UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

HAGGAR CORP.

(Exact name of the registrant as specified in its charter)

 

 

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

 

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

 

As of May 12, 2003, there were 6,418,426 shares of the registrant’s common stock outstanding.

 

 

Haggar Corp. and Subsidiaries

 

Index

 

Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets (As of March 31, 2003 (unaudited) and September 30, 2002)
		Consolidated Statements of Operations and Comprehensive Income (unaudited) (Three and six months ended March 31, 2003 and 2002)
		Consolidated Statements Of Cash Flows (unaudited) (Six months ended March 31, 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 6.  Exhibits and Reports on Form 8-K
Signature
Certifications

 

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Haggar Corp. and Subsidiaries

 

Consolidated Balance Sheets

(in thousands, except share amounts)

 

		March 31, 2003			September 30, 2002
Assets		(unaudited)
Current assets:
Cash and cash equivalents		$	6,150		$	4,124
Accounts receivable, net		68,161			64,284
Inventories, net		98,173			100,996
Property held for sale		—			2,157
Deferred tax benefit		11,410			12,087
Other current assets		4,439			2,766
Total current assets		188,333			186,414
Property, plant, and equipment, net		42,521			46,195
Goodwill, net		9,472			9,472
Other assets		7,949			7,896
Total assets		$	248,275		$	249,977
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	27,654		$	30,542
Accrued liabilities		27,249			35,669
Accrued wages and other employee compensation		4,916			6,713
Current portion of long-term debt		3,671			3,742
Total current liabilities		63,490			76,666
Other accrued liabilities		9,224			8,247
Long-term debt		32,671			21,343
Total liabilities		105,385			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 March 31, 2003 and September 30, 2002		866			866
Additional paid-in capital		42,911			42,911
Cumulative translation adjustment		(549		)	(534		)
Retained earnings		124,623			125,439
		167,851			168,682
Less – Treasury stock, 2,242,183 shares at cost at March 31, 2003 and September 30, 2002		(24,961		)	(24,961		)
Total stockholders’ equity		142,890			143,721
Total liabilities and stockholders’ equity		$	248,275		$	249,977

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Haggar Corp. and Subsidiaries

 

Consolidated Statements of Operations and Comprehensive Income

(unaudited, in thousands, except per share amounts)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2003			2002			2003			2002
Net sales		$	135,487		$	138,059		$	249,394		$	237,390
Cost of goods sold		100,638			102,841			185,921			173,784
Reorganization costs		—			(1,157		)	—			(1,157		)
Gross profit		34,849			36,375			63,473			64,763
Selling, general and administrative expenses		(32,012		)	(29,183		)	(63,543		)	(56,892		)
Royalty income		300			332			675			728
Other income, net		533			11			480			59
Interest expense		(648		)	(1,095		)	(1,383		)	(2,106		)
Income (loss) before provision (benefit) for income taxes and cumulative effect of accounting change		3,022			6,440			(298		)	6,552
Provision (benefit) for income taxes		1,191			2,502			(124		)	2,543
Income (loss) before cumulative effect of accounting change		$	1,831		$	3,938		$	(174	)	$	4,009
Cumulative effect of accounting change		—			—			—			(15,578		)
Net income (loss)		$	1,831		$	3,938		$	(174	)	$	(11,569	)
Other comprehensive income (loss):
Cumulative translation adjustment		$	(111	)	$	(99	)	$	(15	)	$	(140	)
Comprehensive income (loss)		$	1,720		$	3,839		$	(189	)	$	(11,709	)
NET INCOME (LOSS) PER COMMON SHARE:
BASIC AND DILUTED
Income (loss) before cumulative effect of accounting change		$	0.29		$	0.62		$	(0.03	)	$	0.63
Cumulative effect of accounting change		—			—			—			(2.44		)
Net income (loss)		$	0.29		$	0.62		$	(0.03	)	$	(1.81	)
Weighted average number of common shares outstanding:
Basic		6,418			6,356			6,418			6,368
Diluted		6,430			6,391			6,418			6,368

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Haggar Corp. and Subsidiaries

 

Consolidated Statements of Cash Flows

(unaudited, in thousands)

 

		Six Months Ended March 31,
		2003			2002
Cash Flows from Operating Activities
Net loss		$	(174	)	$	(11,569	)
Adjustments to reconcile net loss to net cash used in 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		(279		)	—
Depreciation and amortization		4,225			4,348
Deferred tax benefit		392			1,061
Changes in assets and liabilities:
Accounts receivable, net		(3,877		)	(4,822		)
Inventories, net		2,823			1,619
Other current assets		(1,673		)	(72		)
Accounts payable		1,451			(10,290		)
Accrued liabilities		(8,420		)	2,232
Accrued wages and other employee compensation		(1,797		)	(3,407		)
Other accrued liabilities		977			433
Net cash used in operating activities		(6,352		)	(7,046		)
Cash Flows from Investing Activities
Purchases of property, plant and equipment, net		(483		)	(1,244		)
Proceeds from the sale of property, plant and equipment		2,493			—
Decrease (increase) in other assets		107			(316		)
Net cash provided by (used in) investing activities		2,117			(1,560		)
Cash Flows from Financing Activities
Purchase of treasury stock at cost		—			(351		)
Proceeds from issuance of long-term debt		157,000			259,000
Payments on long-term debt		(145,743		)	(251,269		)
Decrease in book overdrafts		(4,339		)	—
Payments of cash dividends		(642		)	(637		)
Net cash provided by financing activities		6,276			6,743
Effects of exchange rates on cash and cash equivalents		(15		)	(140		)
Increase (decrease) in cash and cash equivalents		2,026			(2,003		)
Cash and cash equivalents, beginning of period		4,124			7,800
Cash and cash equivalents, end of period		$	6,150		$	5,797

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Haggar Corp. and Subsidiaries

 

Notes to Consolidated Financial Statements

(unaudited)

 

1.  Basis of Presentation

 

Financial Statement Presentation

 

The consolidated balance sheet as of March 31, 2003, the consolidated statements of operations and comprehensive income for the three and six months ended March 31, 2003 and 2002, and the consolidated statements of cash flows for the six months ended March 31, 2003 and 2002, have been prepared by Haggar Corp. (together with its subsidiaries, the “Company”) without audit.  The consolidated balance sheet as of September 30, 2002 has been derived from the Company's audited financial statements as of that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) to present fairly the consolidated financial position, results of operations, and cash flows of the Company at March 31, 2003, and for all other periods presented, have been made.  As permitted under Securities and Exchange Commission rules for interim financial reporting,  certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted.  These financial statements should be read in conjunction with the financial statements and accompanying footnotes thereto in the Company’s Annual Report 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, which authorizes the grant of stock options to key employees. The options vest over a period of three to five years and expire ten years from the date of grant. The options are issued at an exercise price not less than the fair market value of the Company’s common stock on the date of the grant. The long-term incentive plan allows 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 options may be granted under the plan.  The following table summarizes the changes in common stock options during the six months ended March 31, 2003:

 

The Company accounts for its long-term incentive plans under Accounting Principles Board Opinion No. 25, under which no compensation has been recognized.  As required under Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” and Statement of Financial Accounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-Based Compensation Transition and Disclosure,” the pro forma effects of stock-based compensation on net income (loss) and net income (loss) per common share are as follows (in thousands, except per share amounts):

 

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		Three Months Ended March 31,						Six Months Ended March 31,
		2003			2002			2003			2002
Net income (loss):
As reported		$	1,831		$	3,938		$	(174	)	$	(11,569	)
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		)	(50		)	(252		)
Pro-forma net income (loss)		$	1,806		$	3,812		$	(224	)	$	(11,821	)
Net income (loss) per common share on a basic and diluted basis:
As reported		$	0.29		$	0.62		$	(0.03	)	$	(1.81	)
Pro forma		$	0.28		$	0.60		$	(0.03	)	$	(1.86	)

 

On May 1, 2003, the Company adopted a new stockholder approved long-term incentive plan which authorizes the Company to issue up to 575,000 additional shares in connection with options granted to directors, officers or employees of the Company.  The terms and vesting periods will be determined as each option is granted, but the option price cannot be less than the then current market value of the common stock at the grant date.

 

Reclassifications

 

Certain items in the prior period presentation have been reclassified to conform to the current period presentation.

 

2.  Inventories, net

 

Inventories, net are stated at the lower of cost (first-in, first-out) or market and consisted of the following at March 31, 2003, and September 30, 2002 (in thousands):

 

 

Work-in-process and finished garments inventories consisted of materials, labor and manufacturing overhead.  Inventory reserves as of March 31, 2003, and September 30, 2002 consisted primarily of allowances for slow moving and obsolete piece goods and trimming supplies that are not forecasted to be used in production as well as reserves to reflect estimated physical count differences based on the results of cycle counts performed.

 

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3.  Asset Impairment – Goodwill

 

On October 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets”, and recorded a $15.6 million impairment 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 weak retail environment for women’s apparel resulted in a revised earnings forecast for Jerell and the women’s wear business.  In order to determine the fair value of goodwill, the Company obtained an independent appraisal, which considered both prices of comparable businesses and 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 March 31, 2003, and September 30, 2002 (in thousands):

 

 

As of March 31, 2003, the Company had $27.0 million outstanding under the $110.0 million unsecured revolving credit line agreement (the "Agreement") and additional available borrowing capacity is restricted to $15.7 million under the Agreement’s funded debt to operating cash flow covenant.  The Company incurred approximately $0.1 million in commitment fees related to the available borrowing capacity during the six months ended March 31, 2003.  The interest rates ranged from 2.52% to 4.75% during the six month period ended March 31, 2003 and were based on variable market rates (LIBOR or prime rate).  The weighted average interest rate at March 31, 2003, was 3.00%.  The Agreement prohibits the Company from pledging its accounts receivables and inventories, contains limitations on incurring additional indebtedness, requires maintaining minimum net worth levels of the Company and the Company’s main operating subsidiary, and requires the maintenance of certain financial ratios.  The Agreement also prohibits the payment of any dividend if a default exists after giving effect to such a dividend.

 

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

 

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 are a result of this strategy.

 

On January 8, 2002, the Company announced plans to close its cutting facility in Weslaco, Texas.  Accordingly, the Company recorded a $1.0 million charge to operations in reorganization costs for the quarter ending March 31, 2002.  All 142 employees at the Weslaco facility were terminated in conjunction with the closure, which was completed in June 2002.  The plan has been executed and actual amounts paid pursuant to the plan approximated the initial $1.0 million charge.

 

In conjunction with the closure of the Edinburg, Texas manufacturing facility in fiscal 2001, the net book value of the facility of $2.2 million was written off since the net realizable value of the facility was expected to be insignificant.  Subsequent to marketing this facility nationally, having appraisals completed on the property, and receiving an initial offer for this facility during the second quarter of fiscal 2002 (in excess of the pre-closure net book value), the Company reversed the original facility write-down and classified the facility as an asset held for

 

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sale.  The $2.2 million reversal was recorded as a credit to reorganization costs in the income statement in the second quarter of fiscal 2002.  On March 24, 2003, the Company sold the building for net cash proceeds of $2.5 million.  The sale resulted in a pre-tax gain of approximately $0.3 million which was recorded in other income, net.

 

The following summarizes the reorganization costs for the three and six month periods ended March 31, 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 are business 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 to retailers throughout North America and the United Kingdom.  The Company also operates a retail segment, which markets Haggar® branded products through 64 Company-operated stores located in its Dallas headquarters and in outlet malls throughout the United States, and a licensing segment, which generates royalty income by licensing the Company’s trademarks for use by other manufacturers of specified products in specified geographic areas.  The retail and licensing segments are not material for separate disclosure, and have been combined in the results below.  The Company evaluates performance and allocates resources based on segment profits.

 

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

 

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

 

Three Months Ended March 31,		Wholesale			Retail and Other			Consolidated
		(In thousands)
2003
Net sales		$	126,744		$	8,743		$	135,487
Segment profit (loss)		$	4,960		$	(1,290	)	$	3,670
2002
Net sales		$	128,932		$	9,127		$	138,059
Segment profit (loss)		$	8,757		$	(1,222	)	$	7,535

 

Six Months Ended March 31,		Wholesale			Retail and Other			Consolidated
		(In thousands)
2003
Net sales		$	227,087		$	22,307		$	249,394
Segment profit (loss)		$	1,934		$	(849	)	$	1,085
2002
Net sales		$	214,292		$	23,098		$	237,390
Segment profit (loss)		$	9,252		$	(594	)	$	8,658

 

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

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2003			2002			2003			2002
Segment profit		$	3,670		$	7,535		$	1,085		$	8,658
Interest expense		(648		)	(1,095		)	(1,383		)	(2,106		)
Consolidated income (loss) before provision (benefit) for income taxes and cumulative effect of accounting change		$	3,022		$	6,440		$	(298	)	$	6,552

 

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

 

7.  Commitments and Contingencies

 

On February 14, 2003, the Company entered into a contract with a third party for the sale of its corporate headquarters facility.  The Company has until June 2, 2003 to cancel the sale contract without penalty.  On May 9, 2003, the Company entered into a contract for the purchase of a new corporate headquarters facility.  The Company has until July 8, 2003 to cancel the purchase contract without penalty.  In the event of a relocation, the Company will incur costs to exit the current facility and move to a new corporate headquarters.

 

In November 2002, co-trustees of a trust which owns shares of the Company’s common stock filed preliminary proxy materials with the Securities and Exchange Commission indicating that they intended to solicit stockholders in support of their own slate of directors.  The Company entered into an agreement to settle this proxy contest in February 2003.    The Company incurred $0.9 million and $1.2 million in legal and professional fees during the three and six months ended March 31, 2003 related to this matter.  As of March 31, 2003, $0.2 million of these fees remained to be paid and were included in accrued liabilities.

 

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

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and measurement provisions are to be applied on a prospective basis for qualifying guarantees entered into or modified after December 31, 2002.  However, any qualifying guarantees entered into before December 31, 2002, must be disclosed in the footnotes for interim or annual financial statement periods that end after December 15, 2002.

 

The only qualifying guarantee that requires disclosure is a December 1999 operating lease of the Company’s corporate aircraft which contains a residual guarantee.  Under the lease which ends in December 2004, the Company has the option of (a) returning the aircraft to the lessor and paying the guaranteed residual value of $3.0 million; (b) purchasing the aircraft for $4.0 million; or (c) arranging for the sale of the aircraft to a third party.  If the sales proceeds are less than $4.0 million, the Company is required to reimburse the lessor for the deficiency.  If the sales 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 when the lease ends in 2004, the Company began accruing the $0.9 million expected deficiency in the three months ended March 31, 2003.  As of March 31, 2003, the Company included $0.1 million in other accrued liabilities related to the deficiency.  The remainder will be

 

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accreted up to the $0.9 million expected deficiency using the straight-line method through the end of the lease term.

 

8.  Shipping and Handling Fees

 

The Company records shipping and handling fees as selling, general and administrative expense.  For the three and six months ended March 31, 2003, such costs were $3.2 million and $6.5 million, respectively.  For the three and six months ended March 31, 2002, such costs were $2.8 million and $5.6 million, respectively.

 

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

 

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

 

		Three Months Ended March 31,				Six Months Ended March 31,
		2003		2002		2003		2002
Weighted average common shares outstanding		6,418		6,356		6,418		6,368
Shares equivalents, due to stock options		12		35		—		—
Weighted average diluted shares outstanding		6,430		6,391		6,418		6,368

 

Options to purchase 640,280 shares were excluded from the diluted earnings per share calculations for the three months ended March 31, 2003 because the options’ exercise prices were greater than the average market price of the common shares during the period.  Options to purchase 1,263,445 shares were excluded from the diluted earnings per share calculations for the six months ended March 31, 2003 due to the net loss recorded during the period.

 

Options to purchase 775,040 and 806,050 shares were excluded from the diluted earnings per share calculations for the three and six months ended March 31, 2002, because the options’ exercise prices were greater than the average market price of the common shares during the period.

 

10.  Dividends

 

During the second quarter of fiscal 2003, the Company declared a cash dividend of $0.05 per share payable to the stockholders of record on May 12, 2003, which will be paid on May 26, 2003.  The first quarter of fiscal 2003 dividend of approximately $0.3 million was paid in February 2003.

 

11.  Related Party Transactions

 

A director of the Company is a partner of a law firm that rendered various legal services for the Company during the three and six months ended March 31, 2003 and 2002.  The Company paid the law firm approximately $0.2 million and $0.3 million for legal services during the three and six months ended March 31, 2003, respectively.  The Company paid the law firm approximately $0.3 million and $0.5 million for legal services during the three and six months ended March 31, 2002, respectively.  There were no amounts due to such firm from the Company as of March 31, 2003 and September 30, 2002.

 

12.  Recently Issued Financial Accounting Standards

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51,” which addresses consolidation of variable interest entities (“VIEs”) to which the usual consolidation described in Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” does not apply because the VIEs have no voting interests or otherwise are not subject to control through ownership of voting interests.  FASB Interpretation No. 46 requires existing unconsolidated VIEs to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved.  The provisions of the interpretation are effective immediately for VIEs created after January 31, 2003, and to VIEs in which an entity obtains an interest after that date.  An entity with a variable interest in a VIE created

 

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before February 1, 2003, must apply the provisions no later than the first reporting period beginning after June 15, 2003.  The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements.   The Company has adopted the interpretation and has determined it is not party to any VIEs that would require consolidation.

 

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

 

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

 

Forward Looking Statements

 

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).  All statements 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.  The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, as they relate to the Company, are intended to identify forward-looking statements.  The Company has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that the Company believes may affect its financial condition, results of operations, business strategy and financial needs.  These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions that could affect the results of the Company or the apparel industry generally and could cause the Company’s actual results to differ materially from those expressed in this Quarterly Report on Form 10-Q.  These risks, uncertainties and assumptions are described in “Item 1.  Business” of the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2002, and include, among other things:

 

•        changes in general business conditions,

 

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

 

•        seasonality of the Company’s business,

 

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

 

•        impact of competition in the apparel industry,

 

•        availability and cost of raw materials,

 

•        changes in laws and other regulatory actions,

 

•        changes in labor relations,

 

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

 

•                       unexpected judicial decisions,

 

•                       changes in interest rates and capital market conditions,

 

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

 

•                       natural disasters, and

 

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

 

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In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.  Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.  The Company undertakes no obligation to update any such statements or publicly announce any updates or revisions to any of the forward-looking statements contained herein, to reflect any change in its 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 dress men’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 into three business units, wholesale, retail and licensing, each of which offers similar products through different distribution channels.  The Company’s wholesale segment, which sells apparel products through approximately 10,000 retail stores operated by the Company’s retail customers, is the primary distribution channel through which the Company sells its products.  The Company’s retail segment markets Haggar® branded products through 64 Company-operated retail stores located in its Dallas headquarters and in outlet malls throughout the United States.  The Company’s licensing segment generates royalty income by licensing the Company’s trademarks for use by other manufacturers of specified products in specified geographic regions.

 

Critical Accounting Policies

 

There have been no material changes to the Company’s critical accounting policies during the six months ended March 31, 2003.

 

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

 

While the Company believes that the historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, the Company cannot guarantee that its estimates and assumptions will be accurate.  If such estimates and assumptions prove to be inaccurate, the Company may be required to make adjustments to these estimates in future periods.

 

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 and 2001 reorganizations are the results of this strategy.

 

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2002 Reorganization

 

On January 8, 2002, the Company announced plans to close its cutting facility in Weslaco, Texas.  Accordingly, the Company recorded a $1.0 million charge to operations in reorganization costs for the quarter ending March 31, 2002.  All 142 employees at the Weslaco facility were terminated in conjunction with the closure, which was completed in June 2002.  The plan has been executed and actual amounts paid pursuant to the plan approximated the initial $1.0 million charge.

 

In conjunction with the closure of the Edinburg, Texas manufacturing facility in fiscal 2001 (see 2001 Reorganization below), the net book value of the facility of $2.2 million was written off since the net realizable value of the facility was expected to be insignificant.  Subsequent to marketing this facility nationally, having appraisals completed on the property, and receiving an initial offer for this facility during the second quarter of fiscal 2002 (in excess of the pre-closure net book value), the Company reversed the original facility write-down and classified the facility as an asset held for sale.  The $2.2 million reversal was recorded as a credit to reorganization costs in the income statement in the second quarter of fiscal 2002.  On March 24, 2003, the Company sold the building for net cash proceeds of $2.5 million.  The sale resulted in a pre-tax gain of approximately $0.3 million which was recorded in other income, net.

 

The following summarizes the reorganization costs for the three and six month periods ended March 31, 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 its manufacturing facilities in the Dominican Republic.  Accordingly, the Company recorded a $0.6 million pre-tax charge to operations in reorganization costs in the fourth quarter of fiscal 2002.  All 341 employees at the facility were terminated in conjunction with the closure, which was completed in November 2002.  Severance payments of $0.5 million and other employee termination and administrative costs of $0.1 million were paid during the six months ended March 31, 2003.

 

In addition to the reorganization activities noted above, the Company reduced its sales force during the fourth quarter of fiscal 2002, terminating 6 employees.  As a result, the Company recorded a $1.0 million pre-tax charge to operations in selling, general and administrative expenses.   The Company paid $0.4 million in severance payments during the six months ended March 31, 2003, and periodic severance payments to these terminated employees will continue through January 2004.  The remaining $0.6 million in severance payments have been included in accrued liabilities as of March 31, 2003.

 

2001 Reorganization

 

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

 

Severance and other employee related payments of $6.0 million have been made as of March 31, 2003, and all other employee termination costs of $0.9 million are expected to be paid by the end of fiscal 2003.  A $0.7 million pre-tax reduction of the charges for the 2001 reorganization was credited to operations in the fourth quarter of fiscal 2001 as a result of lower than expected costs related to terminated employees and better than

 

15

 

expected recoveries on equipment, offset by lower than anticipated recoveries on inventories and receivables in Japan.

 

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

 

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

 

		Balance September 30, 2002			Payments			Adjustments			Balance March 31, 2003
Employee termination and related costs		$	1.2		$	(0.3	)	$	—		$	0.9
Legal costs		1.5			—			—			1.5

 

Comparison of Three Months Ended March 31, 2003 to Three Months Ended March 31, 2002

 

Net Sales

 

Net sales decreased $2.6 million, or 1.9%, to $135.5 million for the second quarter of fiscal 2003, compared to net sales of $138.1 million for the second quarter of fiscal 2002.  The decrease in net sales is primarily attributable to decreased sales of women’s wear and DKNY® licensed products, offset by increased sales of Haggar® branded products including the new comfort fit waist pants and improved private label business.  Unit sales increased 5.5% while the average sales price decreased 7.4% during the second quarter of fiscal 2003 compared to the second quarter of fiscal 2002.  The sales prices decreased due to pressures in the market place by customers and competitors. 

 

Gross Profit

 

Gross profit as a percentage of net sales decreased to 25.7% in the second quarter of fiscal 2003, compared to 26.3% in the second quarter of fiscal 2002.  Absent the impact of the reorganization costs previously discussed, the gross profit percentage would have been 25.5% in the second quarter of fiscal 2002.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses as a percentage of net sales increased to 23.6% in the second quarter of fiscal 2003, compared to 21.1% in the second quarter of fiscal 2002.  The $2.8 million, or 9.7%, increase in selling, general and administrative expenses primarily relates to $0.9 million in legal and professional fees incurred in a proxy matter involving a Company stockholder, $0.5 million related to the settlement of a lawsuit with the landlord of the Company’s Jerell, Ltd. headquarters, a $1.2 million increase in salaries and other employee compensation, $0.6 million in additional shipping expenses due to increased sales volumes and $0.7 million in expenses related to employee benefits and workers’ compensation expenses.  The expense increases were offset by a $1.1 million decrease in advertising and marketing expenses primarily due to lower cooperative advertising expenses.

 

Other Income

 

Other income increased $0.5 million to $0.5 million during the second quarter of fiscal 2003, compared to $11,000 for the second quarter of fiscal 2002, primarily attributable to a gain on the sale of the Edinburg, Texas manufacturing facility of $0.3 million.

 

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Interest Expense

 

Interest expense decreased $0.4 million, or 40.8%, to $0.7 million for the second quarter of fiscal 2003, compared to $1.1 million for the second quarter of fiscal 2002, primarily due to significantly reduced debt levels throughout the second quarter of fiscal 2003 combined with lower interest rates on variable rate debt.

 

Income Taxes

 

The Company’s income tax provision as a percentage of income before income tax and cumulative effect of accounting change was 39.4% for the second quarter of fiscal 2003.  Comparatively, the Company’s income tax provision as a percentage of income before income tax and cumulative effect of accounting change was 38.9% for the second quarter of fiscal 2002.

 

Comparison of Six Months Ended March 31, 2003 to Six Months Ended March 31, 2002

 

Net Sales

 

Net sales increased $12.0 million, or 5.1%, to $249.4 million for the six months ended March 31, 2003, compared to net sales of $237.4 million for the six months ended March 31, 2002.  The increase in net sales is primarily attributable to increased sales of Haggar® branded products including the new comfort fit waist pants, improved private label business and increased sales of Claiborne® licensed products, offset by decreased sales of women’s wear and DKNY® licensed products.  Unit sales increased 15.6% while the average sales price decreased 10.5% due to pressures in the marketplace by customers and competitors.

 

Gross Profit

 

Gross profit as a percentage of net sales decreased to 25.5% in the six months ended March 31, 2003, compared to 27.3% in the six months ended March 31, 2002.  Absent the impact of the reorganization costs previously discussed, the gross profit percentage would have been 26.8% in the six months ended March 31, 2002.  The decrease in gross profit percentage is related to decreases in sales prices due to pressures in the marketplace by customers and competitors combined with the changing product mix.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses as a percentage of net sales increased to 25.5% in the six months ended March 31, 2003, compared to 24.0% in the six months ended March 31, 2002.  The $6.7 million, or 11.7%, increase in selling, general and administrative expenses primarily relates to an increase in media advertising expense of $3.1 million to introduce the Haggar® comfort fit waist pants, $1.2 million in legal and professional fees incurred in a proxy matter involving a Company stockholder, $0.5 million related to the settlement of a lawsuit with the landlord of the Company’s Jerell, Ltd. headquarters, $0.8 million in additional shipping expenses due to increased sales volumes, $0.5 million in expenses related to increased sales for the Claiborne® division, $0.4 million in expenses related to a new Junior apparel division, $0.5 million in salaries and other employee compensation, $0.7 million in expenses related to employee benefits and workers’ compensation costs and $0.4 million in other administrative expense increases.  The expense increases were offset by a $1.4 million decrease in cooperative advertising expenses.

 

Other Income

 

Other income increased $0.4 million to $0.5 million during the six months ended March 31, 2003, compared to $0.1 million for the six months ended March 31, 2002, primarily attributable to a gain on the sale of the Edinburg, Texas manufacturing facility of $0.3 million.

 

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Interest Expense

 

Interest expense decreased $0.7 million, or 34.3%, to $1.4 million for the six months ended March 31, 2003, compared to $2.1 million for the six months ended March 31, 2002, primarily due to significantly reduced debt levels throughout the six months ended March 31, 2003 combined with lower interest rates on variable rate debt.

 

Income Taxes

 

The Company’s income tax benefit as a percentage of loss before income tax and cumulative effect of accounting change was 41.6% for the six months ended March 31, 2003.  Comparatively, the Company’s income tax provision as a percentage of income before income tax and cumulative effect of accounting change was 38.8% for the six months ended March 31, 2002.  The increase in the effective tax rate was primarily due to a decrease in net income (loss) during the six months ended March 31, 2003 as compared to the six months ended March 31, 2002, while permanent differences remained constant.

 

Cumulative Effect of Accounting Change

 

On October 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” and recorded a $15.6 million impairment of goodwill related to the 1999 acquisition of Jerell, the Company’s women’s wear subsidiary.  Subsequent to the acquisition, pricing pressures and a weak retail environment for women’s apparel resulted in a revised earnings forecast for Jerell and the women’s wear business.  In order to determine the fair value of goodwill, the Company obtained an independent appraisal, which considered both prices of comparable businesses and 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 are business 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 to retailers throughout North America and the United Kingdom.  The Company also operates a retail segment, which markets Haggar® branded products through 64 Company-operated stores located in its Dallas headquarters and in outlet malls throughout the United States, and a licensing segment, which generates royalty income by licensing the Company’s trademarks for use by other manufacturers of specified products in specified geographic areas.  The retail and licensing segments are not material for separate disclosure, and have been combined in the results below.  The Company evaluates performance and allocates resources based on segment profits.

 

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

 

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

 

Three Months Ended March 31,		Wholesale			Retail and Other			Consolidated
		(In thousands)
2003
Net sales		$	126,744		$	8,743		$	135,487
Segment profit (loss)		$	4,960		$	(1,290	)	$	3,670
2002
Net sales		$	128,932		$	9,127		$	138,059
Segment profit (loss)		$	8,757		$	(1,222	)	$	7,535

 

Six Months Ended March 31,		Wholesale			Retail and Other			Consolidated
		(In thousands)
2003
Net sales		$	227,087		$	22,307		$	249,394
Segment profit (loss)		$	1,934		$	(849	)	$	1,085
2002
Net sales		$	214,292		$	23,098		$	237,390
Segment profit (loss)		$	9,252		$	(594	)	$	8,658

 

Wholesale Segment

 

Wholesale segment net sales decreased $2.2 million, or 1.7%, to $126.7 million for the second quarter of fiscal 2003, compared to $128.9 million for the second quarter of fiscal 2002.  The decrease in wholesale segment net sales during the second quarter of fiscal 2003 is primarily attributable to decreased sales of women’s wear and DKNY®  licensed products, offset by increased sales of Haggar® branded products, including the new comfort fit waist pants, and improved private label sales.

 

Wholesale segment net sales increased $12.8 million, or 6.0%, to $227.1 million for the six months ended March 31, 2003, compared to $214.3 million for the six months ended March 31, 2002.  The increase in wholesale segment net sales is primarily attributable to increased sales of Haggar® branded products, including the new comfort fit waist pants, improved private label business and increased sales of Claiborne® licensed products, offset by decreased sales of women’s wear and DKNY® licensed products.

 

Wholesale segment profit decreased $3.8 million, or 43.4%, to $5.0 million for the second quarter of fiscal 2003, compared to $8.8 million for the second quarter of fiscal 2002.  The decrease in segment profit is primarily attributable to decreased sales and a $3.0 million increase in selling, general and administrative expenses primarily related to the settlement of a proxy matter, settlement of a lawsuit at Jerell, Ltd. and other administrative expense increases.

 

Wholesale segment profit decreased $7.4 million, or 79.1%, to $1.9 million for the six months ended March 31, 2003, compared to $9.3 million for the six months ended March 31, 2002.  The decrease in segment profit is primarily attributable to a $7.4 million increase in selling, general and administrative expenses primarily related to media advertising expenses, the settlement of a proxy matter, settlement of a lawsuit at Jerell, Ltd. and other administrative expense increases.

 

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Liquidity and 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 March 31, 2003, the Company had cash and cash equivalents of $6.2 million.

 

As of March 31, 2003, the Company had $27.0 million outstanding under the $110.0 million unsecured revolving credit line agreement (the “Agreement”) and additional available borrowing capacity that is restricted to $15.7 million under the Agreement’s funded debt to operating cash flow covenant.  The Company incurred approximately $0.1 million in commitment fees related to the available borrowing capacity during the six months ended March 31, 2003.  The interest rates ranged from 2.52% to 4.75% during the six months ended March 31, 2003 and were based on variable market rates (LIBOR or prime rate).  The weighted average interest rate at March 31, 2003, was 3.00%.  The Agreement prohibits the Company from pledging its accounts receivables and inventories, contains limitations on incurring additional indebtedness, requires maintaining minimum net 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 these covenants could adversely affect the Company’s ability to meet its needs and pay dividends.

 

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

 

Long-term debt also includes $2.2 million in Industrial Development Revenue (“IDR”) bonds.  Significant terms of the IDR bonds include interest at a rate equal to that of high quality, short-term, tax exempt obligations, as defined in the agreement.  The interest rate at March 31, 2003, was 1.25%.  The IDR bonds are payable in annual installments of $0.1 million, with a final payment of $2.0 million in fiscal 2006.  The IDR bonds are collateralized by certain buildings and equipment of $0.5 million as of March 31, 2003.

 

Certain of the Company’s long-term debt facilities contain restrictions on the ability of the Company’s subsidiaries to transfer funds to the Company.  As of March 31, 2003, the Company was in full compliance with its financial and other covenants.

 

As of March 31, 2003, and September 30, 2002, the Company had outstanding $37.4 million and $22.9 million, respectively, of trade letters of credit for the purchase of inventory from foreign suppliers in the ordinary course of business.  The increase in trade letters of credit outstanding for inventory purchases is primarily due to the seasonality of the business and increased production in the Eastern hemisphere.  These trade letters of credit, generally for periods of less than six months, will only be paid upon satisfactory receipt of the inventory by the Company.  As of March 31, 2003, and September 30, 2002, the Company had entered into $7.5 million and $7.3 million, respectively, of standby letters of credit representing contingent guarantees of performance under self-insurance and other programs.  The increase in standby letters of credit is primarily attributable to an increase in self-insured workers compensation claims experience.  These commitments would only be drawn upon if the Company were to fail to meet its claims obligations.

 

In December 1999, the Company entered into an operating lease of the Company’s corporate aircraft which contains a residual guarantee for the market value of the aircraft at the end of the lease term in December 2004.  Under the lease, the Company has the option of (a) returning the aircraft to the lessor and paying the guaranteed residual value of $3.0 million; (b) purchasing the aircraft for $4.0 million; or (c) arranging for the sale of the aircraft to a third party.  If the sale proceeds are less than $4.0 million, the Company is required to reimburse the lessor for the deficiency.  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 when the lease ends in 2004, the Company began accruing the $0.9 million expected deficiency in the three months ended March 31, 2003.  As of March 31, 2003, the Company included $0.1 million in other accrued liabilities related to the deficiency.  The remainder will be

 

20

 

accreted up to the $0.9 million expected deficiency using the straight-line method through the end of the lease term.

 

On February 14, 2003, the Company entered into a contract with a third party for the sale of its corporate headquarters facility.  The Company has until June 2, 2003 to cancel the sale contract without penalty.  On May 9, 2003, the Company entered into a contract for the purchase of a new corporate headquarters facility.  The Company has until July 8, 2003 to cancel the purchase contract without penalty.  In the event of a relocation, the Company will incur costs to exit the current facility and move to a new corporate headquarters.

 

During the second quarter of fiscal 2003, the Company declared a cash dividend of $0.05 per share payable to the stockholders of record on May 12, 2003, which will be paid on May 26, 2003.  The first quarter of fiscal 2003 dividend of approximately $0.3 million was paid in February 2003.

 

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

 

In November 2002, co-trustees of a trust which owns shares of the Company’s common stock filed preliminary proxy materials with the Securities and Exchange Commission indicating that they intended to solicit stockholders in support of their own slate of directors.  The Company entered into an agreement to settle this proxy contest in February 2003.  The Company incurred $0.9 million and $1.2 million in legal and professional fees during the three and six months ended March 31, 2003 related to this matter.  As of March 31, 2003, $0.2 million of these fees remained to be paid and were included in accrued liabilities.

 

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

 

Cash Flow Results for the Six Months Ended March 31, 2003

 

For the six months ended March 31, 2003, cash flows used by operating activities were approximately $6.4 million.  Cash flows used in operations was primarily the result of a $7.4 million decrease in other current and non-current accrued liabilities, which included a $4.6 million decrease in accruals for inventory in-transit, $2.5 million in property and income tax payments offset by current period tax accruals and $1.0 million in payments for legal and restructuring obligations.  In addition, accrued wages and other employee compensation decreased $1.8 million, primarily due to the payment of bonuses during the period offset by accruals for current period charges, and accounts receivable increased $3.9 million due to higher seasonal sales during the second quarter of fiscal 2003.  These decreases in cash flows were partially offset by a $2.8 million decrease in inventory, primarily due to a reduction in DKNY® inventory in anticipation of the termination of the license agreement, and a $1.5  million increase in accounts payable.

 

Cash flows provided by investing activities were approximately $2.1 million mainly due to proceeds from the sale of the Edinburg, Texas manufacturing facility of $2.5 million, offset by equipment purchases.

 

Cash flows provided by financing activities were approximately $6.3 million due to net borrowings of the long-term debt of $11.3 million, offset by dividend payments of $0.6 million and a decrease in cash book overdrafts of $4.3 million.

 

21

 

Cash Flow Results for the Six Months Ended March 31, 2002

 

For the six months ended March 31, 2002, the Company used cash in operating activities of approximately $7.0 million.  Cash flows used in operations was primarily the result of a $4.8 million increase in accounts receivable, a $10.3 million decrease in accounts payable, and a $3.4 million decrease in accrued wages, workers’ compensation and other employee benefits, offset by income adjusted for non-cash charges of $15.6 million for the cumulative effect of the accounting change for goodwill and the revision in the net realizable value of property held for sale of $2.2 million.

 

The Company used approximately $1.6 million in investing activities for the six months ended March 31, 2002, primarily due to purchases of property, plant and equipment of $1.2 million.

 

Cash flows provided from financing activities of $6.7 million for the six months ended March 31, 2002, were primarily the result of a net increase in long-term debt of $7.7 million offset by $0.6 million in payments of dividends and $0.4 million for the purchase of treasury stock.

 

Recently Issued Financial Accounting Standards

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51,” which addresses consolidation of variable interest entities (“VIEs”) to which the usual consolidation described in Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” does not apply because the VIEs have no voting interests or otherwise are not subject to control through ownership of voting interests.  FASB interpretation No. 46 requires existing unconsolidated VIEs to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved.  The provisions of the Interpretation are effective immediately for VIEs created after January 31, 2003, and to VIEs in which an entity obtains an interest after that date.  An entity with a variable interest in a VIE created before February 1, 2003, must apply the provisions no later than the first reporting period beginning after June 15, 2003.  The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements.  The Company has adopted the interpretation and has determined it is not party to any VIEs that would require consolidation.

 

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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.

 

The Company is exposed to interest rate risk primarily through its borrowing activities. As of March 31, 2003, the Company had $29.2 million outstanding under its revolving credit line agreement and other variable rate debt. A one percentage point increase in the variable interest rate based on debt amounts outstanding at March 31, 2003, would result in an approximately $0.3 million reduction in annual pre-tax earnings.  See “Notes to Consolidated Financial Statements – Long-Term Debt” and “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources” for additional discussion of the terms of the Company’s credit facilities.

 

Item 4.  Controls and Procedures

 

The Chief Executive Officer and Chief Financial Officer of the Company have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date of this quarterly report on Form 10-Q and have concluded that such disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be disclosed in the periodic reports the Company files or submits under the Securities Exchange Act of 1934.  There have not been any significant changes in the internal controls of the Company or in other factors that could significantly affect these internal controls subsequent to the date of the evaluation.

 

23

Part II.  Other Information.

 

Item 1.  Legal Proceedings

 

None.

 

Item 2.  Changes in Securities

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

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

 

None.

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)  Exhibits.
10(a)		Settlement Agreement, dated February 17, 2003, by and among the Company, Thomas G. Kahn, Donald Kahn, Irving Kahn, Kahn Brothers & Co., Inc., a New York corporation, and the Kahn Brothers & Co. Profit Sharing Plan & Trust, a trust organized under the laws of New York (incorporated by reference to Exhibit 99.2 to Form 8-K filed February 18, 2003.)
10(b)		Settlement Agreement, dated February 17, 2003, by and among the Company, Mark E. Schwarz, Newcastle Capital Group, L.L.C., a Texas limited liability company, Newcastle Capital Management, L.P., a Texas limited partnership, and Newcastle Partners, L.P., a Texas limited partnership (incorporated by reference to Exhibit 99.3 to Form 8-K filed February 18, 2003.)
10(c)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and J. M. Haggar, III, Chairman and Chief Executive Officer.
10(d)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and Frank D. Bracken, III, President and Chief Operating Officer.
10(e)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and David Tehle, Executive Vice President and Chief Financial Officer.
10(f)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and Alan Burks, Executive Vice President and Chief Marketing Officer.
10(g)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and David Roy, Executive Vice President of Operations.
10(h)		First Amendment to Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003.
10(i)		First Amendment to Trust Under the Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003, between Haggar Clothing Co. and David Tehle, Trustee.
10(j)		First Amendment to Participation Agreement Under the Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003, between Haggar Clothing Co. and J. M. Haggar, III, Chairman and Chief Executive Officer.
10(k)		First Amendment to Participation Agreement Under the Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003, between Haggar Clothing Co. and Frank D. Bracken, III, President and Chief Operating Officer.
10(l)		First Amendment to Haggar Corp. Split-Dollar Insurance Plan dated February 14, 2003.
10(m)		Commercial Contract - Improved Property effective as of February 14, 2003, between Haggar Clothing Co. and PPM Specialists, Ltd.
10(n)		First Amendment to Commercial Contract - Improved Property effective as of May 6, 2003, between Haggar Clothing Co. and PPM Specialists, Ltd.
99(a)		Certification of Chief Executive Officer Pursuant to 18  U.S.C. 1350.
99(b)		Certification of Chief Financial Officer Pursuant to 18  U.S.C. 1350.
(b)  Reports on Form 8-K.
A Form 8-K was filed on January 29, 2003, announcing, under Item 5, the date for the annual stockholders’ meeting.  A Form 8-K was filed on January 29, 2003, announcing, under Item 5, the issuance of a press release and, under Item 9, the Company’s first quarter and projected fiscal 2003 earnings.  A Form 8-K was filed on February 3, 2003, discussing, under Item 9, proxy matters and the issuance of press releases.  A Form 8-K was filed on February 18, 2003, discussing, under Item 5, proxy matters and the issuance of press releases.

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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 the undersigned thereunto duly authorized.

 

 

	Haggar Corp.,
Date: May 13, 2003	By:	/s/ David M. Tehle
		David M. Tehle
		(Executive Vice President, Chief
		Financial Officer, Secretary,
		Treasurer)
		Signed on behalf of the
		registrant and as principal
		financial officer.

 

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CERTIFICATIONS

 

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

 

1.	I have reviewed this quarterly report on Form 10-Q of Haggar Corp.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date: May 13, 2003
		/s/ J.M. Haggar, III
		J.M. Haggar, III
		Chief Executive Officer

 

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CERTIFICATIONS

 

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

 

1.	I have reviewed this quarterly report on Form 10-Q of Haggar Corp.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date:  May 13, 2003
		/s/ David M. Tehle
		David M. Tehle
		Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit Number		Description
10(a)		Settlement Agreement, dated February 17, 2003, by and among the Company, Thomas G. Kahn, Donald Kahn, Irving Kahn, Kahn Brothers & Co., Inc., a New York corporation, and the Kahn Brothers & Co. Profit Sharing Plan & Trust, a trust organized under the laws of New York (incorporated by reference to Exhibit 99.2 to Form 8-K filed February 18, 2003.)
10(b)		Settlement Agreement, dated February 17, 2003, by and among the Company, Mark E. Schwarz, Newcastle Capital Group, L.L.C., a Texas limited liability company, Newcastle Capital Management, L.P., a Texas limited partnership, and Newcastle Partners, L.P., a Texas limited partnership (incorporated by reference to Exhibit 99.3 to Form 8-K filed February 18, 2003.)
10(c)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and J. M. Haggar, III, Chairman and Chief Executive Officer.
10(d)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and Frank D. Bracken, III, President and Chief Operating Officer.
10(e)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and David Tehle, Executive Vice President and Chief Financial Officer.
10(f)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and Alan Burks, Executive Vice President and Chief Marketing Officer.
10(g)		First Amendment to Executive Employment Agreement dated February 14, 2003, between Haggar Clothing Co. and David Roy, Executive Vice President of Operations.
10(h)		First Amendment to Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003.
10(i)		First Amendment to Trust Under the Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003, between Haggar Clothing Co. and David Tehle, Trustee.
10(j)		First Amendment to Participation Agreement Under the Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003, between Haggar Clothing Co. and J. M. Haggar, III, Chairman and Chief Executive Officer.
10(k)		First Amendment to Participation Agreement Under the Haggar Corp. Supplemental Executive Retirement Plan dated February 14, 2003, between Haggar Clothing Co. and Frank D. Bracken, III, President and Chief Operating Officer.
10(l)		First Amendment to Haggar Corp. Split-Dollar Insurance Plan dated February 14, 2003.
10(m)		Commercial Contract - Improved Property effective as of February 14, 2003, between Haggar Clothing Co. and PPM Specialists, Ltd.
10(n)		First Amendment to Commercial Contract - Improved Property effective as of May 6, 2003, between Haggar Clothing Co. and PPM Specialists, Ltd.
99(a)		Certification of Chief Executive Officer Pursuant to 18  U.S.C. 1350.
99(b)		Certification of Chief Financial Officer Pursuant to 18  U.S.C. 1350.

 

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