SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
DH Apparel Company, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2510086
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1020 Barrow Industrial Pkwy, Winder, GA 30680
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(Address of Principal Executive Offices) (Zip Code)
(770) 867-3111
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
To Be So Registered Each Class Is To Be Registered
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Common Stock, par value $0.01 American Stock Exchange
Common Stock Purchase Rights American Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act:
None
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Except as otherwise indicated below, the information required to be
contained in this Registration Statement on Form 10 of DH Apparel Company, Inc.,
a Georgia corporation ("Duck Head"), is contained in the Form of Information
Statement included as Exhibit 99.1 hereto (the "Information Statement") and is
incorporated herein by reference from that document as specified below. Below
is a list of the items of information required by the instructions to Form 10
and the locations in the Information Statement where such information can be
found if not otherwise included below.
ITEM 1. BUSINESS.
See "Business of Duck Head" "Note (13) - Operating Segments"
contained in the Audited Combined Financial Statements
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - First Quarter of Fiscal Year 2000 versus
First Quarter of Fiscal Year 1999 - Order Backlog"
ITEM 2. FINANCIAL INFORMATION.
See "Summary -- Selected Historical Financial Data" "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations" ("MD&A") "MD&A -- Quantitative and Qualitative
Disclosures About Market Risk"
ITEM 3. PROPERTIES.
See "Business of Duck Head -- Properties"
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See "Security Ownership of Significant Beneficial Owners and
Management"
ITEM 5. DIRECTORS AND OFFICERS.
See "Management of Duck Head -- Directors" "Management of Duck Head
-- Executive Officers"
ITEM 6. EXECUTIVE COMPENSATION.
See "Management of Duck Head -- Management Compensation"
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ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Relationships Among Duck Head, Delta Woodside and Delta Apparel"
"Interests of Directors and Executive Officers in the Duck Head
Distribution"
ITEM 8. LEGAL PROCEEDINGS.
See "Business of Duck Head -- Legal Proceedings"
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
See "Trading Market" "MD&A -- Dividends and Purchases by Duck Head of
its Own Shares"
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
See "Description of Duck Head Capital Stock - Recent Sales of
Unregistered Securities"
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
See "Description of Duck Head Capital Stock"
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
See "Description of Duck Head Capital Stock -- Limitation on
Liability of Directors" and "-- Indemnification of Directors"
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Unaudited Pro Forma Combined Financial Statements Audited
Combined Financial Statements Unaudited Condensed Combined
Financial Statements
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See Index to Financial Statements
Exhibit 99.2
(b) Exhibits.
2.1 Form of Distribution Agreement by and among Delta Woodside
Industries, Inc, the Company and Delta Apparel, Inc.*
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 See Exhibits 3.1 and 3.2.
4.2 Specimen certificate for common stock, par value $0.01 per
share, of the Company. *
4.3 Form of Shareholder Rights Agreement by and among the
Company and First Union National Bank. *
10.1 See Exhibits 2.1 and 4.3.
10.2 Form of Tax Sharing Agreement by and among Delta Woodside
Industries, Inc., the Company and Delta Apparel, Inc. *
10.3.1 Letter dated March 15, 1999, from Delta Woodside
Industries, Inc. to Robert D. Rockey, Jr.
10.3.2 Letter dated October 19, 1999, from Delta Woodside
Industries, Inc. to Robert D. Rockey, Jr.
10.4 Form of Duck Head Apparel Company, Inc. Stock Option Plan. *
10.5 Form of Duck Head Apparel Company, Inc. Incentive Stock
Award Plan. *
10.6 Form of Duck Head Apparel Company, Inc. Deferred
Compensation Plan. *
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21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule for the three months ended October
2, 1999 (electronic filing only).
27.2 Financial Data Schedule for the fiscal year ended July 3,
1999 (electronic filing only).
99.1 Form of Information Statement of DH Apparel Company, Inc.
99.2 Valuation and Qualifying Accounts
* To be provided by amendment.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
DH APPAREL COMPANY, INC.
Date: December 28, 1999 By: /s/ Robert D. Rockey, Jr.
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Robert D. Rockey, Jr., Chairman,
President & Chief Executive Officer
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EXHIBITS
2.1 Form of Distribution Agreement by and among Delta Woodside Industries,
Inc, the Company and Delta Apparel, Inc.*
3.1 Articles of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 See Exhibits 3.1 and 3.2.
4.2 Specimen certificate for common stock, par value $0.01 per share, of the
Company. *
4.3 Form of Shareholder Rights Agreement by and among the Company and First
Union National Bank. *
10.1 See Exhibits 2.1 and 4.3.
10.2 Form of Tax Sharing Agreement by and among Delta Woodside Industries,
Inc., the Company and Delta Apparel, Inc. *
10.3.1 Letter dated March 15, 1999, from Delta Woodside Industries, Inc. to
Robert D. Rockey, Jr.
10.3.2 Letter dated October 19, 1999, from Delta Woodside Industries, Inc.
to Robert D. Rockey, Jr.
10.4 Form of Duck Head Apparel Company, Inc. Stock Option Plan. *
10.5 Form of Duck Head Apparel Company, Inc. Incentive Stock Award Plan. *
10.6 Form of Duck Head Apparel Company, Inc. Deferred Compensation Plan. *
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule for the three months ended October 2, 1999
(electronic filing only).
27.2 Financial Data Schedule for the fiscal year ended July 3, 1999
(electronic filing only).
99.1 Form of Information Statement of DH Apparel Company, Inc.
99.2 Valuation and Qualifying Accounts.
* To be provided by amendment.
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ARTICLES OF INCORPORATION
OF
DH APPAREL COMPANY, INC.
The Articles of Incorporation of DH APPAREL COMPANY, INC. are as follows:
ARTICLE I
CORPORATE NAME
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The name of the corporation is DH APPAREL COMPANY, INC. (the
"Corporation").
ARTICLE II
CORPORATE PURPOSE
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The purpose of the Corporation is pecuniary gain and profit, and the
general nature of the business or businesses to be transacted shall be to engage
in any form or type of business for any lawful purpose or purposes not
specifically prohibited to corporations for profit under the laws of the State
of Georgia and to have all the rights, powers, privileges and immunities which
are now or hereafter may be allowed to corporations under the laws of the State
of Georgia.
ARTICLE III
CAPITAL STOCK
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3.1 Authorized Stock. The Corporation shall have the authority to
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issue Two Million (2,000,000) shares of $0.01 par value preferred stock ("Blank
Preferred Stock") and Nine Million (9,000,000) shares of $0.01 par value common
stock ("Common Stock").
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3.2 Blank Preferred Stock. The Corporation may issue the Blank
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Preferred Stock in one or more classes and in one or more series within any such
class. The Board of Directors of the Corporation (the "Board of Directors")
shall determine the preferences, limitations and relative rights granted to and
imposed upon each class and series of Blank Preferred Stock in accordance with
Section 14-2-602 of the Georgia Business Corporation Code (the "Code").
3.3 Common Stock. Subject to the provisions of any issued and
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outstanding Blank Preferred Stock, any issued and outstanding shares of Common
Stock shall together have unlimited voting rights and shall together be entitled
to receive the net assets of the Corporation upon dissolution. Notwithstanding
anything else contained herein or in the provisions of any class or series of
Blank Preferred Stock to the contrary, the holders of any issued and outstanding
shares of Common Stock shall be entitled to vote as a separate class with
respect to the following actions:
(a) Consummation of a plan of merger or share exchange to which the
Corporation is a party if the approval of its shareholders is required
therefor under the Code;
(b) Consummation of a sale or exchange of all or substantially all of
the Corporation's assets if the approval of its shareholders is required
therefor under the Code;
(c) Any amendment to these Articles of Incorporation or to the Bylaws
of the Corporation if the approval of the shareholders of the Corporation
is required therefor under the Code; and
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(d) Any other action taken by the Corporation pursuant to a
shareholder vote to the extent that the Code, these Articles of
Incorporation, the Bylaws of the Corporation, or a resolution of the Board
provides that voting or non-voting shareholders are entitled to dissent and
obtain payment for their shares pursuant to Article 13 of the Code. In
addition, each holder of any issued and outstanding shares of Common Stock
shall have all rights with respect thereto which are provided in the Code.
ARTICLE IV
ACTION WITHOUT MEETING
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No action required or permitted by the Code may be taken by the
shareholders of the Corporation other than at a duly called and held meeting;
provided, however, action may be taken upon the written consent of all of the
Corporation's shareholders entitled to vote thereon.
ARTICLE V
LIMITATION ON DIRECTOR LIABILITY
--------------------------------
To the fullest extent permitted by the Code (as the same may be amended or
supplemented after the date hereof), no director of the Corporation shall be
personally liable to the Corporation or its shareholders for monetary damages
for any action or omission. No amendment, repeal or modification of this
Article shall apply to or have any effect on the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment, repeal or modification.
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ARTICLE VI
INITIAL REGISTERED OFFICE AND REGISTERED AGENT
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The address of the initial registered office of the Corporation is 1020
Barrow Industrial Parkway, Winder, Barrow County, Georgia 30680, and the
registered agent at such address is K. Scott Grassmyer.
ARTICLE VII
PRINCIPAL OFFICE
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The mailing address of the initial principal office of the Corporation is
1020 Barrow Industrial Parkway, Winder, Barrow County, Georgia 30680.
ARTICLE VIII
DISCHARGE OF DIRECTOR'S DUTIES
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In discharging the duties of their respective positions and in determining
what is believed to be in the best interests of the Corporation, the Board of
Directors, committees of the Board of Directors, and individual directors, in
addition to considering the effects of any action on the Corporation or its
shareholders, may consider the interests of the employees, customers, suppliers,
and creditors of the Corporation and its subsidiaries, the communities in which
offices or other establishments of the Corporation and its subsidiaries are
located, and all other factors such directors consider pertinent; provided,
however, that this provision shall be deemed solely to grant discretionary
authority to the directors and shall not be deemed to provide to any
constituency any right to be considered. Without limiting the generality of the
foregoing, when evaluating any proposed tender offer, exchange offer or plan of
merger, consolidation, sale of assets or stock exchange, the Board of Directors
shall consider not only the consideration being offered in relation to the then
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current market price for the Corporation's outstanding shares of capital stock,
but also in relation to the then current value of the Corporation in a freely
negotiated transaction and in relation to the Board of Directors' estimate of
the future value of the Corporation (including the unrealized value of its
properties and assets) as an independent going concern, as well as such other
factors as the Board of Directors deems relevant.
ARTICLE IX
INCORPORATOR
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The name and address of the Incorporator of the Corporation are Sara Ann
Vaughan, 600 Peachtree Street, N.E., Suite 5200, Atlanta, Georgia 30308-2216.
/s/ Sara Ann Vaughan
__________________________________________
Sara Ann Vaughan, Incorporator
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BYLAWS
OF
DH APPAREL COMPANY, INC.
DECEMBER 10, 1999
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BYLAWS
OF
DH APPAREL COMPANY, INC
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ARTICLE ONE
OFFICES
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1.1 Registered Office and Agent. The Corporation shall at all times
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maintain a registered office in the State of Georgia and a registered agent at
such address.
1.2 Other Offices. The Corporation may from time to time have such
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other offices within or outside the State of Georgia, as the Board of Directors
may determine or as is necessary or desirable to facilitate the business of the
Corporation.
ARTICLE TWO
SHAREHOLDERS' MEETINGS
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2.1 Annual Meetings. An annual meeting of shareholders for the
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election of directors and for such other matters as may be properly brought
before the shareholders meeting shall be held on such date and at such time and
place (within or outside the State of Georgia) as shall be designated by the
Board of Directors and as set forth in the notice thereof.
2.2 Special Meetings. Special meetings of the shareholders may be
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called at any time by the Chairman of the Board of Directors, the President, or
a committee of the Board of Directors that has been duly designated by the Board
of Directors and whose powers and authority, as provided in a resolution of the
Board of Directors or in these Bylaws, include the power to call such meetings,
and special meetings may not be called by any other person or persons. Any
special meeting of the shareholders shall be held on such date and at such time
and place (within or outside the State of Georgia) as shall be set forth in the
notice thereof.
2.3 Notice of Meetings. Unless waived as contemplated in Section 5.2
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or by attendance at the meeting (either in person or by proxy) for any purpose
other than to state at the beginning of the meeting an objection to the
transaction of business at such meeting, a written notice of each shareholders'
meeting stating the place, date and time of the meeting shall be delivered not
less than ten (10) days nor more than sixty (60) days before the date thereof,
either in person, by courier service or by mail, to each shareholder of record
entitled to vote at such meeting. Notwithstanding anything else to the contrary
in the Georgia Business Corporation Code (the "Code"), the notice of meeting
(for both annual and special meetings) shall state the purpose or purposes for
which the meeting is called and the specific business to be conducted at such
meeting. When a meeting is adjourned to another time or place, unless after the
adjournment the Board of Directors fixes a new record date for the adjourned
meeting as may be required pursuant to Section 2.8, it shall not be necessary to
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give any notice of the adjourned meeting if the date, time and place to which
the meeting is adjourned are announced at the meeting at which the adjournment
is taken.
2.4 Quorum. At any meetings of the shareholders, unless otherwise
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provided by law or by the Articles of Incorporation of the Corporation (the
"Articles of Incorporation"), the presence, in person or by proxy, of the
holders of at least two-thirds (2/3) of the shares outstanding and entitled to
vote at such meeting shall constitute a quorum. A shareholder who makes a
special appearance for purposes of objecting to lack of notice or defective
notice or objecting to holding the meeting or transacting the business at the
meeting shall not be counted for purposes of determining a quorum. If a quorum
is not present to organize a meeting, the meeting may be adjourned pursuant to
Section 2.8. The shareholders present at a meeting at which a quorum is present
may continue to transact business for the remainder of the meeting and at any
adjournment of the meeting, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, unless the meeting is adjourned under
circumstances where a new record date is or must be set pursuant to Section 2.8.
2.5 Voting of Shares. Except as otherwise provided by the Articles of
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Incorporation, each outstanding share having voting rights shall be entitled to
one vote on each matter submitted to a vote at a meeting of the shareholders of
the Corporation. If a quorum is present, all elections of Directors shall be
determined by plurality vote and, as to all other matters, action on a matter is
approved if the votes cast in favor of the action exceed the votes cast against
the action, unless and to the extent the Code, these Bylaws or the Articles of
Incorporation requires a greater number of affirmative votes. There shall be no
cumulative voting for Directors.
2.6 Proxies. A shareholder entitled to vote pursuant to Section 2.5
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may vote in person or by written proxy executed by the shareholder or by his
attorney in fact. A proxy shall not be valid after eleven (11) months from the
date of its execution, unless a longer period is expressly stated therein. A
proxy, unless it is irrevocable by its terms and it is coupled with an interest,
shall be revocable at will, but the revocation of a proxy shall not be effective
until notice thereof has been given to the Secretary of the Corporation. A
proxy shall not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written notice of such
death or incapacity is given to the Secretary of the Corporation. The
Corporation is entitled to reject a vote, consent, waiver, proxy appointment or
proxy revocation if the Secretary or other officer or agent authorized to
tabulate the votes, acting in good faith, has reasonable basis for doubt about
the validity of the signature on it or about the signatory's authority to sign
for the shareholder or about the faithfulness or completeness of the
reproductions when the original has not been examined. The Corporation and its
officer or agent who accepts or rejects a vote, consent, waiver or proxy
appointment in good faith and in accordance with Sections 14-2-722(b) or
14-2-724 of the Code (or any successor provision) shall not be liable to the
shareholder for the consequences of the acceptance or rejection.
2.7 Presiding Officer; Secretary. The Chairman of the Board of
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Directors, or in his absence the Vice Chairman of the Board of Directors, or in
his absence an alternate chairman designated by a majority of the Directors
present, shall preside at all shareholders' meetings. The Secretary, or in his
absence, an Assistant Secretary, or, in the absence of the Secretary and
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Assistant Secretary, a person whom the Chairman of such meeting shall appoint,
shall act as secretary of the meeting and keep the minutes thereof.
2.8 Adjournments. Any meeting of the shareholders, whether or not a
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quorum is present, may be adjourned by the holders of a majority of the voting
shares represented at the meeting to reconvene at a specific time and place. At
any such reconvened meeting at which a quorum is represented or present, any
business may be transacted which could have been transacted at the meeting which
was adjourned. It shall not be necessary to give any notice of the reconvened
meeting, if the time and place of the reconvened meeting are announced at the
meeting which was adjourned, except that if the meeting is adjourned to a date
more than 120 days after the date of the original meeting, if additional
business shall be scheduled to be transacted at the adjourned meeting, or if
after adjournment a new record date is set, a notice of the adjourned meeting
shall be given to each shareholder.
2.9 Action by Shareholders Without a Meeting.
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(a) Any action which may be taken at a meeting of the shareholders
may be taken without a meeting if one or more written approvals and consents,
setting forth the action authorized, shall be signed and dated by all of the
shareholders entitled to vote on such matter as determined in Section 2.9(b).
(b) Unless otherwise fixed under Sections 14-2-703 or 14-2-707 of
the Code, the record date for determining shareholders entitled to take action
without a meeting shall be the date the first shareholder signs the consent. No
written consent shall be effective to take the action referred to therein unless
evidence of written consent(s) signed by all shareholders entitled to vote
thereon is delivered to the Corporation for inclusion in the minutes or filing
with the corporate records within sixty (60) days after the date the first
shareholder signed the consent. Unless the consent provides for a later
effective date, a consent delivered to the Corporation shall be effective as of
the date the last shareholder signed the consent.
(c) A shareholder may revoke his written consent by delivering a
writing to that effect to the Corporation that is received prior to receipt by
the Corporation of unrevoked written consents from all shareholders entitled to
vote thereon.
2.10 List of Shareholders. After fixing the record date for a meeting,
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the Secretary or other officer of the Corporation having charge of the stock
ledger shall prepare an alphabetical list of the names of all shareholders who
are entitled to notice of a shareholders' meeting (showing the number and class
and series, if any, of voting shares held by each), and such list shall be kept
open at the time and place of the meeting and during the whole time of said
meeting shall be open to the examination of any shareholder. If the
requirements of this section have not been substantially complied with, the
meeting shall, on the reasonable demand of any shareholder in person or by
proxy, be adjourned until the requirements are met. If no such demand is made,
failure to comply with the requirements of this section shall not affect the
validity of any action taken at such meeting.
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2.11 Shareholders' Agreements. In addition to those shareholders'
-------------------------
agreements authorized by Section 14-2-731 of the Code (or any successor
provision), the holders of any outstanding capital stock of the Corporation may
enter into an agreement or agreements among themselves (or with the Corporation)
concerning the rights and privileges of the respective classes of stock
(including, without limitation, voting rights) and the transferability of the
capital stock of the Corporation. To the extent allowed by the Code, the
provisions of the Articles of Incorporation and these Bylaws shall be
interpreted in a manner consistent with any such shareholders' agreements.
2.12 Inspectors. At any time shares of the Corporation are listed on a
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national securities exchange or regularly traded in a market maintained by one
or more members of a national or affiliated securities association, in advance
of any meeting of shareholders, the Board of Directors may appoint inspectors,
who need not be shareholders, to act at such meeting or any adjournment thereof.
If inspectors be not so appointed, the chairman of any such meeting may, and on
the request of any shareholder or his proxy shall, make such appointment at the
meeting. The number of inspectors shall be one or three as shall be determined
by the Board of Directors, except that, if appointed at the meeting on the
request of one or more shareholders or proxies, the holders of a majority of the
shares of the Corporation present and entitled to vote shall determine whether
one or three inspectors are to be appointed. No person who is a candidate for
office shall act as an inspector.
In case any person appointed as an inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the convening of the meeting, or at the meeting by the
officer or person acting as chairman.
The inspectors shall determine the number of shares outstanding and
the voting power of each, the shares represented at the meeting, the existence
of a quorum, the authenticity, validity and effect of proxies, receive votes or
ballots, hear and determine all challenges and questions in any way arising in
connection with the right to vote, count and tabulate all votes, determine the
result, and do such other acts as may be proper to conduct the election or vote
with fairness to all shareholders.
The inspectors shall perform their duties impartially, in good faith,
to the best of their ability, and as expeditiously as is practical. If there be
three inspectors of election, the decision, act or certificate of a majority
shall be effective in all respects as the decision, act or certificate of all.
On request of the chairman of the meeting, or of any shareholder or
his proxy, the inspectors shall make a report in writing of any challenge or
question or matter determined by them, and execute a certificate of any fact
found by them. Any report or certificate made by them shall be prima facie
evidence of the facts stated therein.
2.13 Notification of Nominations. Nominations for the election of
-----------------------------
directors may be made by the Board of Directors or by any shareholder entitled
to vote for the election of directors. Any shareholder entitled to vote for the
election of directors at a meeting may nominate persons for election as
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directors only if written notice of the intent of such shareholder to make such
nomination shall be given, either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the Corporation not later than (i) with
respect to an election to be held at an annual meeting of shareholders, 120 days
prior to the anniversary date of the immediately preceding annual shareholder
meeting and (ii) with respect to an election to be held at a special meeting of
shareholders for the election of directors, the close of business on the seventh
day following the date on which notice of such meeting shall first be given to
shareholders. Each such notice shall set forth:
(a) the name and address of the shareholder who shall intend to
make the nomination and of the person or persons to be nominated;
(b) the class and number of shares held of record, held
beneficially and represented by proxy by such shareholder as of the record
date of the meeting (if such a date has been established) and as of the
date of such notice, the name in which those shares are registered, and a
representation that the shareholder intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the
notice;
(c) a description of all arrangements or understandings between
the shareholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations
are to be made by the shareholder;
(d) such other information regarding each nominee proposed by
such shareholder as would have been required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and
Exchange Commission had each nominee been nominated, or intended to be
nominated, by the Board of Directors;
(e) the consent in writing of each nominee to serve as a director
of the Corporation if so elected; and
(f) such other information as Duck Head may reasonably request.
The officer or other person presiding over the meeting as provided in
Section 2.7 of these Bylaws may refuse to acknowledge the nomination of any
person not made in compliance with the foregoing procedure.
ARTICLE THREE
BOARD OF DIRECTORS
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3.1 General Powers. The business and affairs of the Corporation shall
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be managed by the Board of Directors. In addition to the powers and authority
expressly conferred upon it by these Bylaws, the Board of Directors may exercise
all such powers of the Corporation and do all such lawful acts and things as are
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not by the Code, the Articles of Incorporation or these Bylaws directed or
required to be exercised or done by the shareholders.
3.2 Number, Election and Term of Office. The number of Directors shall
-----------------------------------
be not less than two (2) or more than fifteen (15), the exact number to be set
by resolution of the Board of Directors from time to time. Except as provided
in Section 3.5, the Directors shall be elected by the affirmative vote of a
plurality of the votes cast by the shares represented at the annual meeting.
Each Director (except in case of death, resignation, retirement,
disqualification, or removal) shall serve for a term ending on the date of the
annual meeting following the annual meeting at which the Director was elected or
until his successor shall have been duly elected and qualified. No Director
need be a shareholder.
3.3 Increase or Decrease in Number of Directors. In the event of any
--------------------------------------------
increase or decrease in the authorized number of Directors, each Director then
serving as such shall nevertheless continue as Director until the expiration of
his current term, or his prior death, retirement, removal or resignation.
Notwithstanding any provisions to the contrary contained herein, each Director
shall serve until a successor is elected and qualified or until his earlier
death, resignation or removal.
3.4 Removal; Resignation. Any Director may be removed from office
---------------------
(with or without cause) by the affirmative vote of the holders of a majority of
the shares entitled to vote at an election of Directors. Removal action may be
taken at any shareholders' meeting with respect to which notice of such purpose
has been given, and a removed Director's successor may be elected at the same
meeting to serve the unexpired term.
Any Director may resign at any time by written notice to the Board of
Directors, the Chairman, the President or the Secretary. Such resignation shall
take effect immediately upon receipt thereof or at any later time specified
therein. Unless otherwise specified in any such notice, acceptance of such
resignation shall not be necessary to make it effective.
3.5 Vacancies. A vacancy occurring in the Board of Directors may be
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filled for the unexpired term and until the shareholders have elected a
successor by an affirmative vote of a majority of the Directors remaining in
office or by the sole remaining Director.
3.6 Compensation. Directors may receive such compensation for their
------------
services as Directors as may from time to time be fixed by vote of the Board of
Directors or the shareholders. A Director may also serve the Corporation in a
capacity other than that of Director and receive compensation, as determined by
the Board of Directors, for services rendered in that other capacity.
3.7 Presiding Officer. The Board of Directors shall appoint from among
-----------------
its members a Chairman and a Vice Chairman of the Board. The Chairman shall
preside at all meetings when present. The Vice Chairman shall perform the
duties of the Chairman in the absence of the Chairman.
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3.8 Committees. The Board of Directors shall designate a Compensation
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Committee, an Audit Committee and any other committees it from time to time
deems necessary or appropriate. Each such committee shall consist of at least
two (2) Directors. The Board of Directors may designate one or more Directors
as alternate members of any committee who may replace any absent or disqualified
member at any meeting of such committee. In the absence or disqualification of
any member of such committee or committees, the members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of such absent or disqualified member, and have such
powers as are provided in the resolution establishing such committee; provided,
however, notwithstanding anything else contained herein to the contrary, no such
committee shall have the power to: (a) approve or propose to the shareholders
any action that is required by the Code, the Articles of Incorporation or these
Bylaws to be approved by the shareholders; (b) fill vacancies on the Board of
Directors or any of its committees; (c) amend the Articles of Incorporation or
adopt, amend or repeal Bylaws; or (d) approve a plan of merger (whether or not
shareholder approval is required therefor under the Code). Unless otherwise
specifically permitted by the Board of Directors, the rules promulgated by these
Bylaws with respect to meetings of Directors, notice, quorums, voting and other
procedures at such meeting shall be applicable to meetings of any committee of
the Board of Directors. Each committee shall keep regular minutes of its
proceedings and all action by such committee shall be reported to the Board of
Directors at its meeting next succeeding such action. Each committee shall fix
its own rules of procedure, provided that such rules are consistent with these
Bylaws, and shall meet where and as provided by such rules or by resolution of
the Board of Directors. The presence of a majority of the then appointed number
of each committee shall constitute a quorum and in every case in which a quorum
is present an affirmative vote by a majority of the members of the Committee
present shall be the act of the committee.
3.9 Fees and Compensation. Directors may receive such compensation, if
---------------------
any, for their services, and such reimbursement of expenses, as may be fixed or
determined by resolution of the Board of Directors. Nothing herein contained
shall be construed to preclude any Director from serving the Corporation in any
other capacity as an officer, agent, employee or otherwise and receiving
compensation for such services.
ARTICLE FOUR
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
4.1 Regular Meetings. Regular meetings of the Board of Directors shall
----------------
be held at such place and at such times as the Board shall from time to time
determine and, if so determined, no notice thereof need be given.
4.2 Special Meetings. Special meetings of the Board of Directors may
-----------------
be called by or at the request of the Chairman of the Board of Directors, the
President, or at least two (2) Directors.
7
<PAGE>
4.3 Date, Time and Place of Meetings. A meeting of the Board of
-------------------------------------
Directors shall be held on such date and at such time and place (within or
outside the State of Georgia) as shall be determined in accordance with Section
4.1 and 4.2 and, in the case of a special meeting, the date, time and place of
the meeting shall be set forth in the notice thereof.
4.4 Notice of Meetings. Unless waived as contemplated in Section 5.2,
-------------------
the Corporation shall give written notice to each Director of each special
meeting of the Board of Directors stating the date, time and place of the
meeting. Such notice shall be given at least forty-eight (48) hours in advance
by courier service, in person or by electronic means or at least ten (10) days
in advance by mail. Attendance by a Director at a meeting shall constitute
waiver of notice of such meeting, except where a Director attends a meeting for
the express purpose of objecting at the beginning of the meeting to the
transaction of business at the meeting.
4.5 Quorum. At meetings of the Board of Directors, the presence of at
------
least one half (1/2) of the Directors then in office (but not less than two (2)
Directors) shall be necessary to constitute a quorum for the transaction of
business at such meeting.
4.6 Vote Required for Action. Except as otherwise provided in the
---------------------------
Code, the Articles of Incorporation or these Bylaws, the act of a majority of
the Directors present at a meeting at which a quorum is present at the time
shall be the act of the Board of Directors.
4.7 Action by Directors Without a Meeting. Any action required or
------------------------------------------
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent thereto shall be signed by all of the
members of the Board of Directors and if such written consent is delivered to
the Corporation for inclusion in the minutes or filing with the corporate
records. Such consent shall have the same force and effect as a unanimous vote
of the Board of Directors and may be evidenced by one (1) or more written
consents describing the action taken.
4.8 Adjournments. A meeting of the Board of Directors (whether or not
------------
a quorum is present) may be adjourned by a majority of the Directors present to
reconvene at a specific time and place. It shall not be necessary to give
notice of the reconvened meeting, other than by announcement at the meeting
which was adjourned. At any such reconvened meeting at which a quorum is
present, any business may be transacted which could have been transacted at the
meeting which was adjourned.
4.9 Telephone Conference Calls. Members of the Board of Directors may
---------------------------
participate in a meeting thereof by conference telephone or similar
communications equipment by means of which all Directors participating in the
meeting may simultaneously hear each other during the meeting, and participation
in a meeting pursuant to this Section 4.9 shall constitute presence in person at
such meeting.
ARTICLE FIVE
NOTICE AND WAIVER
-----------------
8
<PAGE>
5.1 Procedure. Whenever the Code, the Articles of Incorporation or
---------
these Bylaws requires notice to be given to any shareholder or Director, the
notice shall be given as prescribed in Section 14-2-141 of the Code (or any
successor provision) and Sections 2.3 or 4.4 hereof for any shareholder or
Director, respectively.
5.2 Waiver. Whenever any notice is required to be given to any
------
shareholder or Director by the Code, the Articles of Incorporation or these
Bylaws, a waiver thereof in writing signed by the Director or shareholder
entitled to such notice or by the proxy of such shareholder, whether before or
after the meeting to which the waiver pertains, shall be deemed equivalent
thereto.
ARTICLE SIX
OFFICERS
--------
6.1 Number. The officers of the Corporation shall consist of the
------
Chairman of the Board of Directors, Vice Chairman of the Board of Directors (if
so designated by resolution of the Board of Directors), a President, one (1) or
more Vice Presidents, a Secretary, one (1) or more Assistant Secretaries, a
Treasurer, one (1) or more Assistant Treasurers, and such other officers as may
be as designated by the Board of Directors from time to time, but the
Corporation shall not be required to have at any time any officers other than a
President, Secretary and Treasurer. Any two (2) or more offices may be held by
the same person.
6.2 Election and Term. All officers shall be elected by the Board of
-------------------
Directors and shall serve at the will of the Board of Directors and until their
successors have been elected and have qualified or until their earlier death,
resignation, removal, retirement or disqualification. In addition, the
Corporation may enter into employment agreements with any such officer.
6.3 Compensation. The compensation of all officers of the Corporation
------------
shall be fixed by the Board of Directors.
6.4 Removal. The Board of Directors may remove any officer at any time
-------
with or without cause.
6.5 Chief Executive Officer. The Board of Directors may designate an
-------------------------
officer of the Corporation as its Chief Executive Officer. The Chief Executive
Officer shall be subject to the direction and supervision of the Board of
Directors and shall have general control and supervision over the policies of
the Corporation.
6.6 President. The President shall be subject to the direction and
---------
supervision of the Board of Directors and (if the President is not also serving
as the Chief Executive Officer) the Chief Executive Officer, have general
control and supervision over the operations of the Corporation, and shall see
that all orders and resolutions of the Board of Directors are carried into
effect. In particular he shall: (a) manage and administer the Corporation's
business and affairs and perform all duties and exercise all powers usually
pertaining to the office of President of a corporation; (b) appoint and fix the
duties of any and all employees and agents of the Corporation who are not
otherwise appointed by the Board of Directors (and he shall have the authority
9
<PAGE>
to remove or suspend any of such employees or agents not appointed by the Board
of Directors); and (c) have the general power and authority to sign and exe-cute
in the name of and on behalf of the Corporation, any and all agreements and
other documents.
6.7 Vice President. Each Vice President shall have the power to sign
---------------
and execute, in the name of and on behalf of the Corporation, any and all
agreements, instruments and other documents. In the absence of a resolution of
the Board of Directors to the contrary, the several Vice Presidents, other than
those whose authority may be expressly limited, shall act, in the order of their
appointment, in the place of the President, exercising all of his powers and
performing all of his duties, during his absence or disability. Each Vice
President shall perform whatever additional duties and have whatever additional
powers as may be assigned to him from time to time by the Board of Directors.
6.8 Secretary. The Secretary shall keep accurate records of the acts
---------
and proceedings of all meetings of shareholders, Directors and committees of
Directors. He shall have authority to give on behalf of the Corporation all
notices required by the Code, the Articles of Incorporation or these Bylaws. He
shall maintain the books, records, contracts and other documents of the
Corporation. The Secretary may affix the corporate seal to any lawfully
executed documents requiring it and shall sign such instruments as may require
his signature. The Secretary shall perform whatever additional duties and have
whatever additional powers as may be assigned to him from time to time by the
Board of Directors.
6.9 Treasurer. The Treasurer shall, subject to the direction and
---------
supervision of the Board of Directors, have custody of all funds and securities
belonging to the Corporation and shall receive, deposit or disburse the same
under the direction of the Board of Directors. The Treasurer shall keep full
and true accounts of all receipts and disbursements and shall make such reports
on the same to the Board of Directors and the President. The Treasurer shall
perform whatever additional duties and have whatever additional powers as may be
assigned to him from time to time by the Board of Directors.
6.10 Assistant Secretary and Assistant Treasurer. Any Assistant
-----------------------------------------------
Secretary and any Assistant Treasurer may, in the absence or disability of the
Secretary or the Treasurer, respectively, perform the duties and exercise the
powers of those offices. Each Assistant Secretary and each Assistant Treasurer
shall perform whatever additional duties and have whatever additional powers as
may be assigned to him from time to time by the Board of Directors.
6.11 Additional Powers and Duties. In addition to the foregoing
-------------------------------
especially enumerated powers and duties, the several officers of the Corporation
shall have such other powers and duties as the Board of Directors or any
committee of the Board of Directors may from time to time prescribe.
10
<PAGE>
ARTICLE SEVEN
SHARES
------
7.1 Issuance of Shares. The Board of Directors may increase or
--------------------
decrease the number of issued and outstanding shares of the Corporation in
accordance with the Code and within the maximum amounts authorized by the
Articles of Incorporation.
7.2 Share Certificates. The interest of each shareholder in the
-------------------
Corporation shall be evidenced by a certificate or certificates representing
shares of the capital stock of the Corporation which shall be in such form as
the Board of Directors may from time to time adopt in accordance with the Code.
Share certificates shall be consecutively numbered and shall indicate the date
of issuance thereof, and all such information shall be entered on the
Corporation's books. Each share certificate shall contain such information as
is required by the Code and such further information as may be required pursuant
to the terms of the Corporation's capital stock. Each certificate shall be
signed either manually or in facsimile by the President or a Vice President and
the Secretary or an Assistant Secretary and shall be sealed with the seal of the
Corporation or a facsimile thereof; provided, however, that if the certificate
is signed in facsimile, then it must be countersigned, either manually or by
facsimile, by a transfer agent or registered by a registrar other than the
Corporation itself or an employee of the Corporation. In the event an officer
signs a share certificate and thereafter ceases to be an officer of the
Corporation before such certificate is issued, such certificate may nonetheless
be issued by the Corporation with the same effect as if the person or persons
who signed such certificate still held such office.
7.3 Rights of Corporation with Respect to Record Owners. Prior to due
----------------------------------------------------
presentation for transfer of its shares, the Corporation may treat the record
owner of the shares as the person exclusively entitled to vote such shares, to
receive any dividend or other distribution with respect to such shares, and for
all other purposes, and the Corporation shall not be bound to recognize any
equitable or other claim to or interest in such shares on the part of any other
person, whether or not it shall have express or other notice thereof.
7.4 Transfers of Shares. The Board of Directors shall cause suitable
---------------------
records to be kept for the registry and transfer of the shares of capital stock
of the Corporation. Transfers of shares shall be made upon the stock transfer
books of the Corporation (kept at the office of the transfer agent designated to
transfer the shares) only upon direction of the person named in such
certificate, or by an attorney lawfully constituted in writing. Prior to
completing a requested transfer, pledge or release, the Corporation shall be
entitled to obtain reasonable assurances that all endorsement, instructions and
other documents are genuine and effective, that the payment of all transfer
taxes has been made, and that all provisions of law and procedures required by
the Corporation's transfer agent have been complied with. Before a new
certificate is issued, the old certificate shall be surrendered for cancellation
or, in the case of a certificate alleged to have been lost, stolen or destroyed,
the record owner shall have complied with the provisions of Section 7.5.
11
<PAGE>
7.5 Lost, Stolen or Destroyed Certificates. Any person claiming a
------------------------------------------
share certificate to be lost, stolen or destroyed shall make an affidavit or
affirmation of the fact in such manner as the Board of Directors may require and
shall, if the Board of Directors so requires, give the Corporation a bond of
indemnity in form and amount (and with one or more sureties satisfactory to the
Board of Directors) as the Board of Directors may require, whereupon an
appropriate new certificate may be issued in lieu of the one alleged to have
been lost, stolen or destroyed.
7.6 Fixing of Record Date. The Board of Directors may fix an advance
-----------------------
date as the record date in order to determine the shareholders entitled to a
distribution, to notice of a shareholders' meeting, to demand a special meeting,
to vote or to take any other action.
7.7 Record Date if None Fixed. If no record date is fixed as provided
--------------------------
in Section 7.6, then the record date for: (a) determining shareholders entitled
to notice of and to vote at an annual or special shareholders' meeting is the
close of business on the day before the first notice is delivered to
shareholders; (b) for determining shareholders entitled to a distribution (other
than one involving a purchase, redemption, or other acquisition of the
Corporation's shares) is the date the Board of Directors authorizes the
distribution; and (c) for any other action the consummation of which requires a
determination of shareholders is the date such action is to be taken.
7.8 Fractional Shares or Scrip. The Corporation shall not issue
-----------------------------
fractional shares or scrip and, in lieu thereof, shall pay in cash the fair
value of fractional interests as determined by the Board of Directors.
7.9 Restrictions on Transfer. The Board of Directors may impose
--------------------------
restrictions on the transfer of rights, to be distributed as a dividend pursuant
to a rights agreement to which the Corporation is a party, as and to the extent
required by such rights agreement as amended from time to time.
ARTICLE EIGHT
INDEMNIFICATION AND INTERESTED PARTIES
--------------------------------------
8.1 Indemnification.
---------------
(a) The Corporation shall indemnify its directors and officers
(and each person who at its request served as an officer or director of any
other entity) to the fullest extent permitted by Article 8, Part 5 of the Code
(or any successor provision); provided, however, indemnification shall only be
made upon compliance with the requirements of such statutory provisions and only
in those circumstances in which indemnification is authorized under those
provisions; provided further, however, that the shareholders may approve
additional indemnification pursuant to Code Section 14-2-856 (or any successor
provision).
(b) The Corporation may purchase and maintain insurance on behalf
of those persons for whom it is entitled to purchase and maintain insurance
against any liability asserted against such persons and incurred by such persons
in any of the capacities specified in, or arising out of such persons' status as
described in Section 14-2-857 of the Code (or any successor provision), whether
12
<PAGE>
or not the Corporation would have the power to indemnify such persons against
such liability under the laws of the State of Georgia.
(c) The Corporation shall pay for or reimburse the reasonable
expenses incurred by a director or officer who is a party to a proceeding
because he or she is a director or officer of the Corporation in advance of a
final disposition of the proceeding if the director or officer submits to the
Secretary of the Corporation a written request that complies with the
requirements of Section 14-2-853 of the Code (or any successor provision). The
Secretary of the Corporation shall promptly upon receipt of such a request for
advance of expenses advise the Board of Directors in writing that such director
or officer has requested an advance of expenses.
(d) The indemnification and advancement of expenses provided by or
granted pursuant to this Section 8.1 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer of the Corporation and shall inure to the benefit of the heirs,
executors, and administrators of such a person. Such indemnification and
advancement of expenses provided by or granted pursuant to this Section 8.1
shall be a contractual right of the Corporation's directors and officers.
8.2 Interested Directors and Officers.
------------------------------------
(a) No contract or transaction between the Corporation and one or
more of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers or have a material
financial interest, shall be enjoined, set aside or give rise to an award of
damages or other sanctions, in an action by a shareholder or by or in the right
of the Corporation, on the grounds of an interest in the transaction of the
director or officer or any person with whom or which he has a personal,
economic, or other association, if:
(1) such transaction is approved by the directors in
accordance with Section 14-2-862 of the Code (or any successor provision);
(2) such transaction is approved by the shareholders in
accordance with Section 14-2-863 of the Code (or any successor provision);
or
(3) the transaction, judged in the circumstances at the
time of the commitment, is established to have been fair to the
Corporation.
(b) A majority (but not less than two) of all of the "qualified
directors" (as such term is defined in Section 14-2-862 of the Code (or any
successor provision)) on the Board of Directors shall constitute a quorum for
purposes of an action that complies with Section 8.2(a)(1) of these Bylaws. An
action of the Board of Directors that otherwise complies with the Code and these
Bylaws is not affected by the presence or vote of a Director who is not a
"qualified director."
ARTICLE NINE
MISCELLANEOUS
-------------
13
<PAGE>
9.1 Inspection of Books and Records. Except to the extent otherwise
----------------------------------
provided by the Code, the Board of Directors shall have the power to determine
which accounts, books and records of the Corporation shall be opened to the
inspection of shareholders and shall have the power to fix reasonable rules and
regulations not in conflict with the Code for the inspection thereof.
9.2 Fiscal Year. The Board of Directors is authorized to fix the
------------
fiscal year of the Corporation and to change the same from time to time as it
deems appropriate. Unless otherwise so determined, the fiscal year of the
Corporation shall begin on the Sunday following the Saturday closest to June 30
of each year and end on the Saturday closest to June 30 of the following year.
9.3 Seal. The seal of the Corporation shall consist of an impression
----
bearing the name of the Corporation around the perimeter and word "Seal" in the
center thereof. In lieu thereof, the Corporation may use an impression or
writing bearing the words "CORPORATE SEAL," which shall also be deemed to be the
seal of the Corporation.
ARTICLE TEN
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
--------------------------------------------------
10.1 Applicability of Statutes. The Corporation elects to be covered
---------------------------
by all of the requirements set forth in Sections 14-2-1131 through 14-2-1133 of
the Code with respect to business combinations with interested shareholders.
ARTICLE ELEVEN
AMENDMENT
---------
11.1 Power to Amend These Bylaws. The Board of Directors shall have
------------------------------
power to alter, amend or repeal these Bylaws or to adopt any new bylaws;
provided, however, any new bylaws adopted by the Board of Directors may be
altered, amended or repealed, and new bylaws may also be adopted, by the
shareholders. The shareholders may prescribe that any bylaw or bylaws adopted
by them shall not be altered, amended or repealed by the Board of Directors.
11.2 Requisite Vote. Action taken by the shareholders with respect to
---------------
Bylaws shall be taken by an affirmative vote of at least two-thirds (2/3) of
each class of shares entitled to vote, and action by the Board of Directors with
respect to Bylaws shall be taken by an affirmative vote of at least two-thirds
(2/3) of all Directors then in office.
These Bylaws were duly adopted by the Incorporator of the Corporation as of
December 10, 1999.
/s/ K. Scott Grassmyer
___________________________________
K. Scott Grassmyer, Secretary
14
<PAGE>
EXHIBIT 10.3.1
March 15, 1999
Mr. Robert D. Rockey, Jr.
5000 North Ocean Boulevard
Myrtle Beach, SC 29577
Dear Bob:
It was good to spend Friday morning with you. This letter will cover the items
that you, Bettis and I discussed, plus those that we had previously covered. In
this letter, we have assumed that Duck Head will be spun off to the Delta
Woodside shareholders on or about July 3, 1999. A later paragraph will cover
the contingency if that does not happen for some reason.
You will join Duck Head Apparel Company as Chairman & CEO. Since you worked
here all last week, we will make your effective date of employment March 8,
1999. Since you make your permanent home in Texas, we will pay you as a Texas
resident. Your salary will be $500,000 per year, and we will guarantee you a
bonus of $500,000 for performance during the first year after the spin-off. We
will also pay you a salary and bonus at that rate for the remainder of the 1999
fiscal year.
The 1999 guaranteed bonus will cover the period of March 8 - July 3 (17 weeks)
and will be paid one-half now, and one-half following the end of the period.
The 2000 fiscal year bonus of $500,000 will be paid quarterly, following
completion of each fiscal quarter.
Beginning with the 2001 fiscal year, the bonus plan will be set by the Board of
Directors.
We will reimburse you for all direct business expenses. In addition, we will
provide you with an automobile, an apartment in the area, and commutation
expenses. The total of these additional expenses is capped at $100,000 per
year.
<PAGE>
Mr. Robert D. Rockey
Page 2
March 15, 1999
The post spin-off Duck Head Apparel Company will establish an Incentive Stock
Plan that will be like the one currently in place at Delta Woodside, but adapted
to the new Duck Head company. You will be granted incentive shares valued at
$200,000 of the new Duck Head Apparel Company. You will be able to add managers
of the new Duck Head Apparel Company when you are ready. Enclosed is a copy of
the Delta Woodside plan, which shows you how this works. The Delta Woodside
plan works on a three-year cycle. However, in your personal situation, it will
work on a two-year basis - 30% in each year for service and 40% for performance.
The new Duck Head Apparel Company will establish a Stock Option Plan in place -
totaling 500,000 shares. The plan will be modeled after the existing Delta
Woodside plan. Twenty-five percent of these shares will be reserved for you.
Initially, your participation will be based on a two-year performance goal
established by the Board of Directors of the new Duck Head Apparel Company. You
will determine the distribution of the remaining shares among your managers.
Once earned, you will be fully vested in the shares and can exercise at any time
with no termination date.
As part of your commitment to come on board as Chairman & CEO of Duck Head, the
Board of the new Duck Head Apparel Company will grant you an option to purchase
up to one million (1,000,000) shares of the new company for $10.00 per share
(assuming the spun off stock is reduced by a multiple of 10 in a reverse split)
at any time up to and including December 31, 1999. The proceeds of the stock
sale to you would, of course, go into the Company to be used for general
corporate purposes and would strengthen the Company's balance sheet.
You would be covered under the medical plan, which has a $200 deductible, 80%
co-pay option, which should be comparable to your Levi coverage. Since our
carrier (Blue Cross-South Carolina), does not have PPO coverage in Texas, all
doctors you select will be considered qualified and the coverage will be at 80%.
<PAGE>
Mr. Robert D. Rockey
Page 3
March 15, 1999
We can also provide the $1,000,000 life insurance program.
Our idea on Board composition would be you as Chair, offer the Delta Woodside
Directors a seat, and have room to add additional directors as required (new
investors, industry people, etc.).
We discussed the possibility of unforseen events occurring after you have joined
the Company, which might prevent the spin-off from occurring. We do not think
this will happen, but if it should, you would agree to run Duck Head as CEO of
the division rather than as a stand-alone company. In the event this occurs,
you will be elected a Director of Delta Woodside. You would participate in the
Delta Woodside Incentive Stock Plan and Stock Option Plan at the appropriate
level if the spin-off doesn't occur as planned.
I believe this covers all the points we discussed. We are excited, and ready to
get started.
Best regards.
Sincerely yours,
/s/ E. Erwin Maddrey, II
President & CEO
EEM:hw
cc: Ms. J. H. Greer
Mr. B. C. Rainsford
<PAGE>
EXHIBIT 10.3.2
October 19, 1999
Mr. Robert D. Rockey, Jr.
5000 North Ocean Boulevard
Myrtle Beach, SC 29577
Dear Bob:
This letter is an addendum to my letter of March 15, 1999, and supersedes the
paragraph in that letter that deals with the granting of an option to you to
purchase up to one million shares of the new Duck Head company. The following
paragraph replaces the one in my letter of March 15, 1999:
As part of your commitment to come on board as Chairman and CEO of Duck Head,
the Board of the new Duck Head company will grant you an option to purchase up
to one million (1,000,000) shares of the new company stock (assuming the
spun-off stock is reduced by a multiple of 10 in a reverse split) at a price
equal to the average daily closing stock price for the six-month period
following the spin-off of Duck Head shares to the Delta Woodside stockholders.
The option will be exercisable on the final day of the six-month option period
and if not exercised, will expire. The proceeds of the stock sale to you would,
of course, go into the Company to be used for general corporate purposes, and
would strengthen the Company's balance sheet.
All other paragraphs in the March 15, 1999, letter remain the same.
Best regards.
Sincerely yours,
/s/ E. Erwin Maddrey, II
President & CEO
EEM:hw
cc: Ms. J. H. Greer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's combined financial statements for the three months ended October 2,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 373
<SECURITIES> 0
<RECEIVABLES> 9884
<ALLOWANCES> 0
<INVENTORY> 19137
<CURRENT-ASSETS> 32903
<PP&E> 32182
<DEPRECIATION> 21107
<TOTAL-ASSETS> 43978
<CURRENT-LIABILITIES> 108651
<BONDS> 31
0
0
<COMMON> 0
<OTHER-SE> (93086)
<TOTAL-LIABILITY-AND-EQUITY> 43978
<SALES> 16063
<TOTAL-REVENUES> 16063
<CGS> 11117
<TOTAL-COSTS> 11117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2119
<INCOME-PRETAX> (1738)
<INCOME-TAX> (162)
<INCOME-CONTINUING> (1576)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1576)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's combined financial statements for the fiscal year ended July 3,
1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUL-03-1999
<CASH> 236
<SECURITIES> 0
<RECEIVABLES> 10962
<ALLOWANCES> 1618
<INVENTORY> 24721
<CURRENT-ASSETS> 38433
<PP&E> 32239
<DEPRECIATION> 20320
<TOTAL-ASSETS> 50352
<CURRENT-LIABILITIES> 113146
<BONDS> 23236
0
0
<COMMON> 0
<OTHER-SE> (91510)
<TOTAL-LIABILITY-AND-EQUITY> 50352
<SALES> 70642
<TOTAL-REVENUES> 70642
<CGS> 62468
<TOTAL-COSTS> 62468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8222
<INCOME-PRETAX> (47453)
<INCOME-TAX> 223
<INCOME-CONTINUING> (47676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47676)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
INFORMATION STATEMENT
DUCK HEAD APPAREL COMPANY, INC.
COMMON STOCK
This document relates to the distribution (which this document refers to as
the Duck Head distribution) of 100% of the common stock of Duck Head Apparel
Company, Inc., a Georgia corporation (which this document refers to as Duck
Head), by Delta Woodside Industries, Inc., a South Carolina corporation (which
this document refers to as Delta Woodside). Delta Woodside will make the Duck
Head distribution to record holders of Delta Woodside common stock as of
February __, 2000 (which this document refers to as the Duck Head record date).
In the Duck Head distribution, those Delta Woodside stockholders will receive
one share of Duck Head common stock for every ten shares of Delta Woodside
common stock that they hold on that date. If you are a record holder of Delta
Woodside common stock on February __, 2000, you will receive your Duck Head
common shares automatically. You do not need to take any further action.
Currently, Duck Head expects the Duck Head distribution to occur on or about
March __, 2000.
------------------------
Before the Duck Head distribution, Duck Head will apply to The American
Stock Exchange to approve shares of Duck Head's common stock for listing,
subject to official notice of issuance. If this application is not approved,
Duck Head expects that the Duck Head shares will trade in the over-the-counter
market.
------------------------
YOU SHOULD CAREFULLY REVIEW THIS ENTIRE DOCUMENT. IN REVIEWING THIS
DOCUMENT, YOU SHOULD CAREFULLY CONSIDER THE MATTERS AFFECTING DUCK HEAD'S
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE VALUE OF ITS COMMON STOCK
THAT THIS DOCUMENT DESCRIBES IN DETAIL UNDER THE HEADING "RISK FACTORS"
BEGINNING ON PAGE 16.
------------------------
STOCKHOLDER APPROVAL IS NOT REQUIRED FOR THE DUCK HEAD DISTRIBUTION OR ANY
OF THE OTHER TRANSACTIONS THAT THIS DOCUMENT DESCRIBES. DUCK HEAD IS NOT ASKING
YOU FOR A PROXY AND REQUESTS THAT YOU NOT SEND ONE TO IT.
This document is not an offer to sell or solicitation of an offer to buy
any securities.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this document is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this document is February __,2000, and Duck Head first mailed
this document to stockholders on February __, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE DUCK HEAD DISTRIBUTION 3
SUMMARY 8
RISK FACTORS 16
THE DUCK HEAD DISTRIBUTION 23
TRADING MARKET 34
RELATIONSHIPS AMONG DUCK HEAD, DELTA WOODSIDE AND DELTA APPAREL 36
CAPITALIZATION 41
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 48
BUSINESS OF DUCK HEAD 60
MANAGEMENT OF DUCK HEAD 66
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND
MANAGEMENT 77
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE
DUCK HEAD DISTRIBUTION 83
DESCRIPTION OF DUCK HEAD CAPITAL STOCK 87
2000 ANNUAL MEETING OF DUCK HEAD STOCKHOLDERS 96
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE 96
INDEPENDENT AUDITORS 96
ADDITIONAL INFORMATION 97
INDEX TO FINANCIAL STATEMENTS 98
REPORT OF INDEPENDENT AUDITORS F-1
AUDITED COMBINED FINANCIAL STATEMENTS FOR DUCK HEAD'S THREE MOST
RECENT FISCAL YEARS F-2
UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS FOR DUCK HEAD'S
MOST RECENTLY ENDED FISCAL QUARTER F-18
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE DUCK HEAD DISTRIBUTION
The following questions and answers highlight important information about
the Duck Head distribution. For a more complete description of the terms of the
Duck Head distribution, please read this entire document and the other materials
to which it refers.
Q: WHAT WILL HAPPEN IN THE DUCK HEAD DISTRIBUTION AND RELATED
TRANSACTIONS?
A: Delta Woodside is separating the two apparel businesses (the Duck Head
Apparel Company division and the Delta Apparel Company division)
conducted by its wholly-owned subsidiary, Duck Head Apparel Company,
Inc., a Tennessee corporation, from each other and from the textile
fabric business (which this document refers to as Delta Mills
Marketing Company) conducted by its wholly-owned subsidiary, Delta
Mills, Inc., a Delaware corporation (which this document refers to as
Delta Mills). It will accomplish this as follows:
- Delta Woodside has created two new wholly-owned corporations,
Duck Head Apparel Company, Inc., a Georgia corporation (which
this document refers to as Duck Head), and Delta Apparel, Inc., a
Georgia corporation (which this document refers to as Delta
Apparel).
- The Duck Head Apparel Company business, and associated assets and
liabilities, will be transferred to Duck Head, and the Delta
Apparel Company business, and associated assets and liabilities,
will be transferred to Delta Apparel.
- Delta Woodside will simultaneously distribute all the common
stock of Duck Head (which this document refers to as the Duck
Head distribution) and all the common stock of Delta Apparel
(which this document refers to as the Delta Apparel distribution)
to the Delta Woodside stockholders of record as of February __,
2000. (This document refers to this record date for the Duck Head
distribution as the Duck Head record date, and this record date
for the Delta Apparel distribution as the Delta Apparel record
date).
Upon completion of these two distributions, you will own shares in
three separately traded public companies, Delta Woodside Industries,
Inc., Duck Head Apparel Company, Inc. and Delta Apparel, Inc.
Q: WHAT WILL I RECEIVE IN THE DUCK HEAD DISTRIBUTION?
A: You will receive one share of Duck Head common stock for every ten
shares of Delta Woodside common stock that you own of record on
February __, 2000, the Duck Head record date. Simultaneously with the
Duck Head distribution, you will receive in the Delta Apparel
distribution one share of Delta Apparel common stock for every ten
shares of Delta Woodside common stock that you own of record on
February __, 2000, the Delta Apparel record date. After the Duck Head
distribution, you will also continue to own the shares of Delta
Woodside common stock that you owned immediately before the Duck Head
distribution.
Q: WILL I BE TAXED AS A RESULT OF THE DUCK HEAD DISTRIBUTION?
A: Delta Woodside is not at this time in a position to inform its
stockholders as to the federal income tax consequences of the Duck
Head distribution or the Delta Apparel distribution. Delta Woodside
will make a good
3
<PAGE>
faith determination, as soon as practicable and in any event prior to
January 31, 2001, on the basis of all of the facts then known to it,
and advise all of its stockholders who receive Duck Head shares in the
Duck Head distribution and Delta Apparel shares in the Delta Apparel
distribution whether or not in Delta Woodside's opinion the Duck Head
distribution and the Delta Apparel distribution should be treated as
tax-free spin-offs under Section 355 of the Internal Revenue Code.
Accordingly, each Delta Woodside stockholder as of the record date for
the Duck Head distribution and the Delta Apparel distribution may
recognize dividend income and possibly capital gain on the Duck Head
distribution and the Delta Apparel distribution, all to the extent
described in "The Duck Head Distribution - Material Federal Income Tax
Consequences".
Q: WHAT WILL DUCK HEAD'S BUSINESS BE AFTER THE DUCK HEAD DISTRIBUTION?
A: After the Duck Head distribution, Duck Head will continue its business
of designing, sourcing, producing, marketing and distributing boy's
and men's value-oriented casual sportswear predominantly under the
134-year-old nationally recognized "Duck Head" (Reg. Trademark) label.
See information under the heading "Business of Duck Head".
Q: WHAT WILL DELTA WOODSIDE'S AND DELTA APPAREL'S RESPECTIVE BUSINESSES
BE AFTER THE DUCK HEAD DISTRIBUTION?
A: After the Duck Head distribution, Delta Woodside will own all of the
outstanding stock of Delta Mills, whose sole business is the
manufacture and sale, through Delta Mills Marketing Company, of a
broad range of finished apparel fabrics primarily to branded apparel
manufacturers and resellers, and private label apparel manufacturers.
After the Duck Head distribution and the Delta Apparel distribution,
Delta Woodside will have no operating business other than Delta Mills
Marketing Company.
Delta Apparel is a vertically integrated supplier of knit apparel,
particularly T-shirts, sportswear and fleece goods, and sells these
products to distributors, screen printers and private label accounts.
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE DUCK HEAD DISTRIBUTION?
A: Nothing. No proxy or vote is necessary for the Duck Head distribution,
the Delta Apparel distribution or the other transactions described in
this document to occur. You do not need to, and should not, mail in
any certificates of Delta Woodside common stock to receive shares of
Duck Head common stock in the Duck Head distribution. Similarly, you
will not need to, and should not, mail in any certificates of Delta
Woodside common stock to receive shares of Delta Apparel common stock
in the Delta Apparel distribution.
Q: HOW WILL DELTA WOODSIDE DISTRIBUTE DUCK HEAD COMMON STOCK TO ME?
A: If you are a record holder of Delta Woodside common stock as of the
close of business on the Duck Head record date, Delta Woodside's
distribution agent will automatically send to you a stock certificate
for the number of whole shares of Duck Head common stock to which you
are entitled. This stock certificate will be mailed to you on or
around March __, 2000.
4
<PAGE>
Q: WHAT IF I HOLD MY SHARES OF DELTA WOODSIDE COMMON STOCK THROUGH MY
STOCKBROKER, BANK OR OTHER NOMINEE?
A: If you hold your shares of Delta Woodside common stock through your
stockbroker, bank or other nominee, you are probably not a registered
stockholder of record and your receipt of Duck Head common stock
depends on your arrangements with the stockbroker, bank or nominee
that holds your shares of Delta Woodside common stock for you. Duck
Head anticipates that stockbrokers and banks generally will credit
their customers' accounts with Duck Head common stock on or about
March __, 2000, but you should confirm that with your stockbroker,
bank or other nominee.
After the Duck Head distribution, you may instruct your stockbroker,
bank or other nominee to transfer your shares of Duck Head common
stock into your own name.
Q: WHAT ABOUT FRACTIONAL SHARES?
A: If you own ten or more shares of Delta Woodside common stock, the
distribution agent will send to you a stock certificate for all of the
whole shares of Duck Head common stock that you are entitled to
receive in the Duck Head distribution, and your account with Delta
Woodside's distribution agent will be credited with any fractional
share of Duck Head common stock that you would otherwise be entitled
to receive in the Duck Head distribution. Promptly after the Duck Head
distribution, the distribution agent will aggregate and sell all
fractional shares, and will send to you your portion of the cash sale
proceeds (less any brokerage commissions).
If you own fewer than ten shares of Delta Woodside common stock, you
will receive cash instead of your fractional share of Duck Head common
stock. Promptly after the Duck Head distribution, the distribution
agent will distribute to those registered stockholders the portion of
the cash sale proceeds (less any brokerage commissions) that those
holders are entitled to receive.
No interest will be paid on any cash distributed in lieu of fractional
shares. None of Delta Woodside, Duck Head or the distribution agent
guarantees any minimum sale price for the fractional shares of Duck
Head common stock.
Q: ON WHICH EXCHANGE WILL SHARES OF DUCK HEAD COMMON STOCK TRADE
IMMEDIATELY AFTER THE DUCK HEAD DISTRIBUTION?
A: Before the Duck Head distribution, Duck Head will apply to The
American Stock Exchange to approve shares of Duck Head's common stock
for listing, subject to official notice of issuance. If this
application is not approved, Duck Head expects that the Duck Head
shares will trade in the over-the-counter market.
Q: WHEN WILL I BE ABLE TO BUY AND SELL DUCK HEAD COMMON SHARES?
A: Regular trading in Duck Head common stock is expected to begin on
or about March --, 2000. Duck Head expects, however, that
"when-issued" trading for Duck Head common stock will develop before
the Duck Head distribution date, which is expected to be on or about
March__, 2000.
"When-issued" trading means that you may trade shares of Duck Head
common stock before the Duck Head distribution date. "When-issued"
trading reflects the value at which the market expects the shares of
Duck Head common stock to trade
5
<PAGE>
after the Duck Head distribution. If "when-issued" trading develops in
shares of Duck Head common stock, you may buy and sell those shares
before the Duck Head distribution date. None of these trades, however,
will settle until after the Duck Head distribution date, when regular
trading in Duck Head common stock has begun. If the Duck Head
distribution does not occur, all "when-issued" trading will be null
and void.
Q: WHAT WILL HAPPEN TO THE LISTING OF DELTA WOODSIDE COMMON STOCK ON THE
NEW YORK STOCK EXCHANGE AFTER THE DUCK HEAD DISTRIBUTION?
A: Delta Woodside expects that, following the Duck Head distribution, The
New York Stock Exchange will continue to list the Delta Woodside
common stock under the symbol "DLW". You will not receive new share
certificates for Delta Woodside common stock, nor will the Duck Head
distribution change the number of shares of Delta Woodside common
stock that you own.
Q: HOW WILL I BE ABLE TO BUY AND SELL DELTA WOODSIDE COMMON STOCK BEFORE
THE DUCK HEAD DISTRIBUTION DATE?
A: Delta Woodside has advised Duck Head that it expects that its common
stock will continue to trade on the New York Stock Exchange on a
regular basis through the Duck Head distribution date under the
current symbol "DLW". Any shares of Delta Woodside common stock sold
on a regular basis in the period between the date that is two days
before the Duck Head record date and the Duck Head distribution date
(i.e., between February __ and March __, 2000) will be accompanied by
an attached "due bill" representing Duck Head common stock to be
distributed in the Duck Head distribution.
Additionally, Delta Woodside has advised Duck Head that it expects
that "ex-distribution" trading for Delta Woodside common stock will
develop before the Duck Head distribution date and the Delta Apparel
distribution date. "Ex-distribution" trading means that you may trade
shares of Delta Woodside common stock before the completion of the
Duck Head distribution and the Delta Apparel distribution, but on a
basis that reflects the value at which the market expects the shares
of Delta Woodside common stock to trade after the Duck Head
distribution and the Delta Apparel distribution.
If "ex-distribution" trading develops in shares of Delta Woodside
common stock, you may buy and sell those shares before the Duck Head
distribution date and the Delta Apparel distribution date on The New
York Stock Exchange under the symbol "DLWwi". None of these trades,
however, will settle until after the Duck Head distribution date and
the Delta Apparel distribution date, when regular trading in Delta
Woodside common stock has begun. If the Duck Head distribution does
not occur or the Delta Apparel distribution does not occur, all
"ex-distribution" trading will be null and void.
Q: WHAT WILL BE THE RELATIONSHIP BETWEEN DUCK HEAD, DELTA WOODSIDE AND
DELTA APPAREL AFTER THE DUCK HEAD DISTRIBUTION?
A: Duck Head, Delta Woodside and Delta Apparel will be independent,
separate, publicly owned companies. After the Duck Head distribution,
Delta Woodside will not own any of Duck Head's common stock. Seven of
Duck Head's initial directors will also be Delta Woodside directors
after the Duck Head distribution. Seven of Duck Head's initial
directors will also be Delta Apparel directors after the Duck Head
distribution. In connection with the Duck Head distribution, Delta
Woodside, Duck Head and Delta Apparel are entering into agreements to
govern their relationship after the Duck Head distribution and after
the Delta Apparel distribution. This document describes these
agreements and ongoing relationships in detail on pages 36-40.
6
<PAGE>
Q: WHOM SHOULD I CALL WITH QUESTIONS ABOUT THE DUCK HEAD DISTRIBUTION?
A: If you have questions about the Duck Head distribution or the related
transactions or if you would like additional copies of this document
or any other materials to which this document refers, you should
contact:
David R. Palmer, Controller
Delta Woodside Industries, Inc.
233 N. Main Street
Greenville, SC 29601
Telephone No.: (864)232-8301
7
<PAGE>
SUMMARY
The following is a brief summary of the matters that this document
addresses. This summary does not contain all of the information that is
important to you as a recipient of Duck Head shares. For a more complete
description of the Duck Head distribution and related transactions, you should
read this entire document and the other materials to which it refers.
DUCK HEAD
Duck Head is a Georgia corporation with its principal executive offices
located at 1020 Barrow Industrial Parkway, Winder, Georgia 30680 (telephone
number: (770) 867-3111). Duck Head designs, produces, markets and distributes
boy's and men's value-oriented casual sportswear predominantly under the
134-year-old nationally recognized "Duck Head" (Reg. Trademark) label. Duck
Head's collections are centered around its core khaki trouser. Duck Head sells
its apparel primarily in the Southeastern United States to national and regional
department store chains and large specialty apparel retailers. In addition,
Duck Head operates 24 retail apparel outlet stores that sell primarily closeout
and irregular "Duck Head" products. Duck Head also licenses the use of the
"Duck Head" trademark for the manufacture and sale of certain apparel items and
accessories. Duck Head has operations in 9 states and Costa Rica, and at
October 2, 1999 had approximately 500 employees.
THE DUCK HEAD DISTRIBUTION
The following is a brief summary of the principal terms of the Duck Head
distribution.
DISTRIBUTING COMPANY
Delta Woodside Industries, Inc. Before the Duck Head
distribution, the Delta Woodside common stock trades on The New
York Stock Exchange under the symbol "DLW". After the Duck Head
distribution, Delta Woodside's common stock will continue to
trade under the symbol "DLW" and Delta Woodside will not own any
shares of Duck Head common stock.
PRIMARY PURPOSES OF
THE DUCK HEAD DISTRIBUTION
The board of directors and management of Delta Woodside have
concluded that separating the Duck Head and Delta Apparel
businesses from the Delta Mills Marketing Company business by
means of the distribution of shares of Duck Head common stock to
Delta Woodside stockholders, and the simultaneous distribution of
shares of Delta Apparel common stock to Delta Woodside
stockholders is in the best interests of Delta Woodside, Duck
Head, Delta Apparel and the Delta Woodside stockholders. The
Delta Woodside board of directors and management believe that
this separation Will further the following objectives, among
others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate
management of each business, which incentives would not be
affected by the results of the other businesses and,
therefore, would have excellent potential to align closely
the interests of that management with those of the
stockholders;
8
<PAGE>
(b) Permit the elimination of certain existing corporate
overhead expenses that result from the current need to
coordinate the operations of three distinct businesses that
have separate modes of operation and markets;
(c) Eliminate the complaints of certain customers of Delta Mills
Marketing Company (which, as a supplier to those customers,
has access to certain of their competitive information) that
a competitor of theirs (Duck Head Apparel Company) is under
common management with Delta Mills Marketing Company;
(d) Permit each business to obtain, when needed, the best equity
and debt financing possible without being affected by the
operational results of the other businesses;
(e) Permit each business to establish long-range plans geared
toward the expected cyclicality, competitive conditions and
market trends in its own line of business, unaffected by the
markets, needs and constraints of the other businesses;
(f) Promote a more streamlined management structure for each of
the three businesses, better able to respond quickly to
customer and market demands; and
(g) Permit the value of each of the three divisions to be more
accurately reflected in the equity market by separating the
results of each business from the other two businesses.
SECURITIES TO BE DISTRIBUTED
All of the outstanding shares of Duck Head common stock will be
distributed to Delta Woodside stockholders of record as of
February __, 2000. Based on the number of shares of Delta
Woodside common stock outstanding as of January __ 2000 and the
Duck Head distribution ratio of one Duck Head common share for
every ten Delta Woodside common shares, Delta Woodside will
distribute approximately 2,386,000 shares of Duck Head common
stock to Delta Woodside stockholders. After the Duck Head
distribution, Duck Head will have approximately 2,500
stockholders of record.
DUCK HEAD DISTRIBUTION RATIO
You will receive one share of Duck Head common stock for every
ten shares of Delta Woodside common stock that you own as of the
close of business on February __, 2000.
9
<PAGE>
DUCK HEAD RECORD DATE
February __, 2000 (5:00 p.m., Eastern time).
DUCK HEAD DISTRIBUTION DATE
March __, 2000 (4:59 p.m., Eastern time). On the Duck Head
distribution date, Delta Woodside's distribution agent will
credit the shares of Duck Head common stock that you will receive
in the Duck Head distribution to your account or to the account
of your stockbroker, bank or other nominee if you are not a
registered stockholder of record.
DISTRIBUTION AGENT
Before the Duck Head distribution date, Delta Woodside will
appoint First Union National Bank, Delta Woodside's transfer
agent, as its distribution agent for the Duck Head distribution.
TRADING MARKET
Because Duck Head has been a wholly-owned subsidiary of Delta
Woodside, there has been no trading market for Duck Head common
stock. Before the Duck Head distribution, Duck Head will apply to
The American Stock Exchange to approve shares of Duck Head's
common stock for listing, subject to official notice of issuance.
If this application is not approved, Duck Head expects that the
Duck Head shares will trade in the over-the-counter market. Duck
Head expects that a "when-issued" trading market will develop
before the Duck Head distribution date.
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES.
Delta Woodside is not at this time in a position to inform its
stockholders as to the federal income tax consequences of the
Duck Head distribution or the Delta Apparel distribution. Delta
Woodside will make a good faith determination, as soon as
practicable and in any event prior to January 31, 2001, on the
basis of all of the facts then known to it, and advise all of its
stockholders who receive Duck Head shares in the Duck Head
distribution and Delta Apparel shares in the Delta Apparel
distribution whether or not in Delta Woodside's opinion the Duck
Head distribution and the Delta Apparel distribution should be
treated as tax-free spin-offs under Section 355 of the Internal
Revenue Code.
Accordingly, each Delta Woodside stockholder as of the record
date for the Duck Head distribution and the Delta Apparel
distribution may recognize dividend income and possibly capital
gain on the Duck Head distribution and the Delta Apparel
distribution, all to the extent described in "The Duck Head
Distribution - Material Federal Income Tax Consequences".
RISK FACTORS
You should carefully consider the matters discussed under the
section of this document entitled "Risk Factors".
FRACTIONAL SHARE TREATMENT
If you own ten or more shares of Delta Woodside common stock, the
distribution agent will send to you a stock certificate for
10
<PAGE>
all of the whole shares of Duck Head common stock that you are
entitled to receive in the Duck Head distribution, and your
account with Delta Woodside's distribution agent will be credited
with any fractional share of Duck Head common stock that you
would otherwise be entitled to receive in the Duck Head
distribution. Promptly after the Duck Head distribution, the
distribution agent will aggregate and sell all fractional shares,
and will send to you your portion of the cash sale proceeds (less
any brokerage commissions). If you own fewer than ten shares of
Delta Woodside common stock, you will receive cash instead of
your fractional share of Duck Head common stock. Promptly after
the Duck Head distribution, the distribution agent will
distribute to those registered stockholders the portion of the
cash sale proceeds (less any brokerage commissions) that those
holders are entitled to receive. No interest will be paid on any
cash distributed in lieu of fractional shares. None of Delta
Woodside, Duck Head or the distribution agent guarantees any
minimum sale price for the fractional shares of Duck Head common
stock.
RELATIONSHIP WITH DELTA WOODSIDE
AND DELTA APPAREL AFTER THE
DUCK HEAD DISTRIBUTION
Duck Head has entered into a distribution agreement with Delta
Woodside and Delta Apparel dated as of January __, 2000. Duck
Head will also enter into a tax sharing agreement with Delta
Woodside and Delta Apparel on or before the Duck Head
distribution date. These are described on pages 36 to 40 of this
document.
11
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected financial data of Duck Head set forth below should be read in
conjunction with Duck Head's combined financial statements, including the notes
to those statements, which are at pages F-1 to F-22 of this document, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which begins on page 48 of this document. The combined financial
statements of Duck Head include the operations and accounts of the Duck Head
Apparel Company division, which consists of operations and accounts included in
various subsidiaries of Delta Woodside. The combined statement of operations
data for the years ended July 1, 1995 and June 29, 1996, and the combined
balance sheet data as of July 1, 1995, June 29, 1996 and June 28, 1997, are
derived from unaudited combined financial statements not included in this
document. The combined statement of operations data for the years ended June
28, 1997, June 27, 1998 and July 3, 1999, and the combined balance sheet data as
of June 27, 1998 and July 3, 1999, are derived from, and are qualified by
reference to, Duck Head's audited combined financial statements included
elsewhere in this document. The financial information as of October 2, 1999 and
September 26, 1998 and for the three months ended October 2, 1999 and September
26, 1998 has been derived from Duck Head's unaudited financial information.
Duck Head did not operate as a stand alone company for any of the periods
presented. In the opinion of management, the unaudited financial information
has been prepared on a basis consistent with the annual audited combined
financial statements that appear elsewhere in this document, and include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair statement of the financial position and results of operations for those
unaudited periods. Historical results are not necessarily indicative of results
to be expected in the future.
12
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Fiscal Year Ended Three Months Ended
------------------------------------------------------- ---------------------------
July 3, June 27, June 28, June 29, July 1, October 2, September 26,
----------- ---------- --------- --------- -------- ----------- --------------
1999 1998 1997 1996 1995 1999 1998
----------- ---------- --------- --------- -------- ----------- --------------
(In thousands) (In thousands)
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 70,642 83,953 79,642 68,881 73,441 16,063 21,891
Cost of goods sold (62,468) (57,088) (53,391) (84,397) (49,822) (11,117) (14,876)
Selling, general and administrative
expenses (34,005) (28,980) (25,224) (26,778) (24,785) (5,332) (6,165)
Impairment charges (13,650) --- (400) 5,312 7,000 --- ---
Other income (expense) 250 864 667 (897) (157) 767 694
----------- ---------- --------- --------- -------- ----------- --------------
Operating income(loss) (39,231) (1,251) 1,294 (37,879) 5,677 381 1,544
Interest expense, net (8,222) (6,951) (6,183) (5,988) (4,645) (2,119) (1,674)
Income (loss) before taxes (47,453) (8,202) (4,889) (43,867) 1,032 (1,738) (130)
Income tax expense (benefit) 223 (306) (427) 1,015 1,389 (162) (74)
----------- ---------- --------- --------- -------- ----------- --------------
Net loss $ (47,676) (7,896) (4,462) (44,882) (357) (1,576) (56)
=========== ========== ========= ========= ======== =========== ==============
BALANCE SHEET DATA (AT PERIOD
END):
Working capital (deficit) $ (74,713) (44,376) (11,830) (16,810) 37,387 (75,748) (31,573)
Total assets 50,352 77,350 78,131 64,975 119,842 43,978 39,213
Total long-term debt 23,236 29,701 52,277 31,917 31,809 23,209 23,236
Divisional deficit (91,510) (43,834) (35,545) (64,606) (11,392) (93,086) (59,444)
</TABLE>
13
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data set forth below are derived from the
unaudited pro forma combined financial statements of Duck Head at and for the
three month period ended October 2, 1999 and for the year ended July 3, 1999
that are set forth under the heading "Unaudited Pro Forma Combined Financial
Statements" and give effect to the transactions described in that section of
this document as if those transactions had occurred, in the case of the pro
forma balance sheet, on the date of that balance sheet and, in the case of the
pro forma statements of operations at the beginning of the fiscal year that
ended July 3, 1999.
Duck Head has provided the unaudited pro forma financial data to you for
informational purposes only. You should not construe them to be indicative of
the results of operations or financial position of Duck Head had the
transactions referred to above been consummated on the dates given. Those
financial statements also do not project the results of operations or financial
position for any future period or date. You should read these pro forma data in
conjunction with the information found under the heading "Unaudited Pro Forma
Combined Financial Statements" and the combined financial statements of Duck
Head and the related notes as of July 3, 1999 and June 27, 1998 and for each of
the three years in the period ended July 3, 1999, and as of and for the three
month period ended October 2, 1999, included on pages 42-47 and F-1- F-22,
respectively.
14
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS
ENDED ENDED
JULY 3, 1999 OCTOBER 2,1999
-------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ 70,642 16,063
Cost of goods sold (62,468) (11,117)
Selling, general and administrative expenses (34,603) (5,418)
Impairment charges (13,650) ---
Other income 1,027 767
-------------- ---------------
Operating income(loss) (39,052) 295
Interest expense, net (871) (408)
-------------- ---------------
Loss before income taxes (39,923) (113)
Income taxes (223) ---
-------------- ---------------
Net loss $ (40,146) (113)
============== ===============
Basic and diluted net loss per share $ (16.83) (0.05)
============== ===============
Weighted average shares outstanding used in basic
and diluted per share calculation (a) 2,386,000 2,386,000
============== ===============
BALANCE SHEET DATA
Working capital $ 22,555
Total assets 41,204
Total long-term debt 5,342
Stockholders' equity 23,084
<FN>
- -----------------------------------------------------------------------------------
(a) Weighted-average shares outstanding were determined assuming a distribution of
one share of Duck Head common stock for every ten shares of Delta Woodside common
stock owned on the record date. The weighted-average shares do not include
securities that would be anti-dilutive for each of the periods presented.
</TABLE>
15
<PAGE>
RISK FACTORS
In addition to all other information in this document, you should read and
carefully consider the following risk factors which may affect Duck Head's
financial condition or results of operations and/or the value of its common
stock.
The following discussion contains various "forward-looking statements".
Please refer to "Forward-Looking Statements May Not Be Accurate" for a
description of the uncertainties and risks associated with forward-looking
statements.
THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION MAY, FOR FEDERAL
INCOME TAX PURPOSES, BE TAXABLE TO THE DELTA WOODSIDE STOCKHOLDERS.
Delta Woodside is not at this time in a position to inform its stockholders
as to the federal income tax consequences of the Duck Head distribution or the
Delta Apparel distribution. Delta Woodside will make a good faith
determination, as soon as practicable and in any event prior to January 31,
2001, on the basis of all of the facts then known to it, and advise all of its
stockholders who receive Duck Head shares in the Duck Head distribution and
Delta Apparel shares in the Delta Apparel distribution whether or not in Delta
Woodside's opinion the Duck Head distribution and the Delta Apparel distribution
should be treated as tax-free spin-offs under Section 355 of the Internal
Revenue Code.
Accordingly, each Delta Woodside stockholder as of the record date for the
Duck Head distribution and the Delta Apparel distribution may recognize dividend
income and possibly capital gain on the Duck Head distribution and the Delta
Apparel distribution, all to the extent described in "The Duck Head
Distribution - Material Federal Income Tax Consequences".
DUCK HEAD HAS HAD SIGNIFICANT OPERATING LOSSES AND USED SIGNIFICANT AMOUNTS OF
CASH IN ITS OPERATIONS DURING THE LAST TWO YEARS AND THESE LOSSES AND THIS USE
OF CASH MAY CONTINUE.
Duck Head had operating losses of $39.2 million in the fiscal year ended
July 3, 1999, and $1.3 million in the fiscal year ended June 27, 1998. Duck
Head had operating income of $0.4 million in the three months ended October 2,
1999.
Net cash used in operating activities by Duck Head was $16.0 million in the
1999 fiscal year and $5.8 million in the 1998 fiscal year. During the first
quarter of the 2000 fiscal year, Duck Head generated $3.3 million of cash from
operations.
Duck Head believes that it is implementing programs that will reduce
operating expenses and provide for better asset management and that its business
strategy will provide Duck Head with better future results, but there is no
certainty that these programs or that Duck Head's strategy will be successful.
Duck Head's financial condition would be materially adversely affected by
significant operating losses or the significant use of cash by its operations.
IN THE PAST, DUCK HEAD'S NEEDS FOR CASH HAVE GENERALLY BEEN MET BY ADVANCES FROM
DELTA WOODSIDE. AFTER THE DUCK HEAD DISTRIBUTION, DUCK HEAD WILL BE ENTIRELY
DEPENDENT ON ITS OWN OPERATIONS AND THIRD PARTY LENDERS TO OBTAIN NEEDED
FINANCING.
After the Duck Head distribution, Duck Head will no longer have any
affiliation with the Delta Mills Marketing Company textile business of Delta
Woodside's subsidiary, Delta Mills, or the apparel business of Delta Apparel.
This affiliation has historically benefited Duck Head by Delta Mills Marketing
Company being a source of needed funds and by Delta Woodside as a whole
providing a broader base for obtaining bank financing.
16
<PAGE>
Prior to the Duck Head distribution, when the Duck Head operations needed
funds for operations or capital expenditures, it received those funds from Delta
Woodside, which in turn received most of its funds from the positive cash flows
generated by Delta Mills Marketing Company. During the three fiscal years ended
July 3, 1999, Duck Head used an aggregate of $26.1 million of cash provided by
Delta Woodside (of which $21.7 million was used to pay interest to Delta
Woodside on the affiliated debt owed by the Duck Head Apparel Company division).
During the fiscal quarter ended October 2, 1999, Duck Head generated $3.3
million of cash from operations and reduced the balance of the affiliated debt
to Delta Woodside by $3.1 million. Both the cash generated from operations and
the reduction in affiliated debt was after the effect of $2.0 million in
interest charges on debt owed to Delta Woodside.
The Duck Head operation has also historically benefited from financing
obtained by Delta Woodside. This financing has been obtained on the basis of
more than just the operations of Duck Head. Lenders to Duck Head as a stand
alone company will not be able to take advantage of the diversification of risk
provided by lending to Delta Woodside which had more than one operation.
DUCK HEAD'S REVOLVING CREDIT FACILITY PROVIDES BORROWING AVAILABILITY THAT IS
TWICE THE AMOUNT THAT DUCK HEAD PROJECTS WILL BE ITS PEAK BORROWING NEEDS.
Duck Head expects that its peak borrowing needs will be in its third fiscal
quarter and that during that quarter it may need to draw or set aside for
letters of credit an aggregate of approximately $7.5 million under its revolving
credit facility for working capital purposes and letters of credit. Forty-five
percent of the face amount of outstanding documentary letters of credit will
reduce the amount available under the revolving credit facility for working
capital loans.
Based on these expectations, Duck Head believes that its $15 million
revolving credit facility should be sufficient to satisfy its foreseeable
working capital needs. Any material deterioration in Duck Head's results of
operations, however, may result in Duck Head losing its ability to borrow under
its revolving credit facility or may cause the borrowing availability under that
facility not to be sufficient for Duck Head's needs.
DUCK HEAD'S RECENT TREND OF SALES DECLINES MAY NOT BE REVERSED.
Since the beginning of fiscal year 1999, Duck Head has experienced
significant declines in its sales. There have been several reasons for these
declines. The reasons include the loss of key customers, the reduction of sales
of tops and fashion items as Duck Head concentrates on its core products,
reductions in the number of stores in which Duck Head products are sold,
inadequate product focus and poor service. While Duck Head believes that it is
implementing a strategy that will reverse this trend, Duck Head may be
unsuccessful in this regard, because success of the strategy depends heavily on
customers' willingness to purchase Duck Head's products.
DUCK HEAD HAS RECENTLY LOST SEVERAL KEY CUSTOMERS AND MAY LOSE ADDITIONAL KEY
CUSTOMERS IN THE FUTURE.
During fiscal year 1999, Duck Head lost three key customers. One customer
closed down, another merged into another company and the third elected to
discontinue brands, such as the Duck Head brand, that are prominently featured
by certain of that customer's competitors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Similar or other factors could lead to the loss of additional customers or
the decrease of orders from existing customers. The decision of a customer to
cease or diminish purchasing product from Duck Head can be based on factors
within the control of Duck Head, such as product quality, product mix and
service quality, and on factors outside the control of Duck Head, such as
changes in the customer's management, acquisition of the customer or financial
troubles of the customer.
17
<PAGE>
ONE CUSTOMER ACCOUNTS FOR OVER 20% OF DUCK HEAD'S NET SALES. FIVE OF DUCK
HEAD'S CUSTOMERS ACCOUNT FOR MORE THAN 40% OF ITS NET SALES. THE LOSS OF ANY
KEY CUSTOMER COULD ADVERSELY AFFECT DUCK HEAD.
During the three months ended October 2, 1999 and the fiscal years 1999,
1998 and 1997, approximately 24%, 24%, 21% and 17%, respectively, of Duck Head's
sales were to J. C. Penney, Inc. No other customer accounted for 10% or more of
Duck Head's sales during any of those periods. The loss of J.C. Penney, Inc. as
a customer, or a significant reduction in its purchases from Duck Head, may have
a material adverse effect on Duck Head's business.
During the three months ended October 2, 1999 and the fiscal years 1999,
1998 and 1997, approximately 47%, 46%, 45% and 41%, respectively, of Duck Head's
sales were made to Duck Head's five largest customers. The loss by Duck Head of
any of these customers, or a significant reduction in purchases from Duck Head
by any of these customers, could have a material adverse effect on Duck Head's
business.
One of Duck Head=s significant customers, accounting for 8% of both fiscal
year 1999 sales and fiscal year 2000 first quarter sales, is currently
undergoing major management changes. Due to these key management changes, the
customer's business strategy may change as well. Duck Head does not know what
this customer's future strategies may be concerning national and regional
brands.
THE MARKET TREND OF NATIONAL RETAILERS FOCUSING MORE OF THEIR PURCHASING ON
BRANDS WITH A NATIONAL EXPOSURE MAY ADVERSELY AFFECT DUCK HEAD.
Duck Head sells its apparel primarily in eleven states in the Southeastern
United States (Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Virginia) where its
trademarks are most well known. At October 2, 1999, approximately 1,275 of the
approximately 1,725 retail stores in which Duck Head products are displayed are
located in these eleven states.
In recent years, there has been a significant consolidation among
department store retailers. This has led to more purchasing being done at a
national level by department store retailers and to those retailers focusing
more of their purchasing on brands with a national exposure and not on brands,
such as Duck Head, with more of a regional concentration.
One important aspect of Duck Head's strategy is to develop a significant
presence outside of the Southeastern United States. Duck Head can give no
assurance, however, that it will be able successfully to implement this
strategy. The development by Duck Head of a significant presence in areas where
it has not historically sold much of its product will depend primarily on the
willingness of national retailers to provide Duck Head with store space to sell
Duck Head products and then on the willingness of consumers to purchase those
products.
DUCK HEAD FACES INTENSE COMPETITION IN ITS MARKETS, AND DUCK HEAD'S FINANCIAL
RESOURCES ARE NOT AS GREAT AS SEVERAL OF ITS COMPETITORS.
The domestic apparel industry is highly competitive. In part because there
are low economic barriers to entry into the apparel manufacturing business, a
large number of domestic and foreign manufacturers supply apparel into the
United States market, none of which dominates the market for any of Duck Head's
product lines but many of which have a much more significant market presence
than does Duck Head.
Some of Duck Head's competitors also have substantially greater financial,
marketing, personnel and other resources than does Duck Head. This may enable
Duck Head's competitors to compete more aggressively than can Duck Head in
pricing, marketing and other respects, to react more quickly to market trends
and to better weather market downturns.
18
<PAGE>
THERE MAY BE LITTLE INSTITUTIONAL INTEREST, RESEARCH COVERAGE OR TRADING VOLUME
IN THE DUCK HEAD SHARES BECAUSE OF DUCK HEAD'S SIZE. IN ADDITION, AT THE TIME
OF THE DUCK HEAD DISTRIBUTION A LARGE PERCENTAGE OF THE OUTSTANDING DUCK HEAD
SHARES WILL BE HELD BY A FEW INSTITUTIONAL INVESTORS WHO WILL BE FREE TO SELL
THEIR DUCK HEAD SHARES AT ANY TIME. FURTHERMORE, ROBERT D. ROCKEY, JR. HAS THE
RIGHT TO ACQUIRE UP TO 1,000,000 DUCK HEAD SHARES SIX MONTHS FROM THE
DISTRIBUTION DATE. THESE FACTORS COULD HAVE A MAJOR DEPRESSIVE EFFECT ON THE
MARKET PRICE OF THE DUCK HEAD SHARES FOR AN INDETERMINATE PERIOD OF TIME.
Various investment banking firms have informed Delta Woodside and Duck Head
that public companies with relatively small market capitalizations have
difficulty generating institutional interest, research coverage or trading
volume, which illiquidity can translate into price discounts as compared to
industry peers or to the shares' true value. Duck Head believes that the market
will perceive it to have a relatively small market capitalization. In addition,
some of Delta Woodside's stockholders who receive Duck Head shares in the Duck
Head distribution may wish to dispose of those shares because they do not meet
the stockholders' investment objectives regardless of the shares' value or
prospects. Furthermore, Robert D. Rockey, Jr. has the right to acquire up to
1,000,000 Duck Head shares from Duck Head six months after the Duck Head
distribution. Coupled with Duck Head's history of operating losses, these
factors could lead to Duck Head's shares trading at prices that are
significantly lower than Duck Head's estimate of their inherent value.
As of the Duck Head distribution date, Duck Head will have outstanding
approximately 2,386,000 shares of common stock. Duck Head believes that over
69.7% of this stock will be beneficially owned by persons who beneficially own
more than 5% of the outstanding shares of Duck Head common stock and related
individuals, and that of this approximately 32.5% of the outstanding stock will
be beneficially owned by institutional investors. Sales of substantial amounts
of Duck Head common stock in the public market after the Duck Head distribution
by any of these large holders could adversely affect the market price of the
common stock.
POLITICAL UNCERTAINTY IN COSTA RICA COULD ADVERSELY AFFECT DUCK HEAD.
Duck Head's primary manufacturing facility is located in Costa Rica. Duck
Head might be adversely affected if economic or legal changes occur in Costa
Rica that affect the way in which Duck Head conducts its business in that
country.
DUCK HEAD'S RESULTS COULD BE ADVERSELY AFFECTED BY U.S. TRADE REGULATIONS.
The North American Free Trade Agreement (which this document refers to as
"NAFTA"), became effective on January 1, 1994 and has created a free-trade zone
among Canada, Mexico and the United States. NAFTA contains a rule of origin
requirement that products be processed in one of the three countries in order to
benefit from the agreement. NAFTA has phased out all trade restrictions and
tariffs among the three countries on apparel products competitive with those of
Duck Head. At this time, most of Duck Head's internal production of apparel
occurs outside of the NAFTA territory. Therefore, Duck Head is not obtaining
the advantages that NAFTA provides for manufacturing facilities in Mexico.
DUCK HEAD IS HIGHLY DEPENDENT ON ITS TRADEMARKS.
Duck Head relies heavily on the strength of its trademarks. Virtually all
of Duck Head's products are sold under the Duck Head brand. Duck Head has in
the past and may in the future be required to expend significant resources to
protect these trademarks. The loss or limitation of the exclusive right to use
its trademarks could adversely affect Duck Head's sales and results of
operations.
19
<PAGE>
A LOSS OF KEY MANAGEMENT PERSONNEL, PARTICULARLY ROBERT D. ROCKEY, JR., COULD
ADVERSELY AFFECT DUCK HEAD.
Duck Head's success depends upon the talents and efforts of a small number
of key management personnel, particularly Robert D. Rockey, Jr. (Chairman,
President and Chief Executive Officer of Duck Head). The loss or interruption
of the services of these executives could have a material adverse effect on Duck
Head. Duck Head has no assurance that it would be able to find replacements for
its key management with equivalent skills or experience in a timely manner or at
all.
DUCK HEAD'S RESULTS WILL LIKELY BE CYCLICAL.
Duck Head and the U.S. apparel industry are sensitive to the business cycle
of the national economy. Moreover, the popularity, supply and demand for
particular apparel products can change significantly from year to year based on
prevailing fashion trends and other factors.
Reflecting the cyclical nature of the apparel industry, many apparel
producers tend to increase capacity during years in which sales are strong.
These increases in capacity tend to accelerate a general economic downturn in
apparel markets.
These factors have contributed historically to fluctuations in Duck Head's
results of operations and these fluctuations are expected to occur in the
future. Duck Head may be unable to compete successfully in any industry
downturn.
DUCK HEAD DEPENDS ON OUTSIDE PRODUCTION FOR MORE THAN ONE-HALF OF ITS
PRODUCTION.
Duck Head currently manufactures less than one-half of its products in its
leased Costa Rican facility, and purchases its remaining product from outside
suppliers, many of which perform their manufacturing in other foreign countries.
Any shortage of supply or significant price increases from Duck Head's suppliers
could adversely affect Duck Head's results of operations.
DUCK HEAD MAY BE ADVERSELY AFFECTED BY THE AMOUNT OF ITS INDEBTEDNESS.
As of October 2, 1999, on a pro forma basis, after giving effect to the
Duck Head distribution, Duck Head's total indebtedness would have been
approximately $6.4 million, and total stockholders' equity would have been
approximately $23.1 million, resulting in a pro forma ratio of total long-term
debt (including current maturities of long-term debt) to total capitalization
(including current maturities of long-term debt) of 21.8%. In addition, at
that date and after giving effect to the Duck Head distribution, approximately
$15 million of additional borrowing capacity would have been available (pursuant
to the borrowing base formula) under Duck Head's credit agreement.
Duck Head anticipates that its borrowing needs will be seasonal, with its
greatest borrowing needs to be in the third fiscal quarter. Duck Head is not
certain that the borrowing availability under its credit agreement will be
sufficient to satisfy its borrowing needs, particularly during the periods of
greatest need.
The level of Duck Head's indebtedness could have important consequences, such
as:
(i) a substantial portion of Duck Head's cash flow from operations
will be dedicated to the payment of indebtedness, which will reduce the
funds available to Duck Head for operations and related purposes;
(ii) Duck Head may be more highly leveraged than some of its competitors,
which may place Duck Head at a relative competitive disadvantage, could
limit Duck Head's business opportunities and make Duck Head more
vulnerable to changes in the industry and economic conditions; and
20
<PAGE>
(iii) Duck Head's borrowings under its credit agreement will bear interest
at variable rates, which could result in higher interest expense in the
event of an increase in interest rates.
Duck Head believes, based on current circumstances, that Duck Head's cash
flow, together with available borrowings under its credit agreement, will be
sufficient to permit Duck Head to meet its operating expenses and to service its
debt requirements as they become due for the foreseeable future. Significant
assumptions underlie this belief, however, including, among other matters, that
Duck Head will succeed in implementing its business strategy and that there will
be no material adverse developments in the business, markets, operating
performance, liquidity or capital requirements of Duck Head. Actual future
results will be dependent to a large degree on a number of factors beyond Duck
Head's control. If Duck Head is unable to service its indebtedness, it will be
required to adopt alternative strategies, which may include actions such as
reducing or delaying capital expenditures, selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital. Duck Head
may not be able to implement any of these strategies.
DUCK HEAD'S CREDIT AGREEMENT WILL IMPOSE RESTRICTIONS THAT, IF BREACHED BY DUCK
HEAD, MAY PREVENT IT FROM BORROWING UNDER ITS REVOLVING CREDIT FACILITY.
Duck Head's credit agreement will contain covenants that restrict, among
other things, the ability of Duck Head and its subsidiaries to incur
indebtedness, create liens, consolidate, merge, sell assets or make investments.
The credit agreement also will contain customary representations and warranties,
funding conditions and events of default.
A breach of one or more covenants or any other event of default under the
Duck Head credit agreement could result in an acceleration of Duck Head's
obligations under that agreement, in the foreclosure on any assets subject to
liens in favor of the credit agreement's lenders and in the inability of Duck
Head to borrow additional amounts under the credit agreement.
DUCK HEAD WILL PAY NO DIVIDENDS FOR THE FORESEEABLE FUTURE.
Duck Head anticipates that it will pay no dividends to you or its other
stockholders for the foreseeable future. Duck Head's credit agreement also will
limit Duck Head's ability to pay dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Dividends and
Purchases by Duck Head of its Own Stock".
AFTER THE DUCK HEAD DISTRIBUTION, DUCK HEAD WILL BE REQUIRED TO PERFORM VARIOUS
ADMINISTRATIVE FUNCTIONS THAT WERE PREVIOUSLY PROVIDED BY DELTA WOODSIDE AND AS
TO WHICH DUCK HEAD DOES NOT HAVE EXTENSIVE EXPERIENCE.
Duck Head has historically relied upon Delta Woodside corporate
headquarters for administrative services in areas including financial planning,
SEC reporting, employee benefits, stockholder services, insurance, treasury and
tax. After the Duck Head distribution, Duck Head will be responsible for
performing these administrative functions. Duck Head does not have extensive
experience in performing these functions on its own.
DUCK HEAD MAY BE RESPONSIBLE FOR ANY HISTORICAL TAX LIABILITIES OF DELTA
WOODSIDE AND DELTA APPAREL THAT DELTA WOODSIDE OR DELTA APPAREL IS UNABLE TO
PAY.
Prior to the Duck Head distribution, Duck Head has been a member of Delta
Woodside's consolidated group for federal income tax purposes. Each member of a
consolidated group is liable for the federal income tax liability of the other
members of the group. After the Duck Head distribution, Duck Head, along with
Delta Woodside and Delta Apparel, will continue to be liable for these Delta
Woodside liabilities that were incurred for periods before the Duck Head
distribution.
21
<PAGE>
Duck Head, Delta Woodside and Delta Apparel will enter into a tax sharing
agreement. This agreement generally will seek to allocate consolidated federal
income tax liabilities to Delta Woodside for all periods prior to the Duck Head
distribution. Under this agreement, Delta Woodside generally will retain the
authority to file returns, respond to inquiries and conduct proceedings on Duck
Head's behalf with respect to consolidated federal income tax returns for years
beginning before the Duck Head distribution. These arrangements may result in
conflicts of interest among Duck Head, Delta Woodside and Delta Apparel. In
addition, if Delta Woodside becomes unable to satisfy any of its liabilities
respecting any period prior to the Duck Head distribution, Duck Head could be
responsible for satisfying them, notwithstanding the tax sharing agreement.
DUCK HEAD'S PRINCIPAL STOCKHOLDERS WILL EXERT SUBSTANTIAL INFLUENCE.
As of the Duck Head record date, three members of Duck Head's board of
directors and related individuals had the voting power in Delta Woodside shares
that, immediately after the Duck Head distribution, will result in voting power
with respect to approximately 37.3% of the outstanding Duck Head common stock.
These individuals will exert substantial influence with respect to all matters
submitted to a vote of stockholders, including elections of Duck Head's
directors.
DUCK HEAD IS NOT CERTAIN THAT ALL THIRD PARTIES WITH WHICH IT CONDUCTS BUSINESS
WILL SUCCESSFULLY ADDRESS THE YEAR 2000 COMPUTER PROBLEM BY THE END OF 1999.
Duck Head believes that it has addressed the year 2000 problem as it
affects the software and business systems that are critical to its business. If
third parties with whom Duck Head interfaces are unsuccessful in their efforts
to address the year 2000 problem, however, Duck Head could experience business
interruptions that could have a material adverse effect on its operations.
These failures could also require substantial time, effort and expenditures on
the part of Duck Head.
VARIOUS RESTRICTIONS AND AGREEMENTS COULD HINDER ANY ATTEMPT BY A THIRD PERSON
TO CHANGE CONTROL OF DUCK HEAD.
Prior to the Duck Head distribution, Duck Head will enter into a rights
agreement providing for the issuance of rights that will cause substantial
dilution to any person or group of persons that acquires 20% or more of the
outstanding Duck Head common shares without the rights having been redeemed. In
addition, Duck Head's articles of incorporation and bylaws and the Official Code
of Georgia contain provisions that could delay or prevent a change in control of
Duck Head in a transaction that is not approved by its board of directors or
that is on a leveraged basis or otherwise. These include provisions requiring
advance notification of stockholder nominations for director and stockholder
proposals, setting forth additional factors to be considered by the board of
directors in evaluating extraordinary transactions, prohibiting cumulative
voting, limiting business combinations with stockholders that have a significant
beneficial ownership in Duck Head shares, and prohibiting stockholders from
calling a special meeting or taking action by written consent in lieu of a
stockholders' meeting. Moreover, Duck Head's board of directors has the
authority, without further action by the stockholders, to set the terms of and
to issue preferred stock. Issuing preferred stock could adversely affect the
voting power of the owners of Duck Head common stock, including the loss of
voting control to others.
Duck Head's credit agreement also includes restrictions on the ability of
Duck Head to pay dividends and make share repurchases. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Dividends and Purchases by Duck Head of its Own Stock".
All of these provisions could deter or prevent an acquiror that is
interested in acquiring Duck Head on a leveraged basis or otherwise from doing
so. You can find more information on these provisions under the portions of
this documents found under the headings "Description of Duck Head Capital
Stock".
22
<PAGE>
THE DUCK HEAD DISTRIBUTION
PARTIES TO THE DISTRIBUTION AGREEMENT
Delta Woodside
---------------
Delta Woodside is a South Carolina corporation with its principal executive
offices located at 233 North Main Street, Suite 200, Greenville, South Carolina
29601 (telephone number: 864-232-8301).
Prior to the Duck Head distribution, Delta Woodside had three operating
divisions: Delta Mills Marketing Company, Duck Head Apparel Company and Delta
Apparel Company.
- Delta Mills Marketing Company produces a range of cotton, synthetic
and blended finished and unfinished woven products that are sold for
the ultimate production of apparel, home furnishings and other
products. After the Duck Head distribution and the Delta Apparel
distribution, Delta Mills Marketing Company will remain the only
continuing Delta Woodside operation.
- Pursuant to the Duck Head distribution, Delta Woodside will distribute
to its stockholders all of the outstanding common stock of Duck Head,
which will continue the business formerly conducted by the Duck Head
Apparel Company division of various subsidiaries of Delta Woodside.
For a description of the business of the Duck Head Apparel Company
division, see the information under the heading "Business of Duck
Head".
- Simultaneously with the Duck Head distribution, Delta Woodside will,
pursuant to the Delta Apparel distribution, distribute to its
stockholders all of the outstanding stock of Delta Apparel, which will
continue the business formerly conducted by the Delta Apparel Company
division of various subsidiaries of Delta Woodside. For a description
of the business of the Delta Apparel Company division, see the
information below under the subheading "Delta Apparel".
Duck Head
----------
Duck Head is a Georgia corporation with its principal executive offices
located at 1020 Barrow Industrial Parkway, P.O. Box 688, Winder, Georgia 30680
(telephone number: 770-867-3111).
Delta Apparel
--------------
Delta Apparel is a Georgia corporation with its principal executive offices
located at 3355 Breckinridge Blvd., Suite 100, Duluth, Georgia 30680 (telephone
number: 770-806-6800). Delta Apparel is a vertically integrated supplier of
knit apparel, particularly T-shirts, sportswear and fleece goods and sells its
products to distributors, screen printers and private label accounts.
BACKGROUND OF THE DUCK HEAD DISTRIBUTION
Since the middle of its 1998 fiscal year, Delta Woodside's board of
directors has explored various means, in addition to effectively operating Delta
Woodside's businesses, to enhance stockholder value.
On March 9, 1998, Delta Woodside announced that it was withdrawing from the
circular knit fabrics business, which had operated under the name of Stevcoknit
Fabrics Company, and would be selling or closing and liquidating its two
knitting, dyeing and finishing plants in Wallace, North Carolina, and its yarn
spinning plant in Spartanburg, South Carolina. In the announcement, Delta
Woodside also stated that it had decided to sell its Nautilus International
fitness equipment division, and had retained an investment banking firm to
handle the sale.
23
<PAGE>
Delta Woodside completed most of the liquidation and sale of the Stevcoknit
Fabrics Company division during its 1998 fiscal year. The Nautilus
International sale was consummated in January 1999.
On September 15, 1998, Delta Woodside announced that its board of directors
had approved a plan to purchase from time to time up to 2,500,000 outstanding
Delta Woodside common shares at prices and at times at the discretion of Delta
Woodside's top management. The announcement stated that Delta Woodside believed
that, at times, its stock price was undervalued and that these purchases would
enhance stockholder value.
At a meeting on October 9, 1998, the Delta Woodside board of directors made
the decision to sell the Duck Head Apparel Company division. To assist in this
transaction, Delta Woodside hired an investment banking firm.
On January 21, 1999, Delta Woodside announced that it had discussions with
third parties with respect to a possible sale of the Duck Head Apparel Company
division, and that, based on these discussions, Delta Woodside was continuing to
explore strategic alternatives for the Duck Head Apparel Company division, but
could not be reasonably certain that a transaction on satisfactory terms would
be consummated in the near future. The announcement stated that, for this
reason, Delta Woodside had made the decision to continue to report the Duck Head
Apparel Company division as a part of continuing operations.
At a meeting on February 4, 1999, the Delta Woodside board of directors
approved a plan to effect a major restructuring of Delta Woodside. This
restructuring would have involved the spin-off to the Delta Woodside
stockholders of each of Delta Woodside's two apparel divisions, leaving the
Delta Mills, Inc. subsidiary, and its operating division, Delta Mills Marketing
Company, in Delta Woodside. Simultaneously with the spin-off, Delta Woodside
would have been sold to a third party buyer not yet identified. Under this
plan, the Delta Woodside stockholders would have received, for their shares of
Delta Woodside common stock, shares of each of the new spun-off apparel
companies and cash for their post spin-off Delta Woodside shares. The plan
would have been subject to the approval of the Delta Woodside stockholders. If
the plan had been approved by the requisite stockholder vote, the Rainsford
plant in Edgefield, South Carolina, would have been sold by the Delta Mills,
Inc. subsidiary to the Delta Apparel Company division, the Duck Head Apparel
Company division and the Delta Apparel Company division would have been
separated into two corporations, and the stock of each of the Duck Head
corporation and the Delta Apparel corporation would have been distributed to all
of the Delta Woodside stockholders. The Delta Woodside board of directors
decided that Delta Woodside would promptly begin the process of soliciting
offers for the purchase of the post spin-off Delta Woodside common stock, and
that Delta Woodside would retain an investment banking firm to assist in the
implementation of this restructuring plan.
On March 16, 1999, Delta Woodside announced that Robert Rockey was assuming
the position of chief executive officer of the Duck Head Apparel Company
division, effective immediately. The announcement stated that, after the
planned spin-off of the Duck Head Apparel Company operation, Mr. Rockey would
serve as chairman and chief executive officer of that new separate corporation.
On March 23, 1999, Delta Woodside announced that it had engaged Prudential
Securities Incorporated (which this document refers to as "Prudential") to
advise the Delta Woodside board of directors with respect to the previously
announced plan to sell the portion of Delta Woodside remaining after the
distribution to the Delta Woodside stockholders of the shares of stock of Delta
Woodside's apparel businesses. The announcement also stated that the Duck Head
Apparel Company division was no longer for sale.
Following this announcement, Delta Woodside provided information
respecting a possible sale of the remaining Delta Woodside--- to nineteen
companies. None of these potential purchasers, however, made an offer for the
remaining Delta Woodside that Delta Woodside considered to be satisfactory.
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On April 21, 1999, Delta Woodside announced that Robert W. Humphreys was
assuming the position of president and chief executive officer of the Delta
Apparel Company division. The announcement stated that, after the planned
spin-off of the Delta Apparel Company operation, Mr. Humphreys would serve as
the president and chief executive officer of that new separate corporation.
At a meeting on June 24, 1999, the Delta Woodside board of directors
decided to terminate the process of attempting to sell a post-spin-off Delta
Woodside comprised solely of Delta Mills Marketing Company in line with its
previously-announced plan, because it had not received any satisfactory offer
for the business. The Board determined to continue to explore other strategies
to enhance stockholder value, including: (1) the purchase of the Delta Apparel
Company division and the Duck Head Apparel Company division by the Delta Mills,
Inc. subsidiary, or (2) a spin-off/recapitalization in which the apparel
divisions would be spun-off to the Delta Woodside stockholders as separate
public companies, and substantial cash would be paid out to stockholders from
new borrowings by the remaining Delta Woodside. Under the purchase of the Delta
Apparel Company division and the Duck Head Apparel Company division by Delta
Mills, Inc. scenario, Delta Woodside would have been provided with substantial
cash to make acquisitions of Delta Woodside common stock or other businesses, or
for other purposes. Under the spin-off/recapitalization scenario, Delta
Woodside stockholders would have received, for their Delta Woodside common
shares, shares of each of the new spun-off apparel companies, cash and stock in
the remaining Delta Woodside. Also, additional shares of the remaining Delta
Woodside (representing more than 20% of the then outstanding shares of the
remaining Delta Woodside) would have been sold to members of management of Delta
Mills Marketing Company. Consummation of the spin-off/recapitalization
transaction was to be conditioned upon receiving a favorable vote of the Delta
Woodside stockholders.
Following this announcement, Delta Woodside, with the assistance of
Prudential, explored the possibility of Delta Mills, Inc. refinancing its
existing $150 million of 9 -5/8% Senior Notes with a larger issue of
indebtedness in order to effect the proposed recapitalization. During the time
frame of this examination, however, the interest rates payable by issuers of new
senior debt in the textile and apparel industries became higher than were deemed
acceptable by the Delta Woodside board of directors.
On August 20, 1999, Delta Woodside announced that, due to weakness in the
bond market, Delta Woodside believed that its previously announced
recapitalization/spin-off strategy was not feasible at that time. Delta
Woodside further announced that, because Delta Woodside believed that its
stockholders would best be served by separating the operating companies, Delta
Woodside did not plan to pursue the acquisition of the two apparel divisions by
its textile subsidiary, Delta Mills, Inc., at that time. The announcement also
stated that Delta Woodside was continuing to explore strategic alternatives to
accomplish the separation of its operating companies, and would announce
specific plans in the upcoming months.
On October 4, 1999, Delta Woodside announced that it planned to spin off to
the Delta Woodside stockholders its two apparel businesses (Duck Head Apparel
Company and Delta Apparel Company) as two separate publicly-owned corporations.
The announcement further stated that Delta Woodside was in the process of
transferring various corporate functions to its three operating divisions (Delta
Mills Marketing Company, Duck Head Apparel Company and Delta Apparel Company).
The announcement stated that, upon the complete transfer of these functions or
at the time of the spin-offs (as appropriate), the functions then being
performed at the Delta Woodside level would no longer need to be performed at
that level, and the executive officers of Delta Woodside would resign their
positions with Delta Woodside. The announcement stated that, upon consummation
of the spin-offs, Delta Mills Marketing Company would be Delta Woodside's sole
remaining business, and William Garrett, the head of the Delta Mills Marketing
Company division, would become President and Chief Executive Officer of the
remaining Delta Woodside. The announcement stated that, in connection with the
proposed spin-offs, significant equity incentives, in the form of stock options
and incentive stock awards for the new public companies' stock, would be granted
to the managements of the new companies. The announcement stated that Delta
Woodside could not determine at that time whether the receipt of the apparel
companies' stock would, or would not, be taxable to the Delta Woodside
stockholders for Federal income tax purposes, but that, at the time that Delta
Woodside had sufficient information to determine the appropriate Federal income
tax treatment of the spin-offs, it would promptly provide the necessary income
tax information to the Delta Woodside stockholders. The announcement stated
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that Delta Woodside believed that, even if the spin-offs were determined to be
taxable for Federal income tax purposes, the spin-offs would still be in the
best interests of Delta Woodside's stockholders.
REASONS FOR THE DUCK HEAD DISTRIBUTION
Since the summer of 1998, Delta Woodside's board of directors has been
engaged in the process of exploring various means to maximize stockholder value.
The alternatives that the Delta Woodside Board has examined have included:
(a) a potential sale of the Duck Head Apparel Company division;
(b) a pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a sale of
the remaining company;
(c) a pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders accompanied by a
recapitalization of the remaining company that would involve a cash
distribution to Delta Woodside's stockholders by that remaining
company;
(d) a pro rata tax-free spin-off of Delta Woodside's two apparel
businesses to Delta Woodside's stockholders;
(e) a pro rata taxable spin-off of Delta Woodside=s two apparel businesses
to Delta Woodside=s stockholders;
(f) a disproportionate tax-free spin-off of one of Delta Woodside's
apparel businesses to one of Delta Woodside's major stockholders
accompanied by a pro rata tax-free spin-off of the other apparel
business to all the other stockholders;
(g) a potential sale of the Delta Apparel Company business or assets;
(h) a purchase by Delta Mills, Inc. of the Duck Head Apparel Company and
the Delta Apparel Company businesses; and
(i) leaving Delta Woodside's three businesses in Delta Woodside in their
current corporate form.
During the course of this exploration, the Delta Woodside board witnessed a
deterioration of general market conditions in the textile and apparel
industries. This deterioration caused the market's perceived values of textile
and apparel businesses to decline significantly.
This decline, together with the information obtained by Delta Woodside in
the process of exploring the alternatives described above, led the Delta
Woodside board to conclude that:
(i) any sale or liquidation at this time or in the near future of any of
Delta Woodside's businesses would, more likely than not, be at
depressed and unacceptable prices; and
(ii) absent a change in circumstances, the interests of Delta Woodside and
its stockholders would be best served by not pursuing the sale or
liquidation of any of Delta Woodside's businesses at this time.
The Delta Woodside Board also determined that the best interests of Delta
Woodside and its stockholders would not be served by pursuing at this time any
of the additional alternatives described above other than a pro rata spin-off of
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Delta Woodside's two apparel businesses to Delta Woodside's stockholders. The
major factors that led to this conclusion were the general market condition
deterioration described above and:
(1) contractual constraints, which added significantly to the costs of
those alternatives that required additional financing to be incurred
by Delta Mills;
(2) Unfavorable debt market conditions, particularly for debt issuances by
textile and apparel companies;
(3) Insufficient buyer interest in any of Delta Woodside's businesses at
prices deemed sufficient by the Delta Woodside board;
(4) The Delta Woodside board's belief in the future enhanced stockholder
value available from separating Delta Woodside's businesses into
separate companies; and
(5) The Delta Woodside board's conclusion that the interests of Delta
Woodside and its stockholders would be adversely affected by any
decision of the Delta Woodside board to delay implementing the
separation of its businesses. The Board believes that continuing
uncertainty in the marketplace as to Delta Woodside's strategic plans
is likely to be damaging the relations of one or more of Delta
Woodside's businesses with certain of its respective suppliers and
customers, and that continuing uncertainty by the employees of Delta
Woodside and its subsidiaries as to Delta Woodside's strategic plans
could cause Delta Woodside or its subsidiaries to lose valuable
employees.
The Delta Woodside board, therefore, concluded that the best interests of
Delta Woodside and its stockholders would be furthered by separating into
distinct public companies Delta Woodside's three businesses (Delta Mills
Marketing Company, Delta Apparel Company and Duck Head Apparel Company), and
that the best method to accomplish this separation and thereby enhance
stockholder value that is available to Delta Woodside at this time is to effect
a pro rata spin-off to Delta Woodside's stockholders of each of Delta Woodside's
apparel businesses, whether that spin-off is tax-free or taxable for federal
income tax purposes.
In reaching this determination, the Delta Woodside Board took into account
its belief that the separation of Delta Woodside's three businesses will further
the following objectives, among others, and thereby enhance stockholder value:
(a) Permit the grant of equity incentives to the separate management of
each business, which incentives would not be affected by the results
of the other businesses and, therefore, would have excellent potential
to align closely the interests of that management with those of the
stockholders;
(b) Permit the elimination of certain existing corporate overhead expenses
that result from the current need to coordinate the operations of
three distinct businesses that have separate modes of operation and
markets;
(c) Eliminate the complaints of certain customers of Delta Mills Marketing
Company (which, as a supplier to those customers, has access to
certain of their competitive information) that a competitor of theirs
(Duck Head Apparel Company) is under common management with Delta
Mills Marketing Company;
(d) Permit each business to obtain, when needed, the best equity and debt
financing possible without being affected by the operational results
of the other businesses;
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(e) Permit each business to establish long-range plans geared toward the
expected cyclicality, competitive conditions and market trends in its
own line of business, unaffected by the markets, needs and constraints
of the other businesses;
(f) Promote a more streamlined management structure for each of the three
businesses, better able to respond quickly to customer and market
demands; and
(g) Permit the value of each of the three divisions to be more accurately
reflected in the equity market by separating the results of each
business from the other two businesses.
In reaching its conclusion, the Board also took into account the following
additional factors:
- The conclusion to be delivered to the Delta Woodside Board by a third
party as to the solvency of Duck Head at the time of the Duck Head
distribution;
- The financial statements of Duck Head set forth in this document under
the heading, "Unaudited Pro Forma Combined Financial Statements", and
at pages F-1 to F-22;
- The Delta Woodside board's knowledge of the business, operations,
assets and financial condition of Duck Head;
- Duck Head management's assessment of the prospects of Duck Head;
- The current and prospective economic environment in which Duck Head
operates; and
- The terms of the distribution agreement and the tax sharing agreement.
This discussion of the information and factors considered by the Delta
Woodside board is not meant to be exhaustive but is believed to include the
material factors considered by the Delta Woodside board in authorizing the Duck
Head distribution. The Delta Woodside board did not quantify or attach any
particular weight to the various factors that it considered in reaching its
determination that the Duck Head distribution, the Delta Apparel distribution
and related transactions are advisable and in the best interests of Delta
Woodside and its stockholders. In reaching its determination, the Delta
Woodside board took the various factors into account collectively and the Delta
Woodside board did not perform a factor-by-factor analysis.
DESCRIPTION OF THE DUCK HEAD DISTRIBUTION
The distribution agreement among Delta Woodside, Duck Head and Delta
Apparel sets forth the general terms and conditions relating to, and the
relationship of the three corporations after, the Duck Head distribution. For
an extensive description of the distribution agreement, see the section of this
document found under the heading "Relationship Among Duck Head, Delta Woodside
and Delta Apparel--Distribution Agreement".
Delta Woodside plans to effect the Duck Head distribution on or about March
__, 2000 by distributing all of the issued and outstanding shares of Duck Head
common stock to the record holders of Delta Woodside common stock on the record
date for this transaction, which is February __, 2000. Delta Woodside will
distribute one share of Duck Head common stock to each of those holders for
every ten shares of Delta Woodside common stock owned of record by that holder.
The actual total number of shares of Duck Head common stock that Delta Woodside
will distribute will depend on the number of shares of Delta Woodside common
stock outstanding on the record date. Based upon the one-for-ten Duck Head
distribution ratio and the number of shares of Delta Woodside common stock
outstanding on January __, 2000, Delta Woodside will distribute approximately
2,386,000 shares of Duck Head common stock to holders of Delta Woodside common
stock, which will then constitute all of the outstanding shares of Duck Head
common stock. Duck Head common shares will be fully paid and nonassessable, and
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the holders of those shares will not be entitled to preemptive rights. For a
further description of Duck Head common stock and the rights of its holders, see
the portion of this document located under the heading "Description of Duck Head
Capital Stock".
For those holders of Delta Woodside common stock who hold their shares of
Delta Woodside common stock through a stockbroker, bank or other nominee, Delta
Woodside's distribution agent, First Union National Bank, will transfer the
shares of Duck Head common stock to the registered holders of record who will
make arrangements to credit their customers' accounts with Duck Head common
stock. Delta Woodside anticipates that stockbrokers and banks generally will
credit their customers' accounts with Duck Head common stock on or about March
__, 2000.
If a holder of Delta Woodside common stock owns a number of shares of Delta
Woodside common stock that is not a whole multiple of ten and therefore would be
entitled to receive a fraction of a whole share of Duck Head common stock, that
holder will receive cash instead of a fractional share of Duck Head common
stock. The distribution agent will aggregate into whole shares the fractional
shares to be cashed out and sell them as soon as practicable in the open market
at then prevailing prices on behalf of those registered holders who would
otherwise be entitled to receive less than whole shares. These registered
holders will receive instead a cash payment in the amount of their pro rata
share of the total proceeds of those sales, less any brokerage commissions. The
distribution agent will pay the net proceeds from sales of fractional shares
based upon the average selling price per share of Duck Head common stock of all
of those sales, less any brokerage commissions. Duck Head expects the
distribution agent to make sales on behalf of holders who would receive a
fraction of a whole Duck Head common share in the Duck Head distribution as soon
as practicable after the Duck Head distribution date. None of Delta Woodside,
Duck Head or the distribution agent guarantees any minimum sale price for those
fractional shares of Duck Head common stock, and no interest will be paid on the
sale proceeds of those shares.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Delta Woodside has attempted to structure the Duck Head distribution and
the Delta Apparel distribution to qualify as tax-free spin offs for federal
income tax purposes under Section 355 of the Internal Revenue Code. Section 355
treats a spin-off as tax free if the conditions of that statute are satisfied.
One of these conditions is that the transaction is "not used principally as a
device for the distribution of the earnings and profits" of Delta Woodside, Duck
Head or Delta Apparel.
Upon the request of a corporation that desires to effect a spin-off, the
IRS will issue a private letter ruling that the proposed spin-off will be
treated as tax-free under Section 355 so long as various conditions specified by
the IRS are satisfied. Delta Woodside believes that, with the exception of one
condition, the Duck Head distribution and the Delta Apparel distribution satisfy
all the conditions for Delta Woodside to be able to obtain a private letter
ruling from the IRS that the distributions are tax-free spin-offs under Section
355.
The one IRS private letter ruling condition that Delta Woodside is unable
to satisfy relates to the statutory requirement mentioned above that the
transaction not be used principally as a device for the distribution of earnings
and profits. The IRS private letter ruling condition is that each
non-institutional beneficial owner of at least 5% of the outstanding Delta
Woodside shares represent to the IRS that he, she or it has no plan or intention
to sell, exchange, transfer by gift or otherwise dispose of any stock in Delta
Woodside, Duck Head or Delta Apparel after the Duck Head distribution and the
Delta Apparel distribution.
Each of the non-institutional beneficial owners of at least 5% of the
outstanding Delta Woodside shares, other than Bettis C. Rainsford (a director of
Delta Woodside, Duck Head and Delta Apparel), has informed Delta Woodside that
he, she or it is willing to provide the necessary representation to the IRS.
Mr. Rainsford, however, has informed Delta Woodside that he is unwilling to
provide the required representation.
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As a result, Delta Woodside is not eligible to receive a private letter
ruling from the IRS that the Duck Head distribution and the Delta Apparel
distribution qualify as tax-free spin-offs under Section 355.
The fact that Delta Woodside is not eligible to receive a private letter
ruling from the IRS on the issue does not, however, in and of itself, mean that
the distributions do not qualify as tax-free spin-offs under Section 355.
Whether the Duck Head distribution and the Delta Apparel distribution qualify
under Section 355 as tax-free spin-offs will depend on whether the criteria in
Section 355 and the relevant rules and regulations of the IRS are satisfied.
Delta Woodside believes, based on the information currently available to
it, that the only Section 355 condition that the IRS may view as not satisfied
by the Duck Head distribution and the Delta Apparel distribution is the one
mentioned above that the distributions not be "used principally as a device for
the distribution of the earnings and profits" of Delta Woodside, Duck Head or
Delta Apparel. Whether or not the distributions satisfy this condition will
depend primarily on events and circumstances that may or may not occur after the
Duck Head distribution and the Delta Apparel distribution and over which Delta
Woodside, Duck Head and Delta Apparel will have no control. In particular, in
some circumstances one or more sales or other dispositions by any greater than
5% beneficial owner of Delta Woodside, Duck Head or Delta Apparel shares after
the distributions may indicate to the IRS that the distributions were "used
principally as a device for the distribution of the earnings and profits" of
Delta Woodside, Duck Head or Delta Apparel, whereas in other circumstances any
sales or dispositions of this nature may not. Delta Woodside cannot at this
time predict what all of its 5% or greater beneficial owners will do with
respect to their Delta Woodside shares, Duck Head shares or Delta Apparel shares
after the distributions and, therefore, is not in a position now to inform its
stockholders as to the federal income tax consequences of the Duck Head
distribution and the Delta Apparel distribution.
Notwithstanding this uncertainty, Delta Woodside will make a good faith
determination, as soon as practicable and in any event prior to January 31,
2001, on the basis of all of the facts then known to it, and advise all of its
stockholders who receive Duck Head shares in the Duck Head distribution and
Delta Apparel shares in the Delta Apparel distribution whether or not in Delta
Woodside's opinion the Duck Head distribution and the Delta Apparel distribution
should be treated as tax-free spin-offs under Section 355.
Each holder of Delta Woodside shares that receives Duck Head shares and
Delta Apparel shares in the distribution must attach a descriptive statement
about the distributions to his, her or its federal income tax return for the
year in which the distributions occur. Delta Woodside will provide the required
information to each holder of Delta Woodside shares as of the record date for
the distributions.
Material Federal Income Tax Consequences if the Duck Head Distribution and
---------------------------------------------------------------------------
the Delta Apparel Distribution Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Section 355
-----------
If the Duck Head distribution and the Delta Apparel distribution qualify as
tax-free spin-offs under Section 355, then:
1. The Delta Woodside stockholders who receive those shares will not recognize
gain upon either of the distributions, except as described immediately
below with respect to fractional shares.
2. Cash, if any, received by a Delta Woodside stockholder instead of a
fractional share of Duck Head common stock or Delta Apparel common stock
will be treated as received in exchange for that fractional share. That
stockholder will recognize gain or loss to the extent of the difference
between his, her or its tax basis in that fractional share and the amount
received for that fractional share, and, provided that fractional share is
held as a capital asset, the gain or loss will be capital gain or loss.
3. Each Delta Woodside stockholder will be required to apportion his, her or
its tax basis in the stockholder's Delta Woodside shares between the Delta
Woodside shares retained and the Duck Head shares and Delta Apparel shares
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received, with this apportionment to be made in proportion to the shares'
relative fair market values for federal income tax purposes at the date of
the distributions.
4. The Delta Woodside stockholder's holding period for the Duck Head shares
and the Delta Apparel shares received in the distributions will be the same
as the stockholder's holding period for the Delta Woodside shares with
respect to which the Duck Head distribution and the Delta Apparel
distributions are made.
5. No gain or loss will be recognized by Delta Woodside with respect to the
Duck Head distribution or the Delta Apparel distribution, except to the
extent of any excess loss accounts or deferred intercompany gains. Delta
Woodside anticipates that in connection with the distributions Delta
Woodside will recognize gain as a result of excess loss accounts or
deferred intercompany gains, but that this gain will be offset by Delta
Woodside's net operating losses.
Material Federal Income Tax Consequences if the Duck Head Distribution and
---------------------------------------------------------------------------
the Delta Apparel Distribution Do Not Qualify as Tax-Free Spin-Offs under
---------------------------------------------------------------------------
Section 355
-----------
If the Duck Head distribution and the Delta Apparel distribution do not
qualify as tax-free spin-offs under Section 355, then the following are the
material federal income tax consequences to each participating Delta Woodside
stockholder and to Delta Woodside:
1. Each Delta Woodside stockholder will recognize dividend income to the
extent of the lesser of (a) the value of the Duck Head shares and the Delta
Apparel shares received (together with any cash received for any fractional
share) or (b) the stockholder's pro rata share of the accumulated earnings
and profits of Delta Woodside for federal income tax purposes through the
end of fiscal year 2000. This dividend income will not reduce any Delta
Woodside stockholder's basis in his, her or its Delta Woodside shares.
a. Delta Woodside will advise each Delta Woodside stockholder, as soon as
practicable and in any event prior to January 31, 2001, of the fair
market value for federal income tax purposes of the Duck Head shares
and the Delta Apparel shares received by them in the distributions.
Because those values for federal income tax purposes will depend on
the trading prices of the Duck Head shares and the Delta Apparel
shares around the time of the distribution, Delta Woodside is not able
at this time to predict what those values will be.
b. Delta Woodside's accumulated earnings and profits through fiscal year
1999 were approximately $18.2 million (approximately $0.76 per Delta
Woodside share). The amount, if any, of Delta Woodside's earnings and
profits for fiscal year 2000 cannot be determined at this time. Delta
Woodside will advise each Delta Woodside stockholder, as soon as
practicable and in any event prior to January 31, 2001, of that
stockholder's pro rata share of Delta Woodside's accumulated earnings
and profits through fiscal year 2000.
2. Any value of the Duck Head shares and Delta Apparel shares (together with
any cash received for any fractional share) that exceeds the Delta Woodside
stockholder's pro rata share of Delta Woodside's accumulated earnings and
profits through fiscal year 2000 will constitute a return of capital to
that stockholder (i.e. the stockholder will not be taxed on that value) up
to the stockholder's basis in his, her or its Delta Woodside shares, and
the stockholder's basis in his, her or its Delta Woodside shares will be
reduced accordingly. Any remaining value of the Duck Head shares and Delta
Apparel shares (together with any cash received for any fractional share)
in excess of the Delta Woodside stockholder's basis in his, her or its
Delta Woodside shares will be taxable to the Delta Woodside stockholder as
gain, which will be capital gain if the Delta Woodside stock is held as a
capital asset. This capital gain will be taxable as either long-term or
short-term capital gain, depending upon the stockholder's holding period
for those Delta Woodside shares.
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3. The Delta Woodside stockholder's tax basis in the Duck Head shares and the
Delta Apparel shares received in the distributions will be equal to the
fair market value for federal income tax purposes of those shares at the
time of the distributions. The stockholder's holding period for those
shares will begin on the date of the distributions.
4. The Duck Head distribution and the Delta Apparel distribution will also be
taxable as a gain to Delta Woodside, to the extent of the excess of the
value for federal income tax purposes of the Duck Head shares and the Delta
Apparel shares distributed over their tax bases to Delta Woodside. Delta
Woodside believes that any federal income tax liability to it resulting
from the Duck Head distribution and the Delta Apparel distribution will not
be material, because any applicable recognized income will be offset by
Delta Woodside's net operating losses. Any gain recognized by Delta
Woodside on the Duck Head distribution or the Delta Apparel distribution
will increase the fiscal year 2000 earnings and profits. Delta Woodside
cannot at this time calculate the amount of this gain because it is unable
to forecast what the initial trading prices will be for the Duck Head
shares or the Delta Apparel shares, which will be the federal income tax
values of the Duck Head shares and the Delta Apparel shares for purposes of
this calculation.
Net Operating Loss Carry Forwards
-------------------------------------
As of July 3, 1999, Delta Woodside had net operating loss carry forwards,
for federal income tax purposes, of approximately $68 million. Delta Woodside
believes that, following the Duck Head distribution and the Delta Apparel
distribution, approximately $56 million of this net operating loss carry forward
will remain as a tax attribute of Delta Woodside ($10 million of which will be
subject to limitation under the separate return limitation rules), approximately
$3 million will be a tax attribute of Duck Head and approximately $9 million
will be a tax attribute of Delta Apparel.
Prior to the Duck Head distribution and the Delta Apparel distribution, the
Duck Head Apparel Company division and the Delta Apparel Company division were
part of the Delta Woodside consolidated group, and the net operating losses of
any member of the Delta Woodside consolidated group were generally available to
reduce the consolidated federal taxable income of the group. For financial
reporting purposes, prior to the Duck Head distribution and the Delta Apparel
distribution each of Duck Head and Delta Apparel carries "deferred tax assets"
on its balance sheet to reflect, among other matters, the financial impact of
their respective hypothetical separate company net operating loss carry
forwards. For federal income tax purposes, tax attributes, such as net
operating loss carry forwards, remain with the corporate entity, not the
division, that generated them. Therefore, with the Duck Head distribution and
the Delta Apparel distribution, tax attributes, including the Delta Woodside
consolidated federal net operating loss carry forward, will be allocated among
Delta Woodside, Duck Head and Delta Apparel in accordance with the federal
consolidated return regulations.
The pro forma balance sheet of Duck Head that is included under the heading
"Unaudited Pro Forma Combined Financial Statements" reflects Duck Head's
expected allocable portion of the pre-distribution Delta Woodside consolidated
federal net operating loss carry forward.
THE FOREGOING IS A GENERAL DISCUSSION AND IS NOT INTENDED TO SERVE AS
SPECIFIC ADVICE FOR ANY PARTICULAR DELTA WOODSIDE STOCKHOLDER, SINCE THE TAX
CONSEQUENCES OF THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION TO
EACH STOCKHOLDER WILL DEPEND UPON THAT STOCKHOLDER'S OWN PARTICULAR
CIRCUMSTANCES. EACH STOCKHOLDER SHOULD CONSULT HIS, HER OR ITS OWN ADVISORS AS
TO THE FEDERAL, FOREIGN, STATE AND LOCAL TAX CONSEQUENCES TO THAT STOCKHOLDER OF
THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION.
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ACCOUNTING TREATMENT
The Duck Head distribution and the Delta Apparel distribution will be
accounted for in accordance with United States generally accepted accounting
principles. Accordingly, the Duck Head distribution will be accounted for by
Delta Woodside based on the recorded amounts of the net assets being spun-off
after reduction, if appropriate, for any indicated impairment of value. Delta
Woodside will charge directly to equity as a dividend the historical cost
carrying amount of the net assets of Duck Head.
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TRADING MARKET
As of the Duck Head record date, all of the outstanding shares of Duck Head
were owned by an indirect wholly-owned subsidiary of Delta Woodside. As of that
date, there were approximately 2,500 record holders of the common stock of Delta
Woodside who will be entitled to participate in the Duck Head distribution.
Before the Duck Head distribution, there has been no trading market for
Duck Head common stock, and there can be no assurances that an active trading
market will develop or be sustained in the future. Before the Duck Head
distribution, Duck Head will apply to The American Stock Exchange to approve
shares of Duck Head's common stock for listing, subject to official notice of
issuance. If this application is not approved, Duck Head expects that the Duck
Head shares will trade in the over-the-counter market. Duck Head also
anticipates that a "when-issued" trading market will develop in its common stock
before the Duck Head distribution date.
Duck Head cannot predict the prices at which its common stock may trade,
either before the Duck Head distribution on a "when-issued" basis or after the
Duck Head distribution. Until an orderly market develops, if at all, the
trading prices of that stock may fluctuate significantly. In addition, the
trading prices of the Delta Woodside shares have fluctuated significantly and
Duck Head believes that the trading prices of its shares are likely to be
subject to similar significant fluctuations. The marketplace will determine the
trading prices of Duck Head common stock. Many factors may influence those
prices. These factors may include, among others, the depth and liquidity of the
market for the Duck Head shares, quarter-to-quarter variations in Duck Head's
actual or anticipated financial results, investor perceptions of the apparel
industry and general conditions in the U.S. equity markets. For a description
of some of the factors that may impact the prices at which the Duck Head shares
may trade, see the section of this document found under the heading "Risk
Factors".
The Duck Head shares received in the Duck Head distribution will be freely
transferable, except for those shares received by any person who may be deemed
to be a Duck Head "affiliate" within the meaning of Rule 144 under the
Securities Act of 1933. Persons who may be deemed to be Duck Head affiliates
after the Duck Head distribution generally will be individuals or entities that
directly, or indirectly through one or more intermediaries, control, are
controlled by, or are under common control with, Duck Head. Duck Head
affiliates may sell their Duck Head common stock received in the Duck Head
distribution only under an effective registration statement under the Securities
Act of 1933 or under an exemption from registration under that Act.
At the time of the Duck Head distribution, the only outstanding equity
securities of Duck Head will be the approximately 2,386,000 shares being
distributed. As described below under the heading "Interests of Directors and
Executive Officers in the Duck Head Distribution":
- Robert D. Rockey, Jr. has the right to acquire 1,000,000 Duck Head
shares from Duck Head on the date that is six months after the Duck
Head distribution; and
- Duck Head anticipates that, during the first six months after the Duck
Head distribution, it will grant stock options under its stock option
plan and incentive stock awards under its incentive stock award plan
to its executive officers. Duck Head may grant additional stock
options and incentive stock awards during that period to other
employees of Duck Head and may grant additional stock options and
additional stock awards in the future to its executive officers and
other employees. Duck Head shares issued upon exercise of stock
options granted under the stock option plan and awards granted under
the incentive stock award plan will be registered on a Registration
Statement on Form S-8 under the Securities Act of 1933 and will
therefore generally be freely transferable under the securities laws,
except by affiliates as described above. See "Interests of Directors
and Executive Officers in the Duck Head Distribution - Receipt of Duck
Head Stock Options and Duck Head Incentive Stock Awards".
34
<PAGE>
Except as described above and except for the rights agreement which is
discussed below under the heading "Description of Duck Head Capital Stock-Rights
Plan", Duck Head will not have any other securities outstanding as of or
immediately after the Duck Head distribution, and Duck Head has not entered into
any agreement or otherwise committed to register any Duck Head shares under the
Securities Act of 1933 for sale by security holders.
35
<PAGE>
RELATIONSHIPS AMONG DUCK HEAD,
DELTA WOODSIDE AND DELTA APPAREL
This section describes the primary agreements among Duck Head, Delta
Woodside and Delta Apparel that will define the ongoing relationships among them
and their subsidiaries and affiliates after the Duck Head distribution and is
expected to provide for the orderly separation of the three companies. The
following description of the distribution agreement and the tax sharing
agreement summarizes the material terms of those agreements. If there is a
discrepancy between this summary and those agreements, you should rely on the
information in those agreements. Duck Head has filed those agreements as
exhibits to its Registration Statement on Form 10 filed with the Securities and
Exchange Commission. This document is a part of that registration statement.
DISTRIBUTION AGREEMENT
Duck Head has entered into a distribution agreement with Delta Woodside and
Delta Apparel as of January __, 2000. The distribution agreement provides for
the procedures for effecting the Duck Head distribution and the Delta Apparel
distribution. For this purpose, as summarized below, the distribution agreement
provides for the principal corporate transactions and procedures for separating
the Duck Head Apparel division's business and the Delta Apparel division's
business from the rest of Delta Woodside. Also, as summarized below, the
distribution agreement defines the relationships among Duck Head, Delta Woodside
and Delta Apparel after the Duck Head distribution with respect to, among other
things, indemnification arrangements and employee benefit arrangements.
Intercompany reorganization
----------------------------
The distribution agreement provides, that, no later than the time the Duck
Head distribution occurs, Delta Woodside, Duck Head and Delta Apparel will have
caused the following to have been effected:
(a) Delta Woodside will have contributed, as contributions to capital, all
net debt amounts owed to it by the corporations that previously had
conducted the Duck Head Apparel division's business and the Delta
Apparel division's business.
(b) All the assets used in the operations of the Duck Head Apparel
division's business will have become owned by Duck Head or a
subsidiary of Duck Head.
(c) Duck Head will have assumed all of the liabilities of the Duck Head
Apparel division of Delta Woodside, and will have caused all holders
of indebtedness for borrowed money that are part of the assumed Duck
Head liabilities and all lessors of leases that are part of the
assumed Duck Head liabilities to release all obligors (other than Duck
Head or any of its subsidiaries) of that indebtedness and under those
leases.
(d) All the assets used in the operations of the Delta Apparel division's
business will have become owned by Delta Apparel or a subsidiary of
Delta Apparel, including the sale by Delta Mills to Delta Apparel of
the Rainsford Plant, located in Edgefield, SC, to Delta Apparel as
described below under the subheading "Other Relationships".
(e) Delta Apparel will have assumed all of the liabilities of the Delta
Apparel division of Delta Woodside, and will have caused all holders
of indebtedness for borrowed money that are part of the assumed Delta
Apparel liabilities and all lessors of leases that are part of the
assumed Delta Apparel liabilities to release all obligors (other than
Delta Apparel or any of its subsidiaries) of that indebtedness and
under those leases.
36
<PAGE>
(f) Delta Woodside will have caused all holders of indebtedness for
borrowed money and all lessors of leases that are not part of the
liabilities assumed by Duck Head or the liabilities assumed by Delta
Apparel to release all obligors (other than Delta Woodside or its
remaining subsidiaries) of that indebtedness and under those leases.
Indemnification
---------------
Each of Delta Woodside, Duck Head and Delta Apparel has agreed to indemnify
each other and their respective directors, officers, employees and agents
against any and all liabilities and expenses incurred or suffered that arise out
of or pertain to:
(a) any breach of the representations and warranties made by it in the
distribution agreement;
(b) any breach by it of any obligation under the distribution agreement;
(c) the liabilities assumed or retained by it under the distribution
agreement; or
(d) any untrue statement or alleged untrue statement of a material fact or
omission or alleged omission of a material fact contained in any of
its disclosure documents filed by it with the SEC, except insofar as
the misstatement or omission was based upon information furnished to
the indemnifying party by the indemnified party.
Employee Matters
-----------------
Delta Woodside will cause those individuals who are employed by the Duck
Head Apparel division to become employees of Duck Head, Duck Head will assume
the accrued employee benefits of these employees and Delta Woodside will cause
the account balance of each of these employees in any and all of Delta
Woodside's employee benefit plans(other than the Delta Woodside stock option
plan) to be transferred to a comparable employee benefit plan of Duck Head.
Intercompany Accounts
----------------------
Other than any amounts owed under the tax sharing agreement, generally all
intercompany receivable, payable and loan balances existing as of the time of
the Duck Head distribution between Duck Head, on the one hand, and Delta Apparel
and Delta Woodside, on the other hand, will be deemed to have been paid in full
by the party or parties owing the relevant obligation.
Transaction Expenses
---------------------
Generally, all costs and expenses incurred in connection with the Duck Head
distribution, the Delta Apparel distribution and related transactions shall be
paid by Delta Woodside; provided that the holders of the Delta Woodside shares
shall pay their own expenses, if any, incurred in connection with the Duck Head
distribution and the Delta Apparel distribution.
TAX SHARING AGREEMENT
Duck Head will enter into a tax sharing agreement with Delta Woodside and
Delta Apparel that will describe, among other things, each company's rights and
obligations relating to tax payments and refunds for periods before and after
the Duck Head distribution and related matters like the filing of tax returns
and the handling of audits and other tax proceedings. The tax sharing agreement
also describes the indemnification arrangements with respect to tax matters
among Duck Head and its subsidiaries (which this document refers to as the Duck
Head tax group), Delta Woodside and its subsidiaries after the Duck Head
distribution and the Delta Apparel distribution (which this document refers to
as the Delta Woodside tax group) and Delta Apparel and its subsidiaries (which
this document refers to as the Delta Apparel tax group).
37
<PAGE>
Under the tax sharing agreement, the allocation of tax liabilities and
benefits is generally as follows:
- With respect to federal income taxes:
(a) For each taxable year that ends prior to the Duck Head
distribution, Delta Woodside shall be responsible for paying any
increase in federal income taxes, and shall be entitled to
receive the benefit of any refund of or saving in federal income
taxes, that results from any tax proceeding with respect to any
returns relating to federal income taxes of the Delta Woodside
consolidated federal income tax group.
(b) For the taxable period ending on the date of the Duck Head
distribution, Delta Woodside shall be responsible for paying any
federal income taxes, and shall be entitled to any refund of or
saving in federal income taxes, with respect to the Delta
Woodside consolidated federal income tax group.
- With respect to state income, franchise or similar taxes:
(a) For each taxable year that ends prior to the Duck Head
distribution, each corporation that is a member of the Delta
Woodside tax group, the Delta Apparel tax group or the Duck Head
tax group shall be responsible for paying any increase in those
state taxes, and shall be entitled to receive the benefit of any
refund of or saving in those state taxes, that results from any
tax proceeding with respect to any returns relating to those
state taxes of that corporation (or any predecessor by merger of
that corporation).
(b) For the taxable period ending on the date of the Duck Head
distribution, each corporation that is a member of the Delta
Woodside tax group, the Delta Apparel tax group or the Duck Head
tax group shall be responsible for paying any of those state
taxes, and shall be entitled to any refund of or saving in those
state taxes, with respect to that corporation (or any predecessor
by merger of that corporation).
- With respect to federal employment taxes:
(a) Delta Woodside shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Duck Head distribution, by
any member of the Delta Woodside federal income tax consolidated
group for any part of the period ending on the date of the Duck
Head distribution or by any member of the Delta Woodside tax
group for any period after that date to all individuals who are
past or present employees of any business of Delta Woodside other
than the business of Duck Head or the business of Delta Apparel.
(b) Delta Apparel shall be responsible for the federal employment
taxes payable with respect to the compensation paid, whether
before, on or after the date of the Duck Head distribution, by
any member of the Delta Woodside federal income tax consolidated
group for any part of the period ending on the date of the Delta
Apparel distribution or by any member of the Delta Apparel tax
group for any period after that date to all individuals who are
past or present employee of the business of Delta Apparel.
(c) Duck Head shall be responsible for the federal employment taxes
payable with respect to the compensation paid, whether before, on
or after the date of
38
<PAGE>
the Duck Head distribution, by any member of the Delta Woodside
federal income tax consolidated group for any part of the period
ending on the date of the Duck Head distribution or by any member
of the Duck Head tax group for any period after that date to all
individuals who are past or present employee of the business of
Duck Head.
- With respect to any taxes, other than federal employment taxes,
federal income taxes and state income, franchise or similar taxes:
(a) Delta Woodside shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to any
business of Delta Woodside other than the business of Duck Head
or the business of Delta Apparel;
(b) Delta Apparel shall be responsible for any of these taxes,
regardless of the time period or circumstance with respect to
which the taxes are payable, arising from or attributable to the
business of Delta Apparel; and
(c) Duck Head shall be responsible for any of these taxes, regardless
of the time period or circumstance with respect to which the
taxes are payable, arising from or attributable to the business
of Duck Head.
- The Delta Woodside tax group shall be responsible for all taxes, and
shall receive the benefit of all tax items, of any member of the Delta
Woodside tax group that relate to any taxable period after the Duck
Head distribution. The Delta Apparel tax group shall be responsible
for all taxes, and shall receive the benefit of all tax items, of any
member of the Delta Apparel tax group that relate to any taxable
period after the Delta Apparel distribution. The Duck Head tax group
shall be responsible for all taxes, and shall receive the benefit of
all tax items, of any member of the Duck Head tax group that relate to
any taxable period after the Duck Head distribution.
Under the tax sharing agreement, the Duck Head tax group and the Delta
Apparel tax group have irrevocably designated Delta Woodside as their agent for
purposes of taking a broad range of actions in connection with taxes for
pre-distribution periods. Those actions include the settlement of tax audits,
other tax proceedings and disputes arising out of the interpretation of the tax
sharing agreement. These arrangements may result in conflicts of interest among
Duck Head, Delta Woodside and Delta Apparel.
Under the tax sharing agreement, the Duck Head tax group, the Delta
Woodside tax group and the Delta Apparel tax group have agreed to indemnify one
another against various tax liabilities, generally in accordance with the
allocation of tax liabilities and benefits described above.
OTHER RELATIONSHIPS
Boards of Directors of Duck Head, Delta Woodside and Delta Apparel
---------------------------------------------------------------------------
The following directors of Duck Head are also directors of Delta Woodside
and Delta Apparel: William F. Garrett, C. C. Guy, Dr. James F. Kane, Dr. Max
Lennon, E. Erwin Maddrey, II, Buck A. Mickel and Bettis C. Rainsford. In the
event that any material issue were to arise between Duck Head, on the one hand,
and either Delta Woodside or Delta Apparel, on the other hand, these directors
could be deemed to have a conflict of interest with respect to that issue. In
that circumstance, Duck Head anticipates that it will proceed in a manner that
is determined by a majority of those members of Duck Head's board of directors
who are not also members of the board of directors of Delta Woodside or the
board of directors of Delta Apparel (as applicable).
39
<PAGE>
Sales to and Purchases from Delta Woodside or Delta Apparel of Goods or
---------------------------------------------------------------------------
Manufacturing Services
- -----------------------
In the ordinary course of Duck Head's business, Duck Head has produced
T-shirts for Delta Apparel, purchased T-shirts from Delta Apparel and purchased
fabrics from Delta Mills. The following table shows these transactions for the
last three fiscal years and for the first three months of fiscal year 2000:
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First quarter
------------------ ----------------
Of
--
1997 1998 1999 Fiscal year 2000
----- ----- ---- ----------------
<S> <C> <C> <C> <C>
Sold to Delta Apparel 653 132 -- --
Purchased from Delta Apparel 403 156 481 6
Purchased from Delta Mills 3,338 1,824 662 --
</TABLE>
All of these T-shirt and fabric sales were made at prices deemed by Duck
Head to approximate market value.
Duck Head anticipates that any future sales or purchases to or from Delta
Woodside or Delta Apparel in the future will not be material.
Management Services
--------------------
Delta Woodside has provided various services to the operating divisions of
its subsidiaries, including the Delta Mills Marketing Company, Duck Head Apparel
Company and Delta Apparel Company divisions. These services include payroll,
accounting, internal audit, employee benefits and services, purchasing, cotton
procurement, management information services and tax accounting. These services
have been charged on the basis of Delta Woodside=s cost and allocated to the
various divisions based on employee headcount, computer time, projected sales
and other criteria.
During fiscal years 1997, 1998, and 1999, Delta Woodside charged the Duck
Head Apparel Company division $772,000, $882,000 and $777,000, respectively, for
these services.
Other
-----
For further information on transactions with affiliates by Duck Head, see
Note 8 to the Combined Financial Statements of Duck Head under "Index to
Financial Statements" in this document, which information is incorporated into
this section by reference.
Any transaction entered into between Duck Head and any officer, director,
principal stockholder or any of their affiliates has been on terms that Duck
Head believes are comparable to those that would be available to Duck Head from
non-affiliated persons.
40
<PAGE>
CAPITALIZATION
The following table sets forth at October 2, 1999: (1) the capitalization
of Duck Head, and (2) the pro forma capitalization of Duck Head to give effect
to the transactions described under the portion of this document found under the
heading "The Duck Head Distribution". You should read this table in conjunction
with the information located under the heading "Unaudited Pro Forma Combined
Financial Statements" and the condensed combined financial statements of Duck
Head and related notes as of October 2, 1999 and for the three months ended
October 2, 1999, included on pages 42-47 and F-18 - F-22, respectively, of this
document.
<TABLE>
<CAPTION>
AS OF
OCTOBER 2, 1999
------------------------------
ACTUAL PRO FORMA
------------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current maturities:
Capital lease obligations $ 87 87
Mortgage loan payable 6,339 6,339
Due to parent and affiliates 118,509 ---
------------------ ----------
Total long-term debt (including current maturities) 124,935 6,426
Less current maturities (101,726) (1,084)
------------------ ----------
Total long-term debt (excluding current maturities) 23,209 5,342
Stockholders' equity (deficit):
Preferred stock, 2,000,000 shares authorized; none issued and outstanding --- ---
Common stock, $0.01 par value; 9,000,000 shares
authorized; 2,386,000 shares issued and
outstanding --- 24
Additional paid-in capital --- 23,060
Divisional deficit (93,086) ---
------------------ ----------
Total stockholders' equity (deficit) (93,086) 23,084
------------------ ----------
Total capitalization $ (69,877) 28,426
================== ==========
</TABLE>
41
<PAGE>
UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
The following unaudited pro forma combined financial information has been
prepared from and should be read in conjunction with the historical financial
statements and the related notes thereto of Duck Head included in this document
at pages F-1 to F-22.
The unaudited pro forma combined balance sheet has been prepared to give
effect to the following transactions as if they occurred on October 2, 1999:
- The contribution to equity of the intercompany debt owed by Duck Head
to Delta Woodside and the distribution of Duck Head common stock to
existing Delta Woodside stockholders; and
- The refinancing of current existing debt.
The unaudited pro forma combined statements of operations for the year
ended July 3, 1999 and for the three months ended October 2, 1999 give effect to
the following transactions as if they had occurred at the beginning of the
fiscal year ended July 3, 1999:
- The decreased interest expense attributable to the contribution to
equity of the intercompany debt and the refinancing of existing
third-party debt;
- The elimination of the intercompany management fees and the incurred
cost to replace services performed by Delta Woodside; and
- - The distribution of Duck Head common stock to existing Delta Woodside
stockholders.
Duck Head believes that the assumptions used provide a reasonable basis on
which to present the unaudited pro forma combined financial statements. Duck
Head is providing the unaudited pro forma combined financial statements to you
for informational purposes only. You should not construe them to be indicative
of Duck Head's results of operations or financial position had the transactions
and events described above been consummated on the dates assumed. These pro
forma combined financial statements also do not project the results of
operations or financial position for any future period or date.
42
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
OCTOBER 2, 1999
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------- ------------ -----------
ASSETS (IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C>
Current assets:
Cash $ 373 373
Accounts receivable 7,110 7,110
Affiliate receivables 2,774 (2,774) (1) ---
Inventories 19,137 19,137
Prepaid expenses and other current assets 166 166
Deferred tax assets 3,343 3,343
------------- ------------ -----------
Total current assets 32,903 (2,774) 30,129
Property, plant and equipment, net 11,075 11,075
------------- ------------ -----------
$ 43,978 (2,774) 41,204
============= ============ ===========
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,161 3,161
Accrued expenses 3,322 3,322
Current portion of long-term debt 6,339 (5,311) (2) 1,028
Current portion of capital leases 56 56
Due to Parent and affiliates 95,331 (95,331) (1) ---
Income taxes payable 442 (435) (1) 7
------------- ------------ -----------
Total current liabilities 108,651 (101,077) 7,574
Long-term debt --- 5,311 (2) 5,311
Long-term portion of capital leases 31 31
Due to Parent 23, 178 (23,178) (1) ---
Deferred tax liabilities 4,440 4,440
Other liabilities 764 764
------------- ------------ -----------
Total liabilities 137,064 (118,944) 18,120
STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Preferred stock, 2,000,000 shares authorized; none
issued and outstanding --- ---
Common stock, $0.01 par value; 9,000,000
shares authorized; 2,386,000 issued and outstanding --- 24 (1) 24
Additional paid in capital --- 23,060 (1) 23,060
Divisional deficit (93,086) 93,086 (1) --
------------- ------------ -----------
Total stockholders'/divisional equity (deficit) (93,086) 116,170 23,084
------------- ------------ -----------
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY
(DEFICIT) $ 43,978 (2,774) 41,204
============= ============ ===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
43
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
OCTOBER 2, 1999
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined balance sheet:
1) To reflect the contribution to equity of intercompany debt owed by Duck
Head to Delta Woodside totaling $115,735 and the distribution of 2,386,000
Duck Head common shares to Delta Woodside's existing stockholders.
2) Duck Head will refinance the existing mortgage loan on its Winder, Georgia
office and distribution center at an interest rate similar to that of the
existing loan.
44
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999
PROFORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------- ------------ -----------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales $ 70,642 70,642
Cost of goods sold (62,468) (62,468)
------------- -----------
Gross Profit 8,174 8,174
Selling, general and administrative expenses (34,005) (34,005)
Intercompany management fees (777) 179 (2) (598)
Impairment charges (13,650) (13,650)
Royalty and other income 1,027 1,027
------------- ------------ -----------
Operating loss (39,231) 179 (39,052)
Interest (income) expense:
Interest income (expense), net 74 (945) (3) 871
Intercompany interest expense (8,296) 8,296 (3) --
------------- ------------ -----------
(8,222) 7,351 (871)
------------- ------------ -----------
Loss before taxes (47,453) 7,530 (39,923)
Income tax expense (223) (223)
------------- ------------ -----------
Net loss (47,676) 7,530 (40,146)
============= ============ ===========
Basic and diluted net loss per share $ (16.83)
===========
Weighted average shares outstanding used in basic
and diluted per share(3) 2,386,000
===========
</TABLE>
See notes to unaudited pro forma combined financial statements.
45
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
OCTOBER 2, 1999
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales $ 16,063 16,063
Cost of goods sold (11,117) (11,117)
------------ ------------
Gross profit 4,946 4,946
Selling, general and administrative expenses (5,332) (86) (2) (5,418)
Royalty and other income 767 767
------------ ------------ ------------
Operating income 381 (86) 295
Interest (income) expense:
Interest expense, net (132) (276) (1) (408)
Intercompany interest expense (1,987) 1,987 (1) --
------------ ------------ ------------
(2,119) 1,711 (408)
------------ ------------ ------------
Loss before taxes (1,738) 1,625 (113)
Income tax (benefit) (162) 162 (3) --
------------ ------------ ------------
Net income (loss) $ (1,576) 1,463 (113)
============ ============ ============
Basic and diluted net loss per share $ (0.05)
============
Weighted average shares outstanding used in basic and diluted per share (4)
2,386,000
============
</TABLE>
See notes to unaudited pro forma combined financial statements.
46
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999 AND THE THREE MONTHS ENDED OCTOBER 2,
1999
(in thousands of dollars, unless otherwise noted)
The following is a summary of the adjustments reflected in the unaudited pro
forma combined statements of operations:
1) To reflect interest expense on new bank borrowings of $945 and $408
for the fiscal year ended July 3, 1999 and the three months ended
October 2, 1999, respectively, at an assumed interest rate of 10%.
Also, to reflect the elimination of interest expense totaling $8,296
and $1,987 on the intercompany debt owed by Duck Head to Delta
Woodside for the fiscal year ended July 3, 1999 and the three months
ended October 2, 1999, respectively.
2) To eliminate intercompany management fees of $777 charged by Delta
Woodside for the fiscal year ended July 3, 1999 and $0 for the three
months ended October 2, 1999. Also to reflect the replacement of Delta
Woodside's management fees with outside fees for insurance, financial
software, audit, legal, tax consulting, internal audit and payroll
processing, board of directors expenses, and stock and stockholder
related expenses. These expenses would approximate $598 for the fiscal
year ended July 3, 1999, and $147 (an increase of $86 over the actual
incurred expenses of this type of $61) for the three months ended
October 2, 1999.
3) To reflect estimated tax liability.
4) To reflect earnings per share based on the weighted-average shares
outstanding assuming a distribution of one Duck Head share for every
ten Delta Woodside shares owned on the record date.
47
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with Duck Head's
historical financial statements and the notes to those statements, both included
elsewhere in this document.
The following discussion contains various "forward-looking statements".
Please refer to "Forward-Looking Statements May Not Be Accurate" for a
description of the uncertainties and risks associated with forward-looking
statements.
OVERVIEW OF RESULTS OF OPERATIONS
Since 1990, Duck Head has experienced significant swings in its historical
operating performance. Sales increased rapidly between 1990 and 1992. From
1993 through 1996, the business introduced several classes of new products, such
as women's and juniors' product lines. Duck Head believes, however, that the
business' infrastructure was inadequate to handle the planned growth and that
the business strategy was not supported by a wide base of Duck Head's retail
accounts. Consequently, the business failed to make timely deliveries, produced
products of an uneven quality, inadequately controlled its sourcing, disrupted
sales relationships which in some cases led to expensive litigation, and built
excessive inventories. These matters led to significant operating losses in
several of these years.
During fiscal years 1997, 1998 and 1999, Duck Head began developing twelve
fashion product deliveries per fiscal year. This resulted in fashion goods
constituting a much larger percentage of the total product offering. In
addition, in-store fixtures were rapidly installed at major retailers, which
secured good retail floor space for Duck Head. Gross margin support agreements,
however, were entered into with major customers, which resulted in much higher
return and allowance charges, mostly related to poor margins at retail on
fashion goods. Selling, general and administrative costs, primarily in product
development and marketing, and inventory levels were expanded based on planned
sales volume increases which were not achieved.
Duck Head has recently devoted considerable effort to resolving these
issues, and believes that the business is now positioned for growth. Early in
1999, Robert D. Rockey, Jr., who has extensive experience in the apparel
industry, joined the Duck Head Apparel Company division as its new President and
Chief Executive Officer. Since his arrival, the management team has commenced
planning for or implementation of the following actions:
- instituted more effective quality controls,
- moved substantially all of its manufacturing operations off-shore, and
begun more cost-effective utilization of Duck Head's leased facility
in Costa Rica,
- developed a cost-effective full-package sourcing operation to procure
much of its product from a variety of suppliers around the world,
- developed a higher quality retail customer distribution network that
eliminated several heavily promotional, lower-end retailers,
- adopted the strategy of targeting the male consumer from ages 18 to 24
years as Duck Head's primary focus in product development and
marketing,
- reduced the recent emphasis on fashion product by increasing the core
and fashion basic portion, lessening the fashion portion of its
product mix, and reducing the number of fashion product deliveries per
year,
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- reduced margin support commitments,
- reduced selling, general and administrative costs, including
significantly lower product development costs, more cost-effective
marketing programs and better utilization of distribution capacity
through providing distribution services to third parties,
- began implementing a vendor managed inventory system with its largest
customer, which Duck Head believes will yield significant sales growth
as consumer sales are more rapidly replenished,
- implemented a more stringent inventory control process to avoid
building unnecessarily high inventory levels and to more rapidly
dispose of excess inventory,
- began the development of distribution outside the eleven Southeastern
states where the Duck Head brand has historically had stronger
consumer acceptance, and
- started negotiating with two major accounts for additional new markets
outside of the southeast, with the aim of completing these
negotiations in the fourth quarter of fiscal 2000.
FIRST QUARTER OF FISCAL YEAR 2000 VERSUS FIRST QUARTER OF FISCAL YEAR 1999
Net Sales.
Consolidated net sales for the three months ended October 2, 1999 totaled
$16.1 million, as compared to $21.9 million for the three months ended September
26, 1998, a decrease of 26.5%. A summary of Duck Head's net sales for the
three months ended October 2, 1999 and September 26, 1998 follows:
Net Sales (in millions)
<TABLE>
<CAPTION>
Wholesale Retail Total
---------- ------- -------
<S> <C> <C> <C>
Fiscal year 2000 ($) 11.6 4.5 16.1
Fiscal year 1999 ($) 16.2 5.7 21.9
(Decrease) ($) (4.6) (1.2) (5.8)
Percent (decrease) (28.4%) (21.1%) (26.5%)
</TABLE>
The decrease in wholesale sales dollars reflected a decrease in unit
shipments, which was due to the loss of three key accounts, reduced volume at
other accounts and the exit from certain segments of Duck Head's private label
business. The loss of key accounts was the result of the closure of Uptons, Inc.
(a subsidiary of American Retail Group, Inc.) and the acquisition of Mercantile
Stores Company, Inc. by other key accounts, including Dillard's, Inc.
Dillard's, Inc. made the decision to discontinue from its merchandise mix any
brands (such as the Duck Head brand) that are prominently featured by certain
of Dillard's, Inc.'s competitors. During the three months ended October 2, 1999
there were no sales to Uptons, Inc., Mercantile Stores Company, Inc. or
Dillard's, Inc., while sales in the quarter ended September 26, 1998 to these
three accounts were $1.8 million. Reduced volume at other accounts was due to
inventory levels at several key accounts being reduced. These reductions
reflected a change in merchandise mix, including a reduction in fashion
inventory which is delivered in one-shot deliveries and an increase in basic
replenishment inventory which requires lower in-stock levels on the retail
floor. Reduced volume at other accounts was also due to first quarter fiscal
1999 sales including the initial shipments into several new Duck Head "shops"
within major retailers. Shipments to these same "shop" locations continued
49
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through the first quarter fiscal 2000; however, they were at reduced levels as
compared to the higher levels needed in the initial shop set up. Private label
sales decreased by $0.9 million in the first quarter of fiscal year 2000 as
compared with fiscal year 1999 as certain unprofitable segments of the private
label were discontinued.
The decreases in Duck Head retail store sales resulted from a combination
of fewer stores being open in the three months ended October 2, 1999 as compared
with the three months ended September 26, 1998 and a comparable store sales
decrease of 8%. Fiscal 1999 was a fifty-three week year that contained a key
high volume back-to-school week in the fourth quarter in fiscal 1999 that was
thereby not included in the first quarter of fiscal year 2000. During the
three months ended October 2, 1999 Duck Head did not open or close any stores
and at October 2, 1999 Duck Head operated 24 retail outlet stores versus 27
stores at September 26, 1998. Duck Head believes that the number of stores
currently open is an appropriate number given the geographic distribution of the
"Duck Head" brand through its current wholesale channels. Duck Head's strategy
continues to include the closure of poor performing stores, the investigation of
new store openings in better outlet malls in the Southeastern United States, and
the geographic expansion of retail stores as wholesale distribution expands
outside the Southeastern United States.
Gross Profit.
Consolidated gross profit and gross profit margin for the three months
ended October 2, 1999 were $4.9 million and 30.8%, respectively, as compared to
$7.0 million and 32.0%, respectively, for the three months ended September 26,
1998, a decrease in consolidated gross profit of 30.0%.
Gross profit was $3.0 million and gross profit margin was 25.7% on
wholesale sales for the three months ended October 2, 1999, as compared to $4.5
million and 27.9%, respectively, for the three months ended September 26, 1998.
The $1.5 million decrease in gross profit was primarily due to lower sales and
higher unfavorable operating variances. The higher unfavorable operating
variances were primarily the result of lower levels of production as part of an
inventory reduction program.
Gross profit was $2.0 million and gross profit margin was 44.0% on retail
sales for the three months ended October 2, 1999 as compared to $2.5 million and
43.2%, respectively, for the three months ended September 26, 1998. This $0.5
million decrease in gross profit was primarily due to lower sales.
Selling General and Administrative Expenses.
During the three months ended October 2, 1999, selling, general and
administrative expenses were $5.3 million, as compared to $6.0 million during
three months ended September 26, 1998, a decrease of 11.6%. For the three
months ended October 2, 1999, expenses in this category were 33.2% of net sales
as compared to 27.2% of net sales for the three months ended September 26, 1998.
Sales decreased at a higher rate than did selling, general and administrative
expenses, due to the fixed nature of many of these items, resulting in selling,
general and administrative expenses as a percentage of sales being higher in the
most recent quarter.
Wholesale selling, general and administrative expenses for the three months
ended October 2, 1999 decreased by $0.3 million as compared to the three months
ended September 26, 1998. The dollar decrease was primarily due to reductions
in all selling, general and administrative expense categories, except for
marketing related expenses, which increased. Duck Head expects this lower
selling, general and administrative expense level to continue.
Retail selling, general and administrative expenses for the three months
ended October 2, 1999 declined by $0.4 million as compared to the three months
ended September 26, 1998. The decrease was primarily due to fewer stores being
open in the three months ended October 2, 1999 as compared to the three months
ended September 26, 1998.
50
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Operating Income.
Operating income for the three months ended October 2, 1999 were $0.4
million, as compared to $ 1.5 million of operating income for the three months
ended September 26, 1998.
Wholesale operations broke even for the three months ended October 2, 1999,
as compared to generating $0.9 million of operating income for the three months
ended September 26, 1998. Included in the wholesale operating income for the
three months ended October 2, 1999 was $0.8 million of other income primarily
related to royalty income on license agreements and a $0.3 million gain on an
insurance settlement. Other income for the three months ended September 26,
1998 was $0.6 million which was primarily related to royalty income on license
agreements.
As a result of the factors described above, retail operating income for the
three months ended October 2, 1999 was $0.4 million, as compared to $0.6 million
of operating income for the three months ended September 26, 1998.
Net Interest Expense. For the three months ended October 2, 1999 net
interest expense was $2.1 million, as compared to $1.7 million for three months
ended September 26, 1998. The increase in interest expense was primarily a
result of the higher average principal balance outstanding on affiliated debt.
Taxes. The effective tax rate was 9.3% for the three months ended October
2, 1999 as compared to the effective tax rate for the three months ended
September 26, 1998 of (0.4)%. Although both quarters reflected a pretax loss,
in the quarter ended October 2, 1999 Duck Head was able to recognize more of a
tax benefit due to changes in the valuation allowance against certain deferred
tax assets that are becoming currently deductible.
Net Loss. Net loss for the three months ended October 2, 1999 was $1.6
million, as compared to $0.1 million for the three months ended September 26,
1998. The increased loss was due to the factors described above.
Inventories. Inventories decreased to $19.1 million at October 2, 1999
from $24.7 million at July 3, 1999, a decrease of $5.6 million or 22.6%. The
net decrease in inventories reflects decreases in all categories of inventory.
This decrease was due to Duck Head's inventory control strategy which has
included aggressive sales of close-out inventories and reductions in the
production levels at Duck Head's own sewing facility and in the levels of
product acquired from outside contractors and package goods vendors.
Capital Expenditures. No significant capital expenditures were made in the
three months ended October 2, 1999.
Order Backlog.
Duck Head's order backlog at October 2, 1999 was $9.9 million, a 40%
decrease from the $16.5 million order backlog at September 26, 1998. The
decrease is due to a general decline in sales, the loss of three key customers
and a shift in product mix to a higher percentage of core and basic products and
a lower percentage of fashion products. At September 26, 1998, the order
backlog for the three key accounts that are no longer Duck Head accounts was
$2.2 million. There was no backlog for these accounts at October 2, 1999.
Orders for core products are normally shipped under replenishment programs where
goods are ordered for immediate shipment as compared to fashion products for
which orders are received several months prior to the requested ship date.
Duck Head believes that, although backlog orders can give a general
indication of future sales, the change of its customers order patterns to a
heavier emphasis on core and basic merchandise, which are ordered closer to the
desired ship date, and a lower emphasis on fashion merchandise, which are
ordered several months in advance, may have caused a reduction in backlog that
is not indicative of a reduction in sales trend.
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FISCAL YEAR 1999 VERSUS FISCAL YEAR 1998
Net Sales.
Consolidated net sales for the year ended July 3, 1999 totaled $70.6
million, as compared to $84.0 million for the year ended June 27, 1998, a
decrease of 16%. A summary of Duck Head's net sales for the years ended July 3,
1999 and June 27, 1998 follows:
Net Sales (in millions)
<TABLE>
<CAPTION>
Wholesale Retail Total
---------- ------- -------
<S> <C> <C> <C>
Fiscal year 1999 ($) 54.1 16.5 70.6
Fiscal year 1998 ($) 64.0 20.0 84.0
(Decrease) ($) (9.9) (3.5) (13.4)
(Decrease) (%) (15.5%) (17.5%) (16.0%)
</TABLE>
The decrease in wholesale sales dollars reflected a decrease in unit
shipments and was primarily due to the loss of two key accounts and higher
returns and allowances. The loss of key accounts was the result of the
acquisition of Mercantile Stores Company, Inc. by other key accounts, including
Dillard's, Inc. Dillard's, Inc. made the decision to discontinue from its
merchandise mix any brands (such as the Duck Head brand) that are prominently
featured by certain of Dillard's, Inc.'s competitors. Sales in fiscal year 1999
to Mercantile Stores Company, Inc. and Dillard's, Inc. were $2.6 million
compared to fiscal 1998 sales of $8.4 million Higher returns and allowances
were due to increased levels of returns, customer deductions and margin
assistance given to customers. The majority of the margin assistance was
related to poor retail margins on fashion products.
The decreases in Duck Head retail store sales resulted from a combination
of a comparable store sales decrease of 2% and fewer stores being open in Duck
Head's fiscal year 1999 as compared with its fiscal year 1998. During 1999,
Duck Head opened 2 stores and closed 7 stores. At July 3, 1999, Duck Head
operated 24 retail outlet stores. The net reduction in the number of stores was
the result of the continuation of Duck Head's strategy to close unprofitable
stores, to reduce the total number of outlet stores and to open new stores in
better outlet centers.
Gross Profit.
Consolidated gross profit and gross profit margin for the year ended July
3, 1999 were $8.2 million and 11.6%, respectively, as compared to $26.9 million
and 32.0%, respectively, for the year ended June 27, 1998, a decrease in
consolidated gross profit of 69.5%.
Gross profit and gross profit margin on wholesale sales for the year ended
July 3, 1999 were $1.8 million and 3.3% respectively, as compared to $18.8
million and 29.3%, respectively, for the year ended June 27, 1998. This $17
million decrease in gross profit was primarily due to $7.4 million of inventory
52
<PAGE>
charges taken mainly on close-out fashion inventories, lower sales volume versus
fiscal year 1998, higher returns and allowances and charges totaling $1.5
million to reduce production capacity including the closure of one manufacturing
facility and the downsizing of another. The reduction in production capacity
was due to reduced sales levels and shifts in product sourcing strategy to take
advantage of more favorable product costs available through outside contractors
versus producing in Duck Head's owned facilities. Fiscal year 1998 included a
$0.6 million charge related to the closing of two of Duck Head's sewing
facilities in Costa Rica.
Gross profit and gross profit margin on retail sales for the year ended
July 3, 1999 were $6.4 million and 38.7% respectively, as compared to $8.1
million and 40.6%, respectively, for the year ended June 27, 1998. This $3.4
million decrease in gross profit was due to lower sales and a decrease in gross
margin. The decrease in gross margin was due to the percentage of goods
purchased from Duck Head licensees, which are generally sold at a lower gross
margins, being a higher percentage of total sales in fiscal 1999 than they were
in fiscal 1998 and $0.2 million of charges taken on close-out inventories.
Selling General and Administrative Expenses.
During the year ended July 3, 1999, consolidated selling, general and
administrative expenses were $34.0 million, as compared to $29.0 million during
the year ended June 27, 1998, an increase of 17%. For the year ended July 3,
1999, expenses in this category were 48.1% of net sales as compared to 34.5% of
net sales for the year ended June 27, 1998.
Wholesale selling, general and administrative expenses for the year ended
July 3, 1999 increased by $7.9 million as compared to the year ended June 27,
1998. This increase was primarily due to $3.9 million of increased marketing
expenses, $1.6 million of additional amortization of in-store shops and of
certain computer equipment as a result of the shortening of the expected future
useful lives of these assets to reflect business conditions and technological
changes, a $1.2 million charge to write-off fixtures that were abandoned or no
longer in service primarily due to lost accounts, and increased administrative
costs. The increase in marketing expenses was primarily the result of a heavy
consumer marketing campaign. The results of this advertising campaign were not
considered successful and Duck Head has since reduced its expenditures of this
nature to a level it considers more reasonable based on current sales levels.
Duck Head has also reduced selling, general and administrative expenses in other
categories which Duck Head believes will result in expenses of this nature in
the foreseeable future being lower than the fiscal year 1999 or fiscal 1998
levels.
Retail selling, general and administrative expenses for the year ended July
3, 1999 declined by $2.9 million as compared to the year ended June 27, 1998.
The decrease was primarily due to the closing of several stores during fiscal
years 1998 and 1999. The stores that were closed generally had higher selling,
general and administrative expenses as a percentage of sales than the stores
that have remained opened. The year ended June 27, 1998 included $0.9 million of
charges related primarily to the closing of retail outlet stores.
Operating Losses.
Consolidated operating losses for the year ended July 3, 1999 were $39.2
million, as compared to $1.3 million of operating losses for the year ended June
27, 1998.
Wholesale operating losses for the year ended July 3, 1999 were $38.5
million, as compared to $0.1 million of operating losses for the year ended June
27, 1998. Included in the fiscal year 1999 wholesale operating losses is a
$13.7 million charge for the impairment of the excess of cost over assigned
value of net assets acquired and the impairment of certain in-store fixtures,
somewhat offset by $1.0 million of other income primarily related to royalties
on the license of the Duck Head brand. During fiscal 1999, Duck Head
experienced an adverse change in its business climate, including a significant
decline in net sales mainly due to the loss of three major accounts (one of
which occurred at the end of the year). In October 1998, the Duck Head Apparel
Company division was put up for sale by Delta Woodside, which generated offers
significantly below the net book value of the business. Based upon these
factors and Duck Head's business plan and cash flow projections, Duck Head
determined that its goodwill was impaired by $12.6 million and, accordingly,
recognized the impairment loss. Other income in fiscal year ended June 27, 1998
was $1.7 million, primarily related to royalty income.
As a result of the factors described above, retail operating losses for the
year ended July 3, 1999 were $0.7 million, as compared to $1.2 million of
operating losses for the year ended June 27, 1998.
Net Interest Expense. For the year ended July 3, 1999, net interest
expense was $8.2 million, as compared to $7.0 million for the year ended June
27, 1998. The increase in interest expense was primarily a result of the
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higher average principal balance outstanding on affiliated debt. Prior to the
effective date of the spin-off of Duck Head, the affiliated debt will be
contributed to equity and replaced with significantly lower levels of bank debt.
Taxes. The effective tax rate for the year ended July 3, 1999 was (0.4)%
as compared to 3.7% effective tax rate for the year ended June 27, 1998.
Although both years reflected a pretax loss, the year ended July 3, 1999 had
less of a tax benefit due to the writeoff of goodwill which is nondeductible for
federal income tax purposes.
Net Loss. Net loss for the year ended July 3, 1999, was $47.7 million, as
compared to $7.9 million for the year ended June 27, 1998. The decrease was due
to the factors described above.
Inventories. Inventories decreased to $24.7 million at the end of fiscal
year 1999, from $28.3 million at the end of fiscal year 1998, a decrease of $3.6
million. This net decrease in inventories is primarily due to the following:
- A $5.0 million increase in inventory reserves, primarily due to higher
levels of fashion goods in excess of anticipated in-season sales;
- A $2.9 million decrease in older obsolete inventory (primarily fashion
goods from fiscal year 1997 and earlier) from $3.7 million at the end
of fiscal year 1998 to $0.8 million at the end of fiscal year 1999;
- A $1.9 million decrease in inventory in Duck Head's retail stores from
$3.9 million at the end of fiscal year 1998 to $2.0 million at the end
of fiscal year 1999; this decrease was due to fewer stores being open
at the end of fiscal year 1999 than there were at the end of fiscal
year 1998 and to lower inventory levels in the stores that were open
at the end of fiscal year 1999; and
- A $1.0 million decrease in work in process inventory from $3.6 million
at the end of fiscal year 1999 to $2.5 million at the end of fiscal
year 1998, which reduction is related to lower production levels as
part of the inventory reduction program;
partially offset by the following:
- A $6.5 million increase in both recent season closeouts and in active
inventory from $20.7 million at the end of fiscal year 1998 to $27.3
million at the end of fiscal year 1999; and
- An increase in raw materials of $.8 million.
Capital Expenditures. Capital expenditures were $2.4 million and $8.0
million for fiscal years 1999 and 1998, respectively. The expenditures were
primarily for fixtures for in-store shops and focal areas placed in major
retailers and hardware and software related to Duck Head's information
technology programs. Fiscal 1998 capital expenditures contained the primary
rollout of the in-store fixture program.
FISCAL YEAR 1998 VERSUS FISCAL YEAR 1997
Net Sales.
Consolidated net sales for the year ended June 27, 1998 totaled $84.0
million, as compared to $79.6 million for the year ended June 28, 1997, an
increase of 5.5%. A summary of Duck Head's net sales for the years ended July 3,
1999 and June 27, 1998 follows:
54
<PAGE>
Net Sales (in millions)
<TABLE>
<CAPTION>
Wholesale Retail Total
---------- ------- ------
<S> <C> <C> <C>
Fiscal year 1998 ($) 64.0 20.0 84.0
Fiscal year 1997 ($) 57.3 22.3 79.6
Increase (decrease) ($) 6.7 (2.3) 4.4
Increase (decrease) (%) 11.7% (10.3%) 5.5%
</TABLE>
The increase in wholesale sales dollars in fiscal 1998 versus fiscal 1997
reflects an increase in unit shipments and was due to increased sales of the
"Duck Head" brand to the same customers and increases in private label sales,
mostly to new customers.
The decrease in Duck Head retail store sales resulted from a combination of
a comparable store sales decrease of 1% and fewer stores being open in Duck
Head's fiscal year 1998 as compared with its fiscal year 1997. During fiscal
year 1998, Duck Head opened 5 stores and closed 7 stores as part of a strategy
to close unprofitable stores and open stores in better outlet centers. At June
27, 1998, Duck Head operated 29 retail outlet stores.
Gross Profit.
Consolidated gross profit and gross profit margin for the year ended June
27, 1998 were $26.9 million and 32.0%, respectively, as compared to $26.3
million and 33.0%, respectively, for the year ended June 28, 1997, an increase
in consolidated gross profit of 2.3%.
Gross profit and gross profit margin on wholesale sales for the year ended
June 27, 1998 were $18.8 million and 29.3% respectively, as compared to $16.3
million and 28.4%, respectively, for the year ended June 28, 1997. This $2.5
million increase in gross profit dollars was primarily due to higher sales
volume partially offset by a $0.6 million charge in fiscal 1998 related to the
closing of two of Duck Head's sewing facilities in Costa Rica.
Gross profit and gross profit margin on retail sales for the year ended
June 27, 1998 were $8.1 million and 40.6% respectively, as compared to $10.0
million and 44.9%, respectively, for the year ended June 28, 1997. This $1.9
million decrease in gross profit and the decline in gross profit margin were
primarily due to the closing of several stores during fiscal 1998.
Selling General and Administrative Expenses.
During the year ended June 27, 1998, selling, general and administrative
expenses were $28.9 million, as compared to $25.2 million during the year ended
June 28, 1997, an increase of $3.7 million or 15%. For the year ended June 27,
1998, expenses in this category were 34.5% of net sales as compared to 31.7% of
net sales for the year ended June 28, 1997.
Wholesale selling, general and administrative expenses for the year ended
June 27, 1998 increased by $4.4 million as compared to the year ended June 28,
1997. The dollar increase was primarily due to increased marketing and
merchandising expenses.
Retail selling, general and administrative expenses for the year ended June
27, 1998 declined by $0.6 million as compared to the year ended June 28, 1997.
The decrease was primarily due to the closing of several stores during fiscal
year 1998. The stores that were closed generally had higher selling, general
and administrative expenses as a percentage of sales than the stores that
remained opened. The year ended June 27, 1998 included $0.9 million of charges
related primarily to the closing of retail outlet stores.
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<PAGE>
Operating Income/Losses.
As a result of the factors described above, Duck Head's operating losses
for the year ended June 27, 1998 were $1.3 million, as compared to $1.3 million
of operating income for the year ended June 28, 1997.
Wholesale operating losses for the year ended June 27, 1998 were $0.1
million, as compared to $2.0 million of operating income for the year ended June
28, 1997. Included in the fiscal year 1998 wholesale operating losses is $1.7
million of other income. The other income is primarily due to royalty income
on license agreements for the Duck Head brand. Other income in fiscal year
ended June 28, 1997, which was also primarily related to royalty income, was
$1.4 million.
As a result of the factors described above, retail operating losses for the
year ended June 27, 1998 were $1.2 million, as compared to $0.7 million of
operating losses for the year ended June 28, 1997.
Net Interest Expense. For the year ended June 27, 1998, net interest
expense was $7.0 million, as compared to $6.2 million for the year ended June
28, 1997. The increase in interest expense was primarily a result of the
higher average principal balance outstanding on affiliated debt.
Taxes. The effective tax rate for the year ended June 27, 1998 was 3.7% as
compared to 8.7% effective tax rate for the year ended June 28, 1997. Although
both years reflected a pretax loss, fiscal year 1998 had less tax benefit
recognized due to an increased valuation allowance on the deferred tax benefit
generated by current year net operating losses.
Net Loss. Net loss for the year ended June 27, 1998 was $7.9 million, as
compared to $4.5 million for the year ended June 28, 1997. The increased loss
was due to the factors described above.
Inventories. Inventories decreased $8.6 million during fiscal year 1998,
resulting from a reduction of older obsolete inventory and lower levels of core
inventory and recent season close-outs.
Capital Expenditures. Higher capital expenditures of $8.0 million during
fiscal year 1998 were primarily for in-store shops and focal areas placed in
major retailers.
LIQUIDITY AND CAPITAL RESOURCES
Historical
In each of the first quarter of fiscal year 2000 and in fiscal years 1999,
1998 and 1997, Duck Head's source of liquidity and capital has been the
borrowing arrangement it has had with its parent company, Delta Woodside
Industries, Inc. As funds were needed, the affiliated debt was increased, and
as funds were generated, the affiliated debt was decreased.
Duck Head's operating activities resulted in $3.3 million of cash provided
in the first quarter of fiscal 2000 compared with $1.3 million of cash provided
in the first quarter of fiscal 1999. Duck Head's operating activities resulted
in a use of cash of $16.0 million, $5.8 million and $0.9 million in fiscal years
1999, 1998 and 1997, respectively. The cash provided in the first quarter of
each of fiscal years 2000 and 1999 was primarily the result of inventory
reductions and was after interest payments to Delta Woodside on affiliated debt
of $2.0 million in the first quarter of fiscal year 2000 and $1.5 million in the
first quarter of fiscal year 1999. The uses of cash in each of the fiscal years
1999, 1998 and 1997 were primarily associated with net losses incurred in each
of these years. These net losses included interest charges on the affiliated
debt of $8.3 million, $7.1 million and $6.3 million, respectively.
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Capital expenditures were $2.4 million in the year ended July 3, 1999 and
$8.0 million in the year ended June 27, 1998. Capital expenditures in both
these years were primarily related to the installation of in-store shops at
major retailers. Duck Head expects fiscal 2000 capital expenditures, primarily
for new in-store shops, to approximate $1.4 million to support anticipated
growth outside the Southeastern United States.
Pro Forma
In connection with the Duck Head distribution, Delta Woodside will
contribute, as contributions to capital, all net debt amounts owed to it by the
corporations that previously had conducted the Duck Head Apparel Company
division's business and the Delta Apparel Company division's business. As a
result of this action, Duck Head will no longer owe any amounts to Delta
Woodside, other than as specifically provided in the distribution agreement or
the tax sharing agreement.
Also in connection with the Duck Head distribution, Duck Head will enter
into the following financing arrangements:
- Duck Head will refinance its existing bank indebtedness.
- Duck Head will enter into a credit agreement with a lending
institution, under which the lender will provide Duck Head with a
5-year $6.3 million term loan and a 5-year $15 million revolving
credit facility. All loans under the credit agreement will bear
interest at rates based on LIBOR or a prime rate plus an applicable
margin. Duck Head will grant the lender a first mortgage lien on or
security interest in substantially all of its assets.
- The credit agreement will contain limitations on, or prohibitions of,
cash dividends, stock purchases, related party transactions, mergers,
acquisitions, sales of assets, indebtedness and investments.
- Principal of the term loan will be repaid in monthly installments of
principal based on a 60 month amortization.
- Under the revolving credit facility, Duck Head will be able to borrow
up to $15 million (including a $10 million letter of credit
subfacility) subject to borrowing base limitations based on accounts
receivable and inventory levels.
The pro forma statements included in this document under the heading
"Unaudited Pro Forma Combined Financial Statements" assume that these capital
contributions had occurred and these new debt facilities were in place as of
October 2, 1999 (for purposes of the pro forma balance sheet) or the beginning
of the 1999 fiscal year (for purposes of the pro forma income statements).
Using the same assumptions as are in these pro forma statements, if the Duck
Head distribution had taken place at the beginning of fiscal year 1999, the use
of cash in operating activities during fiscal year 1999 would have been
approximately $8.4 million ($7.6 million less than the actual use of cash from
operations). The lower use of cash would have been due to $7.4 million less
interest expense and $0.2 million net reduction in the management fee charged by
Delta Woodside as compared to the estimated cost of replacing those services.
Using the same assumptions as are in the pro forma statements, if the Duck
Head distribution had taken place at the beginning of fiscal year 1999, cash
provided by operating activities during the first quarter of fiscal year 2000
would have been approximately $4.0 million. This $0.7 million increase in cash
provided by operations would have been due to lower interest payments on bank
debt as compared with the actual interest charged on the affiliated debt.
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As Duck Head shifts its sourcing strategy to more package goods and less
internally manufactured and contracted goods, Duck Head will be required to
provide its suppliers with more letters of credit. Duck Head expects that its
peak revolving credit needs, including use of its credit facility for letters of
credit, will be approximately $7.5 million. Forty-five percent of the face
amount of outstanding documentary letters of credit will reduce the amount
available under the revolving credit facility for working capital loans.
Based on these expectations, Duck Head believes that its $15 million
revolving credit facility should be sufficient to satisfy its foreseeable
working capital needs, and that the cash flow generated by its operations and
funds available under its revolving credit line should be sufficient to service
its debt payment requirements, to satisfy its day-to-day working capital needs
and to fund its planned capital expenditures. Any material deterioration in
Duck Head's results of operations, however, may result in Duck Head losing its
ability to borrow under its revolving credit facility and to issue letters of
credit to supplier or may cause the borrowing availability under that facility
not to be sufficient for Duck Head's needs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Duck Head's credit agreement will provide that the interest rate on
outstanding amounts owed shall bear interest at variable rates. An interest
rate increase would have a negative impact on Duck Head to the extent that it
has borrowings outstanding under either its term loan or its revolving line of
credit. Based on the assumptions used in preparing the pro forma statements of
operations contained under the heading "Unaudited Pro Forma Combined Financial
Statements", if the interest rate on Duck Head 's outstanding indebtedness had
been increased by 1% of the debt's average outstanding principal balance, Duck
Head's pro forma interest expense would have been approximately $87,100 higher
in the fiscal year ended July 3, 1999 and approximately $40,800 higher in the
three months ended October 2, 1999. The actual increase in interest expense
resulting from a change in interest rates would depend on the magnitude of the
increase in rates and the average principal balance outstanding.
YEAR 2000 COMPLIANCE
The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. This could
result in a system failure causing disruptions to Duck Head's operations.
Duck Head's internal information technology and non-information technology
systems are generally licensed from third parties rather than being internally
developed. Duck Head has received written certifications from all
manufacturers of third-party systems that they are Year 2000 compliant. The
inventory and testing of mission critical hardware systems has been completed.
Additionally, all mission critical operating software has been tested by
the manufacturers as well as internally tested. All of the mission critical
hardware and software passed predetermined Year 2000 criteria for compliance.
Duck Head's business is also dependent upon the computer-controlled systems
of third parties such as suppliers, customers and service providers. A systemic
failure outside of Duck Head's control, such as a prolonged loss of
telecommunications, electrical or telephone services, could interrupt the flow
of orders from customers or the flow of goods and services from vendors and
service providers and could have a material adverse effect on Duck Head's
business.
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To date, Duck Head has spent approximately $60,000 on Year 2000 compliance
issues, including the purchase of hardware and the cost of a third party
consultant. Based on management's current assessment, Duck Head does not
anticipate that additional costs associated with the Year 2000 issue will have a
material adverse effect on its business. Duck Head does not currently
anticipate having to develop a contingency plan for handling a Year 2000 problem
that is not detected and corrected prior to its occurrence.
There is general uncertainty inherent in the Year 2000 computer problem.
The consequences of Year 2000 failures could have a material adverse effect on
Duck Head's business. In particular, unforeseen Year 2000 computer problems
could require substantial time, expenditures and effort on the part of
management.
DIVIDENDS AND PURCHASES BY DUCK HEAD OF ITS OWN SHARES
Duck Head's ability to pay cash dividends or purchase its own shares will
largely be dependent on its future results of operations and compliance with its
loan covenants. Duck Head's credit agreement will permit the payment of cash
dividends in an amount up to 25% of cumulative net income (excluding
extraordinary or unusual non-cash items), provided that no event of default
exists or would result from that payment and after the payment at least $6.0
million remains available under the revolving credit facility. Duck Head's
credit agreement will also permit up to an aggregate of $3.0 million of
purchases by Duck Head of its own stock provided that no event of default exists
or would result from that action and after the purchase at least $6.0 million
remains available under the revolving credit facility.
Duck Head currently anticipates that it will pay no cash dividends to its
stockholders for the foreseeable future. If Duck Head's board of directors
determines at any time that the purchase of its own stock is in the best
interests of its stockholders and that the purchase complies with its loan
covenants, Duck Head may purchase its own shares in the market or in privately
negotiated transactions.
In general, any future cash dividend payments will depend upon Duck Head's
earnings, financial condition, capital requirements, compliance with loan
covenants and other relevant factors.
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BUSINESS OF DUCK HEAD
The following discussion contains various "forward-looking statements".
Please refer to "Forward-Looking Statements May Not Be Accurate" for a
description of the uncertainties and risks associated with forward-looking
statements.
Duck Head is a Georgia corporation with its principal executive offices
located at 1020 Barrow Industrial Parkway, Winder, Georgia 30680 (telephone
number: (770) 867-3111 ). Duck Head was incorporated in 1999.
The following information under this heading, "Business of Duck Head",
describes Duck Head as if the transactions contemplated by the distribution
agreement had been consummated at the beginning of the periods described. All
references in this document to Duck Head refer to Duck Head Apparel Company,
Inc., together with its subsidiaries.
BUSINESS
Duck Head designs, produces, markets and distributes boy's and men's
value-oriented casual sportswear predominantly under the 134-year-old nationally
recognized "Duck Head" (Reg. Trademark) label. Duck Head's collections are
centered around its core khaki trouser. Duck Head sells its apparel primarily
in the Southeastern United States to national and regional department store
chains and large specialty apparel retailers. In addition, Duck Head operates
24 retail apparel outlet stores that sell primarily closeout and irregular "Duck
Head" products. Duck Head also licenses the use of the "Duck Head" trademark
for the manufacture and sale of certain apparel items and accessories. Duck
Head has operations in 9 states and Costa Rica, and at October 2, 1999 had
approximately 500 employees.
Products, Marketing and Manufacturing
----------------------------------------
Duck Head produces collections of men's and boy's casual apparel sold under
the "Duck Head" (Reg. Trademark) label, primarily pants, shorts and shirts. The
main products sold by Duck Head are long and short sleeve, knitted and woven,
shirts and long and short pants. In addition, Duck Head sells a relatively
small amount of men's and boy's woven uniforms, sportswear and casual wear under
the private labels of its customers.
The "Duck Head" (Reg. Trademark) label has been associated with apparel
since 1865 and has been historically distributed in the Southeastern United
States. To market its products more effectively, Duck Head has recently
expanded its marketing efforts in department stores. In-store shops enable the
business to maintain prime retail floor space year-round. Duck Head believes
that these in-store shops enhance brand-name recognition, permit more complete
merchandising of the business' lines and differentiate the presentation of its
products from those of other producers. Duck Head opened its first in-store
Duck Head shop in April 1997 and now has in place over 400 men's and 200 boy's
shops in major department stores. The "shop" display format of the Duck Head
line utilizes dedicated retail floor space in the sportswear department that is
positioned with other national brands. Typically, Duck Head pays for the
associated capital expenditures. Currently, approximately one-third of the
stores in which Duck Head products are sold have Duck Head in-store shops.
Duck Head has entered into gross margin support agreements with many of its
major customers. Under these agreements, the retailer is entitled to reduce the
amount payable to Duck Head for any retail gross margin shortfall below the
target gross margin. In connection with these agreements, Duck Head and the
customer agree upon a markdown schedule that is largely determined by the number
of days the product remains on the floor.
Duck Head licenses the use of the "Duck Head" (Reg. Trademark) label to
third party licensees for the manufacture and sale of products that Duck Head
does not sell, including children's wear (ages 0 to 7), footwear, luggage,
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hosiery and accessories. These arrangements require that the licensee pay Duck
Head a royalty fee for the use of the Duck Head trademark.
"Duck Head" labeled products are primarily marketed by an employed sales
staff to regional and national retailers, predominantly in the Southeastern
United States. Duck Head also uses independent sales representatives, primarily
with respect to sales to specialty stores. Duck Head's marketing office is
based in Winder, Georgia, with sales personnel located throughout the country.
Duck Head has a sales office in New York City.
During the first quarter of fiscal year 2000 and fiscal 1999, 1998 and
1997, approximately 24%, 24%, 21% and 17%, respectively, of Duck Head's sales
were to J. C. Penney, Inc. No other customer accounted for 10% or more of Duck
Head's sales during any of those periods. Sales to five customers accounted for
over 46 % of its net sales in the first quarter of fiscal 2000 and in fiscal
year 1999, over 45% in fiscal year 1998 and over 41% in fiscal year 1997.
Duck Head operates a distribution facility and a small manufacturing repair
unit in Winder, Georgia and a leased sewing and finishing plant in Costa Rica.
"Duck Head" core basic labeled apparel items are generally required to be
inventoried to permit replenishment shipments and to level production schedules.
Customer private label apparel items are generally made only to order. Duck
Head's products are manufactured primarily from 100% cotton.
Duck Head purchases the fabrics used in its products from several
producers, the loss of any of which would not be expected to have a material
adverse effect on Duck Head. The business manufactures approximately 40% of its
garments from those fabrics. Duck Head acquires the remainder of its finished
products from third party contractors throughout the world that operate in
accordance with Duck Head's design, specification and production schedules.
This outside production takes the form of cutting and sewing with fabric and
patterns supplied by Duck Head, or providing finished garments made to Duck Head
specifications. Duck Head maintains a staff of quality specialists who
consistently monitor work in process at outside companies. Duck Head has
long-term relationships with a number of international contractors for these
services. Duck Head believes that there is ample capacity among outside
contractors worldwide to meet its future production requirements.
Duck Head's distribution facility has the capacity, with a relatively small
amount of capital expenditures, to handle at least two times the current sales
volume. All products are warehoused in Duck Head's facilities, and shipped to
customers using common carriers.
Duck Head has an extensive quality control effort. The success of this
effort contributed to the business being awarded the J. C. Penney, Inc. Supplier
of the Year award in 1997. During the past few years, Duck Head has worked with
its vendors to implement its quality standards in all of its vendors'
facilities.
Duck Head acquires a substantial quantity of its knit and a small quantity
of woven shirts from an unrelated third party contractor with facilities in
various countries and a sales office in Duck Head's building in Winder, Georgia.
Duck Head purchases goods from this contractor based on favorable prices and
delivery experience. Duck Head does not have a long-term contract with this
company. Duck Head believes that there is ample production capacity available
through other outside vendors and that this production could be replaced with
similar production at prices that are competitive and that the loss of this
producer would not have a material adverse effect.
Shipments by the wholesale segment of Duck Head's business are generally
highest in the third and fourth fiscal quarters, coinciding with the season of
strongest demand for Duck Head shorts and shipments to retailers for the strong
back-to-school selling season. Duck Head retail store sales typically peak
during the first and second fiscal quarters, coinciding with the back-to-school
and Christmas seasons. The offsetting peak quarters of the two segments help to
reduce any significant seasonality impact on overall sales. Seasonality does
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affect cash flow as cash flow is generally weakest in the third fiscal quarter
when retail segment sales are the weakest and accounts receivable on wholesale
sales are at their peak.
Duck Head has 24 outlet stores located in 9 Southeastern states. These
stores, which are located primarily in outlet malls in suburban locations, sell
principally closeout and irregular "Duck Head" products. They also sell a small
amount of apparel and accessory items manufactured by Duck Head licensees.
Business Strategy
------------------
Duck Head believes that its trademarks have considerable consumer
acceptance and that it may have more flexibility than some of its larger
competitors to respond to shifts in market demand. Duck Head has recently
initiated a strategy that it believes will capitalize on these strengths. This
strategy includes the following components:
- Be positioned as the department store popular priced, enhanced margin
khaki wear line that can enable department stores to attract young men
and boys consumers from the specialty stores (such as the GAP,
Abercrombie and Fitch, and Old Navy).
- For department stores, be the main floor men's popular priced,
enhanced margin khaki wear line.
- Develop a significant presence outside of the Southeastern United
States, particularly through arrangements with a limited number of
department store retailers and chain stores.
- Increase the focus on a relatively small range of core basic products,
while continuing to produce fashion basics and fashion products. The
target assortment is 50% basic, 30% fashion basic and 20% fashion.
- Target the male consumer from ages 18 to 24 years as Duck Head's
primary focus in product development and marketing.
- Continue to emphasize in-store shops in department stores.
- Continue aggressively to develop lower cost sources of product,
including more arrangements with third party producers.
- Provide industry-leading customer service in terms of on-time
delivery, replenishment and order fulfillment rate.
- Focus on reducing selling, general and administrative expenses as a
percentage of gross revenues.
- Seek opportunities to obtain profitable private label business from a
small number of retailers.
- Improve the management of inventory.
Duck Head's management believes that this strategy will take advantage of
the following market trends:
- Continued implementation in the workplace of a more casual dress code.
- Growth in the khaki pants market, largely at the expense in recent
years of the denim business.
- The aging of the population, which supports the trend toward casual
clothing.
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- Significant consolidation among department store retailers, which has
led to more purchasing being done by national retailers and those
national retailers focusing more of their purchasing on brands with a
national exposure.
- Increased coordination, including electronic data interchange, between
producers and retailers.
- Compression of the supply chain, with retailers monitoring sales on a
weekly or daily basis, carrying less inventory, demanding quicker
response times from producers and requiring producers to keep the
retailers' model inventories stocked for quick delivery.
- Increasing brand and product sameness between retailers in the same
locale, which has caused retailers to seek ways to differentiate
themselves with the consumer, such as through successful private label
brands.
- Because of the retailers' focus on cost reduction and enhancing narrow
margins, virtually all productive capacity has gone off shore.
- Increased consumer focus on the price-to-value relationship of
products.
Competition
-----------
The cyclical nature of the apparel industry, characterized by rapid shifts
in fashion, consumer demand and competitive pressures, results in both price and
demand volatility. The demand for any particular product varies from time to
time based largely upon changes in consumer preferences and general economic
conditions affecting the apparel industry, such as consumer expenditures for
non-durable goods. The apparel industry is also cyclical because the supply of
particular products changes as competitors enter or leave the market.
Duck Head competes in the value-oriented men's and boys' apparel market,
primarily in the Southeast United States. Duck Head competes with numerous
domestic and foreign manufacturers of branded and private label apparel,
including companies significantly greater in size and financial resources than
Duck Head. Retail specialty stores, such as the GAP and Abercrombie & Fitch,
are Duck Head's principal competitors in the boys' and young men's markets.
Major brands, such as Dockers, Farrah, Haager, and Savane, and certain
department and chain store private labels, are Duck Head's principal competitors
in the men's market. The principal competitive factors in the portion of the
apparel industry in which Duck Head competes are product styling and
differentiation, quality, price, manufacturing flexibility, delivery time and
customer service. The relative importance of these factors varies with the
needs of particular customers and the specific product offering.
To varying degrees, in recent years Duck Head's competitive position has
been negatively affected by its financial performance, poor track record of
delivery credibility, lack of a clearly defined strategy, personnel turn-over
and uncertainties with respect to the future ownership of the business and the
largely regional basis of its business. Duck Head believes that some of these
negative factors have been reduced as a result of the recent efforts described
above under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and will be reduced by implementation of the business
strategy described above under this heading "Business of Duck Head".
Duck Head believes that its competitive strengths include the long history
of its brand with the consumer, its demonstrated ability to produce enhanced
margins for its customers as compared to certain national brands, its relatively
low sourcing costs, its relatively small size, which makes supply chain issues
less difficult to fix, and its excellent information technology systems support.
Duck Head also believes that its flexible production operations are a
significant competitive advantage. The business has a distribution facility
that has capacity for considerable growth. By coordinating operations between
its leased Costa Rica facility and third party contractors, Duck Head believes
that it can take advantage of the lower costs of offshore production.
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Foreign competition has been an increasingly significant factor in the
apparel manufacturing industry, particularly with respect to items that require
labor-intensive production, such as shirts and jackets, and high cost luxury
items. Although domestic apparel companies must compete to some extent on a
price basis with foreign competition, Duck Head's management believes that
domestic apparel companies can best compete by selling branded products, by
manufacturing off-shore, by offering product flexibility, by responding quickly
to changes in consumer demand and by providing more timely deliveries. The
latter characteristics permit retailers in turn to reduce their inventory cost
and lower the risk that product availability will not match consumer demand.
Duck Head is focused on supplying its customers with all of these competitive
advantages.
Employees
---------
At October 2, 1999, Duck Head had approximately 500 employees. Duck Head's
employees are not represented by unions. Duck Head believes that its relations
with its employees are good.
Environmental and Regulatory Matters
---------------------------------------
Duck Head is subject to various federal, state and local environmental laws
and regulations concerning, among other things, wastewater discharges, storm
water flows, air emissions, ozone depletion and solid waste disposal. Duck
Head's facilities generate very small quantities of hazardous waste which are
either recycled or disposed of off-site. Most of its facilities are required to
possess one or more discharge permits.
Duck Head believes that it is in compliance in all material respects with
federal, state, and local environmental statutes and requirements.
Generally, the environmental rules applicable to Duck Head are becoming
increasingly stringent. Duck Head incurs capital and other expenditures in each
year that are aimed at achieving compliance with current and future
environmental standards.
Duck Head does not expect that the amount of these expenditures in the
future will have a material adverse effect on its operations or financial
condition. There can be no assurance, however, that future changes in federal,
state or local regulations, interpretations of existing regulations or the
discovery of currently unknown problems or conditions will not require
substantial additional expenditures. Similarly, the extent of Duck Head's
liability, if any, for past failures to comply with laws, regulations and
permits applicable to its operations cannot be determined.
Trademarks
----------
Duck Head has several trademarks material to its business registered with
the United States Patent and Trademark Office, including marks covering the name
"Duck Head" and several logos used by the business. The name "Duck Head" has
been subject to a registered trademark since 1866. Duck Head is not aware of
any challenge to its rights in any of the trademarks material to its business.
Legal Proceedings
------------------
From time to time Duck Head and its subsidiaries are defendants in legal
actions involving claims arising in the normal course of its business, including
product liability claims. Duck Head believes that, as a result of its legal
defenses, insurance arrangements and indemnification provisions with financially
capable parties, none of these actions is reasonably likely to have a material
adverse effect on its results of operations or financial condition taken as a
whole.
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PROPERTIES
The following table provides a description of Duck Head's principal
production and warehouse facilities.
<TABLE>
<CAPTION>
Approximate
Square
Location Utilization Footage Owned/Leased
- ---------------------------- --------------------- ------------ -----------------------
<S> <C> <C> <C>
San Jose Plant,
San Jose, Costa Rica sew 60,000 Leased(1)
Winder Distribution Center, admin offices,
Winder, GA warehouse,
embroidery,
repair unit 230,000 Owned
Various (2) stores (2) (2)
__________________________
<FN>
(1) The San Jose plant is leased on a month-to-month basis. Duck Head believes that, as
long as it pays the rent, it can continue to use this facility indefinitely.
(2) The "Duck Head" outlet stores operation leases 24 facilities in 9 states, which
leased space is approximately 82,000 square feet. These leases expire at various dates
through 2006.
</TABLE>
A sales office is leased in New York City, with the lease expiring in
December 2000.
The Winder Distribution Center is currently subject to a mortgage lien in
favor of a bank. Duck Head's accounts receivable and inventory, and certain
other intangible property, currently secure Delta Woodside's credit facility.
In connection with the Delta Apparel distribution, these liens on the assets of
Duck Head will be terminated or released and new liens on substantially all of
Duck Head's assets will be granted to the credit agreement lender.
Various factors affect the relative use by Duck Head of its own facilities
and outside contractors in the various apparel production phases. Duck Head is
not currently using the majority of its internal leased production capacity.
Duck Head believes that its equipment and facilities are generally adequate
to allow it to remain competitive with its principal competitors.
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<TABLE>
<CAPTION>
MANAGEMENT OF DUCK HEAD
DIRECTORS
The following eight persons are the members of Duck Head's board of directors. Their term
runs until the next annual meeting of stockholders of Duck Head or until their successors are duly
elected and qualified. Each director is a citizen of the United States. There are no family
relationships among the directors and the executive officers of Duck Head.
NAME AND AGE PRINCIPAL OCCUPATION DIRECTOR SINCE
<S> <C> <C>
William F. Garrett (59) President of Delta Mills Marketing 1998(1)
Company, a division of a subsidiary
of Delta Woodside (2)
C. C. Guy (67) Retired Businessman 1984(1)
Shelby, North Carolina (3) (10) (11)
Dr. James F. Kane (68) Dean Emeritus of the College of 1986(1)
Business Administration of the
University of South Carolina
Columbia, South Carolina
(4) (10) (11)(12)
Dr. Max Lennon (59) President of Mars Hill College 1986(1)
Mars Hill, North Carolina
(5) (10) (11)(12)
E. Erwin Maddrey, II (58) President and Chief Executive 1984(1)
Officer of Delta Woodside (6)
Buck A. Mickel (44) President and Chief Executive Officer 1984(1)
of RSI Holdings, Inc.
Greenville, South Carolina (7) (11)
Bettis C. Rainsford (48) President of The Rainsford 1984(1)
Development Corporation
Edgefield, South Carolina (8)
Robert D. Rockey, Jr. (58) Chairman of the Board, President 1999
and Chief Executive Officer of
Duck Head (9)
<FN>
(1) Includes service as a director of Delta Woodside and Delta Woodside's predecessor by
merger, Delta Woodside Industries, Inc., a Delaware corporation (which this documents refers to as
"Old Delta Woodside"), or any predecessor company to Old Delta Woodside.
(2) William F. Garrett served as a divisional Vice President of J. P. Stevens & Company, Inc.
from 1982 to 1984, and as a divisional President of J. P. Stevens & Company, Inc. from 1984 until
1986, at which time the Delta Mills Marketing Company division was acquired by a predecessor of Old
Delta Woodside. From 1986 until the present he has served as the President of Delta Mills Marketing
Company, a division of a subsidiary of Delta Woodside. Upon consummation of the Duck Head
distribution, Mr. Garrett will become President and Chief Executive Officer of Delta Woodside. Mr.
Garrett serves as a director of Delta Woodside and Delta Apparel.
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(3) C. C. Guy served as Chairman of the Board of Old Delta Woodside or its predecessors from
the founding of Old Delta Woodside's predecessors in 1984 until November 1989. Since before the
November 15, 1989 merger (which this document refers to as the "RSI Merger") of Old Delta Woodside
into RSI Corporation, a South Carolina corporation which changed its name to Delta Woodside
Industries, Inc. and is now Delta Woodside, he has been a director of RSI Holdings, Inc., and from
before the RSI Merger until January 1995 he also served as President of RSI Holdings, Inc. RSI
Holdings, Inc. until 1992 was engaged in the sale of outdoor power equipment, until 1994 was
engaged in the sale of turf care products and currently is engaged in the consumer finance
business. Prior to November 15, 1989, RSI Holdings, Inc. was a subsidiary of RSI Corporation. Mr.
Guy served from October 1979 until November 1989 as President, Treasurer and a director of RSI
Corporation. Prior to the RSI Merger, RSI Corporation owned approximately 40% of the outstanding
shares of common stock of Old Delta Woodside and, among other matters, was engaged in the office
supply business, as well as the businesses of selling outdoor power equipment and turf care
products. Mr. Guy serves as a director of Delta Woodside and Delta Apparel.
(4) Dr. James F. Kane is Dean Emeritus of the College of Business Administration of the
University of South Carolina, having retired in 1993 as Dean, in which capacity he had served since
1967. He also serves as a director of Delta Woodside, Delta Apparel and Glassmaster Company.
(5) Dr. Max Lennon was President of Clemson University from March 1986 until August 1994. He
was President and Chief Executive Officer of Eastern Foods, Inc., which was engaged in the business
of manufacturing and distributing food products, from August 1994 until March 1996. He commenced
service in March 1996 as President of Mars Hill College. He also serves as a director of Delta
Woodside, Delta Apparel and Duke Power Company.
(6) E. Erwin Maddrey, II was President and Chief Executive Officer of Old Delta Woodside or
its predecessors from the founding of Old Delta Woodside's predecessors in 1984 until the RSI
Merger and he has served in these positions with Delta Woodside since the RSI Merger. Upon
consummation of the Duck Head distribution, Mr. Maddrey will retire from his officer positions with
Delta Woodside. He also serves as a director of Delta Woodside, Delta Apparel and Kemet
Corporation.
(7) Buck A. Mickel was a Vice President of Old Delta Woodside or its predecessors from the
founding of Old Delta Woodside's predecessors until November 1989, Secretary of Old Delta Woodside
from November 1986 to March 1987, and Assistant Secretary of Old Delta Woodside from March 1987 to
November 1988. He served as Vice President and a director of RSI Holdings, Inc. from before the
RSI Merger until January 1995 and as Vice President of RSI Holdings, Inc. from September 1996 until
July 1998 and has served as President, Chief Executive Officer and a director of RSI Holdings,
Inc. from July 1998 to the present. He served as Vice President of RSI Corporation from October
1983 until November 1989. Mr. Mickel serves as a director of Delta Woodside and Delta Apparel.
(8) Bettis C. Rainsford was Executive Vice President and Chief Financial Officer of Old Delta
Woodside or its predecessors from the founding of Old Delta Woodside's predecessors in 1984 until
the RSI Merger and served in these positions with Delta Woodside from the RSI Merger until October
1, 1999. Mr. Rainsford served as Treasurer of Old Delta Woodside or its predecessors or Delta
Woodside from 1984 to 1986, from August 1988 to November 1988 and from November 1990 to October 1,
1999. He is President of The Rainsford Development Corporation which is engaged in general
business development activities in Edgefield, South Carolina. Mr. Rainsford serves as a director
of Delta Woodside, Delta Apparel and Martin Color-Fi, Inc. and is a member of the managing entity
of Mount Vintage Plantation Golf Club, LLC.
(9) Robert D. Rockey, Jr. has served as the chief executive officer of the Duck Head Apparel
Company division of a subsidiary of Delta Woodside since March 1999, and was elected Chairman of
the Board, President and Chief Executive Officer of Duck Head in December 1999. Mr. Rockey served
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for nearly twenty years with Levi Strauss & Co. From May 1993 until June 1997, he was President of
Levi Strauss North America, the company's largest operating business. From June 1997 to March
1999, Mr. Rockey ran his own consulting business, serving the retail, textile and apparel
industries.
(10) Member of Audit Committee.
(11) Member of Compensation Committee.
(12) Member of Compensation Grants Committee.
</TABLE>
EXECUTIVE OFFICERS
The following provides information regarding the executive officers of Duck
Head
NAME AND AGE POSITION AND EXPERIENCE
Robert D. Rockey, Jr. (58) Chairman of the Board, President and Chief
Executive Officer (1)
Michael H. Prendergast (54) Senior Vice President of Sales (2)
K. Scott Grassmyer (38) Senior Vice President, Chief Financial Officer,
Secretary and Treasurer (3)
William B. Mattison, Jr. (55) Senior Vice President of Merchandising (4)
______________________
(1) See information under the subheading "Directors."
(2) Mr. Prendergast was elected as Duck Head's Senior Vice President of
Sales in December 1999. He was elected in July 1997 to serve as Senior Vice
President of Sales and Marketing of the Duck Head Apparel Company division.
Prior to joining the Duck Head Apparel Company division, Mr. Prendergast was
Senior Vice President-Sales at Bugle Boy Industries (an apparel producer) from
1994 to 1997.
(3) Mr. Grassmyer was elected as Duck Head's Senior Vice President,
Chief Financial Officer, Secretary and Treasurer in December 1999. He was
elected in February 1998 to serve as Senior Vice President and Chief Financial
Officer of the Duck Head Apparel Company division. Prior to that time, he was
Chief Financial Officer of the Duck Head Apparel Company division from August
1992 to February 1998.
(4) Mr. Mattison was elected Senior Vice President of Merchandising for
Duck Head in December 1999. He was elected in July 1999 to serve as Senior Vice
President of Merchandising of the Duck Head Apparel Company division. Prior to
joining the Duck Head Apparel Company division, Mr. Mattison was Vice President
of merchandising at Hagale Industries (an apparel producer) from 1995 to 1999.
Prior to that, Mr. Mattison served for nearly 12 years with River City Trading
Company (an apparel producer), serving as President from 1992 to 1995.
Duck Head's executive officers are appointed by Duck Head's board of
directors and serve at the pleasure of Duck Head's Board.
MANAGEMENT COMPENSATION
Summary Compensation Table
----------------------------
The following table sets forth information for the fiscal year ended July
3, 1999 respecting the compensation from Delta Woodside or any of its
subsidiaries that was earned by Duck Head's current Chief Executive Officer and
by the other two current executive officers of Duck Head who earned salary and
bonus in fiscal 1999 from Delta Woodside or any of its subsidiaries in excess of
$100,000 (whom this document refers to collectively as the "Named Executives").
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long-Term
------------------- ------------
Compensation
-------------
Awards
-------------
Other
Annual Securities
Compen- Underlying All Other
Fiscal Bonus sation Options Compen-
Name and Principal Position Year Salary ($) (a) ($) (a)(b) ($) (c) (#) (d) sation ($)
- -------------------------------- ------ -------------- ---------- -------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert D. Rockey, Jr. (e) 1999 153,848 81,731 0 0 0
President and Chief Executive
Officer of Duck Head Apparel
Company division
Head Apparel Company
division
Michael H. Prendergast 1999 217,266 7,500 4,106 0 8,001 (g)(h) (j)
Senior Vice President of
Sales and Marketing of Duck
Head Apparel Company
division
K. Scott Grassmyer 1999 120,914 15,000 1,123 12,000 (f) 5,239 (i) (j)
Senior Vice President and
Chief Financial Officer of
Duck Head Apparel Company
division
_______________________________
<FN>
(a) The amounts shown in the column include sums the receipt of which has been deferred pursuant to the
Delta Woodside Savings and Investment Plan (the "Delta Woodside 401(k) Plan") or the Delta Woodside deferred
compensation plan.
(b) Amounts in this column are cash bonuses paid to reward performance.
(c) The amounts in this column were paid by Delta Woodside in connection with the vesting of awards under
the Delta Woodside Incentive Stock Award Plan and were in each case approximately sufficient, after the payment
of all applicable income taxes, to pay the participant's federal and state income taxes attributable to the
vesting of the award.
(d) For purposes of this table, awards under the Delta Woodside Incentive Stock Award Plan are treated as
options.
(e) Mr. Rockey was not employed by Delta Woodside or any of its subsidiaries until his appointment as
President and Chief Executive Officer of the Duck Head Apparel Company division in March 1999.
69
<PAGE>
(f) During fiscal 1999, Mr. Grassmyer was granted an award covering 12,000 shares under the Delta Woodside
Stock Option Plan.
(g) The fiscal 1999 amount represents $666 Delta Woodside contribution allocated to Mr. Prendergast's
account in the Delta Woodside 401(k) Plan, $240 contributed by Delta Woodside to the Delta Woodside deferred
compensation plan as payment for the amount of Delta Woodside contributions to the Delta Woodside 401(k) Plan
for fiscal year 1998 that were not made for Mr. Prendergast because of Internal Revenue Code contribution
limitations, $1,506 contributed by Delta Woodside to the Delta Woodside 401(k) Plan for Mr. Prendergast with
respect to his compensation deferred under the Delta Woodside 401(k) Plan, and $8 earned on Mr. Prendergast's
deferred compensation at a rate in excess of 120% of the Federal mid-term rate.
(h) Delta Woodside paid $5,581 in fiscal 1999 for expenses related to Mr. Prendergast's relocation,
including amounts approximately sufficient, after the payment of all applicable income taxes, to pay his
federal and state income taxes attributable to these relocation expenses.
(i) The fiscal 1999 amount represents $502 Delta Woodside contribution allocated to Mr. Grassmyer's
account in the Delta Woodside 401(k) Plan, $1,451 contributed by Delta Woodside to the Delta Woodside 401(k)
Plan for Mr. Grassmyer with respect to his compensation deferred under the Delta Woodside 401(k) Plan, $236
contributed to Delta Woodside's deferred compensation plan by Delta Woodside for Mr. Grassmyer with respect to
his compensation deferred under Delta Woodside's deferred compensation plan and $3,050 earned on Mr.
Grassmyer's deferred compensation at a rate in excess of 120% of the Federal mid-term rate.
(j) The Delta Woodside 401(k) Plan allocation shown for the fiscal year was allocated to the
participant's account during that fiscal year, although all or part of the allocation may have been determined
in whole or in part on the basis of the participant's compensation during the prior fiscal year.
</TABLE>
The amounts shown in the table above do not include reimbursement by Delta
Woodside or its subsidiaries for certain automobile, residential and commuting
expenses and other items. The non-business personal benefit to any Named
Executive of these amounts does not exceed 10% of the Named Executive's total
salary and bonus.
Option Grants in the Last Fiscal Year
-------------------------------------------
The following table provides information respecting the grant to any Named
Executive during fiscal 1999 of options under the Delta Woodside Stock Option
Plan.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants Potential Realizable Value
-------------------------- at Assumed Annual Rates
Number of % of Total of Stock Price
Securities Options Market Appreciation for Option
Underlying Granted To Exercise Price on Term (b)
Options Duck Head or Base Date of -------------------------
Granted Employees in Price Grant Expiration 0% 5% 10%
Name (#)(a) Fiscal Year ($/Sh) ($/Sh) Date ($) ($) ($)
- ----------------------- ---------- ------------- ------ ------ ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
K. Scott
Grassmyer 12,000 (a) 71% 2.47 4.94 8/2003 29,640 46,018 65,831
<FN>
70
<PAGE>
(a) These represent shares covered by an option granted during fiscal 1999
under Delta Woodside's Stock Option Plan, pursuant to which a participant
is granted the right to acquire shares of Delta Woodside's common stock for
an exercise price per share which will be not less than one-half of the
fair market value on the date of the grant. Each option granted under the
plan sets forth the circumstances under which all or part of the option can
be exercised. The expiration date set forth in the table is the termination
date for the option.
This option was granted to Mr. Grassmyer on August 6, 1998, and became
exercisable with respect to 25% of the shares covered by the option on
August 6, 1999. Under the original terms of the option, it became
exercisable with respect to an additional 25% of the shares covered by the
option on each subsequent anniversary of August 6, 1998, if he remained as
an employee of Delta Woodside on each of the relevant dates. The option
also set forth additional terms and conditions relating to the exercise of
options if Mr. Grassmyer's employment terminated early by reason of death,
retirement or permanent disability. Pursuant to the terms of the
distribution agreement, each participant in the Delta Woodside stock option
plan has been given the opportunity to enter into an agreement amending the
participant's stock option agreement, pursuant to which amendment all of
the unexercisable options shall become immediately exercisable in full. Mr.
Grassmyer entered into this amendment agreement with Delta Woodside. See
"Interests of Directors and Executive Officers in the Duck Head
Distribution - Early Exercisability of Delta Woodside Stock Options."
(b) Based on annual compounding of assumed appreciation rate until termination
date.
</TABLE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
---------------------------------------------------------------------------
Values
- ------
The following table provides information respecting the exercise by any
Named Executive during fiscal 1999 of awards granted under Delta Woodside's
Incentive Stock Award Plan and options granted under Delta Woodside's Stock
Option Plan, and the fiscal year end value of any unexercised outstanding awards
and options. For purposes of this table, awards under Delta Woodside's
Incentive Stock Award Plan are treated as options.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION VALUES
Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-Money Options
Acquired Options at FY-End (#) at FY-End ($)(a)
on Value ---------------------------- --------------------------
Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael H.
Prendergast 4,200 18,918 0 9,000 0 26,978
K. Scott
Grassmyer 3,400 6,137 0 12,000 0 41,610
_____________________________________
<FN>
(a) Based on the closing sales price of $5.9375 per Delta Woodside share on July 2, 1999.
</TABLE>
71
<PAGE>
Director Compensation
----------------------
Duck Head will pay each current director who is not an officer of Duck Head
a fee of $6,667 per year, plus will provide each of these directors
approximately $3,333 annually with which shares of Duck Head's common stock will
be purchased. These Duck Head shares may be newly issued or acquired in the
open market for this purpose. Each non-officer director will also be paid $500
($750 for the committee chair) for each committee meeting attended and $250 for
each telephonic committee meeting in which the director participates. Each
director will also be reimbursed for reasonable travel expenses in attending
each meeting.
Duck Head anticipates that any non-officer director subsequently added to
the Duck Head Board will be paid a fee of $13,334 per year, plus be provided
approximately $6,666 per year with which shares of Duck Head's common stock will
be purchased. Each of these additional directors will be paid the same meeting
fees as payable to Duck Head's current directors. Duck Head anticipates that
the fees payable to Duck Head's existing directors will increase over a five
year period to be the same as the fees payable to any additional directors.
Robert D. Rockey, Jr. Employment Contract.
----------------------------------------------
Robert D. Rockey, Jr. joined the Duck Head Apparel Company division in
March 1999 under the terms of a letter dated March 15, 1999 which was amended on
October 19, 1999. Under the letter:
- Mr. Rockey serves as Chairman and Chief Executive Officer of Duck
Head.
- Duck Head has granted to Mr. Rockey the right to purchase from Duck
Head up to 1,000,000 Duck Head shares on the date that is six months
after the Duck Head distribution. If the right is exercised, the price
for the shares will be the average daily closing stock price for the
Duck Head common stock for the six-month period following the Duck
Head distribution.
- Mr. Rockey's salary is $500,000 per year. In addition, he was
guaranteed a fiscal year 1999 bonus at the annualized rate of
$500,000. Until the first anniversary of the Duck Head distribution,
he will continue to receive a guaranteed bonus at the annualized rate
of $500,000. Any bonus plan for any subsequent period will be set by
the Duck Head board of directors.
- Duck Head will pay up to $100,000 per year for the costs of an
automobile, an apartment in the Winder, Georgia area and commuting.
- Mr. Rockey will be granted incentive stock awards under the Duck Head
incentive stock award plan valued at $200,000. These awards will vest
to the extent of 60% of the shares covered thereby on March 8, 2001 if
he is still then employed by Duck Head and to the extent of the
remaining 40% of the shares covered thereby if specified performance
criteria through March 8, 2001 are satisfied.
- An aggregate of 125,000 Duck Head shares will be reserved for options
to be granted to Mr. Rockey under the Duck Head stock option plan. Mr.
Rockey will vest in the stock option over a period ending March 8,
2001.
- Mr. Rockey will be the beneficiary of $1.0 million life insurance
policy paid for by Duck Head.
Duck Head Stock Option Plan
-------------------------------
Under the Duck Head stock option plan, the compensation committee (or, in
the case of the Named Executives, the compensation grants committee) of the Duck
Head board of directors will have the discretion to grant options for up to an
aggregate maximum of 500,000 Duck Head shares.
72
<PAGE>
The purpose of the Duck Head option plan is to promote the growth and
profitability of Duck Head and its subsidiaries by increasing the personal
participation of key and middle level executives in the performance of Duck Head
and its subsidiaries, by enabling Duck Head and its subsidiaries to attract and
retain key and middle level executives of outstanding competence and by
providing these key and middle level executives with an equity opportunity in
Duck Head. The compensation committee (or, in the case of the Named Executives,
the compensation grants committee) of the Duck Head board of directors will
administer the Duck Head option plan.
Participation in the Duck Head option plan is determined by the applicable
committee and is limited to those key and middle level executives, who may or
may not be officers or members of the Duck Head board of directors, of Duck Head
or one of its subsidiaries who have the greatest impact on Duck Head's long-term
performance. In making any determination as to the key and middle level
executives to whom options will be granted and the number of shares that will be
subject to each option, the applicable committee is to take into account, in
each case, the level and responsibility of the executive's position, the
executive's performance, the executive's level of compensation, the assessed
potential of the executive and those other factors that the applicable committee
deems relevant to the accomplishment of the purposes of the plan. Directors who
are not also employees of Duck Head are not eligible to participate in the Duck
Head option plan. The Duck Head option plan provides that no more than 125,000
Duck Head shares may be covered by grants made under the plan in any fiscal year
to any particular employee.
In the discretion of the applicable committee, options granted under the
Duck Head option plan may be "incentive stock options" for federal income tax
purposes. Duck Head is not allowed a deduction at any time in connection with,
and the participant is not taxed upon either the grant or the exercise of, an
"incentive stock option." The difference between the exercise price of and
incentive stock option and the market value of the shares of common stock at the
date of exercise, however, constitutes a tax preference item for the participant
in the year of exercise for alternative minimum tax purposes. Among other
requirements, the stock acquired by the participant must be held for at least
two years after the option is granted and for at least one year after the option
is exercised for the option to qualify as an incentive stock option. If the
participant satisfies these holding period requirements, the participant will be
taxed only upon any gain realized upon disposition of the stock. The
participant's gain will be equal to the difference between the sales price of
the stock and the exercise price. If an incentive stock option is exercised
after the death of the employee by the estate of the decedent, or by a person
who acquired the right to exercise the option by bequest or inheritance or by
reason of the death of the decedent, none of the holding period requirements
apply.
If the participant fails to satisfy the holding period requirements, the
option will be treated in a manner similar to options that are not incentive
stock options. The participant is generally not taxed upon the grant of an
option that is not an incentive stock option. Upon exercise of any the option,
however, the participant recognizes ordinary income equal to the difference
between the fair market value of the shares acquired on the date of exercise and
the exercise price. Subject to Section 162(m) of the Internal Revenue Code
(relating to limitations on corporate income tax deduction of certain executive
compensation in excess of $1 million), generally Duck Head receives a deduction
for the amount the participant reports as ordinary income arising from the
exercise of the option. Upon a subsequent sale or disposition of the stock, the
holder would be taxable on any excess of the selling price over the fair market
value of the stock at the date of exercise. If the participant fails to satisfy
the holding period requirements with respect to an option that would otherwise
qualify as an incentive stock option, (i) ordinary income to the participant
and, subject to Section 162(m) of the Internal Revenue Code, the deduction for
Duck Head will arise at the time of the early disposition of the stock and will
equal the excess of (a) the lower of the fair market value of the shares at the
time of exercise or the fair market value of the shares at the time of
disposition over (b) the exercise price, and (ii) if the fair market value of
the stock at the time of the early disposition exceeds the exercise price, the
participant will also recognize capital gain income equal to the difference
between the fair market value at the time of exercise and the fair market value
at the time of disposition.
73
<PAGE>
Duck Head will attempt, to the maximum extent possible, to structure grants
under the Duck Head option plan to the Named Executives in a manner that
satisfies the deductibility requirements of Section 162(m) of the Internal
Revenue Code.
The term of each option will be established by the applicable committee,
but will not exceed ten years (or five years in the case of an incentive stock
option recipient who owns stock having more than ten percent of the total
combined voting power of all classes of stock of Duck Head), and the option will
be exercisable according to the schedule that the applicable committee may
determine. The recipient of an option will not pay Duck Head any amount at
the time the option is granted. If an option expires or terminates for any
reason without having been fully exercised, the unpurchased shares subject to
the option will again be available for the purposes of the Duck Head option
plan.
Under the Duck Head option plan, the applicable committee determines the
period of time (up to three months), if any, during which an option may be
exercised after the participant's termination of employment with Duck Head.
However, if a participant dies while in the employ of Duck Head or (if so
determined by the applicable committee at the date of grant) within three-months
after termination of employment or if a participant's employment is terminated
by reason of having become permanently and totally disabled, the option may be
exercised during the one-year period after the participant's death or
termination of employment due to disability. In no event, however, may an option
be exercised after the expiration of its fixed term.
The price per share at which each option granted under the Duck Head option
plan may be exercised will be the price set by the applicable committee at the
time of grant based on the criteria adopted by the applicable committee in good
faith; provided, however, in the case of an option intended to qualify as an
incentive stock option, the price per share will not be less than the fair
market value of the stock at the time the option is granted (or 110% of fair
market value if the recipient of the incentive stock option owns stock having
more than ten percent of the total combined voting power of all classes of stock
of Duck Head). The Duck Head option plan provides that in no event will the
exercise price per share of an option be less than 50% of the fair market value
per share of Duck Head's common stock on the date of the option grant.
Options may be exercised by the participant tendering to Duck Head payment
in cash in full of the exercise price for the shares as to which the option is
exercised. The applicable committee may determine at the time of grant that the
recipient will be permitted to pay the exercise price in Duck Head shares rather
than in cash.
The Duck Head option plan may be terminated or amended by the board of
directors (or committee of the Board), except that stockholder approval would be
required in the event an amendment were to increase the number of Duck Head
shares issuable under the plan (other than an increase pursuant to the
antidilution provisions of the plan).
The Duck Head option plan provides that it will terminate on the close of
business on January _, 2010, and no options will be granted under the plan
thereafter, but termination will not affect any option granted under the plan
before the termination date.
As described in "Interests of Directors and Executive Officers in the Duck
Head Distribution - Receipt of Duck Head Stock Options and Duck Head Incentive
Stock Awards", the compensation grants committee or the compensation committee
of the Duck Head board of directors currently expects to grant, within the first
six months after the Duck Head distribution, stock options under the Duck Head
option plan to the executive officers of Duck Head.
74
<PAGE>
Duck Head Incentive Stock Award Plan
-----------------------------------------
Under the Duck Head incentive stock award plan, the compensation committee
(or, in the case of the Named Executives, the compensation grants committee) of
the Duck Head board of directors has the discretion to grant awards for up to an
aggregate maximum of 200,000 Duck Head shares.
The purposes of the Duck Head incentive stock award plan are to establish
or increase the equitable ownership in Duck Head by key and middle level
management employees of Duck Head and its subsidiaries and to provide incentives
to key and middle level management employees of the Duck Head and its
subsidiaries through the prospect of stock ownership.
The Duck Head incentive stock award plan authorizes the applicable
committee to grant to officers or other key management employees or middle level
management employees of Duck Head or any of its subsidiaries rights to acquire
Duck Head shares at a cash purchase price of $.01 per share. Awards may be made
to reward past performance or to induce exceptional future performance. The
applicable committee will administer the Duck Head incentive stock award plan
and determine the officers or key or middle level management employees to whom
awards will be granted and the number of shares to be covered by any award.
Directors who are not also employees are not eligible to participate in the
plan. The Duck Head incentive stock award plan provides that no more than
75,000 Duck Head shares may be covered by awards granted under the plan in any
fiscal year to any particular employee.
A participant may receive an incentive stock award only upon execution of
an incentive stock award agreement with Duck Head. The incentive stock award
agreement sets forth the circumstances under which the award (or portion of the
award) is forfeited. These circumstances may include (i) the termination of
employment of the participant with Duck Head or any of its subsidiaries, for any
reason other than death, retirement or permanent total disability, prior to the
vesting date for the award (or portion of the award), and (ii) those additional
circumstances (which could include the failure by Duck Head to meet specified
performance criteria) that may be deemed appropriate by the applicable
committee. The forfeiture circumstances may vary among the shares covered by an
award. In the event an award (or portion of the award) is forfeited pursuant to
the terms of the applicable incentive stock award agreement, the participant
will immediately have no further rights under the award (or portion of the
award) or in the shares covered thereby, and the shares will again become
available for purposes of the Duck Head incentive stock award plan.
Each incentive stock award agreement sets forth the circumstances under
which the award (or portion of the award) will vest. These circumstances may
include (i) the participant being an employee with Duck Head or any subsidiary
on the date set forth in the incentive stock award agreement and (ii) those
additional circumstances (which could include Duck Head having met specified
performance criteria) that may be deemed appropriate by the applicable
committee. The vesting circumstances may vary among the shares covered by an
award. In the event an award (or portion of the award) vests pursuant to the
terms of the applicable incentive stock award agreement, Duck Head will issue
and deliver, or cause to be issued and delivered, to the participant or his or
her legal representative, certificate(s) for the number of shares covered by the
vested portion of the award, subject to receipt by Duck Head of the $.01 per
share cash purchase price.
The recipient of an award will not pay Duck Head any amount at the time of
the receipt of the award. Ordinarily, the holder of an award will realize
taxable income, for federal income tax purposes, when the award (or portion of
the award) vests in an amount equal to the excess of the fair market value of
the covered shares on the date the award (or portion of the award) vests over
the $.01 per share cash purchase price. At the same time, subject to Section
162(m) of the Internal Revenue Code, Duck Head should generally be allowed a tax
deduction equivalent to the holder's taxable income arising from that vesting.
The Duck Head incentive stock award plan provides that, at or about the time the
award (or portion of the award) vests, Duck Head will pay the participant cash
sufficient to pay the participant's income tax liability associated with the
vesting and receipt of that cash. This cash payment would be taxable as income
to the participant and, subject to Section 162(m), generally deductible by Duck
Head.
75
<PAGE>
The portion of any Duck Head incentive stock award that vests based on a
participant being an employee at specified dates will not satisfy the
requirements of Section 162(m) of the Internal Revenue Code. Duck Head will
attempt, however, to the maximum extent possible, to structure the portion of
incentive stock awards made to the Named Executives that vests in accordance
with performance criteria in a manner that satisfies the deductibility
requirements of Section 162(m). Duck Head anticipates that all compensation
payable pursuant to the plan, except to Robert D. Rockey, Jr., will be
deductible by Duck Head because, with the exception of Mr. Rockey, no Named
Executive is expected to receive in any fiscal year aggregate compensation in
excess of $1 million. Duck Head anticipates that, with the possible exception
of the portion of Mr. Rockey's incentive stock award that vests in accordance
with performance criteria, none of the compensation payable pursuant to the plan
to Mr. Rockey will be deductible by Duck Head, because Duck Head expects that he
will receive more than $1 million in any fiscal year in aggregate compensation
that counts against the $1 million deductibility cap of Section 162(m).
Until the issuance and delivery to the participant of certificate(s)for
shares pursuant to the vesting of an award, the participant has none of the
rights of a stockholder with respect to those shares.
The Duck Head incentive stock award plan provides that the board of
directors (or committee of the Board) may terminate or amend the plan, except
that stockholder approval is required in the event any amendment would increase
the total number of Duck Head shares covered by the plan (except in connection
with the antidilution provisions of the plan).
As described in "Interests of Directors and Executive Officers in the Duck
Head Distribution - Receipt of Duck Head Stock Options and Duck Head Incentive
Stock Awards", the compensation grants committee or the compensation committee
of the Duck Head board of directors currently expects to grant, within the first
six months after the Duck Head distribution, incentive stock awards to the
executive officers of Duck Head.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors will serve on the Compensation Committee of Duck
Head's board of directors: C.C. Guy, Dr. James F. Kane, Dr. Max Lennon and Buck
A. Mickel.
The following directors will serve on the Compensation Grants Committee of
Duck Head's board of directors: Dr. James F. Kane and Dr. Max Lennon.
C.C. Guy served as Chairman of the Board of Delta Woodside or its
predecessors (and their respective subsidiaries) from the founding of Delta
Woodside's predecessors in 1984 until November 1989. Buck A. Mickel was a Vice
President of Delta Woodside or its predecessors (and their respective
subsidiaries) from the founding of Delta Woodside's predecessors until November
1989, Secretary of Delta Woodside or its predecessors (and their respective
subsidiaries) from November 1986 to March 1987, and Assistant Secretary of Delta
Woodside or its predecessors (and their respective subsidiaries) from March 1987
to November 1988.
76
<PAGE>
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS
AND MANAGEMENT
If the Duck Head distribution had occurred immediately prior to the Duck
Head record date and the Duck Head record date had been December 7, 1999, the
following table sets forth what the beneficial ownership of Duck Head's common
stock would have been as of the Duck Head record date by (i) any person that
would have beneficially owned more than five percent of the outstanding common
stock of Duck Head, (ii) the directors of Duck Head, (iii) the Named Executives
of Duck Head, and (iv) all directors and executive officers of Duck Head as a
group. Unless otherwise stated in the notes to the table, Duck Head believes
that the persons named in the table would have had sole voting and investment
power with respect to all shares of common stock of Duck Head shown as
beneficially owned by them. On December 7, 1999, 23,863,745 Delta Woodside
shares were outstanding, corresponding to 2,386,374 Duck Head shares. The table
does not include Duck Head shares that would be covered by the right granted to
Robert D. Rockey to acquire Duck Head shares six months after the Duck Head
distrribution or Duck Head shares that would be covered by stock options that
may be granted under Duck Head's stock option plan or incentive stock awards
that may be granted under Duck Head's incentive stock award plan. See
"Interests of Directors and Executive Officers in the Duck Head Distribution -
Receipt of Duck Head Stock Options and Duck Head Incentive Stock Awards".
<TABLE>
<CAPTION>
Shares
Beneficially
Beneficial Owner Owned Percentage
- --------------------------------------------- ------- -----------
<S> <C> <C>
Robert D. Rockey, Jr. (1) 0 0.0%
13101 Preston Road #312
Dallas, Texas 75240
Reich & Tang Asset Management L. P. (2) 351,590 14.7%
600 Fifth Avenue
New York, New York 10020
Franklin Resources, Inc. (3) 226,900 9.5%
Franklin Advisory Services, Inc.
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Boulevard
San Mateo, California 94404
Dimensional Fund Advisors Inc. (4) 195,972 8.2%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
E. Erwin Maddrey, II (5) 326,927 13.7%
233 North Main Street
Suite 200
Greenville, SC 29601
Bettis C. Rainsford (6) 319,340 13.4%
108-1/2 Courthouse Square
Post Office Box 388
Edgefield, SC 29824
77
<PAGE>
Buck A. Mickel (7) (8) 157,436 6.6%
Post Office Box 6721
Greenville, SC 29606
Micco Corporation (8) 124,063 5.2%
Post Office Box 795
Greenville, SC 29602
Minor H. Mickel (8) (9) 156,523 6.6%
415 Crescent Avenue
Greenville, SC 29605
Minor M. Shaw (8) (10) 152,008 6.4%
Post Office Box 795
Greenville, SC 29602
Charles C. Mickel (8) (11) 149,694 6.3%
Post Office Box 6721
Greenville, SC 29606
William F. Garrett (12) 14,525 (20)
C. C. Guy (13) 2,501 (20)
Dr. James F. Kane (14) 1,708 (20)
Dr. Max Lennon (15) 1,549 (20)
Michael H. Prendergast (16) 1,020 (20)
K. Scott Grassmyer (17) 1,943 (20)
William B. Mattison, Jr. (18) 0 (20)
All current directors and executive officers
as a group (11 Persons) (19) 826,949 34.5%
<FN>
(1) Mr. Rockey is Chairman of the Board, President and Chief Executive
Officer of Duck Head. Mr. Rockey has the right to acquire up to 1,000,000 Duck
Head shares from Duck Head on the date that is six months after the Duck Head
distribution at a purchase price equal to the average daily closing stock price
for the Duck Head common stock for the six-month period following the Duck Head
distribution. If Mr. Rockey exercises this right for the full amount of the
shares subject thereto, he would be the beneficial owned of approximately 29.5%
of the then outstanding Duck Head shares causing all directors and executive
officers as a group beneficially to own approximately 53.9% of the then
78
<PAGE>
outstanding Duck Head shares. The table does not include any shares that may be
covered by incentive stock awards and stock options that the compensation grants
committee of the Duck Head board of directors may grant to Mr. Rockey. Under
the letter agreement pursuant to which Mr. Rockey became Chairman and Chief
Executive Officer of Duck Head, an aggregate of 125,000 Duck Head shares will be
reserved for options to be granted to him under the Duck Head stock option plan
and he will be granted incentive stock awards under the Duck Head incentive
stock award plan valued at $200,000. See "Management of Duck Head - Management
Compensation"; "Interests of Directors and Executive Officers in the Duck Head
Distribution - Right of Robert D. Rockey, Jr. to acquire Duck Head Shares" and
"- Receipt of Duck Head Stock Options and Duck Head Incentive Stock Awards."
(2) This information is based on confirmation obtained on December 7, 1999
and on an amendment dated February 12, 1999 to Schedule 13G that was filed with
the Securities and Exchange Commission by Reich & Tang Asset Management L. P.
(which this document refers to as "Reich & Tang") with respect to Delta
Woodside's common stock. In the amendment, Reich & Tang reported that, with
respect to Delta Woodside's common stock, it had shared voting power and shared
dispositive power with respect to all of the shares shown. The amendment
reported that the shares of Delta Woodside's common stock were held on behalf of
certain accounts for which Reich & Tang provides investment advice on a fully
discretionary basis. The amendment reported that none of such accounts has an
interest with respect to more than 5% of the outstanding shares of Delta
Woodside's common stock.
(3) This information is based on confirmation obtained on December 7, 1999
and on an amendment dated January 16, 1998 to Schedule 13G that was filed with
the Securities and Exchange Commission by Franklin Resources, Inc. (which this
document refers to as "FRI") with respect to Delta Woodside's common stock.
Telephone confirmation was given to Delta Woodside that the amendment was
correct in all respects except that the number of Delta Woodside shares
beneficially owned as of December 7, 1999 had changed to 2,269,000 (which, based
on the distribution ratio for the Duck Head distribution, would entitle FRI to
beneficial ownership of 226,900 Duck Head shares). In the amendment, FRI
reported that, with respect to Delta Woodside's common stock, the shares shown
in the table above were beneficially owned by one or more investment companies
or other managed accounts that are advised by one or more direct and indirect
investment advisory subsidiaries of FRI. The amendment reported that the
investment advisory subsidiary(ies) have investment and/or voting power over the
securities owned by their investment advisory clients. Accordingly, such
subsidiary(ies) may be deemed to be the beneficial owner of the shares shown in
the table. The amendment reported that Charles B. Johnson and Rupert H.
Johnson, Jr. (which this document refers to as the "FRI Principal Shareholders")
(each of whom has the same business address as FRI) each own in excess of 10% of
the outstanding common stock and are the principal shareholders of FRI and may
be deemed to be the beneficial owners of securities held by persons and entities
advised by FRI subsidiaries. The amendment reported that one of the investment
advisory subsidiaries, Franklin Advisory Services, Inc. (whose address is One
Parker Plaza, Sixteenth Floor, Fort Lee, New Jersey 07024), has sole voting and
dispositive power with respect to all of the shares shown. FRI, the FRI
Principal Shareholders and the investment advisory subsidiaries disclaim any
economic interest or beneficial ownership in the shares shown in the table above
and are of the view that they are not acting as a "group" for purposes of the
Securities Exchange Act of 1934, as amended.
(4) This information is based on a confirmation obtained on December 7,
1999 and on a Schedule 13F dated September 30, 1999, that was filed with the
Securities and Exchange Commission by Dimensional Fund Advisors Inc. (which this
document refers to as "Dimensional") with respect to Delta Woodside's common
stock. Dimensional reported that it had sole voting power and sole dispositive
power with respect to all of the shares shown. An amendment dated February 12,
1999 to Schedule 13G that was filed by Dimensional reports that Dimensional
furnishes investment advice to four investment companies and serves as
investment manager to certain other investment vehicles, including commingled
group trusts, that all of the shares of Delta Woodside's common stock were owned
by such investment companies or investment vehicles, that Dimensional disclaims
beneficial ownership of such securities and that, to the knowledge of
Dimensional, no such investment company or investment vehicle client owned more
than 5% of the outstanding shares of Delta Woodside's common stock.
(5) Mr. Maddrey is a director of Duck Head. He is the President and Chief
Executive Officer (from which officer positions he will resign in connection
with the Duck Head distribution and the Delta Apparel distribution) and a
director of Delta Woodside and Delta Apparel. The number of shares shown as
beneficially owned by Mr. Maddrey includes approximately 33,493 Delta Woodside
shares (3,349 Duck Head shares) allocated to Mr. Maddrey's account in Delta
Woodside's Employee Stock Purchase Plan, 431,470 Delta Woodside shares (43,147
Duck Head shares) held by the E. Erwin and Nancy B. Maddrey, II Foundation, a
charitable trust, as to which shares Mr. Maddrey holds sole voting and
investment power but disclaims beneficial ownership, and approximately 1,074
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Delta Woodside shares (107 Duck Head shares) allocated to the account of Mr.
Maddrey in the Delta Woodside 401(k) Plan. Mr. Maddrey is fully vested in the
shares allocated to his account in the Delta Woodside 401(k) Plan.
(6) Mr. Rainsford is a director of Duck Head. He is also a director of
Delta Woodside and Delta Apparel. The number of shares shown as beneficially
owned by Mr. Rainsford includes 47,945 Delta Woodside shares (4,794 Duck Head
shares) held by The Edgefield County Foundation, a charitable trust, as to which
shares Mr. Rainsford holds sole voting and investment power but disclaims
beneficial ownership, and approximately 167 Delta Woodside shares (16 Duck Head
shares) allocated to the account of Mr. Rainsford in the Delta Woodside 401(k)
Plan. Mr. Rainsford is fully vested in the shares allocated to his account in
the Delta Woodside 401(k) Plan.
On December 14, 1999, Mr. Rainsford filed an amendment to his Schedule 13D
in which he stated that he was filing the amendment to disclose the fact that he
is considering the possibility of making an offer to purchase those Delta
Woodside shares that he does not currently own. The amendment stated that the
terms and financing for any such offer have not yet been established by Mr.
Rainsford. The amendment stated that Mr. Rainsford was considering making this
offer because of his strong disagreement with the recently announced decision by
the Delta Woodside board of directors to spin-off Delta Apparel Company and Duck
Head Apparel Company. The amendment stated that Mr. Rainsford has significant
concerns regarding the tax ramifications to Delta Woodside's shareholders of the
recently announced spin-offs as well as significant concerns regarding the value
and liquidity of the spun-off shares after the spin-off. The amendment stated
that Mr. Rainsford strongly objected to the adoption on December 9, 1999 by the
Delta Woodside board of directors of new Bylaws containing anti-takeover
provisions and an anti-takeover Shareholder Rights Plan. The amendment stated
that, in his capacity as an officer, director and significant shareholder of
Delta Woodside, Mr. Rainsford has discussed and proposed a variety of
alternatives as to how best to restructure Delta Woodside. The amendment stated
that, if certain alternatives proposed by Mr. Rainsford were pursued and
consummated, such a transaction could result in a substantial change in Delta
Woodside's corporate organization and operations, including particularly the
possible sale of the Delta Apparel and/or the Duck Head divisions. The
amendment stated that Mr. Rainsford may modify or change his intentions based
upon developments in Delta Woodside's business, discussions with Delta Woodside,
actions of management or a change in market or other conditions or other
factors. The amendment stated that Mr. Rainsford will continually consider
modifications of his position, or may take other steps, change his intentions,
or trade in Delta Woodside's securities at any time, or from time to time.
(7) Buck A. Mickel is a director of Duck Head. He is also a director of
Delta Woodside and Delta Apparel. The number of shares shown as beneficially
owned by Buck A. Mickel includes 330,851 Delta Woodside shares (33,085 Duck Head
shares) directly owned by him, all of the 1,240,634 Delta Woodside shares
(124,063 Duck Head shares) owned by Micco Corporation, and 2,871 Delta Woodside
shares (287 Duck Head shares) held by him as custodian for a minor. See Note
(8).
(8) Micco Corporation owns 1,240,634 shares of Delta Woodside's common
stock (124,063 Duck Head shares). The shares of common stock of Micco
Corporation are owned in equal parts by Minor H. Mickel, Buck A. Mickel (a
director of Duck Head), Minor M. Shaw and Charles C. Mickel. Buck A. Mickel,
Minor M. Shaw and Charles C. Mickel are the children of Minor H. Mickel. Minor
H. Mickel, Buck A. Mickel, Minor M. Shaw and Charles C. Mickel are officers and
directors of Micco Corporation. Each of Minor H. Mickel, Buck A. Mickel, Minor
M. Shaw and Charles C. Mickel disclaims beneficial ownership of three quarters
of the shares of Delta Woodside's common stock and Duck Head shares owned by
Micco Corporation. Minor H. Mickel directly owns 116,854 shares of Delta
Woodside's common stock (11,685 Duck Head shares) and as personal representative
of her husband's estate owns 207,750 shares of Delta Woodside's common stock
(20,775 Duck Head shares). Buck A. Mickel, directly or as custodian for a
minor, owns 333,722 shares of Delta Woodside's common stock (33,372 Duck Head
shares). Charles C. Mickel, directly or as custodian for his children, owns
256,210 shares of Delta Woodside's common stock (25,621 Duck Head shares).
Minor M. Shaw, directly or as custodian for her children, owns 264,978 shares of
Delta Woodside's common stock (26,497 Duck Head shares). Minor M. Shaw's
husband, through an individual retirement account and as custodian for their
children, beneficially owns approximately 14,474 shares of Delta Woodside's
common stock (1,447 Duck Head shares), as to which shares Minor M. Shaw may also
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be deemed a beneficial owner. Minor M. Shaw disclaims beneficial ownership with
respect to these shares and with respect to the 2,748 shares of Delta Woodside's
common stock (274 Duck Head shares) held by her as custodian for her children.
The spouse of Charles C. Mickel owns 100 shares of Delta Woodside's common stock
(10 Duck Head shares), as to which shares Charles C. Mickel may also be deemed a
beneficial owner. Charles C. Mickel disclaims beneficial ownership with respect
to these shares and with respect to the 3,510 shares of Delta Woodside's common
stock (351 Duck Head shares) held by him as custodian for his children. Buck A.
Mickel disclaims beneficial ownership with respect to the 2,871 shares of Delta
Woodside's common stock (287 Duck Head shares) held by him as custodian for a
minor.
(9) The number of shares shown as beneficially owned by Minor H. Mickel
includes 116,854 Delta Woodside shares (11,685 Duck Head shares) directly owned
by her, 207,750 Delta Woodside shares (20,775 Duck Head shares) owned by her as
personal representative of her husband's estate and all of the 1,240,634 Delta
Woodside shares (124,063 Duck Head shares) owned by Micco Corporation. See Note
(8).
(10) The number of shares shown as beneficially owned by Minor M. Shaw
includes 264,978 Delta Woodside shares (26,497 Duck Head shares) owned by her
directly or as custodian for her children, approximately 14,474 Delta Woodside
shares (1,447 Duck Head shares) beneficially owned by her husband through an
individual retirement account or as custodian for their children, and all of the
1,240,634 Delta Woodside shares (124,063 Duck Head shares) owned by Micco
Corporation. See Note (8).
(11) The number of shares shown as beneficially owned by Charles C. Mickel
includes 256,210 Delta Woodside shares (25,621 Duck Head shares) owned by him
directly or as custodian for his children, 100 Delta Woodside shares (10 Duck
Head shares) owned by his wife and all of the 1,240,634 Delta Woodside shares
(124,063 Duck Head shares) owned by Micco Corporation. See Note (8).
(12) William F. Garrett is a director of Duck Head. He is also a director
of Delta Woodside and Delta Apparel. The number of shares shown as beneficially
owned by Mr. Garrett includes approximately 598 Delta Woodside shares (59 Duck
Head shares) that are held in two dividend reinvestment accounts, one of which
has approximately 78 Delta Woodside shares (7 Duck Head shares) and is
registered in the names of William Garrett and Ann Garrett, though Mr. Garrett
has sole voting and dispositive power of these shares. It also includes
approximately 2,088 Delta Woodside shares (208 Duck Head shares) allocated to
Mr. Garrett's account in the Delta Woodside 401(k) Plan. Mr. Garrett is fully
vested in the shares allocated to his account in the Delta Woodside 401(k) Plan.
The number of shares shown in the table includes an aggregate of 95,000 unissued
Delta Woodside shares (9,500 Duck Head shares) subject to employee stock options
under Delta Woodside's stock option plan. Not all of these options will become
exercisable within 60 days or less under the current provisions of the Delta
Woodside stock option plan and the pertinent grants; however, it is expected
that Mr. Garrett will enter into an amendment to his options pursuant to which
all of his options will become exercisable prior to the Duck Head distribution,
and there is a likelihood that such an amendment would become effective within
the next 60 days. Consequently, all of Mr. Garrett's outstanding options are
included in the table. See, "Interests of Directors and Executive Officers in
the Duck Head Distribution -- Early Exercisability of Delta Woodside Stock
Options."
(13) C. C. Guy is a director of Duck Head. He is also a director of Delta
Woodside and Delta Apparel. The number of shares shown as beneficially owned by
C. C. Guy includes 18,968 Delta Woodside shares (1,896 Duck Head shares) owned
by his wife, as to which shares Mr. Guy disclaims beneficial ownership.
(14) Dr. James F. Kane is a director of Duck Head. He is also a director
of Delta Woodside and Delta Apparel.
(15) Dr. Max Lennon is a director of Duck Head. He is also a director of
Delta Woodside and Delta Apparel.
(16) Michael H. Prendergast is Senior Vice President of Sales of Duck
Head. The number of shares shown as beneficially owned by Mr. Prendergast
includes an aggregate of 9,000 unissued Delta Woodside shares (900 Duck Head
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shares) subject to employee stock options under Delta Woodside's stock option
plan. Not all of these options will become exercisable within 60 days or less
under the current provisions of the Delta Woodside stock option plan and the
pertinent grants; however, it is expected that Mr. Prendergast will enter into
an amendment to his options pursuant to which all of his options will become
exercisable prior to the Duck Head distribution, and there is a likelihood that
such an amendment would become effective within the next 60 days. Consequently,
all of Mr. Prendergast's outstanding options are included in the table. See,
"Interests of Directors and Executive Officers in the Duck Head Distribution --
Early Exercisability of Delta Woodside Stock Options."
(17) K. Scott Grassmyer is Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of Duck Head. The number of shares shown as
beneficially owned by Mr. Grassmyer includes 219 Delta Woodside shares (21 Duck
Head shares) allocated to Mr. Grassmyer's account in the Delta Woodside 401(k)
Plan. Mr. Grassmyer is fully vested in the shares allocated to his account in
the Delta Woodside 401(k) Plan. It also includes 2,312 Delta Woodside shares
(231 Duck Head shares) allocated to Mr. Grassmyer's account in Delta Woodside's
Employee Stock Purchase Plan. The number of shares shown in the table includes
an aggregate of 12,000 unissued Delta Woodside shares (1,200 Duck Head shares)
subject to employee stock options under Delta Woodside's stock option plan. Not
all of these options will become exercisable within 60 days or less under the
current provisions of the Delta Woodside stock option plan and the pertinent
grants; however, it is expected that Mr. Grassmyer will enter into an amendment
to his options pursuant to which all of his options will become exercisable
prior to the Duck Head distribution, and there is a likelihood that such an
amendment would become effective within the next 60 days. Consequently, all of
Mr. Grassmyer's outstanding options are included in the table. See, "Interests
of Directors and Executive Officers in the Duck Head Distribution -- Early
Exercisability of Delta Woodside Stock Options."
(18) William B. Mattison, Jr. is Senior Vice President of Merchandising of
Duck Head.
(19) Includes all shares deemed to be beneficially owned by any current
director or executive officer. Includes 3,548 Delta Woodside shares (354 Duck
Head shares) of Delta Woodside's common stock held for the executive officers on
December 7, 1999 by the Delta Woodside 401(k) Plan. Each participant in the
Delta Woodside 401(k) Plan has the right to direct the manner in which the
trustee of the Plan votes the shares held by the Delta Woodside 401(k) Plan that
are allocated to that participant's account. Except for shares as to which such
a direction is made, the shares held by the Delta Woodside 401(k) Plan will not
be voted. Also includes 35,805 Delta Woodside shares (3,580 Duck Head shares)
allocated to directors' and executive officers' accounts in Delta Woodside's
employee stock purchase plan. The number of shares shown in the table includes
an aggregate of 116,000 unissued Delta Woodside shares (11,600 Duck Head shares)
subject to employee stock options under Delta Woodside's stock option plan held
by directors and executive officers. Not all of these options will become
exercisable within 60 days or less under the current provisions of the Delta
Woodside stock option plan and the pertinent grants; however, it is expected
that all directors and executive officers with outstanding options will enter
into an amendment to their options pursuant to which all of their options will
become exercisable prior to the Duck Head distribution, and there is a
likelihood that such amendments would become effective within the next 60 days.
Consequently, all of such persons' outstanding options are included in the
table. See, "Interests of Directors and Executive Officers in the Duck Head
Distribution -- Early Exercisability of Delta Woodside Stock Options."
(20) Less than one percent.
</TABLE>
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INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN
THE DUCK HEAD DISTRIBUTION
One or more executive officers of Duck Head and one or more members of the
Duck Head board of directors will receive economic benefits as a result of the
Duck Head distribution and the Delta Apparel distribution and may have other
interests in the Duck Head distribution and the Delta Apparel distribution in
addition to their interests as Delta Woodside stockholders. Some of these
executive officers and directors will also be the beneficial owners of more than
5% of the outstanding shares of common stock of Duck Head immediately following
the Duck Head distribution. See "Security Ownership of Significant Beneficial
Owners and Management." The Delta Woodside board of directors was aware of
these interests and considered them along with the other matters described above
under "The Duck Head Distribution -- Background of the Duck Head Distribution"
and "The Duck Head Distribution -- Reasons for the Duck Head Distribution."
RIGHT OF ROBERT D. ROCKEY, JR. TO ACQUIRE DUCK HEAD SHARES
Pursuant to the letter agreement pursuant to which Robert D. Rockey, Jr.
became Chairman and Chief Executive Officer of Duck Head, he has the right to
acquire from Duck Head up to 1,000,000 Duck Head shares on the date that is six
months after the Duck Head distribution. If this right is exercised, the price
for the shares will be the average daily closing stock price for the Duck Head
common stock for the six-month period following the Duck Head distribution.
Duck Head does not believe that it will be able to deduct any expense
attributable to this right for federal income tax purposes. See "Management of
Duck Head - Management Compensation".
RECEIPT OF DUCK HEAD STOCK OPTIONS AND DUCK HEAD INCENTIVE STOCK AWARDS
The compensation grants committee or compensation committee of the Duck Head
board of directors anticipates that, during the first six months following the
Duck Head distribution, grants under the Duck Head stock option plan and awards
under the Duck Head incentive stock award plan will be made to the following
executive officers of Duck Head:
<TABLE>
<CAPTION>
Name and position Shares Covered by Options(1) Shares Covered by Awards
- ---------------------------------------- ---------------------------- ------------------------
<S> <C> <C>
Robert D. Rockey, Jr. [to be determined] [to be determined]
Chairman, President and Chief
Executive Officer
Michael H. Prendergast [to be determined] [to be determined]
Senior Vice President-Sales
K. Scott Grassmyer [to be determined] [to be determined]
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
William B. Mattison, Jr. [to be determined] [to be determined]
Senior Vice President-Merchandising
___________________________________
<FN>
(1) The compensation grants committee or the compensation committee of the Duck Head board
of directors anticipates that the stock options will be granted at various dates during the six
month period. The exercise price for each option will be the stock's closing market value at
the date of grant.
</TABLE>
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PAYMENTS IN CONNECTION WITH DUCK HEAD DISTRIBUTION AND DELTA APPAREL
DISTRIBUTION
The Delta Woodside board of directors currently anticipates that, in
connection with the Duck Head distribution and the Delta Apparel distribution,
special cash bonuses may be awarded by Delta Woodside to the following
individuals who are members of the Duck Head board of directors:
Name Cash bonus ($)
- ---- ----------------
William F. Garrett 306,000
C.C. Guy 32,625
Dr. James F. Kane 32,625
Dr. Max Lennon 32,250
E. Erwin Maddrey, II 500,000
Buck A. Mickel 31,625
Bettis C. Rainsford 360,000
These bonuses would be made in consideration of these individuals' efforts on
behalf of Delta Woodside leading up to the Duck Head distribution and the Delta
Apparel distribution.
EARLY EXERCISABILITY OF DELTA WOODSIDE STOCK OPTIONS
Pursuant to the distribution agreement, Delta Woodside has provided the
holders of outstanding options granted under the Delta Woodside stock option
plan, whether or not those options were then exercisable, with the opportunity
to amend the terms of their Delta Woodside stock options. The amendment offered
to each holder provided that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
became immediately exercisable in full five (5) business days prior to the
Duck Head record date, which permitted the holder to exercise all or part
of the holder's Delta Woodside stock option prior to the Duck Head record
date (and thereby receive Duck Head shares in the Duck Head distribution
and Delta Apparel shares in the Delta Apparel distribution); and
(ii) any Delta Woodside stock options that remained unexercised as of the
Duck Head record date remain exercisable for only Delta Woodside common
shares, and for the same number of Delta Woodside common shares at the same
exercise price, after the Duck Head distribution and the Delta Apparel
distribution as before the Duck Head distribution and the Delta Apparel
distribution (and not for a combination of Delta Woodside shares, Duck Head
shares and Delta Apparel shares).
All holders of outstanding options under the Delta Woodside Stock Option
Plan entered into the proposed amendment.
As a result of these amendments, options for Delta Woodside shares became
exercisable earlier than they otherwise would have for the following Named
Executives and members of the Duck Head board of directors for the following
number of shares of Delta Woodside common stock:
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Name Number of Delta Woodside common shares covered by portion
- ---- ---------------------------------------------------------
of stock options the exercisability of which was accelerated
------------------------------------------------------------
William F. Garrett 37,500
Michael H. Prendergast 6,000
K. Scott Grassmyer 9,000
LEASE TERMINATIONS
Delta Woodside has leased its principal corporate office space and space
for its benefits department, purchasing department and financial accounting
department from a corporation (Hammond Square, Ltd.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director of Duck Head and
Delta Apparel and President and Chief Executive Officer (from which officer
positions he will resign in connection with the Duck Head distribution) and a
director of Delta Woodside) and Jane H. Greer (Vice President and Secretary of
Delta Woodside (from which officer positions she will resign in connection with
the Duck Head distribution)). Mr. Maddrey and Ms. Greer are also the directors
and executive officers of Hammond Square, Ltd. The lease of this space was
executed effective September 1, 1998, covers approximately 9,662 square feet at
a rental rate of $13.50 per square foot per year (plus certain other expenses)
and had an expiration date of August 2003. In connection with the Duck Head
distribution and the Delta Apparel distribution, Hammond Square, Ltd. and Delta
Woodside have agreed that this lease will terminate on the Duck Head
distribution date in exchange for the payment by Delta Woodside to Hammond
Square, Ltd. of $135,268. Following the Duck Head distribution date, Delta
Woodside may continue to use the space on an as needed month-to-month basis at
the rental rate of $14.00 per square foot per year (plus certain other
expenses).
Delta Woodside has leased office space in Edgefield, South Carolina from
The Rainsford Development Corporation, a corporation wholly owned by Bettis C.
Rainsford (a director of Duck Head, Delta Apparel and Delta Woodside). Mr.
Rainsford is a director and executive officer and Brenda L. Jones (Assistant
Secretary of Delta Woodside (from which officer positions she will resign in
connection with the Duck Head distribution)) is an executive officer of The
Rainsford Development Corporation. In connection with the Duck Head
distribution and the Delta Apparel distribution, The Rainsford Development
Corporation and Delta Woodside have agreed that this lease will terminate on the
Duck Head distribution date in exchange for the payment by Delta Woodside to The
Rainsford Development Corporation of $33,299.08.
LEASE OF STORE IN EDGEFIELD, SOUTH CAROLINA
Duck Head leases a building in Edgefield, South Carolina from Bettis C.
Rainsford (a director of Duck Head, Delta Apparel and Delta Woodside) pursuant
to an agreement involving rental payments equal to 3% of gross sales of the
Edgefield store, plus 1% of gross sales of the store for utilities. Under this
lease agreement, $9,944, $11,076 and $10,947 was paid to Mr. Rainsford during
fiscal 1997, 1998 and 1999, respectively.
TRANSFERS OF LIFE INSURANCE POLICIES
In February 1991, each of E. Erwin Maddrey, II (a director of Duck Head and
Delta Apparel and President and Chief Executive Officer (from which officer
positions Mr. Maddrey will resign in connection with the Duck Head distribution)
and a director of Delta Woodside) and Bettis C. Rainsford (a director of Duck
Head, Delta Apparel and Delta Woodside) entered into a stock transfer
restrictions and right of first refusal agreement (which this document refers to
as a "First Refusal Agreement") with Delta Woodside. Pursuant to each First
Refusal Agreement, Mr. Maddrey or Mr. Rainsford, as the case may be, granted
Delta Woodside a specified right of first refusal with respect to any sale of
that individual's Delta Woodside shares owned at death for five years after the
individual's death. In connection with the First Refusal Agreements, life
insurance policies were established on the lives of Mr. Maddrey and Mr.
Rainsford. Under the life insurance policies on the life of each of them, $30
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million is payable to Delta Woodside and $10 million is payable to the
beneficiary or beneficiaries chosen by the individual. Nothing in either First
Refusal Agreement restricts the freedom of Mr. Maddrey or Mr. Rainsford to sell
or otherwise dispose of any or all of his Delta Woodside shares at any time
prior to his death or prevents Delta Woodside from canceling the life insurance
policies payable to it for $30 million on either Mr. Maddrey's or Mr.
Rainsford's life. A First Refusal Agreement terminates if the life insurance
policies payable to the applicable individual's beneficiaries for $10 million
are canceled by reason of Delta Woodside's failure to pay the premiums on those
policies.
In connection with the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside has agreed with each of Mr. Maddrey and Mr.
Rainsford that, effective as of dates in January and February, 2000 (the dates
through which the applicable insurance premiums have been paid), that
individual's First Refusal Agreement will terminate and Delta Woodside will
transfer to the individual the $10 million life insurance policies on his life
the proceeds of which are payable to the beneficiary or beneficiaries he
selects. After this transfer, the recipient individual will be responsible for
payment the premiums on these life insurance policies. Delta Woodside will
allow the remaining $30 million of life insurance payable to Delta Woodside to
lapse.
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DESCRIPTION OF DUCK HEAD CAPITAL STOCK
Duck Head has authorized common stock of 9,000,000 shares, par value $.01
per share, and "blank check" preferred stock of 2,000,000 shares, par value of
$.01 per share. All of the outstanding shares of Duck Head common stock are,
and all the shares of Duck Head common stock to be distributed to the Delta
Woodside stockholders in the Duck Head distribution will be, fully paid and
nonassessable. The shares of Duck Head common stock have no preference,
conversion, exchange or cumulative voting rights.
Upon consummation of the Duck Head distribution, the transfer agent for
Duck Head common stock will be First Union National Bank.
VOTING RIGHTS
Each share of Duck Head common stock is entitled to one vote. Because Duck
Head's stockholders do not have cumulative voting rights, the holders of a
majority of the shares voting for the election of directors may elect all the
directors and minority representation on the board of directors may be
prevented. The voting rights of shares of any class or series of Duck Head
blank check preferred stock to be issued will be determined by the Duck Head
board of directors in the resolutions creating that class or series and will be
set forth in a certificate of designation filed with the Georgia Secretary of
State.
RIGHTS PLAN
Common Stock Purchase Right Dividend
Prior to the Duck Head distribution, the board of directors of Duck Head
declared a dividend distribution of one Duck Head common stock purchase right
(which this document refers to as a Right) for each then outstanding share of
Duck Head common stock. Each Right entitles the registered holder to purchase
from Duck Head one quarter share of its common stock, at a cash exercise price
of $__- per quarter share (equivalent to $__ per whole share), subject to
adjustment. The description and terms of the Rights are set forth in a
Shareholder Rights Agreement (which this document refers to as the rights
agreement) between Duck Head and First Union National Bank, as rights agent.
The number of Rights outstanding is equal to the number of shares of the Duck
Head common stock outstanding.
The following summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the rights agreement.
A copy of the rights agreement has been included as an exhibit to the
Registration Statement on Form 10 of which this Information Statement is a part.
You can access the Registration Statement on the Securities and Exchange
Commission's web site at www.sec.gov by searching the Edgar Archives on the
SEC's web site. You can also get a copy free of charge by calling or writing to
Duck Head at the telephone number or address stated under "Summary -- Duck
Head."
Certificates; Separation of Rights from Common Stock
Initially, the Rights will not be exercisable, will be attached to all
outstanding shares of Duck Head common stock, and no separate Right certificates
will be distributed. The Rights will separate from the Duck Head common stock
and a "Distribution Date" will occur upon the earliest of (i) 10 days following
a public announcement that a person or group of affiliated or associated persons
(which this document refers to as an Acquiring Person) (other than an Exempt
Person as defined in the rights agreement) has acquired beneficial ownership of
20% or more of the outstanding shares of Duck Head common stock (which date of
announcement this document refers to as the Share Acquisition Date) and (ii) 10
business days following the commencement of a tender offer or exchange offer
that would result in a person or group owning 20% or more of the outstanding
shares of Duck Head common stock.
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Robert D. Rockey, Jr. has the right to purchase from Duck Head up to
1,000,000 Duck Head shares six months after the Duck Head distribution, and may
receive options under the Duck Head stock option plan and incentive stock awards
under the Duck Head incentive stock award plan. The rights agreement provides
that any acquisition of Duck Head shares by Mr. Rockey upon exercise of this
right or any of these options or awards will not, in and of itself, cause him to
become an Acquiring Person. The rights agreement provides that Mr. Rockey will
become an Acquiring Person only if he acquires in one or more transactions a
number of shares equal to 1% of the total outstanding shares of Duck Head voting
securities other than in the transactions mentioned above or in a compensation
transaction approved by the Duck Head board of directors. See "Management of
Duck Head -- Management Compensation -- Robert D. Rockey, Jr. Employment
Contract".
Until the Distribution Date (or earlier redemption or expiration of the
Rights), (a) the Rights will be evidenced by the Duck Head common stock
certificates and will be transferred with and only with the Duck Head common
stock certificates, (b) Duck Head common stock certificates will contain a
notation incorporating the rights agreement by reference, and (c) the surrender
for transfer of any certificates for Duck Head common stock will also constitute
the transfer of the Rights associated with the Duck Head common stock
represented by the certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on February __, 2010 unless previously redeemed or
exchanged for Duck Head common stock by Duck Head as described below.
As soon as practicable after the Distribution Date, Right certificates will
be mailed to holders of record of Duck Head common stock as of the close of
business on the Distribution Date and, thereafter, the separate Right
Certificates alone will represent the Rights. Except as otherwise determined by
the board of directors, only shares of Duck Head common stock issued prior to
the Distribution Date will be issued with Rights.
Flip-In Rights
In the event that (i) a person becomes an Acquiring Person, (ii) Duck Head
is the surviving corporation in a merger with an Acquiring Person or any
affiliate or associate of an Acquiring Person and the Duck Head common stock is
not changed or exchanged, (iii) an Acquiring Person engages in one of a number
of self-dealing transactions specified in the rights agreement, or (iv) an event
occurs that results in an Acquiring Person's ownership interest being increased
by more than 1% , proper provision will be made so that each holder of a Right
will thereafter have the right to receive upon exercise of the Right at the then
current exercise price, that number of shares of Duck Head common stock (or in
certain circumstances, cash, property, or other securities of Duck Head) having
a market value of two times that exercise price. However, the Rights are not
exercisable following the occurrence of any of the events set forth above until
the time the Rights are no longer redeemable as set forth below.
Notwithstanding any of the foregoing upon any of the events set forth above,
rights that are or were beneficially owned by an Acquiring Person will become
null and void.
Flip-Over Rights
In the event that, at any time following the Share Acquisition Date, (i)
Duck Head is acquired in a merger or other business combination transaction or
(ii) 50% or more of Duck Head's assets or earning power is sold, each holder of
a Right will thereafter have the right to receive, upon exercise, common stock
of the acquiring company having a market value equal to two times the exercise
price of the Right.
Exchange of Common Stock for Rights at Option of the Board
At any time after any person becomes an Acquiring Person and prior to the
time that person, together with its affiliates and associates, becomes the
beneficial owner of 50% or more of the outstanding Duck Head common stock, the
board of directors of Duck Head may exchange the Rights (other than Rights that
have become void), in whole or in part, at the exchange rate of one quarter
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share of Duck Head common stock per Right, subject to adjustment as provided in
the rights agreement.
Adjustment of Exercise Price and Underlying Shares in Certain Events
The exercise price payable, and the number of shares of Duck Head common
stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Duck Head common stock, (ii) if all holders of the Duck Head common stock are
granted certain rights or warrants to subscribe for Duck Head common stock or
securities convertible into Duck Head common stock at less than the current
market price of the Duck Head common stock, or (iii) upon the distribution to
all holders of the Duck Head common stock of evidences of indebtedness or
assets (excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the exercise price will be
required until cumulative adjustments amount to at least 1% of the exercise
price. No fractional shares of Duck Head common stock will be issued upon
exercise of a Right and, in lieu of a fractional share, a payment, in cash will
be made based on the fair market value of the Duck Head common stock on the last
trading date prior to the date of exercise.
Redemption of Rights
The Rights may be redeemed in whole, but not in part, at a price of $.001
per Right (payable in cash, Duck Head common stock or other consideration deemed
appropriate by the board of directors) by the board of directors at any time
prior to the earlier of the close of business on the tenth day after the Share
Acquisition Date or the final expiration date of the Rights (whichever is
earlier); provided that under certain circumstances, the Rights may not be
redeemed unless there are Disinterested Directors (as defined in the rights
agreement) in office and the redemption is approved by a majority of the
Disinterested Directors. After the redemption period has expired, Duck Head's
right of redemption may be reinstated upon the approval of the board of
directors if an Acquiring Person reduces his beneficial ownership to 10% or less
of the outstanding shares of Duck Head common stock in a transaction or series
of transactions not involving Duck Head and there are no other Acquiring
Persons. Immediately upon the action of the board of directors ordering
redemption of the Rights and without any notice, the Rights will terminate and
thereafter the only right of the holders of Rights will be to receive the
redemption price.
No Rights of Stockholder Until Exercise
Until a Right is exercised, the holder will have no rights as a stockholder
of Duck Head (beyond those as an existing stockholder), including the right to
vote or to receive dividends.
Material Federal Income Tax Consequences of Rights Plan
Although the distribution of the Rights will not be taxable to stockholders
or to Duck Head, stockholders may, depending upon the circumstances, recognize
taxable income in the event that the Rights become exercisable for Duck Head
common stock (or other consideration) of Duck Head or for common stock of an
acquiring company as described above.
Amendment of Rights Agreement
Any of the provisions of the rights agreement may be amended by the board
of directors of Duck Head prior to the Distribution Date. After the
Distribution Date, the provisions of the rights agreement, other than those
relating to the principal economic terms of the Rights, may be amended by the
board of directors to cure any ambiguity, defect or inconsistency, to make
changes which do not adversely affect the interests of holders of Rights
(excluding the interests of any Acquiring Person), or to shorten or lengthen any
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time period under the rights agreement. Amendments adjusting time periods may,
under certain circumstances, require the approval of a majority of Disinterested
Directors, or otherwise be limited.
OTHER PROVISIONS RESPECTING STOCKHOLDER RIGHTS AND EXTRAORDINARY TRANSACTIONS
Set forth below is a brief summary of some of the provisions of Duck Head's
articles of incorporation and bylaws respecting stockholder rights and
extraordinary transactions that will govern your rights as a holder of Duck Head
common stock after the distribution. Some of these provisions may deter
takeovers of Duck Head that you may consider to be in your best interests.
Those takeovers could include offers for Duck Head common stock for a premium
over the market price of the stock. If the information in this summary differs
from the information in Duck Head's articles of incorporation or bylaws, you
should rely on the information in the articles of incorporation and the bylaws.
General
Duck Head is a Georgia corporation that is subject to the provisions of the
Official Code of Georgia. The rights of Duck Head's stockholders are governed
by its articles of incorporation and bylaws, in addition to Georgia law.
Authorized Capital
Duck Head's authorized capital stock consists of 9,000,000 common shares
and 2,000,000 shares of "blank check" preferred stock.
Under Duck Head's articles of incorporation, its board of directors could
issue additional authorized but unissued common stock or could designate and
issue one or more classes or series of preferred stock. One of the effects of
authorized but unissued and unreserved shares of common stock and blank check
preferred stock may be to render more difficult or to discourage an attempt by a
potential acquiror to obtain control of Duck Head by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of Duck
Head's management and board of directors. The issuance of those shares of common
stock and/or preferred stock may have the effect of delaying, deferring or
preventing a change in control of Duck Head without any further action by its
stockholders. Duck Head's articles of incorporation authorize its board of
directors to determine the preferences, limitations and relative rights granted
to and imposed upon each class and series of Duck Head's preferred stock.
Amendment of the Articles of Incorporation
Except for certain primarily ministerial amendments that may be authorized
by the Duck Head board of directors alone to amend Duck Head's articles of
incorporation, the following is required to amend Duck Head's articles of
incorporation: (1) an authorization by the Duck Head board of directors;
followed by (2) a vote of the majority of all outstanding voting stock.
Amendments of the Bylaws
Duck Head's bylaws may be amended, adopted or repealed by:
- approval of holders of two-thirds of each class entitled to vote; or
- approval by two-thirds of the directors then in office.
Number of Directors
The number of directors must be no less than 2 and no more than 15, with
the actual number to be determined by Duck Head's board of directors from time
to time. This provision gives Duck Head's board of directors the power to
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increase the size of the board of directors within this range. In the event of
an increase or decrease in the size of the board of directors, each director
then serving nevertheless continues as a director until the expiration of his
current term or his prior death, retirement, resignation or until a successor is
appointed.
Vacancies on Duck Head's Board of Directors
Any vacancy that occurs during the year or that occurs as a result of
death, resignation, removal, an increase in the size of Duck Head's board of
directors or otherwise, may be filled by a vote of majority of the directors
remaining in office or by the sole remaining director.
Nominations of Directors
Any nomination for a director that is made by a stockholder must be made
in writing by personal delivery or by United States mail, postage pre-paid, to
Duck Head's corporate secretary within the following deadlines:
- in the case of annual meetings of stockholders, at least 120 days
before the anniversary date of the immediately preceding annual
stockholder meeting; and
- in the case of special meetings, the close of business on the seventh
day following the date that notice of the meeting was first given to
stockholders.
A stockholder's nomination for director must include:
- the name and address of the stockholder, the class and number of
shares beneficially owned by the stockholder as of any record date for
the meeting and as of the date of the notice of the meeting and the
name in which those shares are registered;
- a representation that the stockholder intends to appear in person or
by proxy at the meeting to make the nomination;
- a description of all arrangements and understandings between the
stockholder and each nominee and any other person pursuant to which
the nominations are to be made;
- other information that must be disclosed in proxy solicitations;
- the written consent of each nominee to serve as a director of Duck
Head if so elected; and
- any other information that Duck Head may reasonably request.
Depending on the circumstances, these timing and notice requirements may
preclude or deter some stockholders from making nominations for directors at a
meeting of stockholders.
Limitation on Liability of Directors
Under the Official Code of Georgia, a corporation may adopt provisions to
its articles of incorporation limiting the personal liability of its directors
to the corporation or any of its stockholders for monetary damage as a result of
breaches of duty of care or other duty as a director, provided that the
provision may not eliminate or limit the liability of a director: (i) for any
appropriation in violation of the director's duties to Duck Head or its
stockholders, (ii) for acts or omissions that involve intentional misconduct or
a knowing violation of law, (iii) for any willful or negligent payment of an
unlawful dividend, or (iv) for any transaction from which the director derived
an improper personal benefit. Duck Head's articles of incorporation contains a
provision that limits the personal liability of directors "to the fullest extent
permitted" by the Official Code of Georgia.
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This exculpation provision may have the effect of reducing the likelihood
of derivative litigation against Duck Head's directors and may discourage or
deter stockholders or Duck Head from bringing a lawsuit against its directors
for breach of their fiduciary duties as directors. However, the provision does
not affect the availability of equitable remedies like an injunction or
rescission.
The foregoing liability and the indemnification provisions described below
may be materially more liberal with respect to directors than available under
the corporate laws of many other states.
Indemnification of Directors
Duck Head's bylaws provide that each person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative, because
that person is or was an Duck Head director or officer or is or was serving at
Duck Head's request as a director or officer of another entity, shall be
indemnified and held harmless by Duck Head to the fullest extent permitted by
Georgia law. This right to indemnification also includes the right to be paid by
Duck Head the expenses incurred in connection with that proceeding in advance of
its final disposition to the fullest extent authorized by Georgia law.
Duck Head intends to purchase and maintain insurance on behalf of any
person who is or was one of its directors, officers, employees or agents, or is
or was serving at Duck Head's request as a director, officer, employee or agent
of another entity against any liability asserted against him or her and incurred
by him or her in that capacity, or arising out of his or her status as such,
whether or not Duck Head would have the power or the obligation to indemnify him
or her against that liability under the provisions of Duck Head's bylaws.
The indemnification provisions of the Official Code of Georgia and the
provisions of the Official Code of Georgia permitting liability insurance are
set forth in Duck Head's bylaws as a contractual right of Duck Head's directors,
officers and agents.
Annual Meeting of Stockholders
The annual meeting of stockholders must be held on a date and at a place
fixed by Duck Head's board of directors.
Special Meetings of Stockholders
Special meetings may be called at any time and for any purpose by:
- the chairman of Duck Head's board of directors;
- Duck Head's president; or
- a committee of the board of directors that has been duly designated by
the board of directors and whose powers and authority provided in a
resolution of the board of directors or in the bylaws include the
power to call those meetings.
Under Duck Head's bylaws, stockholders may not call a special meeting and
no action may be taken by stockholders of Duck Head except at an annual or
special meeting of stockholders. The fact that holders of Duck Head voting stock
are unable to call a special meeting or to take action without a meeting may
make it more difficult for stockholders to take action opposed by Duck Head's
board of directors.
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Stockholder Proposals
A stockholder wishing to bring business before an annual meeting of
stockholders must provide written notice of the business by personal delivery or
by United States mail, postage pre-paid, to Duck Head's corporate secretary at
its principal executive offices. The notice must be received by the earlier of
the following dates:
- at least 120 days prior to the anniversary date of the immediately
preceding annual meeting; or
- at least 10 days after notice or public disclosure of the date of the
annual meeting was made or given to the stockholders.
The notice must include:
- a description of the item of business and the reasons for conducting
it at the meeting and, if the item of business includes a proposal to
amend the articles of incorporation or bylaws, the text of the
proposed amendment;
- the name and address of the stockholder, the class and number of
shares beneficially owned and represented by proxy by the stockholder
as of any record date for the meeting, and as of the date of the
notice of the meeting;
- a representation that the stockholder intends to appear in person or
by proxy at the meeting to propose the item of business; and
- any material interest of the stockholder in the item of business.
Depending on the circumstances, these timing and notice requirements may
preclude or deter some stockholders from bringing matters before an annual
meeting.
Preemptive Rights
In general, preemptive rights allow stockholders whose dividend rights or
voting rights would be adversely affected by issuing new stock to purchase, on
terms and conditions set by the board of directors, that proportion of the new
issue that would preserve the relative dividend or voting rights of those
stockholders. As permitted by Georgia law, Duck Head's articles of incorporation
do not grant its stockholders preemptive rights.
Stockholder Action Without Meeting
Duck Head's articles of incorporation provide that no action required or
permitted to be taken at an annual or special meeting of stockholders may be
taken without a meeting unless the action is taken by the unanimous written
consent of all of the stockholders in lieu of a meeting. This restriction on
stockholders' ability to act by written consent may make it more difficult for
stockholders to take action opposed by Duck Head's board of directors.
Dividends, Distributions and Liquidations
Subject to the provisions of any outstanding blank check preferred stock,
the holders of Duck Head common stock are entitled to receive whatever
dividends, if any, may be declared from time to time by the Duck Head board of
directors in its discretion from funds legally available for that purpose.
Under Georgia law, a corporation generally may pay dividends or make
distributions on its common stock; provided, however, that no distribution may
be made if, after giving it effect, either (i) the corporation would be unable
to pay its debts when due in the ordinary course of business or (ii) the
corporation's total liabilities would exceed the sum of its total assets, plus
the total dissolution preferences of any senior classes of stock. For a
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description of some of the restrictions placed on Duck Head's ability to pay
dividends or make distributions, see the portion of this document found under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Dividends and Purchases of its Own Shares by Duck Head".
The holders of Duck Head common stock are entitled to share on a pro rata basis
in any distribution to stockholders upon liquidation, dissolution or winding up
of Duck Head, subject to the provisions of any outstanding blank check preferred
stock.
Approval of and Special Rights with Respect to Mergers or Consolidations
and Other Transactions
Under Georgia law, although articles of incorporation may require a higher
stockholder vote, the holders of a majority of the outstanding voting common
shares must approve a plan adopted by the board of directors in order to
authorize mergers, consolidations, share exchanges or the transfer of all or
substantially all of the corporation's assets. Duck Head's articles of
incorporation do not require a higher vote to approve any of those
transactions.
Georgia Business Combinations Statute
Duck Head is also subject to Section 14-2-1131 et seq. of the Official Code
of Georgia. In general, this section prohibits a publicly held Georgia
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of five years after the stockholder becomes an
"interested stockholder", unless:
- before that date the board of directors of that corporation approves
either the "business combination" or the transaction that resulted in
the stockholder becoming an "interested stockholder";
- in the transaction that resulted in the stockholder becoming an
"interested stockholder", the "interested stockholder"owned at least
90% of the voting stock of the corporation outstanding at the time
that the transaction commenced, excluding, for purposes of determining
the number of shares outstanding, shares owned by any of the following
persons (which this document refers to as the persons excluded from
the voting calculation):
- persons who are directors or officers, their affiliates and
associates;
- subsidiaries of the corporation, and
- employee stock plans that do not provide employees with the
right to determine confidentially the extent to which shares
held subject to the plan will be tendered in a tender or
exchange offer; or
- after becoming an "interested stockholder", the stockholder:
- acquired additional shares resulting in the "interested
stockholder" being the beneficial owner of at least 90% of
the voting stock of the corporation, excluding, for purposes
of determining the number of shares outstanding, shares
owned by the persons excluded from the voting calculation;
and
- the business combination was approved at an annual or
special meeting of stockholders by the holders of a majority
of the voting stock entitled to vote, excluding the voting
stock beneficially owned by the "interested stockholder" and
the persons excluded from the voting calculation.
A "business combination" includes a merger, consolidation, asset sale,
lease, liquidation, reclassification or securities, share exchange, issuance in
one transaction or a series of transactions of equity securities of the
corporation that have an aggregate market value of 5% or more of the aggregate
market value of the outstanding common and preferred stock of the corporation
(except pursuant to the exercise of rights granted proportionately to other
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stockholders and for convertible or exercisable rights outstanding prior to the
time that the person became an interested stockholder) or other transaction
resulting in a financial benefit to the "interested stockholder".
Under this statute, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within two years did own, 10% or more
of the corporation's voting stock.
The restrictions imposed by this section will not apply to a corporation
unless its bylaws specifically provide for coverage under the statute. In its
bylaws Duck Head has opted into the statute. Accordingly, the restrictions
outlined above will apply to Duck Head.
"Relevant Factors" Provision
The articles of incorporation expressly requires the Duck Head board of
directors, when evaluating any proposed tender offer, exchange offer or plan of
merger, consolidation, sale of assets or stock exchange, to consider not only
the consideration being offered in relation to the then current market price for
Duck Head's outstanding shares of capital stock, but also in relation to the
then current value of Duck Head in a freely negotiated transaction and in
relation to the Duck Head board of directors' estimate of the future value of
Duck Head (including the unrealized value of its properties and assets) as an
independent going concern, as well as any other factors that the Duck Head board
of directors deems relevant.
Effect of Provisions on Extraordinary Transactions
The provisions respecting tender offers and similar transactions may tend
to discourage attempts by third parties to acquire Duck Head in a hostile
takeover effort, and may adversely affect the price that a potential purchaser
would be willing to pay for the stock of Duck Head. The provisions may also
make the removal of incumbent management more difficult. The Duck Head board of
directors believes that these provisions are in the long-term interests of Duck
Head and its stockholders because they may encourage persons seeking to acquire
control of Duck Head to consult first with Duck Head's board of directors and
permit the board to consider factors other than the relationship of the price
offered to recent market prices. Duck Head believes that any takeover attempt
or business combination in which Duck Head is involved should be thoroughly
studied by Duck Head's board of directors and that the Duck Head stockholders
should have the benefit of the Duck Head board's recommendation. Nonetheless,
Duck Head's stockholders should be aware that these provisions could reduce the
market value of Duck Head common stock.
RECENT SALES OF UNREGISTERED SECURITIES
Following Duck Head's incorporation on December 10, 1999, Duck Head issued
100 shares of its common stock for aggregate consideration of $100 to its parent
corporation, Duck Head Apparel Company, Inc., a Tennessee corporation which is
an indirect wholly-owned subsidiary of Delta Woodside, in a transaction that was
not registered under the Securities Act of 1933 because of the exemption from
registration provided by Section 4(2) of that Act. Prior to the Duck Head
distribution, Duck Head's parent corporation will merge into its immediate
parent corporation, which in turn will merge into Delta Woodside, and Duck Head
will issue as a stock dividend to Delta Woodside, in a transaction that does not
constitute a sale under the Securities Act of 1933, the number of additional
Duck Head shares needed so that the Duck Head distribution can be effected. The
Rights described above will be attached to the shares of common stock.
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2000 ANNUAL MEETING OF DUCK HEAD STOCKHOLDERS
Duck Head plans to hold an annual meeting of its stockholders in the fall
of 2000.
Any stockholder of Duck Head who desires to present a proposal at the 2000
annual meeting of stockholders of Duck Head for inclusion in the proxy statement
and form of proxy relating to that meeting must submit the proposal to Duck Head
at its principal executive offices on or before June 5, 2000. If a stockholder
of Duck Head desires to present a proposal at the 2000 annual meeting of
stockholders of Duck Head that will not be included in Duck Head's proxy
statement and form of proxy relating to that meeting, the proposal must be
submitted to Duck Head at its principal executive offices no later than August
21, 2000 for the proposal to be considered timely.
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE
This document, particularly the material under the headings "Risks
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business of Duck Head", contains "forward-looking
statements". All statements, other than statements of historical fact, that
address activities, events or developments that Duck Head expects or anticipates
will or may occur in the future are forward-looking statements. Examples are
statements that concern future revenues, future costs, future capital
expenditures, business strategy, competitive strengths, competitive weaknesses,
goals, plans, references to future success or difficulties and other similar
information. The words "estimate", "project", "forecast", "anticipate",
"expect", "intend", "believe" and similar expressions, and discussions of
strategy or intentions, are intended to identify forward-looking statements.
The forward-looking statements in this document are based on Duck Head's
expectations and are necessarily dependent upon assumptions, estimates and data
that Duck Head believes are reasonable and accurate but may be incorrect,
incomplete or imprecise. Forward-looking statements are also subject to a
number of business risks and uncertainties, any of which could cause actual
results to differ materially from those set forth in or implied by the
forward-looking statements. Many of these risks and uncertainties are described
under the heading "Risk Factors" and are beyond Duck Head's control.
Accordingly, any forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized.
Duck Head does not undertake publicly to update or revise the
forward-looking statements even if it becomes clear that any projected results
will not be realized.
INDEPENDENT AUDITORS
Duck Head's board of directors has appointed KPMG LLP as its independent
auditors to audit its financial statements for fiscal year 2000.
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ADDITIONAL INFORMATION
Duck Head has filed a Registration Statement on Form 10 with the SEC under
the Securities Exchange Act of 1934 with respect to the Duck Head common stock.
This document does not contain all of the information set forth in the
Registration Statement and the related exhibits to which this document refers.
Statements in this document as to the contents of any agreement or other
document are summaries only and are not necessarily complete. For complete
information as to these matters, Duck Head refers you to the applicable exhibit
to the Registration Statement.
You may inspect and copy the Registration Statement and the related
exhibits filed by Duck Head with the SEC at the public reference facilities that
the SEC maintains at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, as
well as at the Regional Offices of the Commission at Northwest Atrium Center,
500 West Madison, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center,
13th floor, New York, New York 10048. You can obtain copies of that information
by mail from the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, DC 20549 at prescribed rates. You may also access that
material electronically through the SEC's home page on the Internet at
http://www.sec.gov.
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DUCK HEAD APPAREL COMPANY
INDEX TO COMBINED FINANCIAL STATEMENTS
Financial Statements:
Report of Independent Public Accountants F-1
Combined Balance Sheets as of July 3, 1999
and June 27, 1998 F-2
Combined Statements of Operations and Accumulated
Divisional Deficit for the Years ended July 3, 1999,
June 27, 1998 and June 28, 1997 F-3
Combined Statements of Cash Flows for the Years
ended July 3, 1999, June 27, 1998 and June 28, 1997 F-4
Notes to Combined Financial Statements F-5
Condensed Combined Balance Sheet as of
October 2, 1999 (unaudited) F-18
Condensed Combined Statements of Operations and
Accumulated Divisional Deficit for the Three Months
Ended October 2, 1999 and September 26, 1998 (unaudited) F-19
Condensed Combined Statements of Cash Flows for the
Three Months ended October 2, 1999 and
September 26, 1998 (unaudited) F-20
Notes to Unaudited Condensed Combined Financial
Statements (unaudited) F-21
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INDEPENDENT AUDITORS' REPORT
----------------------------
Duck Head Apparel Company:
We have audited the accompanying combined balance sheets of Duck Head Apparel
Company (the "Company"), as described in note 1, as of July 3, 1999 and June 27,
1998, and the related statements of operations and accumulated divisional
deficit and cash flows for each of the years in the three-year period ended July
3, 1999. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Duck Head Apparel
Company as of July 3, 1999 and June 27, 1998, and the results of its operations
and cash flows for each of the years in the three-year period ended July 3,
1999, in conformity with generally accepted accounting principles.
Atlanta, Georgia
August 13, 1999
F-1
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<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
(as described in Note 1)
Combined Balance Sheets
-----------------------
(Amounts in thousands)
----------------------
JULY 3, JUNE 27,
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 236 274
Accounts receivable, less allowances of
$1,618 in 1999 and $1,136 in 1998 6,780 10,942
Affiliate receivables (note 8) 2,564 501
Inventories (notes 3 and 8) 24,721 28,252
Prepaid expenses and other current assets 174 1,605
Deferred tax assets (note 7) 3,958 1,967
--------- ---------
Total current assets 38,433 43,541
Property, plant and equipment, net (note 4) 11,919 20,728
Goodwill, less accumulated amortization of $4,419 in 1998 (note 2) -- 13,066
Other assets -- 15
--------- ---------
$ 50,352 77,350
========= =========
LIABILITIES AND DIVISIONAL DEFICIT
Current liabilities:
Accounts payable $ 3,849 5,609
Accrued expenses (note 5) 5,602 3,810
Current portion of long-term debt (note 6) 6,415 292
Current portion of capital leases (note 9) 56 117
Due to Parent and affiliates (note 8) 96,963 77,948
Income taxes payable 261 141
--------- ---------
Total current liabilities 113,146 87,917
Long-term debt (note 6) -- 6,420
Long-term portion of capital leases (note 9) 58 103
Due to Parent (note 8) 23,178 23,178
Deferred tax liabilities (note 7) 4,748 2,796
Other liabilities 732 770
--------- ---------
Total liabilities 141,862 121,184
Divisional deficit (91,510) (43,834)
Commitments (notes 9, 10 and 11)
--------- ---------
$ 50,352 77,350
========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
(as described in Note 1)
Combined Statements of Operations and Accumulated Divisional Deficit
(Amounts in thousands)
YEAR ENDED
-------------------------------
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 70,642 83,953 79,642
Cost of goods sold 62,468 57,088 53,391
--------- --------- ---------
Gross profit 8,174 26,865 26,251
Selling, general and administrative expenses 34,005 28,980 25,224
Intercompany management fees (note 8) 777 882 772
Impairment charges (note 2) 13,650 --- 400
Royalty and other income (1,027) (1,746) (1,439)
--------- --------- ---------
Operating (loss) income (39,231) (1,251) 1,294
Interest (income) expense:
Interest income, net (74) (131) (105)
Intercompany interest expense (note 8) 8,296 7,082 6,288
8,222 6,951 6,183
--------- --------- ---------
Loss before income taxes (47,453) (8,202) (4,889)
Income tax expense (benefit) - (note 7) 223 (306) (427)
--------- --------- ---------
Net loss (47,676) (7,896) (4,462)
--------- --------- ---------
Accumulated divisional deficit, beginning of year (43,834) (35,938) (31,476)
--------- --------- ---------
Accumulated divisional deficit, end of year $(91,510) (43,834) (35,938)
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
(as described in Note 1)
Combined Statements of Cash Flows
(Amounts in thousands)
YEAR ENDED
----------
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(47,676) (7,896) (4,462)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 7,087 3,498 2,875
Amortization 485 621 773
Impairment charges 13,650 --- 400
Deferred taxes (38) (465) (90)
Loss on sale of property and equipment 1,257 68 60
Provision for losses on accounts receivable 482 75 (256)
Changes in operating assets and liabilities:
Trade accounts receivable 3,680 (1,052) (1,468)
Inventories 3,531 8,617 (5,309)
Prepaid expenses and other current assets 1,431 (1,115) 48
Other noncurrent assets 15 18 (7)
Accounts payable (1,760) (659) (751)
Accrued expenses 1,792 (936) (3,023)
Income taxes payable 120 (6,664) 10,380
Other liabilities (39) 121 (20)
--------- --------- ---------
Net cash used in operating activities (15,983) (5,769) (850)
--------- --------- ---------
Investing activities:
Purchases of property, plant and equipment (2,445) (8,042) (3,086)
Proceeds from sale of property, plant and equipment
1,841 140 1,043
--------- --------- ---------
Net cash used in investing activities (604) (7,902) (2,043)
--------- --------- ---------
Financing activities:
Change in obligations under capital leases, net (106) 85 132
Proceeds from issuance of long-term debt --- --- 7,037
Principal payments on long-term debt (297) (325) ---
Change in due to Parent and affiliates, net 16,952 13,883 (4,693)
--------- --------- ---------
Net cash provided by financing activities
16,549 13,643 2,476
--------- --------- ---------
Decrease in cash (38) (28) (417)
Cash at beginning of year 274 302 719
--------- --------- ---------
Cash at end of year $ 236 274 302
========= ========= =========
Supplemental disclosure of cash flow information -
interest paid $ 723 721 241
========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(1) BASIS OF PRESENTATION
The accompanying combined financial statements for the three years ended
July 3, 1999 include the operations and accounts of Duck Head Apparel, Duck
Head Outlet Stores, International Apparel Marketing Corporation and Duck
Head Marketing Company (all of which are owned by Delta Woodside
Industries, Inc. or its subsidiaries). These operations are combined and
referred to herein as the "Company." Duck Head Apparel Company, Inc. is
owned by Alchem Capital Corporation, a wholly owned subsidiary of Delta
Woodside Industries, Inc. ("DWI" or the "Parent").
The accompanying combined financial statements have been prepared for
purposes of depicting the financial position and results of operations of
the Company on a historical cost basis.
All balances and transactions among the combining entities have been
eliminated in combination. Balances and transactions with other affiliates
have not been eliminated in the combination and are reflected as affiliate
balances and transactions.
(2) SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
The Company produces woven and knit apparel, including the "Duck Head"
line of casual wear marketed primarily in the Southeastern United
States to department stores and specialty apparel retailers. The
Company operates a distribution facility in the Southeast United
States and manufacturing facilities in Central America. The Company
also operates retail apparel outlet stores that sell primarily
closeout and irregular "Duck Head" products. In addition, the Company
licenses various categories of apparel and accessories.
(B) FISCAL YEAR
The Company's operations are based upon a fifty-two- or
fifty-three-week fiscal year ending on the Saturday closest to June
30. Fiscal years 1998 and 1997 each consisted of 52 weeks. Fiscal year
1999 consisted of 53 weeks.
(C) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for
approximately 56% and 69% of the inventories at July 3, 1999 and June
27, 1998, respectively. The first-in, first-out (FIFO) method is
principally used for the remainder.
F-5
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(D) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation and
amortization is provided for using the straight-line method over
estimated useful lives of 2 to 20 years. Leasehold improvements are
amortized over the shorter of the lease term or the estimated useful
life of the improvements.
At the beginning of 1999, the Company reduced its estimate of the
useful lives of certain store fixtures and computer equipment to
reflect business conditions and technological changes. These changes
had the effect of increasing the operating loss for 1999 by $4,228.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair
value of the assets. Accordingly, in 1997 $400 was written off for the
closing of a distribution facility.
(F) GOODWILL
Goodwill, which represents the excess purchase price over net assets
originally acquired, is amortized on a straight-line basis over 40
years. Each year, the Company assesses the recoverability of this
intangible asset by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through
undiscounted estimated future operating cash flows of the Company.
During 1999, the Company experienced an adverse change in its business
climate; net sales declined significantly mainly due to the loss of
two major accounts. At season end there were excessive levels of
unsold fashion goods which resulted in a $7.3 million inventory
write-down. In October 1998, the Company was put up for sale by its
Parent, which indicated value significantly below the net book value
of the Company. Due to the diminished fair value of the Company, the
Parent suspended its efforts to sell the Company and hired new senior
management to develop a new business plan and restructure its
operations. As a result, the Company determined that an impairment
loss should be recognized. Based upon the Company's business plan for
fiscal year end 2000 and cash flow projections, the Company determined
that the goodwill was impaired by $12,581 and accordingly, recognized
the impairment loss.
F-6
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(G) REVENUE RECOGNITION
Sales are recorded upon shipment.
(H) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(I) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
The Company's operations are included in the consolidated Federal tax
return of DWI. Under the consolidated tax sharing arrangement, the
Company's tax receivable or payable is calculated as if the Company
separately filed a Federal tax return. Any tax settlement due to or
from the Parent is settled when the Parent receives or pays taxes to
the government.
(J) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS 130, Reporting Comprehensive Income, was issued and
was adopted by the Company as of July 1, 1998. SFAS 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This
statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in financial statements and (b)
display the accumulated balance of other comprehensive income
separately from accumulated deficit and additional paid-in capital in
the equity section of statements of financial position. Comprehensive
income is defined as the change in equity during the financial
reporting period of a business enterprise resulting from non-owner
sources. Comprehensive income approximates the net loss for all
periods presented.
F-7
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise with Related Information. SFAS No. 131 establishes
standards for the way public business enterprises report information
about operating segments in annual financial statements and requires
those enterprises to report selected information about operating
segments in interim financial reports issued to stockholders. SFAS No.
131 is effective for financial statements for fiscal years beginning
after December 31, 1997. The Company has adopted SFAS No. 131 for
fiscal year-end July 3, 1999 and has applied it for all periods
presented.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was subsequently deferred by
SFAS No. 137. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133
is effective for all fiscal years beginning after June 15, 2000. The
Company will determine the applicability of SFAS No. 133 and apply it
if necessary.
(3) INVENTORIES
Inventories consist of the following:
JULY 3, JUNE 27,
1999 1998
-------- --------
Raw materials $ 1,370 1,425
Work in process 2,548 3,579
Finished goods 20,803 23,131
Supplies and miscellaneous -- 117
-------- --------
$ 24,721 28,252
======== ========
If these inventories had been determined using the FIFO method, they would have
been $340 higher than reported at July 3, 1999 and $144 higher than reported at
June 27, 1998.
F-8
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
ESTIMATED JULY 3, JUNE 27,
USEFUL LIFE 1999 1998
Land and land improvements N/A $ 970 1,136
Buildings 20 years 9,950 11,330
Machinery and equipment 10-15 years 6,904 7,531
Computers and software 3 years 5,021 5,134
Furniture and fixtures 2-7 years 7,920 7,855
Leasehold improvements 3-10 years 1,168 1,188
Automobiles 5 years 148 52
Construction in progress N/A 158 1,706
32,239 35,932
---------- --------
Less accumulated depreciation and
Amortization (20,320) (15,204)
---------- --------
$ 11,919 20,728
========== ========
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
JULY 3, JUNE 27,
1999 1998
------ ------
Accrued employee compensation and benefits $2,243 628
Taxes accrued and withheld 413 616
Accrued insurance 359 324
Accrued legal 539 ---
Store closing reserve 626 971
Accrued advertising 702 724
Other 720 547
------ ------
$5,602 3,810
====== ======
F-9
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(6) LONG-TERM DEBT
Long-term debt consists of the following:
JULY 3, JUNE 27,
1999 1998
------- --------
Bank loan, interest at 8.75%, payable monthly,
principal payable in 34 installments of $75,
with final payment due January 10, 2000 $ 6,415 6,712
Less current installments 6,415 292
Long-term debt, excluding current
Installments $ - 6,420
======= ========
The loan is secured by a $500 certificate of deposit held by the Company's
Parent and the property and fixtures at the Company's distribution center.
(7) INCOME TAXES
The Company's operations are included in the consolidated Federal tax
return of DWI. The Federal income tax obligation or refund under the
corporate tax sharing arrangement allocated to the Company is substantially
determined as if the Company was filing a separate Federal income tax
return. The Company's Federal tax liability or receivable is paid to or is
received from DWI.
Federal and state income tax expense (benefit) was as follows:
JULY 3, JUNE 27, JUNE 29,
1999 1998 1997
------- -------- --------
Current:
Federal $ - 80 (263)
State 261 79 (74)
------- -------- --------
Total current 261 159 (337)
------- -------- --------
Deferred:
Federal (35) (423) (52)
State (3) (42) (38)
------- -------- --------
Total deferred (38) (465) (90)
------- -------- --------
Income tax expense (benefit) $ 223 (306) (427)
======= ======== ========
F-10
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
A reconciliation between actual income tax expense (benefit) and the income
tax expense (benefit) computed using the Federal statutory income tax rate
of 35% is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Income tax benefit at the statutory rate $ (16,609) (2,902) (1,690)
State income tax expense (benefit), net of Federal
income taxes 167 24 (73)
Valuation allowance adjustments 13,032 2,874 1,718
Foreign subsidiary adjustment 208 206 129
Non-deductible amortization and other permanent
Differences 4,566 - -
Other (1,141) (508) (511)
---------- --------- --------
Income tax expense (benefit) $ 223 (306) (427)
========== ========= ========
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
computed under the corporate tax sharing arrangement are as follows:
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1999 1998
---------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 28,982 20,775
Inventories 4,752 2,445
Depreciation 1,481 -
Currently nondeductible accruals 1,546 1,255
---------- --------
Gross deferred tax assets 36,761 24,475
Less valuation allowance 36,717 23,684
---------- --------
Net deferred tax assets 44 791
---------- --------
Deferred tax liabilities:
Inventories B LIFO basis difference (790) (829)
Depreciation - (549)
Other (44) (242)
---------- --------
Deferred tax liabilities (834) (1,620)
---------- --------
Net deferred tax liability $ (790) (829)
========== ========
</TABLE>
F-11
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
The valuation allowance for deferred tax assets as of July 3, 1999 and June
27, 1998 was $36,717 and $23,684, respectively. The net change in the total
valuation allowance for the years ended July 3, 1999 and June 27, 1998 was
an increase of $13,033 and $2,874, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
would be realized if the Company were filing a separate Federal income tax
return. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods during
which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at July 3,
1999. The amount of the deferred tax assets considered realizable, however,
could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
As of July 3, 1999, the Company had regular tax loss carryforwards of
approximately $68.7 million for Federal purposes as calculated under the
corporate tax sharing arrangement. The Company also has state net operating
loss carryforwards of approximately $83.4 million calculated under the
corporate tax-sharing arrangement. These carryforwards expire at various
intervals through 2019. If the Company were to leave its current
consolidated group, these carryovers may not be available for future use.
(8) AFFILIATED PARTY TRANSACTIONS
Due to (from) related parties consists of the following:
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1999 1998
-------- --------
<S> <C> <C>
Delta Woodside Industries, Inc. $117,492 100,373
Stevcoknit Fabrics Company, a
division of Delta Mills, Inc. - 30
Delta Apparel Company 85 35
Delta Mills Marketing, a division
of Delta Mills, Inc. - 187
-------- --------
$117,577 100,625
======== ========
</TABLE>
The Company had inventory purchases from related parties totaling $1,143,
$1,980, and $3,741 in fiscal 1999, 1998, and 1997, respectively. In
addition, the Company had sales to related parties of $0, $132 and $653 in
fiscal 1999, 1998 and 1997, respectively.
F-12
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
The Company participates in a cash management system maintained by DWI.
Under this system, excess cash is forwarded to DWI each day, reducing the
due to Parent. Likewise, cash requirements are funded daily by DWI,
increasing the current due to Parent. Interest is charged on loan payable
to DWI balances based on the weighted average cost of DWI's borrowings. In
addition, the Company incurs management fees from DWI for various corporate
services including management, treasury, computer, benefits, payroll,
auditing, accounting and tax services. For these services, DWI charges
actual cost based on relative usage and other factors which, in the opinion
of management, represents a reasonable and appropriate method of
allocation.
In May 1998, DWI obtained a $30 million revolving credit facility (subject
to borrowing base limitations) which is due in December 1999. This credit
facility is backed by certain accounts receivable and inventory, as defined
in the credit agreement, of the Company and another division of DWI.
(9) LEASES
The Company is obligated under various capital leases for machinery and
equipment that expire at various dates during the next three years. The
Company also has several noncancelable operating leases relating to
buildings, office equipment, machinery and equipment, and computer systems.
Future minimum lease payments under noncancelable operating and capital
leases as of July 3, 1999 were as follows:
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
------------ --------- -------
2000 $ 1,893 56
2001 1,737 44
2002 1,414 14
2003 532 -
2004 and thereafter 268 -
--------- -------
$ 5,844 114
=========
Less current portion of
obligations under capital leases 56
-------
Obligations under capital leases,
excluding current installments $ 58
=======
Rent expense for all operating leases was approximately $2,005, $2,181, and
$2,634 for fiscal years 1999, 1998 and 1997, respectively.
F-13
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(10) EMPLOYEE BENEFIT PLANS
The Company participates in the Delta Woodside Industries, Inc. Retirement
and 401(k) Plans. On September 27, 1997, the Delta Woodside Industries
Employee Retirement Plan ("Retirement Plan") merged into the Delta Woodside
Employee Savings and Investment Plan ("401(k) Plan"). In the 401(k) Plan,
employees may elect to convert DWI stock to other funds, but may not
increase the amount of DWI stock in their account. Each participant has the
right to direct the trustee as to the manner in which DWI shares held are
to be voted. The Retirement Plan qualified as an Employee Stock Ownership
Plan ("ESOP") under the Internal Revenue Code as a defined contribution
plan. The Company contributed approximately $152, $84, and $128 to the
401(k) Plan during fiscal 1999, 1998, and 1997, respectively. The Company
contributed approximately $0, $28, and $31 to the Retirement Plan and/or
the 401(k) Plan during fiscal 1999, 1998 and 1997, respectively.
The Company also participates in a 501(c)(9) trust, the Delta Woodside
Employee Benefit Plan and Trust ("Trust"). The Trust collects both employer
and employee contributions from the Company and makes disbursements for
health claims and other qualified benefits.
The Company participates in a Deferred Compensation Plan, managed by DWI,
which permits certain management employees to defer a portion of their
compensation. Deferred compensation accounts are credited with interest and
are distributed after retirement, disability or employment termination. As
of July 3, 1999 and June 27, 1998, the Company's liability was
approximately $733 and $736, respectively. The Company contributed
approximately $2 to the Deferred Compensation Plan during fiscal 1999,
1998, and 1997.
The Company also participates in the Delta Woodside Industries, Inc.
Incentive Stock Award Plan and Stock Option Plan. Under both Plans, the
Company recognized expenses of approximately $190, $108, and $78 for fiscal
years 1999, 1998, and 1997, respectively.
(11) EMPLOYMENT AGREEMENT
The Company has an Employment Agreement ("Agreement") with an officer of
the Company that provides for the officer's salary and bonus through one
year after the spin-off. In addition, the Agreement provides that the post
spin-off Duck Head Apparel Company will establish an Incentive Stock Plan
similar to the one in place at the parent company that grants the officer
incentive shares valued at $200 of the new Duck Head Apparel Company. The
shares vest through March 8, 2001 B 60% in each year for service and 40%
for performance.
F-14
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
The new Duck Head Apparel Company will establish a Stock Option Plan,
totaling 500 shares; 25% of these shares are to be reserved for the
officer. Under a separate agreement, the new Duck Head Apparel Company will
grant the officer an option to purchase up to 1,000 shares of the new
company at the average price for which these shares trade over the first
six months after the Duck Head distribution.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of its
business. The carrying values approximate fair values for financial
instruments that are short-term in nature, such as cash, accounts
receivable, accounts payable and accrued expenses. The Company estimates
that the carrying value of the Company's long-term debt approximates fair
value based on the current rates offered to the Company for debt of the
same remaining maturities.
(13) OPERATING SEGMENTS
In June 1997, SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, was issued effective for fiscal years ending after
December 15, 1998.
The Company has two reportable segments: Wholesale and Outlet Retail. The
Company's reportable segments are strategic business units that offer
similar products through different distribution channels. The Wholesale
segment designs, markets, manufactures, sources and distributes casual wear
and sportswear for men and boys and licenses the Company's trademarks for
specified products. The Outlet Retail segment operates the Company's outlet
and clearance stores.
F-15
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
The accounting policies of the reportable segments are the same as those
described in the summary of accounting policies. Segment operating income
(loss) is based on net earnings (loss) before interest and tax. Financial
information for the Company's reportable segments is as follows:
<TABLE>
<CAPTION>
WHOLESALE OUTLET RETAIL TOTAL
----------- -------------- --------
<S> <C> <C> <C>
1999
REVENUES $ 54,094 16,548 70,642
OPERATING (LOSS) (38,495) (736) (39,231)
IMPAIRMENT CHARGES 13,650 - 13,650
TOTAL ASSETS 47,440 2,912 50,352
CAPITAL EXPENDITURES 2,067 378 2,445
DEPRECIATION AND AMORTIZATION 7,047 525 7,572
1998
REVENUES $ 64,016 19,937 83,953
OPERATING (LOSS) (99) (1,152) (1,251)
TOTAL ASSETS 71,598 5,752 77,350
CAPITAL EXPENDITURES 7,591 451 8,042
DEPRECIATION AND AMORTIZATION 3,570 549 4,119
1997
REVENUES $ 57,331 22,311 79,642
OPERATING INCOME (LOSS) 1,969 (675) 1,294
IMPAIRMENT CHARGE 400 - 400
TOTAL ASSETS 70,870 7,261 78,131
CAPITAL EXPENDITURES 3,015 71 3,086
DEPRECIATION AND AMORTIZATION 2,720 928 3,648
</TABLE>
(14) CUSTOMER CONCENTRATION
DURING THE FISCAL YEARS ENDED 1999, 1998, AND 1997, APPROXIMATELY 24%, 21%,
AND 17%, RESPECTIVELY, OF THE COMPANY'S SALES WERE TO ONE CUSTOMER. IN
ADDITION, DURING THE SAME FISCAL YEARS, 46%, 45%, AND 41%, RESPECTIVELY, OF
THE COMPANY'S SALES WERE MADE TO ITS FIVE LARGEST CUSTOMERS.
F-16
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(15) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
PRESENTED BELOW IS A SUMMARY OF THE UNAUDITED COMBINED QUARTERLY FINANCIAL
INFORMATION FOR THE YEARS ENDED JULY 3, 1999 AND JUNE 27, 1998:
<TABLE>
<CAPTION>
1999 QUARTER ENDED
----------------------------------------------
SEPTEMBER 26 DECEMBER 26 MARCH 27 JULY 3
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 21,891 16,418 15,680 16,653
GROSS PROFIT 7,014 3,164 3,533 (5,537)
OPERATING INCOME (LOSS) 1,544 (3,389) (4,050) (33,336)
NET LOSS (56) (3,062) (3,367) (41,191)
</TABLE>
<TABLE>
<CAPTION>
1998 QUARTER ENDED
----------------------------------------------
SEPTEMBER 27 DECEMBER 27 MARCH 28 JUNE 27
------------- ----------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 22,821 17,343 20,975 22,814
GROSS PROFIT 7,685 6,901 5,728 6,551
OPERATING INCOME (LOSS) 868 361 (2,544) 64
NET LOSS (404) (779) (2,374) (4,339)
</TABLE>
DURING THE FOURTH QUARTER OF FISCAL YEAR 1999, THE COMPANY RECOGNIZED
IMPAIRMENT CHARGES OF $12,581 RELATED TO GOODWILL AND $1,069 RELATED TO
STORE FIXTURES TAKEN OUT OF SERVICE.
DURING THE THIRD QUARTER OF FISCAL YEAR 1998, THE COMPANY RECOGNIZED OTHER
RESTRUCTURING CHARGES OF $1.4 MILLION PRIMARILY RELATED TO THE CLOSURE OF
CERTAIN FACILITIES.
F-17
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
Condensed Combined Balance Sheet
(Amounts in thousands)
(unaudited)
(Amounts in thousands)
October 2,
Assets 1999
---------
<S> <C>
Current assets:
Cash $ 373
Accounts receivable, less allowances of $1,684 7,110
Affiliate receivables 2,774
Inventories 19,137
Prepaid expenses and other current assets 166
Deferred tax assets 3,343
---------
Total current assets 32,903
Property, plant and equipment, net 11,075
---------
$ 43,978
=========
Liabilities and Divisional Deficit
Current liabilities:
Accounts payable $ 3,161
Accrued expenses 3,322
Current portion of long-term debt 6,339
Current portion of capital leases 56
Due to Parent and affiliates 95,331
Income taxes payable 442
---------
Total current liabilities 108,651
Long-term portion of capital leases 31
Due to Parent 23,178
Deferred tax liabilities 4,440
Other liabilities 764
---------
Total liabilities 137,064
Divisional deficit (93,086)
---------
$ 43,978
=========
</TABLE>
See accompanying notes to condensed combined financial statements.
F-18
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
Condensed Combined Statements of Operations and Accumulated Divisional Deficit
(Amounts in thousands)
(unaudited)
For the Three Months Ended
----------------------------
October 2, September 26,
1999 1998
------------ --------------
<S> <C> <C>
Net sales $ 16,063 21,891
Cost of goods sold 11,117 14,876
------------ --------------
Gross profit 4,946 7,015
Selling, general and administrative expenses 5,332 5,962
Intercompany management fees - -- 203
Royalty and other income (767) (694)
------------ --------------
Operating income 381 1,544
------------ --------------
Interest (income) expense:
Interest expense, net 132 126
Intercompany interest expense 1,987 1,548
------------ --------------
2,119 1,674
------------ --------------
Loss before income taxes (1,738) (130)
Income tax expense (benefit) (162) 1
------------ --------------
Net loss (1,576) (131)
Accumulated divisional deficit, beginning of period. (91,510) (35,938)
------------ --------------
Accumulated divisional deficit, end of period $ (93,086) (36,069)
============ ==============
</TABLE>
See accompanying notes to condensed combined financial statements.
F-19
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
Condensed Combined Statements of Cash Flows
(Amounts in thousands)
(unaudited)
For the Three Months Ended
----------------------------
October 2, September 26,
1999 1998
------------ --------------
<S> <C> <C>
Operating activities:
Net loss $ (1,576) (131)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 788 932
Amortization - 115
Deferred taxes 307 -
Loss on sale of property and equipment 4 11
Provision for losses on accounts receivable 66 12
Changes in operating assets and liabilities:
Trade accounts receivable (397) 2,007
Inventories 5,515 1,345
Prepaids and other current assets (10) (611)
Accounts payable (695) (1,740)
Accrued expenses (849) (618)
Income taxes payable 180 75
Other liabilities (46) (69)
------------ --------------
Net cash provided by operating activities 3,287 1,328
------------ --------------
Investing activities:
Purchases of property, plant and equipment (14) (1,128)
Proceeds from sale of property, plant and equipment 94 13
------------ --------------
Net cash provided by (used in) investing activities 80 (1,115)
------------ --------------
Financing activities:
Change in obligations under capital leases, net (27) (23)
Principal payments on long-term debt (76) (63)
Change in due to Parent and affiliates, net (3,127) (270)
------------ --------------
Net cash used in financing activities (3,230) (356)
------------ --------------
Increase (decrease) in cash 137 (143)
Cash at beginning of period 236 272
------------ --------------
Cash at end of period $ 373 129
============ ==============
Supplemental disclosure of cash flow information interest paid $ 170 723
============ ==============
</TABLE>
See accompanying notes to condensed combined financial statements.
F-20
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Condensed Combined Financial Statements
(Amounts in thousands)
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements for the
three months ended October 2, 1999 and September 26, 1998 include the
operations and accounts of Duck Head Apparel, Duck Head Outlet Stores,
International Apparel Marketing Corporation and Duck Head Marketing Company
(all of which are owned by Delta Woodside Industries, Inc. or its
subsidiaries). These condensed combined financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations relating to interim financial statements. In the
opinion of management, the accompanying unaudited interim condensed
combined financial statements reflect all adjustments, consisting of only
normal, recurring adjustments, necessary to present fairly the financial
position of the Company at October 2, 1999, and the results of its
operations and its cash flows for the three months ended October 2, 1999
and September 26, 1998, respectively. The results for the three months
ended October 2, 1999 are not necessarily indicative of the expected
results for the full year or any future period. The unaudited condensed
combined financial statements included herein should be read in conjunction
with the combined financial statements and notes thereto included in this
filing.
(2) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for approximately 56% of the
inventories at October 2, 1999. The first-in, first-out (FIFO) method is
principally used for the remainder.
Inventories consist of the following:
October 2,
1999
-----------
Raw materials $ 920
Work in process 1,578
Finished goods 16,639
-----------
$ 19,137
===========
If these inventories had been determined using the FIFO method, they would
have been $227 higher than reported at October 2, 1999.
F-21
<PAGE>
(3) OPERATING SEGMENTS
The Company has two reportable segments: Wholesale and Outlet Retail. The
Company's reportable segments are strategic business units that offer
similar products through different distribution channels. The Wholesale
segment designs, markets, manufactures, sources and distributes casual wear
and sportswear for men and boys and licenses the Company's trademark for
specified products. The Outlet Retail segment operates the Company's outlet
and clearance stores.
Summarized segment information as of October 2, 1999 and September 26, 1998
and for the three months ended October 2, 1999 and September 26, 1998 is
presented below.
<TABLE>
<CAPTION>
Wholesale Outlet Retail Total
----------- -------------- ------
<S> <C> <C> <C>
Quarter ended October 2, 1999
Revenues. . . . . . . . . . . . . $ 11,603 4,460 16,063
Operating income (loss). . . . . (35) 416 381
Total assets. . . . . . . . . . . 40,803 3,095 43,978
Capital expenditures 102 (88) 14
Depreciation and amortization . . 740 48 788
Quarter ended September 26, 1998
Revenues. . . . . . . . . . . . . $ 16,183 5,708 21,891
Operating income . . . . . . . . 960 584 1,544
Total assets. . . . . . . . . . . 68,454 5,217 73,671
Capital expenditures. . . . . . . 1,018 110 1,128
Depreciation and amortization . . 948 99 1,047
</TABLE>
(4) CUSTOMER CONCENTRATION
During the three months ended October 2, 1999 and September 26, 1998
approximately 24% and 26% of the Company's sales were to one customer. In
addition, during the same three month periods 47% and 47% of the Company's
sales were made to its five largest customers.
F-22
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
Valuation and Qualifying Accounts
Fiscal 1999, 1998, and 1997
(Amounts in thousands)
Balance at Charged to Charged to Balance
beginning of costs and other at end of
period expenses accounts Deductions period
------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowances:
Year ended July 3, 1999 $ 1,136 3,817 -- 3,335 1,618
Year ended June 27, 1998 1,279 2,481 -- 2,624 1,136
Year ended June 28, 1997 1,371 2,922 -- 3,014 1,279
</TABLE>
<PAGE>
