**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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| **(Mark One)**                                                                                                                                                                                                                                          |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                              | ** ** |
| **ý**                                                                                                                                                                                                                                              | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
| ** **                                                                                                                                                                                                                                              | ** ** |
| **For the quarterly period ended June 30,  2005.**                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                    |   |
| **OR**                                                                                                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                                              | ** ** |
| **o**                                                                                                                                                                                                                                                   | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
| ** **                                                                                                                                                                                                                                              | ** ** |
| **For the transition period from                     to                   .** |
| ** **                                                                                                                                                                                                                                              | ** ** |
| **Commission File Number: 0-20850**                                                                                                                                                                                                                     |

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

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

 

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

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

 

As of August 8, 2005, there were 7,083,333 shares of theRegistrant’s common stock outstanding.

 

 

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**HaggarCorp. and Subsidiaries**

 

**Index**

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

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**HaggarCorp. and Subsidiaries**

 

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                                            | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **(unaudited)**         | ** ** | ** **                   | ** ** |
| **Assets**                                                                                                                                                                            |       |                    |       |                         |       |
| Current assets:                                                                                                                                                                       |       |                    |       |                         |       |
| Cash and  cash equivalents                                                                                                                                                            |       | $                       | 20,175     |                         | $          | 30,667 |   |
| Accounts  receivable, net                                                                                                                                                             |       | 49,605                  |       | 56,132                       |       |
| Inventories,  net                                                                                                                                                                     |       | 87,995                  |       | 95,229                       |       |
| Property  held for sale                                                                                                                                                               |       | 2,538                   |       | —                       |       |
| Deferred tax  asset                                                                                                                                                                   |       | 11,027                  |       | 11,021                       |       |
| Other  current assets                                                                                                                                                                 |       | 5,923                   |       | 7,392                        |       |
| Total current assets                                                                                                                                                                  |       | 177,263                 |       | 200,441                      |       |
|                                                                                                                                                                                  |       |                    |       |                         |       |
| Property,  plant and equipment, net                                                                                                                                                   |       | 41,316                  |       | 44,394                       |       |
| Goodwill,  net                                                                                                                                                                        |       | 9,472                   |       | 9,472                        |       |
| Other assets                                                                                                                                                                          |       | 10,197                  |       | 7,165                        |       |
| Total assets                                                                                                                                                                          |       | $                       | 238,248    |                         | $          | 261,472 |   |
| ** **                                                                                                                                                                            | ** ** | ** **              | ** ** | ** **                   | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                        |       |                    |       |                         |       |
| Current  liabilities:                                                                                                                                                                 |       |                    |       |                         |       |
| Accounts  payable                                                                                                                                                                     |       | $                       | 18,983     |                         | $          | 30,621 |   |
| Accrued  liabilities                                                                                                                                                                  |       | 29,962                  |       | 36,678                       |       |
| Accrued  wages and other employee compensation                                                                                                                                        |       | 4,119                   |       | 8,538                        |       |
| Current  portion of long-term debt                                                                                                                                                    |       | —                  |       | 100                          |       |
| Total current liabilities                                                                                                                                                             |       | 53,064                  |       | 75,937                       |       |
|                                                                                                                                                                                  |       |                    |       |                         |       |
| Other non-current liabilities                                                                                                                                                         |       | 13,417                  |       | 12,760                       |       |
| Deferred tax liability                                                                                                                                                                |       | 374                     |       | 374                          |       |
| Long-term  debt                                                                                                                                                                       |       | —                  |       | 2,000                        |       |
| Total  liabilities                                                                                                                                                                    |       | 66,855                  |       | 91,071                       |       |
|                                                                                                                                                                                  |       |                    |       |                         |       |
| Commitments  and contingencies                                                                                                                                                        |       |                    |       |                         |       |
|                                                                                                                                                                                  |       |                    |       |                         |       |
| Stockholders’  equity:                                                                                                                                                           | ** ** | ** **              | ** ** | ** **                   | ** ** |
| Preferred  stock – par value $0.10 per share; 250,000 shares authorized and no shares  issued and outstanding at June 30, 2005 or September 30, 2004              |       | —                  |       | —                       |       |
| Common stock  – par value $0.10 per share; 25,000,000 shares authorized; 9,530,309 and  9,455,679 shares issued at June 30, 2005 and September 30, 2004,  respectively |       | 953                     |       | 945                          |       |
| Additional  paid-in capital                                                                                                                                                           |       | 56,135                  |       | 54,966                       |       |
| Deferred  compensation                                                                                                                                                                |       | (1,352                  | )          | (1,796                       | )          |
| Cumulative  translation adjustment                                                                                                                                                    |       | 5                       |       | (9                           | )          |
| Retained  earnings                                                                                                                                                                    |       | 145,087                 |       | 141,256                      |       |
|                                                                                                                                                                                  |       | 200,828                 |       | 195,362                      |       |
| Less –  Treasury stock, 2,446,976 and 2,242,183 shares at cost at June 30, 2005  and September 30, 2004, respectively                                                  |       | (29,435                 | )          | (24,961                      | )          |
| Total  stockholders’ equity                                                                                                                                                      |       | 171,393                 |       | 170,401                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                                      |       | $                       | 238,248    |                         | $          | 261,472 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

3

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**Haggar Corp. and Subsidiaries**

 

**Consolidated Statements of Operations and Comprehensive Income**

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

 
| ** **                                             | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net sales                                              |       | $                                     | 119,492    |                                 | $          | 116,347 |   | $ | 340,833 |   | $ | 356,146 |   |
| Cost of  goods sold                                    |       | 85,026                                |       | 84,109                               |       | 243,725 |   | 255,690 |   |
| Reorganization  costs                                  |       | (1,765                                | )          | —                               |       | (1,291 | ) | — |   |
| Gross profit                                           |       | 36,231                                |       | 32,238                               |       | 98,399 |   | 100,456 |   |
| Selling,  general and administrative expenses          |       | (28,837                               | )          | (29,368                              | )          | (91,601 | ) | (91,429 | ) |
| Royalty  income                                        |       | 224                                   |       | 255                                  |       | 852 |   | 854 |   |
| Other income  (expense), net                           |       | 398                                   |       | (30                                  | )          | 608 |   | 369 |   |
| Interest  expense                                      |       | (208                                  | )          | (393                                 | )          | (653 | ) | (1,309 | ) |
| Income  before provision for income taxes              |       | 7,808                                 |       | 2,702                                |       | 7,605 |   | 8,941 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Provision  for income taxes                            |       | 3,052                                 |       | 1,032                                |       | 2,695 |   | 3,415 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                             |       | $                                     | 4,756      |                                 | $          | 1,670 |   | $ | 4,910 |   | $ | 5,526 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Other  comprehensive income (loss):                    |       |                                  |       |                                 |       |   |   |   |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Foreign  currency translation adjustment               |       | (107                                  | )          | 135                                  |       | 14 |   | 393 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Comprehensive  income                                  |       | $                                     | 4,649      |                                 | $          | 1,805 |   | $ | 4,924 |   | $ | 5,919 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| NET INCOME  PER COMMON SHARE:                          |       |                                  |       |                                 |       |   |   |   |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| — Basic                                           |       | $                                     | 0.68       |                                 | $          | 0.24 |   | $ | 0.70 |   | $ | 0.81 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| — Diluted                                         |       | $                                     | 0.67       |                                 | $          | 0.23 |   | $ | 0.69 |   | $ | 0.79 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| Weighted  average number of common shares outstanding: |       |                                  |       |                                 |       |   |   |   |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| — Basic                                           |       | 6,997                                 |       | 7,049                                |       | 7,017 |   | 6,810 |   |
|                                                   |       |                                  |       |                                 |       |   |   |   |   |
| — Diluted                                         |       | 7,090                                 |       | 7,164                                |       | 7,124 |   | 6,962 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

4

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**Haggar Corp. and Subsidiaries**

 

**Consolidated Statements of Cash Flows**

*(unaudited,in thousands)*

 
| ** **                                                                         | ** ** | **Nine months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                                                                               |       |                                 |       |   |   |
| **Cash  Flows from Operating Activities**                                          |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 4,910      |   | $ | 5,526 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation  and amortization                                                     |       | 4,134                                |       | 4,548 |   |
| Loss (gain)  on the disposal of property, plant and equipment                      |       | 182                                  |       | (232 | ) |
| Stock-based  compensation expense                                                  |       | 625                                  |       | 389 |   |
| Increase in  cash surrender value of officers’ life insurance policies        |       | (304                                 | )          | (370 | ) |
| Tax benefits  from employee stock plans                                            |       | 192                                  |       | — |   |
| Changes in  assets and liabilities:                                                |       |                                 |       |   |   |
| Accounts  receivable, net                                                          |       | 6,895                                |       | 5,079 |   |
| Inventories,  net                                                                  |       | 7,225                                |       | 956 |   |
| Other  current assets                                                              |       | 1,470                                |       | (1,662 | ) |
| Other assets                                                                       |       | 119                                  |       | (21 | ) |
| Accounts  payable                                                                  |       | (14,261                              | )          | (1,233 | ) |
| Accrued  liabilities                                                               |       | (6,740                               | )          | 3,475 |   |
| Accrued  wages and other employee compensation                                     |       | (4,419                               | )          | (1,139 | ) |
| Other  non-current liabilities                                                     |       | 657                                  |       | 1,228 |   |
| Net cash  provided by operating activities                                         |       | 685                                  |       | 16,544 |   |
|                                                                               |       |                                 |       |   |   |
| **Cash  Flows from Investing Activities**                                          |       |                                 |       |   |   |
| Purchases of  property, plant and equipment, net                                   |       | (4,443                               | )          | (2,846 | ) |
| Proceeds  from sale of property, plant and equipment                               |       | 842                                  |       | 232 |   |
| Decrease in  restricted cash                                                       |       | —                               |       | 1,287 |   |
| Net payments  of loans on officers’ life insurance policies                   |       | (2,422                               | )          | — |   |
| Premiums on  officers’ life insurance policies                                |       | (617                                 | )          | (693 | ) |
| Proceeds  from officers’ life insurance policies                              |       | —                               |       | 471 |   |
| Net cash  used in investing activities                                             |       | (6,640                               | )          | (1,549 | ) |
|                                                                               |       |                                 |       |   |   |
| **Cash  Flows from Financing Activities**                                          |       |                                 |       |   |   |
| Proceeds  from issuance of long-term debt                                          |       | 74,000                               |       | 66,000 |   |
| Payments on  long-term debt                                                        |       | (76,100                              | )          | (69,669 | ) |
| Proceeds  from exercise of employee stock options                                  |       | 797                                  |       | 7,474 |   |
| Debt  issuance costs                                                               |       | —                               |       | (420 | ) |
| Purchases of  treasury stock                                                       |       | (4,474                               | )          | — |   |
| Increase  (decrease) in book overdrafts                                            |       | 2,302                                |       | (4,472 | ) |
| Payments of  cash dividends                                                        |       | (1,078                               | )          | (1,043 | ) |
| Net cash  used in financing activities                                             |       | (4,553                               | )          | (2,130 | ) |
|                                                                               |       |                                 |       |   |   |
| Effect of  exchange rates on cash and cash equivalents                             |       | 16                                   |       | 148 |   |
|                                                                               |       |                                 |       |   |   |
| Increase  (decrease) in cash and cash equivalents                                  |       | (10,492                              | )          | 13,013 |   |
| Cash and  cash equivalents, beginning of period                                    |       | 30,667                               |       | 7,674 |   |
| Cash and  cash equivalents, end of period                                          |       | $                                    | 20,175     |   | $ | 20,687 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

5

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**Haggar Corp. and Subsidiaries**

 

**Notes to Consolidated Financial Statements**

*(unaudited)*

 

**1. Basis of Presentation**

 

*Financial Statement Preparation*

 

The consolidated balance sheet as of June 30, 2005, theconsolidated statements of operations and comprehensive income for the threeand nine months ended June 30, 2005 and 2004, and the consolidatedstatements of cash flows for the nine months ended June 30, 2005 and 2004,have been prepared by Haggar Corp. (together with its subsidiaries, the “Company”)without audit.  The consolidated balancesheet as of September 30, 2004, has been derived from the Company’saudited financial statements as of that date, but does not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments necessary to present fairly theconsolidated financial position, results of operations, and cash flows of theCompany at June 30, 2005, and for all other periods presented, have beenmade.  Certain information anddisclosures normally included in financial statements prepared in accordance withgenerally accepted accounting principles have been omitted in accordance withthe Securities and Exchange Commission’s rules for interim reporting.  Accordingly, these financial statementsshould be read in conjunction with the financial statements and accompanyingnotes thereto in the Company’s Annual Report on Form 10-K for the fiscalyear ended September 30, 2004.

 

*Accounting for Stock Based Compensation*

 

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

 
| ** **                                                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income:                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                         |       | $                                     | 4,756      |                                 | $          | 1,670 |   | $ | 4,910 |   | $ | 5,526 |   |
| Add back:  Stock-based compensation included in net income as reported, net of related  tax effects |       | 145                                   |       | 106                                  |       | 394 |   | 241 |   |
| Less:  Pro-forma stock-based compensation expense, net of related tax effects                       |       | (161                                  | )          | (114                                 | )          | (429 | ) | (266 | ) |
| Pro-forma  net income                                                                               |       | $                                     | 4,740      |                                 | $          | 1,662 |   | $ | 4,875 |   | $ | 5,501 |   |
| Net income  per common share:                                                                       |       |                                  |       |                                 |       |   |   |   |   |
|                                                                                                |       |                                  |       |                                 |       |   |   |   |   |
| —Basic                                                                                         |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                         |       | $                                     | 0.68       |                                 | $          | 0.24 |   | $ | 0.70 |   | $ | 0.81 |   |
| Pro forma                                                                                           |       | $                                     | 0.68       |                                 | $          | 0.24 |   | $ | 0.69 |   | $ | 0.81 |   |
|                                                                                                |       |                                  |       |                                 |       |   |   |   |   |   |   |   |   |
| —Diluted                                                                                       |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                         |       | $                                     | 0.67       |                                 | $          | 0.23 |   | $ | 0.69 |   | $ | 0.79 |   |
| Pro forma                                                                                           |       | $                                     | 0.67       |                                 | $          | 0.23 |   | $ | 0.68 |   | $ | 0.79 |   |

 

6

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The Company granted options to certain directors in both March 2004and February 2005 under the Company’s long-term incentive plan adopted infiscal 2003 (the “2003 LTIP”).  Theoptions vest over three years.  The fairvalue of the options granted was estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions:

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

 

In June 2005, 3,000 shares of restricted stock with a fair valueof $20.11 per share were granted to one director of the Company.  In February 2005, 5,000 shares ofrestricted stock with a fair value of $18.99 per share were granted to anotherdirector of the Company. In the second quarter of fiscal 2004, 125,000 sharesof restricted stock with fair values ranging from $19.69 to $19.85 per sharewere granted to certain officers and directors of the Company.  All such restricted stock shares, which weregranted under the 2003 LTIP, have dividend rights and voting rights, but aresubject to restrictions on transfer and risk of forfeiture until vested.  The shares vest in three equal annualinstallments.  The Company recorded instockholders’ equity deferred compensation of $0.2 million and $2.5 millionduring the nine months ended June 30, 2005 and 2004, respectively, relatedto the restricted stock grants.  In May 2004, one of the Company’sofficers resigned and forfeited 10,000 restricted shares.  The Company reversed $0.2 million in deferredcompensation related to these shares, as well as minimal expense the Companyhad recognized through the date of forfeiture. The remaining deferred compensation balance will be amortized as expenseon a straight-line basis over the vesting periods of the respective awards.

 

*Correction of Prior Period Errors*

 

In connection with the financial statement preparation process for thequarter ended December 31, 2004, the Company’s management identified twoaccounting errors related to prior reporting periods.  The first error was an understatement ofinventory at September 30, 2004, resulting from utilization of incorrectfinished goods inventory overhead factors at such date.  This error was corrected in the quarter endedDecember 31, 2004 and resulted in an overstatement of cost of sales of$760,000 for the quarter ended December 31, 2004.  The second error was an understatement of thecustomer allowances reserve at September 30, 2004.  This error was also corrected in the quarterended December 31, 2004, and resulted in an overstatement of net sales of$773,000 for the quarter ended December 31, 2004.  Management believes that the impact of theseerrors was not quantitatively or qualitatively material on an individual andnet basis to the prior period or the quarter ended December 31, 2004.  As such, prior period results have not beenrestated and the errors corrections were recorded in the quarter ended December 31,2004.

 

**2. 2005 Strategic Sourcing Changes**

 

*Sewing Facilities*

 

On May 3, 2005, the Company announced plans to close its tworemaining Company-operated sewing plants, located in Leon, Mexico and LaRomana, Dominican Republic, as part of the Company’s plan to focus sourcingefforts in the Eastern Hemisphere.  As ofMarch 31, 2005, the Company employed approximately 1,675 associates at thesewing facilities.  The Company completedthe closures during the third quarter of fiscal 2005.

 

As of March 31, 2005, given that plant closures and associatedseverance costs were probable, management recorded a $0.8 million pre-taxcharge to reorganization costs for severance and other related benefits inaccordance with SFAS No. 112, “Employer’s Accounting for Post-employmentBenefits and an Amendment of FASB Statements No. 5 and 43.”  During the third quarter of fiscal 2005, theCompany incurred $0.8 million in additional charges related to the closure,which included $0.3 million in additional severance and other related benefits,$0.3 million related to

 

7

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the accelerated depreciation of certain equipment at the sewing plantsand $0.2 million for other costs related to the closure.

 

As of June 30, 2005, the Company included $0.4 million in unpaidseverance and other related benefits and $0.2 million in other shutdown costsin accrued liabilities.  The Companyexpects to pay a substantial portion of these amounts by September 2005.   The Company is actively marketing the land,building and other equipment from the Mexico facility, as well as certain equipmentfrom the Dominican Republic facility. Land, building and equipment costs from both sewing plants of $0.6million were classified as property held for sale as of June 30,2005.  Management expects the sellingprices for all property held for sale to exceed carrying values.

 

*Raw Materials Warehouse*

 

On March 31, 2005, the Company closed its owned raw materialswarehouse facility in Weslaco, Texas.  The Company eliminated 16 positions in conjunction with the closure,resulting in a pre-tax charge of approximately $0.1 million to selling, generaland administrative expense during the second quarter of fiscal 2005.

 

As of June 30, 2005, the Company was actively marketing theproperty, which includes a separate building used as a fabric cutting facilityuntil its closure in fiscal 2002. Accordingly, land and building costs of $1.9 million were classified asproperty held for sale as of June 30, 2005.

 

**3. Inventories, net**

 

Inventories, net are stated at the lower of cost (first-in, first-out)or market and consisted of the following at June 30, 2005, and September 30,2004 *(in thousands)*:

 
| ** **                     | ** ** | **June 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|--------------------------------|------------|-------------------------|------------|------------------------------|------------|
| Piece goods                    |       | $                       | 4,103      |                         | $          | 4,473 |   |
| Trimmings &  supplies |       | 240                     |       | 1,550                        |       |
| Work-in-process                |       | 2,954                   |       | 4,464                        |       |
| Finished  garments             |       | 81,739                  |       | 85,526                       |       |
|                           |       | 89,036                  |       | 96,013                       |       |
| Inventory  reserves            |       | (1,041                  | )          | (784                         | )          |
| Total  inventories, net        |       | $                       | 87,995     |                         | $          | 95,229 |   |

 

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

 

**4. Long-Term Debt**

 

Long-term debt consisted of the following at June 30, 2005, and September 30,2004 *(in thousands)*:

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

 

8

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As of June 30, 2005, the Company had no amounts outstanding undera $111.0 million unsecured revolving credit agreement (the “Agreement”).  The available borrowing capacity wasrestricted to $54.6 million at June 30, 2005, under the Agreement’s fundeddebt to operating cash flow covenant. The Company incurred approximately $0.3 million in unused letters ofcredit and commitment fees related to the available borrowing capacity duringthe nine months ended June 30, 2005. The interest rates ranged from 2.34%to 6.25% during the nine months ended June 30, 2005, and were based uponboth margins over a bank base rate and margins over LIBOR, depending on theborrowing option selected by the Company. The Agreement, which expires in June 2007, prohibits the Companyfrom pledging its accounts receivable and inventories, contains limitations onincurring additional indebtedness, requires maintaining minimum net worthlevels of the Company and the Company’s main operating subsidiary, and requiresthe maintenance of certain financial ratios. The Agreement also prohibits the payment of any dividend if a defaultexists after giving effect to such a dividend. As of June 30, 2005, the Company was in full compliance with itsfinancial and other covenants under the Agreement.  On August 5, 2005, the Company notifiedthe lender that it would reduce the maximum borrowings under the Agreement to$70.0 million, effective September 6, 2005. Management exercised the rightto reduce the maximum borrowings in order to reduce future commitment fees due to the Company’s current anticipatedborrowing requirements.

 

The Company called and paid in full the remaining $2.0 million balanceof outstanding Industrial Development Revenue bonds on June 30, 2005,without penalty.  The bonds werecollateralized by a building and certain equipment at the Company’s formerfabric cutting facility in Weslaco, Texas, which the Company is currentlymarketing for sale.

 

**5. Segment Reporting**

 

The Company’s three operating segments are business units that offersimilar products through different distribution channels.  The Company’s wholesale segment designs,manufactures, imports and markets casual and dress men’s and women’s apparel toretailers throughout North America.  TheCompany also operates a retail segment, which markets Haggar® branded productsthrough 82 Company-operated stores located in outlet and strip malls throughoutthe United States, and a licensing segment, which generates royalty income bylicensing the Company’s trademarks for use by manufacturers or marketers ofspecified products in specified geographic areas.  The Company evaluates performance andallocates resources based on segment profits.

 

Intercompany sales from the wholesale segment to the retail segment arenot reflected in wholesale segment net sales. Additionally, there is no profit included on sales from the wholesalesegment to the retail segment.  Segmentprofit is comprised of segment net income before interest expense and provisionfor income taxes.

 

The table below reflects the Company’s segment results for the threeand nine months ended June 30, 2005 and 2004 *(in thousands)*:

 
| **Three months ended June 30,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|--------------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                             |       |          |       |       |       |          |       |             |       |
| Net sales                            |       | $             | 103,351    |       | $          | 16,141        |       | $                | —     |   | $ | 119,492 |   |
| Segment  profit                      |       | $             | 7,156      |       | $          | 636           |       | $                | 224        |   | $ | 8,016 |   |
|                                 |       |          |       |       |       |          |       |             |       |
| **2004**                             |       |          |       |       |       |          |       |             |       |
| Net sales                            |       | $             | 103,173    |       | $          | 13,174        |       | $                | —     |   | $ | 116,347 |   |
| Segment  profit                      |       | $             | 2,337      |       | $          | 503           |       | $                | 255        |   | $ | 3,095 |   |

 

9

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| **Nine months ended June 30,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                            |       |          |       |       |       |          |       |             |       |
| Net sales                           |       | $             | 297,268    |       | $          | 43,565        |       | $                | —     |   | $ | 340,833 |   |
| Segment  profit                     |       | $             | 6,263      |       | $          | 1,143         |       | $                | 852        |   | $ | 8,258 |   |
|                                |       |          |       |       |       |          |       |             |       |
| **2004**                            |       |          |       |       |       |          |       |             |       |
| Net sales                           |       | $             | 317,629    |       | $          | 38,517        |       | $                | —     |   | $ | 356,146 |   |
| Segment  profit                     |       | $             | 8,389      |       | $          | 1,007         |       | $                | 854        |   | $ | 10,250 |   |

 

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

 
| ** **                                             | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total  segment profit                                  |       | $                                     | 8,016      |                                 | $          | 3,095 |   | $ | 8,258 |   | $ | 10,250 |   |
| Interest  expense                                      |       | (208                                  | )          | (393                                 | )          | (653 | ) | (1,309 | ) |
| Consolidated  income before provision for income taxes |       | $                                     | 7,808      |                                 | $          | 2,702 |   | $ | 7,605 |   | $ | 8,941 |   |

 

The table below reflects the net sales related to the Company’s keyproduct lines as a percentage of consolidated net sales for the three and ninemonths ended June 30, 2005 and 2004*:*

 
| ** **                               | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales by  category:                  |       |                                  |       |                                 |       |   |   |   |   |
| Men’s  Haggar® branded apparel |       | 64.2                                  | %          | 62.4                                 | %          | 63.4 | % | 66.9 | % |
| Men’s  licensed apparel             |       | 12.2                                  | %          | 15.1                                 | %          | 12.3 | % | 9.7 | % |
| Men’s  private label apparel        |       | 16.6                                  | %          | 14.6                                 | %          | 16.1 | % | 14.2 | % |
| Women’s  apparel                    |       | 7.0                                   | %          | 7.9                                  | %          | 8.2 | % | 9.2 | % |
| Consolidated  net sales                  |       | 100.0                                 | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |

 

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

 

**6. Commitments and Contingencies**

 

The Company was party to an operating lease for a corporate aircraftthat contained a residual value guarantee. Under the lease, which ended in December 2004, the Company had theoption of (a) returning the aircraft to the lessor and paying theguaranteed residual value of $3.0 million; (b) purchasing the aircraft for$4.0 million; or (c) arranging for the sale of the aircraft to a thirdparty.  If the sales proceeds were lessthan $4.0 million, the Company was required to reimburse the lessor for thedeficiency.  If the sales proceedsexceeded $4.0 million, the Company was entitled to all of such excess amounts.

 

In December 2004, the Company completed the sale of the aircraftto a third party for proceeds of $3.2 million, net of commission and expensesof $0.2 million.  The Company reimbursedthe lessor for a $0.9 million deficiency, which included nominal fees relatedto the termination of the lease prior to December 31, 2004.  The Company had accrued $0.7 million of thisamount as of September 30, 2004, and recorded the additional $0.2 millionin selling, general and administrative expenses during the three months ended December 31,2004.

 

10

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The Company has been named as a defendant in several legal actionsarising from its operations in the normal course of business, including actionsbrought by certain terminated employees. Although exact settlement amounts, if any, related to these actionscannot accurately be predicted, the claims and damages alleged, the progress ofthe litigation to date and past experience with similar litigation leads theCompany to believe that any liability resulting from these actions and thosedescribed below will not, individually or collectively, have a material adverseeffect on the Company.

 

The Company is a defendant in a wrongful termination lawsuit brought infederal district court in 2000 by a former salesman.  A jury rendered a verdict in January 2002in favor of the plaintiff against the Company. After various appeals and remand to the trial court, on January 31,2005, the Company received a Memorandum Order ordering the Company to pay,after entry of judgment, backpay in the amount of $0.8 million, liquidateddamages of $0.8 million and front pay of $0.5 million.  The court also ordered the Company to makemonthly payments of $14,583 until the Company reinstates the plaintiff to thefirst available sales associate vacancy in the Dallas area.  The trial court denied, however, plaintiff’srequest for enhanced backpay and prejudgment interest.  During the first quarter of fiscal 2005, theCompany recorded an additional $1.7 million charge to selling, general andadministrative expenses related to this matter. During the second quarter of fiscal 2005, after negotiations with theplaintiff’s counsel, the Company agreed to pay $0.8 million in attorney’s fees,subject to the Company’s right to appeal the damages award.  As a result, the Company recorded anadditional $0.3 million charge to selling, general and administrativeexpenses.  The Company filed its noticeof appeal on April 28, 2005.  TheCompany has reserved an aggregate of $3.1 million in accrued liabilities forthis matter as of June 30, 2005.

 

During fiscal years 2003 and 2004, one attorney filed five separatesuits in Texas state courts against the Company and certain of itssubsidiaries, as well as unrelated third parties, alleging injuries toapproximately 3,000 former employees from airborne fibers and chemicals incertain of the Company’s now closed facilities located in south Texas.  All proceedings in one case, which names over2,900 plaintiffs, have been stayed due to the unrelated bankruptcy of one ofthe other defendants.  The Company isawaiting a decision by the trial court on its motion to dismiss another case,which names 71 plaintiffs.  After takingdiscovery in one of the remaining cases, the Company believes that all of thesecases and claims are frivolous and that the plaintiffs have no factual or legalbasis for any of their allegations.  Inaddition, the Company believes that it has meritorious defenses to all of theasserted claims.  The Company intends tovigorously defend all of these suits, unless a favorable settlement can beachieved.

 

Jury verdicts in two cases totaling approximately $1.7 million in theaggregate were returned in fiscal 2000 against certain subsidiaries of theCompany related to claims by former employees of now closed manufacturingfacilities for wrongful discharge and common law tort.  Both cases were appealed to the Texas SupremeCourt because management and legal counsel believed the verdicts were bothlegally and factually incorrect.  On December 31,2004, the Texas Supreme Court reversed the judgment of the Court of Appeals andrendered judgment in the Company’s favor in one of such cases.  As a result, during the first quarter offiscal 2005, the Company reversed the prior accrual for such case, resulting ina $0.3 million increase in gross profit for such quarter.  On May 13, 2005, the Texas Supreme Courtrendered judgment for the Company in the remaining case.  The TexasSupreme Court reversed the Court of Appeals’ judgment that had upheld a juryverdict of $0.2 in compensatory damages and $1.4 million in exemplarydamages.  The Company had accrued $2.6 million as reorganization costs tocover the judgment, plus prejudgment and post-judgment interest that hadaccrued since the trial court entered judgment in 2000.  During the third quarter of fiscal 2005, theCompany reversed the prior accrual for such case, resulting in a $2.6 millionincrease in gross profit for such quarter.

 

**7. Shipping and Handling Fees**

 

The Company records shipping and handling fees as selling, general andadministrative expense.  For the threeand nine months ended June 30, 2005, such costs were $3.0 million and $9.5million, respectively.  For the three andnine months ended June 30, 2004, such costs were $3.5 million and $10.4million, respectively.

 

11

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**8.  Basic and Diluted Common Shares**

 

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

 
| ** **                                                     | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted  average common shares outstanding                    |       | 6,997                                 |       | 7,049                                |       | 7,017 |   | 6,810 |   |
| Shares  equivalents, due to stock options and restricted stock |       | 93                                    |       | 115                                  |       | 107 |   | 152 |   |
| Weighted  average diluted shares outstanding                   |       | 7,090                                 |       | 7,164                                |       | 7,124 |   | 6,962 |   |

 

All options were included in the diluted earnings per share calculationfor the three months ended June 30, 2005. Options to purchase 18,868shares were excluded from the diluted earnings per share calculation for thenine months ended June 30, 2005, because the options’ exercise prices weregreater than the average market price of the common shares during theperiod.   Options to purchase 23,000 and14,131 shares were excluded from the diluted earnings per share calculations forthe three and nine months ended June 30, 2004, respectively, because theoptions’ exercise prices were greater than the average market price of thecommon shares during the period.

 

**9. Dividends**

 

During the third quarter of fiscal 2005, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on August 15,2005, which will be paid on August 29, 2005.  The second quarter of fiscal 2005 dividend ofapproximately $0.4 million was paid in May 2005.

 

**10. Related Party Transactions**

 

A director of the Company is a partner of a law firm that renderedvarious legal services to the Company during the three and nine months ended June 30,2005 and 2004.  The Company paid the lawfirm approximately $0.3 million and $0.5 million for legal services during thethree and nine months ended June 30, 2005, respectively.  The Company paid the law firm approximately$0.1 million and $0.8 million for legal services during the three and ninemonths ended June 30, 2004, respectively. There were approximately $45,000 and $0.1 million in unpaid fees due tothe law firm at June 30, 2005 and September 30, 2004, respectively,which were included in accrued liabilities.

 

**11. Sales Force Reduction**

 

As of September 30, 2004, the Company’s senior managementcommitted to a plan to reduce the Company’s sales force.  Severance benefits for this reduction inforce were to be determined in accordance with an established severance plancommunicated to all affected employees. The Company recorded a $0.4 million pre-tax charge to selling, generaland administrative expenses during fiscal 2004, which approximated averageseverance benefits for three employees pursuant to the severance plan.

 

During November 2004, management communicated the reduction inforce to the sales force and asked for volunteers to accept the severancebenefits.  On December 15, 2004,management engaged in negotiations with three volunteers from the sales forceand, as a result of these negotiations, granted an additional amount over the severancebenefits prescribed by the severance plan. The Company recorded an additional $0.3 million pre-tax charge toselling, general and administrative expenses during the first quarter of fiscal2005 for these incremental severance benefits. Severance payments for these three employees began at their terminationdates in January 2005 and are expected to continue through March 2006.  The Company included $0.5 million in accruedliabilities related to these severance benefits at June 30, 2005.

 

12

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

 

During fiscal 1991, the Company entered into split-dollar lifeinsurance agreements with trusts established by three former officers of theCompany.  Pursuant to these agreements,the Company is entitled to the cumulative premiums it has paid on the policiesless the Company’s interest in policy loans and related accrued interest.  No further premiums are due on thesepolicies.  The Company’s interest in thepolicies was $1.1 million at September 30, 2004, which was net of $9.1million in policy loans made to the Company.

 

The Company was notified of the death of one of the insured formerofficers in September 2004.  In November 2004,the insurance company applied the proceeds of $4.5 million directly to the $4.0million in outstanding loans related to this policy, and the Company receivednet proceeds of $0.4 million, net of interest of $0.1 million, related to thispolicy.  In October 2004, theCompany executed the surrender of $2.2 million in accumulated cash dividends onthe second of these policies, resulting in a reduction of the policy loans forthis amount.  In November 2004, theCompany repaid the remaining policy loans of $2.9 million for thesepolicies.  As a result of thetransactions described above, at December 31, 2004, all policy loans hadbeen repaid.  The cash surrender value ofthe policies at June 30, 2005, was $3.6 million.

 

**13. Equity**

 

On November 30, 1999, the Board of Directors authorized the Companyto repurchase of up to 3,000,000 shares of the Company’s stock (the “1999Program”).  The 1999 Program does nothave an expiration date.  As of September 30,2002, the Company had purchased 2,242,183 shares of stock.  The Company did not purchase any shares infiscal 2003 or fiscal 2004.  On November 8,2004, the Company publicly announced that it was resuming its stock buybackprogram and, during the first quarter of fiscal 2005, purchased 204,793 sharesof outstanding stock for $4.5 million commensurate with that announcement.  There were no additional purchases during thesecond and third quarters of fiscal 2005. The amount and timing of additional purchases will depend upon marketconditions.

 

**14. Property Sales**

 

In April 2005, the Company sold an apartment property located inNew York for proceeds of $0.7 million. The Company recorded a gain on the sale of approximately $0.5 million toother income during the third quarter of fiscal 2005.

 

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

 

In December 2004, the Financial Accounting Standards Board issuedSFAS No. 123R (revised 2004), “Share-Based Payment”, to amend SFAS No. 123,“Accounting for Stock-Based Compensation” and SFAS No. 95, “Statement ofCash Flows”.  SFAS No. 123R will requirecompanies to measure all employee stock-based compensation awards using a fairvalue method and recognize compensation costs in the financial statements.  SFAS No. 123R is effective beginning asof the first annual reporting period beginning after June 15, 2005.  The Company will be required to adopt SFAS No. 123Rbeginning October 1, 2005 for new awards of stock-based compensationgranted after that date and for unvested awards outstanding at that date.  Management believes the impact of SFAS No. 123Ron the Company’s results of operations will be consistent with the historicaldisclosure of pro forma stock compensation under SFAS No. 123; however, aportion of the tax benefit from the future exercise of stock options theCompany has historically classified as net cash provided by operatingactivities will be reported in net cash by financing activities after theimplementation of SFAS No. 123R.

 

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**Item 2. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion and analysis of the consolidated results ofoperations and financial condition of the Company should be read in conjunctionwith the accompanying consolidated financial statements and the notes theretoand the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,2004.

 

**Forward Looking Statements**

 

This Quarterly Report on Form 10-Q includes forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933(the “Securities Act”) and Section 21E of the Securities Exchange Act of1934 (the “Exchange Act”).  Allstatements other than statements of historical facts contained in this report,including statements regarding the Company’s future financial position,business strategy and plans and objectives of management for future operations,are forward-looking statements.  Thewords “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”“expect” and similar expressions, as they relate to the Company, are intendedto identify forward-looking statements. The Company has based these forward-looking statements largely on itscurrent expectations and projections about future events and financial trendsthat the Company believes may affect its financial condition, results ofoperations, business strategy and financial needs.  These forward-looking statements are subjectto a number of known and unknown risks, uncertainties and assumptions thatcould affect the results of the Company or the apparel industry generally andcould cause the Company’s expected results to differ materially from thoseexpressed in this Quarterly Report on Form 10-Q.  These risks, uncertainties and assumptionsare described in “Item 1.  Business” ofthe Company’s Annual Report on Form 10-K filed with the Securities andExchange Commission on December 10, 2004, and include, among other 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,

 

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

 

•                  impactof the identification of material weaknesses in disclosure controls andprocedures.

 

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In light of these risks, uncertainties and assumptions, theforward-looking events and circumstances discussed in this Quarterly Report on Form 10-Qmay not occur and actual results could differ materially from those anticipatedor implied in the 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 hereinto reflect any change in its expectations with regard thereto or any change inevents, conditions, circumstances or assumptions underlying such statements.

 

**Overview**

 

The Company designs, imports and markets casual and dress men’s andwomen’s apparel products, 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 82Company-operated retail stores located in outlet and strip malls throughout theUnited States.  The Company’s licensingsegment generates royalty income by licensing the Company’s trademarks for useby manufacturers or marketers of specified products in specified geographicregions.

 

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

 

*Men’s Haggar® branded apparel*.  The Company’s Haggar® branded productsconsist of high quality, affordable men’s dress and casual pants, shirts,suits, sport coats, sweaters and vests. These products are sold nationwide in major department stores andmarketed through the Company’s own retail stores located in outlet and stripmalls throughout the United States.  TheHaggar® trademark is also licensed to manufacturers of related apparel andaccessories in categories outside the core product lines of the Company, or tomarketers of core or specified products in designated geographic regionsoutside the United States.

 

*Men’s licensed apparel. *The Company is thelicensee of certain trademarks owned by other apparel companies.  The Company has entered into licenseagreements to source and market certain men’s pants and shorts under theKenneth Cole New York®, Kenneth Cole Reaction® and Claiborne® trademarks.

 

*Men’s private label apparel. *The Company’s massretailer division, The Horizon Group, markets men’s apparel products includingdress pants, casual pants, shorts, suits, sport coats and shirts.  In addition to sourcing products under itsown labels, the Company also sources men’s apparel for certain of its customersunder the individual store’s proprietary label. These products, which areoffered at lower price points than Haggar® licensed and branded apparel, aresold to customers such as Wal-Mart Stores, Inc. and J.C. Penney.

 

*Women’s apparel. *The Company’s women’swear subsidiary markets women’s sportswear including tops, coats, dresses,skirts, pants, and vests.  These productlines are primarily sold to major department stores, including Dillard’s andJ.C. Penney in the United States and Sears and The Bay in Canada, and catalogsuppliers, such as Coldwater Creek.

 

15

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**Key Performance Indicators**

 

The Company’s management evaluates the financial condition andoperating performance of the business on the basis of numerous factors,including:

 

*Annual sales growth. *The Company hasreported modest sales increases in recent years despite a trend in the apparelindustry of declining retail prices and the consolidation of majorretailers.  The Company plans to attainsales growth by maintaining a keen focus on the long-term business strategiesover all the principal product categories. The Company expects reduced overall sales for fiscal 2005 as compared tofiscal 2004 mainly related to a pant product called ForeverNewTM that did notmeet expectations.

 

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

 

The Company continuously evaluates sourcing alternatives for high-quality,low-cost sourcing channels in order to increase gross profit.  During the third quarter of fiscal 2005, theCompany closed the remaining Company-operated sewing plants in the WesternHemisphere to focus more sourcing in the Eastern Hemisphere.

 

Further, the Company continually pursues initiatives to reduce selling,general and administrative expenses. Recent initiatives include the sale of the corporate aircraft, aheadcount reduction in the sales force and the elimination of redundant activitiesin the men’s and women’s wear organizations.

 

*Inventory turns. *The Company managesinventory levels by carefully evaluating sales plans and monitoring inventorypurchasing lead times.  The Company alsohas introduced a variety of replenishment product programs, which contribute tohigher inventory turns due to the decrease in inventory carrying costs.

 

**Business Strategies**

 

The Company has adopted the following strategies, as more fullydescribed in the Annual Report on Form 10-K for the year ended September 30,2004, to achieve its corporate and financial goals:

 

*Increase Haggar® brand equity.*  The Company designs comprehensive marketingplans, including national advertising, co-operative advertising, point-of-salesignage and in-store fixtures, to maintain and increase brand awareness andgrow market share.

 

*Introduce new products. *The Company’scontinually seeks to introduce innovative products and technologies to themarketplace.

 

*Expand licensing of trademarks. *The Companycontinues to pursue license agreements of Haggar-owned trademarks and thetrademarks of other apparel companies to strengthen its market position.

 

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

 

*Actively manage costs and collections. *The Company hasidentified vendors to provide high-quality, low-cost product sourcing from 14foreign countries, with future sourcing plans to eventually reduce the numberof countries to six to eight, given the overall apparel marketplace.  The Company also seeks to actively monitorand pursue timely collections on its receivables from retailer customers.

 

*Pursue strategic acquisitions. *The Company willcontinue to seek growth through the identification of acquisition targets thatare aligned with the Company’s long-term financial goals.

 

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**Key Activity  - Three Months Ended June 30, 2005**

 

Key activity for the three months ended June 30, 2005 included:

 

•                  TheTexas Supreme Court rendered judgment for the Company in a wrongful terminationcase.  The judgment reversed a court of appeals’ judgment that had uphelda jury verdict of $1.6 million in total damages.  The judgment resulted in the reversal toincome of a $2.6 million reserve that had been accrued in a prior period forthese damages and pre- and post-judgment interest.

 

•                  Theremaining Company-operated sewing facilities operated by subsidiaries of theCompany in Leon, Mexico, and La Romana, Dominican Republic were closed.  The Company began to utilize other costeffective sourcing alternatives late in the third quarter 2005.

 

•                  TheCompany called and paid in full theremaining $2.0 million balance of outstanding Industrial Development Revenue (“IDR”)bonds on June 30, 2005, without penalty.

 

•                  Netsales increased 2.7% for the third quarter of fiscal 2005 as compared to netsales for the third quarter of fiscal 2004 primarily due to the Company’sexpansion of retail outlets, improved sales of men’s private label products andan increase in sales of Haggar® branded products.

 

•                  Grossprofit as a percentage of net sales, excluding reorganization costs, increased1.1% for the third quarter of fiscal 2005 as compared to the third quarter offiscal 2004.

 

•                  Dilutedearnings per share increased 191% for the third quarter of fiscal 2005 ascompared to the third quarter of fiscal 2004.

 

**Critical Accounting Policies**

 

There have been no material changes to the Company’s critical accountingpolicies during the nine months ended June 30, 2005.

 

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

 

While the Company believes that the historical experience and otherfactors considered provide a meaningful basis for the accounting policiesapplied in the preparation of the consolidated financial statements, theCompany cannot guarantee that its estimates and assumptions will beaccurate.  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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**Comparison of Three Months Ended June 30,2005 to Three Months Ended June 30, 2004**

 

*Net Sales*

 

Net sales increased $3.1 million, or 2.7%, to $119.5 million for thethird quarter of fiscal 2005, compared to net sales of $116.3 million for thethird quarter of fiscal 2004.  Theincrease in net sales was primarily attributable to a $3.0 million increase innet sales for the Company’s retail stores due to strong same store sales andthe net addition of 13 new stores since June 30, 2004.  Sales of men’s private label productsincreased $2.8 million primarily due to increased shipments to a key customerand the addition of two new customers during the third quarter of fiscal2005.  The overall net sales increase wasalso due to a $1.9 million increase in Haggar® branded business primarily dueto a shift in the timing of orders in fiscal 2005 as compared to fiscal 2004for one customer, offset in part by reduced sales of seasonal sportswear andsales related to the Company’s ForeverNewTM pant product.  The Company also expanded its sales offeringsinto Mexico during February 2005, which resulted in $1.0 million inincremental sales for the third quarter of fiscal 2005 as compared to the sameperiod in fiscal 2004.

 

These net sales increases were partially offset by a $3.0 milliondecrease in sales of Kenneth Coleâand Claiborneâ branded products.  The Company’s domestic women’s wear businessdecreased $2.0 million due to the elimination of programs in the Juniorscategory and a continued decrease in sales to a key customer and to specialtystores.    However, this decrease wasoffset in part by sales growth of $1.2 million for the Company’s women’s wearproducts in Canada due to increased sales of new programs to key customers.   The Company also transferred its operationsin the United Kingdom to a licensee during October 2004, which resulted ina $1.7 million decrease in net sales for the third quarter of fiscal 2005.

 

*Reorganization Costs*

 

Reorganization costs for the third quarter of fiscal 2005 werecomprised of $2.6 million in income related to the reversal of a legal reservedue to a favorable ruling in a wrongful termination suit offset by $0.8 millionin expenses related to plant closures during the period.

 

On May 3, 2005, the Company announced plans to close its tworemaining Company-operated sewing plants, located in Leon, Mexico and LaRomana, Dominican Republic, as part of the Company’s plan to focus sourcingefforts in the Eastern Hemisphere.  As ofMarch 31, 2005, the Company employed approximately 1,675 associates at thesewing facilities.  The Company completedthe closures during the third quarter of fiscal 2005.

 

As of March 31, 2005, given that plant closures and associatedseverance costs were probable, management recorded a $0.8 million pre-taxcharge to reorganization costs for severance and other related benefits inaccordance with SFAS No. 112, “Employer’s Accounting for Post-employmentBenefits and an Amendment of FASB Statements No. 5 and 43.”  During the third quarter of fiscal 2005, theCompany incurred $0.8 million in additional charges related to the closure,which included $0.3 million in additional severance and other related benefits,$0.3 million related to the accelerated depreciation of certain equipment atthe sewing plants and $0.2 million for other costs related to the closure.

 

As of June 30, 2005, the Company included $0.4 million in unpaidseverance and other related benefits and $0.2 million in other shutdown costsin accrued liabilities.  The Companyexpects to pay a substantial portion of these amounts by September 2005.  The Company is actively marketing the land,building and other equipment from the Mexico facility, as well as certainequipment from the Dominican Republic facility. Land, building and equipment costs from both sewing plants of $0.6million were classified as property held for sale as of June 30,2005.  Management expects the sellingprices for all property held for sale to exceed carrying values.

 

*Gross Profit*

 

Gross profit as a percentage of net sales increased to 30.3% in thethird quarter of fiscal 2005, compared to 27.7% in the third quarter of fiscal2004.  Absent $1.8 million inreorganization costs, gross profit as a percentage of net sales would have been28.8% in the third quarter of fiscal 2005. The increase was primarily attributable to a decrease in customerallowances for Haggar® branded products and better product costs for theCompany’s private label products.

 

 

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*Selling, General and Administrative Expenses*

 

Selling, general and administrative expenses as a percentage of netsales decreased to 24.1% in the third quarter of fiscal 2005, compared to 25.2%in the third quarter of fiscal 2004.  The$0.5 million, or 1.8%, decrease in selling, general and administrative expenseswas primarily due to a $0.3 million decrease in incentive compensation expensedue to lower overall earnings projections for fiscal 2005, $0.7 million inreduced costs due to the transfer of operations in the United Kingdom to alicensee during the first quarter of fiscal 2005, $0.6 million related to areduced estimate of outstanding self-insured health claims and $0.3 million insavings due to the sale of the corporate aircraft during the first quarter offiscal 2005.  The expense decreases wereoffset by a $1.1 million increase in professional fees related to the Company’scompliance with the Sarbanes-Oxley Act as well as other miscellaneous expenseincreases.

 

*Other Income*

 

Other income increased $0.4 million to $0.4 million of other income forthe third quarter of fiscal 2005, compared to $30,000 of other expense for thethird quarter of fiscal 2004.  Otherincome for the third quarter of fiscal 2005 included a $0.5 million gain on thesale of a Company-owned apartment, offset by a $0.1 million loss on thedisposal of certain fixtures.

 

*Interest Expense*

 

Interest expense decreased $0.2 million, or 47.1%, to $0.2 million forthe third quarter of fiscal 2005, compared to $0.4 million for the thirdquarter of fiscal 2004, primarily due to the repayment of policy loans onofficers’ life insurance policies during the first quarter of fiscal 2005 andlower debt levels during the third quarter of fiscal 2005.

 

*Income Taxes*

 

The Company’s income tax provision as a percentage of income beforeincome tax was 39.1% for the third quarter of fiscal 2005.  Comparatively, the Company’s income taxprovision as a percentage of income before income tax was 38.2% for the thirdquarter of fiscal 2004.  The increase inthe effective tax rate was primarily due to certain non-deductible expenses anda change in the estimate of certain potential state income tax assessments.

 

**Comparison of Nine Months Ended June 30,2005 to Nine Months Ended June 30, 2004**

 

*Net Sales*

 

Net sales decreased $15.3 million, or 4.3%, to $340.8 million for thenine months ended June 30, 2005, compared to net sales of $356.1 millionfor the nine months ended June 30, 2004. The decrease in net sales was primarily attributable to a $23.6 millionreduction in the domestic Haggar® branded business due to weak performance ofthe Company’s ForeverNewTM product during the first nine months of fiscal 2005,a shift in the timing of orders in fiscal 2005 as compared to fiscal 2004 forone customer, reduced sales of seasonal sportswear and reductions in net salesto two department store customers.  Thedecrease in domestic net sales of Haggar® branded products was partially offsetby a $7.3 million increase in sales of Kenneth Coleâand Claiborneâ branded products with several customers.  The Company transferred its operations in theUnited Kingdom to a licensee during October 2004, which resulted in anadditional $4.8 million decrease in net sales for the nine months ended June 30,2005.  The Company’s domestic women’swear business decreased $8.4 million due to the elimination of programs in theJuniors category as well as a continued decrease in sales to a key customer andspecialty stores.  This decrease wasoffset in part by sales growth of $3.8 million for the Company’s women’s wearproducts in Canada due to increased sales of new programs to keycustomers.  The Company’s retail segmentnet sales increased $5.0 million due to management’s focus on effectivepromotional planning, improved store mix and the net addition of 13 new storessince the nine months ended June 30, 2004.

 

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The Company expects reductions in orders for Haggar® branded men’s wearand Kenneth Cole® and Claiborne® branded products through the remainder offiscal 2005 as compared to fiscal 2004. The Company intends to explore opportunities for growth with its women’swear programs in the United States and in the women’s wear business in Canadato offset decreased volume for its traditional women’s wear programs.Additionally, the Company plans to drive additional net sales increases in itsretail division by opening new retail locations subsequent to June 30,2005, and focusing on same-store sales growth.

 

*Reorganization Costs*

 

Reorganization costs for the nine months ended June 30, 2005 of$1.3 million were primarily attributable to $1.6 million in severance costs andother related benefits associated with the shutdown of the two remainingCompany-operated sewing plants, offset by the reversal of accruals of $0.3million and $2.6 million to earnings related to separate wrongful terminationlawsuits in which the Company received favorable judgments on appeal in December 2004and May 2005, respectively.

 

*Gross Profit*

 

Gross profit as a percentage of net sales increased to 28.9% in thenine months ended June 30, 2005, compared to 28.2% in the nine monthsended June 30, 2004.  Absent $1.3million in reorganization costs, gross profit as a percentage of net saleswould have been 28.5% in the nine months ended June 30, 2005.   The increase in gross profit percentage wasprimarily due to an improved product mix for the Company’s men’s private labelproducts, improved gross profits in the Company’s retail stores due toeffective promotional and merchandise planning and a decrease in customerallowances on Claiborne® branded products due to a change in estimate.  The increase in gross profit was offset inpart by an increase in customer allowances during the first quarter of fiscal2005, which primarily related to markdowns associated with the ForeverNewäproducts during the first quarter of fiscal 2005.

 

The Company continues to evaluate lower cost sourcing options.  The Company closed the last twoCompany-operated sewing plants as noted above and intends to reduce the numberof suppliers to reduce costs, enhance product quality and improve productdeliveries.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative expenses as a percentage of netsales increased to 26.9% in the nine months ended June 30, 2005, comparedto 25.7% in the nine months ended June 30, 2004.  The $0.2 million, or 0.2%, increase inselling, general and administrative expenses primarily related to $2.5 millionin incremental media advertising expense to introduce the ForeverNewäproduct line during the first quarter of fiscal 2005 and $2.0 million inconnection with a wrongful termination lawsuit. The increase in selling, general and administrative expenses was alsoattributable to a $1.4 million increase in professional fees related to theCompany’s compliance with the Sarbanes-Oxley Act, and other administrativeexpense increases.  The increases werepartially offset by a $1.5 million decrease in incentive compensation expensedue to lower overall earnings projections for fiscal 2005, $1.9 million in reducedcosts due to the transfer of operations in the United Kingdom to a licenseeduring the first quarter of fiscal 2005, $1.0 million in savings due to thesale of the corporate aircraft during the first quarter of fiscal 2005 and a$1.5 million decrease in expenses related to the Company’s global headquartersrelocation in the first nine months of fiscal 2004.

 

During the first quarter of fiscal 2005, the Company also recorded a$0.3 million charge for additional severance benefits to three sales forceemployees.  The Company recorded a $0.4 millioncharge during fiscal 2004 when management committed to this reduction inforce.  Severance payments for thesethree employees began at their termination dates in January 2005 and areexpected to continue through March 2006. The Company included $0.5 million in accrued liabilities related tothese severance benefits as of June 30, 2005.

 

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*Other Income*

 

Other income increased $0.2 million to $0.6 million during the ninemonths ended June 30, 2005, compared to $0.4 million for the nine monthsended June 30, 2004.  Other incomefor the nine months ended June 30, 2005 included a $0.5 million gain onthe sale of an apartment property, offset by a $0.1 million loss on thedisposal of certain fixtures.  The priorperiod includes a gain on the sale of a property of $0.2 million.

 

*Interest Expense*

 

Interest expense decreased $0.6 million, or 50.0%, to $0.7 million forthe nine months ended June 30, 2005, compared to $1.3 million for the ninemonths ended June 30, 2004, primarily due to the repayment of policy loanson officers’ life insurance policies during the first quarter of fiscal 2005and lower debt levels during fiscal 2005.

 

*Income Taxes*

 

The Company’s income tax provision as a percentage of income beforeincome tax was 35.4% for the nine months ended June 30, 2005. Comparatively, the Company’s income tax provision as a percentage ofincome before income tax was 38.2% for the nine months ended June 30,2004.  Despite an increase in certain non-deductible expenses and stateincome tax for the period ended June 30, 2005, the Company’s effectiverate decreased primarily due to certain discrete period adjustments.  TheCompany recorded discrete period adjustments to reflect a downward revision inthe Company’s estimate of interest owed related to a pending settlement withthe Internal Revenue Service covering tax years 1993 to 1998 and a change inthe estimate of certain potential state tax assessments.

 

**Segment Profitability**

 

The Company’s three operating segments are business units that offersimilar products through different distribution channels.  The Company’s wholesale segment designs,manufactures, imports and markets casual and dress men’s and women’s apparel toretailers throughout North America.  TheCompany also operates a retail segment, which markets Haggar® branded productsthrough 82 Company operated stores located in outlet and strip malls throughoutthe United States, and a licensing segment, which generates royalty income bylicensing the Company’s trademarks for use by other manufacturers of specifiedproducts in specified geographic areas. The Company evaluates performance and allocates resources based onsegment profits.

 

Intercompany sales from the wholesale segment to the retail segment arenot reflected in wholesale segment net sales. Additionally, there is no profit included on sales from the wholesalesegment to the retail segment.  Segmentprofit is comprised of segment net income before interest expense and provisionfor income taxes.

 

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The table below reflects the Company’s segment results for the threeand nine months ended June 30, 2005 and 2004 *(in thousands)*:

 
| **Three months ended June 30,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|--------------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                             |       |          |       |       |       |          |       |             |       |
| Net sales                            |       | $             | 103,351    |       | $          | 16,141        |       | $                | —     |   | $ | 119,492 |   |
| Segment  profit                      |       | $             | 7,156      |       | $          | 636           |       | $                | 224        |   | $ | 8,016 |   |
|                                 |       |          |       |       |       |          |       |             |       |
| **2004**                             |       |          |       |       |       |          |       |             |       |
| Net sales                            |       | $             | 103,173    |       | $          | 13,174        |       | $                | —     |   | $ | 116,347 |   |
| Segment  profit                      |       | $             | 2,337      |       | $          | 503           |       | $                | 255        |   | $ | 3,095 |   |

 
| **Nine months ended June 30,** | ** ** | **Wholesale** | ** ** | **Retail** | ** ** | **Licensing** | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|---------------|------------|------------|------------|---------------|------------|------------------|------------|
| **2005**                            |       |          |       |       |       |          |       |             |       |
| Net sales                           |       | $             | 297,268    |       | $          | 43,565        |       | $                | —     |   | $ | 340,833 |   |
| Segment  profit                     |       | $             | 6,263      |       | $          | 1,143         |       | $                | 852        |   | $ | 8,258 |   |
|                                |       |          |       |       |       |          |       |             |       |
| **2004**                            |       |          |       |       |       |          |       |             |       |
| Net sales                           |       | $             | 317,629    |       | $          | 38,517        |       | $                | —     |   | $ | 356,146 |   |
| Segment  profit                     |       | $             | 8,389      |       | $          | 1,007         |       | $                | 854        |   | $ | 10,250 |   |

 

The table below reflects the net sales related to the Company’s keyproduct lines as a percentage of consolidated net sales for the three and ninemonths ended June 30, 2005 and 2004*:*

 
| ** **                               | ** ** | **Three months ended  June 30,** | ** ** | **Nine months ended  June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales by  category:                  |       |                                  |       |                                 |       |   |   |   |   |
| Men’s  Haggar® branded apparel |       | 64.2                                  | %          | 62.4                                 | %          | 63.4 | % | 66.9 | % |
| Men’s  licensed apparel             |       | 12.2                                  | %          | 15.1                                 | %          | 12.3 | % | 9.7 | % |
| Men’s  private label apparel        |       | 16.6                                  | %          | 14.6                                 | %          | 16.1 | % | 14.2 | % |
| Women’s  apparel                    |       | 7.0                                   | %          | 7.9                                  | %          | 8.2 | % | 9.2 | % |
| Consolidated  net sales                  |       | 100.0                                 | %          | 100.0                                | %          | 100.0 | % | 100.0 | % |

 

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

 

*Wholesale Segment*

 

Wholesale segment net sales increased $0.2 million, or 0.2%, to $103.4million for the third quarter of fiscal 2005, compared to $103.2 million forthe third quarter of fiscal 2004.  Theincrease in wholesale segment net sales was primarily attributable to a $2.8million increase in sales of men’s private label products primarily due toincreased shipments to a key customer and the addition of two new customersduring the third quarter of fiscal 2005. The wholesale segment net sales increase was also due to a $1.9 millionincrease in Haggar® branded business primarily due to a shift in the timing oforders in fiscal 2005 as compared to fiscal 2004 for one customer, offset inpart by reduced sales of seasonal sportswear and sales related to the Company’sForeverNewTM pant product.  The Companyalso expanded its sales offerings into Mexico during February 2005, whichresulted in $1.0 million in incremental sales for the third quarter of fiscal2005 as compared to the same period in fiscal 2004.

 

These net sales increases were partially offset by a $3.0 milliondecrease in sales of Kenneth Coleâand Claiborneâ branded products.  The Company’s domestic women’s wear businessdecreased $2.0 million due to the elimination of programs in the Juniorscategory and a continued decrease in sales to a key customer and to specialtystores.

 

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However, this decrease was offset in part by sales growth of $1.2million for the Company’s women’s wear products in Canada due to increasedsales of new programs to key customers.  The Company also transferred its operations in the United Kingdom to alicensee during October 2004, which resulted in a $1.7 million decrease innet sales for the third quarter of fiscal 2005.

 

Wholesale segment net sales decreased $20.4 million, or 6.4%, to $297.3million for the nine months ended June 30, 2005, compared to $317.6million for the nine months ended June 30, 2004.  The decrease in wholesale segment net saleswas primarily attributable to a $23.6 million reduction in the domestic Haggar®branded business due to weak performance of the Company’s ForeverNewTM productduring the first nine months of fiscal 2005, a shift in the timing of orders infiscal 2005 as compared to fiscal 2004 for one customer, reduced sales ofseasonal sportswear and reductions in net sales to two department storecustomers.  The decrease in domestic netsales of Haggar® branded products was partially offset by a $7.3 millionincrease in sales of Kenneth Coleâand Claiborneâ branded products.  The Company transferred its operations in theUnited Kingdom to a licensee during October 2004, which resulted in anadditional $4.8 million decrease in net sales for the nine months ended June 30,2005.  The Company’s domestic women’swear business decreased $8.4 million due to the elimination of programs in theJuniors category as well as a continued decrease in sales to a key customer andspecialty stores.  This decrease wasoffset in part by sales growth of $3.8 million for the Company’s women’s wearproducts in Canada due to increased sales of new programs to key customers.

 

Wholesale segment profit increased $4.9 million to $7.2 million for thethird quarter of fiscal 2005, compared to $2.3 million for the third quarter offiscal 2004.  The increase in wholesalesegment profit was primarily due to $2.6million in income related to the reversal of a legal reserve due to a favorableruling in a wrongful termination suit. The increase is also attributable to a 1.0% increase in gross profit asa percentage of net sales for the wholesale segment, excluding reorganizationcosts, primarily due to a decrease in customer allowances for Haggar®branded products and better product costs for the Company’s private labelproducts.  The increase in wholesalesegment profit was also due in part to a decrease in selling, general andadministrative expenses of $1.6 million, primarily attributable to a decreasein incentive compensation expense due to lower overall earnings projections forfiscal 2005, reduced costs due to the transfer of operations in the UnitedKingdom to a licensee during the first quarter of fiscal 2005, a reducedestimate of outstanding self-insured health claims and savings due to the saleof the corporate aircraft during the first quarter of fiscal 2005.  The expense decreases were offset in part byan increase in professional fees related to the Company’s compliance with theSarbanes-Oxley Act and additional reorganization costs related to the closureof the sewing plants.

 

Wholesale segment profit decreased $2.1 million, or 25.3%, to $6.3million for the nine months ended June 30, 2005, compared to $8.4 millionfor the nine months ended June 30, 2004. The decrease in wholesale segment profit was primarily attributable to a$20.4 million decrease in net sales as noted above.  The Company also incurred $1.6 million inreorganization costs related to the shutdownof the two remaining Company-operating sewing plants.  The decrease was also attributable toan increase in wholesale segment selling, general and administrative expensesas a percentage of net sales to 24.5% during the nine months ended June 30,2005 from 23.5% for the comparable period in fiscal 2004.  This increase was due to increased mediaadvertising expense and expenses related to a wrongful terminationlawsuit.  The increase in selling,general and administrative expenses was also attributable to an increase inprofessional fees related to the Company’s compliance with the Sarbanes-OxleyAct.  The increases were partially offsetby a decrease in incentive compensation expense due to lower overall earningsprojections for fiscal 2005, reduced costs due to the transfer of operations inthe United Kingdom to a licensee during the first quarter of fiscal 2005,savings due to the sale of the corporate aircraft during the first quarter offiscal 2005, a severance charge related to a reduction of the sales force and adecrease in expenses related to the Company’s global headquarters relocation inthe first nine months of fiscal 2004.

 

The decrease in wholesale segment profit for the nine months ended June 30,2005 was offset in part by the reversal of accruals of $0.3 million and $2.6million to earnings related to separate wrongful termination lawsuits in whichthe Company received favorable judgments on appeal in December 2004 and May 2005,respectively.

 

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*Retail Segment*

 

Retail segment net sales increased $2.9 million, or 22.5%, to $16.1million for the third quarter of fiscal 2005, compared to $13.2 million for thethird quarter of fiscal 2004.  Retailsegment net sales increased $5.1 million, or 13.1%, to $43.6 million for thenine months ended June 30, 2005, compared to $38.5 million for the ninemonths ended June 30, 2004.  Theincrease in net sales for the retail segment for both periods was primarilyattributable to strong same store sales, the net addition of 13 new storessince June 30, 2004, a seasonal promotion during the third quarter offiscal 2005 that resulted in higher sales volume than the comparable period infiscal 2004 and improved merchandising efforts.

 

Retail segment profit increased $0.1 million, or 26.4%, to $0.6 millionfor the third quarter of fiscal 2005, compared to $0.5 million for the thirdquarter of fiscal 2004.  Although, theretail segment reported a $2.9 million increase in net sales for the thirdquarter of fiscal 2005, retail gross profit as a percentage of net salesdecreased 1.3%, primarily due to seasonal promotions to address competitivediscounting during the period.  Retailsegment selling, general and administrative expenses also increased $1.0million primarily due to increased employee compensation and marketingexpenses, increased store opening expenses and other volume-related expenseincreases.

 

Retail segment profit increased $0.1 million, or 13.5%, to $1.1 millionfor the nine months ended June 30, 2005, compared to $1.0 million for thenine months ended June 30, 2004. Although the retail segment reported a $5.1 million increase in netsales for the period, retail gross profit as a percentage of net salesdecreased 0.5%, primarily due to promotions during the period and downwardpricing pressures from the Company’s retail competitors.  Retail segment selling, general andadministrative expenses also increased $2.0 million primarily due to increasedemployee compensation and marketing expenses, increased store opening expensesand other volume-related expense increases.

 

**Liquidity and Capital Resources**

 

The Company’s principal sources of liquidity are cash flows from operations and borrowings under its unsecured revolving credit facility.  As of June 30, 2005, the Company had cash and cash equivalents of $20.2 million.

 

As of June 30, 2005, the Company had no amounts outstanding undera $111.0 million unsecured revolving credit agreement (the “Agreement”).  The available borrowing capacity wasrestricted to $54.6 million at June 30, 2005, under the Agreement’s fundeddebt to operating cash flow covenant. The Company incurred approximately $0.3 million in unused letters ofcredit and commitment fees related to the available borrowing capacity duringthe nine months ended June 30, 2005. The interest rates ranged from 2.34%to 6.25% during the nine months ended June 30, 2005, and were based uponboth margins over a bank base rate and margins over LIBOR, depending on theborrowing option selected by the Company. The Agreement, which expires in June 2007, prohibits the Companyfrom pledging its accounts receivable and inventories, contains limitations onincurring additional indebtedness, requires maintaining minimum net worthlevels of the Company and the Company’s main operating subsidiary, and requiresthe maintenance of certain financial ratios. The Agreement also prohibits the payment of any dividend if a defaultexists after giving effect to such a dividend. As of June 30, 2005, the Company was in full compliance with itsfinancial and other covenants under the Agreement.  On August 5, 2005, the Company notifiedthe lender that it would reduce the maximum borrowings under the Agreement to$70.0 million, effective September 6, 2005.  Management exercised the right to reduce themaximum borrowings in order to reduce future commitment fees due to the Company’s current anticipatedborrowing requirements.

 

The Company called and paid in full the remaining $2.0 million balanceof outstanding IDR bonds on June 30, 2005 without penalty.  The bonds were collateralized by a buildingand certain equipment at the Company’s fabric cutting facility in Weslaco,Texas.

 

In February 2005, the Company purchased software related to a newfinancial management system.  Theimplementation of the system began during the third quarter of fiscal 2005, andis scheduled for completion during the third quarter of fiscal 2006.  The Company anticipates that costs topurchase the software and implement the new system will be approximately $2.0million to $3.0 million over the next nine months.  The Company also plans to replace themerchandising and point-of-sale systems at the retail segment.  The Company anticipates that

 

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implementation of these systems will begin during January 2006 andconclude by the end of fiscal 2006.  TheCompany estimates that costs to license the software and implement the newretail systems will be approximately $1.5 to $2.5 million.  The Company intends to fund the implementationof these new systems with cash flows from operations.

 

The Company was party to an operating lease for a corporate aircraftthat contained a residual value guarantee. Under the lease, which ended in December 2004, the Company had theoption of (a) returning the aircraft to the lessor and paying theguaranteed residual value of $3.0 million; (b) purchasing the aircraft for$4.0 million; or (c) arranging for the sale of the aircraft to a thirdparty.  If the sales proceeds were lessthan $4.0 million, the Company was required to reimburse the lessor for thedeficiency.  If the sales proceedsexceeded $4.0 million, the Company was entitled to all of such excess amounts.

 

In December 2004, the Company completed the sale of the aircraftto a third party for proceeds of $3.2 million net of commissions and expensesof $0.2 million.  The Company reimbursedthe lessor for a $0.9 million deficiency, which included minimal fees relatedto the termination of the lease prior to December 31, 2004.  The Company had accrued $0.7 million of thisamount as of September 30, 2004, and recorded the additional $0.2 millionin selling, general and administrative expenses during the three months ending December 31,2004.

 

During fiscal 1991, the Company entered into split-dollar lifeinsurance agreements with trusts established by three former officers of theCompany.  Pursuant to these agreements,the Company is entitled to the cumulative premiums it has paid on the policiesless the Company’s interest in policy loans and related accrued interest.  No further premiums are due on thesepolicies.  The Company’s interest in thepolicies was $1.1 million at September 30, 2004, which was net of $9.1million in policy loans made to the Company.

 

The Company was notified of the death of one of the insured formerofficers in September 2004.  In November 2004,the insurance company applied the proceeds of $4.5 million directly to the $4.0million in outstanding loans related to this policy, and the Company receivednet proceeds of $0.4 million, net of interest of $0.1 million, related to thispolicy.  In October 2004, theCompany executed the surrender of $2.2 million in accumulated cash dividends onthe second of these policies, resulting in a reduction of the policy loans forthis amount.  In November 2004, theCompany repaid the remaining policy loans of $2.9 million for thesepolicies.  As a result of thetransactions described above, at December 31, 2004, all policy loans hadbeen repaid.  The cash surrender value ofthe policies at June 30, 2005 was $3.6 million.

 

On November 30, 1999, the Board of Directors authorized theCompany to repurchase of up to 3,000,000 shares of the Company’s stock (the “1999Program”).  The 1999 Program does nothave an expiration date.  As of September 30,2002, the Company had purchased 2,242,183 shares of stock.  The Company did not purchase any shares infiscal 2003 or fiscal 2004.  On November 8,2004, the Company publicly announced that it was resuming its stock buybackprogram and, during the first quarter of fiscal 2005, purchased 204,793 sharesof outstanding stock for $4.5 million commensurate with that announcement.  There were no additional purchases during thesecond and third quarters of fiscal 2005. The amount and timing of additional purchases will depend upon marketconditions.

 

During the third quarter of fiscal 2005, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on August 15,2005, which will be paid on August 29, 2005.  The second quarter of fiscal 2005 dividend ofapproximately $0.4 million was paid in May 2005.

 

From time to time, the Company will sell or dispose of assets, which itfeels are under-performing or are no longer needed in the businesses in whichthe Company operates. There can be no assurance that the Company will be ableto sell or dispose of the assets in a manner that is profitable to the Company,or at all.  In addition, the Company willmake investments in assets that management believes are needed to acquire andmaintain the businesses in which the Company operates.  Again, there can be no assurance that theCompany can obtain a reasonable return on any such investments.

 

The ongoing evaluation for impairment of the goodwill related to the1999 acquisition of the Company’s women’s wear subsidiary requires significantmanagement estimation and judgment. Changes in overall business strategy, negative industry or economictrends or actual results which do not meet the Company’s current plan for the

 

25

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women’s wear business may trigger a future impairment charge, whichcould negatively affect the Company’s results of operations in the period inwhich the charge is recorded.

 

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

 

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

 

*Cash Flow Results for the Nine Months Ended June 30,2005*

 

Net cash provided by operating activities decreased $15.8 million to$0.7 million during the nine months ended June 30, 2005, compared to $16.5million during the nine months ended June 30, 2004.  The decrease in net cash provided byoperating activities was primarily due to a decrease in the accounts payablebalance due to the timing of payments, a decrease in accrued liabilitiesprimarily due to payment for inventory that was in transit at the end of fiscal2004, payment of severance benefits for terminated employees at the sewingplants closed during the third quarter of fiscal 2005 and payment of a $0.9million residual value guarantee related to the lease on the Company’scorporate aircraft.  The decrease in cashprovided by operating activities was also attributable to a decrease in accruedincentive compensation for fiscal 2005. These decreases in cash provided by operating activities were offset bya decrease in inventory purchases during the nine months ended June 30,2005 due to improved management of inventory levels during the period.

 

Net cash used in investing activities increased $5.1 million to $6.6million during the nine months ended June 30, 2005, compared to $1.5million during the nine months ended June 30, 2004.  Investing activities for the nine monthsended June 30, 2005 included $2.4 million in net payments on officer’slife insurance policy loans.  Theincrease in cash used in investing activities was also due to a $1.6 millionincrease in capital expenditures for the nine months ended June 30, 2005as compared to the same period for fiscal 2004. Capital expenditures for the nine months ended June 30, 2005included $0.5 million related the purchase of software for the Company’s newfinancial system to be implemented in fiscal 2006 as well as capitalexpenditures related to 12 new retail stores opened during the period.  Capital expenditures for the nine monthsended June 30, 2004 included $2.0 million related to capital improvementsof the new global headquarters facility, $1.3 million of which were financedwith funds transferred from restricted cash.

 

Net cash used in financing activities increased $2.5 million to $4.6million in the nine months ended June 30, 2005 from $2.1 million in thenine months ended June 30, 2004. The increase was primarily due to a decrease of $6.7 million in proceedsfrom the exercise of employee stock options and increased purchases of treasurystock of $4.5 million, as the Company resumed its stock buyback program duringfiscal 2005.  The increase in cash usedin financing activities was offset by $2.3 million in cash provided by bookoverdrafts during the nine months ended June 30, 2005, compared to $4.5million in cash used for book overdrafts for the comparable period in fiscal2004, due to the timing of check clearing activity at the Company’s banks.  The increase in cash used in financingactivities was also offset by a $1.6 million decrease in net repayments oflong-term debt.  While the nine monthsended June 30, 2005 included a $2.1 million payment of the remaining IDRbonds, the comparable period in fiscal 2005 included a $3.5 million payment onsenior notes that were no longer outstanding during fiscal 2005.

 

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

 

An investment in the Company involves certainrisks and uncertainties.  The risks anduncertainties described below and elsewhere in this Quarterly Report on Form 10-Qshould be carefully considered.  If anyof the events described below or elsewhere occurs, the Company’s business couldbe adversely affected in a material way.

 

26

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*Dependence on Key Customers*

 

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

 

*Uncertainties in Apparel Retailing*

 

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

 

*Competition*

 

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

 

*Dependence on Third-Party Manufacturers*

 

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

 

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

 

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

 

The Company operates the majority of its warehouse and distributionactivities in the United States out of its main distribution center in Fort Worth,Texas.  Any major work disruption at theCompany’s Fort Worth facility could have a material adverse effect on theCompany.  Although the Company believesit could utilize other warehousing companies to satisfy its shipping anddistribution functions, there can be no assurance that these warehousingcompanies could be utilized in a timely manner, and the inability to servicethe Company’s customers for any period of time could materially adverselyaffect the Company.

 

27

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*Risks of Acquisition Strategy*

 

The Company continues to seek growth through strategic acquisitions ofother apparel businesses.  However, theCompany cannot give any assurances that its acquisition strategy will besuccessful.  The success of the Company’sacquisition strategy is dependent upon a number of factors, including:

 

•                  theCompany’s ability to identify suitable acquisition candidates;

•                  theCompany’s ability to negotiate favorable acquisition terms, including purchaseprice, which may be adversely affected due to increased competition with otherbuyers;

•                  theavailability of financing to the Company, or on terms favorable to the Company;

•                  theCompany’s ability to integrate effectively the systems and operations ofacquired businesses; and

•                  theCompany’s ability to retain key personnel of acquired businesses.

 

Acquisitions involve a number of other risks, including diversion ofmanagement’s attention from other business concerns and the assumption of knownor unknown liabilities of acquired businesses. The integration of acquired businesses may place significant strains onthe Company’s current operating and financial systems and controls.  The Company may not successfully overcomethese risks or any other problems encountered in connection with itsacquisition strategy.

 

*Weaknesses in Internal Controls*

 

Weaknesses in internal controls and procedures could have a materialadverse effect on the Company.  Forfurther discussion of the Company’s internal control over financial reporting,including significant deficiencies and material weaknesses identified and therelated remediation effort, see “Item 4. Controls and Procedures.”  Other instances of weaknesses in the Company’sinternal controls and procedures could occur or be identified in the future.Any such weaknesses may have a material adverse effect on the Company.

 

**Recently Issued and Adopted FinancialAccounting Standards**

 

In December 2004, the Financial Accounting Standards Board issuedSFAS No. 123R (revised 2004), “Share-Based Payment”, to amend SFAS No. 123,“Accounting for Stock-Based Compensation” and SFAS No. 95, “Statement ofCash Flows”.  SFAS No. 123R willrequire companies to measure all employee stock-based compensation awards usinga fair value method and recognize compensation costs in the financialstatements.  SFAS No. 123R iseffective beginning as of the first annual reporting period beginning after June 15,2005.  The Company will be required toadopt SFAS No. 123R beginning October 1, 2005 for new awards of stock-basedcompensation granted after that date and for unvested awards outstanding atthat date.  Management believes theimpact of SFAS No. 123R on the Company’s results of operations will beconsistent with the historical disclosure of pro forma stock compensation underSFAS No. 123; however, a portion of the tax benefit from the futureexercise of stock options the Company has historically classified as net cashprovided by operating activities will be reported in net cash by financingactivities after the implementation of SFAS No. 123R.

 

28

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**Item 3. Quantitative and Qualitative Disclosures about Market Risk.**

 

The Company is exposed to market risk from changes in foreign currency exchange risk and interest rate risk, which may adversely affect its financial position, results of operations and cash flows. The Company does not use financial instruments for trading or other speculative purposes and is not a party to any derivative financial instrument.  There was no variable rate debt outstanding at June 30, 2005.

 

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

 

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

 

The Chief Executive Officer and ChiefAccounting Officer of the Company have reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures (as defined in theSecurities Exchange Act of 1934 Rules 240.13a-15(e) and 15d-15(e)),and have concluded, as more fully described below in Item 4(b), that as of theend of the period covered by this Quarterly Report on Form 10-Q, suchdisclosure controls and procedures were effective in timely alerting them tomaterial information relating to the Company required to be disclosed in theperiodic reports the Company files or submits under the Securities Exchange Actof 1934.  Such disclosure controls andprocedures were also effective in ensuring that this information is accumulatedand communicated to the Company’s management, including its Chief ExecutiveOfficer and Chief Accounting Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

*(b)**                               **Internal Control over Financial Reporting***

 

In professional auditing literature, “significant deficiencies” arereferred to as “reportable conditions,” which are control issues that couldhave a significant adverse effect on the ability to record, process, summarizeand report financial data in financial statements. Auditing literature defines “materialweakness” as a particularly serious reportable condition where the internalcontrol does not reduce to a relatively low level the risk that misstatementscaused by error or fraud may occur in amounts that would be material inrelation to the financial statements and the risk that such misstatements wouldnot be detected within a timely period by employees in the normal course ofperforming their assigned functions.  Thefollowing significant deficiencies and material weaknesses have been identifiedduring the nine months ended June 30, 2005:

 

(i)             Inconnection with the financial statement preparation process for the quarterended December 31, 2004, the Company’s management identified two controldeficiencies which management believed constituted material weaknesses in itsinternal controls. The first of these related to the finished goods inventoryvaluation process.  Management believedthat there was inadequate analysis of the capitalized cost factors used in thefinished goods inventory valuation. During January 2005, the Company remediated this weakness in itsinternal control over financial reporting by implementing a detailed review ofthe calculation of capitalized cost factors. The review includes a process to verify completeness and accuracy ofgeneral ledger accounts included in the calculation of the cost capitalizationfactors, as well as a review of the appropriateness of the expenses includedwithin those accounts.  The Company alsoimplemented a more robust monthly analytical review of the trend of capitalizedcost factors compared to prior periods.

 

29

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(ii)   The second material weakness related to internal controls for customer allowance reserves identified in the quarter ended December 31, 2005.  The Company periodically grants allowances for certain customers.  The Company’s management identified customer allowances for which a reserve was not recorded on a timely basis.  During January 2005, the Company remediated this weakness in internal controls by conducting training on the Company’s accounting for customer allowance reserves for those senior sales personnel with the responsibility for customer allowances.

 

(iii) Inconnection with a review of all outstanding customer allowance reserves in February 2005,the Company’s management identified control deficiencies that, when consideredin the aggregate, management believed constituted a material weakness in itsinternal controls.  Management determinedthat a key control requiring adequate supporting documentation and periodicreview for customer allowance reserves was not operating effectively.  Management also noted that there were nocontrols in place to ensure adequate monitoring of customer allowance reservesby sales management personnel and timely communication of such allowances withaccounting personnel.

 

To remediate the control deficiencies relatedto customer allowances which were identified during February 2005, theCompany has enhanced the periodic review process by sales personnel for allcustomer allowances granted as well as the supporting documentation that is requiredto record such allowances.  In addition,although the Company conducted training in January 2005 on customerallowances, the Company believed, given the new occurrence, that additionaltraining was required.  That additionaltraining was conducted in May 2005 with sales personnel, and emphasizedtimely communication on all arrangements with customers and the importance ofdocumentation of such transactions.

 

(iv)      Management’sassessment of the Company’s internal control over financial reporting pursuantto the Sarbanes Oxley Act of 2002 is ongoing and is, therefore, incomplete.However, during the second quarter of fiscal 2005, management identified asignificant deficiency that could potentially be, if not remediated, a materialweakness.  The significant deficiencyrelates to controls over the access to financial application programs anddata.  Specifically, the Company does notmaintain effective controls over the granting, maintenance and termination ofuser identification and passwords for employees, the required segregation ofduties within certain financial applications and the independent monitoring andverification of internal user access to data.

 

To address the significant deficiency relatedto systems access, the Company is implementing controls to require monthlyupdates of all user access lists for all financial applications.  While the Company has not detected anyfinancial statement errors resulting from this significant deficiency, fullremediation is not complete at the date of this report.  However, management expects to completeremediation by the end of fiscal 2005. The Company will also implement its new financial management systemsduring fiscal 2006.  The benefits of thisimplementation include an enhanced security model as compared to the Company’scurrent system.

 

30

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**Part II.  Other Information.**

 

**Item 1.  Legal Proceedings**

 

The Company has been named as a defendant in several legal actionsarising from its operations in the normal course of business, including actionsbrought by certain terminated employees. Although exact settlement amounts, if any, related to these actionscannot accurately be predicted, the claims and damages alleged, the progress ofthe litigation to date and past experience with similar litigation leads theCompany to believe that any liability resulting from these actions and thosedescribed below will not, individually or collectively, have a material adverseeffect on the Company.

 

The Company is a defendant in a wrongful termination lawsuit brought infederal district court in 2000 by a former salesman.  A jury rendered a verdict in January 2002in favor of the plaintiff against the Company. After various appeals and remand to the trial court, on January 31,2005, the Company received a Memorandum Order ordering the Company to pay,after entry of judgment, backpay in the amount of $0.8 million, liquidateddamages of $0.8 million and front pay of $0.5 million.  The court also ordered the Company to makemonthly payments of $14,583 until the Company reinstates the plaintiff to thefirst available sales associate vacancy in the Dallas area.  The trial court denied, however, plaintiff’srequest for enhanced backpay and prejudgment interest.  During the first quarter of fiscal 2005, theCompany recorded an additional $1.7 million charge to selling, general andadministrative expenses related to this matter. During the second quarter of fiscal 2005, after negotiations with theplaintiff’s counsel, the Company agreed to pay $0.8 million in attorney’s fees,subject to the Company’s right to appeal the damages award.  As a result, the Company recorded anadditional $0.3 million charge to selling, general and administrativeexpenses.  The Company filed its noticeof appeal on April 28, 2005.  TheCompany has reserved an aggregate of $3.1 million in accrued liabilities forthis matter as of June 30, 2005.

 

During fiscal years 2003 and 2004, one attorney filed five separatesuits in Texas state courts against the Company and certain of itssubsidiaries, as well as unrelated third parties, alleging injuries toapproximately 3,000 former employees from airborne fibers and chemicals incertain of the Company’s now closed facilities located in south Texas.  All proceedings in one case, which names over2,900 plaintiffs, have been stayed due to the unrelated bankruptcy of one ofthe other defendants.  The Company isawaiting a decision by the trial court on its motion to dismiss another case,which names 71 plaintiffs.  After takingdiscovery in one of the remaining cases, the Company believes that all of thesecases and claims are frivolous and that the plaintiffs have no factual or legalbasis for any of their allegations.  Inaddition, the Company believes that it has meritorious defenses to all of theasserted claims.  The Company intends tovigorously defend all of these suits, unless a favorable settlement can beachieved.

 

Jury verdicts in two cases totaling approximately $1.7 million in theaggregate were returned in fiscal 2000 against certain subsidiaries of theCompany related to claims by former employees of now closed manufacturingfacilities for wrongful discharge and common law tort.  Both cases were appealed to the Texas SupremeCourt because management and legal counsel believed the verdicts were bothlegally and factually incorrect.  On December 31,2004, the Texas Supreme Court reversed the judgment of the Court of Appeals andrendered judgment in the Company’s favor in one of such cases.  As a result, during the first quarter offiscal 2005, the Company reversed the prior accrual for such case, resulting ina $0.3 million increase in gross profit for such quarter.  On May 13, 2005, the Texas Supreme Courtrendered judgment for the Company in the remaining case.  The TexasSupreme Court reversed the Court of Appeals’ judgment that had upheld a juryverdict of $0.2 in compensatory damages and $1.4 million in exemplarydamages.  The Company had accrued $2.6 million as reorganization costs tocover the judgment, plus prejudgment and post-judgment interest.  During the third quarter of fiscal 2005, theCompany reversed the prior accrual for such case, resulting in a $2.6 millionincrease in gross profit for such quarter.

 

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

 

On November 30, 1999, the Board of Directors authorized theCompany to repurchase of up to 3,000,000 shares of the Company’s stock.  The 1999 Program does not have an expirationdate.  As of September 30, 2002, theCompany had purchased 2,242,183 shares of stock.  The Company did not purchase any shares infiscal 2003 or fiscal 2004.  On November 8,2004, the Company publicly announced that it was resuming its stock buybackprogram and, during the first quarter of fiscal 2005, purchased 204,793 sharesof outstanding stock for $4.5 million commensurate with that announcement.  There were no additional purchases during thesecond and third quarters of fiscal 2005. The amount and timing of additional purchases will depend upon marketconditions.

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

 

**Item 3. Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.  Other Information**

 

None.

 

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**Item 6.Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3(a)                |       | Third Amended and Fully Restated Articles  of Incorporation. (Incorporated by reference from Exhibit 3(a) to  the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,  1993 [File No. 0-20850].)                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3(b)                |       | Amended and Restated Bylaws of the Company,  as amended, dated October 10, 2002. (Incorporated by reference from Exhibit 99.2  to the Company’s Current Report on Form 8-K filed October 15, 2002  [File No. 0-20850].)                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(a)                |       | Specimen Certificate evidencing Common  Stock (and Preferred Stock Purchase Right). (Incorporated by reference from Exhibit 4(a) to  the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,  1994 [File No. 0-20850].)                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(b)                |       | Rights Agreement, dated as of October 10,  2002, between the Company and Mellon Investor Services, LLC, as Rights Agent,  specifying the terms of the Rights, which includes the description of Series B  Junior Participating Preferred Stock as Exhibit A, the form of Rights  Certificate as Exhibit B and the form of the Summary of Rights as Exhibit C.  (Incorporated by reference from Exhibit 99.3 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(c)                |       | Form of Rights Certificate.  (Incorporated by reference from Exhibit 99.4 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].)                                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(d)                |       | Form of Summary of Rights.  (Incorporated by reference from Exhibit 99.5 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].)                                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10(a)               | *          | Notification dated August 5, 2005,  reducing maximum borrowing under Second Amended and Restated Credit Agreement  between the Company and JPMorganChase Bank, as Agent for a bank syndicate.                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10(b)               | *          | Executive Employment Agreement dated August  8, 2005, between Haggar Clothing Co., and John W. Feray, Senior Vice  President and Chief Accounting Officer.                                                                                                                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31(a)               | *          | Certification of Chief Executive Officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31(b)               | *          | Certification of Chief Accounting Officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32(a)               | **         | Certification of Chief Executive Officer  Pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32(b)               | **         | Certification of Chief Accounting Officer  Pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

----

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

 

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**Signatures**

 

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

 

 
|                      | Haggar Corp.                  |   |
|---------------------------|-------------------------------|--------|
|                      |                          |   |
| Date: August 9, 2005 | /s/ John W. Feray             |   |
|                      | John W.  Feray                |   |
| * *                  | *(Chief  Accounting Officer)* |   |
|                      |                          |   |
|                      | Signed on  behalf of the      |   |
|                      | registrant  and as chief      |   |
|                      | accounting  officer.          |   |

 

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**INDEX TOEXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3(a)                |       | Third Amended and Fully Restated Articles  of Incorporation. (Incorporated by reference from Exhibit 3(a) to  the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,  1993 [File No. 0-20850].)                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3(b)                |       | Amended and Restated Bylaws of the Company,  as amended, dated October 10, 2002. (Incorporated by reference from Exhibit 99.2  to the Company’s Current Report on Form 8-K filed October 15, 2002  [File No. 0-20850].)                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(a)                |       | Specimen Certificate evidencing Common  Stock (and Preferred Stock Purchase Right). (Incorporated by reference from Exhibit 4(a) to  the Company’s Annual Report on Form 10-K for the fiscal year ended September 30,  1994 [File No. 0-20850].)                                                                                                                                                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(b)                |       | Rights Agreement, dated as of October 10,  2002, between the Company and Mellon Investor Services, LLC, as Rights Agent,  specifying the terms of the Rights, which includes the description of Series B  Junior Participating Preferred Stock as Exhibit A, the form of Rights  Certificate as Exhibit B and the form of the Summary of Rights as Exhibit C.  (Incorporated by reference from Exhibit 99.3 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(c)                |       | Form of Rights Certificate.  (Incorporated by reference from Exhibit 99.4 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].)                                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4(d)                |       | Form of Summary of Rights.  (Incorporated by reference from Exhibit 99.5 to the Company’s Current  Report on Form 8-K, filed October 15, 2002 [File No. 0-20850].)                                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10(a)               | *          | Notification dated August 5, 2005,  reducing maximum borrowing under Second Amended and Restated Credit Agreement  between the Company and JPMorganChase Bank, as Agent for a bank syndicate.                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10(b)               | *          | Executive Employment Agreement dated August  8, 2005, between Haggar Clothing Co., and John W. Feray, Senior Vice  President and Chief Accounting Officer.                                                                                                                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31(a)               | *          | Certification of Chief Executive Officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31(b)               | *          | Certification of Chief Accounting Officer  required by Rule 13a-14(a) or Rule 15d-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32(a)               | **         | Certification of Chief Executive Officer  Pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32(b)               | **         | Certification of Chief Accounting Officer  Pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

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

 

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