements**                                                                                           |   |
|                                   |                                                                                                                             |   |
|                                   | **Consolidated  Balance Sheets  (As of March 31, 2004 and September 30, 2003)**                                                  |   |
|                                   |                                                                                                                             |   |
|                                   | **Consolidated Statements  of Operations and Comprehensive Income (Loss)  (Three and six months ended March 31, 2004 and 2003)** |   |
|                                   |                                                                                                                             |   |
|                                   | **Consolidated  Statements of Cash Flows  (Six months ended March 31, 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

----

 

**Haggar Corp. andSubsidiaries**

** **

###### **Consolidated Balance Sheets**

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

 
|                                                                                                                                                                              |   | **March 31,  2004** |       | **September  30,  2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|--------------------------|------------|
|                                                                                                                                                                              |   | **(unaudited)**     |       |                     |       |
| **Assets**                                                                                                                                                                        |   |                |       |                     |       |
| Current assets:                                                                                                                                                                   |   |                |       |                     |       |
| Cash and cash  equivalents                                                                                                                                                        |   | $                   | 6,645      |                     | $          | 7,674 |   |
| Accounts receivable,  net                                                                                                                                                         |   | 68,593              |       | 56,528                   |       |
| Inventories, net                                                                                                                                                                  |   | 99,365              |       | 96,959                   |       |
| Deferred tax  asset                                                                                                                                                               |   | 10,505              |       | 10,505                   |       |
| Other current  assets                                                                                                                                                             |   | 5,791               |       | 3,557                    |       |
| Total current assets                                                                                                                                                              |   | 190,899             |       | 175,223                  |       |
|                                                                                                                                                                              |   |                |       |                     |       |
| Property, plant  and equipment, net                                                                                                                                               |   | 45,411              |       | 45,932                   |       |
| Goodwill, net                                                                                                                                                                     |   | 9,472               |       | 9,472                    |       |
| Other assets                                                                                                                                                                      |   | 6,121               |       | 7,580                    |       |
| Total assets                                                                                                                                                                      |   | $                   | 251,903    |                     | $          | 238,207 |   |
|                                                                                                                                                                              |   |                |       |                     |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                    |   |                |       |                     |       |
| Current  liabilities:                                                                                                                                                             |   |                |       |                     |       |
| Accounts payable                                                                                                                                                                  |   | $                   | 25,349     |                     | $          | 26,245 |   |
| Accrued  liabilities                                                                                                                                                              |   | 34,558              |       | 31,898                   |       |
| Accrued wages  and other employee compensation                                                                                                                                    |   | 5,323               |       | 7,228                    |       |
| Current portion  of long-term debt                                                                                                                                                |   | 3,671               |       | 3,671                    |       |
| Total current liabilities                                                                                                                                                         |   | 68,901              |       | 69,042                   |       |
| Other non-current liabilities                                                                                                                                                     |   | 10,823              |       | 9,554                    |       |
| Deferred tax liability                                                                                                                                                            |   | 523                 |       | 523                      |       |
| Long-term debt                                                                                                                                                                    |   | 8,000               |       | 5,671                    |       |
| Total  liabilities                                                                                                                                                                |   | 88,247              |       | 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 March 31, 2004 or September 30, 2003                        |   | —              |       | —                   |       |
| Common stock –  par value $0.10 per share; 25,000,000 shares authorized;  9,386,746 and 8,718,609 shares issued at  March 31, 2004 and September 30, 2003, respectively |   | 939                 |       | 872                      |       |
| Additional  paid-in capital                                                                                                                                                       |   | 52,752              |       | 43,653                   |       |
| Deferred  compensation                                                                                                                                                            |   | (2,348              | )          | —                   |       |
| Foreign currency  translation adjustment                                                                                                                                          |   | 95                  |       | (163                     | )          |
| Retained  earnings                                                                                                                                                                |   | 137,179             |       | 134,016                  |       |
|                                                                                                                                                                              |   | 188,617             |       | 178,378                  |       |
|                                                                                                                                                                              |   |                |       |                     |       |
| Less – Treasury  stock, 2,242,183 shares at cost at March 31, 2004 and September 30, 2003                                                                                    |   | (24,961             | )          | (24,961                  | )          |
| Total  stockholders’ equity                                                                                                                                                  |   | 163,656             |       | 153,417                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                  |   | $                   | 251,903    |                     | $          | 238,207 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

3

----

 

**Haggar Corp. andSubsidiaries**

** **

**Consolidated Statements of Operations****andComprehensive Income (Loss)**

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

 
|                                                       |   | **Three  Months Ended  March 31,** |    | **Six Months  Ended  March 31,** |   |
|------------------------------------------------------------|--------|------------------------------------|---------|----------------------------------|--------|
|                                                       |   | **2004**                           |    | **2003**                         |   | **2004** |   | **2003** |   |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| Net sales                                                  |   | $                                  | 132,071 |                             | $      | 135,487 |   | $ | 239,805 |   | $ | 249,394 |   |
| Cost of goods  sold                                        |   | 95,168                             |    | 100,638                          |   | 171,580 |   | 185,921 |   |
| Gross profit                                               |   | 36,903                             |    | 34,849                           |   | 68,225 |   | 63,473 |   |
| Selling, general  and administrative expenses              |   | (32,492                            | )       | (32,012                          | )      | (62,067 | ) | (63,543 | ) |
| Royalty income                                             |   | 345                                |    | 300                              |   | 598 |   | 675 |   |
| Other income,  net                                         |   | 26                                 |    | 533                              |   | 399 |   | 480 |   |
| Interest expense                                           |   | (459                               | )       | (648                             | )      | (916 | ) | (1,383 | ) |
| Income (loss)  before provision (benefit) for income taxes |   | 4,323                              |    | 3,022                            |   | 6,239 |   | (298 | ) |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| Provision  (benefit) for income taxes                      |   | 1,652                              |    | 1,191                            |   | 2,383 |   | (124 | ) |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| Net income  (loss)                                         |   | $                                  | 2,671   |                             | $      | 1,831 |   | $ | 3,856 |   | $ | (174 | ) |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| Other  comprehensive income (loss):                        |   |                               |    |                             |   |   |   |   |   |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| Foreign currency  translation adjustment                   |   | $                                  | 146     |                             | $      | (111 | ) | $ | 258 |   | $ | (15 | ) |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| Comprehensive  income (loss)                               |   | $                                  | 2,817   |                             | $      | 1,720 |   | $ | 4,114 |   | $ | (189 | ) |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| NET INCOME  (LOSS) PER COMMON SHARE:                       |   |                               |    |                             |   |   |   |   |   |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| — Basic                                               |   | $                                  | 0.39    |                             | $      | 0.29 |   | $ | 0.58 |   | $ | (0.03 | ) |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| — Diluted                                             |   | $                                  | 0.38    |                             | $      | 0.29 |   | $ | 0.56 |   | $ | (0.03 | ) |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| Weighted average  number of common shares outstanding:     |   |                               |    |                             |   |   |   |   |   |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| — Basic                                               |   | 6,823                              |    | 6,418                            |   | 6,691 |   | 6,418 |   |
|                                                       |   |                               |    |                             |   |   |   |   |   |
| — Diluted                                             |   | 6,986                              |    | 6,430                            |   | 6,861 |   | 6,418 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

4

----

 

**Haggar Corp. andSubsidiaries**

** **

**Consolidated Statements of Cash Flows**

*(unaudited, in thousands)*

 
|                                                                                  |   | **Six Months  Ended  March 31,** |   |
|---------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                  |   | **2004**                         |   | **2003** |   |
|                                                                                  |   |                             |   |   |   |
| **Cash Flows from Operating  Activities**                                             |   |                             |   |   |   |
| Net income  (loss)                                                                    |   | $                                | 3,856  |   | $ | (174 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |   |                             |   |   |   |
| Depreciation and  amortization                                                        |   | 3,119                            |   | 4,232 |   |
| Deferred tax  expense                                                                 |   | —                           |   | 392 |   |
| Gain on the  disposal of property, plant and equipment                                |   | (227                             | )      | (279 | ) |
| Stock-based  compensation expense                                                     |   | 140                              |   | — |   |
| Increase in cash  surrender value of officers’ life insurance policies           |   | (468                             | )      | — |   |
| Changes in  assets and liabilities:                                                   |   |                             |   |   |   |
| Accounts  receivable, net                                                             |   | (11,965                          | )      | (4,289 | ) |
| Inventories, net                                                                      |   | (2,220                           | )      | 2,841 |   |
| Other current  assets                                                                 |   | (2,278                           | )      | (1,552 | ) |
| Other assets                                                                          |   | 45                               |   | — |   |
| Accounts payable                                                                      |   | 1,583                            |   | 1,878 |   |
| Accrued liabilities                                                                   |   | 2,660                            |   | (8,420 | ) |
| Accrued wages  and other employee compensation                                        |   | (1,905                           | )      | (1,797 | ) |
| Other  non-current liabilities                                                        |   | 1,269                            |   | 977 |   |
| Net cash used in  operating activities                                                |   | (6,391                           | )      | (6,191 | ) |
|                                                                                  |   |                             |   |   |   |
| **Cash Flows from Investing  Activities**                                             |   |                             |   |   |   |
| Purchases of  property, plant and equipment, net                                      |   | (2,384                           | )      | (483 | ) |
| Proceeds from  sale of property, plant and equipment                                  |   | 227                              |   | 2,493 |   |
| Decrease in  restricted cash                                                          |   | 1,287                            |   | — |   |
| Proceeds from  officers’ life insurance policies                                 |   | 471                              |   | — |   |
| Increase in  other assets                                                             |   | —                           |   | 107 |   |
| Net cash  provided by (used in) investing activities                                  |   | (399                             | )      | 2,117 |   |
|                                                                                  |   |                             |   |   |   |
| **Cash Flows from Financing  Activities**                                             |   |                             |   |   |   |
| Proceeds from  issuance of long-term debt                                             |   | 56,000                           |   | 157,000 |   |
| Payments on  long-term debt                                                           |   | (53,671                          | )      | (145,743 | ) |
| Proceeds from  exercise of employee stock options                                     |   | 6,678                            |   | — |   |
| Decrease in book  overdrafts                                                          |   | (2,508                           | )      | (4,339 | ) |
| Payments of cash  dividends                                                           |   | (693                             | )      | (642 | ) |
| Net cash  provided by financing activities                                            |   | 5,806                            |   | 6,276 |   |
|                                                                                  |   |                             |   |   |   |
| Effect of  exchange rates on cash and cash equivalents                                |   | (45                              | )      | (176 | ) |
| Increase  (decrease) in cash and cash equivalents                                     |   | (1,029                           | )      | 2,026 |   |
| Cash and cash  equivalents, beginning of period                                       |   | 7,674                            |   | 4,124 |   |
| Cash and cash  equivalents, end of period                                             |   | $                                | 6,645  |   | $ | 6,150 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

5

----

 

**Haggar Corp. andSubsidiaries**

** **

**Notesto Consolidated****Financial Statements**

*(unaudited)*

 

**1. Basis of Presentation**

 

*Financial Statement Preparation*

 

The consolidated balance sheet as of March 31, 2004, the consolidatedstatements of operations and comprehensive income (loss) for the three monthsand six months ended March 31, 2004 and 2003, and the consolidated statementsof cash flows for the six months ended March 31, 2004 and 2003, have beenprepared by Haggar Corp. (together with its subsidiaries, the “Company”)without audit.  The consolidated balancesheet as of September 30, 2003 has been derived from the Company’s auditedfinancial statements as of that date but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments necessary (which include only normalrecurring adjustments) to present fairly the consolidated financial position,results of operations, and cash flows of the Company at March 31, 2004, and forall other periods presented, have been made. Certain information and disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been omitted in accordance with the Securities and Exchange Commission’srules for interim reporting. Accordingly, these financial statements should be read in conjunctionwith the financial statements and accompanying notes thereto in the Company’sAnnual Report on Form 10-K for the fiscal year ended September 30, 2003.

 

*Accounting for Stock BasedCompensation*

 

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 (loss) and net income (loss) per commonshare are as follows *(in thousands, exceptper share amounts)*:

 
|                                                                                                            |   | **Three  Months Ended  March 31,** |   | **Six Months  Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                                                            |   | **2004**                           |   | **2003**                         |   | **2004** |   | **2003** |   |
| Net income  (loss):                                                                                             |   |                               |   |                             |   |   |   |   |   |
| As reported                                                                                                     |   | $                                  | 2,671  |                             | $      | 1,831 |   | $ | 3,856 |   | $ | (174 | ) |
| Add back:  Stock-based compensation included in net  income (loss) as reported, net of related tax effects |   | 82                                 |   | —                           |   | 135 |   | — |   |
| Less:  Pro-forma stock-based compensation  expense, net of related tax effects                             |   | (88                                | )      | (25                              | )      | (94 | ) | (50 | ) |
| Pro-forma net income  (loss)                                                                                    |   | $                                  | 2,665  |                             | $      | 1,806 |   | $ | 3,897 |   | $ | (224 | ) |
| Net income  (loss) per common share:                                                                            |   |                               |   |                             |   |   |   |   |   |
|                                                                                                            |   |                               |   |                             |   |   |   |   |   |
| —Basic                                                                                                     |   |                               |   |                             |   |   |   |   |   |
| As reported                                                                                                     |   | $                                  | 0.39   |                             | $      | 0.29 |   | $ | 0.58 |   | $ | (0.03 | ) |
| Pro forma                                                                                                       |   | $                                  | 0.39   |                             | $      | 0.28 |   | $ | 0.58 |   | $ | (0.03 | ) |
|                                                                                                            |   |                               |   |                             |   |   |   |   |   |
| —Diluted                                                                                                   |   |                               |   |                             |   |   |   |   |   |
| As reported                                                                                                     |   | $                                  | 0.38   |                             | $      | 0.29 |   | $ | 0.56 |   | $ | (0.03 | ) |
| Pro forma                                                                                                       |   | $                                  | 0.38   |                             | $      | 0.28 |   | $ | 0.57 |   | $ | (0.03 | ) |

 

6

----

 

On March 11, 2004, the Company granted 15,000 options to certaindirectors.  The options vest over threeyears.  The fair value of the optiongrants of $7.50 was estimated on the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions:  risk-free interest rate of 2.72%; expectedlives of 5.53 years; expected volatility of 45.27% and an expected dividendrate 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.

 

*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 March 31, 2004, and September 30,2003 *(in thousands)*:

 
|                      |   | **March 31,  2004** |   | **September  30,  2003** |   |
|---------------------------|--------|---------------------|--------|--------------------------|--------|
| Piece goods               |   | $                   | 7,984  |                     | $      | 7,664 |   |
| Trimmings &  supplies |   | 2,951               |   | 3,660                    |   |
| Work-in-process           |   | 4,699               |   | 4,838                    |   |
| Finished  garments        |   | 85,137              |   | 82,157                   |   |
|                      |   | 100,771             |   | 98,319                   |   |
| Inventory  reserves       |   | (1,406              | )      | (1,360                   | )      |
| Total  inventories, net   |   | $                   | 99,365 |                     | $      | 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 March 31, 2004, andSeptember 30, 2003 *(in thousands)*:

 
|                                    |   | **March 31,  2004** |   | **September  30,  2003** |   |
|-----------------------------------------|--------|---------------------|--------|--------------------------|--------|
| Borrowings under  revolving credit line |   | $                   | 6,000  |                     | $      | — |   |
| Industrial  Development Revenue Bonds   |   | 2,100               |   | 2,200                    |   |
| Senior notes                            |   | 3,571               |   | 7,142                    |   |
| Total debt                              |   | 11,671              |   | 9,342                    |   |
| Less – current  portion            |   | (3,671              | )      | (3,671                   | )      |
| Long-term debt                          |   | $                   | 8,000  |                     | $      | 5,671 |   |

 

As of March 31, 2004, the Company had $6.0 million outstanding under a$110.0 million unsecured revolving credit agreement (the “Agreement”).  The available borrowing capacity wasrestricted to $68.0 million at March 31, 2004, under the Agreement’s fundeddebt to operating cash flow covenant. The Company incurred approximately $0.3 million in commitment feesrelated to the available borrowing capacity during the six months ended March31, 2004. The interest rates ranged from 2.34% to 4.00% during the six monthsended March 31, 2004, and were based upon both margins over a bank base rateand margins over LIBOR, depending on the borrowing option selected by theCompany.  The Agreement, which expiresin June 2005, prohibits the Company from pledging its accounts

 

7

----

 

receivable and inventories, contains limitations on incurringadditional indebtedness, requires maintaining minimum net worth levels of theCompany and the Company’s main operating subsidiary, and requires themaintenance of certain financial ratios. The Agreement also prohibits the payment of any dividend if a defaultexists after giving effect to such a dividend. As of March 31, 2004, the Company was in full compliance with itsfinancial and other covenants.

 

Long-term debt also includes $3.6 million in senior notes at March 31,2004.  Significant terms of the seniornotes include interest payable semi-annually at 8.49% per annum with the finalprincipal payment of $3.6 million due on October 30, 2004.  The terms and conditions of the notepurchase agreement governing the senior notes include restrictions on the saleof assets, limitations on additional indebtedness and the maintenance ofcertain net worth requirements.

 

Long-term debt also includes $2.1 million inIndustrial Development Revenue (“IDR”) bonds at March 31, 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 March 31, 2004, was 1.06%.  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 March 31, 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 United Kingdom.  The Company also operates a retail segment,which markets Haggar® branded products through 68 Company operated storeslocated in outlet malls throughout the United States, and a licensing segment,which generates royalty income by licensing the Company’s trademarks for use byother manufacturers of specified products in specified geographic areas.  The retail and licensing segments are notmaterial for separate disclosure, and have been combined in the resultsbelow.  The Company evaluatesperformance 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 (loss) is comprised of segmentnet income before interest expense and provision (benefit) for income taxes.

 

8

----

 

The table below reflects the Company’ssegment results for the three and six months ended March 31, 2004 and 2003 *(in thousands)*:

 

 
| **Three Months Ended  March 31,** |   | **Wholesale** |    | **Retail and  Licensing** |   | **Consolidated** |   |
|-----------------------------------|--------|---------------|---------|---------------------------|--------|------------------|--------|
| **2004**                          |   |          |    |                      |   |             |   |
| Net sales                         |   | $             | 122,053 |                      | $      | 10,018           |   | $ | 132,071 |   |
| Segment profit  (loss)            |   | $             | 5,064   |                      | $      | (282             | )      | $ | 4,782 |   |
|                              |   |          |    |                      |   |             |   |
| **2003**                          |   |          |    |                      |   |             |   |
| Net sales                         |   | $             | 126,744 |                      | $      | 8,743            |   | $ | 135,487 |   |
| Segment profit  (loss)            |   | $             | 4,635   |                      | $      | (965             | )      | $ | 3,670 |   |

 
| **Six Months Ended  March 31,** |   | **Wholesale** |    | **Retail and  Licensing** |   | **Consolidated** |   |
|---------------------------------|--------|---------------|---------|---------------------------|--------|------------------|--------|
| **2004**                        |   |          |    |                      |   |             |   |
| Net sales                       |   | $             | 214,462 |                      | $      | 25,343           |   | $ | 239,805 |   |
| Segment profit                  |   | $             | 6,052   |                      | $      | 1,103            |   | $ | 7,155 |   |
|                            |   |          |    |                      |   |             |   |
| **2003**                        |   |          |    |                      |   |             |   |
| Net sales                       |   | $             | 227,087 |                      | $      | 22,307           |   | $ | 249,394 |   |
| Segment profit  (loss)          |   | $             | 1,285   |                      | $      | (200             | )      | $ | 1,085 |   |

 

A reconciliation of total segment profit (loss) to consolidated income(loss) before provision (benefit) for income taxes is as follows *(in thousands)*:

 
|                                                                    |   | **Three  Months Ended  March 31,** |   | **Six Months  Ended  March 31,** |   |
|-------------------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                                    |   | **2004**                           |   | **2003**                         |   | **2004** |   | **2003** |   |
| Segment profit                                                          |   | $                                  | 4,782  |                             | $      | 3,670 |   | $ | 7,155 |   | $ | 1,085 |   |
| Interest expense                                                        |   | (459                               | )      | (648                             | )      | (916 | ) | (1,383 | ) |
| Consolidated  income (loss) before provision (benefit) for income taxes |   | $                                  | 4,323  |                             | $      | 3,022 |   | $ | 6,239 |   | $ | (298 | ) |

 

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 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.

 

9

----

 

Based on an estimated $3.1 million market value for the aircraft whenthe lease ends in 2004, the Company began accruing the $0.9 million expecteddeficiency in fiscal 2003.  As of March31, 2004, the Company included $0.6 million in other accrued liabilities relatedto the deficiency.  The remainder of the$0.9 million expected deficiency will be accrued using the straight line methodthrough the end of the lease term.

 

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 agreement relatedto an action for trademark infringement. Under the terms of the settlement, the Company paid $0.6 million to theplaintiff, which the Company had accrued in fiscal 2003, net of anticipatedinsurance proceeds, based on the Company’s estimated range of probableloss.   In April 2004, the Companyreceived reimbursement for a portion of the settlement from an insurer of $0.3million.  The Company does not anticipateadditional reimbursement for the remainder of the settlement.

 

The Company is a defendant in a wrongful termination lawsuit in which ajury rendered a verdict in favor of the plaintiff against the Company in theamount of $843,000, subject to potential doubling in the event judgment isentered on a jury verdict of willful discrimination, plus pre- andpost-judgment interest and attorneys’ fees. The trial court judge reversed the jury’s verdict and rendered ajudgment in favor of the Company granting zero damages to the plaintiff.  The plaintiff appealed the judgment to theUnited States Court of Appeals for the Fifth Circuit, which reversed thejudgment of the trial court and remanded the matter back to the trial court forfurther proceedings.  On February 23,2004, the United States Supreme Court denied the Company’s request for reviewof the case.  As of March 31, 2004, theCompany recorded $0.5 million based on the estimated range of probable loss inthis case, which was included in accrued liabilities.

 

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 ithas meritorious 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.

 

**6. Shipping and Handling Fees**

 

The Company records shipping and handling fees as selling, general andadministrative expense.  For the threeand six months ended March 31, 2004, such costs were $3.2 million and $5.9million, respectively.  For the threeand six months ended March 31, 2003, such costs were $3.2 million and $6.5million, respectively.

 

10

----

 

**7.   Basic and Diluted Common Shares**

 

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

 

 
|                                                           |   | **Three  Months Ended  March 31,** |   | **Six Months  Ended  March 31,** |   |
|----------------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                           |   | **2004**                           |   | **2003**                         |   | **2004** |   | **2003** |   |
| Weighted average  common shares outstanding                    |   | 6,823                              |   | 6,418                            |   | 6,691 |   | 6,418 |   |
| Shares  equivalents, due to stock options and restricted stock |   | 163                                |   | 12                               |   | 170 |   | — |   |
| Weighted average  diluted shares outstanding                   |   | 6,986                              |   | 6,430                            |   | 6,861 |   | 6,418 |   |

 

**8. Dividends**

 

During the second quarter of fiscal 2004, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on May 10,2004, which will be paid on May 24, 2004. The first quarter of fiscal 2004 dividend of approximately $0.3 millionwas paid in February 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 six months endedMarch 31, 2004 and 2003.  The Companypaid the law firm approximately $0.3 million and $0.7 million for legalservices during the three and six months ended March 31, 2004,respectively.  The Company paid the lawfirm approximately $0.2 million and $0.3 million for legal services during thethree and six months ended March 31, 2003, respectively.  There were $0.2 million and $0.1 million inunpaid fees due to the law firm at March 31, 2004 and September 30, 2003,respectively which were included 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  March 31, 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 six months ended March31, 2004.

 

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

 

On March 23, 2003, the Financial Accounting Standards Board issued SFASNo. 132 (Revised 2003) (“SFAS No. 132”), “Employers’ Disclosures About Pensionsand Other Postretirement Benefits.” SFAS No. 132 increases the existing disclosure requirements by requiringcompanies to disclose more details about pension plan assets, benefitobligations, cash flows, benefit costs and related information. Companies willbe required to segregate plan assets by category, such as debt, equity and realestate, and to provide certain expected rates of return and other informationaldisclosures. SFAS No. 132 also requires companies to disclose various elementsof pension and postretirement benefit costs in interim-period financialstatements for quarters beginning after March 15, 2003. The Company hasdetermined that no additional disclosures are required due to the immaterialityof the Company’s pension plan assets and benefit obligations.

 

11

----

 

**Item 2****.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

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 includesforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 (the “Securities Act”) and Section 21E of the Securities ExchangeAct of 1934 (the “Exchange Act”).  Allstatements other than statements of historical facts contained in this report,including statements regarding the Company’s future financial position,business strategy and plans and objectives of management for future operations,are forward-looking statements.  Thewords “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”“expect” and similar expressions, as they relate to the Company, are intendedto identify forward-looking statements. The Company has based these forward-looking statements largely on itscurrent expectations and projections about future events and financial trendsthat the Company believes may affect its financial condition, results ofoperations, business strategy and financial needs.  These forward-looking statements are subject to a number of knownand unknown risks, uncertainties and assumptions that could affect theresults of the Company or the apparel industry generally and could cause theCompany’s expected results to differ materially from those expressed in thisQuarterly Report on Form 10-Q.  Theserisks, uncertainties and assumptions are described in “Item 1.  Business” of the Company’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on December 12,2003, and include, among other things:

 

•                  changes ingeneral business conditions,

 

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

 

•                  seasonality ofthe Company’s business,

 

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

 

•                  impact ofcompetition in the apparel industry,

 

•                  availability andcost of raw materials,

 

•                  changes in lawsand other regulatory actions,

 

•                  changes in laborrelations,

 

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

 

•                  unexpectedjudicial decisions,

 

•                  changes ininterest rates and capital market conditions,

 

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

 

•                  naturaldisasters, and

 

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

 

12

----

 

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 68 Companyoperated retail stores located in outlet malls throughout the UnitedStates.  The Company’s licensing segmentgenerates royalty income by licensing the Company’s trademarks for use by othermanufacturers of specified products in specified geographic regions.

 

**CriticalAccounting Policies**

 

There have been no material changes to the Company’s criticalaccounting policies during the six months ended March 31, 2004.

 

Management’sDiscussion and Analysis discusses the results of operations and financialcondition as reflected in the Company’s consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, disclosure ofcontingent assets and liabilities at the date of the financial statements andreported amounts of revenues and expenses during the reporting period. On anongoing basis, management evaluates its estimates and judgments, includingthose related to accounts receivable; inventory valuation; amortization andrecoverability of long-lived assets, including goodwill; litigation accruals;workers’ compensation liabilities; revenue recognition; and reorganizationcharges. Management bases its estimates and judgments on the Company’ssubstantial historical experience and other relevant factors, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources.

 

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

 

13

----

 

**Comparison of Three Months EndedMarch 31, 2004 to Three Months Ended March 31, 2003**

 

*Net Sales*

 

Net sales decreased $3.4 million, or 2.5%, to $132.1 million for thesecond quarter of fiscal 2004, compared to net sales of $135.5 million for thesecond quarter of fiscal 2003.  Thedecrease in net sales is primarily attributable to reduced private label salesand decreased Claiborne® sales due to decreased orders for casual pants duringthe second quarter of fiscal 2004.  Theoverall sales decrease related to an increase in unit sales of approximately0.4% and a decrease in average sales price of approximately 2.9%.

 

*Gross Profit*

 

Gross profit as a percentage of net sales increased to 27.9% in thesecond quarter of fiscal 2004, compared to 25.7% in the second quarter offiscal 2003.  The increase in grossprofit percentage is primarily related to improved margins on women’s wearsales due to the addition of higher volume replenishment pant programs andreduced fixed overhead costs for the women’s division, gross margincontribution from the Company’s new Kenneth Cole® licensed products and lowernegotiated costs for men’s private label products.

 

*Selling, General and AdministrativeExpenses*

 

Selling, general and administrative expenses as a percentage of netsales increased to 24.6% in the second quarter of fiscal 2004, compared to23.6% in the second quarter of fiscal 2003. The $0.5 million, or 1.5%, increase in selling, general andadministrative expenses is primarily due to $0.7 million in one-time expensesincurred due to the global headquarters relocation and a $0.7 million increasein media advertising expense due to the timing of programs as compared to the priorquarter.  These increases were partiallyoffset by a net decrease in legal expenses of $0.9 million, as the secondquarter of fiscal 2003 included both $0.9 million in fees related to a proxycontest as well as a settlement with one of the Company’s former landlords for$0.5 million.  During the second quarterof fiscal 2004, the Company’s legal costs included expenses to record aprobable loss in a wrongful termination suit of $0.5 million.

 

*Other Income (Expense), Net*

 

Other income (expense), net, decreased $0.5 million to $26,000 in otherincome in the second quarter of fiscal 2004, compared to $0.5 million in otherincome in the second quarter of fiscal 2003. The second quarter of fiscal 2003 includes a gain on the sale of theEdinburg, Texas manufacturing facility of $0.3 million.

 

*Interest Expense*

 

Interest expense decreased $0.2 million, or 29.2%, to $0.5 million forthe second quarter of fiscal 2004, compared to $0.7 million for the secondquarter of fiscal 2003, primarily due to reduced borrowings under the Company’srevolving credit facility during the second quarter of fiscal 2004.

 

*Income Taxes*

 

The Company’s income tax provision as a percentage of income beforeincome tax was 38.2% for the second quarter of fiscal 2004.  Comparatively, the Company’s income taxprovision as a percentage of income before income tax was 39.4% for the secondquarter 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 March 31,2003.

 

14

----

 

**Comparison of Six Months Ended March31, 2004 to Six Months Ended March 31, 2003**

 

*Net Sales*

 

Net sales decreased $9.6 million, or 3.8%, to $239.8 million for thesix months ended March 31, 2004, compared to net sales of $249.4 million forthe six months ended March 31, 2003. The decrease in net sales is primarily attributable to a decrease inmen’s wear closeout sales, reduced women’s wear sales and decreased Claiborne®sales due to decreased orders for casual pants during the six months endedMarch 31, 2004.  Unit sales decreased4.5% while the average sales price increased 0.7%.

 

*Gross Profit*

 

Gross profit as a percentage of net sales increased to 28.5% in the sixmonths ended March 31, 2004, compared to 25.5% in the six months ended March31, 2003.  The increase in gross profitpercentage is primarily related to decreased lower-margin closeout sales,improved margins on women’s wear sales due to the addition of higher volumereplenishment pant programs and reduced fixed overhead costs for the women’sdivision, gross margin contribution from the Company’s new Kenneth Cole®licensed products and lower negotiated costs for men’s private label products.

 

*Selling, General and AdministrativeExpenses*

 

Selling, general and administrative expenses as a percentage of netsales increased to 25.9% in the six months ended March 31, 2004, compared to25.5% in the six months ended March 31, 2003. The $1.5 million, or 2.3%, decrease in selling, general andadministrative expenses primarily relates to a net decrease in media advertisingexpense of $1.4 million, as the prior period included costs to introduce theHaggar® comfort fit waist pants, and a net decrease in legal expenses of $0.9million, as the prior period included both $1.2 million in fees related to aproxy contest as well as a settlement with one of the Company’s formerlandlords for $0.5 million.  During thesecond quarter of fiscal 2004, the Company’s legal costs included expenses torecord probable losses in a wrongful termination suit of $0.5 million and otherlegal and professional fees.  Thedecreases were partially offset by $0.8 million in one-time expenses incurreddue to the global headquarters relocation.

 

*Other Income*

 

Other income decreased $0.1 million to $0.4 million during the sixmonths ended March 31, 2004, compared to $0.5 million for the six months endedMarch 31, 2003.  The prior periodincludes a gain on the sale of the Edinburg, Texas manufacturing facility of$0.3 million, while the current period includes a gain on the sale of anotherproperty of $0.2 million.

 

*Interest Expense*

 

Interest expense decreased $0.5 million, or 33.8%, to $0.9 million forthe six months ended March 31, 2004, compared to $1.4 million for the sixmonths ended March 31, 2003, primarily due to significantly reduced debt levelsthroughout the six months ended March 31, 2004 combined with lower interestrates on variable rate debt.

 

*Income Taxes*

 

The Company’s income tax benefit as a percentage of loss before incometax and cumulative effect of accounting change was 38.2% for the six monthsended March 31, 2004.  Comparatively,the Company’s income tax benefit as a percentage of loss before income tax andcumulative effect of accounting change was 41.6% for the six months ended March31, 2003.  The decrease in the effectivetax rate was primarily due to an increase in estimated annual earnings beforetax for fiscal 2004 as compared to fiscal 2003, as well as a reduction ofestimated unfavorable permanent differences for fiscal 2004 as compared to theamount used in the effective tax rate calculation at March 31, 2003.

 

15

----

 

**2001 Reorganization**

 

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

 
|                                    |   | **Balance  March 31, 2001** |   | **Payments** |   | **Adjustments** |   | **Balance  March 31, 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 six months ended March31, 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 68 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 (loss) is comprised ofsegment net income before interest expense and provision (benefit) for incometaxes.

 

The table below reflects the Company’ssegment results for the three and six months ended March 31, 2004 and 2003:

 

 
| **Three Months Ended  March 31,** |   | **Wholesale** |    | **Retail and  Licensing** |   | **Consolidated** |   |
|-----------------------------------|--------|---------------|---------|---------------------------|--------|------------------|--------|
| **2004**                          |   |          |    |                      |   |             |   |
| Net sales                         |   | $             | 122,053 |                      | $      | 10,018           |   | $ | 132,071 |   |
| Segment profit  (loss)            |   | $             | 5,064   |                      | $      | (282             | )      | $ | 4,782 |   |
|                              |   |          |    |                      |   |             |   |
| **2003**                          |   |          |    |                      |   |             |   |
| Net sales                         |   | $             | 126,744 |                      | $      | 8,743            |   | $ | 135,487 |   |
| Segment profit  (loss)            |   | $             | 4,635   |                      | $      | (965             | )      | $ | 3,670 |   |

 
| **Six Months Ended  March 31,** |   | **Wholesale** |    | **Retail and  Licensing** |   | **Consolidated** |   |
|---------------------------------|--------|---------------|---------|---------------------------|--------|------------------|--------|
| **2004**                        |   |          |    |                      |   |             |   |
| Net sales                       |   | $             | 214,462 |                      | $      | 25,343           |   | $ | 239,805 |   |
| Segment profit                  |   | $             | 6,052   |                      | $      | 1,103            |   | $ | 7,155 |   |
|                            |   |          |    |                      |   |             |   |
| **2003**                        |   |          |    |                      |   |             |   |
| Net sales                       |   | $             | 227,087 |                      | $      | 22,307           |   | $ | 249,394 |   |
| Segment profit  (loss)          |   | $             | 1,285   |                      | $      | (200             | )      | $ | 1,085 |   |

 

16

----

 

*Wholesale Segment*

 

Wholesale segment net sales decreased $4.7 million, or 3.7%, to $122.1million for the second quarter of fiscal 2004, compared to $126.7 million forthe second quarter of fiscal 2003.  Thedecrease in wholesale segment net sales during the second quarter of fiscal 2004is primarily attributable to reduced private label sales and decreasedClaiborne® sales due to decreased orders for casual pants during the secondquarter of fiscal 2004.

 

Wholesale segment net sales decreased $12.6 million, or 5.6%, to $214.5million for the six months ended March 31, 2004, compared to $227.1 million forthe six months ended March 31, 2003. The decrease in wholesale segment net sales is primarily attributable toa decrease in men’s wear closeout sales, reduced women’s wear sales and decreasedClaiborne® sales due to decreased orders for casual pants during the secondquarter of fiscal 2004.

 

Wholesale segment profit increased $0.5 million, or 9.3% to $5.1million for the second quarter of fiscal 2004, compared to $4.6 million profitfor the second quarter of fiscal 2003. The increase in segment profit is primarily attributable to improvedmargins on women’s wear sales due to the addition of higher volumereplenishment pant programs and reduced fixed overhead costs for the women’sdivision, gross margin contribution from the Company’s new Kenneth Cole®licensed products and lower negotiated costs for men’s private label products.

 

Wholesale segment profit increased $4.8 million to $6.1 million for thesix months ended March 31, 2004, compared to $1.3 million for the six monthsended March 31, 2003.  The increase insegment profit is primarily attributable to improved margins due to decreasedlower-margin closeout sales and improved margins for men’s private label linesand women’s wear products. The increase in wholesale segment profit is also dueto lower selling, general and administrative expenses, as the prior periodincluded strategic media advertising expense to introduce the Haggar® comfortfit waist pants.

 

*Retail and Licensing Segments*

 

Retail and licensing segments net sales increased $1.3 million, or14.6%, to $10.0 million for the second quarter of fiscal 2004, compared to $8.7million for the second quarter of fiscal 2003. The increase in retail and licensing segments net sales during thesecond quarter of fiscal 2004 is primarily attributable to increased sales atexisting retail stores.

 

Retail and licensing segments net sales increased $3.0 million, or13.6%, to $25.3 million for the six months ended March 31, 2004, compared to$22.3 million for the six months ended March 31, 2003.  The increase in retail and licensingsegments net sales during the six months ended March 31, 2004 is primarilyattributable to increased sales at existing retail stores.

 

Retail and licensing segments loss decreased $0.7 million, or 70.8%, toa $0.3 million loss for the second quarter of fiscal 2004, compared to a $1.0million loss for the second quarter of fiscal 2003.  The decrease in retail and licensing segments loss is 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.

 

Retail and licensing segments profit increased $1.3 million to a $1.1million profit for the six months ended March 31, 2004 compared to a $0.2million loss for the six months ended March 31, 2003.  The increase in retail and licensing segments profit is 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.

 

17

----

 

**Liquidityand Capital Resources**

 

The Company’s principal sources of liquidity are cash flows fromoperations and borrowings under its unsecured revolving credit facility.  As of March 31, 2004, the Company had cashand cash equivalents of $6.6 million.

 

As of March 31, 2004, the Company had $6.0 million outstanding under a$110.0 million unsecured revolving credit agreement (the “Agreement”).  The available borrowing capacity wasrestricted to $68.0 million at March 31, 2004, under the Agreement’s fundeddebt to operating cash flow covenant. The Company incurred approximately $0.3 million in commitment feesrelated to the available borrowing capacity during the six months ended March31, 2004. The interest rates ranged from 2.34% to 4.00% during the six monthsended March 31, 2004, and were based upon both margins over a bank base rateand margins over LIBOR, depending on the borrowing option selected by theCompany.  The Agreement, which expiresin June 2005, prohibits the Company from pledging its accounts receivable andinventories, contains limitations on incurring additional indebtedness,requires maintaining minimum net worth levels of the Company and the Company’smain operating subsidiary, and requires the maintenance of certain financialratios.  The Agreement also prohibitsthe payment of any dividend if a default exists after giving effect to such adividend.  As of March 31, 2004, theCompany was in full compliance with its financial and other covenants.

 

Long-term debt also includes $3.6 million in senior notes.  Significant terms of the senior notesinclude interest payable semi-annually at 8.49% per annum with the finalprincipal payment of $3.6 million due on October 30, 2004.  The terms and conditions of the notepurchase agreement governing the senior notes include restrictions on the saleof assets, limitations on additional indebtedness and the maintenance ofcertain net 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 at March31, 2004, was 1.06%.  The IDR bondsmature in fiscal 2026, but the Company has the option to prepay the balancewithout penalty in fiscal 2006.  The Companyplans to exercise the prepayment option, and to make principal payments of $0.1and $2.0 million in fiscal 2005 and 2006, respectively.  The IDR bonds are collateralized by certainbuildings and equipment of $0.3 million as of March 31, 2004.

 

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

 

During the second quarter of fiscal 2004, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on May 10,2004, which will be paid on May 24, 2004. The first quarter of fiscal 2004 dividend of approximately $0.3 millionwas paid in February 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 And CommercialCommitments” of the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission on December 12, 2003.  There have been no material changes in theCompany’s contractual obligations and commercial commitments since September30, 2003.

 

*Cash Flow Results for the Six MonthsEnded March 31, 2004*

 

Net cash used in operating activities increased $0.2 million to $6.4million during the six months ended March 31, 2004, compared to $6.2 millionduring the six months ended March 31, 2003. Increased cash flows due to the Company’s improved profitability whencomparing the six months ended March 31, 2004 to the six months ended March 31,2003 were offset by increased accounts receivable due to a higher volume ofshipments toward the end of the period. Changes in inventory and accrued liabilities are primarily due to thetiming of receipt of inventory for some men’s private label programs.

 

The Company used $0.4 million in investing activities during the sixmonths ended March 31, 2004, compared to cash provided by investing activitiesof $2.1 during the six months ended March 31, 2003.  Investing activities for the six months ended March 31, 2004included an additional $2.0 million related to capital improvements of the new

 

18

----

 

global headquarters facility, $1.3 million of which were financed withfunds transferred from restricted cash. Investing activities for the six months ended March 31, 2003 included$2.5 million in proceeds from the sale of the Company’s Edinburg, Texasmanufacturing facility.

 

Net cash provided by financing activities decreased $0.5 million, or7.5%, to $5.8 million in the six months ended March 31, 2004 from $6.3 millionin the six months ended March 31, 2003. The decrease was primarily due to a reduction in net borrowings duringthe six-month period for fiscal 2004, offset in part by proceeds from theexercise of employee stock options.

 

**Recently Issued and Adopted FinancialAccounting Standards**

 

On March 23, 2003, the Financial Accounting Standards Board issued SFASNo. 132 (Revised 2003) (“SFAS No. 132”), “Employers’ Disclosures About Pensionsand Other Postretirement Benefits.” SFAS No. 132 increases the existing disclosure requirements by requiringcompanies to disclose more details about pension plan assets, benefitobligations, cash flows, benefit costs and related information. Companies willbe required to segregate plan assets by category, such as debt, equity and realestate, and to provide certain expected rates of return and other informationaldisclosures. SFAS No. 132 also requires companies to disclose various elementsof pension and postretirement benefit costs in interim-period financialstatements for quarters beginning after March 15, 2003. The Company hasdetermined that no additional disclosures are required due to the immaterialityof the Company’s pension plan assets and benefit obligations.

 

**Item 3****.  Quantitative and Qualitative Disclosuresabout 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 March 31, 2004, the Company’s exposure to interest rate risk wasminimal 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.

 

19

----

 

**Part II****.  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 agreement relatedto an action for trademark infringement. Under the terms of the settlement, the Company paid $0.6 million to theplaintiff, which the Company had accrued in fiscal 2003, net of anticipatedinsurance proceeds, based on the Company’s estimated range of probableloss.   In April 2004, the Companyreceived reimbursement for a portion of the settlement from an insurer of $0.3million.  The Company does notanticipate additional reimbursement for the remainder of the settlement.

 

The Company is a defendant in a wrongful termination lawsuit in which ajury rendered a verdict in favor of the plaintiff against the Company in theamount of $843,000, subject to potential doubling in the event judgment isentered on a jury verdict of willful discrimination, plus pre- andpost-judgment interest and attorneys’ fees. The trial court judge reversed the jury’s verdict and rendered ajudgment in favor of the Company granting zero damages to the plaintiff.  The plaintiff appealed the judgment to theUnited States Court of Appeals for the Fifth Circuit, which reversed thejudgment of the trial court and remanded the matter back to the trial court forfurther proceedings.  On February 23,2004, the United States Supreme Court denied the Company’s request for reviewof the case.  As of March 31, 2004, theCompany recorded $0.5 million based on the estimated range of probable loss inthis case, which was included in accrued liabilities.

 

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 ithas meritorious 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 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 is both legally and factually incorrect.

 

**Item 2.  Chan****ges in Securities and Use of Proceeds**

 

None.

 

**Item 3.  Default****s Upon Senior Securities**

 

None.

 

20

----

 

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

 

The Company’s Annual Meeting of Stockholders was held on March 11,2004. At such meeting, J.M. Haggar, III, Richard W. Heath and James Neal Thomaswere elected to serve as Class II directors of the Company for a three yearterm and until their respective successors are elected and qualified. Of the5,768,130 shares represented at the meeting in person or by proxy, Mssrs.Haggar, Heath and Thomas received 5,510,386, 5,431,660 and 5,431,560 votes,respectively, for their election as Class II directors.  Of the shares represented, 257,744, 336,470and 336,570 shares withheld vote for the election of Mssrs. Haggar, Heath andThomas, respectively.  The otherdirectors whose terms of office continued after the meeting are as follows: RaeF. Evans, Donald E. Godwin, Thomas G. Kahn and John C. Tolleson.

 

The stockholders also ratified the selection of PricewaterhouseCoopersLLP as the independent auditors for the Company for the fiscal year endedSeptember 30, 2004.  The votes withrespect to this resolution were 5,605,046 for the resolution and 161,626against, with 1,458 shares abstaining on the matter.

 

**Item 5.  Other Information**

 

None.

 

**Item 6. Exhibits and Reportson Form 8-K**

 
| (a)    | Exhibits. |
|--------|-----------|
|   |      |   |
|   | 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 January 27, 2004, reporting, under Item 7, the issuance of apress release announcing the Company’s fiscal 2004 first quarter earnings andfiscal 2004 projected quarterly and annual operating results.  A copy of the press release announcing theoperating results and including financial statements was attached as an exhibitand reported under Item 9 of the Form 8-K.

 

21

----

 

**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: May 12, 2004 |         |   |
|               |         |   |
|               |         | /s/ David M. Tehle |   |
|               |         | David M. Tehle |
|               |         | *(Ex**ecutive  Vice President, Chief  Financial Officer, Secretary and  Treasurer)* |
|               |         |   |
|               |         | Signed on behalf of the  registrant and as principal  financial officer. |

 

22

----

 

**INDEXTO EXHIBITS**

 
| **Exhibit  Number** |   | **Description**                                                                        |
|---------------------|--------|----------------------------------------------------------------------------------------|
|                |   |                                                                                   |
| 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             |

 

23

----