**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

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| **(Mark  One)**                                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                               |   |   |
| **ý**                                                                                                                                                         |   | **Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                               |   |   |
| **For the quarterly period ended June 30, 2003.**                                                                                                                  |
|                                                                                                                                                               |   |   |
| **OR**                                                                                                                                                             |
|                                                                                                                                                               |   |   |
| **o**                                                                                                                                                              |   | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|                                                                                                                                                               |   |   |
| **For the transition period from             to            .** |
|                                                                                                                                                               |   |   |
| **Commission File Number:**  **0-20850**                                                                                                                      |

 

**HAGGARCORP.**

(Exact name of theregistrant as specified in its charter)

 

| **Nevada**                                                       |   | **75-2187001**                           |
|------------------------------------------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification Number) |

 

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

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

 

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

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

 

**As ofAugust 13, 2003, there were 6,448,426 shares of the registrant’s common stockoutstanding.**

 

 

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**Haggar Corp. andSubsidiaries**

 

**Index**

 
| **Part  I. Financial Information** |         |
|------------------------------------|--------------|
|                               |
|                               | **Item  1.** | **Financial  Statements** |
|                               |         |
|                               |         | **Consolidated Balance Sheets  (As of June 30, 2003 (unaudited) and September 30, 2002)** |
|                               |         |   |   |
|                               |         | **Consolidated  Statements of Operations and Comprehensive Income (unaudited)  (Three and nine months ended June 30, 2003 and 2002)** |
|                               |         |   |   |
|                               |         | **Consolidated  Statements of Cash Flows (unaudited)  (Nine months ended June 30, 2003 and 2002)** |
|                               |         |   |   |
|                               |         | **Notes to  Consolidated Financial Statements (unaudited)** |   |
|                               |         |   |
|                               | **Item  2.** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|                               |         |   |
|                               | **Item  3.** | **Quantitative  and Qualitative Disclosures about Market Risk** |
|                               |         |   |
|                               | **Item 4.**  | **Controls and  Procedures** |
|                               |         |   |
| **Part II. Other  Information.**   |         |
|                               |         |   |
|                               | **Item 1.**  | **Legal Proceedings** |
|                               |         |   |
|                               | **Item 2.**  | **Changes in Securities  and Use of Proceeds** |
|                               |         |   |
|                               | **Item 3.**  | **Defaults Upon  Senior Securities** |
|                               |         |   |
|                               | **Item  4.** | **Submission  of Matters to a Vote of Security Holders** |
|                               |         |   |
|                               | **Item 5.**  | **Other Information** |
|                               |         |   |
|                               | **Item 6.**  | **Exhibits and  Reports on Form 8-K** |
|                               |
| **Signature**                      |
|                                    |              |  |  |  |  |  |  |

** **

**2**

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**Haggar Corp. andSubsidiaries**

 

**Consolidated Balance Sheets**

*(in thousands, except share amounts)*

 
|                                                                                                                                            |   | **June 30,  2003** |    | **September  30,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|--------------------------|--------|
|                                                                                                                                            |   | **(unaudited)**    |    |                     |   |
| **Assets**                                                                                                                                      |   |               |    |                     |   |
| Current assets:                                                                                                                                 |   |               |    |                     |   |
| Cash  and cash equivalents                                                                                                                      |   | $                  | 13,047  |                     | $      | 4,124 |   |
| Accounts  receivable, net                                                                                                                       |   | 38,133             |    | 64,284                   |   |
| Inventories,  net                                                                                                                               |   | 98,990             |    | 100,996                  |   |
| Property  held for sale                                                                                                                         |   | —             |    | 2,157                    |   |
| Deferred  tax benefit                                                                                                                           |   | 11,410             |    | 12,087                   |   |
| Other  current assets                                                                                                                           |   | 3,465              |    | 2,766                    |   |
| Total current assets                                                                                                                            |   | 165,045            |    | 186,414                  |   |
|                                                                                                                                            |   |               |    |                     |   |
| Property,  plant, and equipment, net                                                                                                            |   | 41,618             |    | 46,195                   |   |
| Goodwill,  net                                                                                                                                  |   | 9,472              |    | 9,472                    |   |
| Other  assets                                                                                                                                   |   | 8,644              |    | 7,896                    |   |
| Total  assets                                                                                                                                   |   | $                  | 224,779 |                     | $      | 249,977 |   |
|                                                                                                                                            |   |               |    |                     |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                  |   |               |    |                     |   |
| Current  liabilities:                                                                                                                           |   |               |    |                     |   |
| Accounts  payable                                                                                                                               |   | $                  | 24,014  |                     | $      | 30,542 |   |
| Accrued  liabilities                                                                                                                            |   | 30,888             |    | 35,669                   |   |
| Accrued  wages and other employee compensation                                                                                                  |   | 5,657              |    | 6,713                    |   |
| Current  portion of long-term debt                                                                                                              |   | 3,671              |    | 3,742                    |   |
| Total current liabilities                                                                                                                       |   | 64,230             |    | 76,666                   |   |
|                                                                                                                                            |   |               |    |                     |   |
| Other non-current liabilities                                                                                                                   |   | 9,410              |    | 8,247                    |   |
| Long-term debt                                                                                                                                  |   | 5,671              |    | 21,343                   |   |
| Total  liabilities                                                                                                                              |   | 79,311             |    | 106,256                  |   |
|                                                                                                                                            |   |               |    |                     |   |
| Commitments  and contingencies                                                                                                                  |   |               |    |                     |   |
|                                                                                                                                            |   |               |    |                     |   |
| Stockholders’  equity:                                                                                                                     |   |               |    |                     |   |
|                                                                                                                                            |   |               |    |                     |   |
| Common  stock – par value $0.10 per share; 25,000,000 shares authorized; 8,660,609  shares issued at June 30, 2003  and September 30, 2002 |   | 866                |    | 866                      |   |
| Additional  paid-in capital                                                                                                                     |   | 42,911             |    | 42,911                   |   |
| Cumulative  translation adjustment                                                                                                              |   | (354               | )       | (534                     | )      |
| Retained  earnings                                                                                                                              |   | 127,006            |    | 125,439                  |   |
|                                                                                                                                            |   | 170,429            |    | 168,682                  |   |
| Less  – Treasury stock, 2,242,183 shares at cost at June 30, 2003 and September 30, 2002                                                   |   | (24,961            | )       | (24,961                  | )      |
| Total  stockholders’ equity                                                                                                                |   | 145,468            |    | 143,721                  |   |
| Total  liabilities and stockholders’ equity                                                                                                |   | $                  | 224,779 |                     | $      | 249,977 |   |

 

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

** **

**3**

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**Haggar Corp. andSubsidiaries**

 

**Consolidated Statements of Operationsand Comprehensive Income**

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

 
|                                                                                       |   | **Three  Months Ended  June 30,** |    | **Nine  Months Ended  June 30,** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|----------------------------------|--------|
|                                                                                       |   | **2003**                          |    | **2002**                         |   | **2003** |   | **2002** |   |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Net  sales                                                                                 |   | $                                 | 107,435 |                             | $      | 111,215 |   | $ | 356,828 |   | $ | 348,605 |   |
| Cost  of goods sold                                                                        |   | 76,166                            |    | 83,411                           |   | 262,106 |   | 257,166 |   |
| Reorganization  costs                                                                      |   | —                            |    | —                           |   | — |   | (1,157 | ) |
| Gross  profit                                                                              |   | 31,269                            |    | 27,804                           |   | 94,722 |   | 92,596 |   |
| Selling,  general and administrative expenses                                              |   | (26,556                           | )       | (26,980                          | )      | (90,079 | ) | (83,900 | ) |
| Royalty  income                                                                            |   | 378                               |    | 178                              |   | 1,052 |   | 905 |   |
| Other  income, net                                                                         |   | 102                               |    | 506                              |   | 603 |   | 564 |   |
| Interest  expense                                                                          |   | (570                              | )       | (702                             | )      | (1,973 | ) | (2,808 | ) |
| Income  before provision for income taxes and cumulative effect of accounting  change |   | 4,623                             |    | 806                              |   | 4,325 |   | 7,357 |   |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Provision  for income taxes                                                                |   | 1,919                             |    | 346                              |   | 1,795 |   | 2,888 |   |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Income  before cumulative effect of accounting change                                      |   | $                                 | 2,704   |                             | $      | 460 |   | $ | 2,530 |   | $ | 4,469 |   |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Cumulative  effect of accounting change                                                    |   | —                            |    | —                           |   | — |   | (15,578 | ) |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Net  income (loss)                                                                         |   | $                                 | 2,704   |                             | $      | 460 |   | $ | 2,530 |   | $ | (11,109 | ) |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Other  comprehensive income (loss):                                                        |   |                              |    |                             |   |   |   |   |   |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Cumulative  translation adjustment                                                         |   | $                                 | 195     |                             | $      | 112 |   | $ | 180 |   | $ | (28 | ) |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Comprehensive  income (loss)                                                               |   | $                                 | 2,899   |                             | $      | 572 |   | $ | 2,710 |   | $ | (11,137 | ) |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| NET  INCOME (LOSS) PER COMMON SHARE:                                                       |   |                              |    |                             |   |   |   |   |   |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| BASIC                                                                                      |   |                              |    |                             |   |   |   |   |   |
| Income  before cumulative effect of accounting change                                      |   | $                                 | 0.42    |                             | $      | 0.07 |   | $ | 0.39 |   | $ | 0.70 |   |
| Cumulative  effect of accounting change                                                    |   | —                            |    | —                           |   | — |   | (2.44 | ) |
| Net  income (loss)                                                                         |   | $                                 | 0.42    |                             | $      | 0.07 |   | $ | 0.39 |   | $ | (1.74 | ) |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| DILUTED                                                                                    |   |                              |    |                             |   |   |   |   |   |
| Income  before cumulative effect of accounting change                                      |   | $                                 | 0.42    |                             | $      | 0.07 |   | $ | 0.39 |   | $ | 0.70 |   |
| Cumulative  effect of accounting change                                                    |   | —                            |    | —                           |   | — |   | (2.43 | ) |
| Net  income (loss)                                                                         |   | $                                 | 0.42    |                             | $      | 0.07 |   | $ | 0.39 |   | $ | (1.73 | ) |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Weighted  average number of common shares outstanding:                                     |   |                              |    |                             |   |   |   |   |   |
| Basic                                                                                      |   | 6,418                             |    | 6,387                            |   | 6,418 |   | 6,375 |   |
|                                                                                       |   |                              |    |                             |   |   |   |   |   |
| Diluted                                                                                    |   | 6,418                             |    | 6,543                            |   | 6,427 |   | 6,426 |   |

 

The accompanyingnotes are an integral 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 EndedJune 30,** |       |
|---------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                |   | **2003**                       | ** ** | **2002** |   |
|                                                                |   |                           | ** ** |   | ** ** |
| **Cash Flows from  Operating Activities**                           |   |                           | ** ** |   | ** ** |
| Net  income (loss)                                                  |   | $                              | 2,530      |   | $ | (11,109 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by |   |                           |       |   |   |
| operating  activities:                                              |   |                           |       |   |   |
| Cumulative  effect of accounting change                             |   | —                         |       | 15,578 |   |
| Revision  of net realizable value on property held for sale         |   | —                         |       | (2,157 | ) |
| Gain  on disposal of property, plant and equipment, net             |   | (248                           | )          | (479 | ) |
| Depreciation  and amortization                                      |   | 6,192                          |       | 6,732 |   |
| Deferred  tax benefit                                               |   | 392                            |       | 1,036 |   |
| Other                                                               |   | 1                              |       | (28 | ) |
| Changes  in assets and liabilities:                                 |   |                           |       |   |   |
| Accounts  receivable, net                                           |   | 26,151                         |       | 20,710 |   |
| Inventories,  net                                                   |   | 2,006                          |       | 2,400 |   |
| Other  current assets                                               |   | (699                           | )          | (82 | ) |
| Accounts  payable                                                   |   | (528                           | )          | (6,220 | ) |
| Accrued  liabilities                                                |   | (4,781                         | )          | (1,697 | ) |
| Accrued  wages and other employee compensation                      |   | (1,056                         | )          | (2,756 | ) |
| Other  non-current liabilities                                      |   | 1,163                          |       | 795 |   |
| Net  cash provided by operating activities                          |   | 31,123                         |       | 22,723 |   |
|                                                                |   |                           | ** ** |   | ** ** |
| **Cash Flows from  Investing Activities**                           |   |                           | ** ** |   | ** ** |
| Purchases  of property, plant and equipment, net                    |   | (1,307                         | )          | (1,859 | ) |
| Proceeds  from the sale of property, plant and equipment            |   | 2,493                          |       | 80 |   |
| Increase  in other assets                                           |   | (680                           | )          | (1,532 | ) |
| Net  cash provided by (used in) investing activities                |   | 506                            |       | (3,311 | ) |
|                                                                |   |                           | ** ** |   | ** ** |
| **Cash Flows from Financing Activities**                            |   |                           | ** ** |   | ** ** |
| Purchase  of treasury stock at cost                                 |   | —                         |       | (351 | ) |
| Proceeds  from issuance of long-term debt                           |   | 213,000                        |       | 404,000 |   |
| Payments  on long-term debt                                         |   | (228,743                       | )          | (423,274 | ) |
| Decrease  in book overdrafts                                        |   | (6,000                         | )          | — |   |
| Proceeds  from issuance of common stock                             |   | —                         |       | 823 |   |
| Payments  of cash dividends                                         |   | (963                           | )          | (957 | ) |
| Net  cash used in financing activities                              |   | (22,706                        | )          | (19,759 | ) |
|                                                                |   |                           |       |   |   |
| Increase  (decrease) in cash and cash equivalents                   |   | 8,923                          |       | (347 | ) |
| Cash  and cash equivalents, beginning of period                     |   | 4,124                          |       | 7,800 |   |
| Cash  and cash equivalents, end of period                           |   | $                              | 13,047     |   | $ | 7,453 |   |
|                                                                |   |                           |       |   |   |
| **Non-cash Investing Activity:**                                    |   |                           |       |   |   |
|                                                                |   |                           |       |   |   |
| Note  receivable from sale of property, plant and equipment         |   | $                              | —     |   | $ | 420 |   |

 

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

** **

**5**

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**Haggar Corp. andSubsidiaries**

 

**Notes to Consolidated FinancialStatements**

*(unaudited)*

 

**1.  Basis of Presentation**

 

*Financial Statement Presentation*

 

The consolidated balance sheet as of June 30, 2003, the consolidatedstatements of operations and comprehensive income for the three and nine monthsended June 30, 2003 and 2002, and the consolidated statements of cash flows forthe nine months ended June 30, 2003 and 2002, have been prepared by HaggarCorp. (together with its subsidiaries, the “Company”) without audit.  The consolidated balance sheet as ofSeptember 30, 2002 has been derived from the Company’s audited financialstatements as of that date but does not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all necessary adjustments (which include only normal recurringadjustments) to present fairly the consolidated financial position, results ofoperations, and cash flows of the Company at June 30, 2003, and for all otherperiods presented, have been made.  Aspermitted under Securities and Exchange Commission rules for interim financialreporting, certain information and footnote disclosures normally included inthe financial statements prepared in accordance with generally acceptedaccounting principles have been omitted. These financial statements should be read in conjunction with thefinancial statements and accompanying footnotes thereto in the Company’s AnnualReport on Form 10-K, as amended, for the fiscal year ended September 30, 2002.

 

*Accounting for Stock Based Compensation*

 

The Company has had, since 1992, a long-term incentive plan, whichauthorizes the grant of stock options to key employees. The options vest over aperiod of three to five years and expire ten years from the date of grant. Theoptions are issued at an exercise price not less than the fair market value ofthe Company’s common stock on the date of the grant. The long-term incentiveplan allowed for 1,750,000 shares to be granted.  On October 21, 2002, in accordance with the terms of the plan,this long-term incentive plan terminated and, accordingly, no further optionsmay be granted under the plan.

 

On May 1, 2003, the Company adopted a new stockholder approvedlong-term incentive plan which authorizes the Company to issue up to 575,000additional shares in connection with options granted to directors, officers oremployees of the Company.  The terms andvesting periods will be determined as each option is granted, but the optionprice cannot be less than the market value of the common stock at the grantdate.  No options had been granted underthe 2003 long-term incentive plan through June 30, 2003.

 

The following table summarizes the changes in stock options outstandingduring the nine months ended June 30, 2003:

* *
|                                          |   | **Shares** |   | **Weighted Average  Exercise Price** |   |
|-----------------------------------------------|--------|------------|--------|--------------------------------------|--------|
|                                          |   |       |   |                                 |   |
| Options outstanding as  of September 30, 2002 |   | 1,420,775  |   | $                                    | 12.61  |   |
|                                          |   |       |   |                                 |   |
| Options granted                               |   | —     |   | —                               |   |
| Options exercised                             |   | —     |   | —                               |   |
| Options canceled                              |   | (185,329   | )      | $                                    | 13.49  |   |
| Options outstanding as  of June 30, 2003      |   | 1,235,446  |   | $                                    | 12.49  |   |
| Options exercisable as  of June 30, 2003      |   | 1,215,046  |   | $                                    | 12.48  |   |

 

6

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The Company accounts for its long-term incentive plans under AccountingPrinciples Board Opinion No. 25, under which no compensation has beenrecognized.  As required under Statementof Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting forStock-Based Compensation,” and Statement of Financial Accounting Standards No.148 (“SFAS No. 148”), “Accounting for Stock-Based Compensation Transition andDisclosure,****an amendment of FASB Statement No. 123,” the pro formaeffects of stock-based compensation on net income (loss) and net income (loss)per common share are as follows *(inthousands, except per share amounts)*:

 
|                                                                                         |   | **Three Months Ended   June  30,** |   | **Nine Months Ended   June 30,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|----------------------------------|--------|
|                                                                                         |   | **2003**                                |   | **2002**                         |   | **2003** |   | **2002** |   |
| Net income (loss):                                                                           |   |                                    |   |                             |   |   |   |   |   |
| As reported                                                                                  |   | $                                       | 2,704  |                             | $      | 460 |   | $ | 2,530 |   | $ | (11,109 | ) |
| Add back:  Stock-based employee compensation included  in net income (loss) as reported |   | —                                  |   | —                           |   | — |   | — |   |
| Less:  Pro-forma stock-based employee  compensation expense, net of related tax effects |   | (25                                     | )      | (126                             | )      | (75 | ) | (378 | ) |
|                                                                                         |   |                                    |   |                             |   |   |   |   |   |
| Pro-forma net income  (loss)                                                                 |   | $                                       | 2,679  |                             | $      | 334 |   | $ | 2,455 |   | $ | (11,487 | ) |
| Net income (loss) per  common share:                                                         |   |                                    |   |                             |   |   |   |   |   |
| BASIC                                                                                        |   |                                    |   |                             |   |   |   |   |   |
| As reported                                                                                  |   | $                                       | 0.42   |                             | $      | 0.07 |   | $ | 0.39 |   | $ | (1.74 | ) |
| Pro forma                                                                                    |   | $                                       | 0.42   |                             | $      | 0.05 |   | $ | 0.38 |   | $ | (1.80 | ) |
| DILUTED                                                                                      |   |                                    |   |                             |   |   |   |   |   |
| As reported                                                                                  |   | $                                       | 0.42   |                             | $      | 0.07 |   | $ | 0.39 |   | $ | (1.73 | ) |
| Pro forma                                                                                    |   | $                                       | 0.42   |                             | $      | 0.05 |   | $ | 0.38 |   | $ | (1.79 | ) |

 

*Reclassifications*

 

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

 

**2.  Inventories, net**

 

Inventories, net are stated at the lower of cost (first-in, first-out)or market and consisted of the following at June 30, 2003, and September 30,2002 *(in thousands)*:

 
|                      |   | **June 30,2003** |    | **September 30,2002** |   |
|---------------------------|--------|------------------|---------|-----------------------|--------|
| Piece goods               |   | $                | 9,271   |                  | $      | 8,270 |   |
| Trimmings &  supplies |   | 2,458            |    | 2,908                 |   |
| Work-in-process           |   | 7,046            |    | 8,143                 |   |
| Finished garments         |   | 82,348           |    | 83,742                |   |
|                      |   | $                | 101,123 |                  | $      | 103,063 |   |
| Inventory reserves        |   | (2,133           | )       | (2,067                | )      |
| Total inventories, net    |   | $                | 98,990  |                  | $      | 100,996 |   |

 

Work-in-process and finished garments inventories consisted ofmaterials, labor and manufacturing overhead. Inventory reserves as of June 30, 2003, and September 30, 2002 consistedprimarily of allowances for slow moving and obsolete piece goods and trimmingsupplies that are not forecasted to be used in production as well as reservesto reflect estimated physical count differences based on the results of cyclecounts performed.

 

7

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**3.  Asset Impairment – Goodwill**

 

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

 

**4.  Long-Term Debt**

 

Long-term debt consisted of the following at June 30, 2003, andSeptember 30, 2002 *(in thousands)*:

 

|                                    |   | **June 30,  2003** |   | **September 30,  2002** |   |
|-----------------------------------------|--------|--------------------|--------|-------------------------|--------|
| Borrowings under  revolving credit line |   | $                  | — |                    | $      | 12,000 |   |
| Industrial Development  Revenue Bonds   |   | 2,200              |   | 2,300                   |   |
| Senior notes                            |   | 7,142              |   | 10,715                  |   |
| Other                                   |   | —             |   | 70                      |   |
| Total debt                              |   | 9,342              |   | 25,085                  |   |
| Less – current portion             |   | (3,671             | )      | (3,742                  | )      |
| Long-term debt                          |   | $                  | 5,671  |                    | $      | 21,343 |   |

 

As of June 30, 2003, the Company had no amounts outstanding under the$110.0 million unsecured revolving credit agreement (the “Agreement”) andavailable borrowing capacity that is restricted to $52.2 million under theAgreement’s funded debt to operating cash flow covenant.  The Company incurred approximately $0.2million in commitment fees related to the available borrowing capacity duringthe nine months ended June 30, 2003. The interest rates ranged from 2.52% to 4.75% during the nine monthsended June 30, 2003 and were based on variable market rates (LIBOR or prime rate).  The Agreement prohibits the Company frompledging its accounts receivables 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.

 

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

 

**5.  2002 Business Reorganization**

 

The Company’s strategy has been to source production internationally in order to remain competitive in the apparel marketplace and to provide high-quality, low-cost products as a value to its customers.  The 2002 reorganization activities were a result of this strategy.

 

On January 8, 2002, the Company announced plans to close its cuttingfacility in Weslaco, Texas. Accordingly, the Company recorded a $1.0 million charge to operations inreorganization costs for the quarter ending March 31, 2002.  All 142 employees at the Weslaco facilitywere terminated in conjunction with the closure, which was completed in June2002.  The plan has been executed andactual amounts paid pursuant to the plan approximated the initial $1.0 millioncharge.

 

In conjunction with the closure of the Edinburg, Texas manufacturingfacility in fiscal 2001, the net book value of the facility of $2.2 million waswritten off since the net realizable value of the facility was expected to beinsignificant.  Subsequent to marketingthis facility nationally, having appraisals completed on the property, andreceiving an initial offer for this facility during the second quarter of fiscal2002 (in excess of the pre-closure net book value), the Company reversed theoriginal facility write-down and classified the facility as an asset held forsale.  The $2.2 million reversal wasrecorded as a credit to reorganization costs in the income statement in the

 

8

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second quarter of fiscal 2002. In the second quarter of fiscal 2003, the Company sold the building fornet cash proceeds of $2.5 million.  Thesale resulted in a pre-tax gain of approximately $0.3 million which wasrecorded in other income, net.

 

The following summarizes the reorganization costs for the nine monthperiod ended June 30, 2002 *(in thousands)*:

 
| Weslaco, Texas cutting  facility closing      |   | $      | 1,000  |   |
|-----------------------------------------------|--------|--------|--------|--------|
|                                          |   |   |   |
| Edinburg, Texas  facility write-down reversal |   | (2,157 | )      |
|                                          |   |   |   |
| Total reorganization  costs                   |   | $      | (1,157 | )      |

 

**6.  Segment Reporting**

 

The Company’s three operating segments arebusiness units that offer similar products through different distributionchannels.  The Company’s wholesalesegment designs, manufactures, imports and markets casual and dress men’s andwomen’s apparel to retailers throughout North America and the UnitedKingdom.  The Company also operates aretail segment, which markets Haggar® branded products through 67 Company-operatedstores located in its Dallas headquarters and in outlet malls throughout theUnited 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 retail and licensing segments are not material for separatedisclosure, and have been combined in the results below.  The Company evaluates performance andallocates resources based on segment profits.

 

Intercompany sales from the wholesale segmentto the retail segment are not reflected in wholesale segment net sales.  Additionally, there is no profit included onsales from the wholesale segment to the retail segment.  Segment profit (loss) is comprised ofsegment net income before interest expense, provision for income taxes andcumulative effect of accounting change.

 

The table below reflects the Company’ssegment results for all periods presented.

 

| **Three Months Ended  June 30,** |   | **Wholesale** |   | **Retail and****Other** |   | **Consolidated** |   |
|----------------------------------|--------|---------------|--------|-------------------------|--------|------------------|--------|
|                             |   |          |   | **(In thousands)**      |   |             |   |
| **2003**                         |   |          |   |                    |   |             |   |
| Net sales                        |   | $             | 95,743 |                    | $      | 11,692           |   | $ | 107,435 |   |
| Segment profit                   |   | $             | 4,958  |                    | $      | 235              |   | $ | 5,193 |   |
|                             |   |          |   |                    |   |             |   |
| **2002**                         |   |          |   |                    |   |             |   |
| Net sales                        |   | $             | 99,769 |                    | $      | 11,446           |   | $ | 111,215 |   |
| Segment profit (loss)            |   | $             | 1,614  |                    | $      | (106             | )      | $ | 1,508 |   |

 

 

| **Nine Months Ended  June 30,** |   | **Wholesale** |    | **Retail and  Other** |   | **Consolidated** |   |
|---------------------------------|--------|---------------|---------|-----------------------|--------|------------------|--------|
|                            |   |          |    | **(In thousands)**    |   |             |   |
| **2003**                        |   |          |    |                  |   |             |   |
| Net sales                       |   | $             | 322,829 |                  | $      | 33,999           |   | $ | 356,828 |   |
| Segment profit                  |   | $             | 6,262   |                  | $      | 36               |   | $ | 6,298 |   |
|                            |   |          |    |                  |   |             |   |
| **2002**                        |   |          |    |                  |   |             |   |
| Net sales                       |   | $             | 314,060 |                  | $      | 34,545           |   | $ | 348,605 |   |
| Segment profit (loss)           |   | $             | 10,303  |                  | $      | (138             | )      | $ | 10,165 |   |

 

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A reconciliation of total segment profit to consolidated income beforeprovision for income taxes and cumulative effect of accounting change is asfollows *(in thousands)*:

 
|                                                                                              |   | **Three Months Ended  June 30,** |   | **Nine Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                                                                              |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
| Segment profit                                                                                    |   | $                                | 5,193  |                            | $      | 1,508 |   | $ | 6,298 |   | $ | 10,165 |   |
| Interest expense                                                                                  |   | (570                             | )      | (702                            | )      | (1,973 | ) | (2,808 | ) |
| Consolidated income  before provision for income taxes and cumulative effect of accounting change |   | $                                | 4,623  |                            | $      | 806 |   | $ | 4,325 |   | $ | 7,357 |   |

 

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

 

**7.  Commitments and Contingencies**

 

In November 2002, co-trustees of a trust which owns shares of theCompany’s common stock filed preliminary proxy materials with the Securitiesand Exchange Commission indicating that they intended to solicit stockholdersin support of their own slate of directors. The Company entered into an agreement to settle this proxy contest inFebruary 2003.    The Company incurredexpenses of $1.2 million in legal and professional fees during the nine monthsended June 30, 2003 related to this matter, and all amounts had been paid as ofJune 30, 2003.

 

The Company is involved in various other claims and lawsuits incidentalto its business. Management believes that the disposition of these claims andsuits in the aggregate will not have a material adverse effect on the Company.

 

In November 2002, the Financial Accounting Standards Board (“FASB”)issued FASB Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers,” which elaborates on required disclosures by a guarantor in itsfinancial statements about obligations under certain guarantees that it hasissued and clarifies the need for a guarantor to recognize, at the inception ofcertain guarantees, a liability for the fair value of the obligation undertakenin issuing the guarantee.  The initialrecognition and measurement provisions were required to be applied on aprospective basis for qualifying guarantees entered into or modified afterDecember 31, 2002.  However, any qualifyingguarantees entered into before December 31, 2002, must be disclosed in thefootnotes for interim or annual financial statement periods that end afterDecember 15, 2002.

 

The only qualifying guarantee that requires disclosure is a December1999 operating lease of the Company’s corporate aircraft which contains aresidual guarantee.  Under the leasewhich ends in December 2004, the Company has the option of (a) returning theaircraft to the lessor and paying the guaranteed residual value of $3.0million; (b) purchasing the aircraft for $4.0 million; or (c) arranging for thesale of the aircraft to a third party. If the sales proceeds are less than $4.0 million, the Company isrequired to reimburse the lessor for the deficiency.  If the sales proceeds exceed $4.0 million, the Company isentitled to all of such excess amounts.

 

Based on an estimated $3.1 million market value for the aircraft whenthe lease ends in 2004, the Company began accruing the $0.9 million expecteddeficiency in the three months ended March 31, 2003.  As of June 30, 2003, the Company included $0.2 million in otheraccrued liabilities related to the deficiency. The remainder will be accrued up to the $0.9 million expected deficiencyusing the straight-line method through the end of the lease term.

 

10

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**8.  Shippingand Handling Fees**

 

The Company records shipping and handling fees as selling, general andadministrative expense.  For the threeand nine months ended June 30, 2003, such costs were $3.1 million and $9.5million, respectively.  For the threeand nine months ended June 30, 2002, such costs were $3.6 million and $9.2million, respectively.

 

**9.  Net Income (Loss) Per Common Share - Basicand Diluted**

 

The following table sets forth the computation of basic and dilutedweighted average common shares:

 
|                                         |   | **Three Months Ended  June 30,** |   | **Nine Months Ended  June 30,** |   |
|----------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|
|                                         |   | **2003**                         |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                         |   |                             |   |                            |   |   |   |   |   |
| Weighted average common shares outstanding   |   | 6,418                            |   | 6,387                           |   | 6,418 |   | 6,375 |   |
| Shares  equivalents, due to stock options    |   | —                           |   | 156                             |   | 9 |   | 51 |   |
| Weighted  average diluted shares outstanding |   | 6,418                            |   | 6,543                           |   | 6,427 |   | 6,426 |   |

 

Options to purchase 1,235,446, 664,681, 158,000 and 750,610 shares wereexcluded from the diluted earnings per share calculations for the three andnine months ended June 30, 2003, and the three and nine months ended June 30,2002, respectively, because the options’ exercise prices were greater than theaverage market price of the common shares during the period.

 

**10.   Dividends**

 

During the third quarter of fiscal 2003, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on ­­­­­­August11, 2003, which will be paid on August 25, 2003.  The second quarter of fiscal 2003 dividend of approximately $0.3million was paid in May 2003.

 

**11.  Related Party Transactions**

 

A director of the Company is a partner of a law firm that renderedvarious legal services for the Company during the three and nine months endedJune 30, 2003 and 2002.  The Companypaid the law firm approximately $0.1 million and $0.4 million for legalservices during the three and nine months ended June 30, 2003,respectively.  The Company paid the lawfirm approximately $0.1 million and $0.6 million for legal services during thethree and nine months ended June 30, 2002, respectively.  There were no material amounts due to suchfirm from the Company as of June 30, 2003 and September 30, 2002.

 

**12.  Recently Issued Financial AccountingStandards**

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities – an Interpretation of ARB No.51,” which addresses consolidation of variable interest entities (“VIEs”) towhich the usual consolidation described in Accounting Research Bulletin No. 51,“Consolidated Financial Statements,” does not apply because the VIEs have novoting interests or otherwise are not subject to control through ownership ofvoting interests.  FIN 46 requiresexisting unconsolidated VIEs to be consolidated by their primary beneficiariesif the entities do not effectively disperse risks among parties involved.  The provisions of the interpretation areeffective immediately for VIEs created after January 31, 2003, and to VIEs inwhich an entity obtains an interest after that date.  An entity with a variable interest in a VIE created beforeFebruary 1, 2003, must apply the provisions no later than the first reportingperiod beginning after June 15, 2003. The interpretation may be applied prospectively with a cumulative-effectadjustment as of the date on which it is first applied or by restatingpreviously issued financial statements.  The Company has adopted the interpretation and has determined it is notparty to any VIEs that would require consolidation.

 

11

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**13.  SubsequentEvent**

 

On July 16, 2003, the Company sold its corporate headquarters facilityto a third party for net proceeds of approximately $14.9 million, resulting ina gain of $5.8 million ($3.4 million net of tax).  On July 25, 2003, the Company used the proceeds from the sale topurchase an undivided interest in a new corporate headquarters facility for$14.1 million.  This exchange qualifiedas a Section 1031 like-kind exchange under the Internal Revenue Code.

 

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

 

The following discussion and analysis of the consolidated results ofoperations and financial condition of the Company should be read in conjunctionwith the accompanying consolidated financial statements and the notes theretoand the Company’s Annual Report on Form 10-K, as amended, for the fiscal yearended September 30, 2002.

 

**Forward Looking Statements**

 

This Quarterly Report on Form 10-Q includesforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 (the “Securities Act”) and Section 21E of the Securities ExchangeAct of 1934 (the “Exchange Act”).  Allstatements other than statements of historical facts contained in this report,including statements regarding the Company’s future financial position,business strategy and plans and objectives of management for future operations,are forward-looking statements.  Thewords “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”“expect” and similar expressions, as they relate to the Company, are intendedto identify forward-looking statements. The Company has based these forward-looking statements largely on itscurrent expectations and projections about future events and financial trendsthat the Company believes may affect its financial condition, results ofoperations, business strategy and financial needs.  These forward-looking statements are subject to a number of knownand unknown risks, uncertainties and assumptions that could affect theresults of the Company or the apparel industry generally and could cause theCompany’s actual results to differ materially from those expressed in this QuarterlyReport on Form 10-Q.  These risks,uncertainties and assumptions are described in “Item 1.  Business” of the Company’s Annual Report onForm 10-K, as amended, for the fiscal year ended September 30, 2002, and include, among other things:

 

•                  changes in general businessconditions,

 

•                  changes in the performance of theretail sector in general and the apparel industry in particular,

 

•                  seasonality of the Company’sbusiness,

 

•                  changes in retailer and consumeracceptance of new products and the success of advertising, marketing, andpromotional campaigns,

 

•                  impact of competition in the apparelindustry,

 

•                  availability and cost of rawmaterials,

 

•                  changes in laws and other regulatoryactions,

 

•                  changes in labor relations,

 

•                  political and economic events andconditions domestically or in foreign jurisdictions in which the Companyoperates or has apparel products manufactured, including, but not limited to,acts of terrorism, war, or insurrection,

 

•                  unexpected judicial decisions,

 

•                  changes in interest rates and capitalmarket conditions,

 

•                  acquisitions or dissolution ofbusiness enterprises, including the ability to integrate acquired businesseseffectively,

 

•                  natural disasters, and

 

•                  unusual or infrequent items thatcannot be foreseen or are not susceptible to estimation.

 

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In light of these risks, uncertainties andassumptions, the forward-looking events and circumstances discussed in thisQuarterly Report on Form 10-Q may not occur and actual results could differmaterially from those anticipated or implied in the forward-lookingstatements.  Accordingly, readers arecautioned not to place undue reliance on such forward-looking statements.  The Company undertakes no obligation toupdate any such statements or publicly announce any updates or revisions to anyof the forward-looking statements contained herein, to reflect any change inits expectations with regard thereto or any change in events, conditions,circumstances or assumptions underlying such statements.

 

**Overview**

 

The Company designs, manufactures, imports and markets casual and dressmen’s and women’s apparel products, including pants, shorts, suits, sportcoats,sweaters, shirts, dresses, skirts and vests in the United States 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 67Company-operated retail stores located in its Dallas headquarters and in outletmalls throughout the United States.  TheCompany’s licensing segment generates royalty income by licensing the Company’strademarks for use by other manufacturers of specified products in specifiedgeographic regions.

 

**CriticalAccounting Policies**

 

There have been no material changes to the Company’s critical accounting policies during the nine months ended June 30, 2003.

 

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

 

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

 

**BusinessReorganizations**

 

The Company’s strategy has been to sourceproduction internationally in order to remain competitive in the apparel marketplaceand to provide high-quality, low-cost products as a value to itscustomers.  The 2002 and 2001reorganizations were significant factors in implementing this strategy.

 

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*2002Reorganization*

 

On January 8, 2002, the Company announced plans to close its cuttingfacility in Weslaco, Texas. Accordingly, the Company recorded a $1.0 million charge to operations inreorganization costs for the quarter ending March 31, 2002.  All 142 employees at the Weslaco facilitywere terminated in conjunction with the closure, which was completed in June2002.  The plan has been executed andactual amounts paid pursuant to the plan approximated the initial $1.0 millioncharge.

 

In conjunction with the closure of the Edinburg, Texas manufacturingfacility in fiscal 2001 (see *2001Reorganization* below), the net book value of the facility of $2.2million was written off since the net realizable value of the facility wasexpected to be insignificant. Subsequent to marketing this facility nationally, having appraisalscompleted on the property, and receiving an initial offer for this facilityduring the second quarter of fiscal 2002 (in excess of the pre-closure net bookvalue), the Company reversed the original facility write-down and classifiedthe facility as an asset held for sale. The $2.2 million reversal was recorded as a credit to reorganizationcosts in the income statement in the second quarter of fiscal 2002.  In the second quarter of fiscal 2003, theCompany sold the building for net cash proceeds of $2.5 million.  The sale resulted in a pre-tax gain ofapproximately $0.3 million which was recorded in other income, net.

 

The following summarizes the reorganization costs for the nine monthperiod ended June 30, 2002 *(in thousands)*:

 
| Weslaco, Texas cutting  facility closing      |   | $      | 1,000  |   |
|-----------------------------------------------|--------|--------|--------|--------|
|                                          |   |   |   |
| Edinburg, Texas  facility write-down reversal |   | (2,157 | )      |
|                                          |   |   |   |
| Total reorganization  costs                   |   | $      | (1,157 | )      |

 

On September 30, 2002, the Company announced plans to close one of itsmanufacturing facilities in the Dominican Republic.  Accordingly, the Company recorded a $0.6 million pre-tax chargeto operations in reorganization costs in the fourth quarter of fiscal 2002.  All 341 employees at the facility wereterminated in conjunction with the closure, which was completed in November2002.  Severance payments of $0.5million and other employee termination and administrative costs of $0.1 millionwere paid during the nine months ended June 30, 2003.

 

In addition to the reorganization activities noted above, the Companyreduced its sales force during the fourth quarter of fiscal 2002, terminating 6employees.  As a result, the Companyrecorded a $1.0 million pre-tax charge to operations in selling, general andadministrative expenses.   The Companypaid $0.6 million in severance payments during the nine months ended June 30,2003, and periodic severance payments to these terminated employees willcontinue through January 2004.  Theremaining $0.4 million in severance payments have been included in accruedliabilities as of June 30, 2003.

 

*2001Reorganization*

 

On March 26, 2001, the Company announced plans to close itsmanufacturing facility in Edinburg, Texas, and its operations in Japan.  The Company recorded a $20.8 million chargeto operations in the quarter ended March 31, 2001.  The charge consisted of $8.6 million in legal costs, $8.1 millionin employee termination and related costs, $3.1 million in plant and equipmentimpairments and $1.0 million in other asset write downs.

 

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Liabilities remaining from the 2001 reorganization costs are summarizedas follows (in millions):

 
|                                    |   | **Balance  September 30, 2002** |   | **Payments** |   | **Adjustments** |   | **Balance  June 30, 2003** |   |
|-----------------------------------------|--------|---------------------------------|--------|--------------|--------|-----------------|--------|----------------------------|--------|
| Employee termination  and related costs |   | $                               | 1.2    |         | $      | (0.3            | )      | $                          | — |   | $ | 0.9 |   |
|                                    |   |                            |   |         |   |            |   |                       |   |
| Legal costs                             |   | 1.5                             |   | —       |   | —          |   | 1.5                        |   |
|                                         |        |                                 |        |              |        |                 |        |                            |        |  |  |  |  |

 

**Comparison of Three Months Ended June 30, 2003 to Three Months Ended June 30, 2002**

 

*Net Sales*

 

Net sales decreased $3.8 million, or 3.4%, to $107.4 million for thethird quarter of fiscal 2003, compared to net sales of $111.2 million for thethird quarter of fiscal 2002.  Thedecrease in net sales is primarily attributable to decreased sales of women’swear and DKNY® licensed products, offset in part by increased sales of Haggar®branded products including the new comfort fit waist pants.  Unit sales increased 0.6% while the averagesales price decreased 4.0% during the third quarter of fiscal 2003 compared tothe third quarter of fiscal 2002.  Thesales prices decreased due to pressures in the marketplace by customers andcompetitors.

 

*Gross Profit*

 

Gross profit as a percentage of net sales increased to 29.1% in thethird quarter of fiscal 2003, compared to 25.0% in the third quarter of fiscal2002.  The increase in gross profit isprimarily due to increased gross profit on the new comfort fit waist pants anddecreased inventory markdowns during the period.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative expenses as a percentage of netsales increased to 24.7% in the third quarter of fiscal 2003, compared to 24.3%in the third quarter of fiscal 2002, but decreased overall from period toperiod.  The $0.4 million, or 1.6%,decrease in selling, general and administrative expenses primarily relates to****a $1.3 million decrease in advertising andmarketing expenses, a $0.4 million reduction in royalty and marketing expensesdue to the termination of the DKNY® license and a $0.5 million reduction inshipping expenses due to efficiencies within the distribution channel.  The expense decreases were offset in part bya $0.7 million increase in expenses related to employee benefits and workers’compensation expenses and $0.9 million in other miscellaneous expense increases.

 

*Other Income*

 

Other income decreased $0.4 million to $0.1 million during the thirdquarter of fiscal 2003, compared to $0.5 million for the third quarter offiscal 2002, as fiscal 2002 results include a $0.5 million gain from the saleof a manufacturing facility during the period.

 

*Interest Expense*

 

Interest expense decreased $0.1 million, or 18.8%, to $0.6 million forthe third quarter of fiscal 2003, compared to $0.7 million for the thirdquarter of fiscal 2002, primarily due to reduced debt levels throughout thethird quarter of fiscal 2003 combined with lower interest rates on variablerate debt.

 

*Income Taxes*

 

The Company’s income tax provision as a percentage of income beforeincome tax and cumulative effect of accounting change was 41.5% for the thirdquarter of fiscal 2003.  Comparatively,the Company’s income tax provision as a percentage of income before income taxand cumulative effect of accounting change was 42.9% for the third quarter offiscal 2002.

 

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**Comparison of Nine Months Ended June 30, 2003 to Nine Months Ended June 30, 2002**

 

*Net Sales*

 

Net sales increased $8.2 million, or 2.4%, to $356.8 million for thenine months ended June 30, 2003, compared to net sales of $348.6 million forthe nine months ended June 30, 2002. The increase in net sales is primarily attributable to increased salesof Haggar® branded products including the new comfort fit waist pants, improvedprivate label business and increased sales of Claiborne® licensed products,offset in part by decreased sales of women’s wear and DKNY® licensedproducts.  Unit sales increased 10.4%while the average sales price decreased 8.0% due to pressures in themarketplace by customers and competitors.

 

*Gross Profit*

 

Gross profit as a percentage of net sales decreased to 26.5% in thenine months ended June 30, 2003, compared to 26.6% in the nine months endedJune 30, 2002.  The decrease in grossprofit percentage is related to decreases in sales prices due to pressures inthe marketplace by customers and competitors combined with the changing productmix, offset in part by decreased inventory markdowns during the period.

 

*Selling, General and Administrative Expenses*

 

Selling, general and administrative expenses as a percentage of netsales increased to 25.2% in the nine months ended June 30, 2003, compared to24.1% in the nine months ended June 30, 2002. The $6.2 million, or 7.4%, increase in selling, general andadministrative expenses primarily relates to an increase in media advertisingexpense of $3.1 million to introduce the Haggar® comfort fit waist pants, $1.2million in legal and professional fees incurred in a proxy matter involving aCompany stockholder, $0.5 million related to the settlement of a lawsuit withthe landlord of the Company’s Jerell, Ltd. headquarters, $0.3 million inadditional shipping expenses due to increased sales volumes, $0.5 million inexpenses related to increased sales for the Claiborne® division, $0.6 millionin expenses related to the new Junior apparel division, $1.0 million insalaries and other employee compensation, $1.0 million in expenses related toemployee benefits and workers’ compensation costs and $0.2 million in otheradministrative expense increases.  Theexpense increases were offset by a $2.2 million decrease in cooperative advertisingexpenses.

 

*Other Income*

 

Other income remained constant at $0.6 million for both the nine monthsended June 30, 2003 and 2002.  TheCompany sold separate manufacturing facilities during each of the nine monthperiods for pre-tax gains of approximately $0.3 and $0.5 million during fiscal2003 and 2002, respectively.

 

*Interest Expense*

 

Interest expense decreased $0.8 million, or 29.7%, to $2.0 million forthe nine months ended June 30, 2003, compared to $2.8 million for the ninemonths ended June 30, 2002, primarily due to significantly reduced debt levelsthroughout the nine months ended June 30, 2003 combined with lower interestrates on variable rate debt.

 

*Income Taxes*

 

The Company’s income tax provision as a percentage of income beforeincome tax and cumulative effect of accounting change was 41.5% for the ninemonths ended June 30, 2003. Comparatively, the Company’s income tax provision as a percentage ofincome before income tax and cumulative effect of accounting change was 39.3%for the nine months ended June 30, 2002. The increase in the effective tax rate was primarily due to a decreasein income before provision for income taxes and cumulative effect of accountingchange during the nine months ended June 30, 2003 as compared to the nine monthsended June 30, 2002, while permanent differences remained constant.

 

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*Cumulative Effect of Accounting Change*

 

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

 

**Segment Profitability**

 

The Company’s three operating segments arebusiness units that offer similar 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 and the United Kingdom.  The Company also operates a retail segment,which markets Haggar® branded products through 67 Company-operated storeslocated in its Dallas headquarters and in outlet malls throughout the UnitedStates, and a licensing segment, which generates royalty income by licensingthe Company’s trademarks for use by other manufacturers of specified productsin specified geographic areas.  Theretail and licensing segments are not material for separate disclosure, andhave been combined in the results below. The Company evaluates performance and allocates resources based onsegment profits.

 

Intercompany sales from the wholesale segmentto the retail segment are not reflected in the wholesale segment’s netsales.  Additionally, there is no profitincluded on sales from the wholesale segment to the retail segment.  Segment profit (loss) is comprised ofsegment net income before interest expense, provision for income taxes andcumulative effect of accounting change.

 

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The table below reflects the Company’ssegment results for all periods presented.

 

 

| **Three Months Ended  June 30,** |   | **Wholesale** |   | **Retail and****Other** |   | **Consolidated** |   |
|----------------------------------|--------|---------------|--------|-------------------------|--------|------------------|--------|
|                             |   |          |   | **(In thousands)**      |   |             |   |
| **2003**                         |   |          |   |                    |   |             |   |
| Net sales                        |   | $             | 95,743 |                    | $      | 11,692           |   | $ | 107,435 |   |
| Segment profit                   |   | $             | 4,958  |                    | $      | 235              |   | $ | 5,193 |   |
|                             |   |          |   |                    |   |             |   |
| **2002**                         |   |          |   |                    |   |             |   |
| Net sales                        |   | $             | 99,769 |                    | $      | 11,446           |   | $ | 111,215 |   |
| Segment profit (loss)            |   | $             | 1,614  |                    | $      | (106             | )      | $ | 1,508 |   |

 

| **Nine Months Ended  June 30,** |   | **Wholesale** |    | **Retail and  Other** |   | **Consolidated** |   |
|---------------------------------|--------|---------------|---------|-----------------------|--------|------------------|--------|
|                            |   |          |    | **(In thousands)**    |   |             |   |
| **2003**                        |   |          |    |                  |   |             |   |
| Net sales                       |   | $             | 322,829 |                  | $      | 33,999           |   | $ | 356,828 |   |
| Segment profit                  |   | $             | 6,262   |                  | $      | 36               |   | $ | 6,298 |   |
|                            |   |          |    |                  |   |             |   |
| **2002**                        |   |          |    |                  |   |             |   |
| Net sales                       |   | $             | 314,060 |                  | $      | 34,545           |   | $ | 348,605 |   |
| Segment profit (loss)           |   | $             | 10,303  |                  | $      | (138             | )      | $ | 10,165 |   |

 

*Wholesale Segment*

 

Wholesale segment net sales decreased $4.0 million, or 4.0%, to $95.7million for the third quarter of fiscal 2003, compared to $99.8 million for thethird quarter of fiscal 2002.  Thedecrease in wholesale segment net sales during the third quarter of fiscal 2003is primarily attributable to decreased sales of women’s wear, private label andDKNY® licensed products, offset by increased sales of Haggar® branded products,including the new comfort fit waist pants.

 

Wholesale segment net sales increased $8.8 million, or 2.8%, to $322.8million for the nine months ended June 30, 2003, compared to $314.1 million forthe nine months ended June 30, 2002. The increase in wholesale segment net sales is primarily attributable toincreased sales of Haggar® branded products, including the new comfort fitwaist pants, improved private label business and increased sales of Claiborne®licensed products, offset by decreased sales of women’s wear and DKNY® licensedproducts.

 

Wholesale segment profit increased $3.4 million, or 207.2%, to $5.0million for the third quarter of fiscal 2003, compared to $1.6 million for thethird quarter of fiscal 2002.  Theincrease in segment profit is primarily attributable to increased gross profitpercentages due to new product introductions and fewer inventory markdowns,together with a $0.3 million decrease in selling, general and administrativeexpenses, primarily due to lower shipping and advertising expenses, offset inpart by a decrease in sales during the period.

 

Wholesale segment profit decreased $4.0 million, or 39.2%, to $6.3million for the nine months ended June 30, 2003, compared to $10.3 million forthe nine months ended June 30, 2002. The decrease in segment profit is primarily attributable to a $6.9million increase in selling, general and administrative expenses primarilyrelated to media advertising expenses, the settlement of a proxy matter,settlement of a lawsuit at Jerell, Ltd. and other administrative expenseincreases, offset in part by increased sales.

 

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**Liquidityand Capital Resources**

 

The Company’s principal sources of liquidity have been cash flows from operations and borrowings under its unsecured revolving credit facility.  As of June 30, 2003, the Company had cash and cash equivalents of $13.0 million.

 

As of June 30, 2003, the Company had no amounts outstanding under the$110.0 million unsecured revolving credit agreement (the “Agreement”) andavailable borrowing capacity that is restricted to $52.2 million under theAgreement’s funded debt to operating cash flow covenant.  The Company incurred approximately $0.2million in commitment fees related to the available borrowing capacity duringthe nine months ended June 30, 2003. The interest rates ranged from 2.52% to 4.75% during the nine monthsended June 30, 2003 and were based on variable market rates (LIBOR or primerate).  The Agreement prohibits theCompany from pledging its accounts receivables and inventories, containslimitations on incurring additional indebtedness, requires maintaining minimumnet worth levels of the Company and the Company’s main operating subsidiary,and requires the maintenance of certain financial ratios.  The Company’s failure to satisfy thesecovenants could adversely affect the Company’s ability to meet its needs andpay dividends.

 

Long-term debt includes $7.1 million in senior notes.  Significant terms of the senior notesinclude interest payable semi-annually at 8.49% per annum and annual principalpayments of approximately $3.6 million through fiscal 2005.  The terms and conditions of the notepurchase agreement governing the senior notes include restrictions on the saleof assets, limitations on additional indebtedness and the maintenance ofcertain net worth requirements.

 

Long-term debt includes $2.2 million inIndustrial Development Revenue (“IDR”) bonds. Significant terms of the IDR bonds include interest at a rate equal tothat of high quality, short-term, tax exempt obligations, as defined in theagreement.  The interest rate at June30, 2003, was 1.1%.  The IDR bonds arepayable in annual installments of $0.1 million, with a final payment of $2.0million in fiscal 2006.  The IDR bondsare collateralized by certain buildings and equipment with a net book value of$0.4 million as of June 30, 2003.

 

Certain of the Company’s long-term debt facilitiescontain restrictions on the ability of the Company’s subsidiaries to transferfunds to Haggar Corp.  As of June30, 2003, the Company was in full compliance with its financial and othercovenants.

 

As of June 30, 2003, and September 30, 2002, the Company hadoutstanding $39.6 million and $22.9 million, respectively, of trade letters ofcredit for the purchase of inventory from foreign suppliers in the ordinarycourse of business.  The increase intrade letters of credit outstanding for inventory purchases is primarily due tothe seasonality of the business and increased production in the Easternhemisphere.  These trade letters ofcredit, generally for periods of less than six months, will only be paid upon satisfactoryreceipt of the inventory by the Company. As of June 30, 2003, and September 30, 2002, the Company had enteredinto $7.3 million of standby letters of credit representing contingentguarantees of performance under self-insurance and other programs.  These commitments would only be drawn uponif the Company failed to meet its claims obligations.

 

In December 1999, the Company entered into an operating lease of theCompany’s corporate aircraft which contains a residual guarantee for the marketvalue of the aircraft at the end of the lease term in December 2004.  Under the lease, the Company has the optionof (a) returning the aircraft to the lessor and paying the guaranteed residualvalue of $3.0 million; (b) purchasing the aircraft for $4.0 million; or (c)arranging for the sale of the aircraft to a third party.  If the sale proceeds are less than $4.0million, the Company is required to reimburse the lessor for thedeficiency.  If the sale proceeds exceed$4.0 million, the Company is entitled to all of such excess amounts.

 

Based on an estimated $3.1 million market value for the aircraft whenthe lease ends in 2004, the Company began accruing the $0.9 million expecteddeficiency in the three months ended March 31, 2003.  As of June 30, 2003, the Company included $0.2 million in otheraccrued liabilities related to the deficiency. The remainder will be accrued up to the $0.9 million expected deficiencyusing the straight-line method through the end of the lease term.

 

20

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On July 16, 2003, the Company sold its corporate headquarters facilityto a third party for net proceeds of approximately $14.9 million.  On July 25, 2003, the Company used theproceeds from the sale to purchase an undivided interest in a new corporateheadquarters facility for $14.1 million. This exchange qualified as a Section 1031 like-kind exchange under theInternal Revenue Code.  The Companyexpects to record a pre-tax gain on the sale, net of related one-time costs, ofapproximately $4.0 million to $4.7 million during the fourth quarter of fiscal2003.

 

During the third quarter of fiscal 2003, the Company declared a cashdividend of $0.05 per share payable to the stockholders of record on August 11,2003, which will be paid on August 25, 2003. The second quarter of fiscal 2003 dividend of approximately $0.3 millionwas paid in May 2003.

 

The Company has other contractual obligations and commercialcommitments as described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Disclosures About Contractual Obligations And CommercialCommitments” of the Company’s Annual Report on Form 10-K, as amended, for thefiscal year ended September 30, 2002.

 

In November 2002, co-trustees of a trust which owns shares of theCompany’s common stock filed preliminary proxy materials with the Securitiesand Exchange Commission indicating that they intended to solicit stockholdersin support of their own slate of directors. The Company entered into an agreement to settle this proxy contest inFebruary 2003.  The Company incurredexpenses of $1.2 million in legal and professional fees during the nine monthsended June 30, 2003 related to this matter, and all amounts had been paid as ofJune 30, 2003.

 

Two jury verdicts totaling $5.2 million have been returned againstsubsidiaries of the Company related to claims by former employees for wrongfuldischarge and common law tort.  One ofthe verdicts was settled on September 30, 2002, for $1.3 million.  The other case is currently on appeal, asmanagement, based on the advice of legal counsel, believes the verdict in thislawsuit is both legally and factually incorrect.  Management does not believe that the outcome of this appeal willhave a material adverse effect on the Company. The Company is involved in various other claims and lawsuits incidentalto its business. In the opinion of management, these claims and suits in theaggregate will not have a material adverse effect on the Company.

 

*Cash Flow Results for the Nine Months Ended June 30,2003*

 

For the nine months ended June 30, 2003, cash flows provided byoperating activities was approximately $31.1 million.  Cash flows provided by operations was primarily the result of netincome as adjusted for non-cash items, a $26.2 million decrease in accountsreceivable, net, primarily due to the seasonality of sales and improved cashcollections, and a $2.0 million decrease in inventories, net, offset by a $4.8million decrease in accrued liabilities primarily due to severance payments,tax payments and decreased royalty and advertising accruals.  In addition, accrued wages and otheremployee compensation decreased $1.0 million, primarily due to the payment ofbonuses during the period offset by accruals for current period charges.

 

Cash flows provided by investing activities were approximately $0.5million mainly due to proceeds from the sale of the Edinburg, Texasmanufacturing facility of $2.5 million, offset by equipment purchases and $0.7million in insurance premium payments which increased the cash surrender valueof certain whole life policies.

 

Cash flows used in financing activities were approximately $22.7million due to net repayment of borrowings of long-term debt of $15.7 million,dividend payments of $1.0 million and a decrease in cash book overdrafts of$6.0 million.

 

21

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*Cash Flow Results for the Nine Months Ended June 30,2002*

 

For the nine months ended June 30, 2002, cash flows provided byoperating activities were approximately $22.7 million.  The cash provided from operations wasprimarily the result of net income as adjusted for non-cash items, a $20.7million decrease in accounts receivable, net, and a $2.4 million decrease ininventories, net, offset by a $6.2 million decrease in accounts payable and a$3.7 million decrease in accrued wages, workers’ compensation, other employeebenefits and other current and non-current liabilities.

 

The Company used cash flows of approximately $3.3 million for investing activities for the nine months ended June 30, 2002, primarily due to purchases of property, plant and equipment of $1.9 million principally related to fixtures and leasehold improvements for new retail stores as well as an increase in other assets of $1.5 million primarily due to additional premium payments for executive variable life insurance policies.

 

Cash flows used in financing activities of $19.8 million for the nine months ended June 30, 2002, were primarily the result of a net decrease in long-term debt of $19.3 million and dividend payments of $1.0 million.

 

**Recently Issued Financial Accounting Standards**

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities – an Interpretation of ARB No.51,” which addresses consolidation of variable interest entities (“VIEs”) towhich the usual consolidation described in Accounting Research Bulletin No.51,” “Consolidated Financial Statements,” does not apply because the VIEs haveno voting interests or otherwise are not subject to control through ownershipof voting interests.  FIN 46 requiresexisting unconsolidated VIEs to be consolidated by their primary beneficiariesif the entities do not effectively disperse risks among parties involved.  The provisions of the interpretation areeffective immediately for VIEs created after January 31, 2003, and to VIEs inwhich an entity obtains an interest after that date.  An entity with a variable interest in a VIE created beforeFebruary 1, 2003, must apply the provisions no later than the first reportingperiod beginning after June 15, 2003. The interpretation may be applied prospectively with a cumulative-effectadjustment as of the date on which it is first applied or by restatingpreviously issued financial statements. The Company has adopted the interpretation and has determined it is notparty to any VIEs that would require consolidation.

 

22

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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.  As of June 30, 2003, the Company’s exposure to interest rate risk was minimal due to the low level of variable rate debt.

 

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

 

The Chief Executive Officer and Chief Financial Officer of the Companyhave reviewed and evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as defined in the Securities Exchange Act of 1934Rules 240.13a-14(c) and 15d-14(c)), and have concluded that, as of the end ofthe period covered by this quarterly report on Form 10-Q, such disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company required to be disclosed in the periodicreports the Company files or submits under the Securities Exchange Act of1934.  During the most recent fiscalquarter, there have not been any significant changes in the internal controlsover financial reporting that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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**Part II.  Other Information.**

 

**Item 1.  Legal Proceedings**

 

None.

 

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

 

None.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

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

 

The Company’s AnnualMeeting of Stockholders was held on April 2, 2003. At such meeting, Rae F.Evans and Donald E. Godwin were elected to serve as Class I directors of theCompany for a three year term and until their respective successors are electedand qualified. Of the 6,029,942 shares represented at the meeting in person orby proxy, Ms. Evans and Mr. Godwin received 5,502,150 and 5,506,180 votes, respectively,for their election as Class I directors. Of the shares represented, 527,792 and 523,762 shares withheld vote forthe election of Ms. Evans and Mr. Godwin, respectively.  The other directors whose terms of officecontinued after the meeting are as follows: J. M. Haggar, III, Richard W.Heath, John C. Tolleson, James Neal Thomas and Thomas G. Kahn.

 

The stockholders also approved the adoption of the Haggar Corp. 2003 Long Term Incentive Plan (the “Plan”) at such meeting.  The resolution to approve and adopt the Plan received 2,558,548 votes for the resolution, and 2,166,088 against, with 92,154 shares abstaining on the matter.

 

The stockholders also ratified the selection of PricewaterhouseCoopers LLP as the independent auditors for the Company for the fiscal year ended September 30, 2003.  The votes with respect to this resolution were 6,021,870 for the resolution and 5,873 against, with 2,199 shares abstaining on the matter.

 

A description of the terms of the settlementof a proxy contest between the Company and the co-trustees of a trust owningshares of the Company’s common stock is contained in the Company’s definitiveproxy statement dated March 4, 2003.

 

**Item 5.  Other Information**

 

None.

 

**Item 6.  Exhibits and Reports on Form 8-K**

 

(a)          Exhibits.

 

10(a) – Second Amendment to Second Amended andRestated Credit Agreement dated June 6, 2003, between the Company and JPMorganChase Bank, as agent for a bank syndicate

 

10(b) – Commercial Contract – Improved Propertyeffective as of May 9, 2003, between Colinas Crossing, L.P. and the Company

 

10(c) – First Amendment to Commercial Contract –Improved Property effective as of June 3, 2003 between Colinas Crossing, L.P.and the Company

 

10(d) – Second Amendment to Commercial Contract –Improved Property effective as of July 8, 2003 between Colinas Crossing, L.P.and the Company

 

24

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10(e) – Third Amendment to Commercial Contract –Improved Property effective as of July 9, 2003 between Colinas Crossing, L.P. andthe Company

 

10(f) – Fourth Amendment to Commercial Contract –Improved Property effective as of July 10, 2003 between Colinas Crossing, L.P.and the Company

 

10(g) – Fifth Amendment to Commercial Contract –Improved Property effective as of July 15, 2003 between Colinas Crossing, L.P.and the Company

 

10(h) – Sixth Amendment to Commercial Contract –Improved Property effective as of July 17, 2003 between Colinas Crossing, L.P.and the Company

 

10(i) – Seventh Amendment to Commercial Contract –Improved Property effective as of July 18, 2003 between Colinas Crossing, L.P.and the Company

 

10(j) – Eighth Amendment to Commercial Contract –Improved Property effective as of July 21, 2003 between Colinas Crossing, L.P.and the Company

 

10(k) – Ninth Amendment to Commercial Contract –Improved Property effective as of July 23, 2003 between Colinas Crossing, L.P.and the Company

 

31(a) – Certification of Chief Executive Officerrequired by Rule 13a-14(a) or Rule 15d-14(b)

 

31(b) – Certification of Chief Financial Officerrequired by Rule 13a-14(a) or Rule 15d-14(b)

 

32(a) – Certification of Chief Executive OfficerPursuant to 18 U.S.C. §1350

 

32(b) – Certification of Chief Financial OfficerPursuant to 18 U.S.C. §1350

 

(b)         Reports on Form 8-K.

 

A Form 8-K was filed on April 29, 2003, announcing, under Item 7, theissuance of a press release and, under Item 9, the Company’s second quarter andprojected fiscal 2003 earnings.

 

25

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

 

26

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**INDEX TOEXHIBITS**

 
| **Exhibit**Number |   | **Description**                                                                                                                                                 |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                            |
| 10(a)             |   | Second Amendment to Second Amended and Restated Credit Agreement dated June 6, 2003, between the Company and JPMorgan Chase Bank, as agent for a bank syndicate |
|              |   |                                                                                                                                                            |
| 10(b)             |   | Commercial Contract – Improved Property effective as of May 9, 2003,  between Colinas Crossing, L.P. and the Company                                       |
|              |   |                                                                                                                                                            |
| 10(c)             |   | First Amendment to Commercial Contract – Improved Property effective  as of June 3, 2003 between Colinas Crossing, L.P. and the Company                    |
|              |   |                                                                                                                                                            |
| 10(d)             |   | Second Amendment to Commercial Contract – Improved Property effective  as of July 8, 2003 between Colinas Crossing, L.P. and the Company                   |
|              |   |                                                                                                                                                            |
| 10(e)             |   | Third Amendment to Commercial Contract – Improved Property effective  as of July 9, 2003 between Colinas Crossing, L.P. and the Company                    |
|              |   |                                                                                                                                                            |
| 10(f)             |   | Fourth Amendment to Commercial Contract – Improved Property effective  as of July 10, 2003 between Colinas Crossing, L.P. and the Company                  |
|              |   |                                                                                                                                                            |
| 10(g)             |   | Fifth Amendment to Commercial Contract – Improved Property effective  as of July 15, 2003 between Colinas Crossing, L.P. and the Company                   |
|              |   |                                                                                                                                                            |
| 10(h)             |   | Sixth Amendment to Commercial Contract – Improved Property effective  as of July 17, 2003 between Colinas Crossing, L.P. and the Company                   |
|              |   |                                                                                                                                                            |
| 10(i)             |   | Seventh Amendment to Commercial Contract – Improved Property  effective as of July 18, 2003 between Colinas Crossing, L.P. and the Company                 |
|              |   |                                                                                                                                                            |
| 10(j)             |   | Eighth Amendment to Commercial Contract – Improved Property effective  as of July 21, 2003 between Colinas Crossing, L.P. and the Company                  |
|              |   |                                                                                                                                                            |
| 10(k)             |   | Ninth Amendment to Commercial Contract – Improved Property effective as of July 23, 2003 between Colinas Crossing, L.P. and the Company                    |
|              |   |                                                                                                                                                            |
| 31(a)             |   | Certification of Chief Executive Officer required by Rule 13a-14(a)  or Rule 15d-14(b)                                                                          |
|              |   |                                                                                                                                                            |
| 31(b)             |   | Certification of Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(b)                                                                           |
|              |   |                                                                                                                                                            |
| 32(a)             |   | Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350                                                                                       |
|              |   |                                                                                                                                                            |
| 32(b)             |   | Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350                                                                                       |

 

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