UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________
Commission File number 1-15585
DUCK HEAD APPAREL COMPANY, INC.
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(Exact name of registrant as specified in its charter)
GEORGIA 58-2510086
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1020 Barrow Industrial Pkwy,
Winder, Georgia 30680
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(Address of principal executive offices) (Zip Code)
(770) 867-3111
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(Registrant's telephone number, including area code)
(Not Applicable)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 Par Value--2,407,213 shares as of October 31, 2000
INDEX
DUCK HEAD APPAREL COMPANY, INC.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Page
----
Condensed consolidated balance sheets--
September 30, 2000 and July 1, 2000 2
Condensed consolidated statements of operations--
Three months ended September 30, 2000 and
October 2, 1999 3
Condensed consolidated statements of cash flows
Three months ended September 30, 2000 and
October 2, 1999 4
Notes to condensed consolidated financial
statements- September 30, 2000 5-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-9
Item 3. Quantitative and Qualitative Disclosures about Market 9
Risk
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Securities Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DUCK HEAD APPAREL COMPANY, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
(Unaudited)
SEPTEMBER 30, JULY 1,
ASSETS 2000 2000
---------------- ---------------
Current assets:
Cash $ 2,633 1,275
Accounts receivable, less allowances of
$996 in September 2000 and $1,219 in July 2000 4,973 3,191
Inventories (note 2) 14,339 17,766
Prepaid expenses and other current assets 316 269
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Total current assets 22,261 22,501
Property, plant and equipment, net 10,469 10,842
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$ 32,730 33,343
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,216 1,621
Accrued expenses 3,913 4,161
Current portion of long-term debt 960 960
Revolving credit facility 149 --
Income taxes payable 28 --
---------------- ---------------
Total current liabilities 6,266 6,742
Long-term debt 4,400 4,640
Other liabilities 348 798
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Total liabilities 11,014 12,180
Stockholders' equity:
Preferred stock,2,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $0.01 par value; 9,000,000 shares authorized;
2,407,213 issued and outstanding at September 30, 2000;
2,399,863 issued and outstanding at July 1, 2000 24 24
Additional paid-in capital 21,147 21,139
Retained earnings 545 --
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Total stockholders' equity 21,716 21,163
$ 32,730 33,343
================ ===============
See accompanying notes to condensed consolidated financial statements.
2
DUCK HEAD APPAREL COMPANY, INC.
Consolidated Statements of Operations
(Amounts in thousands except per share data)
(Unaudited)
FOR THE THREE MONTHS ENDED
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SEPTEMBER 30, OCTOBER 2,
2000 1999
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Net sales $ 13,114 16,063
Cost of goods sold 8,052 11,126
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Gross profit 5,062 4,937
Selling, general and administrative expenses 4,760 5,332
Other income 429 767
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Operating income 731 372
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Interest expense:
Interest expense, net 158 132
Intercompany interest expense -- 1,987
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158 2,119
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Income (loss) before income taxes 573 (1,747)
Income tax 28 9
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Net income (loss) $ 545 (1,756)
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Basic net earnings (loss) per share $ 0.23 (0.74)
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Diluted net earnings (loss) per share $ 0.22 (0.74)
================= ====================
Weighted average shares outstanding used in basic
per-share calculation 2,405 2,380
Dilutive effect of stock options and non vested
incentive stock awards 114 --
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Weighted average shares outstanding used in
diluted per-share calculation 2,519 2,380
================= ====================
See accompanying notes to condensed consolidated financial statements.
3
DUCK HEAD APPAREL COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED
-----------------------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
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Operating activities:
Net income (loss) $ 545 (1,756)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 739 788
Loss on sale of property and equipment -- 4
Provision for losses on accounts receivable (223) 66
Changes in operating assets and liabilities:
Trade accounts receivable (1,559) (397)
Inventories 3,427 5,515
Prepaid and other current assets (125) (10)
Accounts payable (405) (695)
Accrued expenses (248) (849)
Income taxes payable 28 667
Other liabilities (450) (46)
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Net cash provided by
operating activities 1,729 3,287
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Investing activities:
Purchases of property, plant and equipment (288) (14)
Proceeds from sale of property, plant and equipment -- 94
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Net cash (used in) provided by
investing activities (288) 80
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Financing activities:
Change in obligations under capital leases, net -- (27)
Change in revolving credit facility 149 --
Principal payments on long-term debt (240) (76)
Stock option/incentive award 8 --
Change in due to Parent, net -- (3,127)
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Net cash used in financing activities (83) (3,230)
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Increase in cash 1,358 137
Cash at beginning of quarter 1,275 236
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Cash at end of quarter $ 2,633 373
=================== ====================
See accompanying notes to condensed consolidated financial statements.
4
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
for the three months ended September 30, 2000 and October 2, 1999,
respectively, include the operations and accounts of Duck Head Apparel
Company, Inc. These condensed consolidated 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
accounting principles generally accepted in the U.S. have been condensed
or omitted pursuant to such rules and regulations of the Securities and
Exchange Commission relating to interim financial statements. In the
opinion of management, the accompanying unaudited interim condensed
consolidated financial statements reflect all adjustments, consisting of
only normal, recurring adjustments, necessary to present fairly the
financial position of the Company at September 30, 2000 and the results
of its operations and its cash flows for the three months ended September
30, 2000 and October 2, 1999, respectively. The results for the three
months ended September 30, 2000 are not necessarily indicative of the
expected results for the full year or any future period. The unaudited
condensed consolidated financial statements included herein should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's form 10-K for the fiscal year ended
July 1, 2000.
(2) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The Company's management 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:
SEPTEMBER 30, JULY 1, 2000
2000
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Raw materials $ 1,473 1,268
Work in process 1,535 1,641
Finished Goods 11,331 14,857
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$ 14,339 17,766
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(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
trademarks for specified products. The Outlet Retail segment operates the
Company's outlet and clearance stores.
Summarized segment information as of September 30, 2000 and October 2,
1999 and for the three months ended September 30, 2000 and October 2,
1999 is presented below.
5
Wholesale Outlet Total
Retail
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Quarter ended September 30, 2000
Revenues $ 8,745 4,369 13,114
Operating income (loss) 308 423 731
Total assets 29,481 3,249 32,730
Capital expenditures 269 19 288
Depreciation and amortization 668 71 739
Quarter ended October 2, 1999
Revenues $ 11,603 4,460 16,063
Operating income (loss) (44) 416 372
Total assets 37,354 3,095 40,449
Capital expenditures 102 (88) 14
Depreciation and amortization 741 47 788
(4) CUSTOMER CONCENTRATION
During the three months ended September 30, 2000 and October 2, 1999
approximately 24.0% and 24.4% of the Company's sales were to one
customer. In addition, during the same three month period 46.5% and 44.2%
of the Company's sales were made to its five largest customers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains various "forward-looking statements".
All statements, other than statements of historical fact, that address
activities, events or developments that the Company 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 Quarterly Report are based on
the Company's expectations and are necessarily dependent upon assumptions,
estimates and data that the Company 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. These risks and uncertainties include, among
others, changes in the retail demand for apparel products, the cost of raw
materials, competitive conditions in the apparel and textile industries, the
relative strength of the United States dollar as against other currencies,
changes in United States trade regulations and the discovery of unknown
conditions (such as with respect to environmental matters and similar items).
Accordingly, any forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized.
The Company 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.
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales for the first quarter ended September 30, 2000
totaled $13.1 million, as compared to $16.1 million for the first quarter ended
October 2, 1999, a decrease of 18.6%. A summary of Duck Head's net sales for the
quarters ended September 30, 2000 and October 2, 1999 follows:
6
Net Sales (in millions)
Wholesale Retail Total
- ------------------------------- ----------------------- -------------------------- --------------------------
First quarter 2001 ($) 8.7 4.4 13.1
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First quarter 2000 ($) 11.6 4.5 16.1
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(Decrease) ($) (2.9) (0.1) (3.0)
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Percent (decrease) (25.0) (2.2%) (18.6%)
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The decrease in wholesale sales dollars reflected a decrease in unit
shipments, which was primarily due to the reduction in categories of Duck Head
product carried at two key accounts, and to reduced volume at other accounts,
which were partially offset by lower sales returns and allowances. As a result
of Duck Head reducing margin support agreement commitments with two key
accounts, those accounts chose to reduce the categories of Duck Head product,
namely men's tops and boys' products, that they carry. This reduction in the
categories of Duck Head product carried by these two key accounts resulted in a
$2.1 million reduction in sales to these accounts in the first quarter of fiscal
year 2001 as compared with the first quarter of fiscal year 2000. Men's bottoms
continue to be carried at these two accounts. Reduced volume at other accounts
was due to the reduction of inventory levels at several key accounts. 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
core and key item replenishment inventories which require lower in-stock levels
on the retail floor. Sales returns and allowances were $0.2 million lower in the
first quarter of fiscal year 2001 as compared to the first quarter of fiscal
year 2000 as a result of the reduction or elimination of margin support
arrangements with several customers and the elimination of many seasonal product
return arrangements.
The decreases in Duck Head retail store sales resulted from a
comparable store sales decrease of 8% partially offset by more stores on the
average being open during the first quarter of fiscal year 2001 as compared with
the first quarter of fiscal year 2000. The comparable store sales decrease
accounted for $0.3 million while the increase in sales due to more stores on the
average being open accounted for $0.2 million. During the first quarter of
fiscal 2001 Duck Head did not open or close any stores, and at September 30,
2000 Duck Head operated 26 retail outlet stores. 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
and Southwestern United States, and the geographic expansion of retail stores to
the extent that wholesale distribution expands outside the Southeastern and
Southwestern United States. Duck Head plans to close two underperforming stores
in fiscal year 2001 and open two or three new retail stores in the middle to
later part of fiscal 2001.
Gross Profit
Consolidated gross profit and gross profit margin for the first quarter
of fiscal year 2001 were $5.1 million and 38.9%, respectively, as compared to
$4.9 million and 30.4%, respectively, for the first quarter of fiscal year 2000,
an increase in consolidated gross profit of 4.1%.
Gross profit was $3.0 million and gross profit margin was 34.5% on
wholesale sales for the first quarter of fiscal year 2001, as compared to $3.0
million and 25.9%, respectively, for the first quarter of fiscal year 2000. The
increase in gross profit margin was primarily due to lower product cost and, as
described above, lower sales returns and allowances. Product costs were reduced
due to better product sourcing arrangements with domestic fabric, offshore
contractors and offshore package good vendors and more efficient use of leased
offshore production capacity due to the completion of the downsizing of a
manufacturing facility in the first quarter of fiscal year 2000. Gross profit
remained flat due to increased gross profit margin offset by lower sales. Duck
Head expects the improved gross profit margin to continue.
7
Gross profit was $2.1 million and gross profit margin was 47.7% on
retail sales for the first quarter of fiscal year 2001 as compared to $1.9
million and 42.2%, respectively, for the first quarter of fiscal year 2000. This
$0.2 million increase in gross profit was primarily due to higher gross profit
margins, partially offset by lower sales. The increase in gross profit margin
was primarily due to better margins in the first quarter of fiscal 2001 on goods
produced by Duck Head. In addition, gross profit margins were negatively
affected during the first quarter of fiscal year 2000 by the liquidation of
goods purchased from Duck Head's womenswear licensee. The womenswear license
agreement was terminated during fiscal year 1999 and the remaining products in
Duck Head's retail stores purchased from this licensee were sold at poor gross
profit margins. Duck Head expects the improved gross profit margin to continue.
Selling, General and Administrative Expenses
During the first quarter of fiscal year 2001, consolidated selling,
general and administrative expenses were $4.8 million, as compared to $5.3
million during the first quarter of fiscal year 2000, a decrease of 9.4%. For
the first quarter of fiscal year 2001, expenses in this category were 36.6% of
net sales as compared to 32.9% of net sales for the first quarter of fiscal year
2000.
Wholesale selling, general and administrative expenses for the first
quarter of fiscal year 2001 decreased by $0.6 million as compared to the first
quarter of fiscal year 2000. The dollar decrease was primarily due to reductions
in marketing, product development and distribution expenses. Duck Head expects
this lower selling, general and administrative expense level to continue.
Retail selling, general and administrative expenses for the first
quarter of fiscal year 2001 increased by $0.1 million as compared to the first
quarter of fiscal year 2000. The increase was primarily due to higher selling
costs due to more stores being open on average during the first quarter of
fiscal year 2001 as compared to the first quarter of fiscal 2000 partially
offset by lower home office costs. Based on the current number of stores, Duck
Head expects this new level of retail selling, general and administrative
expenses to continue.
Operating Income
Consolidated operating income for the first quarter of fiscal year
2001 was $0.7 million, as compared to $0.4 million operating income for the
first quarter of fiscal year 2000.
Wholesale operating income for the first quarter of fiscal year 2001
was $0.3 million, as compared to operating losses of $50,000 for the first
quarter of fiscal year 2000. Included in the wholesale operating income for the
first quarter of fiscal year 2001 and in the operating loss for the first
quarter of fiscal year 2000 was $0.4 million of royalty income on license
agreements. The first quarter of fiscal year 2000 also included a $0.4 million
gain on an insurance settlement.
Primarily as a result of the factors described above, retail operating
income for the first quarter of both fiscal years 2001 and 2000 was $0.4
million.
Net Interest Expense. For the first quarter of fiscal year 2001, net
interest expense was $0.2 million, as compared to $2.1 million for the first
quarter of fiscal year 2000. In the fourth quarter of fiscal year 2000, pursuant
to the Distribution Agreement to which the Company and Delta Woodside
Industries, Inc. are parties related to the spin-off of the Company by Delta
Woodside, the affiliated debt was contributed to equity or repaid and replaced
with significantly lower levels of third party debt. This decreased the
Company's interest expense.
8
Taxes. The effective tax rate was 4.9% expense on a pretax profit for
the first quarter of fiscal year 2001 as compared to (0.1)% expense on a pretax
loss for the first quarter of fiscal year 2000. The tax expense in both quarters
represents various state minimum alternative taxing systems.
Net Income/ Loss. Net income for the first quarter of fiscal year 2001
was $0.5 million, as compared to a net loss of $1.8 million for the first
quarter of fiscal year 2000. The improvement was due to the factors described
above.
Inventories. Inventories decreased to $14.3 million at September 30,
2000 from $17.8 million at July 1, 2000, a decrease of $3.5 million or 19.7%.
The decrease in inventories reflects decreases in finished goods and work in
process inventories offset by increases in raw material inventories. This
overall decrease was due to Duck Head's inventory control strategy which
includes aggressive sales of close-out inventories and reductions in the
production levels at Duck Head's own sewing facility.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, $5.4 million was outstanding under Duck Head's
term loan at a weighted interest rate of 9.28%. At September 30, 2000, Duck Head
had $0.1 of loans outstanding and had approximately $9.6 million of borrowings
available to it under its revolving credit facility.
Duck Head's operating activities resulted in $1.7 million of cash
provided during the first quarter of fiscal year 2001 as compared to $3.3
million of cash provided during the first quarter of fiscal year 2000. The cash
provided in the first quarter of both fiscal year 2001 and fiscal year 2000 was
primarily the result of reductions in inventories partially offset by increases
in accounts receivable.
Capital expenditures of $0.3 million were made in the first quarter of
fiscal year 2001, as compared to $14,000 of capital expenditures during the
first quarter of fiscal year 2000. The expenditures in the first quarter of
fiscal year 2001 were primarily for fixtures for in-store shops and focal areas
placed in major retailers and for hardware and software related to Duck Head's
information technology programs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
Duck Head's credit agreement provides 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 amount of Duck Head's indebtedness during the first quarter
of fiscal 2001, if the interest rate on this outstanding indebtedness had been
increased by 1%, Duck Head's interest expense during the quarter would have been
approximately $16,000 higher than the actual expense. 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.
9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 24, 2000, the Company filed a lawsuit in the United States
Federal District Court for the Northern District of Georgia against Bettis C.
Rainsford and Talmadge Knight alleging that Messrs. Rainsford and Knight have
violated Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and rules promulgated thereunder by, among other things,
failing to disclose that Messrs. Rainsford and Knight are and have been acting
as a "group" under the federal securities laws and by failing to make the
appropriate filings under Section 13(d) disclosing the actions and intentions of
the Rainsford-Knight group. The lawsuit requests that the Court enter an order
against Messrs. Rainsford and Knight finding that they have violated Section
13(d) of the Exchange Act and rules promulgated thereunder and ordering them to
make the required filings and disclosures and for such other relief as may be
appropriate.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to the Company's incentive stock award plan, on August 1, 2000 the
Company issued an aggregate of 7,350 shares of the Company's common stock to
officers and key and middle management employees of the Company in exchange for
$73.50 aggregate consideration ($0.01 per share, as provided by the incentive
stock award plan). Issuance of these shares to such officers and key and middle
management employees was exempt from registration under the Securities Act of
1933, as amended, by reason of Section 4(2) of that Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES*
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*
ITEM 5. OTHER INFORMATION*
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
27 Financial Data Schedule (For SEC purposes only)
(b) Reports on Form 8-K filed during quarter ended September 30, 2000
None
* Items 3, 4 and 5 are not applicable.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Duck Head Apparel Company, Inc.
----------------------------------
(Registrant)
Date November 1, 2000 /s/ K. Scott Grassmyer.
---------------------- -------------------------------------
K. Scott Grassmyer
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
11