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 March 31, 2001
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
--------------
(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--2,855,438 shares as of April 15, 2001
INDEX
DUCK HEAD APPAREL COMPANY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
Condensed consolidated balance sheets--
March 31, 2001 and July 1, 2000 3
Consolidated statements of operations--
Three and six month periods ended March 31, 2001 and April 1, 2000 4
Condensed consolidated statements of cash flows
Three months ended March 31, 2001 and April 1, 2000 5
Notes to condensed consolidated financial statements - March 31, 2001 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
Item 3. Quantitative and Qualitative Disclosures about Market 15
Risk
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
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DUCK HEAD APPAREL COMPANY, INC.
Condensed Consolidated Balance Sheets
(Amounts in thousands except share data)
(Unaudited)
March 31, July 1,
Assets 2001 2000
----------------- -----------------
Current assets:
Cash and cash equivalents $ 2,700 1,275
Accounts receivable, less allowances of
$1,067 in March 2001 and $1,594 in July 2000 5,287 3,191
Inventories (note 2) 12,235 17,766
Prepaid expenses and other current assets 296 269
----------------- -----------------
Total current assets 20,518 22,501
Property, plant and equipment, net 9,734 10,842
Other assets 346 -
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$ 30,598 33,343
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,450 1,621
Accrued expenses 3,218 4,161
Current portion of long-term debt 960 960
Income taxes payable 32 -
----------------- -----------------
Total current liabilities 5,660 6,742
Long-term debt 3,920 4,640
Other liabilities 373 798
----------------- -----------------
Total liabilities 9,953 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;
2,852,438 issued and outstanding at March 31, 2001;
2,399,863 issued and outstanding at July 1, 2000 29 24
Additional paid-in capital 21,847 21,139
Accumulated deficit (1,231) -
----------------- -----------------
Total stockholders' equity 20,645 21,163
$ 30,598 33,343
================= =================
See accompanying notes to condensed consolidated financial statements.
3
DUCK HEAD APPAREL COMPANY, INC.
Condensed Consolidated Statements of Operations
(Amounts in thousands except per share data)
(Unaudited)
For the three months ended For the nine months ended
------------------------------- -------------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 10,483 13,619 33,102 42,611
Cost of goods sold 6,398 8,996 20,378 29,026
-------------- -------------- -------------- --------------
Gross profit 4,085 4,623 12,724 13,585
Selling, general and administrative expenses 5,046 5,402 14,992 15,753
Other income (473) (387) (1,461) (1,553)
-------------- -------------- -------------- --------------
Operating loss (488) (392) (807) (615)
-------------- -------------- -------------- --------------
Interest expense:
Interest expense, net 61 56 369 394
Intercompany interest expense - 2,018 - 5,885
-------------- -------------- -------------- --------------
61 2,074 369 6,279
-------------- -------------- -------------- --------------
Loss before income taxes (549) (2,466) (1,176) (6,894)
Income taxes 15 26 55 57
-------------- -------------- -------------- --------------
Net loss $ (564) (2,492) (1,231) (6,951)
============== ============== ============== ==============
Basic and diluted net loss per share $ (0.20) (1.06) (0.48) (2.93)
============== ============== ============== ==============
Weighted average shares outstanding used in basic
and diluted per-share calculation 2,819 2,351 2,545 2,373
============== ============== ============== ==============
See accompanying notes to condensed consolidated financial statements.
4
DUCK HEAD APPAREL COMPANY, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
For the nine months ended
---------------------------------------
March 31, April 1,
2001 2000
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Operating activities:
Net loss $ (1,231) (6,951)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,050 2,472
Gain on sale or disposal of property and equipment (92) (64)
Provision for losses on accounts receivable (152) (602)
Changes in operating assets and liabilities:
Trade accounts receivable (1,944) 1,061
Inventories 5,531 7,514
Prepaid and other current assets (27) 44
Accounts payable (171) (888)
Accrued expenses (951) (1,423)
Income taxes payable 32 643
Other liabilities (425) 40
------------------ -------------------
Net cash provided by
operating activities 2,620 1,846
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Investing activities:
Purchases of property, plant and equipment (850) (959)
Proceeds from sale of property, plant and equipment - 809
Investment in other assets (346) -
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Net cash used in investing activities (1,196) (150)
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Financing activities:
Change in obligations under capital leases, net - (114)
Principal payments on long-term debt (720) (6,415)
Proceeds from exercise of stock option/incentive award 721 -
Change in due to Parent, net - 5,034
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Net cash provided by (used in) financing activities 1 (1,495)
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Increase in cash 1,425 201
Cash at beginning of period 1,275 236
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Cash at end of quarter $ 2,700 437
================== ===================
Supplemental disclosure of cash flow information -
interest paid $ 457 394
================== ===================
taxes paid $ 23 -
================== ===================
See accompanying notes to condensed consolidated financial statements.
5
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for the three months and nine months ended March 31, 2001 and April 1,
2000, 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 United
States of America. 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 March 31, 2001 and the results of its operations and its cash
flows for the three months and nine months ended March 31, 2001 and April
1, 2000. The results for the nine months ended March 31, 2001 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.
6
Inventories consist of the following:
March 31, July 1, 2000
2001
------------------ -----------------
Raw materials $ 1,068 1,268
Work in process 1,386 1,641
Finished Goods 9,781 14,857
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$ 12,235 17,766
================== =================
(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 March 31, 2001 and April 1, 2000 and
for the nine months ended March 31, 2001 and April 1, 2000 and for the
quarter ended March 31, 2001 and April 1, 2000 is presented below.
Wholesale Outlet Retail Total
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Quarter ended March 31, 2001
Revenues $ 7,796 2,687 10,483
Operating loss (34) (454) (488)
Total assets 26,979 3,619 30,598
Capital expenditures 146 16 162
Depreciation and amortization 572 59 631
Quarter ended April 1, 2000
Revenues $ 11,043 2,576 13,619
Operating loss (11) (381) (392)
Total assets 31,473 3,361 34,834
Capital expenditures 582 126 708
Depreciation and amortization 752 141 893
Nine months ended March 31, 2001
Revenues $ 21,845 11,257 33,102
Operating income (loss) (759) (48) (807)
Total assets 26,979 3,619 30,598
Capital expenditures 618 232 850
Depreciation and amortization 1,852 198 2,050
7
Nine months ended April 1, 2000
Revenues $ 31,657 10,954 42,611
Operating income (loss) (790) 175 (615)
Total assets 31,473 3,361 34,834
Capital expenditures 916 43 959
Depreciation and amortization 2,218 254 2,472
(4) Customer Concentration
During the nine months ended March 31, 2001 and April 1, 2000
approximately 24.3% and 23.7% of the Company's sales were to one
customer. In addition, during the same nine-month periods 44.8% and 48.0%
of the Company's sales were made to its five largest customers
respectively. A total of 34.2% and 48.9% of gross accounts receivable
were with one customer at March 31, 2001 and July 1, 2000, respectively.
In addition, 49.8% and 69.8% of gross accounts receivable were with two
customers at the same dates respectively.
(5) Stockholders' equity
On November 1, 2000, Duck Head Apparel Company Inc. announced that the
Board of Directors authorized the repurchase by the company in open
market transactions up to $3 million of Duck Head Apparel Company Inc.
common stock. All purchases are to be made at the discretion of
management in accordance with the IRS guidelines for shares repurchased
after spin-off. As of March 31, 2001, no shares have been repurchased.
8
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 third quarter ended March 31, 2001
totaled $10.5 million, as compared to $13.6 million for the third quarter ended
April 1, 2000, a decrease of 22.8%. Consolidated net sales for the nine months
ended March 31, 2001 totaled $33.1 million, as compared to $42.6 million for the
nine months ended April 1, 2000, a decrease of 22.3%. A summary of Duck Head's
net sales for the three-month and nine-month periods ended March 31, 2001 and
April 1, 2000 are as follows:
9
Net Sales (in millions)
Wholesale Retail Total
------------------ -------------------------- --------------------------
Three months ended:
March 31, 2001 ($) 7.8 2.7 10.5
April 1, 2000 ($) 11.0 2.6 13.6
Increase/(Decrease) ($) (3.2) 0.1 (3.1)
Percent increase(decrease) (29.1%) 3.8% (22.8%)
Nine months ended:
March 31, 2001 ($) 21.8 11.3 33.1
April 1, 2000 ($) 31.7 11.0 42.7
Increase/(Decrease) ($) (9.9) 0.3 (9.6)
Percent increase(decrease) (31.2%) 2.7% (22.5%)
The decrease in wholesale sales dollars in both the three months and
nine months ended March 31, 2001 as compared to the three months and nine months
ended April 1, 2000 reflected a decrease in unit shipments, which was primarily
due to reduced sales to major accounts and reduced sales of close-out inventory
to close-out accounts, partially offset by increases in private label sales and
lower sales returns and allowances. The decrease in sales to major accounts,
which accounted for decreases of approximately $2.9 million and $8.9 million in
the three month and nine month periods ended March 31, 2001, respectively, as
compared to the prior year periods, was due to lower offerings and sales of
fashion goods during the three month and nine month periods ended March 31, 2001
as compared to the three month and nine month periods ended April 1, 2000; and
inventory reduction efforts at our largest customer and a weak retail
environment where many major accounts experienced comparative sales decreases
over the prior year, especially in the three months ended March 31, 2001. The
decrease in fashion offerings was in line with the Company's continuing strategy
to shift the mix of its product to a heavier mix of core product and key items
and a lower mix of fashion inventory. Inventory levels at Duck Head's largest
account were approximately $1.0 million lower at March 31, 2001 as compared to
the same time in the previous year. Duck Head product was carried in
approximately the same number of doors at this account during the three-month
and nine-month periods ended March 31, 2001 as in the three-month and nine-month
periods ended April 1, 2000. Sales to close-out accounts were $0.9 million lower
during the three months and $2.6 million lower in the nine months ended March
31, 2001 as compared to the three and nine month periods ended April 1, 2000 due
to significantly lower levels of close-out inventory available to sell. Private
label sales increased by $0.1 million and $1.3 million during the three and nine
month periods ended March 31, 2001 as compared to the three and nine-month
periods ended April 1, 2000.
The increases in Duck Head retail store sales during both the three
month and nine month periods ended March 31, 2001 as compared to the three and
nine month periods ended April 1, 2000 resulted from more stores on the average
being open, including temporary locations which are not included in the store
count, in the three and nine month periods ended March 31, 2001 as compared to
the three and nine month periods ended April 1, 2000, partially offset by
comparable store sales decreases of 9.2% and 6.7% during the three and nine
10
months ended March 31, 2001, respectively. During the three-month period ended
March 31, 2001, Duck Head closed one store and did not open any. During the
nine-month period ended March 31, 2001, Duck Head opened two stores and closed
two stores, and at March 31, 2001 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.
Gross Profit
Consolidated gross profit and gross profit margin for the third quarter
ended March 31, 2001 were $4.1 million and 39.0%, respectively, as compared to
$4.6 million and 33.9%, respectively, for the third quarter ended April 1, 2000,
a decrease in consolidated gross profit of 10.9%. Consolidated gross profit and
gross profit margin for the nine months ended March 31, 2001 were $12.7 million
and 38.4%, respectively, as compared to $13.6 million and 31.9%, respectively,
for the nine months ended April 1, 2000, a decrease in consolidated gross profit
of 6.6%.
Gross profit was $3.0 million and gross profit margin was 38.5% on
wholesale sales for the third quarter ended March 31, 2001, as compared to $3.5
million and 31.8%, respectively, for the third quarter ended April 1, 2000.
Gross profit was $7.9 million and gross profit margin was 36.2% on wholesale
sales for the nine months ended March 31, 2001, as compared to $8.9 million and
28.1%, respectively, for the nine months ended April 1, 2000. The increase in
gross profit margin for both the three and nine month periods ended March 31,
2001 was primarily due to lower product cost, lower sales returns and allowances
and sales of close-out inventory, which are sold at low gross profit margins,
being a lower percentage of the total sales mix. Product costs were reduced due
to better product sourcing arrangements with domestic fabric, offshore
contractor 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
decreased due to lower sales partially offset by the increase in gross profit
margin.
Gross profit was $1.1 million and gross profit margin was 40.7% on
retail sales for the third quarter ended March 31, 2001 as compared to $1.1
million and 42.3%, respectively, for the third quarter ended April 1, 2000.
Gross profit was $4.8 million and gross profit margin was 42.5% on retail sales
for the nine months ended March 31, 2001 as compared to $4.7 million and 42.7%,
respectively, for the nine months ended April 1, 2000. The decrease in gross
profit margin in the third quarter ended March 31, 2001 was due to a more
promotional retail environment during the second and third quarters of fiscal
year 2001 as compared to the same quarters of fiscal year 2000 and due to higher
sales through temporary locations where gross profit margins are usually lower
than at outlet stores.
11
Selling, General and Administrative Expenses
During the third quarter ended March 31, 2001, consolidated selling,
general and administrative expenses were $5.0 million, as compared to $5.4
million during the third quarter ended April 1, 2000 a decrease of 7.4%. During
the nine months ended March 31, 2001, consolidated selling, general and
administrative expenses were $15.0 million, as compared to $15.8 million during
the nine months ended April 1, 2000, a decrease of 5.1 %. For the three months
ended March 31, 2001, expenses in this category were 48.1% of net sales as
compared to 39.7% of net sales for the three months ended April 1, 2000. For the
nine months ended March 31, 2001, expenses in this category were 45.3% of net
sales as compared to 37.0% of net sales for the nine months ended April 1, 2000.
Wholesale selling, general and administrative expenses for the third
quarter ended March 31, 2001 were 11.5% lower than during the third quarter
ended April 1, 2000. Wholesale selling, general and administrative expenses for
the nine months ended March 31, 2001 were 9.9% lower than during the nine months
ended April 1, 2000. Reductions in marketing, product development and
distribution expenses were experienced during both the three and nine-month
periods ended March 31, 2001 as compared to the three and nine-month periods
ended April 1, 2000. General and administrative expenses were higher in both the
three and nine-month periods ended March 31, 2001 as compared to the three and
nine-month periods ended April 1, 2000. The increase in general and
administrative expenses in the three months ended March 31, 2001 as compared to
the three months ended April 1, 2000 was primarily due to charges associated
with staff reductions and the transitioning of the Chairman, President and Chief
Executive position from Robert D. Rockey to William V. Roberti. During the three
months ended March 31, 2001, the company reduced the salaried staff by 34
people. A charge of approximately $500,000 was recorded associated with this
reduction. Both Mr. Rockey and Mr. Roberti were employed by the Company full
time until Mr. Rockey's retirement in March of 2001. These staff reductions,
which have caused a reduction in salary payroll of approximately $2.4 million
annually, will result in a significant reduction of selling, general and
administrative expenses going forward. The increase in general and
administrative expenses for the nine months ended March 31, 2001 as compared to
the nine months ended April 1, 2000 was primarily due to the factors that
impacted the three months ended March 31, 2001 as compared to the three months
ended April 1, 2000 and due to expenses associated with a proxy contest and
expenses associated with the search for and hiring of a new President. William
V. Roberti was hired in October of 2000 as President and Chief Operating
Officer. Mr. Roberti became Chairman and Chief Executive Officer in March of
2001 when Mr. Rockey retired.
Retail selling, general and administrative expenses for the three-month
period ended March 31, 2001 increased by $0.1 million as compared to the
three-month period ended April 1, 2000 and by $0.3 million for the nine-month
period ended March 31, 2001 as compared to the nine-month period ended April 1,
2000. The increases were primarily due to higher selling costs due to more
stores being open on average during both the three and nine-month periods ended
March 31, 2001 as compared to the three and nine month periods ended April 1,
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.
12
Operating Income/ Loss
Consolidated operating loss for the third quarter ended March 31, 2001
was $0.5 million, as compared to $0.4 million operating loss for the third
quarter ended April 1, 2000. Consolidated operating loss for the nine months
ended March 31, 2001 was $0.8 million, as compared to $0.6 million operating
loss for the nine months ended April 1, 2000.
Wholesale operating loss for the three months ended March 31, 2001 was
$34,000, as compared to operating losses of $11,000 for the three months ended
April 1, 2000. Wholesale operating loss for both the nine months ended March 31,
2001 and the nine months ended April 1, 2000 was $0.8 million. Included in the
wholesale operating loss for the three and nine months ended March 31, 2001 were
$0.4 million and $1.4 million, respectively, of royalty income on license
agreements as compared to $0.3 million and $1.1 million, respectively, in the
three and nine month periods ended April 1, 2000. The nine months ended April 1,
2000 included a $0.4 million gain on an insurance settlement.
Primarily as a result of the factors described above, retail operating
loss for the three months ended March 31, 2001 was $0.5 million as compared to
an operating loss of $0.4 million for the three months ended April 1, 2000.
Primarily as a result of the factors described above, retail operating loss for
the nine months ended March 31, 2001 was $48,000 as compared to operating income
of $0.2 million for the nine months ended April 1, 2000.
Net Interest Expense. For the third quarter ended March 31, 2001 net
interest expense was $0.1 million, as compared to $2.1 million for the third
quarter ended April 1, 2000. For the nine months ended March 31, 2001 net
interest expense was $0.4 million, as compared to $6.3 million for the nine
months ended April 1, 2000. In the latter part of the year ended July 1, 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.
Taxes. The effective tax rate was (2.7)% expense on a pretax loss for
the three months ended March 31, 2001 as compared to (1.1)% expense on a pretax
loss for the three months ended April 1, 2000. The effective tax rate was (4.7)%
expense on a pretax loss for the nine months ended March 31, 2001 as compared to
(0.8)% expense on a pretax loss for the nine months ended April 1, 2000. The tax
expense in all of these periods results from various state minimum
alternative-taxing systems.
Net Loss. Net loss for the third quarter ended March 31, 2001 was $0.6
million, as compared to a net loss of $2.5 million for the third quarter ended
April 1, 2000. Net loss for the nine months ended March 31, 2001 was $1.2
million, as compared to a net loss of $7.0 million for the nine months ended
April 1, 2000. The improvement was due to the interest expense reduction,
partially offset by the operating loss increases, described above.
13
Inventories. Inventories decreased to $12.2 million at March 31, 2001
from $17.8 million at July 1, 2000, a decrease of $5.6 million or 31.5%. The
decrease in inventories reflects decreases in all categories of inventory. This
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 March 31, 2001, $4.9 million was outstanding under Duck Head's term
loan at a weighted interest rate of 8.24%. At March 31, 2001, Duck Head did not
have any loans outstanding under its revolving credit facility and had
approximately $9.0 million of borrowings available.
Duck Head's operating activities resulted in $2.6 million of cash
provided during the nine months ended March 31, 2001 as compared to $1.8 million
of cash provided during the nine months ended April 1, 2000. The cash provided
during the first nine months of both fiscal year 2001 and fiscal year 2000 was
primarily the result of reductions in inventories and accounts receivable
partially offset by a reduction in current liabilities.
Capital expenditures of $0.9 million were made during the nine months
ended March 31, 2001, as compared to $1.0 million of capital expenditures during
the nine months ended April 1, 2000. The expenditures in the nine months ended
March 31, 2001 were primarily for fixtures for in-store shops and focal areas
placed in major retailers and in Duck Head's own retail outlet stores, and
hardware and software related to Duck Head's information technology programs.
Other Information
As announced on January 31, 2001, the Company has decided to pursue
certain actions recommended by Kurt Salmon Associates ("KSA") designed to
significantly enhance shareholder value. In November 2000, a special committee
of the Company's Board of Directors, chaired by Dr. Max Lennon, was appointed by
the Board to engage and work with an investment banking firm to explore any and
all options to enhance shareholder value, and to recommend appropriate action to
the Board of Directors. The special committee selected KSA for this work.
The Company believes that it is not appropriate at this time to outline
publicly all the steps the Company will be taking over the next several months
based on the advice of KSA. In the immediate future, the Company will be looking
for smaller, more cost-effective distribution and office facilities. The Company
is currently marketing its current distribution and office facilities, which far
exceed the Company's needs for the foreseeable future. The Company hopes to make
future announcements of material developments as they occur, when in the best
interest of the Company and its shareholders.
14
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 three months
ended March 31, 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 $8,000 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings*
- ------- ------------------
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
The Rights issued pursuant to The Shareholder Rights Agreement dated
January 27, 2000, as amended on November 9, 2000, by and between the Company and
First Union National Bank, as rights agent (the "Rights Agreement") ceased to be
exercisable after March 31, 2001. The Agreement and the Rights, as defined in
the Rights Agreement, are commonly referred to as a "poison pill." Thus the
Company's "poison pill" has effectively expired and is of no further force or
effect.
Item 3. Default upon Senior Securities*
- ------- ------------------------------
Item 4. Submission of Matters to a Vote of Security Holders*
- ------- ---------------------------------------------------
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Item 5. Other Information*
- ------- -----------------
Item 6. Exhibits and Report on Form 8-K
- ------- -------------------------------
(a) Exhibits required by Item 601 of Regulation S-K
10.14 Severance Agreement and Release between Duck Head
Apparel Company, Inc. and William B. Mattison; letter
dated April 2, 2001 to William B. Mattison from the
Company regarding proposed Severance Agreement and
Release; letter dated April 2, 2001 from the Company
to William B. Mattison regarding amendment of
Incentive Stock Award Agreement dated August 1, 2000
and Stock Option Agreements dated July 31, 2000 and
September 8, 2000.
* Items 1, 3, 4, and 5 are not applicable.
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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 Apirl 27, 2001 /s/ K. Scott Grassmyer
--------------------------------- -------------------------
K. Scott Grassmyer
Senior Vice President, Chief
Financial Officer, Secretary and
Treasurer
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