**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

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| **(Mark  One)**                                                                                                                                                                                                            |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                       |
| **ý**                                                                                                                                                                                                                 | **Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                       |   |   |
| **For the quarterly period ended December 31, 2002.**                                                                                                                                                                      |
|                                                                                                                                                                                                                       |
| **OR**                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                       |
| **o**                                                                                                                                                                                                                      | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                       |
| **For the transition period  from               to               .** |
|                                                                                                                                                                                                                       |
| **Commission File Number:  0-20850**                                                                                                                                                                                  |

 

**HAGGARCORP.**

(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) |
|                                                             |   |                                     |
| **6113 Lemmon Avenue  Dallas, Texas  75209**                |
| (Address of  principal executive offices)  (zip code)            |
|                                                             |
| **Telephone Number (214) 352-8481**                              |
| (Registrant’s  telephone number, including area code)       |

 

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

 

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

 

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

 

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

 

As of February 14, 2003,there were 6,418,426, shares of the Registrant’s common stock outstanding.

 

 

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**HaggarCorp. and Subsidiaries**

 

**Index**

 
| Part I. Financial Information |
|-------------------------------|
|                          |   |
|                          | Item 1.   Financial Statements |
|                          |   |   |
|                          |   | Consolidated Balance Sheets  (As of December 31, 2002 and September 30, 2002) |
|                          |   |   |
|                          |   | Consolidated  Statements of Operations and Comprehensive Income  (Three months ended December 31, 2002 and 2001) |
|                          |   |   |
|                          |   | Consolidated  Statements of Cash Flows  (Three months ended December 31, 2002 and 2001) |
|                          |   |   |
|                          |   | 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  6.   Exhibits and Reports on Form 8-K |
|                          |   |   |
| Signature                     |
|                          |
| Certifications                |
|                               |  |  |  |

 

2

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**HaggarCorp. and Subsidiaries**

 

**Consolidated Balance Sheets**

*(in thousands)*

 
|                                                                                                                                                      |   | **December  31,  2002** |       | **September  30,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|--------------------------|------------|
|                                                                                                                                                      |   | **(unaudited)**         |       |                     |       |
| **Assets**                                                                                                                                                |   |                    |       |                     |       |
| Current assets:                                                                                                                                           |   |                    |       |                     |       |
| Cash  and cash equivalents                                                                                                                                |   | $                       | 8,091      |                     | $          | 4,124 |   |
| Accounts  receivable, net                                                                                                                                 |   | 47,879                  |       | 64,284                   |       |
| Inventories                                                                                                                                               |   | 94,235                  |       | 100,996                  |       |
| Property  held for sale                                                                                                                                   |   | 2,157                   |       | 2,157                    |       |
| Deferred  tax benefit                                                                                                                                     |   | 11,944                  |       | 12,087                   |       |
| Other  current assets                                                                                                                                     |   | 5,689                   |       | 2,766                    |       |
| Total current assets                                                                                                                                      |   | 169,995                 |       | 186,414                  |       |
|                                                                                                                                                      |   |                    |       |                     |       |
| Property,  plant, and equipment, net                                                                                                                      |   | 44,225                  |       | 46,195                   |       |
| Goodwill,  net                                                                                                                                            |   | 9,472                   |       | 9,472                    |       |
| Other  assets                                                                                                                                             |   | 8,093                   |       | 7,896                    |       |
| Total  assets                                                                                                                                             |   | $                       | 231,785    |                     | $          | 249,977 |   |
|                                                                                                                                                      |   |                    |       |                     |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                            |   |                    |       |                     |       |
| Current  liabilities:                                                                                                                                     |   |                    |       |                     |       |
| Accounts  payable                                                                                                                                         |   | $                       | 29,906     |                     | $          | 30,542 |   |
| Accrued  liabilities                                                                                                                                      |   | 29,436                  |       | 35,669                   |       |
| Accrued  wages and other employee compensation                                                                                                            |   | 3,060                   |       | 6,713                    |       |
| Current  portion of long-term debt                                                                                                                        |   | 3,671                   |       | 3,742                    |       |
| Total current liabilities                                                                                                                                 |   | 66,073                  |       | 76,666                   |       |
|                                                                                                                                                      |   |                    |       |                     |       |
| Other accrued liabilities                                                                                                                                 |   | 8,550                   |       | 8,247                    |       |
| Long-term  debt                                                                                                                                           |   | 15,671                  |       | 21,343                   |       |
| Total  liabilities                                                                                                                                        |   | 90,294                  |       | 106,256                  |       |
|                                                                                                                                                      |   |                    |       |                     |       |
| Commitments  and contingencies                                                                                                                            |   |                    |       |                     |       |
|                                                                                                                                                      |   |                    | ** ** |                     | ** ** |
| **Stockholders’ equity:**                                                                                                                            |   |                    | ** ** |                     | ** ** |
| Common  stock – par value $0.10 per share; 25,000,000 shares authorized;  8,660,609 shares issued at December 31,  2002 and September 30, 2002. |   | 866                     |       | 866                      |       |
| Additional  paid-in capital                                                                                                                               |   | 42,911                  |       | 42,911                   |       |
| Cumulative  translation adjustment                                                                                                                        |   | (438                    | )          | (534                     | )          |
| Retained  earnings                                                                                                                                        |   | 123,113                 |       | 125,439                  |       |
|                                                                                                                                                      |   | 166,452                 |       | 168,682                  |       |
|                                                                                                                                                      |   |                    |       |                     |       |
| Less  – Treasury stock, 2,242,205 shares at cost at December 31, 2002 and September  30, 2002.                                                       |   | (24,961                 | )          | (24,961                  | )          |
| Total  stockholders’ equity                                                                                                                          |   | 141,491                 |       | 143,721                  |       |
| Total  liabilities and stockholders’ equity                                                                                                          |   | $                       | 231,785    |                     | $          | 249,977 |   |

 

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

 

3

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**HaggarCorp. and Subsidiaries**

 

**Consolidated Statements of Operationsand Comprehensive Income**

*(unaudited, in thousands, except pershare amounts)*

 

 
|                                                                                                   |   | **Three  Months Ended  December 31,** |    |
|--------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                                   |   | **2002**                              |    | **2001** |   |
|                                                                                                   |   |                                  |    |   |   |
| Net  sales                                                                                             |   | $                                     | 113,907 |   | $ | 99,330 |   |
| Cost  of goods sold                                                                                    |   | 85,303                                |    | 70,933 |   |
| Gross  profit                                                                                          |   | 28,604                                |    | 28,397 |   |
| Selling,  general and administrative expenses                                                          |   | (31,510                               | )       | (27,709 | ) |
| Royalty  income                                                                                        |   | 373                                   |    | 395 |   |
| Other  income (expense), net                                                                           |   | (52                                   | )       | 40 |   |
| Interest  expense                                                                                      |   | (735                                  | )       | (1,011 | ) |
| Income  (loss) before provision (benefit) for income taxes and cumulative effect of  accounting change |   | (3,320                                | )       | 112 |   |
|                                                                                                   |   |                                  |    |   |   |
| Provision  (benefit) for income taxes                                                                  |   | (1,315                                | )       | 40 |   |
|                                                                                                   |   |                                  |    |   |   |
| Income  (loss) before cumulative effect of accounting change                                           |   | $                                     | (2,005  | ) | $ | 72 |   |
|                                                                                                   |   |                                  |    |   |   |
| Cumulative  effect of accounting change                                                                |   | —                                |    | (15,578 | ) |
|                                                                                                   |   |                                  |    |   |   |
| Net  loss                                                                                              |   | $                                     | (2,005  | ) | $ | (15,506 | ) |
|                                                                                                   |   |                                  |    |   |   |
| Other  comprehensive income (loss):                                                                    |   |                                  |    |   |   |
|                                                                                                   |   |                                  |    |   |   |
| Cumulative  translation adjustment                                                                     |   | $                                     | 96      |   | $ | (41 | ) |
|                                                                                                   |   |                                  |    |   |   |
| Comprehensive  loss                                                                                    |   | $                                     | (1,909  | ) | $ | (15,547 | ) |
|                                                                                                   |   |                                  |    |   |   |
| NET  INCOME (LOSS) PER COMMON SHARE:                                                                   |   |                                  |    |   |   |
|                                                                                                   |   |                                  |    |   |   |
| BASIC  AND DILUTED                                                                                     |   |                                  |    |   |   |
| Income  (loss) before cumulative effect of accounting change                                           |   | $                                     | (0.31   | ) | $ | 0.01 |   |
| Cumulative  effect of accounting change                                                                |   | —                                |    | (2.44 | ) |
| Net  loss                                                                                              |   | $                                     | (0.31   | ) | $ | (2.43 | ) |
|                                                                                                   |   |                                  |    |   |   |
| Weighted  average number of common shares outstanding – Basic and Diluted                         |   | 6,429                                 |    | 6,381 |   |

 

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

 

4

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**HaggarCorp. and Subsidiaries**

 

**Consolidated Statements of Cash Flows**

*(unaudited, in thousands)*

 
|                                                       |   | **Three  Months Ended  December 31,** |   |
|------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                       |   | **2002**                              |   | **2001** |   |
|                                                       |   |                                  |   |   |   |
| **Cash  Flows from Operating Activities**                  |   |                                  |   |   |   |
| Net  loss                                                  |   | $                                     | (2,005 | ) | $ | (15,506 | ) |
| Adjustments  to reconcile net loss to net cash provided by |   |                                  |   |   |   |
| operating  activities:                                     |   |                                  |   |   |   |
| Cumulative  effect of accounting change                    |   | —                                |   | 15,578 |   |
| Depreciation  and amortization                             |   | 2,257                                 |   | 2,182 |   |
| Deferred  tax benefit                                      |   | (46                                   | )      | — |   |
| Other  noncash loss                                        |   | 1                                     |   | — |   |
| Changes  in assets and liabilities:                        |   |                                  |   |   |   |
| Accounts  receivable, net                                  |   | 16,405                                |   | 29,415 |   |
| Inventories                                                |   | 6,761                                 |   | (12,341 | ) |
| Other  current assets                                      |   | (2,923                                | )      | (2,011 | ) |
| Accounts  payable                                          |   | 5,364                                 |   | (11,725 | ) |
| Accrued  liabilities                                       |   | (6,233                                | )      | (1,680 | ) |
| Accrued  wages and other employee compensation             |   | (3,653                                | )      | (3,605 | ) |
| Other  accrued liabilities                                 |   | 303                                   |   | 329 |   |
| Net  cash provided by operating activities                 |   | 16,231                                |   | 636 |   |
|                                                       |   |                                  |   |   |   |
| **Cash  Flows from Investing Activities**                  |   |                                  |   |   |   |
| Purchases  of property, plant, and equipment, net          |   | (232                                  | )      | (745 | ) |
| Decrease  (increase) in other assets                       |   | (64                                   | )      | 224 |   |
| Net  cash used in investing activities                     |   | (296                                  | )      | (521 | ) |
|                                                       |   |                                  |   |   |   |
| **Cash  Flows from Financing Activities**                  |   |                                  |   |   |   |
| Purchase  of treasury stock at cost                        |   | —                                |   | (351 | ) |
| Proceeds  from issuance of long-term debt                  |   | 55,000                                |   | 104,000 |   |
| Payments  on long-term debt                                |   | (60,743                               | )      | (108,666 | ) |
| Increase  (decrease) in book overdrafts                    |   | (6,000                                | )      | 1,834 |   |
| Payments  of cash dividends                                |   | (321                                  | )      | (319 | ) |
| Net  cash used in financing activities                     |   | (12,064                               | )      | (3,502 | ) |
|                                                       |   |                                  |   |   |   |
| Effects  of exchange rates on cash and cash equivalents    |   | 96                                    |   | (41 | ) |
|                                                       |   |                                  |   |   |   |
| Increase  (decrease) in cash and cash equivalents          |   | 3,967                                 |   | (3,428 | ) |
| Cash  and cash equivalents, beginning of period            |   | 4,124                                 |   | 7,800 |   |
| Cash  and cash equivalents, end of period                  |   | $                                     | 8,091  |   | $ | 4,372 |   |

 

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

 

5

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**HaggarCorp. and Subsidiaries**

 

**Notes to Consolidated FinancialStatements**

*(unaudited)*

 

**1.  Basis of Presentation**

 

*FinancialStatement Preparation*

 

The consolidated balancesheet as of December 31, 2002, and the consolidated statements of operationsand comprehensive income and cash flows for the three months ended December 31,2002 and 2001, have been prepared by Haggar Corp. (together with itssubsidiaries, the “Company”) without audit. In the opinion of management, all adjustments necessary (which includeonly normal recurring adjustments) to present fairly the consolidated financialposition, results of operations, and cash flows of the Company at December 31,2002, and for all other periods presented, have been made.  Certain information and disclosures normallyincluded in financial statements prepared in accordance with generally acceptedaccounting principles have been omitted. These financial statements should be read in conjunction with thefinancial statements and accompanying notes thereto in the Company’s AnnualReport on Form 10-K, as amended, for the fiscal year ended September 30, 2002.

 

*Accountingfor Stock Based Compensation*

 

The Company has along-term incentive plan which authorizes the grant of stock options to keyemployees. The options vest over a period of three to five years and expire tenyears from the date of grant. The options are issued at an exercise price notless than the fair market value of the Company’s common stock on the date ofthe grant. The long-term incentive plan allows for 1,750,000 shares to begranted.  On October 21, 2002, inaccordance with the terms of the plan, this long-term incentive plan terminatedand, accordingly, no further options may be granted under the plan.  The following table summarizes the changesin common stock options during the three months ended December 31, 2002:

 
|                                          |   | **Shares** |   | **Weighted  AverageExercise Price** |   |
|-----------------------------------------------|--------|------------|--------|-------------------------------------|--------|
|                                          |   |       |   |                                |   |
| Options  outstanding as of September 30, 2002 |   | 1,420,775  |   | $                                   | 12.61  |   |
|                                          |   |       |   |                                |   |
| Options  canceled                             |   | (147,330   | )      | $                                   | 13.24  |   |
| Options  outstanding as of December 31, 2002  |   | 1,273,445  |   | $                                   | 12.54  |   |
| Options  exercisable as of December 31, 2002  |   | 1,242,245  |   | $                                   | 12.52  |   |

 

6

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The Company accounts forthe long-term incentive plan under Accounting Principles Board Opinion No. 25,under which no compensation has been recognized.  As required under Statement of Financial Accounting Standards No.123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” and Statementof Financial Accounting Standards No. 148 (“SFAS No. 148”), “Accounting forStock-Based Compensation Transition and Disclosure,” the pro forma effects ofstock-based compensation on net loss and net loss per common share are asfollows *(in thousands, except per shareamounts)*:

 
|                                                                                         |   | **Three  Months Ended  December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                                         |   | **2002**                              |   | **2001** |   |
|                                                                                         |   |                                  |   |   |   |
| Net  loss:                                                                                   |   |                                  |   |   |   |
| As  reported                                                                                 |   | $                                     | (2,005 | ) | $ | (15,506 | ) |
| Add  back:  Stock-based employee  compensation included in net loss as reported         |   | —                                |   | — |   |
| Less:  Pro-forma stock-based employee  compensation expense, net of related tax effects |   | (118                                  | )      | (126 | ) |
| Pro  forma                                                                                   |   | (2,123                                | )      | (15,632 | ) |
|                                                                                         |   |                                  |   |   |   |
| Net  loss per common share on a basic and diluted basis:                                     |   |                                  |   |   |   |
| As  reported                                                                                 |   | $                                     | (0.31  | ) | $ | (2.43 | ) |
| Pro  forma                                                                                   |   | (0.33                                 | )      | (2.45 | ) |

 

There were no optionsgranted during the three months ended December 31, 2002 and 2001.

 

*Reclassifications*

 

Certain items in theprior period presentation have been reclassified to conform to the currentperiod presentation.

 

**2.  Concentrations ofCredit Risk**

 

Financial instruments,which potentially expose the Company to concentrations of credit risk, asdefined by Statement of Financial Accounting Standards No. 105, “Disclosure ofInformation about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentrations of Credit Risk,” consist primarily oftrade accounts receivable. The Company’s largest customer, J.C. Penney Company,Inc., accounted for approximately 19% and 23% of the Company’s net sales duringthe three months ended December 31, 2002 and 2001, respectively, andapproximately 26% and 25% of the Company’s outstanding trade receivables as ofDecember 31, 2002 and September 30, 2002. The Company’s second largest customer, Kohl’s Department Stores, Inc.,accounted for approximately 17% and 16% of the Company’s net sales during thethree months ended December 31, 2002 and 2001, respectively, and approximately14% and 13% of the Company’s outstanding trade receivables as of December 31,2002 and September 30, 2002, respectively. No other customer accounts for more than 10% of consolidatedrevenues.  The loss of the business of oneor more of the Company’s larger customers could have a material adverse effecton the Company. The Company has no long-term commitments or contracts with anyof its customers. The Company establishes an allowance for doubtful accountsbased upon factors surrounding the credit risk of specific customers,historical trends and other information.

 

7

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**3.  Inventories**

 

Inventories are stated atthe lower of cost (first-in, first-out) or market and consisted of thefollowing at December 31, 2002, and September 30, 2002 *(in thousands)*:

 
|                      |   | **December  31,  2002** |   | **September  30,  2002** |   |
|---------------------------|--------|-------------------------|--------|--------------------------|--------|
| Piece  goods              |   | $                       | 9,363  |                     | $      | 8,270 |   |
| Trimmings  & supplies |   | 2,429                   |   | 2,908                    |   |
| Work-in-process           |   | 7,814                   |   | 8,143                    |   |
| Finished  garments        |   | 76,559                  |   | 83,742                   |   |
|                      |   | 96,165                  |   | 103,063                  |   |
| Inventory  reserves       |   | (1,930                  | )      | (2,067                   | )      |
| Total  inventories        |   | $                       | 94,235 |                     | $      | 100,996 |   |

 

Work-in-process andfinished garments inventories consisted of materials, labor and manufacturingoverhead.  Inventory reserves as ofDecember 31, 2002, and September 30, 2002 consisted primarily of allowances forslow moving and obsolete piece goods and trimming supplies that are notforecasted to be used in production as well as reserves to reflect estimatedphysical count differences based on the results of cycle counts performed.

 

**4.**  **AssetImpairment -****Goodwill**

 

On October 1, 2001, theCompany adopted Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets” (“SFAS No. 142”), and recorded a $15.6 millionimpairment of goodwill related to the 1999 acquisition of Jerell, Ltd.(“Jerell”), the Company’s women’s wear subsidiary.  Subsequent to the acquisition, pricing pressures and a weakretail environment for women’s apparel resulted in a revised earnings forecastfor Jerell and the women’s wear business. In order to determine the fair value of goodwill, the Company obtainedan independent appraisal, which considered both prices of comparable businessesand the discounted value of projected cash flows.  There was no tax benefit associated with the impairment charge.

 

**5.  Long-Term Debt**

 

Long-term debt consistedof the following at December 31, 2002, and September 30, 2002 *(in thousands)*:

 
|                                    |   | **December  31,  2002** |   | **September  30,  2002** |   |
|-----------------------------------------|--------|-------------------------|--------|--------------------------|--------|
| Borrowings  under revolving credit line |   | $                       | 10,000 |                     | $      | 12,000 |   |
| Industrial  Development Revenue         |   |                    |   |                     |   |
| Bonds                                   |   | 2,200                   |   | 2,300                    |   |
| Senior  notes                           |   | 7,142                   |   | 10,715                   |   |
| Other                                   |   | —                  |   | 70                       |   |
| Total  debt                             |   | 19,342                  |   | 25,085                   |   |
| Less  – current portion            |   | (3,671                  | )      | (3,742                   | )      |
| Long-term  debt                         |   | $                       | 15,671 |                     | $      | 21,343 |   |

 

As of December 31, 2002,the Company had additional available borrowing capacity of approximately $72.9million under its unsecured revolving credit line agreement (the “Agreement”)with certain banks. The Company incurred approximately $0.1 million in commitmentfees related to the available borrowing capacity during the three months endedDecember 31, 2002. The interest rates ranged from 3.01% to 4.75% during thefirst quarter of fiscal 2003 and were based on variable market rates (LIBOR orprime rate).  The interest rate atDecember 31, 2002, was 4.25%.  TheAgreement prohibits the Company from pledging its accounts receivables 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.  In December 2002,

 

8

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the Company amended theAgreement to increase the commercial letters of credit permitted by the debtcovenants from $45.0 million to $75.0 million.

 

Long-term debt alsoincludes $7.1 million in senior notes. Significant terms of the senior notes include interest payablesemi-annually at 8.49% per annum and annual principal payments through fiscal2005.  The terms and conditions of thenote purchase agreement governing the senior notes include restrictions on the saleof assets, limitations on additional indebtedness and the maintenance ofcertain net worth requirements.

 

Long-termdebt also includes $2.2 million in Industrial Development Revenue (“IDR”)bonds.  Significant terms of the IDRbonds include interest at a rate equal to that of high quality, short-term, taxexempt obligations, as defined in the agreement.  The interest rate at December 31, 2002, was 1.65%.  The IDR bonds are payable in annualinstallments of $0.1 million, with a final payment of $2.0 million in fiscal2006.  The IDR bonds are collateralizedby certain buildings and equipment of $0.5 million as of December 31, 2002.

 

Certain of the Company’slong-term debt facilities contain restrictions on the ability of the Company’ssubsidiaries to transfer funds to the Company.

 

**6.  BusinessReorganization**

 

TheCompany’s strategy has been to source production internationally in order toremain competitive in the apparel marketplace and to provide high-quality,low-cost products as a value to its customers. The 2002 and 2001 reorganizations are the results of this strategy.

 

*2002 Reorganization*

 

On January 8, 2002, theCompany announced plans to close its cutting facility in Weslaco, Texas.  Accordingly, the Company recorded a $1.0million pre-tax charge to operations in reorganization costs for the quarterended March 31, 2002.  All 142 employeesat the Weslaco facility were terminated in conjunction with the closure, whichwas completed in June 2002.  Severancepayments of $0.7 million and other employee termination costs of $0.3 millionhad been paid as of December 31, 2002.

 

In conjunction with theclosure of the Edinburg, Texas manufacturing facility in fiscal 2001 (see *2001 Reorganization* below), the net bookvalue of the facility of $2.2 million was written off since the net realizablevalue of the facility was expected to be insignificant.  Subsequent to marketing this facilitynationally, having appraisals completed on the property, and receiving aninitial offer for this facility during the second quarter of fiscal 2002 (inexcess of the pre-closure net book value), the Company reversed the originalfacility write-down and classified the facility as an asset held for sale.  The $2.2 million reversal was recorded as acredit to reorganization costs in the income statement in the second quarter offiscal 2002.

 

On September 30, 2002,the Company announced plans to close one of its manufacturing facilities in theDominican Republic.  Accordingly, theCompany recorded a $0.6 million pre-tax charge to operations in reorganizationcosts in the fourth quarter of fiscal 2002. All 341 employees at the facility were terminated in conjunction withthe closure, which was completed in November 2002.  Severance payments of $0.4 million were paid during the three monthsended December 31, 2002.  The remaining$0.1 million in severance payments and $0.1 in other employee termination andadministrative costs are expected to be paid during the second quarter offiscal 2003 and have been included in accrued liabilities as of December 31,2002.

 

In addition to thereorganization activities noted above, the Company reduced its sales forceduring the fourth quarter of fiscal 2002, terminating 6 employees.  As a result, the Company recorded a $1.0million pre-tax charge for related severance costs in selling, general andadministrative expenses.   The Companypaid $0.2 million in severance payments during the three months ended December31, 2002 and periodic severance payments to these terminated employees willcontinue through January 2004.  Theremaining $0.8 million in severance payments have been included in accruedliabilities as of December 31, 2002.

 

9

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*2001 Reorganization*

 

On March 26, 2001, theCompany announced plans to close its manufacturing facility in Edinburg, Texas,and its operations in Japan.  TheCompany recorded a $20.8 million charge to operations in the quarter endedMarch 31, 2001.  The charge consisted of$8.6 million in legal costs, $8.1 million in employee termination and relatedcosts, $3.1 million in plant and equipment impairments and $1.0 million inother asset write downs.

 

Severance and otheremployee related payments of $5.8 million have been made as of December 31,2002, and all other employee termination costs of $1.1 million are expected tobe paid by the end of fiscal 2003.  A$0.7 million pre-tax reduction of the charges for the 2001 reorganization wascredited to operations in the fourth quarter of fiscal 2001 as a result oflower than expected costs related to terminated employees and better thanexpected recoveries on equipment, offset by lower than anticipated recoverieson inventories and receivables in Japan.

 

The $8.6 million chargefor legal costs included a $1.6 million cash settlement for certain claims and$7.0 million for estimated losses on unsettled claims against the Company,including two jury verdicts totaling $5.2 million, which were returned againstthe Company.  One of the verdicts wassettled on September 30, 2002 for $1.3 million.  The other case is currently on appeal.  Many of the legal claims against the Company relate to claims forwrongful discharge and common law tort by former employees of the Company’ssewing facilities in south Texas that were closed in previous years.

 

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

 
|                                    |   | **Balance  September 30, 2002** |   | **Payments** |   | **Adjustments** |    | **Balance  December 31, 2002** |   |
|-----------------------------------------|--------|---------------------------------|--------|--------------|--------|-----------------|---------|--------------------------------|--------|
| Employee  termination and related costs |   | $                               | 1.2    |         | $      | (0.1            | )  | $                              | — |   | $ | 1.1 |   |
| Legal  costs                            |   | 1.5                             |   | —       |   | —          |    | 1.5                            |   |
|                                         |        |                                 |        |              |        |                 |         |                                |        |  |  |  |  |

 

**7.  Segment Reporting**

 

TheCompany’s three operating segments are business units that offer similarproducts through different distribution channels.  The Company’s wholesale segment designs, manufactures, importsand markets casual and dress men’s and women’s apparel to retailers throughoutNorth America and the United Kingdom. The Company also operates  aretail segment, which markets Haggar® branded products through 68 Companyoperated stores located in the Company’s Dallas headquarters and in outletmalls throughout the United States, and a licensing segment, which generatesroyalty income by licensing the Company’s trademarks for use by othermanufacturers 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.

 

Intercompanysales from the wholesale segment to the retail segment are not reflected inwholesale segment net sales. Additionally, there is no profit included on sales from the wholesalesegment to the retail segment.  Segmentprofit (loss) is comprised of segment net income before interest expense andprovision (benefit) for income taxes and cumulative effect of accountingchange.

 

10

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Thetable below reflects the Company’s segment results for all periods presented.

 
| **Three Months Ended  December 31,** |   | **Wholesale**        |    | **Other** |   | **Consolidated** |   |
|--------------------------------------|--------|----------------------|---------|-----------|--------|------------------|--------|
|                                 |   | ***(In thousands)*** |    |
| **2002**                             |   |                 |    |      |   |             |   |
| Net  sales                           |   | $                    | 100,343 |      | $      | 13,564           |   | $ | 113,907 |   |
| Segment  profit (loss)               |   | $                    | (3,026  | )         | $      | 441              |   | $ | (2,585 | ) |
|                                 |   |                 |    |      |   |             |   |
| **2001**                             |   |                 |    |      |   |             |   |
| Net  sales                           |   | $                    | 85,359  |      | $      | 13,971           |   | $ | 99,330 |   |
| Segment  profit (loss)               |   | $                    | 495     |      | $      | 628              |   | $ | 1,123 |   |

 

A reconciliation of totalsegment profit (loss) to consolidated income (loss) before provision (benefit)for income taxes and cumulative effect of accounting change is as follows *(in thousands)*:

 
|                                                                                                                |   | **Three  Months Ended December 31,** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                |   | **2002**                             |   | **2001** |   |
| Segment  profit (loss)                                                                                              |   | $                                    | (2,585 | ) | $ | 1,123 |   |
| Interest  expense                                                                                                   |   | 735                                  |   | 1,011 |   |
| Consolidated  income (loss) before provision (benefit) for income taxes and cumulative  effect of accounting change |   | $                                    | (3,320 | ) | $ | 112 |   |

 

The Company does notsegregate assets on a segment basis for internal management reporting and,therefore, such information is not presented.

 

**8.  Commitments and Contingencies**

 

As of December 31, 2002,the Company had outstanding $49.9 million of trade letters of credit for thepurchase of inventory from foreign suppliers in the ordinary course ofbusiness. These trade letters of credit, generally for periods of less than sixmonths, will only be paid upon satisfactory receipt of the inventory by theCompany.  As of December 31, 2002, the Companyhad entered into $7.5 million of standby letters of credit representingcontingent guarantees of performance under self-insurance and other programs.These commitments would only be drawn upon if the Company were to fail to meetits claims obligations.

 

The Company maintains anoperating lease for its corporate aircraft, which contains a residual guaranteefor the market value of the plane at the end of the lease term in December2004.  Under the lease, the Company hasthe option of (a) returning the aircraft to the lessor and paying theguaranteed residual value of $3.0 million; (b) purchasing the aircraft for $4.0million; or (c) arranging for the sale of the aircraft to a third party.  If the sale proceeds are less than $4.0million, the Company is required to reimburse the lessor for thedeficiency.  If the sale proceeds exceed$4.0 million, the Company is entitled to all of such excess amounts.  The Company has not recorded a liabilityrelated to this guaranteed residual value.

 

Two jury verdicts totaling$5.2 million have been returned against the Company related to claims by formeremployees for wrongful discharge and common law tort.  One of the verdicts was settled on September 30, 2002 for $1.3million.  The other case is currently onappeal, as management, based on the advice of legal counsel, believes theverdict in this lawsuit is both legally and factually incorrect.

 

The Company is involvedin various other claims and lawsuits incidental to its business. Managementbelieves that the disposition of these claims and suits in the aggregate willnot have a material adverse effect on the Company.

 

11

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**9.  Shipping and Handling Fees**

 

The Company recordsshipping and handling fees as selling, general and administrative expense.  For the three months ended December 31, 2002and 2001, such costs were $3.2 million and $2.8 million, respectively.

 

**10.  Net Income (Loss)Per Common Share - Basic and Diluted**

 

Basic earnings per shareexcludes dilution and is computed by dividing net income (loss) by theweighted-average number of common shares outstanding for the period.  Diluted earnings per share is computed bydividing net income by the sum of the weighted-average number of common sharesoutstanding for the period and the number of equivalent shares assumedoutstanding under the Company’s stock-based compensation plan using thetreasury stock method.

 

Options to purchase1,273,445 shares were excluded from the diluted earnings per share calculationsfor the three months ended December 31, 2002, due to the net loss recordedduring the period.

 

Options to purchase883,231 shares, were excluded from the diluted earnings per share calculationsfor the three months ended December 31, 2001, because the options’ exerciseprices were greater than the average market price of the common shares duringthe period.

 

**11.  Dividends**

 

During the first quarterof fiscal 2003, the Company declared a cash dividend of $0.05 per share payableto the stockholders of record on February 10, 2003, which will be paid onFebruary 24, 2003.  The fourth quarterof fiscal 2002 dividend of approximately $321,000 was paid in November 2002.

 

**12.  Related PartyTransactions**

 

A director of the Companyis a partner of a law firm that rendered various legal services for the Companyduring the three months ended December 31, 2002 and 2001. The Company paid thelaw firm approximately $79,000, and $97,000 for legal services during the threemonths ended December 31, 2002 and 2001, respectively.  There were no amounts due to such firm fromthe Company as of December 31, 2002 and September 30, 2002.

 

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

 

In June 2001, theFinancial Accounting Standards Board (“FASB”), issued Statement of FinancialAccounting Standards No. 143, “Accounting for Asset Retirement Obligations”(“SFAS No. 143”), addressing the financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. The standard applies to legal obligations associated with the retirementof long-lived assets that result from the acquisition, construction,development and/or normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it is incurred if areasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associatedasset and this additional carrying amount is depreciated over the life of theasset.  The liability is accreted at theend of each period through charges to operating expense.  If the obligation is settled for other thanthe carrying amount of the liability, a gain or loss on settlement isrecognized.  SFAS No. 143 is effectivefor fiscal years beginning after June 15, 2002, or the first quarter of fiscal2003 for the Company.  The Company hasadopted the standard effective October 1, 2002, and the financial accountingimpact of adopting the standard was not material.

 

In October 2001, the FASBissued Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), which providesnew guidance on the recognition of impairment losses on long-lived assets to beheld and used or to be disposed of and also broadens the definition of whatconstitutes a discontinued operation and how the results of a discontinuedoperation are to be measured and presented. SFAS No. 144 is effective for fiscal years beginning after December 15,2001 or the first quarter of fiscal

 

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2003 for the Company.** **TheCompany has adopted the standard effective October 1, 2002, and the financialaccounting impact of adopting the standard was not material.

 

In June 2002, the FASBissued Statement of Financial Accounting Standards No. 146, “Accounting forExit or Disposal Activities” (“SFAS No. 146”), addressing significant issuesregarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for pursuant to the guidance that theEmerging Issues Task Force (“EITF”) has set forth in EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).” The scope of SFAS No. 146 also includes (1) costs related toterminating a contract that is not a capital lease, and (2) certain terminationbenefits to employees who are involuntarily terminated. SFAS No. 146 will beeffective for exit or disposal activities that are initiated after December 31,2002.

 

In November 2002, theFASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” which elaborates on required disclosures by a guarantor in itsfinancial statements about obligations under certain guarantees that it hasissued and clarifies the need for a guarantor to recognize, at the inception ofcertain guarantees, a liability for the fair value of the obligation undertakenin issuing the guarantee.  The initialrecognition and measurement provisions are to be applied on a prospective basisfor qualifying guarantees entered into or modified after December 31, 2002.

 

In January 2003, the FASBissued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities— an Interpretation of ARB No. 51,” which addresses consolidation of variableinterest entities (“VIEs”) to which the usual consolidation described inAccounting Research Bulletin No. 51, “Consolidated Financial Statements,” doesnot apply because the VIEs have no voting interests or otherwise are notsubject to control through ownership of voting interests.  FASB Interpretation No. 46 requires existingunconsolidated VIEs to be consolidated by their primary beneficiaries if theentities do not effectively disperse risks among parties involved.  The provisions of the interpretation areeffective immediately for VIEs created after January 31, 2003, and to VIEs inwhich an entity obtains an interest after that date.  An entity with a variable interest in a VIE created before February1, 2003, must apply the provisions no later than the first reporting periodbeginning after June 15, 2003.  Theinterpretation may be applied prospectively with a cumulative-effect adjustmentas of the date on which it is first applied or by restating previously issuedfinancial statements.   The Company iscurrently reviewing the impact of adopting the interpretation.

 

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**Item 2****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussionand analysis of the consolidated results of operations and financial conditionof the Company should be read in conjunction with the accompanying consolidatedfinancial statements and the notes thereto and the Company’s Annual Report onForm 10-K, as amended, for the fiscal year ended September 30, 2002.

 

**ForwardLooking Statements**

 

ThisQuarterly Report on Form 10-Q includes forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) andSection 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  All statements other than statements ofhistorical facts contained in this report, including statements regarding theCompany’s future financial position, business strategy and plans and objectivesof management for future operations, are forward-looking statements.  The words “believe,” “may,” “will,”“estimate,” “continue,” “anticipate,” “intend,” “expect” and similarexpressions, as they relate to the Company, are intended to identifyforward-looking statements.  The Companyhas based these forward-looking statements largely on its current expectationsand projections about future events and financial trends that the Companybelieves may affect its financial condition, results of operations, businessstrategy and financial needs.  Theseforward-looking statements are subject to a number of known and unknown risks,uncertainties and assumptions that could affect the results of theCompany or the apparel industry generally and could cause the Company’sexpected results to differ materially from those expressed in this QuarterlyReport on Form 10-Q.  These risks,uncertainties and assumptions are described in “Item 1.  Business” of the Company’s Annual Report onForm 10-K, as amended, filed with the Securities and Exchange Commission onDecember 20, 2002, and include, amongother things:

 

•                  changesin general business conditions,

 

•                  changesin the performance of the retail sector in general and the apparel industry inparticular,

 

•                  seasonalityof the Company’s business,

 

•                  changesin retailer and consumer acceptance of new products and the success ofadvertising, marketing, and promotional campaigns,

 

•                  impactof competition in the apparel industry,

 

•                  availabilityand cost of raw materials,

 

•                  changesin laws and other regulatory actions,

 

•                  changesin labor relations,

 

•                  politicaland economic 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,

 

•                  changesin interest rates and capital market conditions,

 

•                  acquisitionsor dissolution of business enterprises, including the ability to integrateacquired businesses effectively,

 

•                  naturaldisasters, and

 

•                  unusualor infrequent items that cannot be foreseen or are not susceptible toestimation.

 

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Inlight of these risks, uncertainties and assumptions, the forward-looking eventsand circumstances discussed in this Quarterly Report on Form 10-Q may not occurand actual results could differ materially from those anticipated or implied inthe forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on suchforward-looking statements.  The Companyundertakes no obligation to update any such statements or publicly announce anyupdates or revisions to any of the forward-looking statements contained herein,to reflect any change in its expectations with regard thereto or any change inevents, conditions, circumstances or assumptions underlying such statements.

 

**Overview**

 

The Company designs,manufactures, imports and markets casual and dress men’s and women’s apparelproducts, including pants, shorts, suits, sportcoats, sweaters, shirts,dresses, skirts and vests in the United States and abroad.  The Company’s operations are organized intothree business units, wholesale, retail and licensing, each of which offerssimilar products through different distribution channels.  The Company’s wholesale segment, which sellsapparel products through approximately 10,000 retail stores operated by theCompany’s retail customers, is the primary distribution channel through whichthe Company sells its products.  TheCompany’s retail segment markets Haggar® branded products through 68 Companyoperated retail stores located in the Company’s Dallas headquarters and inoutlet malls throughout the United States. The Company’s licensing segment generates royalty income by licensingthe Company’s trademarks for use by other manufacturers of specified productsin specified geographic regions.

 

**Critical Accounting Policies**

 

There have been nomaterial changes to the Company’s critical accounting policies during the threemonths ended December 31, 2002.

 

Management’s Discussion and Analysisdiscusses the results of operations and financial condition as reflected in theCompany’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, disclosure of contingent assets andliabilities at the date of the financial statements and reported amounts ofrevenues and expenses during the reporting period. On an ongoing basis,management evaluates its estimates and judgments, including those related toaccounts receivable; inventory valuation; amortization and recoverability oflong-lived assets, including goodwill; litigation accruals; workers’compensation liabilities; revenue recognition; and reorganization charges.Management bases its estimates and judgments on the Company’s substantialhistorical experience and other relevant factors, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources.

 

While the Company believes that the historicalexperience and other factors considered provide a meaningful basis for theaccounting policies applied in the preparation of the consolidated financialstatements, the Company cannot guarantee that its estimates and assumptionswill be accurate.  If such estimates andassumptions prove to be inaccurate, the Company may be required to makeadjustments to these estimates in future periods.

 

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**Business Reorganization**

 

TheCompany’s strategy has been to source production internationally in order toremain competitive in the apparel marketplace and to provide high-quality,low-cost products as a value to its customers. The 2002 and 2001 reorganizations are the results of this strategy.

 

*2002 Reorganization*

 

On January 8, 2002, theCompany announced plans to close its cutting facility in Weslaco, Texas.  Accordingly, the Company recorded a $1.0million pre-tax charge to operations in reorganization costs for the quarterended March 31, 2002.  All 142 employeesat the Weslaco facility were terminated in conjunction with the closure, whichwas completed in June 2002.  Severancepayments of $0.7 million and other employee termination costs of $0.3 millionhad been paid as of December 31, 2002. Closing this facility is expected to result in approximately $0.3 to$0.6 million annually in cost savings, depending on production volumes.

 

In conjunction with theclosure of the Edinburg, Texas manufacturing facility in fiscal 2001 (see *2001 Reorganization* below), the net bookvalue of the facility of $2.2 million was written off since the net realizablevalue of the facility was expected to be insignificant.  Subsequent to marketing this facilitynationally, having appraisals completed on the property, and receiving aninitial offer for this facility during the second quarter of fiscal 2002 (inexcess of the pre-closure net book value), the Company reversed the originalfacility write-down and classified the facility as an asset held for sale.  The $2.2 million reversal was recorded as acredit to reorganization costs in the income statement in the second quarter offiscal 2002.  The Company is activelymarketing the property and plans to sell the facility by the middle of calendar2003.

 

On September 30, 2002,the Company announced plans to close one of its manufacturing facilities in theDominican Republic.  Accordingly, theCompany recorded a $0.6 million pre-tax charge to operations in reorganizationcosts in the fourth quarter of fiscal 2002. All 341 employees at the facility were terminated in conjunction withthe closure, which was completed in November 2002.  Severance payments of $0.4 million were paid during the threemonths ended December 31, 2002.  Theremaining $0.1 million in severance payments and $0.1 in other employeetermination and administrative costs are expected to be paid during the secondquarter of fiscal 2003 and have been included in accrued liabilities as ofDecember 31, 2002.

 

In addition to thereorganization activities noted above, the Company reduced its sales forceduring the fourth quarter of fiscal 2002, terminating 6 employees.  As a result, the Company recorded a $1.0million pre-tax charge to operations in selling, general and administrativeexpenses.   The Company paid $0.2million in severance payments during the three months ended December 31, 2002,and periodic severance payments to these terminated employees will continuethrough January 2004.  The remaining$0.8 million in severance payments have been included in accrued liabilities asof December 31, 2002.

 

*2001 Reorganization*

 

On March 26, 2001, theCompany announced plans to close its manufacturing facility in Edinburg, Texas,and its operations in Japan.  TheCompany recorded a $20.8 million charge to operations in the quarter endedMarch 31, 2001.  The charge consisted of$8.6 million in legal costs, $8.1 million in employee termination and relatedcosts, $3.1 million in plant and equipment impairments and $1.0 million inother asset write downs.

 

Severance and otheremployee related payments of $5.8 million have been made as of September 30,2002, and all other employee termination costs of $1.1 million are expected tobe paid by the end of fiscal 2003.  A$0.7 million pre-tax reduction of the charges for the 2001 reorganization wascredited to operations in the fourth quarter of fiscal 2001 as a result oflower than expected costs related to terminated employees and better thanexpected recoveries on equipment, offset by lower than anticipated recoverieson inventories and receivables in Japan.

 

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The $8.6 million chargefor legal costs included a $1.6 million cash settlement for certain claims and$7.0 million for estimated losses on unsettled claims against the Company,including two jury verdicts totaling $5.2 million, which were returned againstsubsidiaries of the Company. One of the verdicts was settled on September 30,2002 for $1.3 million.  The other caseis currently on appeal.  Many of thelegal claims against the Company relate to claims for wrongful discharge andcommon law tort by former employees of the Company’s sewing facilities in southTexas that were closed in previous years.

 

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

 
|                                   |   | **Balance  September 30, 2002** |   | **Payments** |   | **Adjustments** |   | **Balance  December 31, 2002** |   |
|----------------------------------------|--------|---------------------------------|--------|--------------|--------|-----------------|--------|--------------------------------|--------|
| Employee termination and related costs |   | $                               | 1.2    |         | $      | (0.1            | )      | $                              | — |   | $ | 1.1 |   |
|                                   |   |                            |   |         |   |            |   |                           |   |
| Legal  costs                           |   | 1.5                             |   | —       |   | —          |   | 1.5                            |   |
|                                        |        |                                 |        |              |        |                 |        |                                |        |  |  |  |  |

 

**Comparisonof Three Months Ended December 31, 2002 to Three Months Ended December 31, 2001**

 

*NetSales*

 

Net sales increased $14.6million, or 14.7%, to $113.9 million for the first quarter of fiscal 2003,compared to net sales of $99.3 million for the first quarter of fiscal2002.  The increase in net sales isprimarily attributable to increased sales of Haggar® branded products includingthe new comfort fit waist pants, improved private label business and increasedsales of Claiborne® licensed products. Unit sales increased 32.5% while the average sales price decreased17.8%.

 

*GrossProfit*

 

Gross profit as apercentage of net sales decreased to 25.1% in the first quarter of fiscal 2003,compared to 28.6% in the first quarter of fiscal 2002.  The decrease in gross profit percentage isrelated to decreases in sales prices due to pressures in the marketplace bycustomers and competitors combined with changing product mix during thequarter.

 

*Selling,General and Administrative Expenses*

 

Selling, general andadministrative expenses as a percentage of net sales decreased to 27.7% in thefirst quarter of fiscal 2003, compared to 27.9% in the first quarter of fiscal2002.  The $3.8 million, or 13.7%,increase in selling, general and administrative expenses primarily relates toan increase in media advertising expense of $3.1 million to introduce theHaggar® comfort fit waist pants, $0.3 million in expenses related to increasedsales for the Claiborne® division, $0.2 million in additional shipping expensesdue to increased sales volumes and $0.2 million in other administrative expenseincreases.

 

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*InterestExpense*

 

Interest expensedecreased $0.3 million, or 27.3%, to $0.7 million for the first quarter offiscal 2003, compared to $1.0 million for the first quarter of fiscal 2002,primarily due to significantly reduced debt levels throughout the first quarterof fiscal 2003 combined with lower interest rates on variable rate debt.

 

*IncomeTaxes*

 

The Company’s income taxprovision as a percentage of income before income tax and cumulative effect ofaccounting change was 39.6% for the first quarter of fiscal 2003.  Comparatively, the Company’s income tax provisionas a percentage of income before income tax and cumulative effect of accountingchange was 35.7% for the first quarter of fiscal 2002.  The effective tax rates for the firstquarters of fiscal 2003 and 2002 exceeded the statutory federal tax rate of 35%primarily as a result of state income taxes and certain permanent differences.

 

*CumulativeEffect of Accounting Change*

 

On October 1, 2001, theCompany adopted Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets,” and recorded a $15.6 million impairment ofgoodwill related to the 1999 acquisition of Jerell, the Company’s women’s wearsubsidiary.  Subsequent to theacquisition, pricing pressures and a weak retail environment for women’sapparel resulted in a revised earnings forecast for Jerell and the women’s wearbusiness.  In order to determine thefair value of goodwill, the Company obtained an independent appraisal, whichconsidered both prices of comparable businesses and the discounted value ofprojected cash flows.  There was no taxbenefit associated with the impairment charge.

 

**SegmentProfitability**

 

TheCompany’s three operating segments are business units that offer similarproducts through different distribution channels.  The Company’s wholesale segment designs, manufactures, importsand markets casual and dress men’s and women’s apparel to retailers throughoutNorth America and the United Kingdom. The Company also operates a retail segment, which markets Haggar®branded products through 68 Company operated stores located in the Company’sDallas headquarters and 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.

 

Intercompanysales from the wholesale segment to the retail segment are not reflected inwholesale segment net sales. Additionally, there is no profit included on sales from the wholesalesegment to the retail segment.  Segmentprofit (loss) is comprised of segment net income before interest expense andprovision (benefit) for income taxes and cumulative effect of accountingchange.

 

Thetable below reflects the Company’s segment results for all periods presented.

 
| **Three Months Ended  December 31,** |   | **Wholesale**        |    | **Other** |   | **Consolidated** |   |
|--------------------------------------|--------|----------------------|---------|-----------|--------|------------------|--------|
|                                 |   | **(*In thousands)*** |    |
| **2002**                             |   |                 |    |      |   |             |   |
| Net  sales                           |   | $                    | 100,343 |      | $      | 13,564           |   | $ | 113,907 |   |
| Segment  profit (loss)               |   | $                    | (3,026  | )         | $      | 441              |   | $ | (2,585 | ) |
| **2001**                             |   |                 |    |      |   |             |   |
| Net  sales                           |   | $                    | 85,359  |      | $      | 13,971           |   | $ | 99,330 |   |
| Segment  profit (loss)               |   | $                    | 495     |      | $      | 628              |   | $ | 1,123 |   |
|                                      |        |                      |         |           |        |                  |        |  |  |  |  |

 

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*WholesaleSegment*

 

Wholesale segment netsales increased $15.0 million, or 17.6%, to $100.3 million for the firstquarter of fiscal 2003, compared to $85.4 million for the first quarter offiscal 2002.  The increase in wholesalesegment net sales during the first quarter of fiscal 2003 is attributable toincreased sales of Haggar® branded products including the new comfort fit waistpants, improved private label sales and increased sales of Claiborne® licensedproducts.

 

Wholesale segment profitdecreased $3.5 million, or 711.3% to a $3.0 million loss for the first quarterof fiscal 2003, compared to a $0.5 million profit for the first quarter offiscal 2002.  The decrease in segmentprofit is primarily attributable to an increase in media advertising expense of$3.1 million to introduce the Haggar® comfort fit waist pants, combined with adecrease in sales prices due to pressures in the marketplace by customers andcompetitors.

 

**Liquidity and Capital Resources**

 

The Company’s principalsources of liquidity have been cash flows from operations and borrowings underits unsecured revolving credit facility. As of December 31, 2002, the Company had cash and cash equivalents of $8.1million.

 

As of December 31, 2002,the Company had $10.0 million outstanding and additional available borrowingcapacity of approximately $72.9 million under its unsecured revolving creditline agreement (the “Agreement”) with certain banks. The Company incurredapproximately $0.1 million in commitment fees related to the availableborrowing capacity during the first quarter of fiscal 2003. The interest ratesranged from 3.01% to 4.75% during the first quarter of fiscal 2003 and werebased on variable market rates (LIBOR or prime rate).  The interest rate at December 31, 2002, was4.25%.  The Agreement prohibits theCompany from pledging its accounts receivables and inventories, containslimitations on incurring additional indebtedness, requires maintaining minimumnet worth levels of the Company and the Company’s main operating subsidiary,and requires the maintenance of certain financial ratios.  The Company's failure to satisfy thesecovenants could adversely affect the Company's ability to acquire capital tomeet its needs and pay dividends.  InDecember 2002, the Company amended the Agreement to increase the commercialletters of credit permitted by the debt covenants from $45.0 million to $75.0million.  As of December 31, 2002, theCompany was in full compliance with its financial and other covenants.

 

Long-term debt alsoincludes $7.1 million in senior notes. Significant terms of the senior notes include interest payablesemi-annually at 8.49% per annum and annual principal payments of approximately$3.6 million through fiscal 2005.  Theterms and conditions of the note purchase agreement governing the senior notesinclude restrictions on the sale of assets, limitations on additionalindebtedness and the maintenance of certain net worth requirements.

 

Long-termdebt also includes $2.2 million in Industrial Development Revenue (“IDR”)bonds.  Significant terms of the IDRbonds include interest at a rate equal to that of high quality, short-term, taxexempt obligations, as defined in the agreement.  The interest rate at December 31, 2002, was 1.65%.  The IDR bonds are payable in annualinstallments of $0.1 million, with a final payment of $2.0 million in fiscal2006.  The IDR bonds are collateralizedby certain buildings and equipment of $0.5 million as of December 31, 2002.

 

Certainof the Company’s long-term debt facilities contain restrictions on the abilityof the Company’s subsidiaries to transfer funds to the Company.

 

As of December 31, 2002,and September 30, 2002, the Company had outstanding $49.9 million and $22.9million, respectively, of trade letters of credit for the purchase of inventoryfrom foreign suppliers in the ordinary course of business.  The increase in trade letters of creditoutstanding for inventory purchases is primarily due to the seasonality of thebusiness.  These trade letters ofcredit, generally for periods of less than six months, will only be paid uponsatisfactory receipt of the inventory by the Company.  As of December 31, 2002, and September 30, 2002, the Company hadentered into $7.5 million and $7.3 million, respectively, of standby letters ofcredit representing

 

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contingent guarantees ofperformance under self-insurance and other programs.  The increase in standby letters of credit is primarily attributableto an increase in self-insured workers compensation claims experience.  These commitments would only be drawn uponif the Company were to fail to meet its claims obligations.

 

The Company maintains anoperating lease for its corporate aircraft, which contains a residual guaranteefor the market value of the plane at the end of the lease term in December2004.  Under the lease, the Company hasthe option of (a) returning the aircraft to the lessor and paying theguaranteed residual value of $3.0 million; (b) purchasing the aircraft for $4.0million; or (c) arranging for the sale of the aircraft to a third party.  If the sale proceeds are less than $4.0million, the Company is required to reimburse the lessor for thedeficiency.  If the sale proceeds exceed$4.0 million, the Company is entitled to all of such excess amounts.  The Company has not recorded a liabilityrelated to this guaranteed residual value.

 

During the first quarterof fiscal 2003, the Company declared a cash dividend of $0.05 per share payableto the stockholders of record on February 10, 2003, which will be paid onFebruary 24, 2003.  The fourth quarterof fiscal 2002 dividend of approximately $321,000 was paid in November 2002.

 

The Company has othercontractual obligations and commercial commitments as described in “Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations – Disclosures AboutContractual Obligations And Commercial Commitments” of the Company’s AnnualReport on Form 10-K, as amended, filed with the Securities and ExchangeCommission on December 20, 2002.

 

Two jury verdictstotaling $5.2 million have been returned against subsidiaries of the Companyrelated to claims by former employees for wrongful discharge and common lawtort.  One of the verdicts was settledon September 30, 2002, for $1.3 million. The other case is currently on appeal, as management, based on theadvice of legal counsel, believes the verdict in this lawsuit is both legallyand factually incorrect.  Management doesnot believe that the outcome of this appeal will have a material adverse effecton the Company.  The Company is involvedin various claims and lawsuits incidental to its business. In the opinion ofmanagement, these claims and suits in the aggregate will not have a materialadverse effect on the Company.

 

*CashFlow Results for the Three Months Ended December 31, 2002*

 

For the first quarter offiscal 2003, cash flows provided by operating activities were approximately$16.2 million.  The cash provided fromoperations was primarily the result of a $16.4 million decrease in accountsreceivable and a $6.8 million decrease in inventories due to lower seasonalsales during the quarter, as well as a $5.4 million increase in accountspayable.  These increases in cash flowswere partially offset by a $3.6 million decrease in accrued wages, workerscompensation and other employee compensation, primarily due to the payment ofaccrued bonuses during the quarter. The increases in cash flows were alsopartially offset by a $5.9 million decrease in other current and non-currentaccrued liabilities, which included $2.5 million in property and income taxpayments, a $1.7 million decrease in accruals for finished goods in transit,$0.9 million in payments for restructuring and legal obligations during thequarter, and a $2.9 million increase in other assets primarily due to anincrease in the Company’s income tax receivable, an increase in prepaidinsurance and prepayments for manufacturing contractor costs.

 

The Company usedapproximately $0.3 million cash in investing activities primarily due topurchases of property, plant and equipment principally related to fixtures andleasehold improvements for new retail stores as well as manufacturingequipment.

 

The Company used approximately$12.1 million cash in financing activities due to net repayments of thelong-term debt of $5.7 million, dividend payments of $0.3 million and adecrease in cash book overdrafts of $6.0 million.

 

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*CashFlow Results for the Three Months Ended December 31, 2001*

 

Cash from the Company’soperating activities for the first quarter of fiscal 2002 was $0.6 million,primarily as a result of a net reduction in accounts receivable of $29.4million offset by decreases in accounts payable and accrued liabilities of$16.7 million and an increase in inventories of $12.3 million.

 

The Company used cash ininvesting activities of $0.5 million during the first quarter of fiscal 2002mainly for the purchase of property, plant, and equipment of $0.7 million.

 

Cash flows used infinancing activities of $3.5 million for the first quarter of fiscal 2002 wereprimarily the result of  net repaymentsin long-term debt of $4.7 million offset by an increase in book overdrafts of$1.8 million.

 

**RecentlyIssued and Adopted Financial Accounting Standards**

 

In June 2001, theFinancial Accounting Standards Board (“FASB”), issued Statement of FinancialAccounting Standards No. 143, “Accounting for Asset Retirement Obligations”(“SFAS No. 143”), addressing the financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. The standard applies to legal obligations associated with the retirementof long-lived assets that result from the acquisition, construction,development and/or normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an assetretirement obligation be recognized in the period in which it is incurred if areasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of theassociated asset and this additional carrying amount is depreciated over thelife of the asset.  The liability isaccreted at the end of each period through charges to operating expense.  If the obligation is settled for other thanthe carrying amount of the liability, a gain or loss on settlement isrecognized.  SFAS No. 143 is effectivefor fiscal years beginning after June 15, 2002, or the first quarter of fiscal2003 for the Company.  The Company hasadopted the standard effective October 1, 2002, and the financial accountingimpact of adopting the standard was not material.

 

In October 2001, the FASBissued Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), which providesnew guidance on the recognition of impairment losses on long-lived assets to beheld and used or to be disposed of and also broadens the definition of whatconstitutes a discontinued operation and how the results of a discontinuedoperation are to be measured and presented. SFAS No. 144 is effective for fiscal years beginning after December 15,2001, or the first quarter of fiscal 2003 for the Company.** **TheCompany has adopted the standard effective October 1, 2002, and the financialaccounting impact of adopting the standard was not material.

 

In June 2002, the FASBissued Statement of Financial Accounting Standards No. 146, “Accounting forExit or Disposal Activities” (“SFAS No. 146”), addressing significant issuesregarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for pursuant to the guidance that theEmerging Issues Task Force (“EITF”) has set forth in EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).” The scope of SFAS No. 146 also includes (1) costs related toterminating a contract that is not a capital lease, and (2) certain terminationbenefits to employees who are involuntarily terminated. SFAS No. 146 will beeffective for exit or disposal activities that are initiated after December 31,2002.

 

In November 2002, theFASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” which elaborates on required disclosures by a guarantor in itsfinancial statements about obligations under certain guarantees that it hasissued and clarifies the need for a guarantor to recognize, at the inception ofcertain guarantees, a liability for the fair value of the obligation undertakenin issuing the guarantee.  The initialrecognition and measurement provisions are to be applied on a prospective basisfor qualifying guarantees entered into or modified after December 31, 2002.

 

In January 2003, the FASBissued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities– an Interpretation of ARB No. 51,” which addresses consolidation of variableinterest entities (“VIEs”) to which the

 

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usual consolidationdescribed in Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” does not apply because the VIEs have no voting interests orotherwise are not subject to control through ownership of voting interests.  FASB Interpretation No. 46 requires existingunconsolidated VIEs to be consolidated by their primary beneficiaries if theentities do not effectively disperse risks among parties involved.  The provisions of the interpretation areeffective immediately for VIEs created after January 31, 2003, and to VIEs inwhich an entity obtains an interest after that date.  An entity with a variable interest in a VIE created beforeFebruary 1, 2003, must apply the provisions no later than the first reportingperiod beginning after June 15, 2003. The interpretation may be applied prospectively with a cumulative-effectadjustment as of the date on which it is first applied or by restatingpreviously issued financial statements.  The Company is currently reviewing the impact of adopting theinterpretation.

 

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**Item 3****.  Quantitative and Qualitative Disclosuresabout Market Risk.**

 

The Company is exposed tomarket risk from changes in foreign currency exchange risk and interest raterisk, which may adversely affect its financial position, results of operationsand cash flows. The Company does not use financial instruments for trading orother speculative purposes and is not a party to any derivative financialinstrument.

 

The Company is exposed tointerest rate risk primarily through its borrowing activities. As of December31, 2002, the Company had $12.2 million outstanding under its revolving creditline agreement and other variable rate debt. A one percentage point increase inthe variable interest rate based on debt amounts outstanding at December 31,2002, would result in an approximately $0.1 million reduction in annual pre-taxearnings.  See “Notes to ConsolidatedFinancial Statements – Long-Term Debt” and “Item 2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations – Liquidity and Capital Resources” for additionaldiscussion of the terms of the Company’s credit facilities.

 

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

.

The Chief ExecutiveOfficer and Chief Financial Officer of the Company have reviewed and evaluatedthe effectiveness of the Company’s disclosure controls and procedures (asdefined in the Securities Exchange Act of 1934 Rules 240.13a-14(c) and15d-14(c)) as of a date within 90 days before the filing date of this quarterlyreport on Form 10-Q and have concluded that such disclosure controls andprocedures are effective in timely alerting them to material informationrelating to the Company required to be disclosed in the periodic reports theCompany files or submits under the Securities Exchange Act of 1934.  There have not been any significant changesin the internal controls of the Company or in other factors that couldsignificantly affect these internal controls subsequent to the date of theevaluation.

 

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

 

**Item 6****. Exhibitsand Reports on Form 8-K**

 

(a)          Exhibits.

 

10(a) – First Amendment to Second Amended andRestated Credit Agreement, dated December 11, 2002, between the Company andJPMorgan Chase Bank, as Agent for a bank syndicate.

 

(b)         Reports on Form 8-K.

 

A Form 8-K was filed onOctober 15, 2002, announcing, under Item 5, the adoption of a new stockholderrights plan and the amendment of the Company’s Bylaws.  A Form 8-K was filed on November 5, 2002, announcing, under Item 5, the issuance of apress release and, under Item 9, the Company’s fourth quarter and fiscal 2002earnings.  A Form 8-K/A was filed onNovember 6, 2002, to correct a clerical error in the November 5, 2002,filing.  Forms 8-K were filed onNovember, 22, 2002, November 27, 2002, and December 16, 2002, discussing, underItem 9, proxy contest matters and the issuance of press releases.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                    | Haggar Corp., |
|-------------------------|---------------|
|                    |          |   |
|                    |          |   |
| Date: February 14, 2003 | By:           | /s/ David M. Tehle |   |
|                    |          | David M. Tehle |
|                    |          | *(Ex**ecutive  Vice President, Chief  Financial Officer, Secretary,  Treasurer)* |
|                    |          |   |
|                    |          | Signed on behalf of the  registrant and as principal  financial officer. |

 

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**CERTIFICATIONS**

 

I, J.M. Haggar, III,Chief Executive Officer of Haggar Corp., certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Haggar Corp.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’s othercertifying officer and I have indicated in this quarterly report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: February 14, 2003

 
|   | /s/ J.M. Haggar, III    |   |
|--------|-------------------------|--------|
|   |                    |
|   | J.M. Haggar, III        |
|   |                    |
|   | Chief Executive Officer |

 

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**CERTIFICATIONS**

 

I, David M. Tehle, ChiefFinancial Officer of Haggar Corp., certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Haggar Corp.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date:  February 14, 2003

 
|   | /s/ David M. Tehle      |   |
|--------|-------------------------|--------|
|   |                    |
|   | David M. Tehle          |
|   |                    |
|   | Chief Financial Officer |

 

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**INDEXTO EXHIBITS**

 
| **Exhibit** |   |                                                                                                                                                |   |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **Number**  |   | **Description**                                                                                                                                     |   |
| 10(a)       |   | First Amended and Restated Credit Agreement, dated  December 11, 2002, between the Company and JPMorgan Chase Bank, as Agent for  a bank syndicate. |   |

 

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