SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10/A
(Amendment No. 2)
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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Georgia 58-2510086
- -------------------------------- --------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1020 Barrow Industrial Pkwy, Winder, GA 30680
- --------------------------------------- -------------------------
(Address of Principal Executive Offices) (Zip Code)
(770) 867-3111
- --------------------------------------------------------------------------------
(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
------------------- ------------------------------
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
<PAGE>
Except as otherwise indicated below, the information required to be
contained in this Registration Statement on Form 10/A of DH Apparel Company,
Inc., a Georgia corporation ("Duck Head" or "the Company"), is contained in the
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 Six Months of Fiscal Year 2000 versus
First Six Months 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"
<PAGE>
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.
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See Index to Financial Statements
Exhibit 99.2*
(b) Exhibits.
2.1 Distribution Agreement by and among Delta Woodside
Industries, Inc, the Company and Delta Apparel, Inc.*
3.1 Articles of Incorporation of the Company. *
3.2.1 Bylaws of the Company. *
3.2.2Amendment to Bylaws of the Company adopted January 20,
2000.*
3.2.3Amendment to Bylaws of the Company adopted February
17, 2000.*
4.1 See Exhibits 3.1, 3.2.1, 3.2.2 and 3.2.3.
4.2 Specimen certificate for common stock, par value $0.01
per share, of the Company.
4.3 Shareholder Rights Agreement dated January 27, 2000, by
and among the Company and First Union National Bank.*
10.1 See Exhibits 2.1 and 4.3.
10.2 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 DH Apparel Company, Inc. 2000 Stock Option Plan,
Effective as of February 15, 2000, Amended & Restated
March 15, 2000.*
10.5 DH Apparel Company, Inc. Incentive Stock Award Plan,
Effective February 15, 2000, Amended & Restated March
15, 2000.*
<PAGE>
10.6 Duck Head Apparel Company, Inc. Deferred Compensation
Plan for Key Managers.*
10.7 Form of Amendment of Certain Rights and Benefits
Relating to Stock Options and Deferred Compensation by
and between Delta Woodside Industries, Inc., the
Company and certain pre-spin-off Delta Woodside
Industries, Inc, plan participants. *(Several persons
will sign substantially identical documents. A schedule
listing director and officer signatories will be filed
by amendment.)
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
99.1 Information Statement of DH Apparel Company, Inc.
99.2 Valuation and Qualifying Accounts *
* Previously filed with initial filing or Amendment No. 1
<PAGE>
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: May 2, 2000 By: /s/ Robert D. Rockey, Jr.
------------------------- ----------------------------------
Robert D. Rockey, Jr., Chairman,
President & Chief Executive Officer
<PAGE>
EXHIBITS
2.1 Distribution Agreement by and among Delta Woodside Industries, Inc, the
Company and Delta Apparel, Inc.*
3.1 Articles of Incorporation of the Company. *
3.2.1 Bylaws of the Company. *
3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000.*
3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000.*
4.1 See Exhibits 3.1, 3.2.1, 3.2.2 and 3.2.3.
4.2 Specimen certificate for common stock, par value $0.01 per share, of the
Company.
4.3 Shareholder Rights Agreement dated January 27, 2000, by and among the
Company and First Union National Bank.*
10.1 See Exhibits 2.1 and 4.3.
10.2 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 DH Apparel Company, Inc. 2000 Stock Option Plan, Effective as of February
15, 2000, Amended & Restated March 15, 2000.*
10.5 DH Apparel Company, Inc. Incentive Stock Award Plan, Effective February 15,
2000, Amended & Restated March 15, 2000.*
10.6 Duck Head Apparel Company, Inc. Deferred Compensation Plan for Key
Managers.*
10.7 Form of Amendment of Certain Rights and Benefits Relating to Stock Options
and Deferred Compensation by and between Delta Woodside Industries, Inc.,
the Company and certain pre-spin-off Delta Woodside Industries, Inc, plan
participants. * (Several persons will sign substantially identical
documents. A schedule listing director and officer signatories will be
filed by amendment.)
<PAGE>
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule (electronic filing only).
99.1 Information Statement of DH Apparel Company, Inc.
99.2 Valuation and Qualifying Accounts *
* Previously filed with initial filing or Amendment No. 1.
DUCK HEAD APPAREL COMPANY, INC.
INCORPORATED UNDER THE LAWS OF
THE STATE OF GEORGIA
NUMBER SHARES
DH ____________ ________
THIS CERTIFICATE IS TRANSFERABLE IN SEE REVERSE FOR
NEW YORK, NEW YORK OR CERTAIN DEFINITIONS
CHARLOTTE, NORTH CAROLINA CUSIP
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID SHARES OF THE COMMON STOCK, PAR VALUE $0.01, OF
DUCK HEAD APPAREL COMPANY, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
the duly authorized officers.
Dated: _________________
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL BANK
(CHARLOTTE, NORTH CAROLINA)
TRANSFER AGENT
AND REGISTRAR
BY ________________________
AUTHORIZED SIGNATURE
/s/ K. Scott Grassmyer Robert D. Rockey
- ----------------------------- -----------------------------
SECRETARY CHAIRMAN OF THE BOARD
<PAGE>
Duck Head Apparel Company, Inc.
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Shareholder Rights Agreement between Duck Head Apparel
Company, Inc. and First Union National Bank, as Rights Agent, dated as of
January 27, 2000 (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the principal
offices of Duck Head Apparel Company, Inc. Under certain circumstances, as set
forth in the Rights Agreement, such Rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. Duck Head
Apparel Company, Inc. will mail to the holder of this certificate a copy of the
Rights Agreement, as in effect on the date of mailing, without charge promptly
after receipt of a written request therefor. Under certain circumstances, Rights
issued to Acquiring Persons or any Affiliates or Associates thereof (as defined
in the Rights Agreement) and any subsequent holder of such Rights may become
null and void.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT-......Custodian .....
TEN ENT - as tenants by the entireties Cust. Minor
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ............
in common (State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________
________________________________________________________________________________
(Please print or typewrite name and address including
postal zip code of assignee)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________ shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation, with
full power of substitution in the premises.
Dated ______________________________
NOTICE: _________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: _________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> JUL-05-1999
<PERIOD-END> JAN-01-2000
<CASH> 179
<SECURITIES> 0
<RECEIVABLES> 5589
<ALLOWANCES> (1594)
<INVENTORY> 16211
<CURRENT-ASSETS> 23839
<PP&E> 30245
<DEPRECIATION> (20297)
<TOTAL-ASSETS> 33787
<CURRENT-LIABILITIES> 106401
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (96610)
<TOTAL-LIABILITY-AND-EQUITY> 33787
<SALES> 28993
<TOTAL-REVENUES> 28993
<CGS> 20030
<TOTAL-COSTS> 20030
<OTHER-EXPENSES> 9185
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4207
<INCOME-PRETAX> (4429)
<INCOME-TAX> 234
<INCOME-CONTINUING> (4663)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4663)
<EPS-BASIC> (1.94)
<EPS-DILUTED> (1.94)
</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 May 19,
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 May 19, 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 June 2, 2000.
------------------------
The American Stock Exchange has approved shares of Duck Head's common stock
for listing, subject to official notice of issuance.
------------------------
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 14.
------------------------
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 May 9, 2000, and Duck Head first mailed this
document to stockholders on May 10, 2000.
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DUCK HEAD DISTRIBUTION............................................................3
SUMMARY.......................................................................................................... 7
RISK FACTORS ....................................................................................................14
THE DUCK HEAD DISTRIBUTION ......................................................................................25
TRADING MARKET ..................................................................................................42
RELATIONSHIPS AMONG DUCK HEAD, DELTA WOODSIDE AND DELTA APPAREL .................................................44
CAPITALIZATION ..................................................................................................50
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS................................................................51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................................................................57
BUSINESS OF DUCK HEAD............................................................................................72
MANAGEMENT OF DUCK HEAD .........................................................................................78
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS AND
MANAGEMENT .....................................................................................................90
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE
DUCK HEAD DISTRIBUTION..........................................................................................96
DESCRIPTION OF DUCK HEAD CAPITAL STOCK..........................................................................102
2000 ANNUAL MEETING OF DUCK HEAD STOCKHOLDERS ..................................................................112
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE .................................................................112
INDEPENDENT AUDITORS ...........................................................................................112
ADDITIONAL INFORMATION .........................................................................................112
INDEX TO COMBINED FINANCIAL STATEMENTS .........................................................................114
INDEPENDENT AUDITORS' REPORT....................................................................................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 SIX MONTHS ...............................................................................F-18
</TABLE>
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 distribute simultaneously 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 May 19, 2000.
(This document refers to this record date for the Duck Head
distribution as the Duck Head record date, and to 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 May
19, 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 May 19, 2000, the
Delta Apparel record date. After the Duck Head distribution and the
Delta Apparel distribution, you will also continue to own the shares
of Delta Woodside common stock that you owned immediately before the
Duck Head distribution and the Delta Apparel distribution.
Q: WILL I BE TAXED AS A RESULT OF THE DUCK HEAD DISTRIBUTION?
A: Delta Woodside has obtained an opinion from KPMG LLP that it is more
likely than not that each of the Duck Head distribution and the Delta
Apparel distribution will qualify as tax-free under US Internal
Revenue Code Section 355. If the Duck Head distribution and the Delta
Apparel distribution qualify as tax-free under US Internal Revenue
Code Section 355, your receipt of Duck Head shares in the Duck Head
distribution and Delta Apparel shares in the Delta Apparel
distribution will be tax-free for United States federal income tax
purposes, except that you will be taxed on any gain attributable to
cash that you receive in lieu of a fractional share.
3
<PAGE>
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 boys'
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, First Union National Bank (which this document
refers to as the 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 June 2, 2000.
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 June
2, 2000, but you should confirm that with your stockbroker, bank or
other nominee.
4
<PAGE>
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: The American Stock Exchange has approved shares of Duck Head's common
stock for listing, subject to official notice of issuance.
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 June 2, 2000. Duck Head believes, however, that there is a
possibility 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 June 2, 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 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.
5
<PAGE>
Q: HOW WILL I BE ABLE TO BUY AND SELL DELTA WOODSIDE COMMON STOCK BEFORE
THE DUCK HEAD DISTRIBUTION DATE?
A: Delta Woodside 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 May 17 and June 2, 2000)
will be accompanied by an attached "due bill" representing Duck Head
common stock to be distributed in the Duck Head distribution and Delta
Apparel common stock to be distributed in the Delta Apparel
distribution.
Delta Woodside does not expect 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 could 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.
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, and after
the Delta Apparel distribution Delta Woodside will not own any of
Delta Apparel'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 44-49.
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
6
<PAGE>
SUMMARY
The following information and the material under the heading "Questions and
Answers About the Duck Head Distribution" are a brief summary of the matters
that this document addresses. This summary and the material under the heading
"Questions and Answers About the Duck Head Distribution" do 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. All descriptions in this document of Duck Head's business
assume that the transactions contemplated by the distribution had been
consummated.
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, sources, produces, markets and
distributes boys' 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 26 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 April
1, 2000 had approximately 500 employees.
THE DUCK HEAD DISTRIBUTION
The following information and the material under the heading "Questions and
Answers About the Duck Head Distribution" are 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 AND
THE DELTA APPAREL 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:
7
<PAGE>
(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;
(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 May 19, 2000. Based on
the number of shares of Delta
Woodside common stock outstanding as
of April 25, 2000, the Duck Head
distribution ratio of one Duck Head
common share for every ten Delta
Woodside common shares and the number
of Delta Woodside shares to be issued
before the Duck Head record date as
described in "Interests of Directors
and Executive Officers in the Duck
Head Distribution - Payments in
Connection with Duck Head
Distribution and Delta Apparel
Distribution", Delta Woodside will
distribute approximately 2,400,000
shares of Duck Head common stock to
Delta Woodside stockholders. After
the Duck Head distribution, Duck Head
will have approximately 1,500
stockholders of record.
8
<PAGE>
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 May 19, 2000.
DUCK HEAD RECORD DATE......... May 19, 2000 (5:00 p.m., Eastern
time).
DUCK HEAD DISTRIBUTION DATE... June 2, 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......... Delta Woodside has appointed 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. The American
Stock Exchange has approved shares of
Duck Head's common stock for listing,
subject to official notice of
issuance. Duck Head believes that
there is a possibility that a "when-
issued" trading market will develop
before the Duck Head distribution
date.
RISK FACTORS.............. You should carefully consider the
matters discussed under the section
of this document entitled "Risk
Factors".
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 March 15, 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 44 to 47 of this
document.
9
<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 57 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
Delta Woodside and 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 January 1, 2000 and
December 26, 1998 and for the six months ended January 1, 2000 and December 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.
10
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
--------------------------------------------------------------- ---------------------------
July 3, June 27, June 28, June 29, July 1, January 1, December
1999 1998 1997 1996 1995 2000 26, 1998
STATEMENT OF OPERATIONS DATA: (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 70,642 83,953 79,642 68,881 73,441 28,993 38,306
Cost of goods sold (62,468) (57,088) (53,391) (84,397) (49,822) (20,030) (28,160)
Selling, general and
administrative expenses (34,005) (28,980) (25,624) (26,778) (24,785) (10,351) (13,067)
Impairment charges (13,650) --- --- 5,312 7,000 --- ---
Other income (expense) 250 864 667 (897) (157) 1,166 1,045
----------- ----------- ----------- ----------- ---------- ------------ --------------
Operating income (loss) (39,231) (1,251) 1,294 (37,879) 5,677 (222) (1,876)
Interest expense, net (8,222) (6,951) (6,183) (5,988) (4,645) (4,207) (3,717)
----------- ----------- ----------- ----------- ---------- ------------ --------------
Income (loss) before taxes (47,453) (8,202) (4,889) (43,867) 1,032 (4,429) (5,593)
Income tax expense (benefit) 261 159 (337) 1,013 1,204 234 31
----------- ----------- ----------- ----------- ---------- ------------ --------------
Net loss $ (47,714) (8,361) (4,552) (44,880) (172) (4,663) (5,624)
=========== =========== =========== =========== ========== ============ ==============
BALANCE SHEET DATA (AT PERIOD
END):
Working capital (deficit) $ (67,979) (47,571) (17,509) (19,940) 37,541 (82,562) (53,173)
Total assets 46,394 75,383 73,836 63,122 120,150 33,787 80,395
Total long-term debt 23,236 29,701 52,277 31,917 31,809 23,206 29,475
Divisional (deficit) equity (91,947) (44,233) (35,872) (31,320) 13,560 (96,610) (49,857)
</TABLE>
11
<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
six month period ended January 1, 2000 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 six
month period ended January 1, 2000, included on pages 51-56 and F-1- F-22,
respectively.
12
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED
JULY 3, 1999 JANUARY 1, 2000
----------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
-------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Net Sales $ 70,642 28,993
Cost of goods sold (62,468) (20,030)
Selling, general and administrative expenses (34,603) (10,523)
Impairment charges (13,650) ---
Other income 1,027 1,166
-------------- ----------------
Operating income (loss) (39,052) (394)
Interest expense, net (1,544) (659)
-------------- ----------------
Loss before income taxes (40,596) (1,053)
Income tax expense 261 ---
-------------- ----------------
Net loss $ (40,857) (1,053)
============== ================
Basic and diluted net loss per share $ (17.02) (0.44)
============== ================
Weighted average shares outstanding used in basic
and diluted per share calculation (a) 2,400,000 2,400,000
============== ================
Balance Sheet Data:
Working capital $ 18,442
Total assets 36,889
Total long-term debt 4,828
Stockholders' equity 22,772
- --------------------------------------------------------------------------------
<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 outstanding on
the record date. The weighted-average shares do not include securities that would be
anti-dilutive for each of the periods presented.
</FN>
</TABLE>
13
<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 UNITED
STATES FEDERAL INCOME TAX PURPOSES, BE TAXABLE TO THE DELTA WOODSIDE
STOCKHOLDERS.
Delta Woodside has obtained an opinion from KPMG LLP that it is more likely
than not that each of the Duck Head distribution and the Delta Apparel
distribution will qualify as tax-free for United States federal income tax
purposes under Section 355 of the Internal Revenue Code of 1986, as amended. For
this purpose, the phrase "more likely than not" means that, in KPMG LLP's
opinion, if KPMG's conclusion is challenged by the IRS, based on all the facts
and circumstances, there is a greater than 50% chance of success that the
conclusions of KPMG LLP's opinion will be sustained on their own merit.
If the Duck Head distribution and the Delta Apparel distribution qualify as
tax-free under Internal Revenue Code Section 355, your receipt of Duck Head
shares in the Duck Head distribution and Delta Apparel shares in the Delta
Apparel distribution will be tax-free for United States federal income tax
purposes, except that you will be taxed on any gain attributable to cash that
you receive in lieu of a fractional share.
The opinion of KPMG LLP is not binding upon the IRS, any other tax
authority or any court. No assurance can, therefore, be given that a position
contrary to that expressed in the opinion of KPMG LLP will not be asserted by
the IRS or any other tax authority and ultimately sustained by a court of law.
Delta Woodside has not sought a ruling from the IRS regarding the Duck Head
distribution or the Delta Apparel distribution, in part because neither
distribution satisfies all the conditions imposed by the IRS for such a ruling.
Accordingly, if the IRS and the courts disagree with the conclusion of KPMG
LLP, 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 IN ITS LAST TWO FULL FISCAL YEARS AND THESE LOSSES AND
THIS USE OF CASH MAY RECUR.
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 losses of $0.2 million in the six months ended January 1, 2000.
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 six
months of the 2000 fiscal year, Duck Head generated $6.0 million of cash from
operations.
Duck Head believes that the primary factors that have contributed to the
improvement in the results of its operations in the most recent six month
period, as compared to the last few full fiscal years, have been:
14
<PAGE>
- The shift in emphasis in Duck Head's product mix away from fashion
products and more toward core and fashion basic products;
- The reduction by Duck Head of its selling, general and administrative
costs;
- Duck Head's implementation of a more stringent inventory control
process; and
- The relocation of substantially all of Duck Head's manufacturing
operations off-shore.
Continuation of this improvement in Duck Head's results of operations will
be dependent on Duck Head's ability to manage effectively the various aspects of
its business, control the non-variable components of its selling, general and
administrative expenses and increase the sales of its products. In view of the
highly competitive nature of the branded apparel business and the changes in
market conditions of that business, Duck Head may not be able to expand its
product sales or prevent unexpected increases in its inventory or operating
expenses. A lack of success in this regard could cause Duck Head to continue to
incur operating losses and use cash in its operations. Significant operating
losses or significant uses by Duck Head of cash in its operations could cause
Duck Head to be unable to pay its debts as they become due and to default on its
credit facility, which would have an adverse effect on the value of the Duck
Head shares.
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. This affiliation has historically benefitted
Duck Head because, until fiscal year 2000, Delta Mills Marketing Company was a
significant source of needed funds for Duck Head's business. Since the end of
fiscal 1999, Delta Mills Marketing Company has ceased being a source of funds
for Duck Head, in part because Duck Head's operations generated cash in the
first six months of fiscal 2000 and in part because Delta Mills' Senior Note
Indenture has not permitted dividends by Delta Mills to Delta Woodside.
Prior to fiscal year 2000, 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 $19.6 million was used to pay interest to Delta Woodside on
the affiliated debt owed by the Duck Head Apparel Company division). During the
six months ended January 1, 2000, Duck Head generated $6.0 million of cash from
operations and reduced the balance of the affiliated debt to Delta Woodside by
$6.5 million. Both the cash generated from operations and the reduction in
affiliated debt were after the effect of $3.9 million in interest charges on
debt owed to Delta Woodside.
In addition, lenders to Duck Head as a stand alone company will not be able
to take advantage of the diversification of risk that might be provided by
lending to a business that had more than one operation, which may in some
circumstances adversely affect Duck Head's ability to obtain financing on
acceptable terms.
DUCK HEAD'S REVOLVING CREDIT FACILITY MAY NOT BE AVAILABLE OR SUFFICIENT TO
SATISFY DUCK HEAD'S NEEDS FOR WORKING CAPITAL.
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.
Approximately forty 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. Duck Head's ability to borrow under its $15
million revolving credit facility will be based upon, and thereby limited by,
the amounts of its accounts receivable and inventory. Any material deterioration
in Duck Head's results of operations could, therefore, result in a reduction in
Duck Head's borrowing base, which could cause Duck Head to lose its ability to
borrow additional amounts under its revolving credit facility or to issue
additional letters of credit to suppliers. In such a circumstance, the borrowing
availability under Duck Head's credit facility may not be sufficient for Duck
Head's working capital needs.
15
<PAGE>
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 or strategy, acquisition of the customer or
financial troubles of the customer.
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 six months ended January 1, 2000 and the fiscal years 1999, 1998
and 1997, approximately 26%, 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 six months ended January 1, 2000 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 7% of fiscal year
2000 first six months sales and 8% of fiscal year 1999 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.
16
<PAGE>
DUCK HEAD'S STRATEGY INCLUDES REDUCING THE MARGIN SUPPORT COMMITMENTS IT MAKES
TO SOME OF ITS KEY CUSTOMERS AND THE ACQUISITION OF ADDITIONAL KEY CUSTOMERS.
IMPLEMENTATION OF THESE ASPECTS OF DUCK HEAD'S STRATEGY DEPENDS ON REACHING
AGREEMENTS WITH THIRD PARTIES, WHICH DUCK HEAD MAY NOT BE ABLE TO ACCOMPLISH.
Approximately 40% of Duck Head's sales are made under margin support
agreements, under which the retailer is entitled to reduce the amount payable to
Duck Head for any retail gross margin shortfall below the target gross margin.
An important component of Duck Head's strategy is to reduce the margin support
commitments that it makes to some of its key customers. Since these customers
find these commitments to be beneficial, they may not be willing to agree to the
margin commitment reductions desired by Duck Head.
In order to implement its strategy of selling more of its product outside
the Southeastern United States, Duck Head is seeking to place its product with
new retailers. Duck Head may not be successful in working out acceptable
arrangements with these third parties.
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 April 1, 2000, approximately 1,400 of the
approximately 1,800 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.
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 AFTER THE
DISTRIBUTION DATE (REPRESENTING APPROXIMATELY 29.4% OF THE DUCK HEAD SHARES
EXPECTED TO BE OUTSTANDING IMMEDIATELY AFTER THE EXERCISE OF THAT RIGHT, IF
EXERCISED IN FULL). THESE FACTORS COULD HAVE A MAJOR DEPRESSIVE EFFECT ON THE
MARKET PRICE OF THE DUCK HEAD SHARES FOR AN INDETERMINATE PERIOD OF TIME.
17
<PAGE>
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' inherent 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 (representing approximately 29.4% of the Duck Head shares expected
to be outstanding immediately after the exercise of that right, if exercised in
full). 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 2,400,000 shares of common stock. Duck Head believes that
approximately 67.8% 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 30.7% of the
outstanding stock will be beneficially owned by institutional investors. If Mr.
Rockey exercised his right to acquire Duck Head shares, this would further
increase the concentration of stock ownership. 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 AND ECONOMIC 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. For example, a growing economy could lower unemployment which could
increase wage rates or make it difficult to retain employees or employ enough
people to meet demand. The government could also decide to add additional
holidays or change employment law increasing Duck Head's costs to produce.
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 produced 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.
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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. Mr. Rockey has informed Duck Head that his current intent is to remain in
his current position with Duck Head through at least March 2001, subject to the
Duck Head board's willingness to permit him to do so. 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
the apparel markets when demand weakens.
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 January 1, 2000, on a pro forma basis, after giving effect to the
Duck Head distribution, Duck Head's total indebtedness would have been
approximately $5.8 million, and total stockholders' equity would have been
approximately $23 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 20.4%. In addition, at that
date and after giving effect to the Duck Head distribution, approximately $12.5
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
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(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 anticipated
capital expenditures 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 AND
RESULT IN THE EXERCISE OF REMEDIES BY THE CREDIT AGREEMENT LENDER.
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 will also 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 Shares".
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, payroll, accounting, internal audit, employee benefits and
services, stockholder services, insurance, treasury, purchasing, management
information services, and tax accounting. 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 DOES NOT 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 jointly and severally 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.
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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 and including
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 periods beginning before the Duck Head distribution. In
addition, Delta Woodside has the authority to decide all disputes that arise
under the tax sharing agreement. These arrangements may result in conflicts of
interest among Duck Head, Delta Woodside and Delta Apparel. In addition, if
Delta Woodside does not 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 38.6% 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. If Mr. Rockey exercises his right to acquire Duck Head shares, that
would result in four members of Duck Head's board of directors and related
individuals having voting power with respect to approximately 56.7% of the then
outstanding Duck Head shares.
ROBERT D. ROCKEY, JR. MAY NOT EXERCISE THE RIGHT HE HAS TO ACQUIRE UP TO
1,000,000 DUCK HEAD SHARES SIX MONTHS AFTER THE DUCK HEAD DISTRIBUTION.
Pursuant to the letter agreement, as amended, pursuant to which Robert D.
Rockey, Jr. became Chairman, President 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 Duck Head 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 may choose not to exercise this right for any of several
reasons. For instance, Mr. Rockey has informed Duck Head that, unless Duck Head
agrees to register the Duck Head shares he acquires, Mr. Rockey may not wish to
acquire those shares because he may recognize taxable income upon the exercise
of the right but could not sell the shares acquired upon that exercise except
pursuant to the provisions of SEC Rule 144. Rule 144 contains volume limitations
on sales and would require Mr. Rockey to hold the shares for one year. Duck Head
has no agreement at this time with Mr. Rockey respecting registration rights,
although Duck Head and Mr. Rockey may enter into such an agreement prior to the
expiration of the right. In addition, Mr. Rockey has informed Duck Head that his
exercise of the right may be dependent on his finding other investors to join
him in the investment. He may not be able to obtain such other investors.
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VARIOUS RESTRICTIONS AND AGREEMENTS COULD HINDER ANY ATTEMPT BY A THIRD PERSON
TO CHANGE CONTROL OF DUCK HEAD.
Duck Head has entered into a rights agreement providing for the issuance of
rights that will cause substantial dilution to any person (other than Robert D.
Rockey, Jr. in certain specified circumstances) or group of persons that
acquires 20% or more of the outstanding Duck Head common shares without the
rights having been redeemed by the Duck Head board. 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. 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. 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 and its subsidiaries 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 Shares".
All of these provisions could deter or prevent an acquirer that is
interested in acquiring Duck Head from doing so. You can find more information
on these provisions under the portions of this documents found under the heading
"Description of Duck Head Capital Stock".
Bettis C. Rainsford, a director and significant stockholder of Delta
Woodside and a director of Duck Head and Delta Apparel, filed with the SEC on
December 14, 1999 an amendment to his Schedule 13D in which, among other
matters, 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 had not yet been established by Mr.
Rainsford. See "Security Ownership of Significant Beneficial Owners and
Management."
Since the filing of this amendment to his Schedule 13D, Mr. Rainsford has
made no proposal to Delta Woodside to acquire Delta Woodside shares. If he were
to make any such proposal, the Delta Woodside board would consider the terms of
the offer in light of the board's views as to the best interests of the holders
of the Delta Woodside shares. If the board concluded that any such offer were in
the Delta Woodside stockholders' best interests, it would redeem the rights
under the Delta Woodside shareholders' rights plan and permit the proposed
transaction to take place. If the board concluded that the offer were not in the
stockholders' best interests, it would not redeem the rights, which would
effectively prevent the proposed transaction from taking place, unless a court
were to order a different result.
In addition to the shareholder rights plan, Delta Woodside's articles of
incorporation and bylaws and the South Carolina code contain provisions that
could delay or prevent a change in control of Delta Woodside in a transaction
not approved by its board of directors. These include provisions in the South
Carolina code limiting business combinations with stockholders that have a
significant beneficial ownership in Delta Woodside shares unless certain
conditions are met and eliminating the voting rights of Delta Woodside shares
acquired by holders of 20% or more of the outstanding voting power of Delta
Woodside common stock unless voting power is approved by Delta Woodside's
stockholders or limited statutory exceptions are satisfied, and provisions
similar to those of Duck Head prohibiting stockholders from calling a special
meeting, setting forth additional factors to be considered by the board of
directors in evaluating extraordinary transactions, and requiring advance
notification of stockholder nominations for director and stockholder proposals.
If the Delta Woodside board were to conclude that any offer by Mr. Rainsford
were not in the stockholders' best interests, it would rely upon these
provisions to oppose Mr. Rainsford's attempts to gain control of additional
Delta Woodside shares.
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If Mr. Rainsford were to make any proposal to Duck Head to acquire Duck
Head shares following the Duck Head distribution, the Duck Head board would
consider the terms of the offer in light of the board's views as to the best
interests of the holders of the Duck Head shares. If the board concluded that
any such offer were in the Duck Head stockholders' best interests, it would
redeem the rights under the Duck Head shareholders' rights plan and permit the
proposed transaction to take place. If the board concluded that the offer were
not in the Duck Head stockholders' best interests, it would not redeem the
rights, which would effectively prevent the proposed transaction from taking
place, unless a court were to order a different result.
In addition to the shareholder rights plan, Duck Head's articles of
incorporation and bylaws and the Georgia code contain provisions that could
delay or prevent a change in control of Duck Head in a transaction not approved
by its board of directors. These include provisions in the Georgia code limiting
business combinations with stockholders that have a significant beneficial
ownership in Duck Head shares unless certain conditions are met, and provisions
prohibiting stockholders from calling a special meeting, setting forth
additional factors to be considered by the Duck Head board of directors in
evaluating extraordinary transactions, and requiring advance notification of
stockholder nominations for director and stockholder proposals. If the Duck Head
board were to conclude that any offer by Mr. Rainsford were not in the
stockholders' best interests, it would rely upon these provisions to oppose Mr.
Rainsford's attempts to gain control of additional Duck Head shares.
The antitakeover provisions applicable to Delta Woodside and Duck Head were
not adopted as a result of Mr. Rainsford's amendment to his Schedule 13D or the
information contained in that amendment or in response to any other takeover
communication.
The antitakeover provisions that are applicable to Duck Head do not
materially differ from the antitakeover provisions that are applicable to Delta
Woodside. The Delta Woodside shareholder rights plan does not contain the
provisions in the Duck Head shareholder rights plan, described under the heading
"Description of Duck Head Capital Stock - Rights Plan", relating to redemptions
and extensions of time requiring the concurrence of a majority of Disinterested
Directors. South Carolina, Delta Woodside's state of incorporation, has a
control share acquisition act that eliminates the voting rights of Delta
Woodside shares acquired by holders of 20% or more of the outstanding voting
power of Delta Woodside's common stock unless voting power is approved by Delta
Woodside's stockholders or limited statutory exceptions are satisfied. Georgia,
Duck Head's state of incorporation, does not have a comparable act. South
Carolina also has a business combinations act analogous, but not identical, to
that of Georgia described under the heading "Description of Duck Head Capital
Stock - Other Provisions Respecting Stockholder Rights and Extraordinary
Transactions - Georgia Business Combinations Statute."
IF A COURT WERE TO DETERMINE THAT DELTA WOODSIDE DID NOT HAVE THE LEGAL
AUTHORITY TO MAKE THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL DISTRIBUTION,
OR IF A COURT WERE TO DETERMINE THAT THE DUCK HEAD DISTRIBUTION AND THE DELTA
APPAREL DISTRIBUTION CONSTITUTED A FRAUDULENT CONVEYANCE, THE DELTA WOODSIDE
STOCKHOLDERS COULD BE LIABLE FOR THE VALUE OF THE DUCK HEAD SHARES THEY RECEIVE
IN THE DUCK HEAD DISTRIBUTION AND THE DELTA APPAREL SHARES THEY RECEIVE IN THE
DELTA APPAREL DISTRIBUTION.
Under South Carolina corporate law, a shareholder may be held liable for
the amount of any "distribution" that the shareholder receives from a
corporation if the shareholder knows that the distribution violates corporate
law. The Duck Head distribution and the Delta Apparel distribution are
"distributions" for South Carolina corporate law purposes.
South Carolina corporate law generally prohibits a corporation from making
a "distribution" if, after giving effect to the "distribution", the corporation
would not be able to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than its total
liabilities. Under South Carolina corporate law, a board of directors may base a
determination that a distribution is not prohibited under this rule either on
financial statements prepared on the basis of accounting practices and
principles that are reasonable in the circumstances or on a fair valuation or
other method that is reasonable in the circumstances.
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Under general fraudulent conveyance law, a creditor of a corporation can
typically obtain a remedy against a shareholder of the corporation who receives
corporate property if, among other matters, the corporation does not receive a
reasonably equivalent value in exchange for the transferred property and the
corporation was left with property that was unreasonably small in relation to
the corporation's business or was or thereby became insolvent.
Applying the tests prescribed by South Carolina corporate law, Delta
Woodside's board of directors has determined that Delta Woodside may legally
make the Duck Head distribution and the Delta Apparel distribution. In addition,
Delta Woodside's board has determined that Delta Woodside's assets remaining
after the Duck Head distribution and the Delta Apparel distribution will not be
unreasonably small in relation to Delta Woodside's business, and before and
after the distributions Delta Woodside will not be insolvent.
A court might disagree with any of these determinations by Delta Woodside's
board, if they are challenged. In that event, any Delta Woodside shareholder who
receives Duck Head shares in the Duck Head distribution and Delta Apparel shares
in the Delta Apparel distribution may be liable for the value of the Duck Head
shares and Delta Apparel shares so received.
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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 and its subsidiaries
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 Delta Woodside and 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 30096 (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, and has take various actions 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.
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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 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
Securities") 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 to
nineteen companies respecting a possible sale of the remaining Delta Woodside.
None of these potential purchasers, however, made an offer for the remaining
Delta Woodside that Delta Woodside considered to be satisfactory.
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.
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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 Duck Head Apparel Company division and the
Delta Apparel Company division by Delta Mills, Inc. scenario, Delta
Woodside, through its wholly-owned subsidiary, Delta Mills, Inc.,
would have continued to own the Duck Head Apparel Company division and
the Delta Apparel Company division. This internal ownership
restructuring could, however, have provided Delta Woodside with
substantial cash, because Delta Mills, Inc. then had a substantial
cash position and its senior note indenture would have permitted it to
use cash for this purpose but not for the purpose of making dividend
payments to its parent company, Delta Woodside. If this purchase
scenario had been adopted, Delta Woodside could have used the cash
provided by Delta Mills, Inc. in the purchase 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 Securities, 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 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.
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On December 13, 1999, Delta Woodside announced that its board of directors
had adopted a shareholders rights plan pursuant to which stock purchase rights
have been distributed as a dividend to the Delta Woodside stockholders at a rate
of one right for each Delta Woodside share held of record as of December 22,
1999. Delta Woodside stated that the rights plan is designed to enhance the
Delta Woodside board's ability to prevent any person interested in acquiring
control of Delta Woodside from depriving stockholders of the long-term value of
their investment and to protect shareholders against attempts to acquire Delta
Woodside by means of unfair or abusive takeover tactics. Delta Woodside stated
that its board had adopted the rights plan at that time because the Delta
Woodside shares were trading at their lowest levels in Delta Woodside's history.
At the same time, Delta Woodside announced that its board had approved a
plan to purchase from time to time up to an aggregate of 5,000,000 shares of
Delta Woodside's outstanding stock at prices and at times at the discretion of
Delta Woodside's top management. The announcement stated that this stock
repurchase plan replaces the 2,500,000 stock purchase plan announced by Delta
Woodside in September 1998.
On December 30, 1999, Delta Woodside announced that each of Duck Head and
Delta Apparel had filed a registration statement with the SEC to register the
subsidiary's stock under the Securities Exchange Act of 1934, and that these
filings were pursuant to the previously announced plan of Delta Woodside to spin
off to its stockholders the Delta Apparel Company division and the Duck Head
Apparel Company division as two separate publicly-owned corporations. Delta
Woodside also stated that, following completion of the spin-offs, Delta Woodside
intends to propose to its stockholders the adoption of a new Delta Woodside
stock option plan and a new Delta Woodside incentive stock award plan pursuant
to which significant equity incentives could be granted to the new management of
Delta Woodside.
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;
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(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
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.
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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;
(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 to effect the Duck Head distribution, the Board
also took into account the following additional factors:
- The opinion delivered to the Delta Woodside board by Houlihan Lokey
Howard & Zukin Financial Advisors, Inc. that is described below;
- The advice provided to the Delta Woodside board by Prudential
Securities that is described below;
- The financial information and 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;
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- 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.
All members of the Delta Woodside board (other than Bettis C. Rainsford)
voted in favor of effectuating the Duck Head distribution, the Delta Apparel
distribution and related transactions. See "Security Ownership of Significant
Beneficial Owners and Management."
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.
Opinion of Houlihan Lokey
-------------------------
Delta Woodside engaged Houlihan Lokey to provide to the Delta Woodside
board and the Duck Head board an opinion as to the solvency of Duck Head as of
the time of the Duck Head distribution. Delta Woodside selected Houlihan Lokey
based on Houlihan Lokey's extensive experience in providing solvency opinions.
In consideration of its services in connection with the opinion described
below and a similar opinion with respect to Delta Apparel, Houlihan Lokey will
be paid a fee of $200,000 plus reasonable out-of-pocket expenses. No portion of
this fee is contingent upon the consummation of the Duck Head distribution or
the Delta Apparel distribution or the conclusions reached in Houlihan Lokey's
opinions. Delta Woodside has also agreed to provide indemnification to Houlihan
Lokey and certain other parties with respect to certain matters. Houlihan Lokey
has had no other material relationship with Delta Woodside or its subsidiaries
during the past two years.
The preparation of a solvency opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the solvency analysis
and valuation methodologies utilized by Houlihan Lokey. Although the summary
sets forth all material facts respecting the opinion of Houlihan Lokey, the
summary does not purport to be a complete statement of the analyses and
procedures applied, the judgments made or the conclusion reached by Houlihan
Lokey or a complete description of its presentation to the Delta Woodside board
or the Duck Head board. Houlihan Lokey believes, and so advised the Delta
Woodside board and the Duck Head board, that its analyses must be considered as
a whole and that selecting portions of its analyses and of the factors
considered by it, without considering all factors and analyses, could create an
incomplete view of the process underlying its analyses and opinions.
The Duck Head distribution and other related transactions disclosed to
Houlihan Lokey are referred to collectively in this summary as the
"Transaction." For purposes of its opinion, Houlihan Lokey assumed that the
third party financing described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
will be entered into on or prior to the date of the Duck Head distribution and
that, prior to the Duck Head distribution, the intercompany reorganization
described in "Relationships Among Duck Head, Delta Woodside and Delta Apparel -
Distribution Agreement" will be completed.
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Delta Woodside's board of directors has requested that Houlihan Lokey
render its written opinion to the Delta Woodside board and the Duck Head board
as to whether, assuming the Transaction has been consummated as proposed,
immediately after and giving effect to the Transaction: (a) on a pro forma
basis, the fair value and present fair saleable value of Duck Head would exceed
its stated liabilities and identified contingent liabilities, (b) Duck Head
should be able to pay its debts as they become absolute and mature; (c) the
capital remaining in Duck Head after the Transaction would not be unreasonably
small for the business in which Duck Head is engaged, as management has
indicated it is now conducted and is proposed to be conducted following the
consummation of the Transaction; and (d) the financial test for distributions of
the state of incorporation of Duck Head (i.e. Georgia) has been satisfied.
Houlihan Lokey's opinion does not address Delta Woodside's underlying
business decision to effect the Transaction. Houlihan Lokey has not been
requested to, and did not, solicit third party indications of interest in
acquiring all or part of Duck Head.
In connection with the preparation of its opinion, Houlihan Lokey made such
reviews, analyses and inquiries as it deemed necessary and appropriate under the
circumstances. Among other things, Houlihan Lokey:
(i) reviewed Duck Head's annual financial statements for the 1997,
1998 and 1999 fiscal years and year-to-date statements for the
first nine months of fiscal year 2000, which Duck Head's and
Delta Woodside's managements have identified as the most current
information available;
(ii) reviewed the proposal from the third party lender to provide Duck
Head revolving credit and term loan facilities;
(iii) spoke with certain members of the senior management of Delta
Woodside and Duck Head to discuss the operations, financial
condition, future prospects and projected operations and
performance of Duck Head;
(iv) reviewed budgets and forecasts prepared by Duck Head's management
with respect to the periods ended January 1, 2000 through fiscal
year 2004;
(v) reviewed marketing and promotional material relating to Duck
Head;
(vi) reviewed the preliminary registration statement filed with the
SEC for Duck Head;
(vii) reviewed other publicly available financial data for Duck Head
and certain companies that Houlihan Lokey deems comparable to
Duck Head; and
(viii) conducted such other studies, analyses and investigations as
Houlihan Lokey has deemed appropriate.
In assessing the solvency of Duck Head immediately after and giving effect
to the Transaction, Houlihan Lokey:
(i) analyzed the fair value and present fair saleable value of Duck Head's
assets relative to Duck Head's stated liabilities and identified
contingent liabilities on a pro forma basis ("balance sheet test");
(ii) assessed Duck Head's ability to pay its debts as they become absolute
and mature ("cash flow test"); and
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(iii)assessed the capital remaining in Duck Head after the Transaction so
as not to be unreasonably small ("reasonable capital test").
Each of "fair value" and "present fair saleable value" is defined as the amount
that may be realized if Duck Head's aggregate assets (including goodwill) are
sold as an entity with reasonable promptness in an arm's length transaction
under present conditions for the sale of comparable business enterprises, as
such conditions can be reasonably evaluated.
Balance Sheet Test
The Balance Sheet Test determines whether or not the fair value and present
fair saleable value of Duck Head's assets exceeds its stated liabilities and
identified contingent liabilities after giving effect to the Transaction. This
test requires an analysis of the fair market value of Duck Head as a
going-concern. As part of this analysis, Houlihan Lokey considered, among other
things,
(i) historical and projected financial performance for Duck Head as
prepared by Duck Head;
(ii) the business environment in which Duck Head competes;
(iii) performance of certain publicly traded companies deemed by
Houlihan Lokey to be comparable to Duck Head, in terms of, among
other things: lines of business, size, profitability, financial
leverage and growth;
(iv) capitalization rates ("multiples") for certain publicly traded
companies deemed by Houlihan Lokey to be comparable to Duck Head
(including (a) Enterprise Value ("EV")/Revenue; and (b)
EV/earnings before interest, taxes, depreciation and amortization
("EBITDA");
(v) multiples derived from acquisitions of companies deemed by
Houlihan Lokey to be comparable to Duck Head;
(vi) the Discounted Cash Flow approach;
(vii) the capital structure and debt obligations of Duck Head; and
(viii) non-operating assets and identified contingent liabilities.
"Enterprise Value" or "EV" is defined as total market value of equity plus net
interest bearing debt.
In determining the fair value and present fair saleable value of the
aggregate assets of Duck Head, the following methodologies were employed: the
Market Multiple approach and the Discounted Cash Flow approach.
Market Multiple Approach. The application of the Market Multiple Approach
involves the derivation of indication of value through the multiplication of
relevant performance fundamentals of the subject entity by appropriate
multiples. Multiples were determined through an analysis of: (i) publicly traded
companies that were determined by Houlihan Lokey to be comparable from an
investment standpoint to Duck Head ("Comparable Public Companies"); and, (ii)
change of control transactions involving companies that were determined by
Houlihan Lokey to be comparable to Duck Head from an investment standpoint
("Comparable Transactions"). Houlihan Lokey selected five publicly traded
domestic companies for comparison to Duck Head (Ashworth, Inc., Perry Ellis
International, Inc., Haggar Corporation, Nautica Enterprises, Inc. and Tropical
Sportswear International). These companies are involved in the branded apparel
businesses. Observed market pricing of the Comparable Public Companies reflected
EV/Latest Twelve Months ("LTM") Revenue ratios ranging from 0.25x to 0.94x with
a median of 0.64x and EV/Projected Fiscal Year 2000 EBITDA ("2000 EBITDA")
ratios ranging from 3.0x to 5.9x with a median of 4.7x. A comparative analysis
between Duck Head and the Comparable Public Companies formed the basis for the
selection of appropriate multiples for Duck Head. The comparative analysis
incorporates both quantitative and qualitative factors which relate to, among
other things, the nature of the industry in which Duck Head and the Comparable
Public Companies are engaged and the relative financial performance of Duck Head
and the Comparable Public Companies. An indicated Enterprise Value of $13.7
million was derived based on the application of selected market multiples to the
relevant fundamentals of Duck Head and an adjustment for control through the
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application of 30% control premium. The selected control premium of 30% was
based on change of control transactions of publicly-traded apparel companies and
available market studies. The indicated Enterprise Value of $13.7 million
reflects implied multiples for Duck Head of 0.22x LTM Revenues and 5.2x
Forecasted Fiscal Year 2000 EBITDA ("FY2000 EBITDA"). The indicated Enterprise
Value for Duck Head based on the Comparable Public Companies analysis exceeded
its stated liabilities and identified contingent liabilities by $6.7 million.
For the Comparable Transactions, Houlihan Lokey analyzed apparel industry
merger and acquisition transactions between 1998 and 1999 where financial
information was publicly disclosed. Market multiples were developed from nine
comparable transactions, of which three were 1999 transactions and considered
most relevant. The 1999 transactions included Podell Industries/Liz Claiborne,
Penobscot Shoes/Riedman Corp. and Tahiti Apparel/Signal Apparel Corp. Enterprise
Value indications were developed through the capitalization of the relevant
performance fundamentals of Duck Head. Relevant fundamentals considered were LTM
Revenues and FY2000 EBITDA. Observed multiples of revenues (EV/Revenues) ranged
from 0.27x to 0.66x with a median of 0.5x and EBITDA (EV/EBITDA) ranged from
3.2x to 10.7x with a median of 3.8x. Of the nine Comparable Transactions
analyzed, four of the acquired companies had EBITDA fundamentals which were
negative or not meaningful. Based on the analysis conducted, an indicated
Enterprise Value of $23.9 million was derived for Duck Head. The indicated
Enterprise Value of $23.9 million produced implied multiples of 0.39x LTM
Revenue and 9.1x Forecasted Fiscal Year 2000 EBITDA. The indicated Enterprise
Values for Duck Head based on the Comparable Transaction analysis exceeded its
stated liabilities and identified contingent liabilities by $16.7 million.
Discounted Cash Flow Approach. The Discounted Cash Flow Approach involved
the development of Enterprise Value indications from the appraisal of projected
cash flows to be generated by Duck Head, which are based on fiscal years 2000 to
2004 financial forecasts prepared by the management of Duck Head. The projected
cash flows include interim cash flows over the forecast period and a terminal
year cash flow, which represents the value of Duck Head beyond the forecast
period. The interim cash flows reflect the cash available to all capital
providers (debt and equity) after accounting for required capital investments.
The terminal year cash flow reflects an estimate of the fair and saleable value
of Duck Head at the end of the forecast period, June 30, 2004. This estimation
was developed from the application of the Market Multiple Approach already
described above, wherein projected fundamentals were capitalized based on
selected market multiples. Indications of Enterprise Value were developed by
applying an appropriate discount rate or cost of capital to the projected cash
flows and terminal value. The concluded Enterprise Value, or sum of the
projected cash flows and terminal value, ranged between $28.5 and $35.8 million
depending on the discount rate and terminal multiple selected. The discount rate
reflects the degree of risk inherent to the assets of Duck Head and its ability
to produce the projected cash flows. The range of discount rates and terminal
multiples selected were 14% to 16% and 3.0x to 4.0x, respectively. The indicated
range of Enterprise Values for Duck Head based on the Discounted Cash Flow
approach exceeded its stated liabilities and identified contingent liabilities
by $21.5 million to $28.8 million.
Cash Flow Test
The Cash Flow Test focuses on whether or not Duck Head should be able to
repay its debts as they become absolute and mature (including the debts incurred
in the Transaction). This test involves a two-step analysis of Duck Head's
fiscal year 2000 to fiscal year 2004 financial projections: (i) examines the
financial projections relative to a variety of factors including: historical
performance, marketing plans and cost structure, and (ii) analyzes the
sensitivity of the projections to changes in key operating variables.
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Over the past twelve months, Duck Head has made significant changes to its
management team, restructured its operations, reduced certain costs and
implemented certain marketing plans. As a result of the changes implemented by
Duck Head, management's forecast for the business represents an improvement over
Duck Head's financial performance over the past several years. Duck Head's
financial performance for fiscal year 2000 reflects in part the changes
implemented by Duck Head's management and represents an improvement over
financial results for fiscal years 1998 and 1999.
The sensitivity analysis of Duck Head's projections involved testing a
number of underlying operating assumptions, including: revenue growth, operating
margins and capital investment requirements. Duck Head's ability to meet its
debt obligation was analyzed in the context of varying a number of the operating
assumptions. Based on the sensitivity analysis conducted on Duck Head's
financial forecast, Duck Head demonstrated an ability to met its obligations as
they came due under a range of financial forecast scenarios.
Reasonable Capital Test
The Reasonable Capital Test follows from the Balance Sheet and Cash Flow
Tests. The determination as to whether the net assets remaining with Duck Head
constitute unreasonably small capital involves an analysis of various factors,
including, (i) the degree of sensitivity demonstrated in the cash flow test;
(ii) historical and expected volatility in revenues, cash flow and capital
expenditures; (iii) the adequacy of working capital; (iv) historical and
expected volatility of going-concern asset values; (v) the maturity structure
and the ability to refinance Duck Head's obligations; (vi) the magnitude, timing
and nature of identified contingent liabilities; and (vii) the nature of the
business and the impact of financial leverage on its operations.
Solvency
Based upon the foregoing, and in reliance thereon, it is Houlihan Lokey's
opinion as of May 9, 2000 that, assuming the Transaction has been consummated as
proposed, immediately after and giving effect to the Transaction:
(i) on a pro forma basis, the fair value and present fair saleable
value of Duck Head's assets would exceed Duck Head's stated
liabilities and identified contingent liabilities;
(ii) Duck Head should be able to pay its debts as they become absolute
and mature; and
(iii)the capital remaining in Duck Head after the Transaction would
not be unreasonably small for the business in which Duck Head is
engaged, as management has indicated it is now conducted and is
proposed to be conducted following the consummation of the
Transaction.
Assumptions and Limiting Conditions
Notwithstanding the use of the defined terms "fair value" and "present fair
saleable value", Houlihan Lokey has not been engaged to identify prospective
purchasers or to ascertain the actual prices at which and terms on which Duck
Head can currently be sold, and Houlihan Lokey knows of no such efforts by
others. Because the sale of any business enterprise involves numerous
assumptions and uncertainties, not all of which can be quantified or ascertained
prior to engaging in an actual selling effort, Houlihan Lokey expresses no
opinion as to whether Duck Head would actually be sold for the amount Houlihan
Lokey believes to be its fair value and present fair saleable value.
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of Duck Head, and that there has been
no material adverse change in the assets, financial condition, business or
prospects of Duck Head since the date of the most recent financial statements
made available to Houlihan Lokey.
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Houlihan Lokey has not independently verified the accuracy and completeness
of the information supplied to it with respect to Duck Head, and does not assume
any responsibility with respect to it. Houlihan Lokey has not made any physical
inspection or independent appraisal of any of the properties or assets of Duck
Head. Houlihan Lokey's opinion is necessarily based on business, economic,
market and other conditions as they exist and can be evaluated by Houlihan Lokey
at the date of its opinion.
Houlihan Lokey's opinion is furnished solely for the benefit of the Delta
Woodside board and the Duck Head board and may not be relied upon by any other
person without Houlihan Lokey's prior written consent. Houlihan Lokey's opinion
is delivered to each recipient subject to the conditions, scope of engagement,
limitations and understandings set forth in its opinion and Houlihan Lokey's
engagement letter with Delta Woodside.
Advice of Prudential Securities
-------------------------------
Delta Woodside's board of directors received financial advice from
Prudential Securities regarding the issues surrounding the separation of the
apparel and textile fabric businesses. The points described above under the
heading "The Duck Head Distribution - Reasons for the Duck Head Distribution"
include the material factors discussed by Prudential Securities. Prudential
Securities also advised the Delta Woodside board regarding the issues
surrounding various alternatives to the Duck Head distribution and the Delta
Apparel distribution, including a sale of either or both of Duck Head or Delta
Apparel and a liquidation of either or both of Duck Head or Delta Apparel.
Prudential Securities' financial advice was based on its analysis of the trading
prices and trading multiples of approximately 14 textile and apparel companies
which Prudential Securities believed provided relevant comparisons. In addition,
Prudential Securities reviewed recent acquisitions, also deemed to provide
relevant comparisons, in the textile and apparel industries, including the
prices paid and multiples of financial performance that those acquisitions
implied. Prudential Securities' advice regarding Delta Woodside's alternatives
with regard to Duck Head was also based on its review and understanding of
prevailing textile and apparel market conditions, as well as its review of Duck
Head's historical market performance.
Prudential Securities was not requested to, and did not, undertake the
types of analyses customary to deliver a financial opinion and did not deliver
any such opinion.
Pursuant to an engagement letter, Prudential Securities has been paid by
Delta Woodside an advisory fee of $500,000 for its services. Delta Woodside has
agreed to indemnify Prudential Securities for certain liabilities relating to or
arising from Prudential Securities' engagement by Delta Woodside. Prudential
Securities has also performed various investment banking services for Delta
Woodside in the past, and has received customary fees for those services.
Prudential Securities is a nationally recognized investment banking firm
and, as a customary part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements, and
valuations for corporate and other purposes. Delta Woodside selected Prudential
Securities because of its expertise, reputation and familiarity with Delta
Woodside. In the ordinary course of business, Prudential Securities and its
affiliates may actively trade or hold the securities and other instruments and
obligations of Delta Woodside for their own account and for the accounts of
customers and, accordingly, may at any time hold long or short positions in such
securities, instruments or obligations.
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".
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Delta Woodside plans to effect the Duck Head distribution on or about June
2, 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 May 19, 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, the number of shares of Delta Woodside common stock
outstanding on April 25, 2000 and the number of Delta Woodside shares to be
issued before the Duck Head record date as described in "Interests of Directors
and Executive Officers in the Duck Head Distribution - Payments in Connection
with Duck Head Distribution and Delta Apparel Distribution", Delta Woodside will
distribute approximately 2,400,000 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 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 June 2,
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 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
The following is a summary of the material US federal income tax
consequences generally applicable to a Delta Woodside stockholder who is a US
Holder. The term "US Holder" means a beneficial owner of Delta Woodside shares
that is (i) a citizen or resident of the United States, (ii) a corporation,
partnership (other than certain partnerships as may be provided in the
applicable provisions of the US Treasury Regulations), or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate the income of which is subject to US
federal income taxation regardless of its source, (iv) a trust if (a) a US court
is able to exercise primary supervision over the trust's administration and (b)
one or more US persons have the authority to control all of the trust's
substantial decisions, or (v) otherwise subject to US federal income taxation on
a net income basis in respect of the Delta Woodside shares.
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The following description is for general purposes only and is based on the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), US
Treasury Regulations and judicial and administrative interpretations thereof,
all as in effect on the date of this document and all of which are subject to
change, possibly retroactively. The tax treatment of a US Holder may vary
depending upon the holder's particular situation. For instance, certain holders,
including, but not limited to, insurance companies, tax-exempt organizations,
financial institutions, persons subject to the alternative minimum tax, dealers
in securities or currencies, persons that have a "functional currency" other
than the US dollar or as part of a "hedging" or "conversion" transaction for US
federal income tax purposes and persons owning, directly or indirectly, 5
percent or more of the Delta Woodside shares may be subject to special rules not
discussed below. The following summary is limited to investors who hold the
Delta Woodside shares as "capital assets" within the meaning of Section 1221 of
the Code. The discussion below does not address the effect of any other laws
(including other federal, state, local or foreign tax laws) on a US Holder of
Delta Woodside shares. As such, the summary does not discuss US federal estate
and gift tax considerations or US state and local tax considerations.
Delta Woodside has structured 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.
Delta Woodside has not sought a ruling from the US Internal Revenue Service
("IRS") regarding the Duck Head distribution or the Delta Apparel distribution,
in part because neither distribution satisfies all the conditions imposed by the
IRS for such a ruling. 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 has obtained an opinion from KPMG LLP that it is more likely
than not that each of the Duck Head distribution and the Delta Apparel
distribution qualifies as tax-free under Code Section 355.
Material Federal Income Tax Consequences if the Duck Head Distribution and
---------------------------------------------------------------------------
the Delta Apparel Distribution Qualify as Tax-Free Spin-Offs under Code
---------------------------------------------------------------------------
Section 355
-----------
If the Duck Head distribution and the Delta Apparel distribution qualify as
tax-free spin-offs under Code Section 355, then:
1. The US Holders of Delta Woodside stock 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 US Holder of Delta Woodside stock 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 US
Holder 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 US Holder of Delta Woodside stock will be required to apportion his,
her or its tax basis in the US Holder's Delta Woodside shares between the
Delta Woodside shares retained and the Duck Head shares and Delta Apparel
shares received, with this apportionment to be made in proportion to the
shares' relative fair market values for federal income tax purposes
immediately after the distributions.
4. The holding period for the Duck Head shares and the Delta Apparel shares
received by a US Holder in the distributions will be the same as the US
Holder's holding period for the Delta Woodside shares with respect to which
the Duck Head distribution and the Delta Apparel distributions are made.
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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 deferred intercompany gains, but
that this gain will be offset by Delta Woodside's net operating losses.
US Treasury Regulations Section 1.355-5 requires that each US Holder that
receives Duck Head shares in the Duck Head distribution and Delta Apparel shares
in the Delta Apparel distribution attach a statement to his, her or its US
federal income tax return for the taxable year in which the distributions occur,
showing the applicability of Code Section 355 to the Duck Head distribution and
the Delta Apparel distribution. US Holders should consult their own tax advisors
regarding these disclosure requirements.
As noted above, Delta Woodside has not sought a ruling from the IRS
regarding the Duck Head distribution or the Delta Apparel distribution. The fact
that no ruling has been sought should not be construed as an indication that the
IRS would necessarily reach a different conclusion regarding the Duck Head
distribution or the Delta Apparel distribution than the conclusion set out in
the opinion of KPMG LLP. The opinion of KPMG LLP referred to in this description
is not binding upon the IRS, any other tax authority or any court, and no
assurance can be given that a position contrary to those expressed in the
opinion of KPMG LLP will be not asserted by the tax authority and ultimately
sustained by a court of law.
Material Federal Income Tax Consequences if the Duck Head Distribution and
---------------------------------------------------------------------------
the Delta Apparel Distribution Qualify as Tax-Free Spin-Offs under Code
---------------------------------------------------------------------------
Section 355
-----------
If the Duck Head distribution and the Delta Apparel distribution do not
qualify as tax-free spin-offs under Code 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. The fair market value for federal income tax purposes of the Duck Head
shares and the Delta Apparel shares received by the Delta Woodside
stockholders in the distributions 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 $15.4 million (approximately $0.64 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.
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.
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.
KPMG LLP is an internationally recognized accounting, tax and consulting
firm and, as a customary part of its tax practice, is regularly engaged to
provide opinions on the federal income tax consequences of merger and
acquisition transactions. Delta Woodside selected KPMG LLP because of its
expertise and its familiarity with Delta Woodside, Duck Head and Delta Apparel.
KPMG LLP acts as the independent auditor of the financial statements of Delta
Woodside, Duck Head and Delta Apparel and as their respective tax advisors. KPMG
LLP has also provided various consulting services to Delta Woodside. KPMG LLP
receives and has received customary fees for those services.
Pursuant to an engagement letter, Delta Woodside has agreed to pay KPMG LLP
a fee of $250,000 in connection with the preparation and delivery of its opinion
on the federal income tax consequences of the Duck Head and Delta Apparel
distributions. Delta Woodside has agreed to indemnify KPMG LLP for certain
liabilities relating to KPMG LLP's engagement by Delta Woodside.
In connection with the opinion of KPMG LLP respecting the U.S. federal
income tax consequences of the Duck Head distribution and the Delta Apparel
distribution, each of E. Erwin Maddrey, II, Buck A. Mickel, Micco Corporation,
Minor H. Mickel, Minor M. Shaw and Charles C. Mickel will represent to KPMG LLP
that such greater than 5% beneficial owner of Delta Woodside shares has no
binding commitment to sell, exchange, transfer by gift or otherwise dispose of
any Delta Woodside shares, Duck Head shares or Delta Apparel shares after the
Duck Head and Delta Apparel distributions, that such shareholder has no present
plan or intention to sell, exchange, transfer by gift or otherwise dispose of
any Delta Woodside shares, Duck Head shares or Delta Apparel shares except when
paired with a proportionate disposition of shares in all three companies and
that such shareholder has no plan or intention to acquire (directly or
indirectly) during the period ending 2 years from the date of the Duck Head
distribution and the Delta Apparel distribution additional Delta Woodside
shares, Duck Head shares or Delta Apparel shares that, when added to such
shareholder's existing stockholding, would represent a 50% of greater interest
in Delta Woodside, Duck Head or Delta Apparel. See "Security Ownership of
Significant Beneficial Owner and Management."
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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. KPMG LLP has
provided its opinion that it is more likely than not that, following the Duck
Head distribution and the Delta Apparel distribution and assuming the
distributions are tax-free pursuant to Code Section 355, approximately $56
million of this net operating loss carry forward will remain as a tax attribute
of Delta Woodside as of July 3, 1999 ($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 as of July 3, 1999 and approximately $9
million will be a tax attribute of Delta Apparel as of July 3, 1999. Duck Head's
and Delta Apparel's federal net operating losses will expire at various dates in
fiscal years 2011 through 2019.
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, however, 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.
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.
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
will be owned by an indirect wholly-owned subsidiary of Delta Woodside. As of
that date, there will be approximately 2,500 record holders of the common stock
of Delta Woodside. As a result of the Duck Head distribution ratio of one Duck
Head share for ten Delta Woodside shares, Duck Head anticipates that, upon the
Duck Head distribution, there will be approximately 1,500 record holders of Duck
Head shares.
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 for the Duck Head shares will develop or be sustained in the future. The
American Stock Exchange has approved shares of Duck Head's common stock for
listing, subject to official notice of issuance. Duck Head believes that there
is a possibility 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 (if
"when-issued" trading develops) 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, analyst coverage of and interest in 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. Generally, Duck Head
affiliates may sell their Duck Head shares received in the Duck Head
distribution only under an effective registration statement under the Securities
Act of 1933 or pursuant to Rule 144, which contains volume and manner of sale
limitations on such sales.
At the time of the Duck Head distribution, the only outstanding equity
securities of Duck Head will be the approximately 2,400,000 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 up to 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
incentive 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 or 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".
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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 equity 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.
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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 respective subsidiaries 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. 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 March 15, 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 Company division's business and the Delta Apparel Company
division's business from each other and 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 currently conduct
the Duck Head Apparel Company division's business and the Delta
Apparel Company division's business. The Duck Head Apparel Company
division's assets are currently owned by Delta Woodside and several of
its wholly-owned subsidiaries. The Delta Apparel Company division's
assets are currently owned by several of Delta Woodside's wholly-owned
subsidiaries.
(b) All the assets used in the operations of the Duck Head Apparel Company
division's business will have been transferred to Duck Head or a
subsidiary of Duck Head to the extent not already owned by Duck Head
or its subsidiaries.
(c) Duck Head will have assumed all of the liabilities of the Duck Head
Apparel Company 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 agree to look only to Duck
Head or a subsidiary of Duck Head for payment of that indebtedness or
lease (except where Delta Woodside or Delta Apparel, as applicable,
consents to not being released from the obligations).
(d) All the assets used in the operations of the Delta Apparel Company
division's business will have been transferred to Delta Apparel or a
subsidiary of Delta Apparel to the extent not already owned by Delta
Apparel or its subsidiaries. This transfer will include the sale by
Delta Mills to Delta Apparel of the Rainsford Plant, located in
Edgefield, SC.
(e) Delta Apparel will have assumed all of the liabilities of the Delta
Apparel Company 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 agree to look only to
Delta Apparel or a subsidiary of Delta Apparel for payment of that
indebtedness or lease (except where Delta Woodside or Duck Head, as
applicable, consents to not being released from the obligations).
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(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 agree to look only to Delta Woodside or a remaining
subsidiary of Delta Woodside for payment of that indebtedness or lease
(except where Duck Head or Delta Apparel, as applicable, consents to
not being released from the obligations).
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 the employees of the Duck Head Apparel Company
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 and except as
provided in the distribution 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 or 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, Duck Head and Delta Apparel proportionately in
accordance with the respective benefits received by Delta Woodside, Duck Head
and Delta Apparel as determined in good faith by the parties; 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.
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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).
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, for each
taxable period that ends prior to or 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 any
increase in those state taxes, and shall be entitled to receive the
benefit of any refund of or saving in those state taxes, with respect
to that corporation (or any predecessor by merger of that corporation)
or 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).
- 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 period ending prior to or 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 Delta Apparel distribution,
by any member of the Delta Woodside federal income tax
consolidated group for any period ending prior to or 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 employees of the business of
Delta Apparel.
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(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 the Duck Head distribution, by any member of
the Delta Woodside federal income tax consolidated group for any
period ending prior to or 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
employees 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 and
other tax proceedings. In addition, the tax sharing agreement provides that all
disagreements and disputes relating to the agreement are to be resolved by Delta
Woodside. These arrangements may result in conflicts of interest among Duck
Head, Delta Woodside and Delta Apparel concerning such matters as whether a tax
relates to the business of Delta Woodside, Duck Head or Delta Apparel. Delta
Woodside might determine that a tax was a liability of Duck Head even though
Duck Head disagreed with that determination.
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).
47
<PAGE>
Principal Stockholders
----------------------
The Duck Head shares will be distributed in the Duck Head distribution, and
the Delta Apparel shares will be distributed in the Delta Apparel distribution,
to the Delta Woodside stockholders proportionately among the Delta Woodside
shares. Therefore, immediately following the Duck Head distribution, Delta
Woodside's principal stockholders will be the same individuals and entities as
Duck Head's and Delta Apparel's principal stockholders, and those principal
stockholders will have the same respective percentages of outstanding beneficial
ownership in each of Delta Woodside, Duck Head and Delta Apparel (assuming no
acquisitions or dispositions of shares by those stockholders between the record
date for the Duck Head distribution or the Delta Apparel distribution and the
completion of either distribution). See "Security Ownership of Significant
Beneficial Owners and Management".
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 six months of fiscal year 2000:
<TABLE>
<CAPTION>
(in thousands of dollars)
Fiscal year First six months
----------- ----------------
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 financial
planning, SEC reporting, payroll, accounting, internal audit, employee benefits
and services, stockholder services, insurance, treasury, purchasing, 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. During the first six months of fiscal year 2000, Delta Woodside
charged the Duck Head Apparel Company division $0 for these services.
48
<PAGE>
Other
-----
For further information on transactions with affiliates by Duck Head, see
Notes 2 and 8 to the Combined Financial Statements of Duck Head under "Index to
Combined 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.
49
<PAGE>
CAPITALIZATION
The following table sets forth at January 1, 2000: (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 January 1, 2000 and for the six months ended
January 1, 2000, included on pages 51-56 and F-18 - F-22, respectively, of this
document.
<TABLE>
<CAPTION>
AS OF
JANUARY 1, 2000
----------------------------------------
Actual Pro Forma
-------------- ----------------
(in thousands)
<S> <C> <C>
Long-term debt, including current maturities:
Capital lease obligations $ 84 84
Mortgage loan payable 6,289 5,760
Due to parent and affiliates 115,517 ---
-------------- ----------------
Total long-term debt (including current maturities) 121,890 5,844
Less current maturities (98,684) (1,016)
-------------- ----------------
Total long-term debt (excluding current maturities) 23,206 4,828
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;
2,400,000 shares issued and outstanding on a pro forma basis --- 24
Additional paid-in capital --- 22,748
Divisional deficit (96,610) ---
-------------- ----------------
Total stockholders' equity (deficit) (96,610) 22,772
-------------- ----------------
Total capitalization $ (73,404) 27,600
============== ================
</TABLE>
50
<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 notes to those statements 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 January 1, 2000:
- The contribution to equity of the intercompany debt owed by Duck Head
to Delta Woodside and subsidiaries and the distribution of Duck Head
common stock to the existing Delta Woodside stockholders;
- The incurrence of new financing; and
- The contribution of $6.8 million of cash by Delta Woodside to Duck
Head to fund the repayment of Duck Head's existing mortgage debt.
The unaudited pro forma combined statements of operations for the year
ended July 3, 1999 and for the six months ended January 1, 2000 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 borrowings utilizing outside
financing;
- The elimination of the intercompany management fees and the incurrence
by Duck Head of costs to replace services previously performed by
Delta Woodside; and
- The distribution of Duck Head common stock to the 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.
51
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 1, 2000
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 179 6,300 (1)(3)3) 6,479
Accounts receivable 3,995 3,995
Affiliate receivables 3,198 (3,198) (2) ---
Inventories 16,211 16,211
Prepaid expenses and other current assets 256 256
Total current assets 23,839 3,102 26,941
Property, plant and equipment, net 9,948 9,948
------------ -------------- ----------
$ 33,787 3,102 36,889
============ ============== ==========
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,692 2,692
Accrued expenses 3,944 3,944
Current portion of long-term debt 6,289 (5,329) (1)(3) 960
Current portion of capital leases 56 56
Due to Parent and affiliates 92,339 (92,339) (2) ---
Income taxes payable 1,081 (234) (4) 847
------------ -------------- ----------
Total current liabilities 106,401 (97,902) 8,499
Long-term debt --- 4,800 (3) 4,800
Long-term portion of capital leases 28 28
Due to Parent 23,178 (23,178) (2) ---
Other liabilities 790 790
------------ -------------- ----------
Total liabilities 130,397 (116,280) 14,117
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; 2,400,000 issued and outstanding on
a pro forma basis --- 24 (2) 24
Additional paid in capital --- 22,748 (2) 22,748
Divisional deficit (96,610) 96,610 (2) ---
----------- --------------- -----------
Total stockholders'/divisional equity (deficit) (96,610) 119,382 22,772
----------- --------------- -----------
LIABILITIES AND STOCKHOLDERS'/DIVISIONAL EQUITY
(DEFICIT) $ 33,787 3,102 36,889
=========== =============== ===========
See notes to unaudited pro forma combined financial statements.
</TABLE>
52
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JANUARY 1, 2000
(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 receipt of the contribution of cash by Delta Woodside to
Duck Head of $6.8 million of which $6.3 million is used to fund the
repayment of its existing mortgage debt of $6.3 million.
2) To reflect the contribution to equity of net intercompany debt owed by Duck
Head to Delta Woodside and subsidiaries totaling $112,319 and the
distribution of 2,400,000 Duck Head common shares to Delta Woodside's
existing stockholders.
3) To reflect the incurrence of the term loan of $5.8 million under Duck
Head's new credit facility.
4) To reflect estimated tax liability.
5) Duck Head has a commitment from a financial institution lender to obtain a
term loan at an interest rate similar to the interest rate on Duck Head's
bank mortgage loan on its Winder, Georgia office and distribution center
that was outstanding on January 1, 2000.
53
<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>
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 expense, net (960) (584) (1) (1,544)
Intercompany interest expense (7,262) 7,262 (1) ---
------------ ------------- -------------
(8,222) 6,317 (1,544)
------------ ------------- -------------
Loss before taxes (47,453) 6,496 (40,596)
Income tax expense 261 261
------------ ------------- -------------
Net loss (47,714) 6,496 (41,857)
============ ============= =============
Basic and diluted net loss per share $ (17.02)
=============
Weighted average shares outstanding used in basic
and diluted per share calculation (4) 2,400,000
=============
See notes to unaudited pro forma combined financial statements.
</TABLE>
54
<PAGE>
DUCK HEAD APPAREL COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JANUARY 1, 2000
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED
---------- ----------- -----------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Net sales $ 28,993 28,993
Cost of goods sold (20,030) (20,030)
-------------- ---------------
Gross profit 8,963 8,963
Selling, general and administrative expenses (10,351) (172) (2) (10,523)
Royalty and other income 1,166 1,166
-------------- ------------ ---------------
Operating income (loss) (222) (172) (394)
Interest income (expense):
Interest expense, net (338) (321) (1) (659)
Intercompany interest expense (3,869) 3,869 (1) ---
-------------- ------------ ---------------
(4,207) 3,236 (659)
-------------- ------------ ---------------
Loss before taxes (4,429) 3,064 (1,053)
Income tax expense (benefit) 234 (234) (3) ---
-------------- ------------ ---------------
Net (loss) $ (4,663) 3,298 (1,053)
============== ============ ===============
Basic and diluted net loss per share $ (0.44)
===============
Weighted average shares outstanding used in basic
and diluted per share calculation (4) 2,400,000
===============
See notes to unaudited pro forma combined financial statements.
</TABLE>
55
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JULY 3, 1999 AND THE SIX MONTHS ENDED JANUARY 1, 2000
(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 net additional interest expense on new borrowings committed to
by a financial institution lender of $584 and $321 for the fiscal year
ended July 3, 1999 and the six months ended January 1, 2000, respectively,
at an assumed interest rate of 10%. Also, to reflect the elimination of
intercompany interest expense totaling $7,262 and $3,869 on the
intercompany debt owed by Duck Head to Delta Woodside and subsidiaries for
the fiscal year ended July 3, 1999 and the six months ended January 1,
2000, respectively. The effect of a 1/8 percent variance in the interest
rate on the new third party borrowing would be a $8 variance and a $4
variance in interest expense for the fiscal year ended July 3, 1999 and the
six months ended January 2, 1000, 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 six months ended
January 1, 2000. Also to reflect the replacement of Delta Woodside's
management fees with outside fees for 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 $294 (an
increase of $172 over the actual incurred expenses of this type of $122)
for the six months ended January 1, 2000.
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 outstanding on the record date.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION ANDRESULTS 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.
Duck Head breaks its product offerings into three categories: core, fashion
basics and fashion. Core product consists of basic pants and shirts in basic
colors that are offered year round. Most core goods are ordered on a
replenishment basis under which orders to replenish goods sold the previous week
are generated either through the customer's replenishment system or are vendor
managed by Duck Head and replenished through Duck Head's system. Fashion basic
product consists of basic products that are offered over a six-month shipping
season. Customers normally order fashion basics in one to three separate
deliveries or through replenishment based on sales within the six-month season.
Fashion goods consist of fashion oriented goods and are offered for one delivery
only. These goods are not stocked for replenishment.
During fiscal years 1997, 1998 and 1999, Duck Head generally offered twelve
fashion product deliveries per fiscal year. This resulted in fashion goods
constituting a much larger percentage of the total product offering. Prior to
fiscal year 1997, fashion goods had generally made up approximately 37% of the
total product offering. During fiscal years 1997, 1998 and 1999, fashion goods
made up between approximately 47% and 50% of the total product offering.
In addition, during fiscal years 1997 through 1999, in-store fixtures were
rapidly installed at major retailers, which secured good retail floor space for
Duck Head's products. 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. During the
third quarter of fiscal 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:
- Duck Head is in the process of instituting more effective quality
controls.
57
<PAGE>
- Duck Head has moved substantially all of its manufacturing operations
off-shore, and has begun more cost-effective utilization of its leased
facility in Costa Rica. The United States portion of Duck Head's cost
of garment assembly, whether in Duck Head's own manufacturing
facilities or through third-party contractors, has been reduced to
approximately 9% of the total cost of manufacturing and third-party
assembly during the first six months of fiscal 2000 as compared to
approximately 22% during fiscal year 1999. The United States component
currently consists of contract fabric cutting, garment dying and
garment repairs, while in previous years it also consisted of garment
sewing. This lower level of United States manufacturing is expected to
continue.
- Duck Head is in the process of developing a cost-effective
full-package sourcing operation to procure more of its product from a
variety of suppliers around the world. Under a full-package sourcing
operation, the supplier furnishes a finished garment with the purchase
commitment normally secured under a letter of credit arrangement in
favor of the supplier. The supplier owns the inventory until it is
delivered to the designated shipping point. Previously, most of Duck
Head's product was made either through its own manufacturing
facilities or through third party sewing contractors. Under this
approach, Duck Head acquired rolls of fabric from outside vendors, cut
the fabric in its own facilities and then sewed the garments in its
own manufacturing facilities in the United States or Costa Rica or had
the garments sewn in third party contractor facilities mostly in
Mexico or the Caribbean basin. This sourcing method required Duck Head
to procure the raw materials and to own the work-in-process
inventories, which resulted in inventory ownership covering the six to
ten weeks of the production process. During the first six months of
fiscal 2000, approximately 54% of Duck Head's sales were attributable
to products supplied under a full-package sourcing arrangement. The
advantages to Duck Head of acquiring product under a full-package
sourcing arrangement are that Duck Head does not need to invest in the
capital equipment used to make the full-packaged product; Duck Head's
investment in inventory is lower since it does not need to acquire raw
materials or have work in process for the full-packaged product; fewer
employees are required to administer a full-package operation than to
administer an internal manufacturing operation or third-party sewing
contractors; defective goods are less of a problem because the
supplier is required only to ship first quality goods to Duck Head;
and Duck Head has greater flexibility to determine the country and
facility where the goods are to be manufactured.
- Duck Head is seeking to develop a higher quality retail customer
distribution network. This would significantly reduce or eliminate
sales to several heavily promotional, lower-end retailers, which have
been the primary distribution network for Duck Head's excess core,
close-out fashion and close-out fashion basic product. Sales to such
lower-end retailers were 10% and 8% of total sales for the first six
months of fiscal year 2000 and fiscal year 1999, respectively, as
close-out fashion and fashion basic and excess core inventories are
being liquidated. Future sales to these channels are anticipated to be
below 5% of total net sales after the liquidation of current close-out
and excess inventories has been completed.
- Duck Head has 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.
- Duck Head is in the process of reducing its recent emphasis on fashion
product by increasing the core and fashion basic portion of its
product offering, lessening the fashion portion of its product mix and
reducing the number of fashion product deliveries per year. Duck Head
currently offers six fashion deliveries per year. During the first six
months of fiscal year 2000, the product mix consisted of 43% core, 30%
fashion basics and 27% fashion. During fiscal year 1999, the product
mix consisted of 44% core, 7% fashion basics and 49% fashion.
58
<PAGE>
- Duck Head is seeking to reduce margin support commitments by either
eliminating or negotiating downward the level of support given to the
retail customers benefitting from these commitments. During the first
six months of fiscal year 2000, the percentage of goods shipped under
margin support agreements was 43%, down from 48% in fiscal 1999. In
addition, Duck Head has successfully negotiated downward the level of
support resulting in an average decrease in the level of support of
two gross margin points in the first six months of fiscal year 2000 as
compared to fiscal year 1999.
- Duck Head has reduced its selling, general and administrative costs.
The primary components of this reduction are significantly lower
product development costs, more cost-effective marketing programs and
better utilization of distribution capacity through the provision of
distribution services to third parties. Duck Head is currently
utilizing approximately 35% of its distribution capacity. Duck Head
has made arrangements to begin contract distribution for a third party
which should increase the current volume in Duck Head's distribution
facility by 30%. Duck Head continues to search for additional third
party distribution opportunities to further increase the utilization
of its distribution capacity.
- Duck Head has begun implementation of a vendor managed inventory
system with its largest customer and with some of its other customers,
which Duck Head believes will yield significant sales growth as
consumer sales are more rapidly replenished. Under the vendor managed
inventory system, Duck Head maintains detail inventory levels and
model stock levels that it wishes to maintain at each individual store
of the customer. Weekly sales transactions are electronically sent by
the customer to Duck Head. Duck Head's system then determines the
amount of inventory that should be replenished to each store of the
customer and generates pre-authorized orders to replenish the stock
based on the previous week's sales and any adjustment to the model
stock levels that Duck Head determines are appropriate. Prior to the
implementation of the vendor-managed inventory system, the retailer
determined when and if a replenishment order was required. This
process led to delays and stock-outs which resulted in lost sales.
- Duck Head has implemented a more stringent inventory control process
to avoid building unnecessarily high inventory levels and to more
rapidly dispose of excess inventory.
- Duck Head has begun the development of distribution outside the eleven
Southeastern states where the Duck Head brand has historically had
stronger consumer acceptance.
- Duck Head is in the process of negotiating with two major accounts for
additional new markets outside of the Southeastern United States, with
the aim of completing these negotiations in the fourth quarter of
fiscal 2000.
FIRST SIX MONTHS OF FISCAL YEAR 2000 VERSUS FIRST SIX MONTHS OF FISCAL YEAR 1999
Net Sales.
Consolidated net sales for the six months ended January 1, 2000 totaled
$29.0 million, as compared to $38.3 million for the six months ended December
26, 1998, a decrease of 24.3%. A summary of Duck Head's net sales for the six
months ended January 1, 2000 and December 26, 1998 follows:
59
<PAGE>
Net Sales (in millions)
<TABLE>
<CAPTION>
Wholesale Retail Total
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Fiscal year 2000 ($) 20.6 8.4 29.0
- ---------------------------- -------------------------- -------------------------- --------------------------
Fiscal year 1999 ($) 28.4 9.9 38.3
- ---------------------------- -------------------------- -------------------------- --------------------------
(Decrease) ($) (7.8) (1.5) (9.3)
- ---------------------------- -------------------------- -------------------------- --------------------------
Percent (decrease) (27.3%) (15.1%) (24.3%)
- ---------------------------- -------------------------- -------------------------- --------------------------
</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 six months ended January 1, 2000 there were no
sales to Uptons, Inc., Mercantile Stores Company, Inc. or Dillard's, Inc., while
sales during the six months ended December 26, 1998 to these three accounts were
$2.5 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 sales during the first six months of fiscal 1999
including the initial shipments into several new Duck Head "shops" within major
retailers. Shipments to these same "shop" locations continued through the first
six months of fiscal 2000; however, they were $0.3 million lower as compared to
the higher levels in the initial shop set up. Private label sales decreased by
$1.7 million during the first six months of fiscal year 2000 as compared with
fiscal year 1999 as certain unprofitable segments of the private label business
were discontinued.
The decreases in Duck Head retail store sales resulted from a combination
of fewer stores being open during the six months ended January 1, 2000 as
compared with the six months ended December 26, 1998 and a comparable store
sales decrease of 6%. The comparable store sales decrease accounted for $0.5
million and lower sales due to fewer stores being open accounted for $1.0
million of the total retail store sales decrease during the six months ended
January 1, 2000, as compared to the six months ended December 26, 1998. During
the six months ended January 1, 2000 Duck Head opened 1 store and did not close
any stores, and at January 1, 2000 Duck Head operated 25 retail outlet stores
versus 27 stores at December 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 closing 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 to the extent that wholesale
distribution expands outside the Southeastern United States.
Gross Profit.
Consolidated gross profit and gross profit margin for the six months ended
January 1, 2000 were $9.0 million and 30.9%, respectively, as compared to $10.2
million and 26.5%, respectively, for the six months ended December 26, 1998, a
decrease in consolidated gross profit of 11.8%. Included in gross profit are
provisions for potentially obsolete or slow-moving inventory. Inventory is
evaluated for potentially obsolete or slow-moving items based on management's
analysis of inventory levels, sales forecasts and historical sales trends, and
additions to cost of sales are recorded as required.
Gross profit was $5.4 million and gross profit margin was 25.9% on
wholesale sales for the six months ended January 1, 2000, as compared to $6.2
million and 21.8%, respectively, for the six months ended December 26, 1998. The
$0.8 million decrease in gross profit was primarily due to lower sales,
partially offset by the higher gross profit margin. Included in gross profit
were provisions for potentially obsolete or slow-moving inventory of $0.4
million for the six months ended January 1, 2000 and $1.9 million for the six
months ended December 26, 1998, respectively. The increase in gross profit
margin was primarily due to lower provisions for potentially obsolete or
slow-moving inventory taken during the six months ended January 1, 2000, as
compared to the six months ended December 26, 1998, due to lower levels of
unsold fashion products remaining at season end.
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Gross profit was $3.6 million and gross profit margin was 43.2% on retail
sales for the six months ended January 1, 2000 as compared to $4.0 million and
39.8%, respectively, for the six months ended December 26, 1998. This $0.4
million decrease in gross profit was primarily due to lower sales, partially
offset by the higher gross profit margin. The increase in gross profit margin
was primarily due to the percentage of goods purchased from Duck Head licensees,
which are generally sold at lower gross profit margins, being a lower percentage
of the total sales during the first six months ended January 1, 2000 than they
were in the six months ended December 26, 1998 and due to the six months ended
December 26, 1998 sales including the closure of a large clearance store which
generated poor gross margins as its inventory was liquidated during this closing
process.
Selling General and Administrative Expenses.
During the six months ended January 1, 2000, selling, general and
administrative expenses were $10.4 million, as compared to $12.7 million during
the six months ended December 26, 1998, a decrease of 18.1%. For the six months
ended January 1, 2000, expenses in this category were 35.7% of net sales as
compared to 33.1% of net sales for the six months ended December 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 six months.
Wholesale selling, general and administrative expenses for the six months
ended January 1, 2000 decreased by $1.8 million as compared to the six months
ended December 26, 1998. The dollar decrease was due to reductions in all
selling, general and administrative expense categories. Duck Head expects this
lower selling, general and administrative expense level to continue.
Retail selling, general and administrative expenses for the six months
ended January 1, 2000 declined by $0.5 million as compared to the six months
ended December 26, 1998. The decrease was primarily due to fewer stores being
open in the six months ended January 1, 2000 as compared to the six months ended
December 26, 1998 and lower home office costs. Duck Head expects this lower
selling, general and administrative expense level to continue.
Operating Losses.
Operating losses for the six months ended January 1, 2000 were $0.2
million, as compared to $1.9 million operating losses for the six months ended
December 26, 1998.
Wholesale operating losses for the six months ended January 1, 2000 were
$0.8 million, as compared to operating losses of $2.3 million for the six months
ended December 26, 1998. Included in the wholesale operating losses for the six
months ended January 1, 2000 was $1.2 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 six months ended December 26, 1998 was $1.0
million which was primarily related to royalty income on license agreements.
As a result of the factors described above, retail operating income for the
six months ended January 1, 2000 was $0.6 million, as compared to $0.4 million
of operating income for the six months ended December 26, 1998.
Net Interest Expense. For the six months ended January 1, 2000 net interest
expense was $4.2 million, as compared to $3.7 million for six months ended
December 26, 1998. The increase in interest expense was primarily a result of
the higher average principal balance outstanding on affiliated debt.
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Taxes. The effective tax rate was (5.3)% for the six months ended January
1, 2000 as compared to the effective tax rate for the six months ended December
26, 1998 of (0.5)%. Although both periods reflected a pretax loss, during the
six months ended January 1, 2000 Duck Head incurred more state income taxes than
during the six months ended December 26, 1998.
Net Loss. Net loss for the six months ended January 1, 2000 was $4.7
million, as compared to $5.6 million for the six months ended December 26, 1998.
The decreased loss was due to the factors described above.
Inventories. Inventories decreased to $16.2 million at January 1, 2000 from
$24.7 million at July 3, 1999, a decrease of $8.5 million or 34.4%. 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. Capital expenditures of $0.3 million were made in the
six months ended January 1, 2000, as compared to $2.0 million of capital
expenditures during the first six months of the prior year.
Order Backlog.
Duck Head's order backlog at January 1, 2000 was $7.2 million, a 47%
decrease from the $13.7 million order backlog at December 26, 1998. The decrease
is due to a general decline in sales, the loss of three key customers and a
shift in customer order patterns to inventory replenishment programs for core
products and to some degree for fashion basic products. At December 26, 1998,
the order backlog for the three key accounts that are no longer Duck Head
accounts was $1.1 million. There was no backlog for these accounts at January 1,
2000. Under a replenishment program, goods are ordered for immediate shipment as
compared to orders being 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
greater use of replenishment programs may have caused a reduction in backlog
that is not indicative of a reduction in sales trend.
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 primarily related to arrangements with
several customers to return basic pants and replace them with basic shorts
during the spring season and to return basic shorts and replace them with basic
pants during the fall season, deductions taken by customers due to not adhering
to customer routing guide instructions and gross margin assistance given to
customers under gross margin support agreements. The majority of the gross
margin assistance was related to poor retail margins on Duck Head fashion
products.
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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. The comparable
store sales decrease accounted for $0.4 million and lower sales due to fewer
stores being open accounted for $3.1 million, respectively, of the total retail
store sales decrease during fiscal year 1999 as compared to 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. The $17.0
million decrease in gross profit was primarily due to provisions for potentially
obsolete or slow-moving inventory of $10.2 million being recorded for the year
ended July 3, 1999 as compared to $0.7 million being recorded for the year ended
June 27, 1998, lower sales volume, 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 increase in the
provision for potentially obsolete or slow-moving inventory was due primarily to
higher levels of unsold fashion goods remaining at 1999 fiscal year end than at
1998 fiscal year end. 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 own 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.
The decrease in gross profit margin was primarily due to the higher provision
for potentially obsolete or slow-moving inventory, higher returns and allowances
and charges taken to reduce production capacity.
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
profit margin. The decrease in gross profit margin was due to the percentage of
goods purchased from Duck Head licensees, which are generally sold at lower
gross profit margins, being a higher percentage of total sales in fiscal 1999
than they were in fiscal 1998 and a $0.2 million provision taken on potentially
slow-moving inventory.
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.
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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.
Impairment Charges.
Wholesale operations recognized impairment charges of $13.7 million during
the year ended July 3, 1999, of which $12.6 million related to the impairment of
goodwill and $1.1 million related to store fixtures taken out of service. No
impairment charges were recorded during the year ended June 27, 1998.
During fiscal year 1999 Duck Head experienced an adverse change in its
business climate. Net sales declined significantly, mainly due to the loss of
two major accounts. At fiscal year end there were excessive levels of unsold
fashion goods, which resulted in a $7.3 million inventory write-down. 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. Due to the diminished fair value of Duck Head, Delta Woodside
suspended its efforts to sell the business and hired new senior management to
develop a new business plan and restructure its operations. As a result, Duck
Head determined that an impairment loss should be recognized. Based upon the
offers received for the business and the further deterioration of the business,
Duck Head determined that its goodwill was impaired by $12.6 million and,
accordingly, recognized the impairment loss. The store fixtures taken out of
service during fiscal 1999 related primarily to the loss of two major accounts.
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. The wholesale operating losses include other income of $1.0 million in
fiscal year 1999 and $1.7 million in fiscal year 1998, respectively, primarily
related to royalties on the license of the Duck Head brand. The decrease in
royalty income was due to fewer licenses being active in fiscal year 1999 and
reduced royalties from one licensee due to the licensee's filing for protection
under the US bankruptcy code during fiscal year 1999.
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 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 third party debt. See
"Capitalization", "Unaudited Pro Forma Combined Financial Statements".
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Taxes. The effective tax rate for the year ended July 3, 1999 was (0.6)% as
compared to (1.9)% effective tax rate for the year ended June 27, 1998. The
higher tax rate for fiscal 1998 was primarily due to the different effects that
permanent non-deductible tax items had on the pre-tax losses in fiscal 1998, as
compared to the effect on pre-tax losses in fiscal 1999.
Net Loss. Net loss for the year ended July 3, 1999, was $47.7 million, as
compared to $8.4 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 $79.6 million for the year ended June 28, 1997, an
increase of 5.5%. A summary of Duck Head's net sales for the years ended July 3,
1999 and June 27, 1998 follows:
65
<PAGE>
<TABLE>
<CAPTION>
Net Sales (in millions)
Wholesale Retail Total
<S> <C> <C> <C>
Fiscal year 1998 ($) 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 primarily due to increased sales
of the "Duck Head" brand to the same customers and increases in private label
sales, mostly to new customers. Sales of "Duck Head" branded goods to the same
customers increased by $4.8 million or 9.8% in fiscal 1998 as compared to fiscal
1997, while private label sales increased by $2.0 million or 128% in fiscal 1998
as compared to fiscal 1997.
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. The comparable
store sales decrease accounted for $0.1 million and lower sales due to fewer
stores being open accounted for $2.2 million, respectively, of the total retail
store sales decrease during fiscal year 1998 as compared to 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 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. The increase in gross
profit margin was primarily due to lower returns and allowances.
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 $25.6 million during the year ended
June 28, 1997, an increase of $3.3 million or 12.9%. For the year ended June 27,
1998, expenses in this category were 34.5% of net sales as compared to 32.2% 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 $3.9 million as compared to the year ended June 28,
1997. The dollar increase was primarily due to increased marketing and
merchandising expenses.
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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.
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 (1.9)%
as compared to 6.9% effective tax rate for the year ended June 28, 1997.
Although both years reflected a pretax loss, fiscal year 1998 had tax expense
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 $8.4 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 the first six months of fiscal year 2000 and in each of fiscal years
1999, 1998 and 1997, Duck Head's source of liquidity and capital has been the
informal borrowing arrangement it has had with its parent company, Delta
Woodside. 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 $6.0 million of cash provided
in the first six months of fiscal 2000 as compared to $7.2 million of net cash
used in the first six months of fiscal 1999. Duck Head's operating activities
resulted in uses of cash of $16.0 million, $5.8 million and $1.0 million in
fiscal years 1999, 1998 and 1997, respectively. The cash provided in the first
six months of fiscal year 2000 was primarily the result of reductions in
inventories and receivables and was after the charge of interest due to Delta
Woodside on affiliated debt of $3.9 million in the first six months of fiscal
year 2000. The uses of cash in each of the fiscal years 1999, 1998 and 1997 and
the first six months of fiscal year 1999 were primarily associated with net
losses incurred in each of these years. These net losses included interest
charges on the affiliated debt of $7.3 million, $6.3 million, $6.0 million and
$3.2 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 $1.2 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 enter into a credit agreement with a lending
institution, under which the lender will provide Duck Head with a term
loan in the approximate amount of $5.8 million and a 3-year $15
million revolving credit facility. All loans under the credit
agreement will bear interest at rates based on an adjusted LIBOR rate
plus an applicable margin or a bank's 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 72 month amortization, with payment of all
outstanding principal and interest required upon earlier termination
of the credit facility.
- 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
January 1, 2000 (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 income 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 $9.1 million ($6.9 million less than the actual use of cash from
operations). The lower use of cash would have been due to $6.7 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 income statements, if
the Duck Head distribution had taken place at the beginning of fiscal year 1999,
cash provided by operating activities during the first six months of fiscal year
2000 would have been approximately $9.3 million. This $3.3 million increase in
cash provided by operations would have been due to lower interest payments on
the institutional lender debt as compared to the actual interest charged on the
affiliated debt.
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The pro forma balance sheet assumes that Delta Woodside contributes cash of
$6.3 million to Duck Head to fund the repayment of Duck Head's existing mortgage
debt, which came due and was paid on January 10, 2000.
Typically, Duck Head's peak borrowing needs are in the third fiscal
quarter. Duck Head anticipates that at the time it enters into its new credit
facility, it will owe amounts to the lender on Delta Woodside's existing credit
facility for borrowings made to fund Duck Head's working capital needs after
January 1, 2000. Any such borrowings will be refinanced by proceeds of Duck
Head's new credit facility.
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 borrowing needs for working capital purposes, including use of its credit
facility for letters of credit, will be approximately $7.5 million.
Approximately forty 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 $15 million
revolving credit facility should be sufficient to satisfy its foreseeable
working capital needs, and that the cash flow generated by its operations and
funds available under its revolving credit line should be sufficient to service
its debt payment requirements, to satisfy its day-to-day working capital needs
and to fund its planned capital expenditures. Any material deterioration in Duck
Head's results of operations, however, may result in Duck Head losing its
ability to borrow under its revolving credit facility and to issue letters of
credit to suppliers or may cause the borrowing availability under that facility
not to be sufficient for Duck Head's needs.
SUMMARY FINANCIAL INFORMATION FOR THIRD QUARTER OF FISCAL 2000 AS COMPARED TO
THIRD QUARTER OF FISCAL 1999
The following table summarizes Duck Head's results of operations for the
third quarter of fiscal year 2000 as compared to the third quarter of fiscal
year 1999.
<TABLE>
<CAPTION>
Net Sales Gross Profit Operating (Losses)
--------- ------------ ------------------
<S> <C> <C> <C>
Fiscal year 2000 ($) 13.6 4.6 0.4
- ---------------------------- -------------------------- -------------------------- --------------------------
Fiscal year 1999 ($) 15.7 3.5 4.1
- ---------------------------- -------------------------- -------------------------- --------------------------
Increase (Decrease) ($) (2.1) 1.1 3.7
- ---------------------------- -------------------------- -------------------------- --------------------------
Percent (decrease) (13.4%) 31.4%
- ---------------------------- -------------------------- -------------------------- --------------------------
</TABLE>
The decrease in net sales reflects a decrease in wholesale unit shipments,
which was due to the loss of two key accounts, reduced volume at other accounts
and the exit from certain segments of Duck Head's private label business,
partially offset by lower return and allowance charges, and an increase in Duck
Head retail store sales, which resulted from a combination of a comparable store
sales increase of 2% and one more store being open during the third quarter of
fiscal 2000 as compared to the third quarter of fiscal 1999.
Gross profit increased on wholesale sales primarily due to a higher gross
profit margin on sales to major accounts, reduced levels of close-out fashion
goods created and lower charges for sales returns and allowances, partially
offset by lower sales. Gross profit increased on retail sales primarily due to
higher sales and a higher gross profit margin.
The decrease in operating losses was due to the increased gross profits and
a $2.4 million reduction in selling, general and administrative expenses.
70
<PAGE>
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 $61,000 higher
in the fiscal year ended July 3, 1999 and approximately $32,000 higher in the
six months ended January 1, 2000. 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.
To date, Duck Head has spent approximately $0.6 million 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 incurring any material additional costs associated with the Year 2000
issue.
Duck Head has not suffered any material adverse effect as a result of the
Year 2000 problem.
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.
71
<PAGE>
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, sources, produces, markets and distributes boys' 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 26 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 April
1, 2000 had approximately 500 employees.
Products, Marketing and Manufacturing
-------------------------------------
Duck Head produces collections of men's and boys' 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 pants and long and short
sleeve, knitted and woven, shirts. In addition, Duck Head sells a relatively
small amount of men's and boys' 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 through the use of in-store shops.
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 Duck Head's lines and
differentiate the presentation of its products from those of other producers.
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. Duck
Head opened its first in-store Duck Head shop in April 1997 and now has in place
over 400 men's and 200 boys' shops in major department stores. 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 several 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,
hosiery and accessories. These arrangements require that the licensee pay Duck
Head a royalty fee for the use of the Duck Head trademark.
72
<PAGE>
"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 six months of fiscal year 2000 and fiscal 1999, 1998 and
1997, approximately 26%, 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
approximately 47 % of Duck Head's net sales in the first six months of fiscal
2000, 46% in fiscal year 1999, 45% in fiscal year 1998 and 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.
At 1999, 1998 and 1997 fiscal year ends, Duck Head's long-lived assets in Costa
Rica comprised 4.3%, 6.3% and 10.3%, respectively, of Duck Head's total net
property, plant and equipment.
"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. Approximately 30% of its garments are sewed in Duck
Head's own facilities. 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 product supply contract
with this company. Duck Head believes that there is ample production capacity
available through other outside vendors, that this third party contractor 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. Duck Head
recently entered into a four-year licensing contract with this third party (with
an option by the licensee to renew for an additional three years) whereby the
third party will manufacture and sell children's wear under the "Duck Head"
(reg. trademark) label. Duck Head has also recently made arrangements to begin
contract distribution for this third party which should increase the current
volume in Duck Head's distribution facility by 30%.
73
<PAGE>
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
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 26 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:
- Position its products in department stores on the main floor men's
area adjacent to other mid-price brands such as Chaps, Dockers and
Savanne. Duck Head believes that it currently enjoys the ability to
deliver excellent retail margins to its customers due to its
distribution strategy of selling primarily to better department and
specialty stores and the national chain stores.
- 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.
- Eliminate or negotiate more favorable margin support agreements with
its retailer customers.
- 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. During the six months of fiscal year 2000,
less than 2% of Duck Head's sales were private label sales.
- Improve the management of inventory.
74
<PAGE>
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 casual 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.
- 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, brand
recognition, 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,
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 should be reduced by implementation of the business
strategy described above under this heading "Business of Duck Head".
75
<PAGE>
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.
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 April 1, 2000, 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.
76
<PAGE>
Legal Proceedings
-----------------
All litigation to which Duck Head is a party is ordinary routine product
liability litigation or contract breach litigation incident to its business that
does not depart from the normal kind of such actions. Duck Head believes that
none of these actions, if adversely decided, would have a material adverse
effect on its results of operations or financial condition taken as a whole.
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, administrative
Winder, GA offices,
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 should be able to continue to use
this facility indefinitely.
(2) The "Duck Head" outlet stores operation leases 26 facilities in 9
states, which leased space is approximately 85,000 square feet. These leases
expire at various dates through 2006.
</FN>
</TABLE>
In addition, a sales office is leased in New York City, with the lease
expiring in December 2000.
Duck Head's accounts receivable and inventory, and certain other intangible
property, currently secure Delta Woodside's credit facility. In connection with
the Duck Head 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 Duck Head's 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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<PAGE>
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.
<TABLE>
<CAPTION>
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 (59) 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 and the Delta Apparel distribution,
Mr. Garrett will become President and Chief Executive Officer of Delta Woodside.
Mr. Garrett also serves as a director of Delta Woodside and Delta Apparel.
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<PAGE>
(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, until January 2000 was engaged in the consumer
finance business and is currently evaluating other business opportunities. 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 also 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 and the Delta Apparel 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 also 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 also 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.
79
<PAGE>
(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 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.
</FN>
</TABLE>
The Duck Head board is considering the establishment of a board governance
committee of the Duck Head board.
EXECUTIVE OFFICERS
The following provides information regarding the executive officers of Duck
Head
<TABLE>
<CAPTION>
NAME AND AGE POSITION AND EXPERIENCE
<S> <C>
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 (39) Senior Vice President, Chief Financial Officer, Secretary and Treasurer (3)
William B. Mattison, Jr. (56) Senior Vice President of Merchandising (4)
______________________
<FN>
(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.
</FN>
</TABLE>
Duck Head's executive officers are appointed by Duck Head's board of
directors and serve at the pleasure of Duck Head's Board.
80
<PAGE>
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
$100,000 (whom this document refers to collectively as the "Named Executives").
Each individual listed in the table worked exclusively for the Duck Head Apparel
Company division during fiscal year 1999 to the extent that individual was
employed during that period by any member of the Delta Woodside group of
corporations.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
Awards
Other Securities
Annual Underlying All Other
Fiscal Salary Bonus Compensation Options Compen-
Name and Principal Position Year ($) (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
Michael H. Prendergast
Senior Vice President of 1999 217,266 7,500 4,106 0 8,001 (g) (i)
Sales and Marketing of Duck Head
Apparel Company division
K. Scott Grassmyer 1999 120,914 15,000 1,123 12,000 (f) 5,239 (h) (i)
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.
81
<PAGE>
(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. For a description of the
compensation that Delta Woodside has agreed to pay Mr. Rockey for his service as
President and chief executive officer of Duck Head, see the material under the
sub-heading below, "Robert D. Rockey, Jr. Employment Contract". Duck Head will
assume Delta Woodside's obligations under this agreement in connection with the
Duck Head distribution.
(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. In addition, 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.
(h) 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 $3,050 earned on Mr. Grassmyer's
deferred compensation at a rate in excess of 120% of the federal mid-term rate.
(i) The Delta Woodside 401(k) Plan allocation shown for the fiscal year was
allocated to the participant's account during that fiscal year, although all or
part of the allocation may have been determined in whole or in part on the basis
of the participant's compensation during the prior fiscal year.
</FN>
</TABLE>
The amounts shown in the table above do not include the value of the
provision by Delta Woodside or its subsidiaries of an apartment, an automobile
or other property for the benefit of any of the Named Executives. The
non-business personal benefit to any Named Executive of these amounts does not
exceed 10% of the Named Executive's total salary and bonus.
82
<PAGE>
Option Grants in the Last Fiscal Year
-------------------------------------
The following table provides information respecting the grant to a Named
Executive during fiscal 1999 of options under the Delta Woodside Stock Option
Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------------- Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options Market of Stock Price
Underlying Granted to Exercise Price on Appreciation for Option
Options Duck Head or Base Date of Term (b)
Granted Employees in Price Grant Expiration 0% 5% 10%
Name (#) (a) Fiscal Year ($/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>
(a) These represent shares covered by an option granted during fiscal 1999
under Delta Woodside's Stock Option Plan. Under the plan, 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 was scheduled to
become 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 will be 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 expects to enter 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.
</FN>
</TABLE>
83
<PAGE>
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
Shares
Acquired FY-End
on Value Number of Securities Value of Unexercised
Exercise Realized Underlying Unexercised In-the-Money Options at
Name (#) ($) Options at FY-End (#) at FY-End ($)(a)
---- -------- -------- ----------------------- -----------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<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.
</FN>
</TABLE>
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, $250 for each
telephonic board and committee meeting in which the director participates and
$500 for each board meeting attended in addition to 4 quarterly board meetings.
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 and as of March 15, 2000. Under the letters:
84
<PAGE>
- 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 covering the lesser of (a) 75,000 Duck Head
shares or (b) Duck Head shares with a value on the date of grant of
$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. If the number of Duck Head shares covered by the award have
a value less than $200,000 on the date of grant, the difference
between that value and $200,000, plus a gross-up income tax amount,
will be paid in cash by Duck Head to Mr. Rockey.
- 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 will assume Delta Woodside's obligations under these letters in
connection with the Duck Head distribution.
Duck Head Stock Option Plan
---------------------------
Under the Duck Head stock option plan, the compensation committee (or, in
the case of at least 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.
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 at least 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.
85
<PAGE>
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 an
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 sales price of the shares at the time of disposition
over (b) the exercise price, and (ii) if the sales price of the stock at the
time of the early disposition exceeds the fair market value of the shares at the
time of exercise, the participant will also recognize capital gain income equal
to that excess.
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.
86
<PAGE>
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 an 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 February 14, 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.
Duck Head Incentive Stock Award Plan
------------------------------------
Under the Duck Head incentive stock award plan, the compensation committee
(or, in the case of at least 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.
87
<PAGE>
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.
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 that
counts against the Section 162(m) cap in excess of $1 million. Duck Head
anticipates that Mr. Rockey will probably receive more than $1 million in
aggregate annual compensation that counts against the $1 million deductibility
cap of Section 162(m). Accordingly, none of the compensation to Mr. Rockey that
is attributable to the vesting of incentive stock awards based on his being an
employee at specified dates will probably be deductible by Duck Head. Duck Head
expects, however, that the grants that are expected to be made to Mr. Rockey
under the plan that will vest in accordance with performance criteria will
probably satisfy the requirements 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).
88
<PAGE>
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 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 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.
89
<PAGE>
SECURITY OWNERSHIP OF SIGNIFICANT BENEFICIAL OWNERS
AND MANAGEMENT
Based on the beneficial ownership of Delta Woodside shares as of April 25,
2000, the following table sets forth what the beneficial ownership of Duck
Head's common stock would be immediately following the Duck Head distribution by
(i) any person that would beneficially own 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 sole voting and
investment power with respect to all shares of common stock of Duck Head shown
as beneficially owned by them. On April 25, 2000, 23,307,645 Delta Woodside
shares were outstanding, corresponding to 2,330,764 Duck Head shares. The table
does not include Duck Head shares that may be issued under the right granted to
Robert D. Rockey to acquire Duck Head shares six months after the Duck Head
distribution 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) 317,060 13.6%
600 Fifth Avenue
New York, New York 10020
Franklin Resources, Inc. (3) 224,000 9.6%
Franklin Advisory Services, LLC
Charles B. Johnson
Rupert H. Johnson, Jr.
777 Mariners Island Boulevard
San Mateo, California 94404
Dimensional Fund Advisors Inc. (4) 195,322 8.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
E. Erwin Maddrey, II (5)(21) 347,592 14.8%
233 North Main Street
Suite 200
Greenville, SC 29601
Bettis C. Rainsford (6)(21) 334,218 14.3%
108-1/2 Courthouse Square
Post Office Box 388
Edgefield, SC 29824
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Buck A. Mickel (7) (8)(21) 158,742 6.8%
Post Office Box 6721
Greenville, SC 29606
Micco Corporation (8) 124,063 5.3%
Post Office Box 795
Greenville, SC 29602
Minor H. Mickel (8) (9)(21) 157,804 6.8%
415 Crescent Avenue
Greenville, SC 29605
Minor M. Shaw (8) (10) 152,008 6.5%
Post Office Box 795
Greenville, SC 29602
Charles C. Mickel (8) (11) 149,694 6.4%
Post Office Box 6721
Greenville, SC 29606
William F. Garrett (12)(21) 27,171 1.2%
C. C. Guy (13)(21) 3,848 (20)
Dr. James F. Kane (14)(21) 4,055 (20)
Dr. Max Lennon (15)(21) 2,881 (20)
Michael H. Prendergast (16) 1,020 (20)
K. Scott Grassmyer (17) 2,971 (20)
William B. Mattison, Jr. (18) 0 (20)
All current directors and executive officers
as a group (11 Persons) (19)(21) 891,494 38.2%
<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 owner of approximately 29.4%
of the then outstanding Duck Head shares causing all directors and executive
officers as a group beneficially to own approximately 55.3% of the then
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, as amended, pursuant to which Mr. Rockey became Chairman,
President 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 covering the lesser of 75,000 Duck Head
shares or Duck Head shares 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."
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(2) This information is based on an amendment dated February 14, 2000 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 and as to which Reich & Tang has full voting and dispositive
power for as long as it retains management of the assets. According to the
amendment, each account has the right to receive and the power to direct the
receipt of dividends from, or the proceeds from the sale of, the Delta Woodside
shares. 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 an amendment dated January 19, 2000 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. 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 advisory contracts grant to
the applicable investment advisory subsidiary(ies) all 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. (whom 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, LLC
(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. The
amendment reported that Franklin Balance Sheet Investment Fund, a series of
Franklin Value Investors Trust, a company registered under the Investment
Company Act of 1940, has an interest in more than 5% of the class of securities
reported in the amendment.
(4) This information is based on an amendment to Schedule 13G dated
February 4, 2000 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. The amendment reports that Dimensional furnishes investment advice to
four investment companies and serves as investment manager to certain other
commingled group trusts and separate accounts, that all of the shares of Delta
Woodside's common stock were owned by such investment companies, trusts or
accounts, that in its role as investment adviser or manager Dimensional
possesses voting and/or investment power over the Delta Woodside shares
reported, that Dimensional disclaims beneficial ownership of such securities and
that, to the knowledge of Dimensional, no such investment company, trust or
account 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 a director of 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
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.
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<PAGE>
(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 Company and/or the Duck Head Apparel Company
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 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.
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(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 Anne 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 it is likely 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.
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<PAGE>
(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 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 it is likely 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 2,585 Delta Woodside shares (258 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 it is likely 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 directors and
executive officers on April 25, 2000 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 are not voted. Also includes 36,078 Delta Woodside shares (3,607
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 it is likely
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.
(21) Includes the Duck Head shares attributable to the Delta Woodside
shares that the Delta Woodside board of directors anticipates paying to certain
directors and key executives prior to the record date for the Duck Head
distribution and the Delta Apparel distribution, as described under "Interests
of Directors and Executive Officers in the Duck Head Distribution - Payments in
Connection with Duck Head Distribution and Delta Apparel Distribution." The
other notes above to the table do not include these Duck Head shares or the
Delta Woodside shares to which they relate.
</FN>
</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, as amended, pursuant to which Robert D.
Rockey, Jr. became Chairman, President 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. By reason of Section 162(m) of the Internal Revenue Code
(which limits the corporate income tax deduction of certain executive officer
compensation paid in excess of $1 million), 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 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 covering an aggregate
of approximately 202,500 Duck Head shares will be made and awards under the Duck
Head incentive stock award plan covering up to an aggregate of approximately
111,750 Duck Head shares will be made, including the following anticipated
option and award grants to the following executive officers of Duck Head:
<TABLE>
<CAPTION>
Name and Position Shares Covered by Options(1) Shares Covered by Awards(2)
----------------- ---------------------------- ---------------------------
<S> <C> <C>
Robert D. Rockey, Jr. 125,000 (3)
Chairman, President and Chief
Executive Officer
Michael H. Prendergast 20,000 10,000
Senior Vice President-Sales
K. Scott Grassmyer 20,000 10,000
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
William B. Mattison, Jr. 20,000 10,000
Senior Vice President-Merchandising
- -------------------------------------
<FN>
(1) The compensation grants 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 any option will be the stock's
closing market value at the date of grant. The compensation grants
committee anticipates that the options, other than the options anticipated
to be granted to Mr. Rockey, will vest over a four year period. The
compensation grants committee anticipates that the options granted to Mr.
Rockey will vest over a period ending March 8, 2001.
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(2) The compensation grants committee of the Duck Head board of directors
anticipates that, except for the anticipated award to Mr. Rockey, 20% of
each award will vest at the end of each of fiscal year 2000, fiscal year
2001 and fiscal year 2002 and up to the remaining 40% will vest at the end
of fiscal year 2002 to the extent that certain performance criteria based
on cumulative earnings before interest and taxes are met.
(3) The compensation grants committee anticipates that Mr. Rockey will be
granted incentive stock awards under the Duck Head incentive stock award
plan covering the lesser of (a) 75,000 Duck Head shares or (b) Duck Head
shares with a value on the date of grant of $200,000. These awards would
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 up to the
remaining 40% of the shares covered thereby if specified performance
criteria based on cumulative earnings before interest and taxes through
March 8, 2001 are satisfied. The compensation committee of the Duck Head
board of directors anticipates that, if the number of Duck Head shares
covered by the award have a value less than $200,000 on the date of grant,
the difference between that value and $200,000, plus a gross-up income tax
amount, would be paid in cash by Duck Head to Mr. Rockey.
</FN>
</TABLE>
For a description of the Duck Head stock option plan and the Duck Head
incentive stock award plan and the anticipated treatment under Section 162(m) of
the Internal Revenue Code of grants of options and awards under these plans, see
"Management of Duck Head - Management Compensation".
PAYMENTS IN CONNECTION WITH DUCK HEAD DISTRIBUTION AND DELTA APPAREL
DISTRIBUTION
In 1997, the Delta Woodside board of directors adopted and the Delta
Woodside stockholders approved the Delta Woodside long term incentive plan.
Under that plan, award grants could be made to key executives and non-employee
directors of Delta Woodside that, depending on the attainment of certain
performance measurement goals over a three-year period, could translate into
stock options for Delta Woodside shares being granted to participants in the
plan. In connection with the exercise of any option granted under the plan,
Delta Woodside would pay cash to the participant to offset the income taxes
attributable to the option exercise and to such cash payment, using an assumed
38% income tax rate.
No award grants complying with all the terms of the plan were made. Around
the time of adoption of the plan, however, Delta Woodside did identify the
individuals who would be plan participants, determined performance targets for
these individuals and communicated these actions to the affected individuals.
These communications also informed the participants that new three-year
performance goals would be established annually.
To take account of the communications previously made to the plan
participants, the fact that all three-year performance periods contemplated by
the plan would expire following consummation of the Delta Apparel and Duck Head
distributions and the efforts of the key executives and directors on behalf of
Delta Woodside leading up to the Duck Head distribution and the Delta Apparel
distribution, Delta Woodside's board (based on resolutions of its compensation
grants and compensation committees) has decided that, once the record date for
the Duck Head distribution and the Delta Apparel distribution is established,
Delta Woodside shares shall be issued and cash shall be paid prior to the Duck
Head and Delta Apparel record date, to those individuals who were intended
participants in the plan. These actions, which have been reflected in an
amendment to the long term incentive plan, provide that (a) Delta Woodside would
issue Delta Woodside shares and make cash payments to the individuals identified
for participation in the plan, (b) as a condition to receipt of those Delta
Woodside shares and that cash, those individuals would surrender any rights they
may have under the plan and (c) no further awards, options or Delta Woodside
shares would be granted or issued under the plan.
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<PAGE>
The number of Delta Woodside shares to be issued and the cash amounts to be
paid have been determined by Delta Woodside's compensation grants and
compensation committees and the Delta Woodside board. In determining the number
of Delta Woodside shares to be issued to each participant, the Delta Woodside
compensation grants committee, compensation committee and board used the closing
sale price of the Delta Woodside common stock on March 15, 2000 ($1.50 per
share).
The table below sets forth the Delta Woodside shares that would thereby be
issued and the cash that would thereby be paid to the individuals who are
directors or executive officers of Duck Head. The Delta Woodside board
anticipates that these Delta Woodside shares would be issued and this cash would
be paid prior to the record date for the Duck Head distribution and the Delta
Apparel distribution.
Name Delta Woodside Shares(#) Cash ($)
William F. Garrett 126,480 116,280
C.C. Guy 13,485 12,398
Dr. James F. Kane 13,485 12,398
Dr. Max Lennon 13,330 12,255
E. Erwin Maddrey, II 206,667 190,000
Buck A. Mickel 13,072 12,018
Bettis C. Rainsford 148,800 136,800
Shares would also be issued and cash would also be paid to the estate of Buck
Mickel (father of Buck A. Mickel), a member of the Delta Woodside board of
directors until his death in 1998, who participated in the early stages of that
board's strategic planning.
E. Erwin Maddrey, II is a participant in Delta Woodside's severance plan.
Upon the termination of Mr. Maddrey's services with Delta Woodside (which is
anticipated to occur on or about the time of the Duck Head distribution and the
Delta Apparel distribution), Delta Woodside will pay Mr. Maddrey $147,115 of
severance in accordance with the normal provisions of this plan.
On or about the time of the Duck Head distribution and the Delta Apparel
distribution, William F. Garrett will become the President and Chief Executive
Officer of Delta Woodside. In recognition of Mr. Garrett's past service to Delta
Woodside and in order to provide him with an additional incentive to remain with
Delta Woodside, the Delta Woodside board has authorized the payment to him of
$100,000 in connection with the Duck Head distribution and the Delta Apparel
distribution and the payment to him of six additional annual payments of
$150,000 each, with the first of these annual payments to be made in October
2000. Mr. Garrett will forfeit any of these payments remaining to be made in the
event that he voluntarily leaves employment with Delta Woodside or such
employment is terminated by Delta Woodside for cause. Any remaining amounts
payable to him under the arrangement will be paid to him in the event of his
death or disability or in the event there is a change of control of Delta
Woodside and he does not remain with Delta Woodside.
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EARLY EXERCISABILITY OF AND OTHER AMENDMENTS OF DELTA WOODSIDE STOCK OPTIONS AND
AMENDMENTS TO DEFERRED COMPENSATION PLAN
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 provides that:
(i) all unexercisable portions of the holder's Delta Woodside stock options
become immediately exercisable in full five (5) business days prior to the
Duck Head record date, which will permit 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 option that remains unexercised as of the
Duck Head record date will remain exercisable for only Delta Woodside
shares, and for the same number of Delta Woodside 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).
Delta Woodside anticipates that all holders of outstanding options under
the Delta Woodside stock option plan will probably enter into the proposed
amendment.
As a result of these amendments, options for Delta Woodside shares will
become 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:
Name Number of Delta Woodside shares covered by portion of stock
---- -----------------------------------------------------------
options the exercisability of which will be accelerated
-------------------------------------------------------
William F. Garrett 37,500
Michael H. Prendergast 6,000
K. Scott Grassmyer 9,000
Also, in connection with the Duck Head distribution, Delta Woodside has
added a provision to the Delta Woodside stock option plan that provides that, so
long as a Duck Head employee who holds Delta Woodside stock options remains an
employee of Duck Head or any of its subsidiaries, those Delta Woodside stock
options will remain outstanding until the end of their stated term. This
amendment will apply to all Delta Woodside stock options currently held by Mr.
Prendergast (under which he can acquire an aggregate of 9,000 Delta Woodside
shares) and Mr. Grassmyer (under which he can acquire an aggregate of 12,000
Delta Woodside shares).
In connection with the Duck Head distribution, each participant in Delta
Woodside's deferred compensation plan will be provided with the opportunity to
receive all or part of his or her vested deferred compensation account in cash
in exchange for consenting to an amendment to the deferred compensation plan.
Under the plan amendment, only the corporation that employs the participant, and
not any other member of Delta Woodside's current group of corporations, will be
responsible in the future for the participant's deferred compensation. Delta
Woodside anticipates that each director and officer of Duck Head will consent to
the proposed plan amendment and will choose to continue to defer his or her
vested deferred compensation account under the amended plan.
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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 (233 North Main, Inc.), one-half of the stock of
which is owned by each of E. Erwin Maddrey, II (a director and significant
stockholder 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 the Delta Apparel distribution) and a director and
significant stockholder 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 and the Delta Apparel distribution)).
Mr. Maddrey and Ms. Greer are also the directors and executive officers of 233
North Main, Inc. 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, 233 North Main, Inc. and Delta Woodside have agreed that this
lease will terminate on the Duck Head and Delta Apparel distribution date in
exchange for the payment by Delta Woodside to 233 North Main, Inc. of $135,268.
Following the Duck Head and Delta Apparel 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 and significant stockholder 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
position she will resign in connection with the Duck Head distribution and the
Delta Apparel 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 and Delta
Apparel 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 and significant stockholder 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 were 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 and significant
stockholder 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 the Delta Apparel distribution) and a director
and significant stockholder of Delta Woodside) and Bettis C. Rainsford (a
director and significant stockholder 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 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.
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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 a date on or about the date the Duck Head
distribution and the Delta Apparel distribution occur, that individual's First
Refusal Agreement will terminate and, if the individual desires, 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.
EMPLOYEE BENEFIT SERVICES
On or about the date of the Duck Head distribution, Duck Head anticipates
engaging Carolina Benefits Services, Inc. to provide payroll processing and
401(k) plan administration services for Duck Head. Carolina Benefits Services,
Inc. is owned by E. Erwin Maddrey, II (a director and significant stockholder 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 the Delta Apparel distribution) and a director and significant
stockholder 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 and the Delta Apparel distribution)). Ms. Greer
is also an executive officer of Carolina Benefits Services, Inc.
For the services to be provided by Carolina Benefits Services, Duck Head
anticipates paying fees based on the numbers of employees, 401(k) plan
participants and plan transactions and other items. Duck Head anticipates that
on an annual basis these fees will be approximately $46,000. Duck Head elected
to engage Carolina Benefits Services to provide these services after receiving
proposals from other providers of similar services and determining that Carolina
Benefits Services' proposal was Duck Head's least costly alternative.
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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 $10.00 per quarter share (equivalent to $40.00 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.
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 on the date that is six months after the Duck Head
distribution. The rights agreement provides that any acquisition of Duck Head
shares by Mr. Rockey upon exercise of this right 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 shall also be or become the
beneficial owner of more than 10% of the Duck Head shares outstanding after the
exercise of his right, in addition to the Duck Head shares acquired upon
exercise of that right. 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 January 20, 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 Duck Head 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
share of Duck Head common stock per Right, subject to adjustment as provided in
the rights agreement.
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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 Duck Head board of directors) by the Duck Head board of
directors at any time prior to 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 Duck Head 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 Duck Head 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 for federal
income tax purposes 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) or for
common stock of an acquiring company as described above or in the event the
Rights are redeemed by Duck Head.
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 Duck Head board of
directors to cure any ambiguity, defect or inconsistency, to make changes that
do not adversely affect the interests of holders of Rights (excluding the
interests of any Acquiring Person), or to shorten or lengthen any 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.
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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 Duck Head 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.
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
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.
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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 by 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.
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.
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Indemnification of Directors
Duck Head's bylaws provide that Duck Head shall indemnify its directors and
officers (and each person who at its request served as an officer or director of
another entity) 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 a proceeding in advance of its final disposition to
the fullest extent authorized by Georgia law.
Duck Head's bylaws provide that it may 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 and advancement of expenses provisions described above
are set forth in Duck Head's bylaws as a contractual right of Duck Head's
directors and officers.
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 of stockholders 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 or by unanimous written consent. The fact that
holders of Duck Head voting stock are unable to call a special meeting or to
take action without a meeting except by unanimous written consent may make it
more difficult for stockholders to take action opposed by Duck Head's board of
directors.
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
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- 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;
- any material interest of the stockholder in the item of business;
- a description of all arrangements and understandings between the
stockholder and any other person or persons (with the name of the
persons) pursuant to which the proposal is made by the stockholder;
and
- such other information as Duck Head may reasonably request.
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 the issuance of 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 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.
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<PAGE>
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 Georgia corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of five years after the date 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 outstanding 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 or share exchange of the corporation or any
subsidiary with any interested stockholder or an affiliate of any
interested stockholder;
109
<PAGE>
- a sale, lease, transfer or other disposition (other than in the
ordinary course of business) in one or a series of transactions to any
interested stockholder or an affiliate or associate of an interested
stockholder of any assets of the corporation or any of its
subsidiaries with an aggregate book value of 10% or more of the
corporation's net assets;
- an issuance or transfer by the corporation or its subsidiaries to any
interested stockholder or its affiliates or associates 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
total market value of the outstanding common and preferred stock of
the corporation (except pursuant to the exercise of rights granted
proportionately to other stockholders and for convertible or
exercisable rights outstanding prior to the time that the person
became an interested stockholder);
- the adoption of any plan or proposal for the liquidation or
dissolution of the corporation;
- any reclassification of securities or merger or consolidation of the
corporation or its subsidiaries that has the effect of increasing by
5% or more the proportionate amount of equity securities of the
corporation or its subsidiaries beneficially owned by the interested
stockholder or its affiliates; and
- any other transaction (other than in the ordinary course of business)
resulting in a disproportionate financial benefit to the "interested
stockholder" or its affiliates or associates.
Under this statute, an "interested stockholder" is a person who
beneficially owns 10% or more of the corporation's outstanding voting stock or
is an affiliate of the corporation and within the two prior years beneficially
owned 10% or more of the corporation's then outstanding 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.
110
<PAGE>
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 Duck Head shares of common stock.
111
<PAGE>
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 by the earlier of July
7, 2000 or ten days after notice or public disclosure of the date of the meeting
is made or given to stockholders. After that date, the proposal will not be
considered timely. Stockholders submitting proposals for inclusion in the proxy
statement and form of proxy must comply with the Exchange Act and all
stockholders submitting proposals or nominations for director must comply with
the bylaw requirements described under the headings "Description of Duck Head
Capital Stock - Nominations of Directors" and "Description of Duck Head Capital
Stock - Stockholder Proposals".
FORWARD-LOOKING STATEMENTS MAY NOT BE ACCURATE
This document, particularly the material under the headings "Risk Factors",
"Trading Market", "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. KPMG LLP also
serves as tax advisors to Duck Head.
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.
112
<PAGE>
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.
<PAGE>
<TABLE>
<CAPTION>
DUCK HEAD APPAREL COMPANY
INDEX TO COMBINED FINANCIAL STATEMENTS
<S> <C>
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
January 1, 2000 (unaudited) F-18
Condensed Combined Statements of Operations and
Accumulated Divisional Deficit for the Six Months
Ended January 1, 2000 and December 26, 1998 (unaudited) F-19
Condensed Combined Statements of Cash Flows for the
Six Months ended January 1, 2000 and
December 26, 1998 (unaudited) F-20
Notes to Unaudited Condensed Combined Financial
Statements (unaudited) F-21
</TABLE>
<PAGE>
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. In connection with our audit of the combined financial statements, we
also have audited the schedule of valuation and qualifying accounts for each of
the years in the three year period ended July 3, 1999. These combined financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements and financial statement schedule 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 its cash flows for each of the years in the three-year period ended July 3,
1999, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic combined financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Atlanta, Georgia
August 13, 1999
F-1
<PAGE>
<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
--------- ---------
Total current assets 34,475 41,574
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
--------- ---------
$ 46,394 75,383
========= =========
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) 98,190 79,176
Income taxes payable 261 141
--------- ---------
Total current liabilities 114,373 89,145
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
Other liabilities 732 770
--------- ---------
Total liabilities 138,341 119,616
Divisional deficit (91,947) (44,233)
Commitments (notes 9, 10 and 11)
--------- ---------
$ 46,394 75,383
========= =========
</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, except per share amounts)
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 25,624
Intercompany management fees (note 8) 777 882 772
Impairment charges (note 2) 13,650 --- ---
Royalty and other income (1,027) (1,746) (1,439)
----------- --------- ---------
Operating (loss) income (39,231) (1,251) 1,294
----------- --------- ---------
Interest (income) expense:
Interest expense, net 960 616 225
Intercompany interest expense (note 8) 7,262 6,335 5,958
----------- --------- ---------
8,222 6,951 6,183
----------- --------- ---------
Loss before income taxes (47,453) (8,202) (4,889)
Income tax expense (benefit) - (note 7) 261 159 (337)
----------- --------- ---------
Net loss (47,714) (8,361) (4,552)
Accumulated divisional deficit, beginning of year (44,233) (35,872) (31,320)
----------- --------- ---------
Accumulated divisional deficit, end of year $ (91,947) (44,233) (35,872)
=========== ========= =========
Unaudited pro forma net loss per share:
(note 2(k)):
Basic and diluted $ (19.88)
===========
Basic and diluted weighted-average common shares outstanding $2,400,000
===========
</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 $(47,714) (8,361) (4,552)
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
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) 10,275
Other liabilities (39) 121 (20)
--------- --------- ---------
Net cash used in operating activities (15,983) (5,769) (955)
--------- --------- ---------
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 (4,588)
--------- --------- ---------
Net cash provided by financing activities 16,549 13,643 2,581
--------- --------- ---------
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 (first-in, first out) or
market. The Company evaluates inventory for potentially obsolete or
slow-moving items based on management's analysis of inventory levels,
sales forecasts and historical sales trends, and records provisions to
cost of sales as required.
The Company adopted the first-in, first-out (FIFO) method of
determining the cost of inventories. The Company had previously
recorded such inventories using the last-in, first-out (LIFO) method.
The Company has experienced a significant decline in prices and level
of finished goods recently, the majority of the manufacturing
component of inventory has moved to lower cost off-shore facilities,
and the Company's inventory mix is shifting more to purchased matches
current costs with current revenues in periods of price-level
decreases. LIFO inventory made up 56% and 69% of the inventories at
July 3, 1999 and June 27, 1998, respectively. All periods presented
have been restated to reflect the retroactive application of this
accounting change as provided by the special exemption for an initial
public distribution in APB Opinion 20, "Accounting Changes". The
accounting change increased the net loss by $38, $465 and $90 in
fiscal 1999, 1998, and 1997, respectively.
F-5 (Continued)
<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 revised its estimate of the
useful lives of certain active store fixtures from five years to two
years and computer equipment from seven years to three years and the
salvage values related to these assets. The reduction in the useful
life of the active store fixtures was based on the actual time these
assets are expected to be deployed in the stores. The reduction in the
salvage value of the store fixtures was to reflect actual losses the
Company was experiencing on store fixtures that were either returned,
damaged or disposed of by customers. The reduction in the useful life
of the computer equipment was to reflect current technological
changes. These changes had the effect of increasing the operating loss
for 1999 by $3,926 or $1.64 per share.
(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. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
In 1999, the Company recorded an impairment charge of $1,069, which is
reflected in impairment charges in the combined statements of
operations and accumulated divisional deficit, relating to store
fixtures that were abandoned due to the loss of two of the Company's
major accounts. The loss was determined based on the estimated salvage
value of the store fixtures. This loss was reflected in the Company's
wholesale operations segment.
(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 fiscal year end there were excessive levels of
unsold fashion goods which resulted in an additional $7.3 million
inventory write-down. Total inventory write-downs for the fiscal year
were $10.4 million. 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. The Company projected future cash flows for the
next ten years using its business plan for fiscal 2000 and 2001 that
was approved by DWI's Board of Directors. The cash flow projections
for fiscal 2002 through 2009 were based on the Company's business plan
for fiscal 2000 and 2001, assuming a 5% growth rate, which management
believes to be reasonable.
F-6 (Continued)
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(g) REVENUE RECOGNITION
Sales of goods are recognized upon shipment of the goods to the
customer. The Company estimates merchandise returns based on
historical returns as a percentage of sales applied to current
accounts receivable and provides allowances for markdowns based on
actual margins being incurred by customers.
(h) RELATED PARTY TRANSACTIONS
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, and 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.
(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) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs amounted
to $7,128, $3,229 and $3,644 in fiscal 1999, 1998 and 1997,
respectively.
(k) COMPUTATION OF UNAUDITED PRO FORMA NET LOSS PER SHARE
The Company has presented the unaudited historical pro forma net loss
per share pursuant to SFAS 128, Earnings per Share. Pursuant to SFAS
128, unvested stock is excluded from basic earnings per share and
included in diluted earnings per share if dilutive. The unaudited
historical pro forma net loss per share is calculated by dividing the
historical net loss by the unaudited pro forma weighted-average common
shares outstanding. The unaudited pro forma weighted-average common
shares outstanding was determined assuming a distribution of one share
of Duck Head Apparel common stock for every ten shares of DWI stock
outstanding on the record date. The weighted-average shares do not
include securities that would be anti-dilutive for each of the periods
presented.
F-7 (Continued)
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(l) 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.
(m) 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.
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of
an Enterprise with Related Information. SFAS 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 131 is
effective for financial statements for fiscal years beginning after
December 31, 1997. The Company has adopted SFAS 131 for fiscal
year-end July 3, 1999 and has applied it for all periods presented.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, which was subsequently deferred by
SFAS 137. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133 is effective for
all fiscal years beginning after June 15, 2000. The Company will
determine the applicability of SFAS 133 and apply it if necessary.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
F-8 (Continued)
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
ESTIMATED JULY 3, JUNE 27,
USEFUL LIFE 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
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
========= =========
</TABLE>
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1999 1998
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
F-9 (Continued)
<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:
<TABLE>
<CAPTION>
JULY 3, JUNE 27,
1999 1998
========= ========
<S> <C> <C>
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
========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ --- --- (263)
State 261 159 (74)
-------- -------- --------
Total current 261 159 (337)
-------- -------- --------
Deferred:
Federal --- --- ---
State --- --- ---
-------- -------- --------
Total deferred --- --- ---
-------- -------- --------
Income tax expense (benefit) $ 261 159 (337)
======== ======== ========
</TABLE>
F-10 (Continued)
<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 170 103 (48)
Valuation allowance adjustments 12,652 3,212 1,755
Foreign subsidiary adjustment 208 206 129
Non-deductible amortization and other permanent
differences 4,566 - -
Other (726) (460) (483)
--------- --------- ---------
Income tax expense (benefit) $ 261 159 (337)
========= ========= =========
</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 $ 28,898 21,048
Inventories 4,883 2,500
Depreciation 1,481 -
Currently nondeductible accruals 1,546 1,355
--------- ---------
Gross deferred tax assets 36,808 24,903
Less valuation allowance (36,764) (24,112)
--------- ---------
Net deferred tax assets 44 791
--------- ---------
Deferred tax liabilities:
Depreciation --- (549)
Other (44) (242)
--------- ---------
Deferred tax liabilities (44) (791)
--------- ---------
Net deferred tax liability $ --- ---
========= =========
</TABLE>
F-11 (Continued)
<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 $36,764 and $24,112, respectively. The net change in the total
valuation allowance for the years ended July 3, 1999 and June 27, 1998 was
an increase of $12,652 and $3,212, 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 $67.8 million for Federal purposes as calculated under the
corporate tax sharing arrangement. The Company also has state net operating
loss carryforwards of approximately $80.5 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. $118,719 101,601
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
-------- --------
$118,804 101,853
======== ========
</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 (Continued)
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
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:
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
- ----------- --------- -------
<S> <C> <C>
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
=======
</TABLE>
Rent expense for all operating leases was approximately $2,005, $2,181, and
$2,634 for fiscal years 1999, 1998 and 1997, respectively.
(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.
F-13 (Continued)
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
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.
The new Duck Head Apparel Company will establish a Stock Option Plan,
covering a total of 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.
F-14 (Continued)
<PAGE>
DUCK HEAD APPAREL COMPANY
Notes to Combined Financial Statements
Three Years ended July 3, 1999
(Amounts in thousands)
(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. 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:
F-15
<PAGE>
<TABLE>
<CAPTION>
WHOLESALE OUTLET RETAIL TOTAL
----------- -------------- --------
<S> <C> <C> <C>
1999
Revenues $ 54,094 16,548 70,642
Impairment charges 13,650 - 13,650
Operating (loss) (38,495) (736) (39,231)
Total assets 43,482 2,912 46,394
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 69,631 5,752 75,383
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
Total assets 69,067 7,261 76,328
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.
(15) PLANT AND STORE CLOSURE COSTS
During the third quarter of fiscal 1998, management adopted a plan to close
several retail outlet stores and to close two plants in Costa Rica. The
closure of the retail outlet stores was completed in the third quarter of
fiscal 1999. The closure of the plants in Costa Rica was completed during
the first quarter of fiscal 1999. Accordingly, during the third quarter of
fiscal 1998, the Company recognized restructuring charges of $1,400. The
charge for the retail and outlet stores of approximately $900 includes the
remaining lease payments for the stores and severance payments. The charge
for the Costa Rica facilities of approximately $500 was to cover the
expected loss on the disposal of the land, buildings, equipment and
machinery and for severance payments.
F-16
<PAGE>
(16) 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 $ 21,888 16,418 15,680 16,656
Gross profit 7,014 3,132 3,533 (5,505)
Operating income (loss) 1,544 (3,420) (4,050) (33,305)
Net loss (316) (5,308) (5,940) (36,150)
</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 (427) (824) (2,513) (4,597)
</TABLE>
During the fourth quarter of fiscal 1999, the Company recognized impairment
charges of $12,581 related to goodwill and $1,069 related to store fixtures
taken out of service.
F-17 (Continued)
<PAGE>
DUCK HEAD APPAREL COMPANY
Condensed Combined Balance Sheet
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
JANUARY 1,
ASSETS 2000
------------
<S> <C>
Current assets:
Cash $ 179
Accounts receivable, less allowances of $1,594 3,995
Affiliate receivables 3,198
Inventories 16,211
Prepaid expenses and other current assets 256
------------
Total current assets 23,839
Property, plant and equipment, net 9,948
------------
$ 33,787
============
LIABILITIES AND DIVISIONAL DEFICIT
Current liabilities:
Accounts payable $ 2,692
Accrued expenses 3,944
Current portion of long-term debt 6,289
Current portion of capital leases 56
Due to Parent and affiliates 92,339
Income taxes payable 1,081
------------
Total current liabilities 106,401
Long-term portion of capital leases 28
Due to Parent 23,178
Other liabilities 790
------------
Total liabilities 130,397
Divisional deficit (96,610)
------------
$ 33,787
============
</TABLE>
See accompanying notes to condensed combined financial statements.
F-18
<PAGE>
DUCK HEAD APPAREL COMPANY
Condensed Combined Statements of Operations andd Accumulated Divisional Deficit
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 26,
2000 1998
-------------- -------------
<S> <C> <C>
Net sales $ 28,993 38,306
Cost of goods sold 20,030 28,160
-------------- -------------
Gross profit 8,963 10,146
Selling, general and administrative expenses 10,351 12,690
Intercompany management fees - 377
Royalty and other income (1,166) (1,045)
-------------- -------------
Operating loss (222) (1,876)
-------------- -------------
Interest (income) expense:
Interest expense, net 338 502
Intercompany interest expense, net 3,869 3,215
-------------- -------------
4,207 3,717
-------------- -------------
Loss before income taxes (4,429) (5,593)
Income tax expense (benefit) 234 31
-------------- -------------
Net loss (4,663) (5,624)
Accumulated divisional deficit, beginning of period (91,947) (44,233)
-------------- -------------
Accumulated divisional deficit, end of period $ (96,610) (49,857)
============== =============
Pro forma net loss per share:
(Note 5):
Basic and diluted $ (1.94)
==============
Basic and diluted weighted-average common shares outstanding 2,400,000
==============
</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 SIX MONTHS ENDED
-----------------------------
JANUARY 1, DECEMBER 26,
2000 1998
-------------- -------------
<S> <C> <C>
Operating activities:
Net loss $ (4,663) (5,624)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 1,579 1,874
Amortization - 229
(Gain) Loss on sale of property and equipment (58) 31
Provision for losses on accounts receivable (24) 121
Changes in operating assets and liabilities:
Trade accounts receivable 2,809 2,175
Inventories 8,510 (1,971)
Prepaids and other current assets (83) (2,616)
Accounts payable (1,157) (1,188)
Accrued expenses (1,770) (300)
Income taxes payable 820 (423)
Other liabilities 58 528
-------------- -------------
Net cash provided by (used in) operating activities 6,021 (7,164)
-------------- -------------
Investing activities:
Purchases of property, plant and equipment (251) (1,983)
Proceeds from sale of property, plant and equipment 813 582
-------------- -------------
Net cash provided by (used in) investing activities 562 (1,401)
-------------- -------------
Financing activities:
Change in obligations under capital leases, net (29) (114)
Principal payments on long-term debt (126) (63)
Change in due to Parent and affiliates, net (6,485) 8,602
-------------- -------------
Net cash (used in) provided by financing activities (6,640) 8,425
-------------- -------------
Decrease in cash (57) (140)
Cash at beginning of period 236 272
-------------- -------------
Cash at end of period $ 179 132
============== =============
Supplemental disclosure of cash flow information - interest paid
$ 338 503
============== =============
</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
six months ended January 1, 2000 and December 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 January 1, 2000, and the results of its
operations and its cash flows for the six months ended January 1, 2000 and
December 26, 1998, respectively. The results for the six months ended
January 1, 2000 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 (first-in, first-out) or
market. The Company evaluates inventory for potentially obsolete or
slow-moving items based on management's analysis of inventory levels, sales
forecasts and historical sales trends, and records provisions to cost of
sales as required.
INVENTORIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
JANUARY 1,
2000
----------
<S> <C>
Raw materials $ 654
Work in process 1,546
Finished goods 14,011
----------
$ 16,211
==========
</TABLE>
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 January 1, 2000 and December 26, 1998
and for the six months ended January 1, 2000 and December 26, 1998 is
presented below.
<TABLE>
<CAPTION>
WHOLESALE OUTLET RETAIL TOTAL
--------- ------------- -------
<S> <C> <C> <C>
SIX MONTHS ENDED JANUARY 1, 2000
Revenues $ 20,615 8,378 28,993
Operating income (loss) (779) 557 (222)
Total assets 30,888 2,899 33,787
Capital expenditures 334 (83) 251
Depreciation and amortization 1,466 113 1,579
SIX MONTHS ENDED DECEMBER 26, 1998
Revenues $ 28,357 9,949 38,306
Operating income (loss) (2,260) 384 (1,876)
Total assets 75,946 4,449 80,395
Capital expenditures 1,859 124 1,983
Depreciation and amortization 1,899 204 2,103
</TABLE>
(4) CUSTOMER CONCENTRATION
During the six months ended January 1, 2000 and December 26, 1998
approximately 25.8% and 24.6% of the Company's sales were to one customer.
In addition, during the same six month periods 47.0% and 45.1% of the
Company's sales were made to its five largest customers.
(5) COMPUTATION OF PRO FORMA NET LOSS PER SHARE
The Company has presented the unaudited historical pro forma net loss per
share pursuant to SFAS 128, Earnings per Share. Pursuant to SFAS 128,
unvested stock is excluded from basic earnings per share and included in
diluted earnings per share if dilutive. The unaudited historical pro forma
net loss per share is calculated by dividing the historical net loss by the
unaudited pro forma weighted-average common shares outstanding. The
unaudited pro forma weighted-average common shares outstanding was
determined assuming a distribution of one share of Duck Head Apparel common
stock for every ten shares of DWI stock outstanding on the record date.
The weighted average shares do not include securities that would be
anti-dilutive for each of the periods presented.
F-22
<PAGE>
